An Post must change to survive in the digital age

There’s a generation of children at school today who might never write a cheque in their lives, or buy a stamp, or even buy a newspaper, more’s the pity.

It's a reality of the digital age and threatens the business models of many long-established companies in those industries, including An Post.

The State-owned postal group has implemented €100 million in cost savings since the economy crashed and diversified its revenue stream in a number of interesting ways (including the delivery of parcels from online shopping) yet it remains financially challenged.

This is largely due to the decline in volumes at its mails business with the result that the group is forecast to lose between €12 million and €15 million this year. This would widen to €40 million if no actions were taken to tackle the situation.

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These losses are not sustainable and the Government’s response yesterday was to provide An Post with the freedom to bring its postal pricing into line with European peers.

This means that the current 72 cent price of an ordinary stamp will rise to somewhere between 90 cent and €1. The percentage increases for business customers, who can avail of discounts, will be less dramatic but still of the order of 15 per cent.

The price increases are likely to go through in the first quarter of next year and follow two previous rises in the past two years.

Breathing space

An Post's new chief executive, David McRedmond, who previously ran TV3, told me yesterday that "there will be a decline" in mail volumes as a result of the price increase, but he hopes it won't be too damaging.

McRedmond is hoping that the price rise, coupled with cost savings of €10 million, will get An Post close to breakeven in 2017. This will give him some certainty on its cash flows for the next two years and give him breathing space to draw up a longer term plan.

Consulting group McKinsey has been hired to conduct a strategic review and advise An Post on the future of the business.

For the mails business, the future looks bleak. From memory, I’ve sent one letter by post this year – a card congratulating a relative on his leaving cert results.

Where previously my utility bills were delivered by a postman or woman, they now arrive by email. I recently renewed my house insurance through the company’s online portal.

It’s a similar story with banking and motor tax and the pace of this transition is only likely to quicken.

An Post has a number of profitable business units, including the post office network, believe it or not. But the traditional letter delivery service continues to be its biggest earner, accounting for 64 per cent of income last year.

This was down from 74 per cent in 2008 and the rate of decline in volumes is currently running at about 10 per cent per annum. But it’s still hugely important to the company.

Universal Service Obligation

An Post’s Universal Service Obligation (USO) requires it to deliver mail to every house in the State every weekday for a uniform price. While the service level is good, the operation is uneconomic.

The loss from USO was €32 million in 2015 but is closer to €50 million this year.

With a steep price increase in the pipeline, McRedmond is not currently seeking changes to the USO. This would be too much for customers and the minority Government to bear. However, amendments to the USO model can’t be far away.

In New Zealand, changes were introduced in the middle of last year whereby each street address in major towns and cities would receive standard mail delivery either on Monday, Wednesday and Friday, or on Tuesday, Thursday and Saturday.

In Italy, Poste Italiane, which was part-privatised last year, was allowed to reduce its delivery service to once every other day in a quarter of its territory - a bigger departure from the principle of universal service than in any other EU country.

To date, An Post has operated without a state subsidy, a position that McRedmond thankfully wants to maintain.

This will involve some unpalatable decisions having to be made, including changes to the frequency of delivery, the closure of more post offices, additional automation, a reduction in its 9,000-strong workforce, and changes to their pensions and other benefits.

In spite of An Post's sizeable losses this year, staff won a 6 per cent pay award over three years in the Labour Court, starting this year.

The changes that will be required won’t go down well with workers, the postmasters’ union or rural lobby groups. But they are undoubtedly necessary if McRedmond is to deliver a viable long-term strategy for An Post.

Twitter: @CiaranHancock1