The turbocharged development of e-commerce in China has spurred similarly explosive growth in the country's express delivery industry, with volumes rising more than 50% a year since 2010, according to State Post Bureau data.
An estimated 20 billion parcels were delivered via express services last year, generating revenues of more than 265 billion yuan ($40.7 billion). Such rapid growth, however, has not come without problems, including damaged, delayed and lost packages.
These difficulties have been concentrated in the so-called last mile, the final step in the delivery of goods from storage depots to the hands of purchasers. Indeed, while the last mile of the supply chain may be the shortest physical stage in a package's journey, it represents about 30% of total delivery costs. It costs four times as much to deliver vegetables from wholesale markets in suburban Beijing to retail outlets in the city's new development zone as it does to deliver them from farms in far more distant Shouguang in Shandong Province.
One underlying element is that third-party logistics providers account for less than 25% of the Chinese delivery market, while in Europe and Japan, the proportion is more than 70%. In-house and third-party providers continue to invest in duplicative infrastructure and resources, stacking up delivery points and drivers. In Beijing, there are some 6,000 delivery points, yet each courier delivers fewer than 40 items per day. Such wasted capacity accounts for up to 50% of total costs.
City regulations are another important factor in high last-mile costs. In Beijing, trucks entering the area encircled by the Fourth Ring Road need a special transportation license; in Shanghai, truck passes are capped and delivery times are restricted.
New solutions, however, are rapidly emerging to tap the business opportunities inherent in last-mile services.
DIY DELIVERY Lockers from which customers can pick up goods are one new approach. Online retailer JD.com, Chengdu Santai Electronic Industrial's Sposter network and Fengchao Kuaidigui, a new venture backed by express delivery services such as SF Express, are among the businesses trying out these "mini depots."
Switching the final step in the logistics chain from courier delivery to self-pickup by consumers reduces business complexity and cost. To persuade consumers to share the last-mile burden, companies have to provide reasonable compensation in the form of discounts or special offers.
Lockers are not a new concept. In the U.S., Amazon.com introduced an option for self-pickup at 7-Eleven convenience stores and pharmacies as early as 2011. It costs 30,000 to 50,000 yuan to set up a locker system in China, with the upfront investment recovered via charges for extended storage and consumer mailing, subsidies from e-commerce and delivery companies and the sale of advertising. According to State Post Bureau data, some 15,000 lockers were put into use in 2014 and handled 1% of total delivery volumes.
But usage of JD.com's locker service, which allows customers to request specific delivery times and locations, appears to have peaked in 2013. Sposter's third-party model may prove to be a more sustainable alternative.
City100 and Shenzhen-based Mail World are taking another approach. Rather than invest in lockers, their services use existing, frequently visited shops as delivery points. Mail World, for example, has set up package collection points within community stores such as fruit sellers and hair and nail salons. City100, meanwhile, has established distribution points on school campuses and other community locations, where it not only delivers fresh produce and other food, but also offers mobile phone account top-ups, ticket purchasing services and more.
This approach represents a new value chain between consumers and courier companies seeking to integrate and optimize previously scattered activities through better spatial distribution technology. Mail World operates close to the consumer in the community, integrating underused resources and breaking into fragmented community logistics networks. Such third-party platform providers rely on subsidies from e-commerce and courier companies, usually of around 1-2 yuan per parcel, rather than charging consumers.
Some delivery and e-commerce companies are setting up their own storefront networks. Tmall, Alibaba Group Holding's online shopping site, is working with existing retailers, while SF Express is setting up thousands of neighborhood Hey Customer outlets where users can not just pick up deliveries, but also place orders, drop off laundry, try on clothes and leave their electronic devices to be repaired.
A third approach leverages unused or underutilized labor for "crowd delivery," echoing the business model of ride-hailing service Uber Technologies of the U.S. JD.com's program utilizes small-shop owners and freelancers to handle last-mile delivery for 6 yuan per parcel; the company's centralized scheduling system matches willing couriers according to location, delivery time and customer rating with parcels awaiting delivery. Alibaba operates a similar service. Social network Renren began offering crowd delivery in 2013 and now has 1 million independent couriers using its platform.
STILL IN BETA But however you look at it, the various models all have their drawbacks. First, revenues for the new services depend on subsidies from e-commerce and courier companies. The lack of a clear profit model means that last-mile delivery companies are still in the capital "burn" phase, with insufficient tried and tested capacity to generate sustainable revenue.
Second, it is unclear how lasting customers' embrace of these services will be. Innovation may attract consumers curious about alternatives to traditional home delivery, but market testing is still ongoing.
From an industry perspective, an improved logistics system should aim to integrate cogs in the delivery wheel and not leave everyone fighting each other. To achieve this, traditional express delivery services would do well to leave the last mile to the experts and subcontract it to third-party professionals.
Yet the challenges of this transition look daunting. If consumers grow accustomed to the third-party community store delivery model, will online retailers be able to retain their influence? How should courier services maintain continuous interaction with consumers? How can service levels best be monitored to ensure a certain brand and consumer experience at third-party and community partner locations?
As third-party platforms and self-service points grow in importance as a bridge between courier services and consumers, their bargaining power will also gradually increase. This could squeeze courier companies' profits. Consider the case of food delivery company feng123, which recently raised $13 million in its first round of external financing. The company plans to move from food delivery into citywide courier services. It will not be long before more third-party platforms move beyond last-mile distribution, a development that will undoubtedly alarm courier services.
The emergence of lockers, third-party platforms and crowd delivery shows that the problems in China's delivery sector are not simply logistical but also relate to cross-sector business model innovation and application. While Internet-based advances and integration between online and offline retail are generating solutions to the last-mile problem, these will pose severe challenges to existing business models for e-commerce and courier companies.
Chen Xinlei is professor of marketing and co-director of the Branding Center at Cheung Kong Graduate School of Business in Beijing.