Cost optimization: 6 postal operators’ strategy
The global inflation increase since 2022 has had a significant impact on the business of carriers and shippers, leading to a decrease in volumes. Parcel delivery companies and postal services are facing reduced profitability due to increasing fuel prices and a shortage of drivers in the industry. To improve their long-term efficiency, some companies are focusing on strategic investments while others are opting for a cost reduction strategy.
Discover how USPS, Royal Mail, Swiss Post, PostNord, PostNL, and La Poste are coping with the increase in their operational costs.
Difficult year ahead for postal operators in 2022
Significant decrease in volumes caused by inflation
Logistics players have had a difficult year in 2022 marked by various challenging events such as the war in Ukraine and the increase in fuel and energy prices. Consequently, all postal operators have experienced a significant decrease in the volumes of packages transported throughout the year.
2022 was a challenging year for Royal Mail, the British postal service, marked by a series of strikes by its employees affecting the business of all parcel delivery companies in the UK. Indeed, many retailers have turned to other players such as Evri, DPD UK or Yodel for the delivery of their shipments. These strikes thus led to a significant decrease in the parcels processed by Royal Mail. In 2022, parcel volumes within the UK fell by 19.8% and those internationally by 12.2%. At the same time, letter volumes decreased by 5.7%.
As for USPS (United States Postal Service), the volumes of its most profitable product, priority mail, have declined by 42% since 2007 and is expected to continue to decline as transactions and communications become more digital. In 2022, the company recorded a 200 million difference in priority mail compared to the previous year.
In recent years, USPS revenues have increasingly come from package deliveries, which have been accentuated by the rise of e-commerce. With inflation, USPS parcel volumes delivered in 2022 decreased by 5.3% compared to 2020/21, representing a revenue decline of 2.2%.
For the year 2022, Swiss Post recorded a 4% decrease in parcel and letter volumes. This trend is also observed in the French group La Poste where its parcel delivery activity, Colissimo, decreased by 10% and the number of distributed mails declined by 8% in 2022.
Further north, the Danish post office PostNord recorded a decrease of 6% in parcel volumes and -12% in mail volumes in 2022. As for PostNL, the Dutch postal service, the decrease in parcel volumes reached 3.8% and -8.1% for letters.
Profits dragged down by rising operating costs
Despite a decrease in volumes, some postal operators have managed to increase their revenue such as the La Poste Group (+2.3% in 2022 compared to 2021) or USPS (+1.9%). However, the profits of all postal services have suffered some turbulence: – for Swiss Post; for La Poste; -73% for PostNL; -85.6% for PostNord; -131.5% for USPS and for Royal Mail.
Ambitious strategies to limit operating cost increases
Rate increases to keep up with inflation
To offset the increase in operating costs, all postal operators have announced a significant increase in the average price of their parcels in 2022 and 2023:
- Like its competitors FedEx or UPS (6.9%) and DHL (7.9%), USPS will not escape rate increases starting in January 2023. While some rates will remain unchanged, Priority Mail rates will increase by about 5.5%, Priority Mail Express rates by 6.6% and First-Class Package rates by 7.8%.
- Royal Mail has increased its rates by an average of about 7% for letters, 4% for parcels in April 2022 and 2.5% for international items from January 2023.
- To balance out rising operating costs, Swiss Post has been applying two new taxes since January 2023: an inflation surcharge for parcels (1.9% of the price) and a variable energy surcharge that is based on average monthly prices for diesel, gasoline and electricity.
- Le Groupe La Poste increased its prices by an average of 3.3% on January 1, 2022. Regarding its Colissimo parcel delivery activity, the price increase was around 2.4% from January 1, 2023.
- PostNord applied a price increase of 4.7% from June 1, 2022 for all products and services.
- And finally, since January 2023, sending a parcel with PostNL costs up to 5.5% more than the previous year.
Major cost optimization programs for some posts
However, the rate increase will not be enough to improve posts margins, which tend to be quite low already. Players are focusing on ambitious investment strategies and reorganizing their networks to achieve savings. This is notably the case for USPS and Royal Mail who have each communicated on their cost reduction program.
USPS has undertaken a number of measures to improve the efficiency of its operations and reduce costs. These include:
- USPS reorganized its Retail and Delivery Operations areas and reduced the number of these areas from seven to four.
- The Postal Service plans to consolidate about 21% of its delivery units into large sorting and delivery centers across the country. The goal is to reduce the number of depots from 19,000 to 15,000 in ten years.
- USPS closed some post offices and reduced service hours at many others (about 13,000) where demand was low.
- The company prefers to hire temporary employees who do not receive the full benefits of permanent employees (e.g., health and pension).
- The U.S. Postal Service continues to upgrade its sorting machines to improve performance: 131 new machines have been installed for the 2022 peak season. 249 machines are now implemented throughout the USPS network and will allow teams to process 60 million packages per day (compared to 53 million in 2021).
To deal with its financial difficulties, Royal Mail aimed to reduce its costs by £350 million each year, an objective that the company is struggling to achieve. Rrecently, IDS Group (Royal Mail & GLS) announced that it has implemented a cost reduction plan to improve its profitability by 2024-2025 with 5 key measures:
- Reducing workforce by approximately 15,000 full-time roles by August 2023 by promoting a decrease in overtime and temporary workers as well as natural turnover. However, the company estimates that at least 5,000 layoffs will be necessary.
- Reduced workforce in all 1,200 delivery centers due to a 50% decrease in customer visits.
- Implementing new employment contracts with more competitive rates that will involve working on Sundays.
- Increased use of subcontractors for parcel delivery within Parcelforce Worldwide.
- Reducing Capex investment by £100 million.
Royal Mail has also identified potential optimizations within its network, including the gradual transfer of parcels from mail centers to new super-hubs. For example, the one located in the city of Warrington, near Manchester and Liverpool, is equipped with machines that can scan and sort more than 40,000 parcels per hour and thus more than 800,000 per day.
Today, there is duplication between the networks of Royal Mail and its subsidiary Parcelforce Worldwide, which deliver the same parcel formats to the same customers. For the company, the challenge is to optimize this network by segmenting the activity: on one hand, the delivery of small parcels by Royal Mail and on the other hand the delivery of medium and large parcels by Parcelforce Worldwide. It has became crucial for Royal Mail to adapt old working methods designed for letter delivery to a world increasingly dominated by parcels. Indeed, more than 70% of the IDS group’s revenues come from the parcel delivery business (and more than half for Royal Mail).
PostNL also announced various measures to reduce its annual costs:
- Reduction of its workforce by 300 positions to save approximately 25 million euros in 2024, and then 30 million euros from 2025 onwards
- Yield management and price adjustments
- Reduction of indirect costs at Parcels
- Consolidation of collection routes and routes between sorting locations
- Adjusting investments (capital expenditure and leases) to align with volumes and strict working capital management
- Tight control of overhead costs: limiting and postponing project costs and a prudent approach to filling staff vacancies
Ambitious investments for better performance over the long term
Postal operators are communicating more about their strategy to invest and optimize their existing network for better performance and profitability over the long term. This includes:
1. The acquisition of various strategic companies
Swiss Post mise fortement sur l’acquisition de sociétés :
- At the beginning of 2022, Swiss Post took over MW Partners Holding, a company specializing in the healthcare industry, as well as the three transport companies Stella Brandenberger Transporte AG, Hugger GmbH and Logistic Center Villingen GmbH.
- In December 2022, it acquired H. Bucher Internationale Transporte AG and Kickbag AG, a sustainable packaging company.
- On January 1, 2023, it takes over the freight transport company Gaiser and the freight forwarder Spedition Nolden.
- In October 2022 , Swiss Post acquired the logistics software company Eoscop in order to standardize its planning software for the entire freight logistics. The postal service does not only deliver goods, but also offers customs clearance services and installation services for furniture stores, for example.
Through its subsidiary Geopost/DPDgroup, the La Poste Group has invested in several companies specialized in delivery: Ninja Van in Southeast Asia and Aramex in the Middle East. The Asendia subsidiary also acquired the e-commerce services provider eShopWorld.
2. The opening of new depots
PostNL recently announced investments in new facilities in Belgium. The postal service has opened two new parcel depots in 2021 and two new high-tech sorting and distribution centers in 2022, where new machines are capable of sorting 9,000 parcels per hour.
Swiss Post has also opened several parcel centers in Switzerland: in Rümlang in May 2022, in Villmergen in June, in Buchs in August and in Pratteln in 2023. In total, Swiss Post wants to invest 1.5 billion Swiss francs (1.4 billion euros) to double its parcel processing capacity by 2030, with the opening of at least 15 branches and the creation of 1,500 full-time jobs. 250 million Swiss francs (242 million euros) have already been invested over the past five years, with the opening of four new regional parcel sorting centers.
Groupe La Poste, which already includes more than 100 urban logistics centers in France, will spend 200 million euros expanding the network by 2026 with 50 new facilities. Louis DeJoy, CEO of USPS, also announced that the company intends to reorganize its delivery network by deploying new sorting and delivery centers across the country.
3. Modernization of the network
Despite a difficult year in 2022, Swiss Post expects parcel volumes to increase over the long term and continues to invest in the expansion of its network. It has invested around CHF 40 million in modernizing 300 self-operated branches in order to have 800 by 2024 as well as 5,000 access points (compared to 4,800 today).
The French Post plans to invest 500 million euros between now and 2025 to modernize its distribution network, extending the Group’s geographical coverage to 40,000 postal service centers, relying on partnerships with municipalities and retailers as well as a more efficient network of lockers.
The U.S. Postal Service USPS plans to make major changes to its operations as part of its ten-year plan, including massive investment in reorganizing its facilities and delivery networks to make them more efficient, introducing more automation and launching new products. Of the $40 billion in planned investments, some $18.1 billion will be spent on delivery vehicles, $8.6 billion on network optimization, $4.2 billion on information technology, $3.8 billion on modernising package processing, $3.1 billion on retail and delivery, and $2.2 billion on operational technology and support.
The network modernization will affect nearly 500 network mail processing centers, 10,000 distribution units, 1,000 transfer centers and nearly 100,000 carrier routes. According to USPS, a major metropolitan area can today be served by up to 8 different processing centers, 80 distribution units and hundreds of routes. The company’s strategy is to consolidate these 8 processing centers into a single facility, equipped with standardized processes and machinery, which will serve 10 sorting and delivery centers instead of 80.
4. The deployment of digital tools
Many postal services are moving towards technological initiatives to optimize their business. Among them, Swiss Post has selected Inform’s Yard Management System (YMS) software to optimize the use of storage areas, the assignment of dock doors and the movement of vehicles in its parcel center in Pratteln. The company opened its own IT development site in Portugal “Swiss Post I/T Portugal” in order to build up core competencies in-house, including software development, data, business analytics and cyber security. The group’s current IT unit handles more than 400 software projects annually, manages more than 1,000 applications and has approximately 5,000 databases.
PostNL is currently implementing an algorithm to optimize route planning, aimed at improving the efficiency of its network. In the first quarter of 2023, PostNL spent around 3 million euros on accelerating its digital transformation. The postal service plans to invest a further 10 million euros in 2023 in innovation and quality measures to improve customer value.
As for PostNord, the company uses Artificial Intelligence to optimize its processes, build digital twins of sorting systems and tractions, visualize fill rates and parcel types, detect volumes and track productivity. PostNord is also developing forecasting tools to anticipate customers’ presence at home and predict parcel volumes.
How can Kardinal help postal operators optimize their operations to reduce costs?
Based on the depot’s history and operational constraints (route, costs, resources, capacity, time, etc.), Kardinal’s algorithms define the optimal territorial sectorization and size the associated vehicle fleet as accurately as possible.
Kardinal’s solution allows depot managers and their subcontractors to rely on precise and reliable data during their negotiations. Negotiations are no longer based on individual feelings and intuition.
With Kardinal’s optimization, all depot managers could each realize huge savings in operational costs, which cumulatively would significantly reduce the group’s expenses.
Kardinal’s solution also allows depot managers to optimize other issues related to last mile delivery:
- The implementation of a warehouse: measurement of the costs and the impact of a new agency or sub-depot on the sectorization of the territory.
- Anticipation of resources according to the evolution of the activity to avoid having to resort to emergency resources.
- Fleet change: calculation of costs and impact of new vehicles (electric vehicles, bicycles, trucks, etc.).
- Daily routes optimization according to the hazards on the field.