You are in: Press Releases

December 2001

THE POST OFFICES ARE WAKING UP!

This article appeared in the December edition of World Trade Magazine

Back in the 1960s, three young guys with the initials D, H and L started shipping documents from the west coast to Hawaii to enable pre-customs clearance before ship arrival. They took advantage of an unlimited excess baggage allowance which Pan American World Airways enjoyed as an international carrier on US domestic routes.

In the early ‘70s, a young graduate, Fred Smith, took advantage of a gap in air traffic rights regulations and set up a national express hub and spoke network. The service was designed to handle checks for the Federal Reserve, hence the founding of Federal Express. The rest, as they say, is history.

In the ‘80s UPS, which had started out as a local parcels carrier in Seattle in 1908 and took a long time to respond to DHL and FedEx, also entered the market.

In the meantime, outside the United States, two Australians, Peter Ables and Gordon Barton, were developing overnight time-definite express services (eventually as TNT), first in Australia and then intra Europe. DHL expanded globally and eventually FedEx and UPS followed suit. A whole new market was created or, you could say, taken away from the post offices. It takes a long time for large bureaucratic organisations like the post offices to react and now they are beginning to do so.

Deutsche Post, under dynamic management and capitalising on its high rated German postal monopoly, has gone on an acquisition rampage buying, amongst others, a majority stake in DHL and the major freight forwarders, AEI and Danzas. The postal monopoly revenue is only 35% of total sales, yet it currently still manages to be 74% of the profits.

The Dutch Post Office bought the Australians (TNT). FedEx is now setting up joint arrangements with USPS and other post offices around the world. Since 1st August, FedEx has been carrying a large amount of US mail in a daytime airlift network. The placement of FedEx drop boxes in post offices throughout the USA is beginning to be rolled out. FedEx also has a close relationship with the French Post Office via its European hub in Paris.

UPS still sits on its hands globally although it has recently acquired some mail chain companies in the US (Mail2000, RMX, Document Exchange, iShip and Mail Boxes etc). UPS, with 85% market dominance of the US domestic road market has high margins in the USA which allow it to compete and develop its international services in competition with the other post offices – particularly in Europe.

Meanwhile, USPS is faced with FedEx and UPS tanks on its lawns, challenging and questioning every time it puts its head above the parapet to become more competitive.

What does this all mean for the US shipper? Are the overseas post offices likely to enter the US market? Should USPS be allowed more commercial freedoms? The answer is probably yes but not in the way that most currently expect, i.e.in a similar model to USPS.

It’s not simple! What is clear is that in another 30 years, most of the European post offices will have lost their monopolies and will be privatised and probably consolidated into three or four groups. Will these groups or any one organisation be strong enough to enter the US market?

The United States is on its way to de facto deregulation with USPS developing concepts such as zone skipping and really only being involved in the delivery of the last mile. This affords opportunities for new US domestic players like the logistics arm of printers R R Donnelly/CTC to develop competitive networks which could be linked to overseas post offices. In addition, FedEx and UPS could work more with USPS to achieve economic distribution and handling of mail and parcels, particularly to the home. Airborne is in fact ahead of the game with its recently launched “Airborne at home” product.

DHL, the world brand leader by far for international business, will have to enter the US domestic market (despite current protestations) and achieve economies of scale in collection and delivery for the same reason that UPS operates an intra-European service. It also has to offer a complete range of national, regional and inter-continental express services. The extraordinary, archaic, protectionist rules and regulations in the land of the free mean that DHL/Deutsche Post cannot acquire the obvious company for absolute synergy – Airborne – or for that matter any other airline operation. In the US foreign owners cannot own more than 25% of an airline and in Europe it is 49%. Don’t ask me why it is not the same and don’t ask me why the US customer shouldn’t be allowed a greater range of choice. This is politics. In this field, the US carriers, FedEx and UPS excel, having created their market around the rules and controlling the development of USPS. It is not surprising that selfish interests prevail.

It is interesting that for the first time in its corporate life, UPS has come up against another gorilla -–one that also has a major cash source to generate competition internationally or stifle it domestically – Deutsche Post. As UPS takes the Germans to court in Germany, stand by for more court action in the land of the lawyers – the USA. The brown gorilla argues with a considerable amount of credibility that the majority shareholder of Deutsche Post is the German government which is the regulator who controls the German domestic monopoly. German domestic mail rates are among the highest in Europe and, to be fair, Deutsche Post has reduced its staff by 140,000 in the last five to six years, achieved impressive efficiency by capital investment and is certainly on the way to becoming a fully privatised company against UPS which has a token 10% in the stock market and is still management owned and controlled.

If you are the US shipper, do you care about all this? Do you care if the brown or yellow gorilla is cross-subsidising and offering you lower prices? The answer is probably “yes” and “no”. The US shipper wants lower rates which can only come from more competition. This is either going to come from overseas post offices or US regulatory authorities who will create a much more entrepreneurial environment to allow more competition. Should the USPS, for example, have the monopoly on home delivery? Does anybody else want it? Is it fair to restrict the development of a highly successful global airfreight forwarder, AEI (formerly American-owned) now that it is foreign-owned?

Judging by other overseas post offices around the world, a key success factor seems to be non-postal management being brought in at the top. Perhaps the US government should be enlightened enough to seek, for example, the head of IBM, Ford or General Motors to run USPS and give him/her the freedom to operate and allow anybody to deliver to the home in the good old American way of letting market forces apply. The USPS is faced with declining revenue from first class mail, increased contractual labour costs, political concern about closing post offices and reducing staff, the requirement to serve 1.7 million new addresses each year – it’s not easy!

Certainly USPS, where it is competing head to head on the international side, is losing market share rapidly and it cannot help that its former partners in terms of overseas post offices are now setting up in the USA market as competitors.

The regular shipper may well ask at this stage if express is really that important? It is not used very often and it is very expensive. The answer is that express really is the tip of the iceberg. The bulk of mail, parcels and freight business is below the surface. The days of high prices for next morning delivery in the domestic markets of the world are now gone. In other words, the market has become commoditised and needs to offer an economic business model for the one-stop customer and be able to collect and deliver economically in the sparse as well as the dense areas – definitely a limiting factor for any company trying to compete with the coverage of USPS and UPS.

The USPS obligation to deliver to every home, six days a week, is a long-standing arrangement but is perhaps not sustainable in the 21st century. Letter mail is no longer urgent; most mail is now direct mail and it will not be long before the invoice and payment sides go electronic. Urgent mail is now e-mail, fax or express. Is it therefore right for the US citizen to insist on an infrastructure that employs some 800,000 people being geared to provide a six days a week service when it is no longer required? A recent suggestion by USPS that it might cease to deliver on Saturdays was not unreasonable, given its commercial restraints and the cost of operating in declining market. It was shouted down quickly by the politicians and trade associations but who is going to pay for the expected losses of several billion dollars in the next few years?

Clearly, this is a complex issue with many self-interested forces pushing in different directions. However, the American shipper and exporter needs to be competitive in a global market. Global competition and innovation will result in an improved service environment. At the end of the day, the customer has to be king. The US customer is becoming increasingly vocal. It is such a complex matter that the average shipper finds it difficult to understand. Or does he feel that the market dominance of the existing duopolies is in the best interest of USA Inc?

The world is getting smaller; the European market has already been stimulated by the overseas invasion of US and Australian carriers. Prices have come down, in real terms perhaps 80% compared to 10 years ago, service levels have improved threefold. The customer is king in Europe at least as far as parcels and freight are concerned and will be as far as mail is concerned by 2007 when postal markets will be liberalised allowing competition, mergers that will improve economies of scale, better prices and better service levels.

Perhaps there are some lessons to learn from Europe. Triangle is the leading management consultancy in this industry in Europe and organises conferences on the subject. The next two are to be held in Orlando on 9th – 11th December focusing on the Americas market and in Amsterdam on 13th-15th May 2002 focusing on the European market.

Triangle Contacts:

Triangle Links:

For more information on Triangle or about this article please contact Paul Jackson on PaulJ@triangle.eu.com

• World Mail & Express Europe •
• Global Mail News •
• Mail & Express Vacancies •