Intra-city Logistics is Undergoing One More Upgrade
Blackstone announced it is buying a network of U.S. industrial warehouses from a Singapore-based GLP for USD 18.7 billion earlier this month, bringing the spotlight to logistics again. As the e-commerce industry keeps surging with a breakneck speed, especially in China, where the new generation of consumers is getting more digitally savvy, disruptions in the transportation process are becoming more prevalent, and companies are looking for ways to tackle this issue.
The development and popularization of inter- and intra-city logistics services, LTL (Less Than Truckload) expresses, and logistics informatization are all reshaping the future of logistics in China.
Previously, we have sat down with Shan Dandan, CEO of the leading inter-city trucking platform ForU (a.k.a. Fuyoukache, 福佑卡车 ), and looked into his company's strategic plan for the developement of new commercial infrastructure. This time, we've interviewed several Lalamove’s drivers and investors and dove into the latest goings-on in China’s intra-city logistic service industry.
Founded in 2013 and headquartered in Hong Kong, Lalamove forayed into mainland China in 2014 and is currently matching customers with van, truck and motorcycle drivers in 136 Chinese and 13 overseas cities. With the intra-city freight industry being fragmented and disorganized, Lalamove centralizes logistics services, making them more effective, and gradually establishes new standards and regulations.
The logistics industry in emerging markets is still in great need of capital and technology to keep developing and transforming for the better. Nonetheless it is sure to create a booming vertical market full of innovations.
China’s road freight market is now worth over CNY 5,000 billion (USD 700 billion). There are more than 5 million heavy-trucks and 14 million minivans in China, according to Bain.
Lalamove targets the market directly focusing on the segment of intra-city logistics that is valued at roughly CNY 1,200 billion (USD 168 billion) in China. Although Lalamove recently also made advances into inter-city logistics, its main business interests remain in intra-city express delivery.
As the sharing economy prospers, Online to Offline (O2O) platforms start taking over the trucking industry. It was estimated that 20 O2O logistics companies had raised approximately USD 2 billion from 2014 to 2017. With more investments flooding the industry and improving its structure, these companies were trying to duplicate the success of DiDi, which managed to beat Kuai and Uber relying on one powerful weapon, subsidies.
However, 2C an 2B businesses operate completely differently. 2B's are working with a batch of enterprises and business that make more sensible decisions than individual consumers with higher requirements in terms of service and experiences. Thus, to build a wide and deep moat a 2B will likely need to put more emphasis on high-quality service and increased efficiency. As for Lalamove, its main revenue streams come from individual drivers, brokers, and other outsourcing capacities.
58 Suyun, previously operated under 58 Home, a subsidiary of New York-listed 58.com (NYSE: WUBA) merged with a Hong Kong delivery startup GOGOVAN in 2017. At that time, 58 Suyun’s priority was to cut costs to increase profits, not to mention grabbing market shares. In addition, 58 Home’s CEO Chen Xiaohua (陈晓华) was busy expanding its cleansing services, which let then weaker rival Lalamove catch some breath in Guangzhou.
Another rival Yunniao struggles. Fresh food startups that have recently been suffering from market downturns and fierce competition, went bankrupt. Those startups had contributed a lot to Yunnaiao’s receivables. It creates a challenge for Yunniao, according to people familiar with the matter.
Fee-based model & commission-based model
It is normal for ride-hailing companies like Uber, Lyft and DiDi to use take rate as one key metric to analyze the state of their businesses. The term defines net revenue as a percentage of gross bookings. Ridesharing companies can choose to increase the take rate once they achieve a certain level of scale, which drives the top line performance. That is how these 2C companies commercialize and generate cash flow. Several logistics companies like Yunniao (云鸟) and Kuaigou Dache ( a.k.a. Suyun, 快狗打车, formerly known as 58速运) adopted that model while Lalamove chose another key financial driver, charging membership fees.
Here are sume useful statisticst related to membership fees: 72% of operating income of Costco, for example, is derived from its membership fees, yet those fees only accounted to 2% of the businesses total revenue in FY 2017. Lyft recorded a 26.8% take rate in 2018, surging from 18% in 2016. Uber and DiDi’s take rates are not muchh different, ranging from 20% to 25%. Kuaigou usually charges 10% from bookings, with the rest going to the driver’s account.
Lalamove charges drivers from CNY 99 to CNY 699 each month in membership fees, with CNY 1000 as a nonrefundable deposit, unless the driver wants to quit. Lalamove won’t charge a 15% commission fee for each order until the driver starts picking up five orders a day, according to a Lalamove driver.
We believe this system is what makes today’s Lalamove. Relying on the membership renewal rate and membership revenue, Lalamove already saw a green financial statement this year, according to people familiar with the matter.
To calculate the BEP and find out the potential key drivers for driver’s retention we created a model that is based on official open-source information and interviews. Bellow are our key assumptions (Figure 1) and the model:
We divided the intra-city express delivery platform into two types by its charging model: the fee-based and the commission-based. The former charges a membership fee for their service and a 15% commission fee after five orders per day for each consecutive order; the latter is compensated by a 10% commission on each order.
Figure 2 represents the net income (net revenues minus costs) that one driver can make in one month using two types of platforms.
In our CNY 60 average price scenario, the BEP for drivers employed by fee-based and commission-based providers are pretty similar; in fact, so are drivers’ benefits under the two models.
In our CNY 100 average price scenario, net income for drivers employed by fee-based businesses surpassed those from the commission-based ones after they delivered three orders a day.
In our CNY 150 average price scenario, net income for drivers from fee-based platforms increases slower than that from the commission-based ones as their income keeps growing even after they have reached six orders per day.
According to our investigation, it takes drivers 1-2 hours to finish an order worth CNY 60 and 2-3 hours for a CNY 150 order. Normally they can deliver 3-6 orders per day. The range is constraint by driver’s physical conditions, orders' time limits and also overall market dynamics.
The idea that the platform charges drivers to join was unimaginable before, however, it has proved to bring drivers sizable benefits as long as the average price per order is high enough (in our case, the average price was above CNY 60).
In addition, the membership provides platforms like Lalamove with a way of pre-selecting the demographics of their driver base without a need for extensive research. The platform takes less risk in assigning orders based on different membership classes, reflecting the driver’s willingness to devote his or her time and efforts accordingly. On top of that, more orders for selected drivers make it possible to deliver high-quality services to customers more effectively. Paying for a higher membership class in a platform is akin to making a long-term commitment. One driver we interviewed has been working for Lalamove since 2014 and we believe he is definetely not the only one. They have a strong reason to stay. Lalamove follows a fee-based business model, implying that drivers purchase memberships expectating them to bring them more orders to make up for the initial investment.
Lalamove employs a self-reinforcing business model of a virtuous cycle. The cycle begins with transparent pricing and large demand for drivers on the platform. Most competitors fail to encourage drivers as much as Lalamove does and are forced to go out of business.
For example, most logistics information service platforms only connect drivers and customers and assign orders based on algorithms. Lalamove’s drivers, however, need more devotion to get more high-quality orders. For instance, they could offer high standard services which in return would increase their credit. When more drivers join the club, Lalamove’s scale increases. This increase in scale allows Lalaomove to spread its overhead like R&D and marketing over a larger base as well as gives the company a stronger position in competing with other players.
Driver side, the supply side of the company, is also the bridge between the company and customers. Only when drivers’needs are met well in Lalamove, could they and the company serve customers better. With its resounding 200% gross bookings growth in 2018, It is clear that drivers consider the advantage of using the platform well worth the membership fee. The fee allows drivers to stop feeling as if they are being charged for each drop of their sweat.
Lalamove’s NPS (Net Promoter Score) was 65.8, quite high compared to tech giants like Amazon and Apple, that recorded scores of 69 and 76 in 2013 when they were all in their relative infancy. Lalamove’s 2018 goal was a score of 75, according to company's press release.
Complexity of freight & customer service
As we mentioned before, the subsidy strategy that works in a 2C world does not necessarily work in the 2B one. Moreover, freight can have additional dimensions which create complexity while dealing with consumers and passengers. One example is Uber, when it was rising in the on-demand passenger market, the company started cutting off its brokerage competitors C.H. Robinson Worldwide Inc. and Echo Global Logistics Inc., as it was chasing market share, according to an analyst from Morgan Stanley.
Uber continues investing in its Uber Freight business, which generated USD 125 million net revenue in the fourth quarter of 2018 (Uber Eats earned USD 165 million during the same period). Uber is sharing 99% of its gross revenue with its carriers (vs. the industry standard of 80-85%).
Uber clearly has a misperception of the freight business where dramatic undercutting of prices is erroneous. Ensuring that the shipment will be delivered duly is a key value-add for brokers or platforms that is not a component of the on-demand passenger business.
Lalamove designed a system to calculate a cartage fee based on several dimensions, from the weight, volume, distance from stairs to cars and so on. The price for cartage set by Lalamove, which will be stated clearly in the order, can be adjusted by drivers and customers offline to suit more flexible needs.
In December 2017, Lalamove launched its enterprise version as the company saw more enterprises using the personal version to book services. company employees had to pay from their personal accounts and apply for reimbursement later, sometimes they also had more requirements in terms controling where the truck is and when it will arrive at the destination as opposed to personal users. Lalamove enterprise version solves these problems, offering a one-stop payment solution that covers everythhing from recharging to invoicing.
To expand capacity Lalamove attracts drivers who use their own vehicles which creates lets the company to compete with incumbent brokers. 90% of Lalamove vehicles are owned by individual drivers, brokers, and other outside players. A large capacity remains an advantage for a platform like Lalamove. By building a complete and stable supply, Lalamove can manage shipments and vehicles dynamically as well as improve delivery time to reach higher efficiency and cost advantages.
Additionally, an increase in fragmented needs is another addressable market that Lalamove can target, with smart retail getting more popular in China. The last-mile networks will need to be optimized for pick-up and delivery. It is also important to note that the greatest factor behind serving enterprises is that they normally have a shipment schedule while individual orders tend to be more sporadic.
Last January, Lalamove started a pilot plan in Shenzhen to offer drivers new cars. Cooperating with automakers, drivers can now buy New Energy logistics cars, vans and trucks for a floor price, without negotiating with dealerships. They can also register their cars under Lalamove’s name and get licenses.
Fuel and wages make up most of individual delivery costs, and because those are highly influenced by prevailing market forces, carriers typically have minimal control over those costs, according to Deloitte.
Today transportation platforms are covering more transaction process than ever before. Companies create a network effect and raise bargaining power, only to later reap the benefits of value added services, for instance, offering lower fuel prices for drivers adopted by Lalamove. Drivers can get discounts for fuel from several selected gas stations that Lalamove cooperates with. But the horizon is not as clear as it might seem.
Offering lower oil prices can increase drivers’ benefits and loyalty. However, drivers from Lalamove are reluctant to use this service since driving to one of those selected gas station is not always convenient and it saves less than CNY 1 for one-liter of fuel, more importantly, drivers need to add a new bank account to get access to the service.
Another alternative solution for fuel costs is electric vehicles. EVs promise higher energy efficiency, lower emissions, lower maintenance costs. The technology is still nascent, but the Chinese government goes out of its way to promote the new means of eco-friendly transportation and subsidize consumers, logistic electric vehicles are sure to be part of Lalamove’s future strategy. The company has already expanded its new energy vehicle fleets in cities with favorable plate policy in 2018 and is expecting to expand to the total of 30 cities in 2019.