The express delivery industry's leading structure begins to shake, and the industry's anti-unfair competition efforts are intensified

Structural changes in the industry are affecting the inside, while policy measures are affecting the outside. Changes in the express delivery industry are imminent. "The epidemic is a dividing point. This round of epidemic has brought forward some major changes in the industry," Zhao Xiaomin, an express delivery expert, told the Economic Observer.

Introduction

1 || SF Holding (69.850, 0.25, 0.36%) expects a net loss of 900 million to 1.1 billion yuan in the first quarter. In the same period of 2020, SF made a profit of around 900 million yuan. This performance forecast has brought a huge impact on the market and also released a signal of industry change.

2 || The losses incurred in the first quarter are the result of continued competition and changes in the industry. Based on the views of many express industry professionals and analysts, the starting point of this change can be traced back to the end of 2018 and the beginning of 2019, when some leading companies noticed the changes in market atmosphere and trends and decided to make changes.

3 || In many reports on the operation of the express delivery industry, it is mentioned that the "scissors" gap between the express delivery industry's operating income and business volume is widening. In the first quarter of this year, especially in the past month, the intensity of supervision has increased sharply.

On April 29, Ma Junsheng, director of the State Post Bureau, conducted a survey and held two meetings.

On the morning of the same day, Ma Junsheng held a special discussion with the main leaders of seven brand express delivery companies in Shanghai on the issue of protecting the rights and interests of express delivery brothers; on the evening of the same day, Ma Junsheng convened another meeting of the Party Leadership Group of the State Post Bureau. The above information was disclosed on the official website of the State Post Bureau and the social media accounts of the surveyed companies.

We have to pay attention to the signal that the potential policy strength is about to be released.

The legitimate rights and interests of couriers cannot be protected by isolated measures, and the adjustment of the income distribution mechanism and the transformation of the express delivery industry's business model are needed. At the symposium in the morning, Ma Junsheng said that "the protection of the rights and interests of couriers should be regarded as a key issue in achieving high-quality development of the industry, and we should promote the solution, examine the shortcomings and weaknesses, implement the main responsibilities, conduct self-examination and self-correction, transform the business model, and improve management capabilities"; at the party group meeting of the State Post Bureau that evening, Ma Junsheng emphasized the need to solve the difficulties and problems currently facing the industry, make up for the shortcomings and strengthen the weaknesses, and strive to achieve solid results.

What are the shortcomings of the industry and the difficulties it faces?

On April 27, the State Post Bureau released a report on the economic operation of the postal industry in the first quarter of 2021. Two data are worthy of attention. One is that the average price of inter-city express delivery was 6.1 yuan, a year-on-year decrease of 22.9%, which was lower than same-city express delivery for the first time; the other data is that in the first quarter, the express and parcel service brand concentration index CR8 was 80.5, a decrease of 5.4 from the same period last year and a decrease of 1.2 from the same period in 2019.

The above two data show the current status of the express delivery industry: the express delivery price war has further deepened, and the long-stable express delivery head structure has begun to shake.

At the same time as the macro data was released, the leading express delivery companies also released their first quarter data or forecasts. Many express delivery companies saw a sharp decline in profits, with SF Express and STO Express suffering losses in the first quarter of this year. For the express delivery industry, which continues to expand, a sharp decline in net profit for leading companies is not uncommon. For example, SF Express has basically maintained a growth trend after its listing, except for a slight decline in net profit in 2018.

Among the reasons for the decline in net profit, two points that were mentioned in common were: first, the relevant investment was increased to improve production capacity; second, temporary expenses including transportation capacity and manpower increased during operations during the Spring Festival. The latter was an accidental factor, while the former had a more long-term impact on profits.

Behind these two reasons is the erosion of the gross profit margins of the express delivery industry by the ongoing price war and market expansion. Since the second half of 2019, the gross profit margins of the leading express delivery companies have shown a rapid decline, which has also made their ability to bear additional cost expenditures even weaker, so that they reached a profit balance point in the first quarter of this year.

Structural changes in the industry are affecting the inside, while policy measures are affecting the outside. Changes in the express delivery industry are imminent. "The epidemic is a dividing point. This round of epidemic has brought forward some major changes in the industry," Zhao Xiaomin, an express delivery expert, told the Economic Observer.

Unexpected annual report

On April 8, SF Holding released its first-quarter performance forecast, predicting a net loss of 900 million to 1.1 billion yuan in the first quarter. In the same period of 2020, SF made a profit of around 900 million yuan. This performance forecast has brought a huge impact on the market and also sent a signal of industry change.

In the first quarter report released later, SF Express's loss was locked at 980 million yuan. In the quarterly report, SF Express explained the reasons for the loss in five aspects, which can be summarized into two points:

The first is the increase in investment. This includes two aspects. The first aspect is some long-term investment, including the increase or decrease in amortization/depreciation costs caused by the increase in fixed asset investment such as network construction for new businesses and automatic transfer yards; the overlapping investment in the initial stage of land transportation network integration adjustment; the other aspect is the temporary increase in investment to cope with the peak period of the Spring Festival and business expansion.

In the first quarter of this year, SF Express's operating costs increased by 40.44%. According to the annual reports of 2019 and 2020, the highest proportion of operating costs was outsourcing costs, including human resources outsourcing and transportation outsourcing. According to the information previously disclosed by SF Express in investor surveys, the proportion of labor costs and transportation costs in revenue showed an upward trend, increasing by 3.53% in 2020. At the same time, capital expenditures in the first quarter reached 3.97 billion yuan.

Second, the business volume of economical express products with special discounts has grown rapidly. As the proportion of these low-priced products has increased rapidly, it has put certain pressure on the overall gross profit.

After SF Express released its annual report, STO Express also released a loss-making quarterly report, predicting a net loss of 70 million to 100 million yuan in the first quarter. The reasons also include temporary expenses during the Spring Festival, capital expenditures to expand production capacity, etc.

Overall, the express delivery industry's profits suffered a setback in the first quarter. In order to cope with the rapid growth of business, network stability and to spread the cost of single express delivery, express delivery companies have invested temporary and long-term costs. However, due to the price war, the price of express delivery tickets continued to decline, exceeding the rate of decline in their costs, resulting in a decrease in gross profit margin. As a result, profits were affected.

According to the above operation notice, the average unit price of express delivery in the first quarter of 2020 was 10.2 yuan, lower than the average price in the same period of the previous year. In terms of product price changes, the average price of intra-city and inter-city delivery was 6.4 yuan and 6.1 yuan, down 9.2% and 22.9% year-on-year respectively. The average price of intra-city express delivery exceeded that of inter-city delivery for the first time. The price of international/Hong Kong, Macao and Taiwan express delivery continued to rise, with an average price of 53.7 yuan, up 2.4% year-on-year.

The above-mentioned report on the economic operation of the industry mentioned that due to the fierce market competition, the performance of major enterprises was under pressure and the financing of enterprises was strengthened. Key enterprises increased their investment in infrastructure equipment, mainly focusing on industrial parks, transportation capacity construction and automation upgrades of processing centers.

Offensive and defensive battle

The losses incurred in the first quarter were the result of continued competition and changes in the industry. Based on the views of many express industry professionals and analysts, the starting point of this change can be traced back to the end of 2018 and the beginning of 2019, when some leading companies noticed the changes in market atmosphere and trends and decided to make changes.

On March 18, 2019, at SF Holding’s 2018 performance briefing, a participant asked SF a pointed question: “The time-sensitive products of 3F Express and 10Z Express have been developed. How will SF Express respond in the short term?” “The speed of the market is not determined by us. After the capital comes in, there may be more competitors. If we ignore this pace and go completely on our own, there will be problems,” SF Holding responded.

Two months later, SF Express launched a preferential delivery service for e-commerce economy items. Initially, this business was temporary and was promoted in the form of filling warehouses. However, in the performance briefing in August of that year, SF Express responded that preferential delivery was not a short-term product. The rapid growth of China's express delivery industry was mainly due to the e-commerce delivery market, so preferential delivery was still mainly aimed at this demand.

At the performance briefing in April this year, Wang Wei, chairman of SF Holding, said bluntly: "We have changed our strategy now. We believe that there is no defense in this world, only offense. In this offense, how to manage the cost model and investment standards is a very important task."

The growth rate of express delivery business volume, which had slowed down since 2019, has returned to a high level and remained at a high level during the 2020 epidemic and the first quarter of 2021. In the first quarter of 2021, the net increase in express delivery business was 9.4 billion pieces, and the express delivery business volume increased by more than 70%. The average annual growth rate in the past two years has reached 34.4%; compared with the same period last year, the proportion of out-of-town express business volume increased by 5 percentage points, and its contribution rate to the growth of all express delivery business exceeded 90%.

All competitors saw the huge potential of the sinking market. The competition started in 2019. The price war intensified, the average price of express delivery continued to decline, and the "scissors gap" between business income and business volume continued to widen. The operating conditions and stability of the entire industry were also affected in this competition.

Policy potential

Policies are closely watching changes in the industry.

In many reports on the operation of the express delivery industry, the widening gap between the express delivery industry's operating income and business volume was mentioned. In the first quarter of this year, especially in the past month, the intensity of supervision increased sharply.

Shao Zhonglin, former deputy secretary-general of the China Express Association and expert at the Guoyou Think Tank, told the Economic Observer that the express delivery industry's continued low-price competition has actually affected the industry's high-quality development. The cost compression caused by low prices will have an impact on many aspects of the express delivery industry, including service quality and treatment of couriers.

On April 15, Ma Junsheng, director of the State Post Bureau, presided over the sixth director's office meeting in 2021. When discussing the topic of "Economic Operation of the Postal and Express Industry in the First Quarter", he mentioned that "We must be ruthless to those who maliciously disrupt the market, strengthen supervision, and standardize the market order of fair competition. At present, we must target our efforts and focus on correcting the unfair competition that exists in some regions."

The express delivery industry has a long history of low-price competition. Shao Zhonglin said that since 2007 and 2008, the price of a single express delivery has dropped by more than 60%, while various costs are constantly rising. The pressure can be imagined. In Shao Zhonglin's view, since 2020, the national level has increased its anti-monopoly and anti-unfair competition supervision on large Internet platforms, and the express delivery industry, which is closely linked to e-commerce platforms and has a network form itself, should also be within the scope of supervision.

On the afternoon of April 22, the 70th executive meeting of the Zhejiang Provincial Government reviewed and approved the "Zhejiang Province Express Delivery Industry Promotion Regulations (Draft)" (hereinafter referred to as the "Draft"). The Draft specifically stipulates that express delivery operators shall not provide express delivery services at prices below cost.

In Shao Zhonglin's opinion, the draft reviewed and approved by Zhejiang can be regarded as the "first shot" fired by the supervision against unfair competition in the express delivery industry. "Unlike previous measures, this time Zhejiang is opposing unfair competition in the express delivery industry in the form of local legislation, which can mobilize more regulatory departments to participate in law enforcement, rather than the previous form of supervision mainly based on functional departments," Shao Zhonglin said.

Will there be measures or related policies similar to those in Zhejiang at the national level? "Of course, there will be a multi-departmental anti-unfair competition measure for the national express delivery industry, and the strength of the policy will also change the current competitive situation in the industry," said Shao Zhonglin.