SINGAPORE Post (SingPost) is having some trouble generating profits from its growing e-commerce logistics business, and given the money that startups are pouring into this space, it is easy to see why.

 

The mainboard-listed company reported growth in e-commerce volumes in the half-year ended September, which lifted its revenue 9.6 per cent to S$707.8 million.

 

Its net profit, however, shrank 42.1 per cent to S$30.9 million, as volume-related expenses rose.

 

The company is still investing in e-commerce it has bought a 38 per cent stake in Australian logistics player Freight Management Holdings for A$85 million (S$83.8 million) - but is only one among the many players trying to buy their way into the market.

 

Margin challenges

 

Over the last decade, letter-mail volumes have come down, and parcel volumes it has handled have gone up - trends that have coincided with the fall in its margins.

 

Except for a standout 2016, SingPost' s annual net profit margin has fallen: It stood at 28.4 per cent in FY2011 by FY2020, it was 6.9 per cent, and in H1 FY2021, 4.4 per cent.

 

Reducing the unit cost of moving each parcel while maintaining delivery fees is tough. Access to the financials of private companies is limited, but it is unlikely that many startups - although flush with cash and free from the burden of legacy business - have succeeded doing this.

 

One major difficulty is the so-called " last mile" - getting that parcel from the logistics company' s warehouse to the customer' s door.

 

Companies active in this space include Ninja Van, Lalamove, J& T Express and Keppel subsidiary UrbanFox. SingPost is a large player, but its size has not necessarily given it an advantage over these competitors.

 

Merchants generally look at three factors when choosing a third-party logistics provider: price, reliability and the level of support.

 

On price, SingPost is competing against venture-funded startups and smaller players in South-east Asia, which are looking to acquire merchants and build scale. Without the pressure to turn a profit immediately, some of these new kids on the block can offer cheaper options others have the deep pockets to invest in technology.

 

In the reliability arena, startups have experienced - and learned - from problems such as theft by couriers, people swopping items in the mail, items being damaged, and drivers using vans for their own purposes.

 

In customer experience, the smaller players are also able to move quickly on requests such as IT systems integration, real-time tracking and exchanges or returns.

 

Last-mile players are now also venturing into services they can cross-sell - such as procurement.

 

Squeezed at the top

 

Even as it feels the heat from smaller players, SingPost is facing competition from the larger ones as well: Multinational logistics corporations are trying to grow their share of the business-delivery market, a segment that often involves large volumes of higher-value items being sent to specific locations instead of scattered destinations.

 

Players in this space include FedEx and UPS, which have also struggled with profitability for consumer deliveries.

 

UPS, for instance, posted a 15.9 per cent rise in third-quarter revenue and an 11.8 per cent rise in net profit, but its domestic operating profit slumped 9.7 per cent after factoring in costs for weekend operations, hiring new workers and speeding up delivery times. The company has also reported lower productivity gains and delivery density.

 

Nevertheless, these giants see e-commerce as a permanent fixture in the logistics industry. DHL Express is pumping 750 million euros (S$1.2 billion) into new and existing facilities in Asia-Pacific markets, and into its air network.

 

Meanwhile, Alibaba' s logistics affiliate Cainiao is ramping up its network by operating international chartered flights. It also claims to have proprietary technology that boosts parcel processing.

 

The bright spot is that e-commerce penetration is only at 4 per cent of retail sales in Asean, compared to 24 per cent in China, said a report from DBS Group Research.

 

There is still time and room for SingPost to improve its performance. In Singapore, the group' s e-commerce market share has grown from 20 to 45 per cent in the last three years. Its " smart letterbox" initiative, a system that stores and dispenses mail and small packages, aims to revamp the national postal infrastructure.

 

The Singapore government is leading efforts to develop last-mile infrastructure. A public consultation launched on Thursday seeks views on the deployment of a nationwide network of parcel-lockers.

 

SingPost, a member of the Universal Postal Union, can link up with other national postal services for deliveries. The group has enjoyed strong growth in e-commerce logistics in Australia, and growth in the number of customers using its solutions in areas such as warehousing and fulfilment.

 

The company needs to work out how it can play to its strengths in order to compete. With a clear strategy, it has a chance of muscling out some of the smaller players and keeping up with the larger ones.