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Business

E-commerce pushes Yamato's low-cost service to breaking point

Rate hike to fill financial hole could spur imitators

TOKYO -- Yamato Transport is raising delivery rates to undo the financial damage wrought by a deluge of unprofitable e-commerce orders, potentially breaking from a low-price, high-quality business model that has shined in Japan's deflation-plagued economy.

The leading Japanese shipper plans to raise base rates for retail customers 5-20% and seeks even steeper hikes for high-volume customers. The decision comes after the Yamato Holdings unit logged a record 1.87 billion in home deliveries in the year ended March, an increase of 30% from five years earlier, attributable mainly to a surge in internet shopping.

But average shipping price per package has fallen nearly 10% over the same period to around 560 yen ($5.10). Yamato has handled much of Amazon.com's shipping in Japan since fiscal 2013, and the proportion of low-margin deliveries has increased.

Yamato Holdings expects to log just 34 billion yen in operating profit for fiscal 2016 -- a 50% year-over-year plunge, resulting in part from the payment of 19 billion yen to some 47,000 workers to cover two years of unpaid overtime. Higher corporate tax and social insurance premium payments weighed as well.

Additional revenue from the rate hikes will be used to improve employee compensation and enlarge Yamato's workforce, as well as to expand overall profitability, for example by investing in package storage lockers that will reduce the need for repeated attempts at delivery.

Yamato's failure to predict the extent of growth in the e-commerce market and the severity of Japan's labor shortage is in part to blame for its current predicament. Online shopping is thought to account for only 5% of product sales in Japan at present, and future growth is inevitable. If such unprofitable shipments continue to swell even as the shortage of workers sends labor costs soaring, it would be nearly impossible for Yamato to maintain the current level of service, the shipper has determined.

Home delivery has become a key element of daily life in Japan, with residents accustomed to high-quality service at a low cost. Yamato will need to tread carefully to bring consumers and corporate customers on board with its rate increases. But if the shipper succeeds, others could follow.

(Nikkei)

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