BEST Inc. to Reduce Costs, Focus on Expanding Express and Freight Segments

The logistics provider is seizing opportunities in the e-commerce delivery market in China, and beyond
CapitalWatch StaffNov 17,2020,17:29

As Covid-19 subsides in China, and supply chains recover pandemic-related setbacks, logistics provider BEST Inc. (NYSE: BEST) is revamping its business with a focus on its core express and freight businesses and cutting costs.

BEST Inc., based in Hangzhou, announced some restructuring over the weekend and will release third-quarter financial results this Thursday. The company aims to reduce expenses by offloading Store+, the platform that facilitates online merchandise sourcing and store management for small merchants to participate in online-to-offline commerce. That platform has weighed on BEST’s performance as of late.

Now, BEST said, it will focus on its core income-generating business segments.

"Over the past several quarters, Store+ has been making encouraging progress in reducing losses,” BEST’s chairman and chief executive, Johnny Chou, said in a statement on Sunday.

“However, as we continue to deploy capital towards our core businesses in order to strengthen our position in the increasingly competitive market environment, we concluded that phasing out Store+ is in the best interest of our Company as a whole and in line with our commitment to sustainable profitability and enhancing shareholder value."

In the second quarter, Store+ fulfilled 768,000 orders, a 1.6% decline, and generated $93 million in revenue, down 17% year-over-year. Costs of revenue in this segment made up $81 million. While BEST’s Express and Freight segments booked about 104 million yuan and 55 million yuan in net income for the second quarter, respectively. Store+ recorded 74 million yuan in losses.

Store+ will be offloaded to independent third parties by the year-end for continued operations, the logistics provider said.

Instead, BEST will direct its resources on expanding on the success of its core businesses— Freight, Express, and Supply Chain Management. These core segments operate synergistically in an integrated platform for merchants and brands looking for smart logistics solutions.

BEST also announced it has shifted some management roles within the company. Shaohua Zhou, former senior vice president and general manager of BEST Express, assumed the role of special assistant to the chairman. In his place, BEST appointed Xiaoqing Wang as the new VP. Wang, an EMBA graduate from The University of Texas, has managed BEST's Express and other businesses in Jiangsu province branch since 2009. Prior to that he served at UTStarcom China.

Betting on E-commerce

China is the world’s largest e-commerce market that’s triple that of the United States. The country’s top online retailer, Alibaba Group (NYSE: BABA; HKEX: 9988), broke all records again last week on Singles’ Day, posting $74 billion in sales from Nov. 1 to Nov. 11. The annual shopping festival this year was a sign both of China’s rapid post-Covid-19 recovery, as well as unrelenting e-commerce growth.

Jason Goldberg, chief commerce strategist at Publicis Communications and host of e-commerce podcast the Jason & Scot Show, predicted the record-breaking sales for China’s retail giants. He also argued that the trend will continue after the outbreak.

"Those that win digital commerce in China, win commerce," Goldberg told CapitalWatch in late October.

It is precisely that opportunity BEST looks to seize.

The company’s biggest revenue generator, BEST Express, shipped 2.3 billion parcels in the second quarter, representing about 11% of the country’s e-commerce packages.

BEST Freight, which delivers bulkier and heavier goods than express parcels from door to door, achieved a growth rate significantly higher than industry-wide average, as well as strong gross margin expansion of 2.5 ppts YoY, driven primarily by the Company's focus on e-commerce products, economies of scale and continuous network optimization,” the company wrote in its second quarter report. Freight volume increased by an impressive 29% in the quarter, while average cost per ton narrowed by 21%.

In a highly competitive logistics market, BEST has the backing of Alibaba Group and the partnership with Cainiao Network. In September, together with Cainiao, it established China-Malaysia cross-border e-commerce logistics service for better shipment services on Singles’ Day and forward.

Internationally, BEST has been expanding its presence in Southeast Asia and beyond. Last year, it launched express delivery services in Thailand and Vietnam. Despite interruptions from Covid-19, the company entered three more markets in Southeast Asia this year, with plans to operate 12 sortation centers and around 400 service stations in Malaysia, Singapore, and Cambodia over the next three years.

Cross-border e-commerce is one of the fastest growing segments in China and will reach a volume of $124 billion this year, nearly double from 2019, according to a recent report.

Chinese giants like Alibaba, PDD, Tencent and JD. Com—are all doubling down on this booming market. As a third-party logistics supplier to support e-commerce fulfilment and delivery, BEST is in a good position to capitalize from such growth.

Other growth factors are increased sales in lower-tier cities, improved fintech, livestreaming and media influencers, as well as group buying, just to name a few.

BEST will release its third quarter financial results on Thursday, Nov. 19.

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Topics:best, logistics, ecommerce, china