UPDATE: NZ Post flags competition headwinds

UPDATED: New Zealand Post Group says it faces "structural and permanent decline" and further headwinds from increasing competition, a fragile global and domestic economy and higher costs on the back of proposed introduction of GST on online purchases.

Net profit was $143 million in the 12 months ended June 30, which includes a $46 million gain from the sale of its Australian business for $A95 million. That compared with $107 million in the previous year.

Revenue, for the government-owned mail business, slipped 0.5% to $1.6 billion, while underlying profit rose 3% to $128 million. It paid an unchanged dividend of $5 million.

NZ Post's banking subsidiary, Kiwibank, increased profit 27% to $127 million in the year ended June 30, as revenue gained 17% to $560 million.

Stripping out sales from its finance and banking unit, sales declined to $700 million in the year, from $730 million the previous year. Its mail business reported an annual loss of $4 million.

Earlier this month, rival Freightways, the listed logistics and courier business, said annual profit rose 4% to $43.3 million on increased sales from express packages, business mail, and information management. It said growth in its DX Mail business came from customers who still require overnight delivery for their standard priced letters, in particular district health boards.

"Competition does drive you and when you read about your competitors, on the face of it doing better than you, that's a call to action," says NZ Post chief executive Brian Roche. Competition is frustrating but it actually is the right answer for the consumer so that's the world we live in.

“The Freightways comments were interesting because a lot of their mail actually gets carried by our network. I think mail, irrespective of who carries it, is in decline and we are actually pretty comfortable where we sit."

The SOE is two years into a five-year transformation plan as it contends with shrinking mail volumes in an increasingly digital world. It is laying off staff and reducing its physical store footprint.

In July it pared back traditional letter-delivery services, moving to alternate day delivery for standard letters in urban areas, which it expects will save it between $25-35 million annually. At the same time, the group has targeted earnings growth from Kiwibank, which was established 13 years ago.

NZ Post starts $30 million behind each year from the "structural and permanent decline" of the mail business. Last year mail volume declined 10%.

While the mail delivery sector is shrinking, private mail operators, such as Freightways and Mainfreight, don't have the same demands on their services as NZ Post does, Mr Roche says.

"We actually have the obligation of carrying mail everywhere in the country. Our competitors have the luxury of picking those areas where there is density - we make money out of density," Mr Roche says. "So the term is often used that they cherry pick, that's just the way it is."

Courier companies are focusing on capturing rising parcel deliveries as more consumers shop online and require delivery, but the government is currently weighing a proposal to introduce GST on those incoming goods.

Imported goods and services worth less than $400 are currently exempt from GST, but the total cost of GST avoided is estimated to be about $180 million, of which some $140 million is physical goods. The total is estimated to be growing at about 10% annually.

Mr Roche said changes may see a dent in consumer demand, but the price gap between offshore and domestic goods is still appealing to consumers. NZ Post's major concern will be any further administrative costs it might incur to ensure the GST payments.

Looking ahead the decline of mail is a reality, and will be further impacted by "quite a fragile economy globally and domestically", he says.

NZ Post is about 75% through the sale of its last peripheral Australian business, Converga, the mail and record management outsourcing unit. In the six months ended December 31, the SOE wrote down the value of its investment in Converga by $23-26 million after the business lost a major customer.

Mr Roche expects the company will announce in the next two to three months whether it will sell or retain Converga. "We're an interested seller, but we're not a desperate seller," he says. "It's a good asset but it's just not core to us."

(BusinessDesk)