Thursday 9th November 2000
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By Fiona Rotheram
Bet if you received an ASB Bank statement or Vector power bill recently you spent more time regretting your credit card debt than pondering the financial future of the company who shoved the letter in your mailbox. The letter was, in fact, delivered by National Mail, the listed postal operator taking on incumbent giant NZ Post. The company has found the going tougher than expected.
National Mail's share price is hovering around 70c, almost half the $1.33 it listed at in March. Revenues are way below profit forecasts in the float prospectus - total operating revenue in the six months to March was just under $670,000, compared with forecast full-year revenue of just over $5 million in 2000, nearly $19 million in 2001 and more than $26 million in 2002. Chief executive Antony Fowler has downgraded the company's pre-float market share predictions from 20% to 10%. National Mail isn't giving figures, but NZ Post says its rival has picked up an absolute maximum of a 2% market share.
Analysts aren't pressing the panic button yet, but they are warning those shareholders who paid $1.25 apiece for National Mail's 11.2 million shares they will need patience, and lots of it, before they can anticipate making any gain. And there's no chance of swapping to NZ Post shares - its government shareholder has said privatisation won't happen.
It's not all bad news. National Mail's posted volumes are increasing slowly and it has won some large corporate clients, ASB Bank and Auckland electricity lines company Vector among them.
But investor payback will be slower than forecast - not only because NZ Post has been aggressively protecting its patch since deregulation in April 1998, but also due to overall declining mail volumes.
The climate has hit not only National Mail but NZ Post, too. NZ Post's June quarter result saw a 5% reduction in mail volumes, though there has been a slight recovery since then. New Zealanders' growing love affair with email and the economic slump were the cause, rather than increased competition, NZ Post says. "Our biggest competitor is the amount of economic growth not happening," says Robert Lake, NZ Post's general manager of letters.
NZ Post's strategy to stave off competition has been to lift its game as high as possible, forcing newcomers to compete on price not efficiency. Thing is, it also has the muscle to undercut everyone on price. Consumers have been the big winners. Large-volume users can get big discounts and even your average punter can buy 35c stamps compared to the usual 40c for a standard letter. Industry players claim NZ Post initially discounted prices as low as 15c a letter to one Auckland council in order to lock in their custom.
NZ Post had a 98.5% share of the total 1.1 billion annual letter market before deregulation. NZ Document Exchange had the rest, falling outside the Postal Act by delivering mail to exchange members. Since April 1998 the incumbent claims its market share (not including its subsidiary postal operator KiwiMail) has dropped just 2% to 96.5%. NZ Document Exchange claims to still have around 1.5% share, which leaves 2% being shared between the four other major competitors: National Mail, Fastway Post, Pete's Post and KiwiMail. Fastway is claiming around 1%. National Mail declined to comment on its market share.
Squeezing the giant
On the other side, competitors question whether NZ Post's strategy of maintaining its dominant stranglehold hasn't also been costly for the postal giant. In the three months to June this year it reported a $3.8 million after-tax loss and has warned its government shareholder that full-year profit will be down on last year. Compare that with an after-tax profit of $23 million in March 1999 and $30.2 million in 2000. Or look at the monopoly profits of yesteryear - $47.7 million in 1997, $75.2 million in 1996 and $72.4 million in 1995.
If the government, as speculated, puts the squeeze on NZ Post for higher dividends, it can only help competitors such as National Mail.
National Mail reported a maiden net loss of $2.6 million for the six months to March 30. It raised $12.6 million, after issue expenses, in the March listing to fund working capital and development. The prospectus forecast a September-year loss of $5.45 million, before turning around a $2.2 million profit in 2001. Investors were warned prior to floating that no dividends would be paid for some time. Revenue growth is two months behind plan and prospectus forecasts now seem ambitious - no cause for panic, but a note of caution for investors.
Fowler blames slow revenue growth on customer concerns over the company's long-term viability and capacity to deliver well. "We've had a higher credibility with corporates since rolling out in Wellington. We're moving from being the tail to the dog in terms of what we can and can't do."
National Mail was set up in 1998 by Paul Meier of Prestige Marketing fame. The four major shareholders are Meier with around 46%, Fowler's family trust with 7%, organising broker Ellis Capital with 10.3% and institutional investor Armstrong Jones (around 6%). Smaller shareholders include rest home operator Cliff Cook, rival Fastway and even NZ Post workers through their pension fund.
The Auckland-based company started business-to-consumer deliveries in June last year. Its 650 dark blue post boxes collect letters using a system of pre-paid envelopes, priced at 32c, rather than stamps. National Mail started in Auckland because the city generates 40% of total mail volume. Wellington was added to the service in August, but expansion into Christchurch has been set back to early 2001.
What's the e-plan?
Fowler reckons success will stem from the fact that National Mail is more than a mail company. He points to a customised database of mailing addresses that's more than a tad useful for direct marketing, as well as development of a digitised service that will effectively turn physical mail into the equivalent of electronic mail with physical content. Gradually introducing barcodes will allow 100% of all mail to be read electronically. Trouble is, NZ Post has been automated for some years. It stopped short of bar codes, claiming the hassle to clients was not worth the benefits.
One edge the start-up does have is the perception of being more fleet of foot and more friendly. The ASB Bank swapped to National Mail after a six-month trial this year because it was offered good savings through a competitive rate, more flexibility and personal attention. "I have had several phone calls from the managing director of National Mail over delivery complaints. I doubt I would get that same service from NZ Post," says Garry Fissenden, ASB's technology and operations manager.
Meanwhile, both National Mail and NZ Post are pouring money into developing ways to link physical and electronic mail. Fowler reckons the early movers in this hybrid market will gain high to medium-sized margins rather than the low margins gleaned from standard letter delivery. Its e-plan doesn't have to win much market share to make it worthwhile.
The trouble is, NZ Post has far more grunt and resources. As part of its on going diversification it has already trialled a Web-based hybrid mail service, eSend, allowing businesses to send mail electronically to NZ Post for printing and postage.
So can National Mail make the number two slot, let alone ever cause the incumbent a sleepless night? The few analysts who cast an eye over National Mail say there is general consensus that it has chosen a hard business model in which to succeed. The jury is still out on whether it will or not.
National Mail isn't the only one snapping at NZ Post's heels. Of the 31 registered postal operators, only a handful - Fastway, NZ Document Exchange, Pete's Post, KiwiMail and National Mail - offer any competition. Most have access agreements with NZ Post to deliver nationally.
Fastway Post was the first company to compete in the deregulated market, and claims to be the largest operator outside of NZ Post with around a 1% market share. Founded by Bill McGowan in the Hawke's Bay, it is part of the Fastway Couriers group. It has an access arrangement with NZ Post, rather than delivering any letters itself, although this may be reviewed if it ever gets sufficient volume.
Pete's Post is a franchised operation offering cheaper rates and specialised service for its provincial and Wellington customers. It was started in New Plymouth in 1998 by unemployed Peter Bell, who borrowed money on his credit card to buy a scooter to make deliveries. Under new owners, Pete's Post claims a 30% market share in New Plymouth and an average 10% in several other provinces. It charges 35c for local deliveries and initially offered 30c stamps in Wellington.
NZ Document Exchange, part of the Freightways Group, doesn't consider itself part of the deregulated market because of its membership set-up. It operates a box-to-box service in an enclosed member network and claims more than 20,000 members, around 10% of the overnight business market.
KiwiMail Group, set up at deregulation in 1998, is a NZ Post subsidiary, ostensibly run as a separate entity. It offers specialised services to domestic and business customers nationally; its competitors complain that it seems to set up for business in the areas they've chosen to work. These conspiracy theories don't wash with KiwiMail chief executive Bob Mackie. KiwiMail, like its competitors, only picks areas where market opportunities are identified, he says.
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