Companies & Industries

Ending home delivery will save Canada Post, not kill it

Despite huge losses, there's a way

(Photographs by Roberto Caruso)

(Roberto Caruso)

EDITOR’S NOTE: Canada Post today announced it would phase out home delivery within five years and eliminate between 6,000 and 8,000 positions. Earlier this year, contributor John Lorinc explored how these moves will save Canada Post, not kill it. Here’s his story from our October 18 issue:

It’s not often one encounters a Canadian who speaks so effusively about a Crown corporation that has been regularly pilloried for its strike-prone workforce, sluggish service and outdated business model. But Jon Levy, co-founder of the rapidly expanding toy merchant Mastermind, gladly offers up an interview’s worth of superlatives for Canada Post, and with good reason.

As e-commerce has gained a foothold in Canada, firms like Mastermind have seen online shopping revenues grow at double-digit rates. To get Grandma and Grandpa’s gifts to their young recipients, Mastermind has found an eager and notably efficient assistant in Canada’s postal monopoly. Mastermind uses Canada Post’s parcel service for all domestic orders, while giving customers a choice of courier firms for U.S. destinations (UPS and FedEx). According to Levy, 80% of outbound traffic ends up in Canada Post’s red-white-and-blue trucks. Given that many of those orders face truly hard deadlines—birthdays, Christmas, nursery-school graduations—Levy would be far less upbeat if his customers were griping about messed-up shipments. “Whether [the customer is] in Cornerbrook or Burnaby, they know the way,” he says.

Did you just do a double-take? After all, it’s no secret that postal services everywhere are among the most visible victims of an ongoing digital revolution that brought us the phrase “snail mail.” Canada Post’s revenues have plunged in the past few years, reversing a 16-year run of consecutive profits. The $6-billion-a-year corporation recently recorded a $76-million loss in its second quarter. (That figure would have been higher but for the sale this year of a $109-million former sorting plant in downtown Vancouver.)

According to an April 2013 study conducted by the Conference Board of Canada on behalf of the corporation, Canada Post will be looking at a $1-billion annual shortfall by the end of the decade. Michael Book, a senior partner with the Boston Consulting Group’s Dusseldorf office who has advised postal services across Europe, warns that letter and admail revenues have tended to drop more precipitously than previously estimated, meaning those looming projected losses could come sooner rather than later.

And yet, Canada Post has discovered a silver lining amid all the revenue-killing connectivity. Indeed, Levy’s testimonial is a bit like that famous moment in The Graduate when a family friend of Dustin Hoffman’s character earnestly says: “I want to say one word to you, just one word: plastics.”

Substitute the word “parcels,” and you will know why the strategists atop the post office—currently led by former Pitney Bowes Canada CEO Deepak Chopra—feel that entrepreneurs like Levy hold the keys to the corporation’s survival. It’s true that Canada Post, under Chopra, has pressed ahead with some bold cost-saving moves to improve productivity and streamline operations. But the corporation’s brass know that the fix can’t just be about efficiency: they must change the business model dramatically. In fact, if other postal services worldwide offer some clues, this epic transition could usher in a new suite of services—everything from customized parcel delivery to retail banking. But to get there, Ottawa first needs to loosen the statutory handcuffs and give Canada Post the latitude to make sweeping changes.

canadapost-chartCanada Post isn’t a story of public-sector bungling. Every national postal service in the developed world is facing the same assault on its core business (and most have loads of financial baggage associated with the pension obligations for large workforces). Canada Post, for its part, has 65,000 employees who move or process 10 billion pieces of mail or parcels every year. The pension plan now tops $15 billion, but there’s a $4.7-billion solvency deficit. What’s more, a third of its employees are expected to retire within a decade.

That’s an oppressive cost structure, considering what’s happening with the business itself. E-mail has replaced letter mail. No one sends greeting cards anymore. Increasingly people pay their bills online and receive electronic statements. Globally, domestic mail fell an average of 3.5% between 2006 and 2010, and 13% internationally.

Yet letter mail won’t go completely extinct anytime soon. Charities and other direct-mail users still rely on this channel for their customer-contact efforts. Companies and institutions that send out bills expect they’ll continue to rely on the post for a portion of their customer base. Enbridge spokesperson Chris Meyer says many customers now pay their gas bill online. “Those who receive bills electronically cite convenience and environmental benefits as primary reasons for their choice,” she says. “However, the majority of our customers still receive a paper bill, and we believe that a segment of our customers will always prefer a paper option.”

Outside Canada, postal services and their government overseers have adopted various fixes, some successful, others less so. The lumbering U.S. Postal Service is actually well behind Canada Post, having only just realized that delivering the mail on Saturdays wasn’t such a smart idea. The British government, however, is ahead: it recently announced that the Royal Mail Group was preparing an initial public offering that would hive off part of the 360-year-old company, with shares available to British residents as well as employees. The move, which has drawn threats of strike action from the Mail’s union, comes a year after the government spun off the 11,780-branch retail network known as the Post Office. The payoff looks like this: Deutsche Post, which privatized gradually during the 1990s, saw a 38% reduction in its workforce and a 20% increase in productivity, according to the Conference Board study. The Netherlands and Austria saw similar improvements.

But a privatization of Canada Post is “completely premature,” says Prof. Robert Campbell, who is the president of Mount Allison University and an authority on postal services worldwide. “I don’t think that if you do an IPO on Canada Post, you’d have huge interest” given its current operating constraints, he says, adding that the clock is ticking loudly. “This is absolutely an urgent matter. They have a five-year window in which this has to be sorted out.”

Put another way, if the government gives Canada Post the tools it needs to clean up its balance sheet and make a serious run at new markets, this Crown corporation may turn out to be an attractive buy a few years hence.

Canada Post’s senior managers haven’t been snoozing as we all stop mailing letters. The corporation is in the midst of implementing a $2-billion program to streamline sorting and delivery, which is why you’ve begun to see all those cute little letter-carrier vans on the streets in some cities instead of the clunky old delivery trucks. Meanwhile, the corporation has been conducting town halls across the country in recent months, trying to gauge public reaction to the prospect of significant reductions in service levels, especially in those older urban areas where homeowners still get (costly) delivery to the door (equivalent of about 40% of households). “We know Canadians are looking for change,” says spokesperson Jon Hamilton. Shifting to alternate-day delivery or community mailboxes for every home could yield operational savings in the hundreds of millions of dollars per year. “At this point,” he adds, “no decision has been made.”

There’s also renewed focus on adjacent business lines. When Canada Post looked at its financial statements in recent quarters, it noticed that the so-called business-to-consumer parcel segment defied the general industry trend. Between its in-house parcel business and Purolator, which Canada Post owns, the corporation commands a $3-billion-a-year shipping empire that appears to be growing in lockstep with the e-commerce revolution. According to one estimate, the size of Canada Post’s B2C parcel business will exceed the letter business by 2015.

Still, parcels account for only 22% of Canada Post’s overall revenues. In other words, Canada Post needs to hoover up a lot more of the growing e-commerce parcel business (and do so against formidable private-sector competitors), before that business line produces the sorts of dividends needed to offset losses in the so-called legacy letter-mail business. In a very large country, Canada Post has some built-in advantages for a foray into the parcel business: besides a national delivery network that reaches or almost reaches every home in Canada, the corporation’s retail outlets offer a far more user-friendly way of collecting a missed parcel than what’s on offer from logistics giants like UPS. Indeed, strategy and organization expert Robert David, the Cleghorn faculty scholar at McGill’s business school, wonders why Canada Post hasn’t been making more hay out of that point of differentiation, especially given that the corporation enjoys plenty of brand equity. “I can imagine an ad [that reads]: ‘Who would want to go to a depot in some godforsaken suburb?’ I don’t see them doing that.”

But what about more off-the-wall ideas? David points out that Canada Post finds itself in virtually the same place as AT&T, Bell Canada and IBM did back in the 1980s, when these monopoly-like giants got whacked by technological and regulatory change. After much organizational upheaval, he says, they emerged with leaner workforces and a greater ability to innovate.

Which, of course, is easier said than done. Canada Post already owns a business-to-business courier company, so they’ve done that bit. This fall, they also launched a pilot in a handful of big cities, offering a premium same-day parcel-delivery service for consumers.

A 2012 study by the Boston Consulting Group offers some other ideas. With direct mail, they could develop ways to help advertisers reach more desirable audiences. On the parcel side, they can provide even more customized delivery options—more precise delivery windows and consolidating multiple orders so they arrive at one time. BCG even suggested that postal agencies could develop secure digital e-mail platforms to take advantage of consumer anxiety about run-of-the-mill e-mail, which is highly vulnerable to spam and hackers, and remains out of bounds for a range of sensitive communications, like exchanges with physicians, government agencies and investment advisers. Postal services that try this route, the consulting firm adds, should borrow a page from Apple and open up those platforms to third-party developers.

Then there’s the whole problem of reinventing the retail side. Yes, Canada Post in the past decade and a half has sold a lot of its dusty old post offices and continues to develop its franchise network. But they’ll have to do more than just sell stamps and packaging stationery to make the investment pay back. In the U.K., the Post Office offers access to all sorts of government services through its retail stores. Still other postal services have used their storefronts to get into financial services, insurance and even e-banking.

Conference Board vice-president for public policy David Stewart-Patterson, who wrote last spring’s report on Canada Post’s future, points out that New Zealand allowed its postal service to get into banking as part of a reform push in 2002. Through its Kiwibank division, the New Zealand Post Group now offers insurance, home loans, pre-loaded bank cards and a payments service. Kiwibank has 800,000 customers, and about $14 billion in assets. But unlike New Zealand, there’s no shortage of domestic banks in Canada and therefore no point for the Canadian government to open that particular door to simply help the corporation stem its losses.

Nothing will happen, however, until the feds crack open Canada Post’s enabling legislation, which sets service standards. That would also give the corporation some additional latitude to deal with their labour costs. BCG’s Michael Book points out senior executives in postal services that were successful in making this transition, such as Deutsche Post or Swiss Post, had plenty of room to manoeuvre. “It is important to provide the flexibility to the operator to adapt,” he says.

Mount Allison’s Robert Campbell says the most significant ingredient now is political courage. He recalls that in the early 1990s, the Mulroney government initiated controversial changes to Canada Post’s service levels, and the minister in charge, the late Harvie Andre, spent long hours in the House of Commons taking the flack. “Canada Post would be swimming in debt if those changes hadn’t been made,” Campbell adds. He’s waiting for the Harper Conservatives to send the same letter, so to speak. If it does, Canada Post could live to sort another day.