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No Amazon, no problem for Japanese courier Sagawa

Shift in focus to profitability from delivery volume pays off for company

Sagawa Express parent company SG Holdings saw a healthy increase in earnings in the fiscal first half. (Photo by Maho Obata)

TOKYO -- The parent of Japanese delivery company Sagawa Express has focused on profitability and reduced reliance on large customers like Amazon Japan, and the strategy is starting to pay off.

SG Holdings' group operating profit grew to 37.1 billion yen ($340 million) in the fiscal first half through September. That is 14% higher than the same period last year, and it beats the company's target by over 2 billion yen.

The results were supported by a brisk increase in delivery orders and SG's efforts to limit outsourced deliveries. Domestic analysts reacted positively to the results.

SG indicated in 2013 that it was refocusing on profitability. At that time, Japanese delivery services were handling more and more parcels from Amazon. SG increased its delivery capacity with more depots and subcontractors, but it could hardly keep up with demand. Later that year it withdrew from a delivery deal with Amazon, through which the U.S. company insisted on low fees in exchange for the promise of large delivery volumes.

"We strongly felt the risk of falling margins," an SG executive said.

The Amazon deal also came with seasonal fluctuations in demand. Deliveries spike in the gift-giving seasons in July and December, followed by sharp drop-offs. SG's strength had been stable demand from corporate customers, so the Amazon deal brought the unwelcome risk of inconsistent delivery volumes.

In the past year, the number of parcels SG handled peaked at 361 million in October-December 2018, and was smallest at 314 million in January-March 2019. These figures represent respectively 27% and 24% of the full-year total, a difference of just 3 percentage points, compared to a 7 point gap for market leader Yamato Holdings. The industry average is a 5 point difference, according to transport ministry data.

If companies cannot handle large swings in delivery volumes, they often resort to expensive outsourced delivery services. That allows the company to make more sales, but also increases costs. That can also mean more fluctuations in earnings.

In the past, major delivery companies like Yamato were able to profit even while handling fluctuating delivery volumes, in part by having their own workers put in large amounts of overtime to limit outsourcing.

But over the past few years, tighter labor regulations mean companies cannot rely on their workers putting in longer hours. A shortage of drivers also means delivery subcontractors now have stronger price-setting power, leading to higher outsourcing prices.

Yamato has been increasing its in-house delivery capacity to reduce subcontracting, but it is still only halfway to its goal.

SG, by contrast, has increased its earnings stability by focusing on profits. Its ordinary profit was 43.9 billion yen in the fiscal year ended March 2015, when it reduced reliance on Amazon. They have steadily increased since then. For the current fiscal year through next March, SG expects to earn 80 billion yen in ordinary profit, up 80% from five years earlier.

Yamato's ordinary profit, which was 70.8 billion yen in the year ended March 2015, fell to 34.9 billion yen in the year to March 2017 as the company suffered from a labor shortage. Yamato estimates it will reach 59 billion yen for the year ending March 2020.

SG has also successfully introduced price hikes in the April-September period to further boost its profits. Average delivery unit price rose 5% from a year earlier to 636 yen. The company increased its consolidated operating profit forecast for the full year by 3.5 billion yen to 75 billion yen, up 7% from the previous year.

Yamato's price hikes have grabbed headlines, but SG actually started raising rates more than five years ago, and industry insiders have come to see it as a pricing leader. It softened the impact by increasing prices gradually.

SG's performance, however, has so far failed to impress investors. While its share prices have not fallen dramatically since the start of the year like those of Yamato and Japan Post Holdings, they remain weak. Analysts attribute this to wariness of a possible drop in consumer spending after the October sales tax hike in Japan.

Some analysts warned that delivery orders may decrease after the tax increase, but an SG insider said the impact has been "minimal." SG raised its full-year dividend per share forecast by 2 yen to 44 yen at the results briefing for the fiscal first half to September.

"SG may exceed its full-year earnings target," said Ryota Himeno, an analyst at JPMorgan Securities Japan, adding that he expects the earnings results to be strong.

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