Shopee’s in-house logistics giving it a leg-up, next step is keeping the edge

SHOPEE’S efforts to grow its in-house logistics arm appear to be bearing fruit, with the e-commerce platform boasting efficiency gains in its delivery and fulfilment in its latest earnings. This came on the back of a record high in quarterly revenue for Shopee.

But the battle is far from over. Investors will need to watch if Shopee can defend its in-house logistics advantage against incumbent rival Lazada and new challenger TikTok Shop.

Shopee, owned by New York-listed Sea, recently posted US$2.7 billion in revenue for the first quarter ended Mar 31. This marked an all-time high, and also accounted for the bulk of Sea’s US$3.7 billion in Q1 revenue.

Seasonality was partly a factor, with both the Chinese New Year and Ramadan falling within Q1 this year and boosting online shopping. But a more pertinent growth driver was Shopee’s expansion of its in-house logistics arm, SPX Express.

SPX Express now delivers more than half of Shopee’s orders in Asia. In Brazil, Shopee’s other key market, this figure is about 70 per cent.

“We have put a lot of hard work into SPX Express, and today, it is one of the fastest and the most intensive logistics operators in our market,” said Sea CEO Forrest Li during the company’s latest earnings call.

Taking its logistics in-house has enabled Shopee to deliver orders more swiftly and efficiently. In Q1, about 70 per cent of SPX Express orders in Asia were delivered within three days of order placements, Li said.

Shopee now also directly manages the return and refund process, which has cut down resolution times and improved customer experience.

Leading position

SPX Express is seen as a considerable advantage for the company.

“We consider Shopee’s industry-unique in-house logistics as a key competitive moat and differentiator, which has been underappreciated by investors, in our view,” said Barclays analysts Jiong Shao, Lian Xiu Duan and Song Xinyao in a May 15 report.

“This in-house capability helps Shopee to... have the lowest delivery cost among (its) peers, plus to provide much better customer purchase and return experiences,” they added. Barclays has an “overweight” call on Sea, with a price target of US$87.

Other observers echoed this sentiment. Having in-house logistics has allowed Shopee to be “structurally defensible while at the same time optimising delivery and fulfilment costs”, said Li Jianggan, CEO of consultancy Momentum Works.

It also helps Shopee to stand out. “Better delivery times and overall customer experience help companies differentiate (themselves from their) peers, who might otherwise be competing on pricing,” said Roshan Raj, a partner at Redseer Strategy Consultants.

As SPX Express grows, it could reap more cost benefits. The logistics service’s cost per order in Q1 decreased by 15 per cent in Asia and 23 per cent in Brazil year on year, Sea CEO Li said in the earnings call, albeit without disclosing the base figures.

Defending the moat

These cost benefits will be important for Shopee to head towards profitability. The platform has had to continue spending aggressively to defend its market share against Lazada and TikTok Shop.

In Q1, Shopee doubled its sales and marketing costs to US$675.9 million. This weighed on profitability, with Shopee recording a loss of US$21.7 million on the basis of adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) – reversed from the year-ago US$207.7 million Ebitda.

It appears that investors are willing to stomach these losses for now: Post-earnings release, Sea’s share price rose more than 5 per cent at the market open to US$67.96. It has since risen even further to US$71.98 as at May 24.

But the past few years have illustrated how quickly investor sentiment can shift, with the appetite for losses vanishing in the face of rising interest rates and inflation. Achieving sustainable cost control, via logistics efficiency, will therefore be crucial for Shopee.

This will require continual investments, as Shopee’s long-time rival Lazada has also invested heavily in in-house logistics.

Lazada in 2021 told The Business Times that it had 400 logistics facilities across South-east Asia, including warehouses, fulfilment centres and sorting centres. Raj of Redseer expects that Lazada will continue investing in such capabilities.

New entrant TikTok Shop does not appear to have gone aggressively into in-house logistics in South-east Asia for now. But this could change after it achieves a certain scale in the market, said Raj.

Over in the US, TikTok has set up a network of warehouses and fulfilment operations, and is managing inventory and delivery, the Wall Street Journal reported in November last year.

Shopee will hence need to defend its in-house logistics moat. Long gone are the days when consumer deals and flashy interfaces were the weapons of choice for e-commerce platforms in South-east Asia.

In these times that require more prudence, the battle has shifted more deeply behind the scenes into old-school business logistics.

As Momentum Works’ Li puts it: “There is no secret in logistics – it is a traditional business where efficiency and people management will determine how competitive you are.”