What the future of global postal services looks like

Post Mortem: innovate or stagnate

Postal services worldwide are feeling the heat of the digital blowtorch. The challenge for these beacons of tradition is to deliver on expectations while adjusting to technology.

In many cities, the stately building serves as a landmark; in smaller towns they’ve been the traditional guardians of the local news and gossip. Indeed, in communities the world over, the local post office has long been an important hub for a range of services and information.

In recent years, however, its role and status have been shifting. The old art of letter writing has fallen out of favour, competition from less bureaucratic global courier companies has bitten into parcel profits and now digital technology is shining a very bright light on the efficiency and relevance of the traditional postal service.

Take Australia Post, the oldest continually operating organisation in Australia. With its letter business in terminal decline and its parcel delivery business under competitive attack, the strain is very clearly showing. 

Australia Post recently recorded its first financial loss in three decades. The A$222 million after-tax loss and resulting round of redundancies came despite growth in its parcel delivery business, which was buoyed by its 2012 acquisition of road freight company StarTrack and significant investment in its e-commerce capabilities. Attempts to beef up its retail offering with the introduction of 60 new superstores across the country have also failed to stem the bleeding.

“There is a future for mail; it’s just different to what we’ve experienced in the past.” Ashley Smout, New Zealand Post 

Global mail volumes dropped by 15 per cent between 2008 and 2013, and while some postal services have taken advantage of the new digital landscape, transforming themselves into multichannel logistics and communications businesses, others are still struggling to deliver.

Post under pressure

Ashley SmoutEven for profitable services such as New Zealand Post, transformation hasn’t been easy.

“It’s like trying to fix the engine of a car while you’re still driving it,” says Ashley Smout, New Zealand Post’s chief operating officer, service delivery. New Zealand Post reported a NZ$143 million net profit this year, up NZ$36 million on 2014. Much of this is credited to the success of its wholly owned banking services subsidiary, Kiwibank.

“We’re still making the transition to a modern parcels, mail and financial services business, and we’re part way through a five-year transformation plan,” says Smout.

“We don’t kid ourselves. It’s hard going.”

Last year, New Zealand Post’s parcel revenue exceeded mail revenue for the first time. Smout says the company’s future is in parcel delivery but making the transition has been tough.

“Postal services around the world are facing the same triggers – the need to reduce costs to become more productive, to find new products and services and to see work practices and the role of the postie changing to reflect customer needs,” he says.

“There is a future for mail; it’s just different to what we’ve experienced in the past.”

A challenge to deliver

Transformation has been easier for some postal services than for others. Hongkong Post continues to rely heavily on traditional mail for revenue and has lost a combined HK$167 million over the past three financial years. Meanwhile, Singapore’s publicly listed postal service, SingPost, has forged a profitable e-commerce path across the region and further expansion is predicted with a recent S$279 million injection from Chinese e-commerce giant, Alibaba.

SingPost’s group CEO Dr Wolfgang Baier says the company chose to embrace digital disruption.

“We handled our challenges by turning them into opportunities for us to re-think about what we do, how we do it and how to stay ahead of competition,” he says.

“Many years ago, we pioneered the term e-commerce logistics. Now, it is the buzz word.”

To suggest that postal services in some countries are simply more innovative than others would ignore the legislative and regulatory frameworks that have stymied their growth. Australia Post, for example, is required to meet Community Service Obligations (CSO), which govern pricing and public access as well as delivery timetables and frequency across a vast geographical landscape. 

The United States Postal Service (USPS) must also deliver across large distances and faces the burden of huge employee benefit liabilities. Despite reducing its costs by US$8 billion over the past two years and increasing revenue through new shipping and packaging services, USPS has reported financial losses for eight consecutive years. In 2014, its net losses came in at US$5.5 billion and it reached its US$15 billion debt limit to US Treasury in 2012.

Teresa Anderson, assistant director of the US Government Accountability Office, an independent, non-partisan agency that examines the effectiveness and efficiency of government programs, notes that USPS has been on its high-risk list since 2009. She says that while USPS has reduced the size of its infrastructure by closing more than 140 mail-processing plants and increasing the efficiency of its retail network, the postal service has struggled to align its operations with changes in technology. 

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The option of selling USPS has been raised a number of times but the viability of a sale can only be questioned.

“People say that given the postal service’s current financial problems, it’s unlikely that there would be a lot of people interested in buying it,” says Anderson.

“It has over US$100 billion in outstanding liabilities for pension and health-related benefits. So that’s why Congress has focused on trying to address the financial problems before talking about making any major changes to its business model or governance structure.”

A European model

Across the pond in the UK, the privatised Royal Mail invested £2.8 billion in its modernisation strategy between 2006 and 2013, yet faces significant challenges from rival delivery companies, such as French state-owned Dynamic Parcel Distribution (DPD). 

Professor John HowardPostal services in Europe have been competing with each other since liberalisation saw the abolition of national post monopolies in the European Union. This competition has injected new energy into the market.

Sweden’s Posten merged with the Danish postal service Post Danmark in 2009 – forming PostNord – and is growing its logistics business to counter declining mail volumes. Germany’s acquisition of DHL sees it competing on a global stage with logistics companies such as FedEx.

Meanwhile, Finland’s Posti was an early innovator in digital mail offerings and recently began testing drone deliveries of online purchases. 

John Howard, adjunct professor in the school of business at the University of Technology Sydney (UTS) and managing director of public policy research and consulting firm Howard Partners, says Australia Post can learn a lot from postal services in Europe. His report into the future sustainability of Australia Post for the McKell Institute suggests that the service should leverage its trusted brand to deliver innovative digital and logistical services.

“If you want to drive your business by cutting costs, you’ll eventually suffer; you’ll lose your brand and your reputation,” warns Howard.

“The Europeans have gone in a different direction. They’ve said, hey, our business has been disrupted but this has also brought opportunities.”

Howard adds that international postal services are now competing on Australia Post’s turf, citing the example of transport and logistics provider Toll, which became part of Japan Post in May this year.

“If you drive around Sydney or Melbourne, you see Australia Post’s competition in DHL or Toll. Australia Post has got to be in that race,” he says.

“In the best-case scenario, Australia Post could be a global corporation competing with the likes of Deutsche Post and its parcels business and getting into other businesses tied to communications. Innovation can come from the use of technology, but that’s a given. Innovation is about being able to use your existing network in different ways.” 

Reforming Australia Post

Australia Post has long held a monopoly to carry letters within Australia, but with Australians now sending one billion fewer letters than they did 15 years ago, mounting losses to the letter business have reached almost A$500 million for the year to June.

John Howard, adjunct professor at the University of Technology Sydney (UTS) and managing director of Howard Partners, says a substantial component of this loss is attributed to the high cost of meeting the postal service’s Customer Service Obligations (CSO), a cost he estimates at A$203.5 million for 2013-14. 

“The major challenge for Australia Post in meeting its CSO is delivering mail to remote and rural communities,” he says.

"Australia Post could save a lot of money by just not delivering to these areas. But given that it’s a publicly owned organisation, politically and from a business perspective, it wouldn’t be acceptable.”

“In the best-case scenario, Australia Post could be a global corporation competing with the likes of Deutsche Post.” Professor John Howard, UTS

Howard sees opportunities for Australia Post to deliver value-added services in these locations, such as digital access. Australia Post is currently pushing to increase the cost of a standard stamp from 70 cents to A$1, which is the average cost of delivering a letter in Australia. 

Recent reforms have also seen the introduction of a two-speed letter delivery system, comprising a priority service that maintains the current delivery timetable and a regular service that takes an extra day for delivery.

Pending acceptance of the new regulations passing through Parliament, Australia Post expects to introduce the pricing changes in January 2016.

SingPost’s push into e-commerce

Singapore’s SingPost launched an aggressive move into e-commerce five years ago. Group CEO Dr Wolfgang Baier says the decision was to focus resources on e-commerce-related activities or in areas to drive regional growth.

“After that, everything else became much clearer, because we knew exactly where to focus our resources and efforts,” he explains.

SingPost is opening up to new global activities.Since September 2014, SingPost has completed a series of mergers and acquisitions, including Australian-based parcels delivery services Hubbed and CouriersPlease, plus Rotterdam Harbour Holding and Hong Kong’s Morning Express.

In October this year, it acquired a majority stake in the US-based e-commerce logistics provider Jagged Peak.

Baier says SingPost’s mergers and acquisitions have brought geographical advantages that are crucial to its growth.

“The future is global, and the denser first mile/last mile links we create, the stronger we become,” he says.

“We handled our challenges by turning them into opportunities ...” Dr Wolfgang Baier, SingPost 

Baier adds that SingPost’s mantra is to think big, act small, fail fast and learn quickly.

“Technology is very important in e-commerce logistics,” he states.

“You are only as good as your end-to-end platform. You also have to manage your operating costs. This is why we are exploring opportunities that will give us the next-generation IT platforms that we need to build our business.”

This article is from the December issue of INTHEBLACK

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