The year 1952 brought a separation of airline subsidies from airmail. The Post Office Department paid airmail compensation and the Civil Aeronautics Board made all airline subsidy payments, based on national interests aside from airmail.
The needs of passenger traffic overtook those of mail cargo in the second half of the 20th century. Airline companies organized their routes to maximize passenger needs. By 1975, airmail had become a fundamental part of the U.S. Postal Service’s transportation plan. That October, first class mailers no longer had to pay an extra fee for airmail service.
FedEx
In 1971, Smith incorporated Federal Express with his college idea of an integrated delivery system specifically designed to accommodate time-sensitive shipments with airfreight as the core.
Postal system has its political importance, which is why it’s included in the constitution. As the US expanded, how information / news / mails were transmitted were directly influencing the limit of a united society.
On July 7, 1838, Congress declared all railroads to be post roads and enabled the railways to make contracts as long as sending mail by rail cost no more than 25 percent above transporting it by stagecoach.
But it’s the industrialization that enabled the US to include / connect California and other lands that are far away from the initial states.
In 1848, US acquired California at the end of the Mexican War. Under the Treaty of Guadalupe Hidalgo, Mexico also recognized the U.S. annexation of Texas, and agreed to sell California and the rest of its territory north of the Rio Grande for $15 million plus the assumption of certain damages claims.
In November 1848, Postmaster General Cave Johnson dispatched a special agent to California to establish Post Offices. By Christmas, steamships were carrying mail from New York to California via the Isthmus of Panama. This was before the construction of the canal. When the ships reached Panama, the mail was taken off and transported in canoes or on pack animals – and later by railroad – about 50 miles to the Pacific coast. Another steamship collected the mail on the Pacific side and headed north.
The first U.S. Mail traveled to California by steamship, via the Isthmus of Panama, in 1848 | Source: USPS
Congress authorized funding for the overland routes not because they brought any financial profit to the Post Office Department or the federal government, but because they helped build and bind together a nation.
Also briefly mentioned in 一朝风雨一代王：Sears, Walmart, Amazon, the expansion of the US rail transportation contributed to the growth of USPS (Post Office Department at the time).
Source: gorhistory.comSource: gorhistory.com
In 1862, mail was sorted en route, as a train moved between two points, using converted baggage cars.
By the early 1900s, railroads were critical to postal operations. Like Union Station in Washington, D.C., located adjacent to the City Post Office Building, the Post Office Department ordered that all new main post offices in large cities be built as near as possible to the principal railroad station.
When the current coronavirus (COVID-19) hit the world and people prepare to stay at home for weeks, some of the social infrastructures are receiving increased attention.
The delivery system is a very good one to start. As uber not only provides uberEATS but also grocery delivery, Walmart / Target / CVS increasingly focus on delivery, etc., I will try to review the development of US delivery system recently and what is implied for the future.
Pre-industrialization: The Origin And Natural Power
The origin of United States Postal Service (USPS) can be dated back to 1775 when Benjamin Franklin was promoted as the first postmaster general.
In 1778, the US Constitution, Article I, Section Eight, known as the Postal Clause, says “The Congress shall have Power to establish Post Offices and post Roads”. This explains the importance of the postal system and its position as a government branch nowadays.
In the early days, mails were mainly carried by manpower and horsepower. In 1785, the Continental Congress authorized the Postmaster General to award mail transportation contracts to stagecoach operators, in effect subsidizing public travel and commerce with postal funds. Despite their higher costs and sometimes lower efficiency, stagecoach proposals were preferred over horseback.
The Philadelphia Stage Coach (about 1800) | Source: https://peterpappas.com
Below is the chart for Jumia’s performance in terms of GMV.
A spike in 2018Q4 just before IPO is controversial..
Although with the “artificial” growth in 18Q4, the trend looks good
The more worrying part is the slowdown in GMV growth – especially when Jumia is still has a long way to go
Jumia’s full year 2019 GMV is €1.1 billion, up 33% compared to 2018.
Comparatively, Pinduoduo’s GMV in the twelve-month period ended December 31, 2018 was RMB471.6 billion (US$268.6 billion), an increase of 234% from RMB141.2 billion in the twelve-month period ended December 31, 2017.
Combined with Jumia’s annual active customer base, we can see the GMV per AAC declining over time.
In its Q4 press release, Jumia says “we have reduced promotional intensity and consumer incentives on lower consumer lifetime value business. While most product categories experienced GMV growth in the 20 to 50% range, phones and consumer electronics contracted by approximately 20% on a year-over-year basis. This aspect of the business mix rebalancing will likely continue to negatively impact GMV development over the next two quarters.”
Source: Jumia 2019Q4 Presentation
“…we have increased our focus on everyday product categories such as Fast Moving Consumer Goods (“FMCG”), fashion, beauty and personal care as well as digital services which provide affordable entry points into the Jumia ecosystem…”
We could also see that Pinduoduo’s GMV per active buyer is a little bit insane..
approx. annual GMV per active buyer = $268.6 billion / 418.5 million = $641.8
Jumia is at ~€180 in 2019, using annual GMV divided by ending AAC.
To compare it with consumers’ e-commerce purchase across the globe..
In the future where Fintech firms dominate, established companies are reacting with three main strategies:
Cut costs for legacy business lines – like what we said in a previous post Banking Headcount Cut
Consolidate with other legacy companies to gain more market share and thus more say/power, further cutting expenses and trying to get more economy of scale – like what we said in the last post From TD Ameritrade To E-Trade: A Wave Of Consolidation
Acquire Fintech startups or replicate what they are doing – like the title of this post Buy & Be FinTech
Plaid is a Fintech firm that enables a lot of other Fintech apps & digital transaction based businesses, providing underlying APIs. It counts Venmo, Robinhood, Coinbase, Acorns, etc. as customers.
Credit Karma lets people check their credit scores, shop for credit cards and loans, file taxes and more. It had close to nearly $1 billion revenue in 2019, growing at 20%.
The company started out originally in 2007 providing free credit scores, later extending that to full credit reports. Credit Karma’s launch of a financial planning tool in 2013 drew a direct comparison to Intuit’s Mint. And since then, Credit Karma has launched other products that directly rival Intuit, for example a free tool to help people file their taxes. These not only represented direct competition, but a disruptive threat, since Credit Karma’s products skewed younger and were built on a “free” premise (offering the products at no charge and instead making money off showing users and selling relevant, related products). The fact that Credit Karma partners with so many other financial services providers also means it’s sitting on a huge data trove that it leverages to build and personalize products, representing a data science angle for Intuit here, too. [TechCrunch]
Meanwhile, besides the notable acquisitions of Fintechs, companies are building similar services by themselves.
By mimicking the experiences/apps offered by startups, established players are essentially becoming Fintechs themselves, thus evolving internally and embracing the future more positively.
Following the underlying trend of growing Fintech companies grabbing more customers & market shares (also discussed in a previous post about job cuts in banks), traditional financial service providers such as brokerage firms are thinking about their future.
And one answer is to consolidate the industry with mega M&As.
The press release also says, “on expenses, current estimates are for approximately $1.8 to $2 billion run-rate expense synergies, which represents approximately 18-20% of the combined cost base” – a $2 billion cut in headcount and operating budget.
TD Ameritrade had a LTM revenue of $5.665B as of 2019Q3, thus receiving a roughly 4.6x revenue multiple. Or taking the revenue declines into account, it represents a 5.0x NTM revenue ($5.2 billion) multiple. Also, it’s around $2,167 per client account.
Combined platforms will have $3.1tn client assets, 8.2 million retail client relationships and accounts, and 4.6 million stock plan participants. E*TRADE has over 5.2 million client accounts with over $360 billion of retail client assets.
Similarly, the acquisition price represents a 4.5x LTM revenue multiple. Also, it’s $2,500 per retail client account.
In 2019Q4, that number has grown to 502,600 (almost 4x). But the year-over-year growth rate has dropped to single digit.
One slowly growing number is the gross dollar value per order, which was $30.74 in 2017Q1 and $33.56 in 2019Q4.
The per order value could implies that group buying (>1; friends gathering, small corporates/teams, etc.) is probably a major purchasing behavior on GrubHub. It’s also a natural choice when people can “split” the overhead (all sorts of fees).
The average order value increases by ~10% in two years and could continue to grow if more business users order food deliveries.
Of the GMV, GrubHub only takes commission, delivery and others as fees (revenues). That “take-rate” has increased from 17.4% in 2017Q1 to 22% in 2019Q4.
The increase could be due to the increased marketing spending by restaurants. See a brochure for Grubhub pricing. But eventually, the take-rate will be reflected in foods’ prices and split with consumers.
That increase is good for the company but consumers may feel that food delivery has become more expansive while what they are buying is not better.
Cross major marketplace platforms, due to the delivery part of business, those food delivery companies might take a bigger % of the GMV as revenues.
The most concerning part of the costs is called “Operations and Support”, which grew from 38% in 2017Q1 to 56% in 2019Q4.
A large part of that increase is due to the shift from independent contractors to GrubHub employees – on which regulators and other gig economy companies spent a lot of efforts.
Food delivery is still a very competitive space and market share needs to be won city by city. Compared with ride-hailing, which two big players remain in the US, we might see a few more players competing without major consolidation in the near term.
Financial Times reported last year in October that HSBC has embarked on a cost-cutting drive that threatens up to 10,000 jobs, as its new interim chief executive Noel Quinn seeks to make his mark on the bank.
It is also not a surprise as fintech companies are becoming more compelling and providing more superior services efficiently.
The long-term trend is inevitable. For example, in retail banking, every major bank is shutting down branches. The previous “comparative advantage” of having more footprint in the last century has become a liability. The bigger they were, the more pain they were feeling.
In a Jan 2017 report, The Guardian said HSBC “will be left with 625 branches by the end of the year [2017], which means it will have more than halved its high street presence since June 2011 when it had 1,301 branches.”
And in today’s report, HSBC US said the bank will close about 80 branches this year in the U.S. alone, a reduction of about 30%.
Other retail banking services such as trading and wealth management are also shifting online + automation. Younger generations just don’t need much face-to-face financial services and digital infrastructure has become more potent than ever. The industry’s reduction in cost structure leads to lowering fees and squeezes every player who couldn’t adapt (fast).
Many Institution services are also digitalized/automated.
Not surprisingly, many parts of the investment banking world such as trading are cutting headcount as well.
Almost 30,000 lay-offs have been announced since April at banks including HSBC, Barclays, Société Générale, Citigroup and Deutsche Bank. Most of the cuts have come in Europe, with Deutsche accounting for more than half the total, while trading desks have been hit hardest.
On Feb 14, Oaktree Capital Management, a Los Angeles-based distressed debt manager, became the first foreign company to set up a wholly owned unit in China under a trade accord with the U.S. The Beijing-based subsidiary has a registered capital of $4.55 million. // Caixin
On Feb 17, OYO reported a $951 million revenue globally for the financial year ending March 31, 2019, growing 350% yoy. In 16 month, OYO China has grown into an annual revenue of $307 million (~1/3 of total revenue). While facing more pressure, OYO China now has expanded into 3 brands and signed up 19,000 hotels. // TechCrunch | FT
Tesla (NASDAQ: TSLA) is in advanced stages of talks to use batteries from Contemporary Amperex 宁德时代 (SHE: 300750) that contain no cobalt – one of the most expensive metals in electric vehicle (EV) batteries – in cars made at its Gigafactory 3 in China. Tesla started to deliver cars from that factory in December 2019. // reuters
