Wednesday, May 25, 2011

Deutsche Post's Strategy for Mail

In response to two questions as part of an interview posted on the company's website, Deutsche Post CEO Frank Appel provides a description of Deutsche  Post's strategy for mail.

How do you intend to achieve the stabilization of the traditional letter business?

Of course, in this division we can see far-reaching structural changes that relate to electronic forms of communication. We have reacted to this with a range of e-products, such as the e-Postbrief. Such products are only one element of our strategy to offer innovative solutions in digital and traditional physical communications and, with this approach, to permanently defend our position as THE postal service for Germany. Moreover, one fact is frequently overlooked: we are also one of the big winners of the e-commerce boom because of the strong growth we have achieved in our parcel business. The parcel business now already accounts for around one-fifth of the MAIL division's total revenue and these revenues are seeing highly dynamic growth: 9 percent in the first three months of 2011 alone.

Like I said, we have set ourselves a target of achieving underlying EBIT of around EUR1 billion in the MAIL division. We need this amount to be able to make the necessary investments in an efficient network. The dynamic parcel business will contribute to this goal and help us to achieve it. The extent to which the traditional letter business will be in a position to contribute will depend on a number of external factors that we are unable to influence.

I presume you are referring here to the procedure for setting the price of letters?

This is definitely one important aspect. Consider this: the price for sending a standard letter in Germany has not been raised for 14 years. Our prices are low in European comparison - although the quality of service is extremely high. At the same time, earnings in the letter business have almost halved within only three years.

The discussion about a possible increase in the price of a letter, then, is not about maximizing our profit, but rather about maintaining the current status and a good infrastructure. At the end of the day, the Federal Network Agency will not only be deciding the future procedure for setting letter prices. In fact, it will also be part of the decision on whether or not Germany will still have a modern and efficient postal network in ten years.

His response raises a couple of questions for those thinking about ensuring a self-sufficient United States Postal Service. 
  • What should the financial goal of the Postal Service be?  Deutsche Post believes that the financial health of its mail business requires $1 billion in EBIT (earnings before interest and taxes.)  This is about a 7.8% margin before interest and taxes are determined. 
  • What is the role of e-Products for the USPS and can it survive delivering only print-communications and parcels?  Deutsche Post apparently believes that it has to provide both print and delivery options to survive.
  • How much capital does the United States Postal Service need to make the investments necessary to handle restructuring the network to deal with changing levels and mix of volume?  Deutsche Post believes it needs $1 Billion Euros EBIT for a much smaller network.
  • With declining volume, can the Postal Service continue to hold all rate increases below CPI, or will some rates need to increase at a faster pace to generate the cash needed to cover the transition costs that will be required to shrink the workforce and network as First Class volume decreases?  Deutsche Post believes that it can no longer continue to meet its long-term commitments if there is not a change in regulatory pricing policy of the past 14 years.
  • What impact does rate changes in any particular year have on the long-term viability of the Postal Service?  Deutsche Post looks at rate setting policy having an impact not just on immediate results, balance sheets, and cash flow but also the long-term viability of the enterprise.    

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