Deutsche Post under pressure as German letter monopoly to end in 2008

Deutsche Post World Net AG's efforts to cut costs are unlikely to offset the impact of the end of its German letter monopoly next year, as competitors are preparing their market entry, analysts said.

"Deutsche Post has always been under pressure to reduce its costs, but now more than in the past," said Per-Ola Hellgren, an analyst at Landesbank Baden-Wuerttemberg.

Deutsche Post's monopoly on letters below 50g, which account for 60 pct of its mail volume, is scheduled to end in January 2008.

"A delay to German mail liberalization now seems unlikely," wrote analysts at Goldman Sachs in a recent note to clients. "We believe that this implies volume loss and margin erosion for Deutsche Post. Our analysis suggests a cost-cutting program is unlikely to compensate for revenue declines." Deutsche Post expects profit losses of 10-20 pct due to mail liberalization, from 2006 earnings before interest and taxes (EBIT) of 2.03 bln eur.

During the first half of 2007, the mail division accounted for 55.8 pct of Deutsche Post's EBIT.

But Hellgren added that: "The liberalization should not only be seen in black and white. We're seeing a long-lasting trend which will aggravate in the short-term but will normalise later on." Hellgren said that volume losses due to substitution of email have been on-going for years now and that other segments of the market have already been liberalised.

Meanwhile, Deutsche Post's competitors are stepping up their preparations for the day that the letter market opens to them. Hermes Logistik Gruppe, a Hamburg-based logistics company, which holds a 29 pct stake in TNT NV's TNT Post, said last week that it is preparing its 13,500 parcel stations to handle letters as well. Its managing director Hanjo Schneider said that prices will be 15-20 pct below current postal tariffs.

PIN AG and one of Germany's Sparkassen savings banks started a pilot project to test the integration of PIN's postal services at Sparkassen branches. PIN's chief executive Guenter Thiel said recently that his company plans to have a branch network as large as that of Deutsche Post's by mid-2008.

The 477 Sparkassen operate some 16,000 branches in Germany, making them a prime candidate for the addition of postal services, with a strong existing retail infrastructure.

Analysts use the UK as a role model, as mail liberalization started a couple of years earlier there than in Germany. In the UK, the Royal Mail maintained a de facto monopoly over the final delivery mile.

But in Germany, the incumbent's rivals have much greater scope than in the UK to create addressed mail networks around an existing system of frequent delivery of another product, as in Germany, most newspapers are delivered daily to readers' doors, analysts say.

In fact, PIN, which is 71.6 pct-owned by leading publishing group Axel Springer AG, said on Aug 6 that it had bought three local letter delivery services in Hesse and North Rhine-Westphalia from the Ippen publishing group.

Goldman Sachs also noted that a lot of sorting capacity exists close to the German border in other national post offices, which could be used to enter the German market at little capital cost, particularly as the German population is largely concentrated along the country's Western borders and around Berlin. "As such, access to the majority of the population is relatively easy. There is a risk that Deutsche Post could thus be left with large uneconomic areas as the market opens up," Goldman's analysts wrote.