Transformation to Save Canada Post

By Angus Gillespie

As our global society continues to race through this new digital era where numerous technologies of today will be ancient history by tomorrow, just trying to stay at the front end of the curve is a daunting task for many enterprises. Successfully establishing a business model that can meet the needs of tomorrow’s customer within an acceptable timeframe will be the difference between success and extinction.

It’s plain to see that recent years have been somewhat hostile to Canada Post, a Crown corporation that has existed in one form or anther since our country’s confederation. Not so far back as the dinosaur, but some of the policies that governed the service had become markedly dated, especially over the past decade. The corporation took on the name Canada Post in the 1960s and was officially rebranded in 1981. Up until that point, it was officially known as the Post Office Department.

The Canada Post Group of Companies is comprised of Canada Post and its three non-wholly owned subsidiaries: Purolator Inc., SCI Group Inc., and Innovapost Inc. There are a total of 69,000 full and part-time employees, including 54,000 at Canada Post, which had revenue of $5.9 billion in 2011. However, there was a loss for the first time in 16 years. Now the question is whether it was an anomaly or a serious precursor and an omen for the foreseeable future.

It has been widely acknowledged that a major transformation was necessary in order to return Canada Post to a profitable position on an annual basis when president and CEO Deepak Chopra addressed the matter in his message within the 2011 annual report. The changing landscape became evident a number of years ago and there have been attempts at following a new charted course. The first noticeable corporate facelift came with the major equipment upgrade at the national service starting in 2007 with much of the existing infrastructure in a sorely outdated state.

“Equipment was becoming obsolete and we needed to move to a more efficient process to handle the mail and the second part was to prepare for the future with more parcels and less mail,” says Jon Hamilton, Director of Communications at Canada Post during a telephone conversation from Ottawa.

With letter mail declining each year at a rapid rate, Canada Post does have Purolator in the battle with other logistics companies such as FedEx, UPS and DHL. But in order for the parcel business to increase, Canada Post is going to have to take a substantial number of customers away from the competition, which will be easier said than done.

“In the last five years we’ve seen a 20 per cent per address decline in letter mail,” Hamilton confirms.

Technology: The Game Changer

A major turning point really came with the advent of tablets, which makes reading emails and other forms of correspondence that much easier. The personal computer and laptops were never really able to duplicate the role of a newspaper or magazine and posed nothing but a nuisance threat. People simply wouldn’t carry such large, bulky hardware items with them. But the invention of the slim, lightweight tablet on the other hand is a whole different story. The tablet is commonly referred to as being at the cutting edge of electronic substitution and is something Hamilton says Canada Post has been aware of for some time.
“Postal services around the world are struggling with the same types of issues in terms of mail dropping off,” Hamilton concedes. “Online gives and takes away; and that’s where ecommerce has not just changed business for us, it’s changing the landscape for major retailers; for mom and pop shops, and we’ve seen it for a while but it’s really starting to come true now where the decline in mail has sped up so that’s going to cause issues at Canada Post, obviously.”

Canada Post is clearly looking towards ecommerce as a way to help it remain relevant into the future and most particularly from the business to consumer aspect. The corporation has invested more than $2 billion to upgrade mail sorting facilities in Toronto, Montreal and Vancouver, with the latter’s location a 700,000-square-foot facility at the Vancouver International Airport with the primary objective of increasing packaging traffic for the Asia-Pacific region.

The desire for Canada Post is to generate enough parcel business to consumers in what stands to be a fierce battle with numerous established national logistics companies.

“Ecommerce is still relatively in its infancy in Canada,” Hamilton states. “We lag behind the U.S. and U.K. The latest figures show it’s about an $8 billion business in Canada and it’s expected to grow to $16 billion by 2016.”

Those figures are estimates, which may or may not be realized in the next four years. If so, it will mean a larger share of the pie for all companies involved in this type of business. That potential growth would in fact offer Canada Post a genuine opportunity to return to profitability, especially since more than 40 per cent of all packages delivered in Canada today are handled by Canada Post employees. 

“You can go with any of our competitors, but if you’re not home at a certain time or you ask that it be sent somewhere else because you can’t be home, that could be an inconvenient location out at an airport or an industrial mall,” Hamilton says.

But once again, it comes down to price. Not only does the Crown corporation need to keep and enhance its customer base, but it needs to do so much more cheaply. Reaching all destinations is great – but at what cost?

Leading logistics companies such as FedEx, DHL and UPS consistently do exceptionally well on surveys when it comes to customer satisfaction, so that’s a weakness which is going to be extremely difficult for Canada Post to try and exploit.

As just one example, FedEx Corp. tells The Canadian Business Journal it expects to have its busiest day in history on Monday, Dec. 10 when it moves a projected 19 million shipments through its global ground, express and freight networks. For the overall holiday season between the U.S. Thanksgiving and Christmas, FedEx forecasts more than 280 million shipments to move through its worldwide shipping networks. This would be a year-over-year volume increase of more than 13 per cent compared to 2011 when 247 million shipments were processed. That’s the activity of just one company, so the competition for the consumer market is monumental.

“Where most people would look at our network and see a liability, it’s a huge potential because nobody’s ever going to put 6,000-plus retail locations out there; nobody’s going to build a network that delivers to every single Canadian every single day,” Hamilton says. “Canada Post is not funded by the taxpayer.

We pay for our operations and obligations with the revenue we generate through our products and services.”

Recent Losses

That may be the case right now, but with a staggering loss of $327 million last year, it stands to reason that wouldn’t be so for very long, even if far more modest losses were to continue in the coming years.

“Last year there was a number of factors that went into that loss,” Hamilton says. “There was a pay equity decision; clearly that’s not going to happen on an annual basis and we lost at least $200 million in revenue due to a labour disruption. It was a tough year on top of the pension obligations and the dropping mail volumes.”

The rapid and continuous annual decline in letter mail has greatly eroded the ability of Canada Post to remain profitable in recent years. In fact, they’ve endured heavy losses, including the $10 million announced in the previous quarter. If there’s a trickle of good news it’s that the hemorrhaging actually was down from the same quarter a year earlier when losses came in at a staggering $18 million. But there are those who would argue the $8 million improvement this time around had more to do with the fact there was a labour strike. The workforce accounts for the largest percentage of Canada Post’s expenses – about 71 per cent.

During the strike by almost 50,000 letter carriers, the Canadian Union of Postal Workers wanted a four-year contract with wage increases of 3.3 per cent in the first year and 2.75 in years two and three. Canada Post responded by saying the union was out of touch with the obvious financial challenges, which at the time included a 17 per cent drop in mail volume since 2006. Canada Post also noted that the union’s demands would cost almost $1.5 billion over four years. The long-term impact of that strike is still unknown.

“We are trying to reduce costs and restructure for the future. We understand that we’re a Crown corporation and we don’t want to be a burden on the taxpayers while being financially self-sufficient,” Hamilton offers.

Mail is currently a $3.2 billion revenue business for Canada Post or about 54 per cent of the entire intake; parcels are $1.3 billion.

“We know we need to transform a business that was largely built to deliver lots and lots of mail to being able to deliver some mail and parcels.” Hamilton notes. “The goal is to ensure we can turn this ship around by reducing our costs and growing the business where it makes sense and not stepping out side of our core business. We’ve been delivering parcels since the 1850s.”

One of the first internal matters to address will be working closely with the unions in order to reduce labour costs, which now accounts for well over two-thirds of expenditures.

“Obviously that has to come down,” Hamilton agrees. “We need to continually look at our operations to drive efficiencies that are there.”

The entire product mix is changing and because of that Canadians are expecting to see different results and that include a streamlined corporation that returns to profitability.

Of concern is just how long this transformation is going to take before Canada Post rebounds from the deep red and into the black. It’s acknowledged that precise timing is not possible, but there seems to be no firm timeline for the public to grasp onto. It’s said Canadians have not been put on the hook for a single dime up until now. That won’t necessarily hold true if this transformation does not achieve the desired success. Pension obligations are a constant concern and will be a growing factor as time goes by and with that in mind, Canadians have good reason to be concerned about the outcome.

The cost of overall operations at Canada Post also increased by about $85 million last year. It’s a figure Hamilton confirmed but he did not have the information in front of him to indicate what the root causes happened to be. It could be dismissed as minor in a $6 billion-plus operation, but nonetheless it accounts for a 6 per cent hike at a time when the national service can ill-afford it, running deeply in the red.

The Future

There have been rumblings that the federal government would look towards privatization for Canada Post, but it’s a subject that is far from being decided. However, Finance Minister Jim Flaherty recently made mention he’d like to see Canada Mortgage and Housing Corp. privatized, so anything is possible, and much will depend on the ability for a financial turnaround.

“That is up to the shareholder,” Hamilton responded when asked about the prospect of privatization. “Our mandate is to serve Canadians and to remain financially self-sufficient.”

Asked what the projections might be for a return to profitability so the public would have some sort of idea when the turnaround may occur, based on this elaborate transformation process, Hamilton wouldn’t provide one.

“I’m not going to lay out a timeline,” was the response.

But Canadians grow weary of hearing about grandiose plans that appear to have no finish line or at least not one that is openly shared. Given that the taxpayer is the one and only shareholder, it seems logical such a plan would be open in that regard. In the end, it’s results that count and we see those in the quarterly reports. Plans mean nothing without successful execution. For now it seems nothing but the “trust us, things will improve” scenario.

It’s also no doubt true that consumers love having convenience – up to a point. Ultimately, the breaking point is cost. It’s not difficult to offer unmatched door to door service from coast to coast while losing money in the process. We’re told that won’t always be the case, so apparently this will all end well. Canada Post is focusing on how it’s changed its delivery of the mail in order to streamline costs.

“We’re about half way through the rollout on that right now,” Hamilton says. “In the past we had one person with the satchel delivering the mail and we had somebody else dropping off the rest of their mail because they couldn’t carry all the mail in their bag as they left the depot. You had somebody else delivering parcels and somebody picking up the mail. Clearly that’s not going to work. We now have delivery agents.”

Hamilton says there are about 3,000 people each year set to retire which will help reduce the number of employees, because there is not a need to be as labour-intensive as in the past.

“Every single day we’re out restructuring routes,” he continues. “We go into a volume count in a depot and then look at the number of routes we have and realize we don’t need as many routes because there’s less mail to deliver so we’re going to cut 10 to 15 per cent of the routes out of a depot and with attrition with people set to retire we can manage that. We’re very much aware of the financial situation we’re facing.”

As are many Canadians.