Post Offices - Pulling the envelope
This is a classwork reseach you will find interesting
Pulling the envelope
Technology and competition are putting huge pressure on the world's postal systems
TO GET a sense of the future of postal systems around the world, look no further than a bottle of milk. Last year, TNT Mail, the packet-delivery unit of TPG, the Netherlands' national post office, began using a dairy company to carry packages to people's doorsteps. At a time when the milkman already seems a vestige of a bygone era—and the postman is struggling to avoid the same fate—this might seem an unlikely alliance. But what makes the arrangement particularly revealing is that it is not happening in the Dutch hinterland, but in Britain, where TPG and the lactose-logistics specialists, Express Dairies, are vying to compete against Royal Mail.
This is just one symptom of how the post is changing. Few industries are as inherently global (mail goes to every corner of the planet), yet at the same time as tightly national (operators are still mainly state-run monopolies). Michael Critelli, boss of Pitney Bowes, a mail-equipment maker, says, “The big, all-in-one model works well if you believe that all the mail is about is standardised delivery of a standardised product and high volumes” with no innovation or customisation. But the market is not like that. Pressured by new technologies and by emerging competition, what were once seamless operations that made it meaningful to talk of a postal sector have increasingly fractured into separate activities—parcels, letters, freight, specialised logistics and so on.
Established operators in rich countries are responding by trying to reshape their businesses. It is not easy. Some operators have long relied on cross-subsidies from activities such as banking to help cover other costs, particularly those of delivering letters six days a week under the aegis of a so-called universal service obligation—a national duty to collect and deliver mail for a uniform price no matter where it is posted. Others with strong monopolies have transferred profits from their protected letters franchises to battle in the more competitive parcels business. Now these complicated economic ties are being broken, sometimes by regulators, but also by competitors, which have been growing ever bolder about challenging post offices' monopoly rights. The accepted goal of most big postal systems is that the letter post should be financially self-sufficient. Increasingly, however, the postal service is being run as a profit-seeking business in which each activity must be economic in its own right.
The postal service that most people come into contact with is only a tiny fraction of the mail, package and freight-delivery operations upon which economies depend. More than 80% of letter mail is from businesses, not individuals (see chart). Of that, over half is monthly bills and statements. (These are slowly moving away from the physical post towards customers' online accounts, which explains the roughly 2% annual drop in mail volumes since 2000 in many countries.) One-quarter of letter volume is junk mail which, alas, is growing.
That prospect represents a challenge for governments and postal managers alike. The traditional postal operators play an important role in developed economies, representing roughly 1% of the labour force and about 1% of gross domestic product. Where the market is open to some sort of competition, the postal-services sector indirectly plays an even greater role in the economy because business customers tend to make more use of innovative services such as speciality printing, targeted direct mail, or pre-paid return labels for mail-order goods. National postal systems globally account for over $250 billion in revenue and employ 5m people, 1m fewer than in the early 1990s. In some countries, the post is also one of the biggest financial institutions: Japan's, for instance, is the world's biggest financial institution, with around $3.4 trillion in assets.
Postal operators everywhere are facing the same challenges, but they are responding differently and at different speeds. Essentially they are caught in a pincer movement. From below, new technologies are altering long-established industry standards. From above, market liberalisation is opening the way for new competitors who are free of the expensive infrastructure that shackles the incumbents.
Getting it sorted
Among the more important technological changes are advances in automated sorting equipment. Today's state-of-the-art machines can read most addresses and then place the mail in the precise order for the letter carrier to deliver door-to-door. Electronic barcodes on the mail allow operators to “track-and-trace” each item, to provide service guarantees of when the mail was sorted and delivered. As this type of cost-saving equipment has become available, new firms have entered postal markets. Andrew Beh of ING Financial Markets estimates that some competitors can operate at half the cost of national posts. New technology improves their work processes, and they also benefit because they lack the strong trade-union culture of incumbents. These are among the reasons why Britain's privately run Business Post Group has been able to compete effectively against Royal Mail.
But perhaps the biggest technological change has been the arrival of “electronic substitution”. This refers to the shift of what was once sent by physical mail to other media. For instance, bulky financial prospectuses can now be posted on the internet (and downloaded and printed at the reader's expense) rather than sent by mail. Postal operators have long been used to fat profits from deliveries of monthly bills, statements, mail-order catalogues and so on. These have begun a gradual shift towards delivery by internet. And although direct marketing and e-commerce fulfilment with parcels is on the rise, it does not compensate for the drop in letter volume because, to the dismay of national operators, these are the two categories that are generally open to competition in places where the market is partially liberalised. The result is that in the very area where post offices might be able to recoup lost letter revenues—namely, parcel delivery—they face the stiffest competition.
Alongside new technologies, postal operators must deal with political pressure to reduce financial losses and accept market liberalisation. In America, which accounts for almost half of the world's letter volume and over a quarter of its postal revenue, the post is constrained from engaging in non-core activities such as banking. Aggressive logistics companies such as UPS and Fedex have become powerful competitors in express mail, parcels and freight delivery. Indeed, the rise to global prominence of such firms is the clearest evidence of the struggle facing big operators. “We have to make money delivering the mail,” says Jack Potter, Postmaster General, who began his postal career as a mail clerk.
That is demanding wrenching changes, as the US Postal Service, which was in crisis before Mr Potter took the top job in 2001, tries to modernise its operations. With some success Mr Potter has overseen swingeing cost cuts and has lobbied to reduce the postal system's pension burden. He argues that it helps that the system is focused only on post, but accepts that without modernisation the government-run system risks becoming irrelevant. Political oversight is onerous: a presidential commission in 2003 called for ongoing change, including more market liberalisation.
In Japan, Junichiro Koizumi has made reforming the national postal operator a major policy goal. Last year, the prime minister unveiled a plan to privatise the post, starting in 2007 by splitting today's monolith into four distinct units: delivery, post-office branches, savings and insurance. But the government has also proposed meddling with elements of the universal service obligation. That brought opprobrium: the post office itself described the idea of reducing service in rural areas as “degrading”.
These changes are not happening without a fight. The Postal Directive, issued by the European Commission in 1997 and updated in 2002, laid out a (non-binding) timetable for the full liberalisation of the EU's postal market. Most EU countries have modified their laws and changed the status of the national post from a government department to a corporate entity. But few have treated postal liberalisation as a priority. Nearly all have established national postal regulatory agencies, as required by the directive, but the independence of these is sometimes in doubt.
The French exception
Big countries, notably France, have fought doggedly against the commission's efforts to speed up market opening. In 2003, after bitter wrangling, the legally permissible postal monopoly in the EU on letters dropped from 350 grams to 100 grams, which opened up 11% of the letters business in the EU to competition. In 2006, the monopoly on weight is set to drop again, to 50 grams, opening up a further 7% of mail. However, roughly three-quarters of letters weigh less than 50 grams, which explains why incumbents have shed only a small share of the overall letters market.
Under the timetable set by the directive, in 2007 the EU's member countries will discuss opening their markets completely by 2009. Norway, not an EU member, plans to open its market in 2007; Sweden, Finland and Estonia already are open. But few believe that many others will be, or will want to be, ready. Of the countries undergoing liberalisation, only Germany, Britain and the Netherlands have agreed to open their markets fully before 2009.
France stands somewhat apart. La Poste says it will meet the directive's recommended 2009 date. However, analysts think it is more likely that La Poste will try to keep its domestic stranglehold for as long as it can, meanwhile entering markets abroad, as France's other utilities have done in the water and electricity sectors. The company rejects this criticism.
In fact, with the exception of Britain's Royal Mail, which has been preoccupied with domestic restructuring to reverse huge losses, Europe's big postal operators have responded to the threat of market liberalisation by seeking to expand into new businesses and new markets. Between 1998 and June 2004, they have acquired or franchised more than 120 companies, in activities as diverse as mail preparation, express-delivery, freight forwarding and intra-city unaddressed mail delivery. In some instances, the logic has been to take on greater volumes, thereby extracting better value from the sunk costs represented by existing infrastructure, such as staff, sorting equipment and delivery vehicles.
Empires of the mail
The Dutch and Germans have been both the most aggressive and the most global in their strategies. In the Netherlands, TPG acquired the express operator TNT in 1996, and expanded into freight delivery and contract logistics in Europe and Asia. In Germany, Deutsche Post embarked on the most grandiose acquisition drive, purchasing DHL, an express firm, between 1998 and 2002, among numerous other assets, mostly in Europe but also in Asia. Since postal reform began in 1990, the portion of Deutsche Post's earnings made overseas has risen from 2% to 50%.
Both companies were relatively early in their efforts to restructure their core businesses. TPG began in 1993; Deutsche Post in 1991, when it needed to integrate the postal systems inherited from formerly communist East Germany. Both operators have also floated on the stock exchange, which gave them shares that they could use as currency for their acquisitions.
By contrast, France's La Poste says it seeks to be a key European player, but not a global one, although it has acquired some companies and formed an alliance with FedEx, America's second-largest logistics firm after UPS. UPS is thought to want to enter the European market for bulk business mail, taking on the national post offices—but only after the letters market has been further opened to competition. La Poste, along with TPG and Deutsche Post, is considering buying a minority stake in Belgium's La Poste when shares are offered for sale; TPG and Deutsche Post are already vying to acquire a stake in Post Danmark when the Danish government sells 25% later this year.
The shape of domestic deregulation differs in each of the four countries, and has been an area of controversy. Germany has a tariff structure that discourages competitors from consolidating mail volumes (this is currently being challenged before competition authorities). The Netherlands allows companies to place pre-sorted mail into TPG's network and also allows, but does not mandate, discounts for large-volume customers. Britain retains the Royal Mail's monopoly on the last-mile delivery for daily mail volumes under 4,000 items (Express Dairies got its delivery licence because its volume is above the monopoly threshold). Alternatively, rivals may hand over mail to the national operator for final delivery, akin to the last-mile connection that gives new entrants access to existing telecoms infrastructure. France has not yet specified the rules for market deregulation; indeed, just this week the legislature began what will be a lengthy debate on the shape of new laws, which prompted postal workers to go on strike.
Small wonder that there have been complaints that these domestic responses amount to anti-competitive behaviour. There have been some clear infractions. Deutsche Post, for example, was fined by the European Commission in 2001 for abusing its monopoly by allowing its global parcels business to receive big subsidies from its letters franchise. It was forced to ring-fence its parcels business.
There is also a view that the large number of acquisitions made by the big operators has, ironically, caused the postal sector to become more than ever dominated by states. A report prepared for the commission last year by WIK-Consult, a consultancy, warned that there is some risk “of ‘governmentalising’ the private sector instead of privatising the public sector.”
In combination, these changes are challenging the post's identity and legacy in ways that are only just starting to become apparent. One problem is managing labour relations, for with modernisation comes big job losses. In countries that have undergone reform and liberalisation, such as Sweden, as much as 25% of postal jobs have disappeared. Ten years after its post became a corporation in 1987, New Zealand's system had reduced its staff by 40%, but the employees handled 20% more business. Moreover, the price of a letter remained constant in nominal terms, representing a big price reduction in real terms.
Checks on the post
Also controversial are branch closures. Even before deregulatory reforms were begun, between 1998 and 2002 post-office branches were closed at an average rate of about 2.4% per year across Europe. Historically, branches have acted as the central nervous system of many communities, used to receive social security and pensions, tax forms and the like. People fight to keep their local outlets.
What is clear is that postal operators will have to continue to expand into new services. Some posts have offered certified e-mail using encryption techniques to time-stamp electronic communications, though with little success to date. This might get a boost now that there are plans for the Universal Postal Union, an international treaty organisation more than a century old that co-ordinates global postal activities, to manage a specialised internet address extension, .post. Most posts are looking at expanding direct-mail operations and selling “hybrid mail”, whereby large mailers such as financial institutions or utilities merely provide data to the post, which takes responsibility for printing the documents and delivering them.
Some plans are more radical. This month, Britain's Royal Mail said it would start to sell telephone services to compete with BT, more than two decades after the post and telecoms were split in preparation for privatisation of the latter. America's postal service is forging new programmes such as allowing customers to book a time for a parcel delivery or pick-up and providing customers with delivery guarantees even for regular first-class mail.
Whether such efforts will succeed remains to be seen. As competition increases so will pressure on incumbent operators to become even leaner and fitter. As broadband internet and mobile phones become ever more ubiquitous, as electronic substitution grows and as demand increases for flexible deliveries and differential pricing, the justification for maintaining the universal service obligation and the monopoly that accompanies it will diminish, and it will come to be seen as an expensive anachronism. But, like other changes in the industry, and with so much employment, national prestige and other interests at stake, this may happen by slow coach rather than post haste. Politics, if nothing else, will probably see to that.
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