The Conference Board of Canada, 52 pages, April 2013
Report by Vijay Gill, Crystal Hoganson, David Stewart-Patterson
Note - Door to Door postal service is slated for cancellation in Canada, and this "objective" report, is problematic as Canada Post's CEO, Deepak Chopra is a board member of the Conference Board of Canada, which tempers the analysis significantly.
4. For the exclusive use of Tracey Lauriault, tlauriau@gmail.com, Carleton University.
Acknowledgements
This report was written and researched by David Stewart-Patterson, Vijay Gill, and Crystal Hoganson. It was made
possible with funding from Canada Post Corporation.
Special thanks go to Dave Crapper of Genesis Public Opinion Research Inc., who conducted the focus groups and the
residential and small business polling that provided the basis for Chapter 5.
We also thank our internal Conference Board contributors, Ross Prusakowski and Decky Kabongi, for their work on
the econometric analysis; and Dan Muzyka and Glen Hodgson for reviewing the report.
We extend our thanks to the three external reviewers of this report: Michael Trebilcock of the University of Toronto,
and Frank Graves and Derek Jansen of EKOS Research Associates.
The findings and conclusions of this report are entirely those of The Conference Board of Canada. Any errors and
omissions in fact or interpretation remain the sole responsibility of The Conference Board of Canada.
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ii | The Future of Postal Service in Canada—April 2013
Our projection suggests that Canada Post’s transaction
mail, addressed and unaddressed advertising mail, and
publication volumes will decline by about 26 to 27 per
cent by 2020. Parcel volume is projected to buck the
trend and see a 26 per cent increase over the same period,
but this will remain small as a share of total mail traffic.
While the Crown corporation’s Postal Transformation
initiative will have a significant impact on its bottom
line by boosting productivity and improving efficiency,
its annual operating loss is nonetheless projected to
reach about $1 billion by 2020.
By presenting a portfolio of potential responses to the
challenge of sustaining postal service, this report offers
a framework for discussion of options by Canadians.
Polling of small business and residential customers confirmed that their habits are changing, with almost half
of households saying they now send two pieces of mail
or less per month. While small businesses, as a group,
also are using mail less frequently, they remain relatively dependent on mail for invoicing and payments.
Both groups of customers confirmed that their demand
for parcel service will continue to rise with the spread
of e-commerce. But residential customers noted growing frustration over the need to travel to pick up parcels
when no one is home to accept delivery during the day.
Residential and small business customers recognize that
the price of a stamp represents good value, and both
appear willing to accept slower service than they currently receive. What matters most to these customers is
not speed but certainty of delivery and, on this score,
they express a high degree of confidence in the mail.
Their responses suggest that Canada Post, like postal
services in other developed countries, is now providing
a higher level of service than necessary.
Canadians believe that despite the spread of electronic
communications, they always will need postal service.
They have a high degree of trust in Canada Post; one that
carries over from physical delivery to digital products.
However, neither residential nor small business customers have fully made the connection between the changes
in their own behaviour and the impact of these changes
on Canada Post’s business model. They recognize that
the status quo is no longer viable, but are not yet fully
convinced of the scale and speed of change that may be
required. Nonetheless, 80 per cent of the household and
small business customers surveyed for our report agreed
with the statement that “Canada Post has to make fundamental changes to the way it has operated in the past
in order to be relevant in the future.”
The quantitative analysis done for this report suggests
that Canada Post could reduce its projected losses significantly by raising prices faster than inflation, but that it
cannot realistically return to self-sustainability through
price increases alone. Therefore, the report examined five
options for cutting costs: wage restraint; alternate-day
delivery for mail (but not parcels); converting Canadian
households’ receiving door-to-door delivery to community mailboxes; further replacement of corporate post
offices with franchised postal outlets; and reduced speed
of delivery. Eliminating delivery to the door for urban
residential customers would be the option with the largest financial impact, saving a projected $576 million
a year by 2020.
No single change to prices or service standards will be
sufficient to enable self-sustainability as mail volumes
continue to decline. While there will probably be a relatively stable and residual level of demand for mail services, it is impossible to determine when and where that
level might be reached. Any given change in service is
likely to have a one-time positive impact on the bottom
line, but cannot change the relentless downward slope
of the mail volume curve. Thus, sustaining a postal service that will meet the evolving needs of Canadians will
require a combination of measures, but not necessarily
all at once.
The purpose of this report is not to recommend any one
or particular combination of options. Rather, its goal is to
illustrate both the potential financial impact of a range
of choices and how such changes would be seen by
Canada Post’s business and residential customers. By
presenting a portfolio of potential responses to the challenge of sustaining postal service, this report offers a
framework for discussion of options by Canadians in
their roles as customers and, through the Government
of Canada, as shareholders and taxpayers.
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2 | The Future of Postal Service in Canada—April 2013
Chart 1
Mail Volume and Number of Addresses
(billions of pieces; millions of addresses)
Mail volume (left)
Number of addresses (right)
Forecast
18
17
16
15
14
13
12
12
11
10
9
8
7
6
2003 04 05 06 07 08 09 10 11 12f 13f 14f 15f 16f 17f 18f 19f 20f
The econometric analysis was used primarily to provide
price and GDP elasticities, and was augmented with a risk
matrix in order to complete the projection of volumes
by line of business. Data from ZenithOptimedia were
leveraged to estimate the impacts of expected advertising expenditures on alternate sources such as Internet
search/display, mobile advertising, and digital replicas
of publications. Although demographic factors (such
as the share of population by decade of birth) were
correlated with transaction mail volumes, they were
not statistically significant in terms of providing
explanatory power.
Source: Canada Post; The Conference Board of Canada.
of Canada to conduct an independent assessment of
the future of postal service in Canada, and to consider
potential paths forward.
The first step was to assess how technological change is
affecting the expectations of Canadians and the extent
to which they actually use and depend on its services.
To this end, the Conference Board interviewed a range
of Canada Post’s major customers and engaged Genesis
Public Opinion Research Inc. to conduct focus groups
and a telephone poll of small business customers and
a parallel telephone poll of residential customers.
Methodology
To quantify the impact of economic, technological,
and demographic trends on Canada Post’s business, the
Conference Board employed econometric analysis and
a competitor risk assessment to project future mail volumes, revenues, and operating income. This framework,
in turn, was used to test the financial impact of a variety
of potential actions aimed at improving the sustainability
of the postal business.
While Canada Post supplied some of the historical
data used in the analysis, the analytical framework was
developed independently. The resulting observations
and conclusions are those of The Conference Board
of Canada alone.
To quantify the impact of economic, technological, and
demographic trends, the Conference Board employed
econometric analysis and a competitor risk assessment.
The research explored the attitudes and behaviour of
Canada Post customers through a combination of interviews, focus groups, and polling. The Conference Board
conducted individual interviews with a selection of
Canada Post’s major customers to add qualitative
insight to the quantitative analysis.
Genesis Public Opinion Research Inc. explored the
attitudes of residential customers through a telephone
survey of households across the country. The objectives
of the survey were to:
understand customers’ current use of both lettermail
and courier/package services;
determine their service expectations and related
attitudes to those lines of business;
assess their use and evaluations of corporate and
private retail outlets;
determine their understanding of the business
challenges Canada Post faces.
The residential survey selected and interviewed correspondents based on the way in which they receive mail.
The target sample included approximately 500 customers
who get mail delivered to their door (DTD), 300 who
use group mailboxes (CMB), 250 who receive mail in
their lobby or common area (LBA), 100 who have mail
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Chapter 2
Global Trends in Postal Service
Chapter Summary
Electronic alternatives are changing the face
of postal service around the world.
Other countries are pursuing the following five
major approaches to enable postal services to
reduce costs or enhance revenue:
– liberalization and privatization;
– expansion into new lines of business;
– development of digital products;
– expansion of parcel delivery;
– reduction of service standards.
Canada Post already is pursuing two of
these approaches by developing new digital
products—including epost and Vault—and
by increasing its efficiency, capacity, and
service offerings in the parcel business.
T
he digital revolution has changed the face of
postal service as we know it. No longer is the
post office viewed as the primary means of
connecting people and businesses wherever they are
located. Widespread access to broadband and mobile
technologies is having a fundamental impact on how
people and businesses communicate. People increasingly are communicating by phone, e-mail, text, and
other web-enabled tools. Growing numbers are accessing information for work and for pleasure on websites,
e-readers, and tablets. Customers and providers alike
are handling statements, invoices, and payments online.
E-commerce has moved quickly from an add-on means
of browsing for products to a primary sales channel.
Generally, survival in the core business of lettermail has
required taking out costs faster than volume-driven revenue declines. This has meant either additional investment
in technologies such as high-speed sorting equipment
or reductions in service standards. However, there is a
growing recognition around the world that postal services
must develop new strategies to survive. A 2012 study by
the International Post Corporation and Boston Consulting
Group concluded that, by 2020, moving the mail will
no longer be the core business of postal operators.1
Despite differences in the economic and social environments across countries, it is clear that postal operators
around the world are facing declining lettermail volumes.
The Universal Postal Union reported that between 2006
and 2010, domestic lettermail traffic decreased by 3.5 per
cent, while international mail decreased 13 per cent.2
1
International Post Corporation and The Boston Consulting Group,
Focus on the Future, 22.
2
Universal Postal Union, The Global Postal Network—Key Figures.
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6 | The Future of Postal Service in Canada—April 2013
25 per cent, invested in new equipment, decreased
its labour costs by 14 per cent, and nearly doubled
its productivity.8
In New Zealand, postal reform was driven by a “broad
economic policy of commercialization of the state enterprise sector.”9 The New Zealand government owns NZ
Post, but the organization is directed to act like a private
sector firm—it needs to generate a profit, repay loans,
self-fund through its earnings, and pay taxes and dividends.10 NZ Post moved from generating a loss to creating a profit by cutting costs by 30 per cent, speeding
up mail delivery, increasing “on time” delivery by 15 per
cent, and nearly doubling its overall productivity.11,12
As a Crown corporation, Canada Post has both a public
service mandate and an obligation to act like a private
sector firm—at least to the extent of being self-sufficient.
Neither privatization nor liberalization of markets is,
by itself, a strategy for sustaining postal services in an
environment of decline. They are policies intended to
drive more rapid response to that environment by encouraging or enabling postal services to make decisions that
might be more difficult or politically impossible to pursue
as an arm of government.
In 1981, Canada turned its postal service into a Crown
corporation. As such, Canada Post has both a public
service mandate and an obligation to act like a private
sector firm—at least to the extent of being self-sufficient.
Until fiscal year 2011, Canada Post operated consistently
at a profit. And, it had been doing so while its monopoly
lettermail privilege declined in value due to a growing
number of cost-effective substitutes. Put another way,
the proliferation of digital alternatives to mail has, in
effect, liberalized the postal market to a great degree.
8
Ibid., 4.
9
Iacobucci, Trebilcock, and Epps, Rerouting the Mail, 11.
The key decisions with respect to the future of postal
service in Canada are about public policy; that is, about
how postal services could change in order to meet the
evolving needs of Canadians in the digital era. Privatization
has been a means to that end in some other jurisdictions,
but this report focuses on desired outcomes rather than
mechanisms for achieving those outcomes.
Expansion Into Financial Services
For international postal operators, the primary new business line being entered is financial services. In some
countries, such as Japan and Great Britain, financial
services have been a core element of the post office for
many years. In other countries, financial services have
been gradually introduced to postal services over time.
The addition of financial services through postal outlets
offers many potential benefits. For instance, it can facilitate financial inclusion in rural areas while also mitigating
the decline in postal revenues.13 Postal banks serve large
markets, but can be low in incremental cost because they
make shared use of the postal retail network. According
to a discussion paper of the United Nations Department
of Economic and Social Affairs, banking revenues in
many countries are actually essential to generate profits
from their postal networks.14
Postal services are generally accepted as safe, trusted, reliable institutions. As such, the public tends to view postal
financial services as a “safe haven.”15 The Universal
Postal Union (UPU) estimates that more than 1 billion
people worldwide conduct banking through postal services and, in 2010, 51 postal operators worldwide held
1.6 billion in savings and deposit accounts.16
13 Berthaud and Davico, Global Panorama on Postal Financial
Inclusion, 3.
10 Ibid.
14 Scher, Postal Savings and the Provision of Financial Services, 15.
11 Geloso and Chassin, Canada Post, 3.
15 Berthaud and Davico, Global Panorama on Postal Financial
Inclusion, 3.
12 Lammam and Karabegovic, “Recent Mail Disruption Strengthens
Case to Privatize Canada Post.”
16 Ibid.
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8 | The Future of Postal Service in Canada—April 2013
Within a rapidly changing global communications market,
postal operators around the world have to adapt quickly
to changes in consumer and business demand. Therefore,
business plans must be modified in order to build parcel
traffic generated by e-commerce and move into digital
services. Postal services generally do not view digital
communications as a separate initiative, but rather as a
means of transforming their business models to incorporate e-commerce and e-substitution.
Finland, for instance, is experimenting with the concept
of secure digital mailboxes. This system, called Netposti,
is an alternative to a physical mailbox. Physical mail
is opened, scanned, and sent as a PDF file to a secure
digital mailbox. Citizens are provided with accounts tied
to their social security numbers and e-mail addresses.23
Consumers receive an e-mail or a text message when
their mail is ready to be viewed. Envelopes are analyzed,
and items such as credit cards are filtered out for physical
delivery. Scanned mail is also delivered to physical
addresses, but residential mail services have been
reduced to twice a week.24
Digital products are evolving within a highly competitive
marketplace, and their potential contribution to the sustainability of postal service is uncertain.
Finns are significant users of electronic services, and
once the use of e-commerce began to take off, so too
did concerns about credit card safety. By signing a
cooperation agreement with the leading Finnish online
payment provider, Netposti allows consumers to click
an invoice button and receive a receipt of their online
purchase directly to their secure Netposti account.25
Then there is Polish Post, which recently released a
new line of digital products. Poland’s postal market has
been opened up to full competition and the NeoKartka
service was developed in response to customer demand
for more digital mail services.26 This hybrid service
allows customers to send greeting cards and postcards
electronically for conversion to the physical form prior
to delivery.27
In the past 10 years, Italy’s Poste Italiane has invested
heavily in technology to bridge the physical and electronic worlds. Poste Italiane developed an advanced
technological infrastructure where over 80 per cent of
correspondence is sorted using automated systems.28
In addition, Poste Italiane has been able to expand its
services and offer new products while utilizing various
channels: electronic invoicing for government contractors,
scanning and electronic archiving, and mobile virtual
network operators (e.g., using mobile devices to pay
bills and send mail).29
Canada Post is actively developing digital products. In
2011, it set up a distinct Digital Delivery Network in
parallel with its Physical Delivery Network. Its digital
product line now includes its epost system for the secure
delivery of statements and payment of bills, the Canada
Post Vault service for secure storage of personal and
sensitive information, and Data and Integrated Market
Solutions to support precision target marketing by
Canadian businesses.30
Digital products, however, are evolving within a highly
competitive marketplace. The international experience
suggests that such products cannot replace lost lettermail business. But they do have the potential to generate some revenue for Canada Post that could contribute
to offsetting the costs of maintaining the physical mail
delivery system. Their potential degree of contribution
is uncertain, so future digital revenues are not addressed
within the revenue projections of this report.
26 Post Parcel, “Polish Post Launches Hybrid Postcard
Delivery Service.”
27 Ibid.
23 United States Postal Service, Office of the Inspector General,
The Postal Service Role in the Digital Age, 28.
28 United States Postal Service, Office of the Inspector General,
The Postal Service Role in the Digital Age, 29.
24 Ibid.
29 Ibid., 30.
25 Ibid., 4.
30 Canada Post Corporation, Transformation, 6–11.
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10 | The Future of Postal Service in Canada—April 2013
six to five delivery days a week.39 Post Danmark has
chosen to deliver bulk mail three days a week and alternate
between areas. Meanwhile, Finland has taken a hybrid
approach on a trial basis, reducing delivery frequency
in certain regions to twice a week while also delivering
mail electronically.40 When customers were asked if
this service was meeting their needs, responses indicated a high degree of satisfaction.41
Potential changes to service standards in Canada,
including reduced days of delivery, are examined
in detail later in this report.
Conclusion
Canada’s experience is not unique. The situation in the
United States is far more severe: the U.S. Postal Service
reported a loss of US$15.9 billion in the fiscal year ended
September 30, 2012, more than triple its US$5.1 billion
loss in the previous year.42 Postal operators around the
world are being forced to deal with the same pressures
on traditional mail volumes. Some have dramatically
reshaped their business models, moving their core operations into new lines of business or new markets. Others
have focused on adding revenue through complementary
digital products and growth sectors such as parcels, while
also exploring ways to sustain their postal networks
through investment in technology and changes in
service standards.
The clear message from the international experience
is that dealing with the technology-driven decline of
lettermail requires significant changes to the traditional
postal business model. In addition, while management
initiatives can drive significant innovation and efficiencies,
the scale of the challenge ultimately requires policy decisions by governments to shape the future course of
postal service within their jurisdictions.
39 Singapore Post, SingPost Implements 5-Day Mail Collection and
Delivery Service.
40 van Heel, Airoldi, and Bos, The Postman Always Brings Twice, 7.
41 Ibid.
42 United States Postal Service, Postal Service $15.9 Billion Loss
Highlights Urgent Need for Legislative Reform.
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Transmission of Bills and
Statements to Customers
Many Canadians still receive paper bills by mail. From
the customer’s point of view, receiving bills has no cost
and is convenient. For companies sending statements
and bills, however, postal service is a major expense
and digital alternatives offer large cost savings.
An executive at a major bank said the bank began
encouraging customers to convert to electronic delivery
five years ago, and intensified its efforts two years ago.
Customers are currently converting at about 1 per cent
per month, and more than half now receive their statements electronically. A major publishing firm said that
its web-based transactions in the first three quarters of
2012 were up 20 per cent from the same period in 2011.
The firm also said that the electronic share of the company’s transactions has grown more than tenfold in the
past five years—from 2 per cent to more than 25 per cent.
Conversion to electronic delivery is being positioned as
offering greater convenience to the customer, as well as
cost savings to the mailer.
A growing number of major mailers have begun charging
customers who want to continue receiving paper bills. This
has prompted an advocacy campaign by the Canadian
Association of Retired Persons, which has focused on
the $2 per month fees now being levied by companies
that include Bell Media, Rogers, TELUS, and TD Bank.1
It is becoming common for newer entrants into the telecom sector to default to online bills and charge a fee for
paper bill service, adding pressure for incumbent providers to do the same. 2 Imposing a cost on customers
for paper delivery can only accelerate the conversion
to electronic transmission.
Not all major customers are cutting transaction mail to
the same extent. But conversion to electronic delivery is
being positioned as offering greater convenience to the
1
Canadian Association of Retired Persons (CARP), Paper Bill
Surcharge Advocacy Update.
2 Roseman, Bell Wants to Charge Web Clients $2 for Paper Bills.
customer, as well as cost savings to the mailer. The
2011 postal labour disruption provided a huge incentive
for both sender and receiver to convert. Those who made
the change at that time generally have not reverted.
Mailers still find physical mail more effective for certain kinds of transactions such as subscription renewals,
but they will continue to encourage conversion to electronic transactions for cost reasons. As one mailer we
interviewed put it, “We would love to do all electronic,
but that’s certainly not realistic.”
The current pace of conversions may level off, but the
ultimate share of customers who will refuse conversion
is not clear. Mailers who are still heavily dependent on
physical mail confirmed that this is linked to the older
demographics of their customer base. One publisher said
subscribers to titles geared to older, rural, and female
readers show little interest in electronic transactions—
but for those aimed at younger male readers, web
transactions are “off the charts.”
Government Mail
The Government of Canada is both Canada Post’s owner
and one of its biggest customers. Like other major mailers,
the federal government is seeking to cut costs by reducing
its use of postal services. In April 2012, for instance, the
government announced that it would phase out the use
of paper cheques by April 2016 and instead make payments to Canadians by direct deposit. Public Works and
Government Services Canada (PWGSC) has set the cost
of producing a cheque at $0.82, compared with only
$0.13 for making the same payment by direct deposit.
This initiative is expected to save the government about
$17.4 million a year, starting in fiscal 2014–15.
Once the process is complete, PWGSC said that “cheques
will only be issued under exceptional circumstances; for
example, when Canadians do not have access to a financial institution because they live in a remote location.” 3
This means that by 2016, the federal government, as a
Canada Post customer, will use its wholly owned postal
service to deliver only a tiny fraction of its 300 million
3
Public Works and Government Services Canada, Government
of Canada Increasing the Use of Direct Deposit.
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14 | The Future of Postal Service in Canada—April 2013
of paper for marketing direct mail plummeted from
165 tonnes in 2010 to 92 tonnes in 2011—a drop of
44 per cent in a single year.6
In the advertising business, Canada Post has some
unique attributes that enable it to charge premium rates
for specific markets. One major retailer, for example,
said in an interview that it heavily uses flyers, but chooses
Canada Post for only about 10 per cent of its total volume.
Canada Post’s universal delivery network enables the
retailer to connect with certain customers that it would
otherwise be unable to reach or target, but Canada
Post’s costs are more than triple that of distribution
via newspaper.
Another mailer we interviewed cited Canada Post’s
ability to target customers down to the route level as key,
but noted that newspapers are beginning to improve service in this area. Another praised Canada Post’s unique
degree of access to customers in apartment buildings
and condominiums. For large firms, mail is but one
channel among many marketing options, and cost is
critical. One mailer told us: “If I can find a distributor
who can do 80 per cent of what we can do with Canada
Post, I’ll move.”
As sources of competition for Admail in the future,
magazines, TV, radio, and newspapers (for ad placement) are not considered to be increasing threats. In
fact, the difficulties that magazine and newspapers have
had in terms of their own physical distribution may present
a mild opportunity. Meanwhile, the decline in newspaper
distribution also provides a particular opportunity for
unaddressed Admail, which competes almost directly
with newspapers in distribution.
The total amount of advertising spending in Canada (on
sources other than Admail) is forecast to grow from just
under $11 billion in 2011 to over $12 billion in 2014.7
What is striking is the rise of Internet advertising spending as a share of the total, which is forecast to increase
from 25 to 35 per cent over the same period, overtaking
TV for the top spot. (See Chart 2.)
Chart 2
Canadian Advertising Expenditure Share of Total
(per cent)
Newspapers
Radio
Magazines
Outdoor
TV
Internet
Forecast
40
30
20
10
0
2000
02
04
06
08
10
12f
Source: ZenithOptimedia.
Like all forms of traditional advertising, Admail (both
addressed and unaddressed) faces competition from the
various forms of Internet advertising, more specifically:
Online display. Advertising spending on online display (such as web banners) reached $800 million in
2011 and is expected to exceed $1.1 billion in 2014.
Online display advertising has grown significantly
more sophisticated in its ability to target individuals
according to demographics, location, search history,
etc.—contributing to its ongoing growth. And while
display ads may not have the “staying power” of
physical flyers (which can sit on a coffee table as a
reminder), they are increasingly able to perform this
role by appearing on websites that are visited by
individuals multiple times per day. Moreover, the
lower visibility is offset by low cost per ad relative to
Admail (roughly $20 to $50 per thousand visitors).8
Online video. The ad spend on online video is relatively small, sitting at $80 million in 2011. But this
is expected to quadruple by 2014 due to increasing
use of streaming video. This is considered to be a
direct threat for TV advertising spending.
Internet classified. One of the “oldest” forms of
Internet advertising spending, Internet classified hit
$600 million in 2011. But as a result of its maturity,
6 Scotiabank, Paper—Measuring and Reducing Paper Consumption.
7 Barnard, ZenithOptimedia Releases September 2012 Advertising
Expenditure Forecasts, 47.
14f
8 ZenithOptimedia, Americas Market MediaFact, 62.
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16 | The Future of Postal Service in Canada—April 2013
rate structure. Another was blunter: “The way the rates
are structured in Canada motivates me to do everything
in my power not to use Canada Post.”
Table 2
Canada Post Segment and Purolator Parcel Volumes
and Revenues
Canada Post
2003
2010
Purolator
2003
2010
Volume (millions)
162
143
129
143
Revenue ($ millions)
991
1,275
1,079
1,493
Yield ($/parcel)
6.12
8.92
8.36
10.44
Source: Canada Post Corporation.
periodicals. These replicas are mainly intended for
tablets, but can also be read on smartphones and personal computers. Digital replicas (as well as general
electronic content consumed through tablets, e-readers,
and smartphones) add potential for an even more rapid
shift away from physical distribution of periodicals.
While data for Canadian digital replica distribution are
not available, the trend in the U.S. is indicative of what is
to come. For example, 7 of the top 25 consumer magazines (rated by circulation) in the U.S. had digital replicas
as of June 2012. Of the seven, two—Game Informer
magazine and Maxim— have seen their digital replica
distribution exceed 10 per cent of their total circulation.9 Other magazines, such as Reader’s Digest and
O (the Oprah magazine), that do not necessarily target
younger demographics have also released digital replicas, suggesting that this will likely be more than a
niche phenomenon.
Canada Post’s publication volume also is being affected by
a shift in federal policy. The government used to subsidize postal rates for publications. Instead, it now offers a
general subsidy to magazines. This has given publishers
a strong incentive to encourage newsstand sales rather
than mailed subscriptions—especially for magazines
using high-quality glossy paper and inserts. On this
subject, one publisher we interviewed pointed to what
he called a “penalty box” (much higher rates for publications that weigh more than 200 grams) in Canada Post’s
9 Lulofs, The Top 25 U.S. Consumer Magazines.
Parcels
In Canada, as elsewhere, the parcel business is the
exception to the downward trend. E-commerce is having
a major upward impact on parcel volume. One e-commerce
firm said its parcel volume is doubling every year, and
it expects that growth trend to continue for at least the
next five years. For e-commerce fulfillment, both the
speed and frequency of delivery are important for customer satisfaction. That said, customers have shown little interest in paying extra for faster delivery options.
Despite the fact that Canada Post’s monopoly does not
cover parcel service, it has been sharing in this rising
overall market. The Canada Post group actually competes
for parcels through two vehicles, its postal segment and
its Purolator courier business. On this score, Purolator
has, to date, been more successful. (See Table 2.)
In Canada, as elsewhere, the parcel business is the
exception to the downward trend—e-commerce is having
a major upward impact on parcel volume.
One major shipper mentioned having moved from
exclusive reliance on Canada Post to heavy reliance on
a private sector competitor and then back to the Canada
Post group. The factors in returning to Canada Post were
its stronger on-time performance, reduction in the proportion of damaged shipments, and initiation of improvements such as signature service and the ability to track
and trace shipments.
As with other major mailers, the 2011 labour disruption
was highly damaging, leading to lost sales as well as
delayed shipments. Shippers, however, do have both
short- and long-term alternatives and can factor the risk of
labour disruption into their choice of delivery company.
One Canada Post customer mentioned hedging its bets
by signing a combination agreement with both Canada
Post and Purolator.
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18 | The Future of Postal Service in Canada—April 2013
Traditional print media and retailers are attempting to
make use of these technologies to avoid being left behind.
The trend of subsidizing digital devices in exchange
for an ongoing subscription commitment is an example.
Barnes and Noble now discounts its Nook e-readers and
tablets when the customer commits to a digital New
York Times subscription.17 The Times (U.K.) is making
a similar offer to customers who purchase Google’s
Nexus 7 tablet.18
17 Melanson, Barnes Noble Offers Discounted Nooks.
18 Smith, The Times UK Offers Digital Newspaper Subscriptions.
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20 | The Future of Postal Service in Canada—April 2013
Rather, the rapidly evolving competitive factors have
come to dominate, but mail volumes will still be positively affected by economic growth.
The Conference Board was able to estimate elasticities
with respect to economic growth and price for transaction mail, addressed Admail, unaddressed Admail,
and publications. This was done through econometric
modelling using historical price and volume data. A
trend variable was introduced in order to account for
the combined impact of the various external factors that
have contributed to flat or declining mail volumes. In
other words, the trend variable helped to normalize the
data in order to help isolate the influence of GDP and
price on mail volumes.
Table 3 shows the coefficients that were estimated
with the modelling. A coefficient of 1 indicates that
volumes are expected to grow in equal proportion relative to the corresponding explanatory variable (all things
being equal). A coefficient of less than 1 indicates less
than proportional growth, while a negative coefficient
indicates that volumes would decline with growth in
the explanatory variable. The coefficients for parcel
volumes were not derived from the econometric modelling, as the estimated coefficients were rarely shown to
be significant. This is likely due to the fact that Canada
Post is one of many competitors in the parcel business.
In addition, the coefficients for publications were only
borderline significant, as was the price elasticity coefficient for unaddressed Admail.
Table 3
Mail Volume Coefficients With Respect to Real GDP
Growth and Real Price Changes
Real GDP
Real price
Transaction mail
0.82
–0.80
Parcels
1.25
–0.75
Addressed Admail
0.80
–1.00
Unaddressed Admail
1.18
–0.46
Publications
0.85
–1.00
Source: The Conference Board of Canada.
Throughout the estimation process, price elasticities
for transaction mail were consistently between –1 and 0
(inelastic). This is consistent with the evidence from the
mailer surveys: the price of mail delivery was generally
not a significant factor when determining mail volumes,
and transaction mail service was considered to be good
value for money. Meanwhile, addressed Admail customers
were estimated to be a bit more price-sensitive, while
unaddressed Admail customers were less so (partly due to
the lower per unit price), with the caveat that the results
from the modelling were only borderline-significant.
The volumes for all lines of business were generally
estimated to be influenced by economic growth in
roughly equal proportion (with unaddressed Admail
responding most significantly to economic growth).
Note that a stronger response to GDP growth also
means that volumes are expected to fall more quickly
in recessionary periods.
Volume and Revenue Projections
The above coefficients were combined with a qualitative assessment of the impact of the competitive threats
discussed earlier in order to project volumes and revenues by line of business to 2020 (with the exception
of the 2012 projection, as explained below).
The Conference Board’s Canadian Outlook Long-Term
Economic Forecast was the source of GDP and the consumer price index (CPI) (for deflating nominal price
increases) forecasts. Transaction mail prices were projected to increase by the rate of CPI (approximately 2 per
cent per year) after the year 2014 and beyond. Prior to
that, the rate increases by $0.02 per year, on the basis of
the $0.02 per year increase in the basic letter rate that
has been approved through 2014. In addition, the quantitative and qualitative evidence suggests that while the
basic letter rate has increased at a pace slower than inflation over the past two decades (or perhaps because of
that), there is room for the price to grow without negatively affecting transaction mail revenues.
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22 | The Future of Postal Service in Canada—April 2013
Chart 5
Projected Net Loss From Operations to 2020
Table 5
2011 Operating Results
($ millions)
($ millions)
Canada Post segment
Revenue
5,861
7,484
Costs
6,189
7,710
Operating income
–328
Baseline with PT plan savings included
Total
–226
Source: The Conference Board of Canada; Canada Post Corporation.
Projection
0
Baseline without PT plan savings
−500
−1,000
−1,500
contributed heavily to the operating loss in 2011.1
Operating income includes the expense portion of pension and other employee future benefits, but excludes the
longer-term impact of the significant deficit in Canada
Post’s pension plan. This report and its scenarios focus
exclusively on the Canada Post segment, because this is
the business that is constrained by public policy.
This projection of mail volumes leads to a very negative
outlook for Canada Post revenues and for its bottom line.
The start of our projection period includes the anticipated
negative impact of a planned change in the accounting for
current costs associated with providing future employee
benefits. From this base, the Conference Board projected
two scenarios.
The first is a “business as usual” outlook that does not
include the impact of the Postal Transformation initiative, either in terms of savings realized through 2012 or
those that are expected through 2017. This first scenario
effectively maintains the labour force at its current level,
meaning that retirees and other leavers are replaced on
an ongoing basis.
The second scenario includes both the realized and
expected impact of the Postal Transformation (PT)
initiative. This recognizes the impact of the actions that
Canada Post management already has launched, with
the objective of significantly improving efficiency and
reducing costs through the application of leading-edge
technologies. This scenario is the one used as the baseline against which all additional options are measured.
(See Chart 5.)
1
Canada Post Corporation, Transformation, 5.
2012p 13p 14p 15p 16p 17p 18p 19p 20p
p = projection
Source: The Conference Board of Canada.
The Postal Transformation initiative will have a significant impact in improving financial performance, but the
Conference Board projects that the annual operating
loss still will reach about $1 billion by 2020.
It is possible that Canada Post could offset some of
these losses in its current core business lines through
increased profits in other activities. These activities
include growth of its existing Purolator courier service,
development of electronic postal products, or entry into
new lines of business that could leverage its expertise
and physical assets.
Despite its major investments in technology to cut costs
and improve efficiency, Canada Post’s annual operating
loss is projected to reach $1 billion by 2020.
However, Canadians should be careful not to rely on
competitive, profit-oriented activities within the broader
Canada Post group as a means of financially sustaining
postal services. First, there is no way to guarantee sustained profitability in rapidly evolving markets. Second,
any Canada Post-owned businesses participating in open
markets must generate competitive financial returns. If
these operations are required to siphon capital into subsidies for postal services, they are more likely to underinvest and fall behind. Third, there is no public policy
rationale for a government-owned business to engage
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Chapter 5
Expectations and Use
of Postal Service
Chapter Summary
Household and small business customers
are using mail less frequently. Almost half of
households send two pieces of mail or less
each month.
Both groups of customers see the current price
of a stamp as good value, and are willing to
tolerate slower service than they now receive.
What matters most is the certainty that mail
will be delivered to its intended destination.
E-commerce is increasing the demand for
parcel delivery. However, having to travel to
pick up parcels when no one is home to accept
delivery is a growing source of frustration.
Many customers, especially in rural areas,
would be significantly inconvenienced if the
distance to the nearest postal outlet was
doubled. But most are highly satisfied with
the retail service they receive, whether from
a corporate or franchised outlet.
Most Canadians believe that despite the
spread of electronic communications, they
always will need postal service and recognize
the need for some degree of change.
T
his chapter describes the responses of Canadian
residential and small business customers to questions about their expectations and actual use of
postal service, about their perceptions of the challenges
facing Canada Post, and about how they might react to
various potential avenues for addressing those challenges.
How the Use of Postal Services
Is Changing
The surveys confirm that traditional forms of paperbased communications are increasingly being overtaken
by electronic forms of communication. Almost half of
households surveyed (47 per cent) said they are sending
less mail today than three to four years ago. Slightly
more (49 per cent) said they are sending about the
same amount of mail. Only 3 per cent claimed to
be sending more mail.
As for incoming mail, just over half of those surveyed
(51 per cent) said that their household currently receives
about the same amount of lettermail that it used to “three
to four years ago.” However, one-third claimed that their
household receives less mail than it used to, while half
that number (17 per cent) said they receive more.
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