Thailand’s last-mile delivery market facing an oversupply

Over the last two years, the pandemic has caused a surge in demand for services in some industries. The e-commerce industry, which experienced the most growth during the pandemic, needs to ensure it could meet the demands of its customers. This included ensuring their deliveries are made on time.

As such, many e-Commerce platforms begin outsourcing their services to delivery startups. various vendors have pushed out low-cost, high-quality logistics services domestically and have begun end-to-end domestic delivery. Larger e-commerce platforms had enough funding to even set up their own logistic companies to ensure minimal disruption to their deliveries.

In Thailand, the Thailand post delivered approximately 2.4 billion pieces of parcels in 2020. Overall, there were 3.5 billion parcels delivered. When it comes to online food delivery, there were 27 million users, with Grab leading accounting for 50% of the market share followed by Foodpanda in 2020.

While the pandemic is starting to ease, with restrictions being lifted in some areas, Thailand’s logistics market is still growing rapidly and is expected to increase by US$18.89 billion between 2021 and 2026.

According to Anthony de Ruijter, Senior Associate at Third Bridge, Thailand’s delivery market is made up of two different key focuses. The first one is the instant delivery market. The instant delivery market focuses more on instant consumer needs. This includes food deliveries and such which are normally delivered within 30 minutes to a day.

The second one is the express delivery and B2B delivery market. Compared to the instant delivery market, the express delivery market is focused more on the traditional B2B delivery services. However, the express delivery is more for parcels that are delivered within a day or two while the B2B delivery market takes longer till about a week. This is more in line with economic growth and the spending power of the market. Express delivery is often the bigger market as it has both offline and online services.

“The major impact of the pandemic was the negative sentiment towards offline retail. This has sparked a large increase in e-Commerce. It has led to a change in growth characteristics of the industry and divergence in the express and B2B delivery industry,” commented Ruijter.

Ruijter also pointed out that the express delivery needed more people on the ground compared to B2B deliveries simply because they had a faster turnaround. The express delivery is also very dependent on labor, meaning if a driver got infected with COVID-19, the entire service was disrupted.

An oversupply problem?

Interestingly, Ruijter also said that the main problem in Thailand’s delivery market was not a shortage of delivery services but an oversupply. He explained that the technology was easily adopted by these companies, but they had problems when it came to scaling the business.

“The problem now is a quantum of oversupply. The ratio of supply to express delivery volumes is 1.5 or 2 to 1. There is a large supply overhang. Businesses are competing to utilize the capacity. The biggest fundamental operating challenge from the commercial side is pricing pressure. When you have pricing pressure, it becomes a longer-term issue. It is not isolated to a certain market in Thailand. It’s a nationwide issue, including rural areas,” explained Ruijter.

As such, Ruijter said scale is becoming an important differentiator. Scale is about putting capital in and scaling on the ground. But apart from the commercial challenges, there are also operating challenges.

With express deliveries, there are issues with route irregularity in the last mile. There’s a lot of turnover in this which requires drivers to be skilled and handle customers that are different. The drivers need to be professionals, which has led to some companies offering incentives for this to ensure drivers perform. In contrast, B2b deliveries go to more established routes. Delivery time is also another challenge. There is a loss of productivity when it comes to delivery management, especially in rural routes.

“The current pricing is unsustainable. This would see the industry consolidate to have a net beneficial impact on prices. People have been attending the market as it has been attractive. However, most e-commerce platforms are now in-housing, a trend that is on the rise in many Southeast Asian countries. A lot of e-commerce platforms want to control the end-to-end product. They want to own the process. Hence, when e-commerce platforms in-house add their own capacity to the market, that will compete with the existing players,” he mentioned.

Who really controls the delivery market?

Ruijter added that e-commerce platforms actually control a majority of the express delivery market. As this happens, added pricing pressure will now see the other companies having to compete as well. It will lead to a demand-supply imbalance. Hence, delivery companies need to understand that scale is important as most of them are running on negative margins currently.

“In Thailand, the price per parcel has declined by 30% to 50%. This is unsustainable as most delivery companies are running all-in operating costs per parcel. The quantum of negative operative margin is quite substantial. The only way around this is to balance the fixed cost over a greater number of units, which is where the scale elements come in,” he explained.

With that said, Ruijter believes the express delivery market in Thailand may not be as profitable as it should be in the next three to five years. None of the delivery companies are profitable from the conversations had with the companies. The only possibility for delivery companies in Thailand now is to have distribution capacity near the customer to maximize efficiency.

“You need the capacity to spread out the cost. At the end of the day, you need to have a higher market share. But everyone is taking the same approach. There is no secret to this and it is all about who has the lowest cost. One thing that can be done better is to invest in sorting capacity. It may not directly reduce cost but improves the overall logistic chains. By investing in sorting capacity, you can reduce the logistics bottleneck,” highlighted Ruijter.

As such, he believes that the tech element and influence in the market remains to be seen if it will make a difference as it’s more of a scale game in Thailand’s express delivery market.

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