Australia Post’s first half results, released today, mark more bad news for our national letter carrier. The headline group profit of A$98 million partially masks a steep and accelerating decline in the profitability of the letters delivery business – which lost A$151 million in the first half and is in line to drive group results into the red for the full year ending June 30, 2015.
The decline in the letters business has been well flagged, even if the precipitous decline we are now observing surprises some. Remedies in this area are clear and relatively uncontroversial – higher prices for letters and a staggered weekly delivery schedule for most homes and businesses. The fact that these initiatives will further erode letter volumes is unavoidable.
Parcels turnaround
The real problem for Post, however, lies not in letters but in its lacklustre performance in the “cash cow” of parcel delivery where parcel revenues and volumes were up around 5%, while e-commerce sales in Australia (one of the key drivers for the parcels industry’s growth) are expected to grow by 14.4% between 2014 and 2015.
Taken together these figures suggest that while Post’s revenues in parcels are increasing, its market share is in decline.
In its most recent annual report, Post reported that parcel revenues increased by 16.4% while volumes increased by only 12.8%.
Today, it reported that volumes growth (5%) outstripped revenues growth (4%) in parcels. This tells us two things – for a while Post was able to leverage its market power to increase revenues at the expense of its customers – even while its costs per parcel were in decline. Today’s announcement tells us those days are past.
The explanations for this are clear. Ahmed Fahour, Post’s CEO, noted the increasingly competitive context of the Australian parcels business. Australia is attracting significant investment in parcel delivery infrastructure, both from global players like DHL, and also from smaller home grown players like Toll and Pack & Send.
In part, Post can take some blame for this. The ease with which it could increase prices for parcels while accruing to itself the emerging scale and scope economies of its network was a “red rag” to the global parcel delivery bulls. Its own customers, too, became irked by its rising prices and lacklustre service. Together, we have seen customers willing to switch, and new entrants keen to grow their business.
Last week’s announcement that Japan Post would acquire Toll is more bad news for Post’s parcel business. We are seeing the emergence of global players in the parcels industry able to benefit from freer trade and the rise of cross-border e-commerce. Toll’s acquisition sees Japan Post as part of this emerging club. Post, however, looks like being left standing at the proverbial altar – certainly under its current ownership and regulatory structure, it could not be acquired even if it was wanted.
Bleak future?
The structural separation now ongoing within Post is part of a long-term process that will likely see the parcels business spun off in some form or other in the future. It’s clear the parcels business would be an extremely attractive acquisition for one of the global players seeking to grow its Australian parcels market share.
And yet, keeping a strong and vibrant Australia Post, especially in the regions, is of vital importance to our national fabric.
Perhaps its time for some fresh thinking. Traditionally, governments have seen ownership and privatisation as polar opposites – you can have one or the other. However, the fundamental economies of scale available to Australia Post were it to partner with a global player in the parcels business are compelling. The letters business, however, without the parcels business would be a financial albatross for government.
Is it time to consider a hybrid arrangement – where Post is able to harness the benefits from integration with a global player while also supporting its key community role, especially in regional Australia?
Such an approach is unlikely, as the bankers who manage such privatisations like things clean and simple. And yet such an innovation provides perhaps the only solution to Australia Post’s need to improve performance and Australia’s need for a strong national network of outlets.