Postal price rise 'inevitable'

Photo: Dominion Post

Sam Knowles, NZ Post's acting chief executive, has pulled out all the stops to cut costs and improve efficiencies.

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The gift forecast this Christmas is down distinctly on last year, and there's a good chance we'll have to pay the price for it with higher mail prices.

"People are getting 5-10% fewer presents this year," said NZ Post's acting chief executive Sam Knowles, commenting on the falling mail volumes that are plaguing the giant state-owned enterprise.

"People are being more prudent with their money, and that is coming through in the attitude towards spending." While some of the plunge in mail is the fault of the stuttering economy, the trend of people sending fewer letters is a fact of life for NZ Post and leads to speculation New Zealand will follow the Australian example of cutting Saturday deliveries and increasing mail prices.

Knowles admitted such options were under discussion.

"We are working through different scenarios for the future. There are different options in there, but we are a long way from making any decisions on that," he said.

But a price rise for sending letters and parcels had to come. The government has indicated it views any rises as an operational matter for NZ Post in which it would not interfere – the only question was when.

"We try to maintain the lowest cost we can, but it is inevitable we will have to raise prices eventually," Knowles said, noting the 50 cent stamp is now 25% cheaper in real terms than when NZ Post was formed as a state-owned enterprise in 1987.

NZ Post shed 500 jobs in the past six months in a bid to trim costs, and has focused on improving performance in key business like its courier businesses, which have suffered badly as economic activity has waned. But Knowles said there was only a finite amount of efficiency gains and cost-cutting that could be achieved, though some measures had been taken overseas that could be used here.

"Some countries have moved to five-day deliveries and it is now just what they are used to," he said. "The UK used to be twice a day. They have gone to once a day."

Unlike overseas postal services, NZ Post, which is much more diversified, is still profitable. Even so, profits were down last year to $71.8 million from $110.2m the year before, the result of an unprecedented 6.7% drop in mail volumes in the 12 months to the end of September – it had been tracking at around 1% decline each year.

The long-term trend behind the volume drops was the switch to email – a process dubbed "electronic substitution", but in the past year a stuttering economy had exacerbated the effect, and Knowles was hopeful the coming year would see economic resurgence offset a further drop.

NZ Post also has a plan to stem falling volumes by ramping up the "direct mailing" operations of its DataMail business. DataMail has been surveying Kiwi households for "lifestyle information" to build a database of people not opposed to receiving direct mail advertising from businesses.

So far something like 10% of New Zealand's 1.6 million or so households have been surveyed, Knowles said, and the database of people who said they were happy to receive direct advertising was growing.

Knowles said New Zealand's direct mailing volumes were low compared to other countries – particularly compared to countries with "positive" credit reporting regimes where it is easier for a lender to see what other debts a potential borrower has – and NZ Post believed it was a potential growth market.

Knowles said NZ Post's Australian courier businesses also offered exciting growth prospects.

"We have got some good little businesses over there. The challenge is trying to turn them into large businesses," he said, though it is likely a challenge of a different kind will make more headlines over here.

NZ Post is on a collision course with private courier businesses like NZX-listed Freightways and the Fastway courier franchise company, over its plans to charge them more to access NZ Post's network.

As with Telecom, there are access agreements with rival operators wanting to use the incumbent's network to help provide nationwide deliveries to their customers, but Knowles said NZ Post had been charging less than it was legally obliged to, and it was seeking to lift access charges by "a very significant number of millions".

Knowles refused to criticise previous management for providing too big a discount for access.

"I think it probably goes back to the time when there was a bit more fat in the business and we wanted to make sure we were bending over backwards to let our competition flourish." Freightways, Fastways and others have been given an extended deadline of January 21 to make their comments on the proposal, Knowles said, with NZ Post aiming to bring in the changes in April.

The Commerce Commission had been briefed, and Knowles said, if the commission had seen anything it had a problem with, he would have expected NZ Post to be told, but it had heard nothing.

"We are very comfortable we are operating within the boundaries of what we are allowed," he said.

"We have all got on pretty well, but we are all facing some pretty tough decisions and it is about maintaining NZ Post's relevance and sustainability and being able to deliver regularly and at one price across New Zealand." But despite the challenges, Knowles is not predicting a low-return future for NZ Post for the government despite plans for lower dividends to retain cash to help maintain Kiwibank's credit rating.

"In the current economic cycle, every business is delivering lower returns. There are very few businesses that are counter-cyclical. I would expect at least one more year of lower returns." But, he added: "In the long term there is no reason why returns should be lower. We are charged with making a decent return on our investments."

And, Knowles said, Kiwibank played a big part in the future of NZ Post. Knowles returns to the helm of Kiwibank in January when Brian Roche, currently a partner at PriceWaterhouseCoopers and the project manager for the bid to host the 2011 Rugby World Cup, takes over as chief executive of NZ Post.

"Banking is an inherently more attractive business and that is the business we are growing," he said.

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