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Freightways works to lift margins as rising household traffic increases costs

Monday 25th February 2019

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Freightways chief executive Mark Troughear says courier prices could rise 5-6 percent if New Zealand follows the example set by Europe and the United States.

A major factor all courier services around the world are grappling with is the rise in business-to-consumer traffic which is growing at about 10 percent a year as more consumers shop online.

That’s much faster than the 2-3 percent annual increase in business-to-business courier traffic, Troughear says. But the cost of delivery per package of business-to-consumer parcels is also significantly greater than business-to-business parcels.

Freightways’ express package and business mail division today reported a 7.8 percent increase in first-half revenue to $233.5 million. Troughear said about a third of that increase came from price rises.

Much of those increases have come from Freightways’ strategy of targeting its lowest margin business and trying to increase its charges to make them more profitable

“We can’t do business for less than it costs us – that has been an issue in the New Zealand market for many years,” Troughear says.

Business-to-business deliveries usually involve multiple parcels to the same address and other deliveries to addresses that are very close. That density of deliveries makes the per-parcel cost relatively cheap.

But business-to-consumer deliveries usually involve a single package per address and each address may be several streets away from each other, exponentially increasing the per-parcel cost of delivery.

“For business-to-residential, we just have to charge more. Otherwise we’re literally doing that work for nothing or we’re losing money on it. If you don’t get your pricing right, you end up with a flawed business model.”

Troughear says couriers used to operate using pre-paid tickets, “a pretty blunt mechanism,” making differential pricing much more difficult. Now pricing for the majority of parcels is done electronically, allowing companies such as Freightways to better calibrate their pricing.

From July 1, Freightways will be launching a courier booking service which will allow its customers to price delivery to any address in New Zealand.

Toughear says Freightways is managing to keep more of its previously low margin customers than it’s losing – “there’s a few who will go with somewhere else.”

He cites the example of a customer using Freightways to courier towbars overnight, a service that used to be “ridiculously cheap.”

After checking with Freightways’ competitors, that customer ended up opting to remain with Freightways, he says.

Earlier today, Freightways reported a $33.4 million net profit for the six months ended December, 6 percent more than a year earlier.

That included a $1.4 million one-off profit because its insurance proceeds exceeded the written down value of racking damaged at its Porirua document storage facility during the Kaikoura earthquake in November 2016.

The express parcels and business mail division accounts for about 74 percent of Freightways’ total sales.

The information management division, whose Shred-X document destruction business branched out into medical waste disposal with the September 2017 acquisition of Med-X, lifted operating revenue 7.6 percent to $82.2 million while earnings before interest, tax and amortisation rose just 0.5 percent to $14.7 million.

Partly that reflected the costs of three bolt-on acquisitions that are still being integrated.

(BusinessDesk)

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