In many markets e-commerce firms only offer free delivery for pricier orders. But China’s vast army of fulfilment staff means that consumers can even get packs of cheap cotton buds delivered to their door for no extra charge.
Thriving in the enormous, lower-end reaches of the market is ZTO Express, founded in Shanghai in 2002 and now based in Tonglu in Zhejiang province (see WiC344).
While rival SF Express has grabbed the lead in higher-margin deliveries between businesses, ZTO has zeroed in on higher-volume deliveries to consumers.
ZTO’s business is built on a franchise model across thousands of third-party partners in smaller cities and rural towns, while SF has invested heavily in its own assets, including its own airports and aircraft. Analysts have tended to hold SF’s model in higher regard, concerned that the franchise approach becomes too complex to manage.
“People who question the franchisee model don’t understand our industry. Any company with hundreds of thousands of employees is difficult to manage,” ZTO’s vice present Jin Renqun told Huxiu earlier this month. “Some people simply cannot accept the fact that a group of farmers and villagers can be successful.”
ZTO’s approach helps it to compete with lower prices. This month it said it had delivered 2.7 billion parcels during its most recent quarter, 35% more than in the same period in the previous year, although the Wall Street Journal noted that it only makes about $0.30 of revenue for each of the parcels it delivers.
Having Alibaba as a minority shareholder and anchor client is a help, although the e-commerce giant is spreading its bets with investments in four of the six largest delivery firms in China. That includes the similarly-named STO Express, in which it bought a 14% stake for $693 million this month too.
Alibaba’s goal is 24-hour delivery anywhere in China and 72 hours worldwide. But it also wants to bring down the cost of logistics in its home market, which are said to amount to about 15% of domestic GDP, or three times the level of more developed markets. That would shake out a lot of the players.
However, ZTO is confident that there is enough business to go around and that its push into smaller towns and rural areas will pay dividends as e-commerce sales start to mature in wealthier cities. Indeed, its leadership in parcel volumes puts it in a better position for when the market starts to consolidate, the company added.
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