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Amazon is not the only threat to legacy post offices

Amazon is not the only threat to legacy post offices

IT MAY be hard to imagine a world without cheap postal services, but 200 years ago sending mail was a luxury. Posting a letter from London to Edinburgh cost an average daily wage. In 1840, after a proposal by Rowland Hill, an inventor, Britain launched the Penny Post, the world’s first universal mail service. The state-run post office was given a mail monopoly in return for delivering letters to any address in the country at the same rate. Cheaper postage proved wildly popular and the flows of information it enabled boosted economic growth. But the scheme’s finances proved controversial. The low cost of the service hit profits and the government introduced income tax to fill the fiscal hole.

That did not stop the idea of a “universal service obligation” for post spreading across the entire rich world over the next century. At the industry’s peak, post offices worldwide delivered nearly 350bn items of mail in 2007. But over the past decade this model has come under threat from falling letter volumes and from gig-economy firms and e-commerce giants expanding into parcel delivery.

As a result, the postal service in America has again become controversial. On April 12th President Donald Trump set up a task force to examine the finances of the state-owned United States Postal Service (USPS). Over the past month he has attacked Amazon, an e-commerce giant, on Twitter for costing USPS “massive amounts of money” for delivering its items. Analysts think that claim is dodgy. Mr Trump has a well-known dislike of Amazon and its boss, Jeff Bezos, who also owns the Washington Post, no fan of the president. But it is true that USPS is in serious financial trouble. Since 2008 revenues have fallen by 35% in real terms and it last made a profit in 2006.

Post offices elsewhere in the rich world suffer the same underlying problems, yet are more financially successful. Letter volumes have fallen at a rate of between 3% and 5% a year across the developed world over the past decade, says Brody Buhler of Accenture, a consultancy. Up to 80% of letter volumes could be lost before a floor is reached, says Rob Wolleswinkel of BCG, another consultancy.

Most of the decline has been due to bank statements and utility bills going online and personal letters and greeting cards going out of fashion. Junk mail has also begun to crumble due to the rise of digital advertising on smartphones. Online government services are likely to reduce demand for first-class letters even further. Denmark scrapped that service in 2016.

Parcels could come to the rescue. In 2014-16 global package volumes surged by 48%, reckons Pitney Bowes, a tech firm. But unlike with letters, most post offices do not have a monopoly in parcels, so margins are thinner. The machines needed to sort bulky parcels require heavy investment that strains cash-strapped post offices.

Their struggles are also due to delivery startups. Investors are pouring money into gig-economy couriers that use cheaper, self-employed drivers. BCG reckons that investment in such firms grew from $200m to nearly $4bn in 2014-16. Post offices, weighed down by strident unions, high labour costs and costly networks of sorting centres, struggle to compete.

But it is not yet clear that gig couriers will survive in the long term, says David Jinks of ParcelHero, a parcel broker. Last month two American startups, UberRUSH, a service owned by Uber, a ride-hailing app, and Shyp, shut themselves down due to a lack of demand. Bad publicity about working conditions is forcing others, such as DPD of Britain, to introduce holiday and sick pay. Tighter labour markets may make it harder to find enough cheap drivers to compete with the postal services.

E-commerce giants may prove a greater threat. The biggest risk is not that post offices bid for their business too cheaply, as Mr Trump suggests. It is that they lose their custom completely. Amazon has already hit Britain’s Royal Mail hard by starting its own door-to-door deliveries. In California it has launched a grocery-delivery service as a way of gaining greater scale to deliver its own e-commerce parcels itself. The biggest threat of all may come from Amazon’s Chinese rival, Alibaba, which is injecting $15bn into its own delivery arm, Cainiao, and aims to expand beyond China. By doing their own deliveries in cities, where profits are juicier, these firms could leave less money on the table for post offices to cross-subsidise rural services, where costs are higher.

The answer to these challenges is not to shield postal services from competition. Four out of the world’s five fastest-growing legacy firms—Singapore Post, Poste Italiane, bpost of Belgium and Austrian Post—are privately owned and face rivals. Royal Mail, which was privatised earlier this decade, is using gig-economy staff to deliver parcels and is investing in startups to improve its services, says Daniel Roeska of Bernstein, a research firm. Although Deutsche Post DHL of Germany will be 30% more labour-efficient in a decade’s time, Frank Appel, its chief executive, insists that the growth of e-commerce will keep his existing workforce fully employed.

Typical mail

Amazon dreams of using drones to disrupt delivery to the doorstep. But that will take years to win regulatory approval. And in spite of new rivals and continued universal service obligations, the sheer scale of post offices still give them a big comparative advantage. Royal Mail has dozens of competitors, yet still has nearly all of the door-to-door letter business. The same is true for other EU countries with competition. Postal firms can survive and thrive if they are prepared to change how they operate. Rowland Hill, a radical reformer in his own era, would approve of that.

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