Czech Post office seeks to deliver new image
Last week, the Ministry of Interior appointed Petr Sedláèek as new general manager to lead the restructuring of a profitable, yet old-fashioned postal service provider Èeská pošta (ÈP). Yet, many challenges lie ahead, and at this point not even the new boss can say how ÈP will look in 2013 when the European postal service market will be fully liberalized.
ÈP has four years to transform from an image-dented, state-controlled colossus with a branch network similar to the one shared under the Austro-Hungarian Empire into a modern, flexible and competitive joint-stock company that will be able to survive in a fully liberalized market. “There is a huge amount of work in front of us,” Sedláèek said. He is the former chief of electronic payment services provider Global Payments Europe and replaced Karel Kratina, who led ÈP since June 2004. The main priorities of the new manager are a better communication of ÈP’s developments to customers and the restructuring of the state-owned firm.
This imperative seems to be ÈP’s current motto. According to ÈP spokesman Ivo Mravinac, ÈP must restructure, improve processes and transfer money earned or saved into a technological upgrade. “We have four years for that. If we don’t do it, by 2013 all our competitors will have systems that will make them less expensive, and we will lose clients. This might even mean the end of Èeská pošta,” he told the Czech financial server Mìšec.cz at the beginning of September 2008.
“Currently, we’re in profit, but we have to think in advance and invest saved money into new technology,” said Jaroslav Jurek, ÈP’s strategy manager. He underlined that the competition also has four years to get ready, but at the end of this period it will probably have the most modern technology available for customers. “In case we don’t react in time, it may happen that we will have to raise prices of our postal services. Mainly corporate clients would then switch to cheaper competition and the postal service wouldn’t only lose its dominant position, but this could even bring its end,” he said.
Critics of ÈP’s current business model say that its current structure is similar to the one held during the Austro-Hungarian empire, safeguarding stone-and-concrete branches even in the most faraway corners of the country. Now, the Czech Republic has almost 3,400 branches serving some 10 million inhabitants, while Austria, a country of a similar size has some 1,000 physical branches. On the other hand, ÈP employs some 37,000 employees, more than the 35,800 employed by the Romanian postal service provider Poºta Românã (RP), despite the fact that RP serves more than 20 million inhabitants.
A branch bone of contentment
The restructuring plans that Sedláèek inherited include possibly closing some 178 branches that are now in the red. “If we don’t do this and we don’t transfer money obtained from savings into a technological upgrade, this might bring the end of ÈP and subsequently we’d assist to the closure of thousands of branches,” Jurek said.
Closing loss-making branches would lead to employee layoffs and a restructuring of services provided to towns where these branches are located. Thus, instead of a physical branch services would be delivered via mobile post offices—utility vehicles that visit smaller communities to deliver postal services and that can be called on demand free of charge. The plan raised much criticism from small-town representatives and customers.
The criticism might have found understanding with the new manager. “The ÈP branch network is one of the richest assets this company has. I’ll do my best [to see] that we have exhausted all—I emphasize, all—possible options to bring these branches into the black before deciding to close them,” Sedláèek said.
Layoffs in the pipeline?
Sedláèek wouldn’t confirm or deny possible layoffs from the problematic branches. He said that all eyes are now turned to an agreement for a new four-year license that is currently being negotiated by ÈP with the Czech Telecommunication Office (ÈTÚ). The license’s conditions will specify ÈP’s commercial freedoms in establishing its branch, employee and financial strategy for the next four years. “It would be a great help if we got more flexibility within the new license. This is why we’re now carrying very intense negotiations with the ÈTÚ,” Sedláèek said. The license agreement is expected to be closed before the end of 2008.
ÈP has already announced it considering the dismissal of some 2,500 people. Labor unions criticized the measure and threatened a general strike if the layoffs took place.
ÈP announced that employee structure optimization would affect company structures. Almost 10 percent of the staff would leave from the department of the general director, the technology department, and the economic and administrative department, the company said. The firm has already started its employee restructuring plan in 2006, when it had 37,200 employees, 2.85 percent more than at the end of 2007.
A bad image
ÈP has been struggling with image troubles after several incidents showed employees stealing letter’s contents prior to deliveries. The most recent event occurred Sept. 26, 2008, when ÈP uncovered a new theft case in Bøeclav, South Moravia, according to the Czech News Agency (ÈTK).
Mail theft is probably bigger than the case in which thousands of letters were stolen in 2001–06 and were found this spring in a tunnel at the Bøeclav railway station. ÈP internal detectives have accused two post office employees of mail theft after several months of monitoring during which they also sent test postal consignments. The employees have confessed that they have stolen valuable items from mail worth Kè 250,000 (€10,208). “They confessed on the spot,” Mravinac said. The employees worked dispatching mail to Slovakia and Austria. “They focused on registered parcels of Slovaks working in the Czech Republic in which [the Slovaks] sent money home to their families. Many people prefer sending money in registered parcels through the post rather than sending it in a more secure way,” Mravinac said, adding that, however, only a mere fraction of the parcels had been violated.
Profit—fine, but that’s not all
Despite such troubles, ÈP raised pretax profit by 140 percent to Kè 794.5 million last year. Operating revenues grew by 0.6 percent to Kè 17.646 billion. The company delivered 905 million letters, a 9.5 million decrease compared with 2006, and almost 29 million parcels. The percent of packages increased by 7 percent to 28.66 million.
“ÈP’s current bottom line of almost Kè 1.5 billion is the best result in the company’s history,” said the departing general manager Karel Kratina. “The situation in the company has stabilized, despite a number of unpopular steps that had to be taken as part of its internal transformation,” he said, adding that his mission had been accomplished before his resignation.
The new manger isn’t looking only at profits. Sedláèek said that after looking into the company’s figures, he couldn’t agree with that despite a higher profit, ÈP had been decreasing investments for the last two years from more than Kè 1 billion in 2005 to some Kè 500 million in 2006 and only some Kè 150 million in 2007. “When you go to any post office, do you have a feeling that it doesn’t need any investment? Because I don’t feel the same,” he said, claiming that ÈP has been massively underinvested for the last two years. “Profit in itself means nothing if the company isn’t competitive. This is why I’ll focus highly on investments and company modernization,” he said.
Price raises, not clear yet
The new manager declined to comment whether ÈP plans to raise postal service prices in 2009. “It all depends on the agreement to be reached with ÈTÚ before the end of this year,” he said. Prices of postal services have been constantly rising since 2002. The price of a letter weighing up to 20 grams jumped from Kè 5.40 in 2002 to Kè 7.50 in 2007 and the current Kè 10. ÈP explained the measure as driven by three factors: rising prices of energy, fuel and rents; a pressure to retain employees whose salaries are at only some 75 percent of the average pay in the state sector and an above-average price for postal services in comparison with the rest of Europe.
Sedláèek also said that it’s not certain how ÈP will manage the implementation of franchising postal services. “This aspect will also depend on the deal with ÈTÚ,” he said.
ÈP has been trying to increasingly use the franchise concept that already works in the UK, Austria and Germany. The postal service signs a contract with a local dealer who will be remunerated for taking and providing deliveries. According to ÈP, the franchise model might be implemented in the second half of 2009.
Mobile postal services also aren’t a novelty. Currently, some 3,556 out of 6,249 communities are served via mobile service points. In the case of communities already covered by mobile services, the services are provided only in case some shipments are to be delivered. If not, the service doesn’t come and the client has to call and order it to come, free of charge. Moreover, in locations where there used to be concrete branches, mobile services are delivered at certain hours in every working day. Except for individual deliveries, mobile post offices take care of all kind of shipments and provide other types of services, including financial ones. The postal service aims to increase and diversify such services in the near future.
ÈP was set in Jan. 1, 1993, as a state firm. The state assigned the postal service with certain basic tasks it must fulfill, above all to provide services universally on the whole territory of the country based on the principle of equal access to services at an equal price. Despite being a state-owned company, the postal service must manage self-financing. According to Mìšec.cz, ÈP pays taxes on the same basis as any other company, which reached some Kè 20 billion for the last nine years.
On sale, on the stock exchange or on its own?
Sedláèek declined to comment on the future options for ÈP’s business. “My mandate is to lead the transformation of ÈP into a joint-stock company. I have no mandate to lead any privatization or sale,” he said, adding that “it’s unfortunate that the legislative measure ruling this [ÈP restructuring] project calls it privatization, but in fact this is only a restructuring we’re talking about,” he said.
In 2009, ÈP is aimed to change from a state-owned firm into a joint stock company with the Czech Ministry of the Interior (MVÈR) as the main shareholder. Then, MVÈR might start looking for a new owner. In an interview given to the Czech media, former general manager Kratina stated that if he had some Kè 20 billion, he’d buy ÈP. According to the Christian Democrats (KDU-ÈSL), the new owner should engage in preserving the current infrastructure for at least 10 years.
No names of eventual bidders for ÈP have been released so far. A second option to the sale would be listing ÈP on the Prague Stock Exchange (PSE), an option limited these days by the current turbulences on world’s financial markets. “I think that an initial public offering (IPO) would be one of the possibilities,” said Milan Vaníèek, main analyst with brokerage Atlantik finanèní trhy. He said that it is usual that an IPO is one of the considerations. “If there would be usual market conditions, then it could make sense. For example Deutsche Post in Germany is also listed, therefore if the financials are right than why not? But not now,” he said. “Right now it makes no sense to have an IPO, not only for the financial crises, but also for the macro outlook that is becoming cloudier.”
Competition is rising in the background
The major competitors of the Czech Post are also shaping their tools to get a wider market share as soon as the market liberalizes. The most important competitors of ÈP are Czech branches of Germany-based DHL International, Netherlands-based General Logistics Systems International Holding (GLS) and TNT Express Holdings, and PPL CZ, a unit of Deutsche Post International. Their main activity is delivery of packages and recommended letters across the country and abroad.
The main difference between them and ÈP is that they don’t have thousands of employees and physical branches, Mìšec.cz said. “In case of liberalization, every Czech citizen could choose his postal operator; healthy competition would arise bringing better services at lower prices, service enhancement and an offer of new services everywhere in the world,” said Petr Zháòal, TNT Post’s general director for Central and Eastern Europe. “It is just the opposite in the Czech Republic now,” he said, adding that competing with ÈP “presents a big challenge for us to offer new services at lower prices, in particular afternoon or evening delivery of consignments, collection of consignments in households, alternative ways of delivery, etc.”
Zháòal said that ÈP has the potential to be a good postal operator. However, without pressure from competition it has no reason to improve its services. “Primarily, Czech citizens will feel the benefits of liberalization. With the entry of TNT Post, but also of other postal operators, a healthy competitive environment will be created, which has been beneficial for every business activity,” he said.
