Source | Bohu Finance (bohuFN)

Fengchao, which was once "not favored by anyone," has actually become profitable.

To solve the "last mile" problem, many express stations and express cabinets have emerged. Although there are many complaints about stations and express cabinets online, in fact, everyone still needs them.

Taking Fengchao, a leading enterprise in the express cabinet sector, as an example, as of May 31, 2024, Fengchao smart cabinets have reached 330,200 units, covering 209,000 communities.

Although the express cabinet business has been booming for a long time, there are not many people who are optimistic about it in the market, believing that it is not a good business.

On the one hand, express cabinets require heavy capital investment and require significant funding.

From 2021 to 2023, Fengchao's profits were losses of 2.071 billion yuan, 1.166 billion yuan, and 541 million yuan, respectively; and adjusted net profits were losses of 1.414 billion yuan, 842 million yuan, and 185 million yuan, respectively. In fact, this is conservative. Fengchao has been losing money since its establishment in 2015, and by 2023, it had been losing money for eight consecutive years.

On the other hand, given the significant upfront investment, the imagination space for express cabinets seems limited. In particular, the new express regulations that "express packages must be delivered to the door and cannot be placed in express cabinets without consent" are bound to bring some impact to the industry.

Surprisingly, however, Fengchao made money in the first five months of this year. From January to May 2024, Fengchao recorded revenue of 1.904 billion yuan and net profit of 71.6 million yuan.

Recently, Fengchao Holdings Limited, a provider of smart express lockers, submitted a prospectus to the Hong Kong Stock Exchange for a listing on the main board, with Huatai International serving as the sole sponsor. This marks the official start of Fengchao's journey to go public in Hong Kong.

01 How did the profitability come about?

In terms of its main business, Fengchao has three main services: express terminal delivery services, consumer smart delivery services, and value-added services and others.

Among them, express terminal delivery services are Fengchao's core business.

The prospectus shows that from 2021 to 2023, Fengchao's total revenue was 2.53 billion yuan, 2.89 billion yuan, and 3.81 billion yuan, respectively, with the number of express packages delivered at the terminal being 6.2 billion, 5.8 billion, and 6.5 billion, respectively. In the five months ended May 31, 2024, Fengchao also temporarily stored 2.76 billion packages. For each package delivered to Fengchao, Fengchao charges a service fee of 0.2-0.4 yuan to the deliveryman.

Revenue from express terminal delivery services was 1.46 billion yuan, 1.69 billion yuan, and 1.84 billion yuan in 2021, 2022, and 2023, respectively, but the proportion of revenue decreased from 57.6% in 2021 to 48.2% in 2023, gradually narrowing. In the first five months of 2024, revenue was 777 million yuan, accounting for only 40.8% of total revenue.

Another important reason for Fengchao's profitability is its consumer smart delivery service.

Revenue from consumer smart delivery services was 149 million yuan, 310 million yuan, 1.02 billion yuan from 2021 to 2023, respectively, and 692 million yuan in the first five months of 2024, accounting for 5.9%, 10.7%, 26.8%, and 36.3% of total revenue, respectively. In the first five months of 2024, Fengchao's revenue from consumer smart delivery services increased by 107.3% year-on-year, an increase of 358 million yuan over the same period last year.

This is thanks to the return rate of online shopping.

Consumer smart delivery refers to the process where the consumer, rather than the deliveryman, places the item in the locker for shipment.

This can be divided into two types: individual casual shipments and returns and exchanges, where online purchases are returned to the merchant. According to the prospectus, from 2021 to 2023 and the first five months of 2024, the number of individual casual shipments was 96 million, 105 million, 99 million, and 36.2 million packages, respectively.

In other words, the number of packages handled by the individual casual shipment service has remained relatively unchanged, relying primarily on returns and exchanges.

Since 2021, to enhance the shopping experience for consumers, mainstream e-commerce platforms have increased their investment in shipping insurance. With the popularity of shipping insurance, the return rate for consumers has also increased. In particular, the rise of live streaming e-commerce has significantly driven up the return rate due to impulsive purchases made during live streams. According to the "2020 China Live Streaming E-commerce Industry Research Report," the return rate for live streaming e-commerce is generally high, averaging between 30-50%, much higher than the 10-15% return rate for traditional e-commerce.

At the same time, to find incremental growth, Fengchao has successively integrated with platforms like Xiaohongshu and Xianyu to expand return scenarios.

In the first five months of this year, Fengchao supported 77.2 million e-commerce returns and exchanges, generating revenue of 692 million yuan. Since 2019, Fengchao's consumer smart delivery business has continued to grow in handling e-commerce reverse logistics, with a compound annual growth rate of 66.5% as of 2023, far exceeding the industry average of 22.7%.

However, relying on a high return rate to create a new growth curve does not give Fengchao a sense of security. Therefore, Fengchao has been exploring richer profit models.

02 Fengchao lacks a sense of security

Behind the 330,000 express cabinets located in almost all high-energy cities and key areas nationwide, Fengchao's greater value lies in the more than 300 million users connected to these locations.

Despite some controversy, even the simplest fee for overdue package pickup has helped Fengchao earn 800 million yuan. Starting around 2020, Fengchao began exploring charging fees. After a free storage period of 18 hours, a fee of 0.5 yuan is charged every 12 hours, with a cap of 3 yuan. According to media calculations based on locker turnover rates, Fengchao has collected approximately 800 million yuan in storage fees over the past three and a half years.

At the same time, Fengchao has further explored advertising, home delivery, and laundry services. In the first five months of 2024, value-added services and other revenue accounted for a quarter of total revenue, and Fengchao has focused more on laundry services.

For example, Fengchao has established a nationwide network of laundry factories. As of May 31, it had one self-operated laundry factory in Zhongshan, Guangdong, and 135 third-party laundry factories.

According to relevant statistics, the dry cleaning industry currently generates more than 100 billion yuan in annual output value and is growing at a rate of 20% per year. This indicates significant market potential and development space for the dry cleaning industry. However, the pain points of dry cleaning shops are apparent: high prices, lack of trust, inconvenience in delivery and pickup, and varying service quality.

With the development of the local life market, internet companies have also set their sights on the dry cleaning industry. Currently, the notable trend is the entry of express companies into this market.

Online platforms can save on store costs, but factory cleaning and personnel delivery and pickup are hard costs that cannot be avoided. Therefore, the entry of express companies into this market makes sense. Their logistics infrastructure can also help consumers address the pain point of "inconvenient laundry pickup and delivery." Taking Fengchao as an example, its laundry service covers clothing, shoes, home textiles, and even luxury item maintenance. Clothes for laundry are typically picked up by SF Express or deposited in express lockers, and Fengchao handles the cleaning and returns the clothes to the locker or the customer's home after approximately five days."Therefore, "stay at home" and "no contact" have become the most appealing marketing slogans in the online laundry industry.

On the other hand, as internet companies with a solid user base, they can typically ensure a certain volume of orders. On the laundry factory side, the larger the order volume, the lower the per-item cleaning cost under normal circumstances. Unlike traditional laundry shops that require storefronts, most online dry cleaners collaborate with third-party laundry factories, eliminating store costs."In other words, in addition to convenience and speed, price is the biggest attraction for consumers in online dry cleaning.

Generally, offline laundry shops require a minimum deposit to enjoy member discounts, while online platforms offer deals like "wash 3 pairs of shoes for 59 yuan" and "wash any 3 items for 69 yuan," which are highly appealing. During promotions or flash sales, online dry cleaning prices can be much cheaper than offline stores."It is conceivable that if Fengchao can successfully industrialize its laundry service, it could significantly disrupt the entire industry. However, when searching for Fengchao laundry and JD.com laundry on Xiaohongshu, there are many negative reviews, which may deter potential customers to some extent."Internet technology can streamline the cumbersome process of delivery and pickup and reduce costs and increase efficiency through centralization and centralized factories. However, the core competitiveness of the laundry industry lies in the ability to clean and return clothes flawlessly, which requires trust. Even if the price is low, one mishap can lead to a loss of trust."Of course, if Fengchao can leverage its express locker network and platform traffic to excel in laundry services, it may achieve a significant turnaround. However, at present, this does not seem easy."03 Final Thoughts

Along the way, Fengchao has faced numerous controversies, but ultimately, the express cabinet business is not an easy one. It seems that enduring some criticism and striving for improvement is currently necessary.

Reference Sources:

1. Poor Review: Fengchao, which lost money on express lockers for eight years, is now making money through housekeeping services

2. New Consumption 101: Is the laundry industry in chaos, with express companies winning by default?

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