Postal operators across the world have historically enjoyed legal monopolies that protect them from competition, while continually rising mail volumes have helped improve productivity. However the progressive deregulation of the postal markets over the last decade has seen increasing competition from nimble private sector operators who have targeted the most profitable business. This includes traditional competitors moving into postal delivery (TNT London), businesses developing their own delivery capabilities (Amazon, Next, Alibaba) and new entrants looking to leverage existing assets, such as Greyhound buses in the US. At the same time, the historical link between economic growth and mail volumes has been broken with electronic substitutes increasingly biting into the physical communications market. On a more positive note, the rapid rise of internet shopping has led to huge growth in the parcels market if operators can provide the right service at the right price.
These factors, combined with the recent economic downturn, have left the postal market in turmoil. We believe that traditional operators can adapt and find new ways to improve both their top-line and bottom-line performance; but there is a relatively short window to make the necessary changes before the decline in mail volumes and competitor activity stifles the opportunity. If operators do not respond effectively, much loved institutions will decline, jobs will fundamentally change and the doorstep service that consumers and e-tailers rely upon will gradually become eroded.
Pricing and profitability
The first challenge for postal operators is to better understand the costs, profitability and customer value of the services they deliver. Postal operators have relatively high, fixed cost-bases, which are associated with the delivery of the Universal Service. However, as the mix of traffic changes and competitors target profitable mail streams, cost models need to be re-evaluated in order to negotiate and execute profitable business.
Traditional cost drivers have included distance and geographical spread, speed of service required, levels of automation that can be applied in handling a mail-piece, the physical attributes and volume of items carried, and any pre-sortation provided by posters. Alongside better information for pricing deals, operators need to manage contracts diligently; in particular being vigilant in ensuring that customer responsibilities such as volume guarantees and pre-sortation are complied with to protect revenue and profitability.
As the demand for parcel delivery increases, the proportion of successful first-time deliveries and the number of additional delivery attempts required become ever more significant as a driver of cost and profitability. Operators that can work with posting customers to understand and minimise missed deliveries (for example through recipients opting-in to delivery options such as leave with neighbour) can leverage significant commercial and reputational advantages.
Operators also need to better understand the value of enhanced services for both the posting and receiving customer. Receiving customers are prepared to pay not just for speed but for certainty of delivery, both in terms of day and time-slot – a good example of this is DPD’s recent launch of one-hour delivery slots, together with a 15-minute countdown that allows customers to track the final mile of delivery. Solutions from the dot.com boom such as locker banks are now reaching critical mass (eg Amazon) and are attractive to some segments of receiving customers – particularly where speed of delivery is important, but waiting at home for delivery is not an option.
Many posting customers, especially e-tailers, want proof of delivery. With online fraud and chargeback rates of up to 2.5% in some segments, proof of delivery and proof of identity can help mitigate these risks and assist e-tailers in negotiations with card issuers when disputes arise. Track and trace, signature capture, GPS and payment on delivery options all help to reduce chargebacks, which can often be far greater than the value of the typical CD or video game purchase. Operators have a limited window to develop enhanced services in these areas or risk being outflanked by the competition.
Driving greater efficiency
In a largely commoditised market with falling mail volumes, operators must continue to reduce costs across the network. Of course, postal operators have been seeking to do this for decades through the rationalisation of mail centres, greater automation of sorting and smarter scheduling of fleet. However, there still remain huge opportunities to use technology, allied with business analytics, to generate further efficiency throughout the value chain; particularly in the local delivery network where the bulk of costs lie. For example, alongside the increased deployment of automated walk sequencing, Post Nord now analyses delivery drop volumes to enable near real-time scheduling to balance workloads between delivery walks. As well as increasing labour productivity, and reducing overtime costs, this has the potential to improve quality of service by reducing variability in walk completion times.
Some operators are fundamentally challenging delivery patterns. For example, USPS has identified potential savings of up-to $5.5bn pa in moving from doorstep delivery to neighbourhood cluster boxes and PostNord only delivers second class mail on two specified days per week. The challenge for operators is to understand how radical they can afford to be whilst retaining the confidence of customers, workforces and regulators.
New delivery models
The need to reduce costs and to adapt to changing customer preference, for example by accommodating evening deliveries, is driving operators to adopt more flexible working patterns with profound implications for management and staff. Post NL has now shifted much of its workforce from full- to part-time. More radical options include the introduction of ‘owner drivers’ as is common in the parcels industry, or even the creation of franchise operations at delivery area or walk level.
Leveraging inherent advantages
To succeed in challenging market conditions, traditional postal operators must use their significant advantages over new suppliers – in terms of their brands, workforce, network and data – to grow profitable business. Technology, for example, can enable postal workers to carry out a range of non-traditional activities as they cover the length and breadth of the country. Potentially this could include taking payments at the door step, collecting survey information or data of value to local councils or utilities firms. The trusted brands of many traditional operators are increasingly being leveraged to provide services outside of delivery – for example La Poste has set out its plans to offer identity assurance in digital exchanges.
Traditional operators can also capitalise on their comprehensive networks to carry an increasing variety of products, offsetting the fall in letter volumes. Postal operators internationally are exploring the profitable potential of providing new services – including cargo, grocery deliveries and pharmaceutical deliveries – to utilise surplus capacity.
Many of the responses described in this article require operators to exploit their technology and their data assets much more effectively. Firstly, more accurate, timely and granular data is essential to understand costs and profitability, manage customer relationships, make operations more efficient and effective, and support the introduction of new services. For example, detailed information on the letter or parcel as it enters and travels through the network will provide operators with the opportunity to track and provide in-flight redirection with less notice, allowing customers to take advantage of the increasing range of convenient collection options. Furthermore, for some operators, the data itself may become a valuable source of revenue; for example by helping government agencies, businesses and individuals, to counter fraud and provide targeted market insight. Whilst significant investment is required and potential data protection issues that need to be overcome, there is considerable untapped potential for operators to unlock the value from their data.
Implications for the future of the industry
The current market turmoil presents both great opportunities and serious threats to established postal operators. The key will be how swiftly and effectively they can invest to secure a stake in the parcels market as mail volumes decline. Governments and Regulators need to be sensitive to this, and workforces should recognise that change now is essential to secure jobs in the medium term. Should postal operators be unable to secure sufficient revenue and profit from the parcels market, then profound and wide-ranging structural changes to the operating model will become unavoidable.
Jim Knox and Paul Dargan are postal services experts at PA Consulting Group