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Ahmed Fahour: the turning point for Australia Post

I’ve been in this role as managing director for four and a half years now. My most vivid memory of starting in this role actually comes from the day before I went off to work at Post for the first time. I was talking to my daughter about this new job I was starting, when she looked at me with this really quizzical expression on her face and she asked, “Dad, what do postmen do?”.

So I started talking about Postman Pat and his black-and-white cat but she stopped me — and said, “dad, I know about the cat but what does the Postman actually do?”.

Now, this is a whip-smart, 8-year-old girl who had already started communicating via a computer and mobile phone. But she had, in reality, completely bypassed traditional mail when she communicates. So, it really hit me — in that moment — that I was entering a business that was facing a generational shift away from THE product that it had been built on over the previous 200 years. My “communication world” when I was growing up was all about stamps, post offices and posties. The mail system connected with my world. Her world is about Instagram, iMessages, WhatsApp and eBay.

Thankfully, my initial reaction of fear quickly turned to determination.

So, the notion crystallised that we couldn’t allow this iconic Australian institution to just fade away. Just because the community’s use of letters was diminishing, didn’t mean the business had to die with it. We had to start planning for a very different future for Aussie Post. That means carefully managing the declining side of the business while simultaneously building new services for the digital economy, leveraging our trusted brand and nation-wide community networks.

So, today, I want to share some detail of our strategy for managing the digital disruption that is happening across our business. Especially, I want to talk about how we’re managing this transformation in the interests of the entire community. So that means explaining how we are looking after each of our stakeholder groups as we change our services.

I guess the central point that I want to make today is that this change is not driven by us at Australia Post. It’s driven by you, the community.

Technology is creating a monumental shift in how we all live our lives. At a basic level, of course it means we all spend much more time, each day, looking at an electronic screen. But in a deeper sense, the rise of digital channels is actually changing our patterns of work, how we relax and how we connect with each other.

It is transforming every part of our economy and society. So, I see this as a revolutionary change, akin to the industrial revolution in that it’ll transform every part of our economy and our society.

Think of all the things in our daily lives that have become redundant ever since Apple launched the first SmartPhone in 2008. Think about it as:

  • I don’t really need a radio anymore;
  • I certainly don’t need a camera or a video-camera;
  • I still wear a watch — but I don’t need it;
  • I don’t need a diary to keep track of my appointments;
  • I don’t need to buy the newspaper.

If I want to check the news, a footy score, a stock price or the weather it’s all there — instantly — on my phone.

Recently, I found the 2007 Melways that I used to have in my car. I threw it in the recycling bin, because I’ll never look at it again. Pretty soon, paper-based maps will just be museum pieces. Our kids will think it really quaint that — once upon a time — maps didn’t even talk to us and you couldn’t zoom in on a map with a touch of your finger!

Those of us who work in industries that traditionally delivered a service on paper — or that sell some type of physical media are unfortunately at the “cutting edge” of this digital disruption. Think of video and book stores or the publishers of all sorts of news, entertainment and media or photographic companies that failed to adapt – like Kodak – or paper-based cheques, Yellow Pages directory advertising and, of course, letters.

From our perspective at Post our business model has already been severely disrupted by the community’s shift to digital channels. As Australians increasingly use the internet and mobile devices to communicate, to shop, to access services and to pay for things it’s affecting every part of our business. But our three core business areas are impacted in very different ways — some good and some bad.

The most dramatic impact, of course, is in our letters business. Ever since the internet came along 25 years ago we have all been gradually weaning ourselves off letters in favour of digital “postings”. Initially, it was email and text messaging. Then, it was transactional information that started going online via direct debits and electronic bills and account statements. Then, more recently, there has been an explosion of online written communications — courtesy of social media.

The community’s falling reliance on letters is clearly evident in the declining volume of mail that’s being sent in Australia. Our mail volumes always tracked in line with GDP — for 190 years — until 2000. Then they began to gradually decline for about eight years until 2008 and since then we have fallen off a cliff. Unfortunately, the rate of decline from 2008 is not linear. It started at 2-3%, then became 4-5%. Today, it’s 6%-plus.

This year, our posties will deliver 1.2 billion fewer letters than they did at the mail peak in 2008. In pure volume terms, we’ve lost 25% of our letter volumes in six years. But when you consider population growth, the number of letters delivered, per letterbox, has actually fallen 32%, in real terms, over the past six years.

On top of that dramatic volume decline our letters service is governed by a unique set of regulations. It’s a “monopoly service” that loses money. The reality is we make a loss on this regulated monopoly because we don’t have full control of any of the levers that determine profitability. Our costs in mail sorting and delivery are effectively fixed by our legislated service obligations.

So, for instance, we have to deliver five-days-a-week to 98% of addresses and within stipulated timeframes. And, with population growth, our delivery network is expanding by 150,000 new points each year. So, we’re condemned to delivering a dwindling volume to an ever-expanding network. The economics of that are obviously unsustainable.

In fact, the last time our CSOs were reviewed was 16 years ago — by the National Competition Council. I think you’ll all agree we’ve moved on a little since then. By the way in that 1998 review, the Competition Council concluded that there was “no effective alternative means of providing those social benefits”.

We also have the second lowest stamp prices in the developed world and very little freedom to actually set prices for our letters service.

Given this combination of declining volume, growing network, CSO service standard and inability to move price, it’s not surprising that our regulated Letters business incurred a loss of $218 million in the 2013 financial year. We know that loss has already grown to over $300 million in FY14 and it will continue to grow unless we reform the letters service.

Unfortunately, all of our market analysis indicates that the volume declines we’ve already experienced have been relatively gentle and we are about to hit an even bigger cliff.

Declines in traditional mail business

The Australian community’s reliance on letters has been eroding for six years and we believe this decline will soon accelerate. Between 2008 and 2012, the volume of addressed letters sent by Australians fell by about 4-5%, annually.

Over the past two years, the underlying trend has increased to annual letter declines of around 6%. Given Australia’s rate of digital adoption is lagging many areas of the developed world we have the dubious “benefit” of knowing what’s coming next. Unfortunately, it’s not pretty.

In fact, the federal government has commissioned external, independent advisors to look at this and based on overseas experience, they have predicted that Australian letter volumes will fall by between 8% and 11%, annually, for the next five years!

It’s important to understand that the vast bulk of our mail is sent by businesses and government: 97% of our mail is either transactional or promotional in nature. In other words, it’s either transactional information like bills and bank statements or direct mail that’s selling you something. Only 3% of our letter volume, today, is social mail.

So it’s not you and me — or even our parents — that are filling the mail stream with greeting cards and love-letters. It’s almost entirely business and government who are our customers, who actually pay to send letters. The harsh reality for us is that they are doing everything they can to move their customer communications to digital channels.

Australia lags behind much of the developed world in the rate of letter volume decline — and the adoption of e-government and there is clearly a correlation between the two. As soon as a government starts communicating and transacting with citizens online then total letter volumes in that nation start to plummet.

At the top end of this scale are the Nordic countries, Denmark, Iceland and Norway. They all have super-fast broadband and they all have e-government adoption rates of roughly 80%. As a result, total letter volumes in those nations have already halved from the peak as governments have transitioned to online communications with their citizens.

Contrast that with Australia, where only 38% of our community regularly interacts with the government online. As a consequence, our letter volume decline from the peak has been relatively slow — so far! Remember, we’ve only declined 25% from our mail peak.

But, as we look to the future, both of our major political parties here in Australia have almost the same policy targets for e-government. If you look at the ALP and the Coalition’s policies for digitising government services both want to have 80% of government communications with citizens online, by 2017. That will push Australia to the same level of e-government adoption as Denmark and Norway in the next three years. If that is the case then our letter volumes will literally fall off a cliff.

It’s a scary thought but the 8-11% annual letter volume decline might actually be an understatement. So the digital disruption of our letters service is our largest challenge — and it’s something that we will need to manage carefully over the coming decade, and beyond.

Let me return to the point I was making about how digital disruption is playing out in our other two business areas.

In our retail business, the community’s shift to digital transactions is also the key factor driving a decline in customer visitation to post offices. If you go back 15 years, or so, there were two prime reasons that Australians came into our post offices. One was to buy a stamp or a satchel — to mail something and two was to pay a bill.

So, with letter volumes down, obviously customer visits are down. But, on top of that, our other big source of customers — over-the-counter bill-payment — has migrated very quickly to online channels. These are the two main factors contributing to our post office customer visits being down 24% in the past six years.

After all of that bad news I’m happy to say that our parcels business has actually benefitted from digital disruption. As we all know, digital channels have been very disruptive for traditional bricks- and-mortar retail models because it’s created this booming growth in online shopping. So smart retailers have been following their customers and moving to sell online.

When Australians do fill that online shopping cart, we are the partner of choice for most of these B2C e-commerce deliveries. In fact, 70% of our total parcel volumes are generated by an online transaction. So, the recent boom in online shopping has driven 39% growth in our domestic parcel volumes over the past four years. At the same time we have grown our parcels business from making around $170 million back in 2010 to over $300 million today.

Looking at the figures, you can actually see that digital channels have fundamentally changed how Australians use our various services. Digital disruption has had a dramatic impact, particularly since 2008.

The strategy going forward

What is our strategy for dealing with this? In essence, it involves carefully managing the decline of letters while also capitalising on our opportunities to serve Australians in new ways. We have divided our strategy for dealing with this shift in customer behaviour into two distinct buckets.

The first thing we want to do is reform our letters service. That means changing our prices, our services and our operations so that they are more aligned with the community’s contemporary use of letters.

One of the ways that we are seeking to limit the losses in our letters business is by introducing a two speed letters service and give customers choice on service standard and price. We introduced this offering for business on June 2 and we are planning to extend this option to all Australians in 2015. It means that everyone will be able to choose the delivery speed and the price-point that suits their needs.

The “priority” service is delivered according to the existing timetable standards e.g next-day delivery in the same city and the delivery standards for the new “regular” service will be one to two days longer than the priority service.

Ultimately, though, we will need some flexibility on the pricing of both the “priority” five-days-a-week letters service and this new “regular” service to actually recover the cost that’s incurred in providing the service.

Without reform of our Community Service Obligations in letters we will soon cease being a contributor to the government’s revenue and, instead, become a drain on it. We don’t want that to happen. We want to keep running Post as a sustainable, self-funding business that isn’t a burden on taxpayers.

Unfortunately, we have now reached a tipping point where that is almost impossible because our letters business operates according to a dated regulatory framework. Remember these regulations were drafted in an era when letters were still the dominant and most vital form of written communication in our society. Unfortunately, in the first six months of this year — from January to June — our business actually made a loss overall. That only happened because the losses we incurred delivering the letters service overwhelmed the profits from our parcels business.

It is the first time we have made a loss, in any six-month period, since becoming a government business enterprise in 1989. So we are at a critical turning point.

This is why we have been so actively talking to the community and our shareholder — about the reform of our letters service. Ultimately, we need community support — and government approval — to proceed with the reforms that are needed to ensure we can deliver a self-sustaining letters services, for the entire community.

If we don’t reform letters, the projected losses in that business will soon be so large that we won’t be able to fund our competitive Parcels business or continue to support the viability of our extensive Post Office network across the country.

And that brings me to the second part of our strategy which is the really exciting part. This is all about changing our business and growing by adding new services that enable us to serve our customers in the digital economy. Under our structure, we have created two customer-facing brands.

The postal business — under the Australia Post brand — offers trusted services that help business and government to connect with Australian consumers. So, that includes Communications services like letters, but also the MyPost Digital Mailbox, which is your free, secure, digital mail delivery of your important letters. And it also includes all sorts of trusted services that we offer via our post offices — as well as online.

I mentioned how significant bill-payment has been for us. We are continually adding new types of trusted services that we offer as an agent on behalf of over 750 businesses and government organisations — financial services, payments, foreign exchange, identity services, travel services and government services!

So, we are giving Australians new reasons to visit us — both in-store and online.

But you can see that the role of our Post Offices is evolving. Of course, post offices will continue to be an access point for the mail network but, increasingly, our post offices are becoming a local shopfront that offers services on behalf of our business and government partners. We’re giving them the ability to conveniently connect and transact with their customers in their own local community.

Of course, the other great opportunity we have been leveraging and growing in the digital economy is as a provider of e-commerce-related parcel delivery and logistics solutions for Australian e-tailers. We offer these services under the StarTrack brand. We help Australian businesses to get their product to their consumers reliably, securely with genuine choice and control.

So we’re a significant part of their supply chain and their customer experience. We’ve been really busy integrating the operations and services of our parcel business with StarTrack, the express logistics business that we fully acquired about 18 months ago. You’ll notice that we have re-branded slightly to include the Post “P” symbol at the front of the StarTrack logo. By integrating these two businesses we can now offer both business and consumer markets a complete suite of logistics, supply chain and delivery services. From simple consumer parcels right through to large-scale business freight and international logistics solutions.

As we implement our strategy — we are always very mindful of the impact of this change on our stakeholders, our employees, disadvantaged and elderly Australians, small businesses — including, of course, licensed post offices and regional and rural communities.

As a business that is literally owned by the community it’s incumbent on us to do everything in our power to mitigate the negative impacts of our business transformation program.

So, for our own people, we have developed an initiative called Post People 1st that’s directed at giving our existing employees career development opportunities and priority when it comes to jobs. It has enabled us to transfer over 2000 of our people into new roles in our changing business.

For the elderly and disadvantaged we recently introduced the MyPost Concession Account. This new account is available to the 5.7 million Australians who have a government-endorsed concession card. It entitles these people — mostly pensioners and the unemployed — to purchase stamps at the discounted rate of 60 cents. So, with the recent 10-cent rise in postage we’ve effectively frozen the price of stamps for a large segment of the community that is still highly reliant on the letters service. It’s been a resounding success and we’ve already had almost a million Australians apply and receive a MyPost Concession Account.

We also recently announced our Rural Sustainability Package to support rural communities and the small business people who run licensed post offices in so many small rural Australian towns. All up, this package is worth about $40 million in extra payments for our partners who run LPOs and community postal agencies. We will also roll out 50 superstores throughout regional and rural Australia by 2020. Importantly, we want to help to support the viability of those licensed post offices throughout rural Australia.

We are continuing to invest in this retail network for two reasons. First, our research shows us how much Australians love and value their local post office and, second, because having this trusted, nationwide retail presence is a genuine source of competitive advantage for our business.

I want to finish by saying our first priority is to serve the community. The Australian Postal Corporation Act of 1989 actually commits us to “serving all Australians wherever they reside”. So, ultimately, we are still driven by this purpose of connecting Australians and Australian communities. For us, community service is not an obligation, it’s our reason for being.

So, our mission is to expand our services, maintain our networks and sustain our position at the hub of communities across Australia but we must do so in a sustainable way.

We’re operating in a dynamic, digital world where community expectations and customer behaviour are changing rapidly. We’re very mindful of protecting the interests of those community segments that are most dependent on our services but, we have to keep reforming Australia Post in response to this shift in customer behaviour.

Simply continuing to do what we have done in the past will not allow us to be a community service in the future. So we are changing today to ensure we will be part of tomorrow.

This is an edited speech delivered by Ahmed Fahour to the Australia Israel Chamber of Commerce on August 14.

Author Bio

Ahmed Fahour

Ahmed Fahour is the managing director and chief executive officer of Australia Post. He was formerly an executive at NAB, Citigroup and a partner at the Boston Consulting Group.