Near-term last-mile delivery fee increase to be shared. Major franchised express companies have raised last-mile delivery fees by RMB0.10/parcel from 1 September.

An express company collects the fee from a parcel collecting franchisee and pays it to a delivery franchisee upon last-mile delivery. The fee is the main income source a delivery franchisee uses to pay couriers. Consequently, we estimate the average monthly income of couriers will increase by c10% (RMB500); this is in line with the government’s policy to improve salaries and strengthen social security. As prices are locked in during a contract, e-commerce sellers, express companies and franchisees will share the increased costs in the near term. Over the medium to long term, we believe an increase of RMB0.20-0.30/parcel in the last-mile delivery fee is reasonable.

Express delivery cost increase may impact small- and medium-sized ecommerce sellers more. The main express delivery companies have, on average, 4,000-5,000 franchisees, with the top 200 franchisees contributing 65% of total parcel volume. A cost increase of RMB0.10-0.20/parcel will increase logistics costs by cRMB8-16bn/year for the whole industry. We think it is harder to raise prices for large customers, but small- and medium-sized e-commerce sellers with lower bargaining power will likely absorb some of the rising express delivery costs.

Limited benefits for express companies in the near term; earnings resilience depends on regulatory policies and competitive landscape in the long term.

Yiwu has regulated delivery volume and prices since April; we estimate the last-mile delivery fee increase will raise local retail delivery prices by cRMB0.30/parcel.

Express companies and franchisees will benefit, but the current regulatory policy is limited nationwide. We think retail delivery prices will moderately increase in the next 3-6 months but express companies are unlikely to benefit. Over the long term, we think the beneficiaries of the express delivery price increase in descending order are couriers, franchisees and express delivery companies. Recent positive signals include: 1) market share of Best (BEST US, Not Rated) and STO continued to shrink; and 2) as regulators tried to separate pricing of products and delivery services, the pricing power of express delivery companies improved. Although the last-mile delivery fee increase helps to ease pricing competition, competition is intensifying and it will likely take time for profitability to rebound significantly (see China Express Delivery: 2021 outlook: Another tough year despite easing of price competition, 10 February 2021).