When transformation meets acceleration – the postal economic outlook for 2020

Every year the postal economic outlook provides insights on the latest developments affecting the sector.

The preparation of this year’s edition has been a particularly demanding task given the rapidly-evolving global economic crisis, with experts predicting the worst annual economic performance since the Second World War.
Within a very short period, the outbreak of the COVID-19 pandemic has transformed social and economic life across the planet, leaving its mark on the postal sector through disruptions in postal supply chains, accompanied by a surge in ecommerce.

Union Postale magazine spoke to the UPU’s resident economist Mauro Boffa, co-author of the latest postal economic outlook, about how to make sense of the current situation.

UP: This year has brought special challenges. What can you say about the positioning of the postal sector in 2019 before the crisis struck?

MB: The sector has been going through a lot of change and transformation for some time, mainly driven by digital substitution. Written communications and the transfer of documents, which used to be carried out through letter mail are increasingly moving online. Even direct marketing, which was at some point considered as a means of diversification for postal operators, may not necessarily be an avenue for growth.

The sector is moving a lot more towards logistics services, including the transfer of goods and the delivery of parcels. Opportunities are also emerging in services to citizens, such as the handling of official administrative tasks.

In 2019, the Third Extraordinary Congress ended in an agreement on the reform of cross-border settlement rules for international letters, further highlighting the need for postal operators to diversify into other revenue streams.

Before March 2020, the long-term trend of declining letter post, a segment which used to be the most important contributor to revenues, sat alongside an increase in parcel-post activity. However, the shift had not been enough to ensure the growth of postal operators. Amid this transformation, no single business model had yet prevailed, with different options pursued in different countries. That was the state of play when the crisis arrived in 2020.

UP: It seems like the postal sector was particularly vulnerable to a shock and now a shock has come. Is the recession going to disproportionately affect the postal sector?

MB: Not necessarily. Before, the postal sector was always pro-cyclical – it would move with the economy. So we will see the traditional segments – letter post and financial services – being affected by the crisis and the losses will come from some areas in those segments slowing down.

At the same time, as lockdowns were imposed all over the world in the past months, postal operators have been among the few economic actors to be asked to stay open in most countries. In some cases, they may be relatively less affected than the real economy, but they will still be impacted negatively by the crisis.

Moreover, as ecommerce continues to grow in spite of the pandemic, there is a surge for some types of services, for example the delivery of goods and parcels. But what you have to remember is that this business is going in the direction of customers, not necessarily between firms, creating a low-margin activity. That means the surge in demand is not going to compensate for the drop in delivery of letters, for example. It would take a much higher increase in volumes to enable that to happen.

UP: You mention in the outlook that the postal sector is no longer moving in tandem with the economy, so-called postal decoupling. Can you explain what’s happening there?

MB: This is a medium-to-long-term trend that has been observed since at least 2008, perhaps even earlier. The economy and the postal sector have been growing at different rates. Historically, for most of its existence, the postal sector grew at roughly the same rate as the wider real economy. This is because, as I mentioned, postal operators used to sell services that were pro-cyclical.

But now this feature is less evident. As the economy develops, the demand for postal services is no longer expanding proportionally, and the growth is going into other services. In other words, the productive paradigm is changing and it does not require as many postal services as before. Or not the same type of services; it requires different ones.
The demand for retail ecommerce, for example, is now much more important for the evolution of the postal sector than wider economic growth. And retail ecommerce is something that would not be affected as much by the crisis as the real economy.

UP: But isn’t retail ecommerce also dependent on people’s disposable income?

MB: Yes, and it depends on how much the income goes down and how much you adjust your share of income to that sector. But if you can’t move freely, you are going to substitute part of your income that goes to retail through the online channel. So even if your disposable income goes down it could still be that you increase your consumption of digitally ordered goods. You may spend less overall, not going to restaurants or concerts, but your demand for ecommerce could also go up.

UP: Can you make any predictions on the impact of the events of 2020 on infrastructure or jobs? Will there be fewer post offices and more redundancies in the next year or so?

MB: Regarding infrastructure it’s difficult to make a prediction. It’s true that many postal operators will have changed the way they operate in order to take into account protective equipment, disinfection of mail items, etc. It will certainly become more costly to operate. At the same time, there might be demand for other types of services, such as shipping test results, delivery of medical equipment and protective gear, and/or new citizen services. It’s not easy to say what will happen on that front. But we expect a net loss in terms of revenues.

The important thing for postal operators is to retain their flexibility. The UPU tries to do that as well, as it monitors the situation in real time.

UP: What would like to say about the competitive environment in the postal sector? New entrants have also benefited from the ecommerce surge.

MB: If the market is big enough there’s not necessarily a problem with reaping the benefits. The question is; were you able to adjust your supply of services to the new normal that the crisis established or not? If yes, I do not think that is necessarily a problem for postal operators. If not, then you need to start planning how to do that.

However, the market for many types of products is still not saturated. As long as there is growth, there is not yet a problem of “sharing the cake”. There are enough slices for everybody at the moment.