This article originally appeared in the NZ Herald.
Technological innovation is having a devastating impact on many companies, including New Zealand Post.
This impact is often called the “Kodak effect” after the mobile phone helped to wipe out the world’s premier film and camera producer.
Kodak became a 20th Century powerhouse after it introduced the Brownie camera in 1900.
This was the launching pad that allowed the company to dominate the lucrative camera and film sector for the remainder of the century.
In 1975, a Kodak engineer invented the first digital camera but the company didn’t realise its massive potential.
Steve Sasson, Kodak’s digital camera inventor, told the New York Times in 2008: “My prototype was as big as a toaster, but the technical people loved it. But it was filmless photography, so management’s reaction was, ‘that’s cute — but don’t tell anyone about it’.”
Kodak went bust in 2012 and Sasson’s 2008 comments to the Times are included in most assessments of the company’s failure.
New Zealand Post doesn’t have its head in the sand but the company is facing major challenges because of the accelerating decline in letter volumes.
This is not the first challenge the organisation has faced since New Zealand’s first post office was established in Kororareka, Bay of Islands, in 1840.
When the old New Zealand Post Office, which was the country’s largest employer, was corporatised on April 1, 1987, it was split into three separate Crown-owned companies: New Zealand Post, Telecom Corporation of New Zealand, and PostBank.
Telecom is now listed on the NZX as two separate entities, Spark and Chorus, while PostBank was sold to ANZ Bank in 1989.
The newly-formed New Zealand Post had 12,000 employees in April 1987.
It also had 800 contractors, mostly for rural delivery, dated sorting operations, a network of 1200 owned and agency-operated post offices and a huge number of middle managers.
These postal operations reported losses of $23.7 million for the March 1986 year and $37.9m for the March 1987 year, with further losses of up to $50m predicted for its first year as a state-owned enterprise.
Vivienne Smith’s book Reining in the Dinosaur: The Story Behind the Remarkable Turnaround of New Zealand Post, covered the 1987-97 period in considerable detail.
Richard Long wrote in the book’s introduction: “Post was regarded as the poor relation of the old Post Office structure, which included telecommunications and the banking operations.
Starved of investment and sorting machines, Post was forced to maintain services by manpower expansions in vastly inefficient ‘third world’ sorting operations.
“Mail bags were cleared on a ‘last in, first out’ basis, with lower bags waiting for weekend sorting on penal pay rates.
“A management structure resembling a Soviet bureaucracy was unfriendly towards innovations, or was unable to act because of a powerful union which was consulted on everything”.
The newly-established NZ Post quickly became a front-page story with its October 1987 announcement that it would close 432 post offices and cut 560 jobs.
The company had quickly embraced modern management practices as it closed small post offices while investing in modern sorting processes and distribution systems.
This had a positive impact on its bottom line, as the new company reported net earnings after tax of $72m for the March 1988 year, compared with a forecast loss of $50m.
The remainder of Smith’s 1997 book was mostly upbeat, with the final chapter looking forward to the 1997-2007 period.
Elmar Toime, the chief executive in 1997, was upbeat: “Will the postie still call in 2007? I think the postie will. I am very confident.”
Harvey Parker, the company’s chief executive between 1987 and 2003, had a more pessimistic view. He told Smith: “I believe that ultimately letters are going to become a thing of the past.
“I think while my generation is around, we will continue to write and appreciate getting letters and direct mail and so on, but the generation coming behind is computer literate. They are comfortable with PCs, they are comfortable with electronic mail, and, with things like the internet around, increasingly, we are going to see electronic communications replace hard copy mail.”
This insightful prediction, made more than 20 years ago, is now having a massive impact on NZ Post.
The company’s annual letter volumes have plunged from 1.1 billion in 2002 to 698m in the June 2014 year and only 514.5m in 2016/17.
Letter numbers fell a further 13.8 per cent, or 38 million, in the first half of the June 2018 year compared with the same period in the previous year.
This issue with our postal service was highlighted again this week when New Zealand Listener mail subscribers were informed that delivery may take one or two days longer in the future because there have been “changes to the New Zealand postal service which have affected delivery days and speed”.
How long before NZ Post’s annual letter volumes drop to 250 million? How long before we have just one or two mail deliveries a week?
The good news is that parcel volumes are increasing year upon year, mainly because of online retail sales.
However, this is not enough to compensate for the decline in letter volumes.
For the 12-month period including the second half of its June 2017 year and the first half of the June 2018 year, NZ Post reported a pre-tax loss of $2m.
This comprised a $39m loss from post, partially offset by a $37m profit from investments, mainly Kiwibank.
Kiwibank was launched in 2002 under the full ownership of NZ Post.
Branches were set up in more than 250 PostShops, giving the new bank an immediate countrywide reach.
Kiwibank’s earnings increased steadily to $127m for the June 2015 year but declined to $124m in 2015-16 and just $53m for the year to June 2017.
The latter result included a $65m impairment on computer software and $4m of earthquake costs.
The bank’s performance deteriorated further in the six months to December 2017, when it reported net earnings of $42m compared with $63m for the same period in the previous year.
NZ Post’s Kiwibank shareholding was reduced from 100 per cent to 53 per cent in October 2016 following the sale of 47 per cent to the New Zealand Superannuation Fund and ACC for $493.5m.
This has strengthened NZ Post’s balance sheet but has reduced the earnings contribution from Kiwibank.
NZ Post chair Jane Taylor wrote in February: “Our commitment to providing a sustainable letters business for New Zealand remains a priority.
“To do this, however, we accept and know we must make further changes to maintain our service levels.”
BusinessDesk reported this week that NZ Post is continuing to focus on shrinking its processing centres, introducing alternate day delivery, dropping FastPost and using electric vehicles.
It will also reduce the number of standalone postal shops in favour of outsourcing to chemists, dairies, stationery stores and video shops.
NZ Post remains committed to providing 880 post outlets throughout the country but an increasing number of these will be outsourced arrangements, rather than company-owned stores.
NZ Post is focusing on growing its parcel post as online retail sales accelerate.
New Zealand online retail sales are growing at 10-11 per cent and have huge potential considering the US online retail market is growing at around 16 per cent per annum.
One of its main parcel competitors is Freightways, which delivered more than 50m items and generated revenue of $403m from this operation in the June 2017 year.
Meanwhile, NZ Post delivered 71m parcels and generated parcel revenue of $431m for the same period.
By comparison, NZ Post delivered 514.5m letters and generated $312m of letter revenue for the June 2017 year.
The battle between NZ Post, Freightways and other parcel delivery companies will be watched with interest because the long-term viability of the Crown-owned company is highly dependent on its ability to continue to grow parcel volumes.
Disclaimer: This article originally appeared in the NZ Herald and is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser. Past performance is not a guarantee of future performance.