China's packaging makers see profits squeezed as e-commerce boom draws new competitors

November 10, 2016 3:00 AM EST

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By Jackie Cai

SHANGHAI (Reuters) - Chinese packaging makers are bracing themselves for Singles' Day on Friday, stocking up on cardboard and taking on staff ahead of an online shopping bonanza that shifts more goods than Black Friday and Cyber Monday in the United States combined.

Sun Jingyun, owner of Kunshan Jiaze Packaging in eastern Jiangsu, has added a third extra staff since early October to meet a threefold jump in demand ahead of a day of discounts led by internet retailer Alibaba Group Holding Ltd (NYSE: BABA).

Yet the packaging business gets slightly less lucrative with every Nov. 11. More packagers have emerged in answer to China's e-commerce boom which began around 2010, squeezing profit margins as the cost of cardboard and tape rises while output prices fall.

"It seems everyone is now making express delivery boxes, and price competition is pretty fierce," said Sun, who entered the market for delivery boxes early last year. "Lots of people are jumping into the business which is pushing down profits."

The trend is reflected throughout the e-commerce industry as players such as sellers and couriers settle for tiny profit margins in a massive online market that is redrawing the retail landscape to the detriment of physical stores.

SHARP GROWTH

But the attraction is clear: In packaging, China used 9.9 billion cardboard cartons and 17 billion meters of adhesive tape last year, each almost 50 percent more than a year earlier, showed a report last month from China's State Post Bureau.

On Singles' Day alone this year, the Post Bureau expects demand for 1 billion boxes, up 35 percent from last year.

To meet that demand, firms both big and small - such as Nine Dragon Paper Holdings Ltd <2689.HK> and Sun's Jiaze - are expanding into the sector. The exact number is unknown, but the steep growth in e-commerce has attracted enough entrants to squeeze margins, Sun said.

The story is similar one step up the chain, with the number of large firms making the base for adhesive tape jumping over 60 percent in the past three years, showed data from petrochemicals website Chem99.

CONNECTED CUSTOMERS

Package makers sell their boxes and tape to couriers such as U.S.-listed ZTO Express (Cayman) Inc (NYSE: ZTO), which box up sellers' goods and deliver them to shoppers.

"In 2007 China's express delivery market had around 1 billion parcels," Post Bureau deputy head Liu Jun said this week. "This year it will break though 30 billion and be the number one market in the world."

The growth is being driven by increasingly internet-savvy consumers who want to pay online for items as varied as clothes, cosmetics, meals and cinema tickets through platforms such as Alibaba's Tmall and that of rival JD.com Inc (NASDAQ: JD).

On Singles' Day last year, these shoppers ran $14 billion worth of transactions through Tmall - a number most company watchers expect to be surpassed on Friday.

One such shopper is 28-year-old accountant Zhang Yuting from Shanghai. In the run up to Singles' Day, Zhang has been filling her online shopping cart on a daily basis with goods such as nappies, tea, motor oil and a Japanese electronic toilet seat.

"I've got loads of e-commerce apps on my phone," said Zhang, listing apps from Alibaba, JD.com, Suning Commerce Group Co Ltd <002024.SZ>, Amazon.com Inc (NASDAQ: AMZN) and fresh produce retailer Beijing MissFresh Ecommerce Co Ltd.

"I probably place one order a day. If its available online, I won't buy it from a high street store," said Zhang.

"For this year's Singles' Day, I'm going to spend at least 10,000 yuan ($1,473)," she said.

(Reporting by Jackie Cai; Writing by Adam Jourdan; Editing by Christopher Cushing)



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