Investment strategies of postal service providers

Marten Büttner, independent consultant in the postal market, writes for World Mail Review. What are the areas postal service providers are investing in and what kind of strategies can be derived from that? These are the questions which will be dealt with in this article. The article is based on a comprehensive study of the investment activities of selected postal service providers together with general comments on recent developments in the postal market, especially the entrance of private equity companies.

Comprehensive study of investment activities

The study looked at the investment activities of eight postal service providers. These were Deutsche Post, TPG, La Poste, Royal Mail, USPS, Swiss Post, UPS and FedEx, and covered the years 2002, 2003 and 2004. The investments of the companies in those years were categorised into three dimensions:

1        the geographical region of the investment

2        the line of business into which the investment went

3        the goal which should be achieved with the investment (eg. cost reduction/quality improvement, market development)

In the years 2002 to 2004 the eight companies included in the study invested a total of 28 billion Euro. Almost half of the total investments were made by Deutsche Post and FedEx. Looking at the percentage of investments against total revenues, La Poste was the strongest investor at 8.2 % followed by FedEx and Deutsche Post.

Going more into detail, the study looked at the three dimensions which are relevant for the investment (region, business, goal), although some of the investments could not be clearly assigned to the various dimensions because of missing information. In the case of regions and businesses in which the investments went, less than 20% of the total investments could not be assigned to the dimension. In the case of the goal that was followed with the investment, this percentage increased to more than 40% showing that the companies are a bit reluctant to reveal too much about their investment goals.

As for the regions, all postal service providers invest in their home market and also their “home continent”. Deutsche Post and TPG additionally invest heavily in North America and Asia whereas UPS and FedEx are strengthening their worldwide presence especially in Asia and Europe.

Regarding the business into which the investments go, about half of the investments went into the CEP (Courier Express & Parcels) business followed by the mail and logistics businesses with around 25% each.

As for the goals, there is an even split between investing in market development and investing in the optimisation of efficiency and quality of the existing business. In order to develop markets the postal service providers included in the study made more than 100 acquisitions in the period of 2002 to 2004.

Three different investment strategies

Based on the investments made, three different strategic directions could be derived, as shown in the following figure.

The major strategic direction of the first group (comprising USPS, Royal Mail, La Poste and Swiss Post) is to reduce costs and improve quality in the core business with a clear focus on the home market.

The second group of Deutsche Post and TPG show the clear objective is to reduce the dependency on the national mail business. Those companies have achieved major successes in reducing costs and increasing quality in the past and are now therefore in a position to invest in globalisation and new businesses like CEP and logistics.

The third group of UPS and FedEx focus their investments on the international expansion of their core business.

In summary, it can be stated that the actual investments by the postal service providers are in line with the strategies that those companies are claiming to pursue. In other words there is a high consistency between the strategic direction and the actions being taken. But even though the study revealed three different investment strategies of postal service providers, one can observe that the borders between those strategies are already blurring with, for instance, La Poste  also investing heavily in new businesses like CEP.

Recent developments – profitable investments in postal service providers?

As the study showed, most of the investments of the past went into the CEP business and in relative terms also a lot into the logistics business. But now we can see increasing investment activities in the mail business – or to be more specific attempts by major postal service providers such as Deutsche Post to invest in other national postal service providers.

Many people in the postal market were surprised when the private equity company CVC Capital Partners took a stake of 22% in the Danish Post last year. Most people had expected the shareholder to be an industrial partner, namely another postal service provider.

Why does a private equity company invest in a postal service provider and only for a minority stake? Is there so much money out there in the financial market that private equity companies are just buying what they can get? Yes and no. Yes – there is a lot of money in the financial market that is looking for investment opportunities. But no – private equity companies are not just investing for the sake of it. Usually they are extremely numbers-driven and they are looking for a high payback sooner rather than later. They achieve the payback by buying a company at a low price, performing necessary restructuring actions in a short time frame and then selling the company for a higher price. Sometimes they buy two or three companies in the same industry and then leverage the synergies between those companies.

Transferring this business concept to the postal industry is not so easy. First of all in order to do tough restructuring you need to be a majority shareholder. Due to the predominant state ownership model of postal service providers and the slow privatisation process acquiring a majority stake is not possible – as shown in the Danish Post example. And secondly, leveraging synergies between various postal service providers is still to be proven – where are the synergies between for example the Danish Post in the north and the Belgian Post in the west of Europe that will result in a major leap in profits?

Perhaps the payback for the private equity company will come from the simple calculation of buying a postal service company today for a perceived low price and selling the company tomorrow for a higher price. This is a risky gamble. It is a big question whether a postal service company will pay a lot more for a stake in Danish Post in a few years than CVC did last year, especially as mail volumes decline further and competition gets even stronger. Deutsche Post has already stated that they are no longer following the strategy of acquiring a stake in a national incumbent but are looking for other investment targets. With Deutsche Post not being part of the game anymore, the strongest investor is gone and with it the chances of achieving high sale prices.

Nevertheless, the appearance of private equity companies as investors in the postal market will almost certainly lead to greater professionalism in the making of investment decisions and will most likely affect the investment activities of the postal service providers themselves. So the results of the study outlined above will look very different in three years’ time.

Relevant Directory Listings

Listing image

FOXPOST

Leading logtech company, transforming last-mile delivery and reducing the industry’s carbon footprint through parcel locker technology. Offering the best turn-key solution on the market to companies aiming to increase last-mile efficiency. Cut the learning curve and save millions of Euros using our market-ready know-how. Cutting-edge […]

Find out more

Other Directory Listings

Advertisement

Advertisement

Advertisement

P&P Poll

Loading

What’s the future of the postal USO?

Thank you for voting
You have already voted on this poll!
Please select an option!



MER Magazine


The Mail & Express Review (MER) Magazine is our quarterly print publication. Packed with original content and thought-provoking features, MER is a must-read for those who want the inside track on the industry.

 

News Archive

Pin It on Pinterest

Share This