New Zealand Post outlines five-year strategy

1 November 2013

New Zealand Post Group today announced a range of strategic initiatives to establish a solid foundation for its future operations to service New Zealand.

The initiatives follow on from changes to the Deed of Understanding announced by the Government last week. 

New Zealand Post Chairman Sir Michael Cullen said the strategies reflect the challenges of new market realities.

“The initiatives commit to investment and growth in New Zealand Post’s logistics and financial services, innovation in our mail and retail network, and lowering costs. Changes will start to be implemented next year.

“New Zealand Post remains committed to maintaining a nationwide letters delivery service and a strong retail network across the country. A credible brand presence is very important to the business.  

“How we deliver services however, must necessarily reflect the dramatic changes we are seeing in our market place. As we have signalled, change is inevitable as letter volumes drop through the greater use of digital channels, email and devices such as smart phones. This irreversible change to our operations also has implications for the retail network.”

The initiatives fall into the main areas of:

Delivery

  • A choice of an overnight service for priority items across the week and a non-priority service;
  • Progressively changing our delivery mode from walking and cycling to a walking and vehicle support – this will allow our posties to accommodate the continued growth in parcels;
  • A move to a Universal Service Obligation of delivery for standard letter mail of not less than three days a week from July 2015 for urban, with a 5 day delivery service for rural. This is permitted by the new Deed of Understanding announced last week;
  • Continued optimisation of our remaining mail processing activities.

Retail

  • Greater use of agency type models where the New Zealand Post service offering is co-located within a host business, allowing greater convenience and longer opening hours;
  • Progressively moving out of direct ownership of stores;
  • Greater use of technology and simplification of our service offerings.

Parcels

  • Actively growing the parcels business and making it easier for businesses to send their products to, from and around New Zealand;
  • Giving customers more control over how they access our products and services.

Financial services

  • Growing Kiwibank and expanding its wealth and insurance services.

Sir Michael said these initiatives will have a significant impact on the number of people working in New Zealand Post across processing, delivery, retail and corporate support roles. 

“While we will remain one of the biggest employers in the country we are also signalling that we expect to need to reduce our workforce by around 1500-2000. 

“These reductions will occur in areas such as corporate, processing, retail and delivery.

“While significant it is important to recognise that the reduction will be phased and will occur over the next three years.

“That impact on people is very regrettable but it’s something we can’t avoid given the changes to how customers and the broader community are using our services,” he said.

“New Zealanders are well aware that our traditional letter mail business is in irreversible decline.  Letter volumes have fallen 30 percent since 2006, and we are facing further significant decline within the next five years.

“The financial position of the traditional business has deteriorated to a point where it would be irresponsible not to take action.

“The Board and management however are committed to doing this in the best possible way and have developed an extensive package of support for those people who are impacted by the changes. This will help provide them with the skills, knowledge and support to assist in their transition to other opportunities” said Sir Michael.

 

Q: Why has New Zealand Post developed this strategy and what is it?

A:  The strategy outlines New Zealand Post Group’s plans for the next five years.   It positions the company to serve the needs of New Zealanders, to grow and innovate, and to control costs.

The strategy commits New Zealand Post to investment and growth in New Zealand Post’s logistics and financial services, innovation in our mail and retail network, and lowering costs across the business including corporate services.

The strategy also reflects New Zealand Post’s ongoing commitment  to maintaining a nationwide letter delivery service and retail network.  

Q: What are the main components of the strategy?

A:  The strategy is made up of a range of initiatives in the following areas:

Parcels

  • Actively growing the parcels business and making it easier for businesses to send their products to, from and around New Zealand;
  • Giving customers more control over how they access our products and services.

Retail

  • Greater use of agency-type models where the New Zealand Post service offering is co-located within a host business, allowing greater convenience and longer opening hours;
  • Progressively moving out of direct ownership of stores;
  • Greater use of technology and simplification of our service offerings.

Delivery

  • A choice of an overnight service for priority letters across the week and a non-priority service;
  • Progressively changing our delivery mode from walking and cycling to a walking and vehicle support – this will allow our posties to accommodate the continued growth in parcels;
  • A move to a Universal Service Obligation of delivery for standard letter mail of not less than three days a week from July 2015 for urban, with a 5-day delivery service for rural. This is permitted by the new Deed of Understanding announced last week;
  • Continued optimisation of our remaining mail processing activities.

Financial services

  • Growing Kiwibank and expanding its wealth and insurance services.

Q: Why are you making significant changes?

A: The changes reflect the dramatic changes we are seeing in our marketplace.

Our customers are changing the way they use our services. In particular, letter volumes continue to decline rapidly due to the greater use of digital channels, email and the significant improvement in accessibility and functionality of portable digital devices such as smart phones; and our customers are increasingly accessing services through digital channels than through traditional ‘bricks and mortar’ retail channels.

These initiatives arise from a fundamental and irreversible change in our operating environment.  Our traditional business model is no longer fit for purpose and we must change and innovate if we are to be sustainable and to meet the changing demands of the market.

The challenges are a global phenomenon with postal operators worldwide experiencing and responding to the same issues as New Zealand Post.   

Q: How fast are letter volumes declining? 

A: Mail volume has declined by a third since 2006.

  • There has been a 7.5% drop in the last year
  • 63 million fewer items last year
  • 30% in the past five years
  • Mail volumes are now falling at a faster rate than ever before in the history of New Zealand Post.

Q: Why are you announcing the strategy now?

A: We have signalled over the last three years the need for the Group to make significant changes to the way it operates, outlining our broad strategic plan.

Today’s announcement articulates our 5-year plan and confirms the direction we are headed in. 

The new Deed of Understand announced last week by the Government provides us with the necessary flexibility to make some changes in relation to standard letter mail delivery and how the store/outlet network is defined.

Q: When will customers notice changes?

A: Initiatives will be implemented in stages over the next three years, starting in 2014. We have further work to do on the initiatives before they are rolled out. Timing, where and how they will be implemented are still to be decided.

Changes to the number of days each week that standard letters are delivered – which are permitted by the new Deed – are expected to be in place from mid-2015. This won’t make any difference however to the amount of time it takes to get a standard letter delivered (it should still get there within three days).  

There will be no change to the frequency of standard mail delivery before July 2015.

Q: What will the changes look like?

A:  New Zealand Post remains committed to maintaining a nationwide letters delivery service.  Similarly for the retail network – a credible brand presence is very important to the business. 

The main changes customers will see over the next 3 years are:

Parcels

New Zealand Post will carry more parcels in our network.  Using technology, we will give customers more control over when and where their parcels are delivered.    The parcel network will be improved with more convenience and control for senders and receivers. 

Delivery

Over time, we will increase motorised delivery to support walking and biking to reflect the shift from letters to parcels in mail volumes.

From mid 2015, there will be a choice of an overnight service for priority letters across the week and a non-priority service. Standard letter mail will be delivered not less than three days a week for urban areas, with a 5-day delivery service for rural addresses.

Retail

New Zealand Post will continue to have a strong outlet presence with the new Deed guaranteeing the same minimum number of points of presence.  However we will expand on the already strong agency network, replacing New Zealand Post ‘corporate’ outlets where it makes sense.    We will invest in self service technology to provide greater access to postal services, with improved convenience. 

Kiwibank

We will continue to grow Kiwibank, including growing our business customers and offerings to those who call Kiwibank their main bank.

Q: What impact will there be on people working for New Zealand Post?

A:  The strategic changes will have a significant impact on the number of people working in New Zealand Post, in areas such as corporate support, processing, delivery and retail.

New Zealand Post will remain one of New Zealand’s largest employers, but we expect that we need to reduce our workforce by between 1500 and 2000 out of our 10,600 employees across the New Zealand Post Group.  

The reduction in the number of people will be driven by a number of factors.  We are committed to reducing our costs in corporate support services; the move to less ownership of stores will require fewer New Zealand Post people employed by us in our retail network; and reduced mail volumes means fewer people will be required to process and deliver mail.

These changes will be phased in over the next three years. We still have lot of work to do and are not yet in a position to provide a breakdown of where the impacts will occur. We will keep staff and customers informed as we work through the changes in detail over the coming months.

Q: What impact will there be on the retail store network?

A: We will still have a minimum of 880 points of presence across the country.  As at 30 June New Zealand Post had 886 postal outlets, consisting of 609 outlets in host businesses providing postal services; and 277 outlets providing a mix of postal and other services such as bill payment and banking.  Of these 277, 139 are owned-and-operated by New Zealand Post while the remaining 138 are operated under agency agreements.

Maintaining these points of presence is important to the communities they service and to the Group as a channel for providing the mix of postal, courier and banking services.

We will have our outlets located where our customers need them, and will provide the mix of services to meet market demand.   There will be greater use of self service technology, but we’ll ensure face-to-face service is also maintained.    While New Zealand Post will expand on the agency model for some outlets, we will continue to own and operate outlets in areas where there are opportunities for Kiwibank to grow. Our current thinking is that we will own up to 50 stores.

The changes to our retail network will start with a plan over the next 12 months to review a number of the 139 New Zealand Post owned-and-operated stores to find alternatives to us owning them.

Other retail outlets will provide a mix of banking, postal, parcel and bill payment services, and are likely to be hosted in other stores.

Q: Why does there need to be any changes to postal services or reduction in costs when the New Zealand Post Group reported a net profit after tax of $121 million for 2012/13?

A: The bulk of the Group’s profit in 2013 was provided by Kiwibank (which recorded a $97 million after tax profit) and our courier operation ($17 million net profit).  The traditional letters mail business effectively just broke even, and that was with extremely tight cost management.  Revenue in our letters business plunged $30 million last year, and without making fundamental changes those  losses would continue.  There are no more short term solutions.

Q: Why can’t the more profitable parts of New Zealand Post such as Kiwibank subsidise the postal business?

A: It is important all parts of the business can stand on their own merits. Taking funds from other businesses doesn't solve the fundamental design problems – it would only be a short term 'sticking plaster' solution. It would also inhibit growth opportunities in the more profitable parts of the Group and potentially cause issues with credit ratings.

Q: Why can’t the postal business be run to just break even?

A: New Zealand Post was established by the Government as a business when it was created as a State Owned Enterprise. It is obliged by the Government to be run as a business and to make a profit. A portion of this profit is given to the Government and the taxpayer via dividends. Since its creation as an SOE, New Zealand Post has returned $720 million to the Government for the benefit of the taxpayer. For the past three years New Zealand Post has provided a minimum dividend of $5 million.

If we do nothing, the postal business will be worse than break even.

Profits are also vital for investing back into the business so it can grow and improve. New Zealand Post requires money to invest in maintaining our postal network. 'Breaking even' would mean no dividends for the Government, and no money to put back into the business. Over time that would lead to running down and cutting back services.

Q: Isn’t the growth in parcel deliveries compensating for the fall in letter mail?

A: No. There is good growth in the parcels market with the increase in online shopping, the impact of TradeMe and 'e-tailing'. But our current postal model relies on big volumes. Parcels currently make up just 2.5% of our mail volumes. Over the next five years parcel volumes are forecast to increase by 10 million items while letter volumes are forecast to fall by 252 million. The increase in revenue from the increased number of parcels won't cover the loss in revenue from fewer letter items.

Parcels are a definite growth area and our postal network is well geared to handle this. New Zealand Post is delighted to now have 100% ownership of Express Couriers Limited (ECL) which is a leading force in the market providing  same and next day delivery through its Pace and CourierPost brands.

Q: What will happen if New Zealand Post does not change?

A: The postal business is rapidly heading into loss-making territory. That's because it has a network geared for volumes of around 1.2 billion pieces of mail and we are currently delivering just 771 million pieces. Volumes are forecast to drop to below 500 million within five years. At the same time as volumes have dropped, costs have risen due in part to an increase in the number of locations we deliver to.

Rising costs and falling revenue would leave New Zealand Post with the following options:

  • Asking the Government to fund the postal business through taxpayer funded subsidies estimated at approximately $30 million per annum and increasing year-on-year;
  • An end to paying the Government dividends from the postal business. New Zealand Post has paid the Government $720 million in dividends since it was established as an SOE in 1987. That money has gone into funding services for New Zealand communities;
  • Frequent and significant price increases. This would not be a sustainable solution and would in fact accelerate the decline – we cannot price our way out of a fundamental change in the market demand.