Key Findings from Canada Post Discussion Paper 2016

While the future of Canada Post will move from a greater proportion of Lettermail to feature parcels, the Canadian Postal Service Charter obligates it to deliver, under the Universal Service Obligation, to the "last mile" within an outdated retail network prescribed in 1994's Rural Moratorium. To fulfill its mandate of financial self-sustainability, Canada Post, a Crown corporation, faces necessary realignment. It must do this within the framework of a Lettermail monopoly with a social mandate, while competing with the private sector in AdMail and Parcels. Based on the comprehensive input to the Task Force, realignment should be undertaken with appropriate consultation and an eventual change of governance (i.e. a regulator).

The next nine points summarize relevant aspects of the Discussion Paper:

1. Public opinion research revealed that 68% of businesses of all sizes and 94% of Canadians in all regions in urban, rural and remote communities believe that mail is highly important and that Canada will always need postal services that are owned and operated as a public service. 91% of Canadians and 83% of businesses are also highly satisfied with Canada Post's services.

This research also revealed that 91% of Canadians use the Internet and 69% pay their bills online rather than through the mail as was the preferred method only a few years ago.

This research also indicated that even though Canadians recognize the ongoing shift to digital communications, they are emotionally attached to mail: personal letters, parcels from loved ones, greeting and holiday related cards are viewed with much affection, even nostalgia.

As a result of the disruptive effect of evolving, Canadians' postal usage is changing. Mail volumes are down but 170,000 new addresses are added each year. Less mail is delivered to more addresses, which has the effect of increasing Canada Post's per-unit mail delivery costs.

2. Transactional Mail volumes have declined by 32% or 1.6 billion pieces since 2006. This type of mail is no longer the main type of mail delivered despite still providing 50% of the Canada Post segment's 2015 revenue of $6.3 billion in part as a result of stamp price increases in 2014.

3. Direct Marketing Mail (referred to as AdMail) makes up the majority of mail delivered to the mail box. However, despite AdMail making up 56% of mail volumes, it contributes only 19% of Canada Post's revenues.

Research indicated that AdMail is viewed as "Junk Mail". The fact that AdMail now makes up the bulk of mail delivered to the mail box is proving an irritant among Canadians. Most of the AdMail received consists of flyers that are often directly recycled and at times litter the neighbourhood. A common observation from stakeholder engagement was the amount of litter around community mailboxes as a result of people not taking home their AdMail.

As for businesses, research showed that only 22% of businesses send AdMail via Canada Post. Out of these businesses, 78% consider it moderately or highly important to their business. However, AdMail overall has declined by 15% since 2006. AdMail is therefore likely headed for a more significant decline as e-flyers are growing in popularity and usage among Canadians

4. Parcel delivery continues to be driven by the upswing in e-commerce. Unfortunately, despite an almost 10% growth in parcel volumes at Canada Post in 2015 over the previous year, the longer term revenue growth in parcels may not be sustainable or enough to offset future declines in letter revenues. The outlook for Canada Post in the Canadian parcels market is far from certain given the large number of competitors in the parcels market.

Greater competition is beginning to force down market prices and lower cost delivery venues will make it more difficult for Canada Post to compete since the Corporation has tied its parcel delivery to its labour-intensive mail delivery. While Canada Post is able to absorb the sizeable overhead network costs in its Transaction Mail line of business, this approach will become less feasible over the longer term as Transaction Mail volumes continue to decline, unless corporate revenues are maintained or increased through higher stamp prices or other options.

5. Fixed costs are proving a challenge for Canada Post despite falling mail volumes. Fixed costs are primarily comprised of infrastructure and overhead costs, and as such are difficult for the Corporation to reduce in reaction to declining business volumes. Traditional postal services are highly labour intensive. In Canada Post's case, labour costs represent about 70% of total costs; 41% higher than those of comparable businesses in the private sector.

Since Canada Post was granted temporary relief from making annual special solvency payments, it was able to defer payments of about $1.4 billion in 2015. Once Canada Post resumes making its solvency payments, unless the interest-rate environment improves substantially, the Corporation will not have sufficient cash on hand to finance its operations.

6. Rural Moratorium prevents Canada Post from closing or franchising almost 3,600 corporate post offices. This has remained unchanged since it was promulgated in 1994, and which now forms part of the Canadian Postal Service Charter announced in 2009. The corporate post offices could be converted to less costly franchises. Franchised post offices, meanwhile, provide lower operating costs to Canada Post and more convenience by virtue of being open longer hours than corporate post offices.

Furthermore, as part of a collective agreement with the CUPW Urban component, Canada Post has agreed to maintain 493 corporate post offices that could otherwise be franchised.

7. Method of Delivery does not allow for alternate-day delivery, as the Canadian Postal Service Charter requires that Canada Post deliver mail five days a week. This is at odds with the views of surveyed Canadians, 73% of whom were open to the idea of alternate day delivery.

In general, research revealed that most Canadians were willing to accept changes in the delivery of mail once they were made aware of some of Canada Post's financial challenges. However, Canadians were resistant to changes if they resulted in mass layoffs of postal workers or increased stamp rates. Also 92% of Canadians were resistant to changes that would affect mail service to those with mobility challenges. 32% of businesses were also generally open to changes such as longer delivery times for certain kinds of mail. However, businesses were generally resistant to the idea of rate increases, and some articulated opposition to the transfer or downloading onto clients of what were perceived as public service costs. 76% of businesses, on the other hand, were in favour of tiered pricing.

8. Postal Banking was examined by third-party experts and informed by the views of Canadians who corresponded or submitted their opinions online, as well as by the presentations of other stakeholders, notably postal unions, that were engaged during the review process. 60% of Canadians think that full-scale postal banking would be a poor fit with Canada Post's business versus 39% who believe that the idea has potential. Although a minority of Canadians seem to like the idea of postal banking, ultimately, only 7% of Canadians and 11% of businesses claim that they would actually use postal banking services. While full-scale postal banking is unlikely to succeed within the Canadian context, a partnership model with banks or credit unions could be considered in corporate post offices in select under-served remote communities in line with the "community hub" option of offering services in select communities provided financial institutions have an interest in this initiative.

9. Options

OpportunityTypeProfit Potential
Community mailbox conversion Savings $400M
Converting 800 of the highest volume corporate post office to franchise outlets Savings $177M
Alternative day delivery Savings $74M
Further streamlining processing operations Savings $66M
Pursuing further synergies with Purolator Savings $16M
Selling advertising in retail network Revenue $19M
Additional "last mile" delivery for 3rd parties Revenue $10M

Other options were considered by the Task Force for which further business cases should be developed in the event these options are recommended by the Parliamentary Committee. These are outlined in the following table:

Other OpportunitiesDescription
Price Based Strategy Implications of increasing prices as a strategy to offset increasing costs
Review of Labour Costs Opportunities to address Canada Post's largest cost component
Distribution of Marijuana Opportunities for Canada Post to distribute marijuana if legalized
Post Offices Serving as Community Hubs Creating hubs in selected rural and remote communities that currently have access to fewer services than other Canadians
Changes to Canada Post's Governance Possibility of establishing a postal regulator

Tags: Postal Matters