NZ Post undergoing biggest-ever upheaval in face of letter decline, parcel demand

NZ Post post box on Lambton Quay Wellington. Photo: Lynn Grieveson

New Zealand Post, the national postal service first established in 1840, is undergoing the biggest upheaval in its history as technological change reduces letter volumes and stokes demand for parcel services, which are often more expensive to manage.

A decade ago NZ Post was delivering more than 1 billion letters every year, but by last year that had fallen to about 500 million and is forecast to drop by almost 15 percent in the coming 2019 financial year. The decline in letters is costing the state-owned postal service about $30 million a year in lost revenue, forcing the company to cut costs and raise prices.

Over the past three to four years the postal service has been reorganising itself to cope, introducing alternate day delivery, dropping its FastPost service, shrinking its processing centres, starting new delivery methods like electric vehicles and reducing its footprint of standalone postal shops in favour of outsourcing to partner businesses such as chemists, dairies, stationery stores and video shops. Some $70-to-$80 million of annualised costs have been taken out of the business but further cuts are becoming harder to find.

Chief executive David Walsh, who has been in the role just over a year, says most of NZ Post's big change programme has largely been implemented with the focus in the 2019 financial year on refining what has already been done and stabilising its network following massive change. The mail delivery operation posted a $13 million loss in the first half of its 2018 financial year and the full-year results for the 12 months ending June 30 are also likely to be in the red, falling short of its forecast to be close to break even.

"It's going to be challenging for us this financial year and that's still largely to do with the fact that there is a limit to how much more cost you can take out of the business," Walsh said.

The company is still finalising its 2018 accounts and expects to report its results in August.

The SOE paid the Crown a $100 million special dividend in February last year after selling down almost half of its share in Kiwibank, which means a smaller earnings stream is now coming from that cash-generating business. In the first half, its share of Kiwibank's earnings was $19 million, offsetting the $13 million loss from its mail business to produce a profit of $6 million.

NZ Post paid a $2.5 million dividend to the Crown from its first-half earnings but is now considering whether its target for a minimum annual dividend of $5 million is sustainable.

"We are working on that," Walsh said. "We haven't made any final decisions on what the future looks like but we will be continuing to have a conversation with Treasury and the Crown about what matters in terms of a sustainable letters business versus what they want in terms of any dividends out of us. It is too early for me to commit to anything on that right now."

The discussions have been "really really sensible" and the Crown understands that NZ Post plays an important role in connecting communities and that many New Zealanders still rely on its delivery service, he said. "They have been listening to where we are and they do understand what the challenges are in front of us."

NZ Post isn't the only national postal service facing disruption to its business as paper correspondence shrinks due to electronic communications. The unprofitable Irish postal service An Post received a 30 million euro bailout from the state to keep operating, while PostNord, which runs the Danish and Swedish postal services, has been promised 2.2 billion Swedish krona from its owners, the Danish and Swedish governments, to turn around its business.

"We are certainly operating well in a global sense," said NZ Post's Walsh. "We do keep an eye on what's happening and think about other ways of solving the challenge we are looking at here. I think we stack up pretty well."

NZ Post is committed to providing 880 post outlets throughout the country but increasingly those are being delivered through partnerships rather than standalone shops. There is no set predetermined number of standalone shops that will be retained but every year the service and cost elements are weighed up by the company when it makes its decisions.

Walsh is aware of the backlash from some communities to the closure of their post shops but says benefits of partnerships can include longer hours and better parking. The company is in talks with Kiwibank about NZ Post taking over some bill payment services to help improve access for customers.

"There are still New Zealanders that rely on that physical communication and that's our responsibility to make sure we meet that standard so while the change is going on around us we are balancing up how do we service those parts of our community as we deal with the structural decline that's going on around us. It's an interesting challenge for us to get that balance right," he said.

Like postal services from Canada to the UK, NZ Post is eyeing the opportunity for growth in package delivery where demand is rising due to online shopping. Parcels started bringing in more revenue than letters a few years ago although in terms of volumes letters are still far the biggest business with about 500 million letters delivered a year to about 75 million parcels.

In New Zealand, about 8 percent of all retail shopping in physical goods takes place online, lagging behind regions like Europe where it is approaching 15-18 percent. The local market is growing at about 10-11 percent a year.

"Most of that is from people wanting goods delivered to home and that is our greatest strength," Walsh said.

While Freightways is a competitor in the parcels business, it has a strong business-to-business focus, while NZ Post has a strong business-to-consumer advantage and also provides some business-to-business service where it makes sense, such as providing customer and store-to-store deliveries for retailers.

NZ Post's strong global brand is also helping it grow its international business, such as its recent deal with Chinese e-commerce giant Alibaba and Fonterra to track customers' orders using blockchain technology. Fonterra and Australian supplements company Blackmores are the first to use the traceability system on products purchased through Tmall Global and if successful the system will be rolled out across Alibaba's online marketplaces.

"We are doing a lot of innovation now in terms of really showing our strength in that international market," Walsh said. "We know we have got great opportunity in that space."