Wolfgang Baier watches parcels of all shapes and sizes as well as bulky envelopes whiz along the conveyor belt of a large, multi-purpose sorting machine on the processing floor of Singapore Post’s central mailroom. Shiny and blue, the machine is a recent investment SingPost made to improve its efficiency in handling the surging volumes of parcels and bulky envelopes that are being sent through its mail system.

The machine can sort some 10,000 to 15,000 parcels and bulky envelopes — called “flats” — in a single hour. It drops these mail items into bags hanging alongside the conveyer belt, sorted by postal code. Previously, sorting was done manually by workers who tossed packages into labelled bins. These workers could sort roughly 1,000 pieces of mail an hour.

In recent years, however, a global boom in online shopping and other forms of e-commerce has resulted in SingPost seeing about 100,000 to 200,000 pieces of parcels and flats a day during the peak season.

“This machine is geared to the B2C or C2C traffic, which is really about the e-commerce traffic,” says Baier, who joined SingPost as CEO of international business on Feb 7 and was appointed group CEO on Oct 5.

At the cost of just “a couple of million”, Baier says SingPost has now dramatically improved its efficiency and productivity. He sees more of such initiatives to bring costs down in the future. At the same time, to benefit further from economies of scale, Baier wants to increase the total volume of mail, parcels, flats and even other packages that SingPost processes. That could provide the company with yet another means of sidestepping the secular decline in the volume of regular mail.

Thanks to the ubiquity of the Internet, the volume of mail sent globally has been on a decline for years. To cut costs, banks and utility companies are offering rewards to customers who opt for electronic billing.

The same motivation is driving marketers to send direct mail to email inboxes rather than home post boxes. Even governments are experimenting with the idea of digital mailboxes for all citizens. Globally, domestic mail volumes have declined by an average of 13% over the last five years.

The falling demand for basic mail services has led to major shake-ups in the industry. At the start of this month, the United States Postal Service (USPS) proposed a massive nationwide consolidation of its facilities, processing equipment, vehicles and employee workforce in an attempt to cut costs and return to profitability.

Most postal operators in Europe have found other less dramatic ways of adapting and innovating. In Germany, Deutsche Post now runs just 2% of the post offices in Germany, and it has acquired DHL, the logistics and shipments company. The Finnish postal service offers a digital mail archival service and an online bill payment system. Customers of Swiss Post can choose to have their mail scanned and sent to a preferred Internet-connected device. Sweden’s Posten has merged with Post Danmark to create PostNord.

SingPost too has been innovating. Since its listing in 2003, the company has expanded into financial services, retail, e-commerce and logistics.

Customers walking into a post office today can buy candy, get a loan and even drop off a computer for repair. SingPost also has a web service called vPOST that allows customers to order goods from e-retailers in the US, the UK and Japan while taking advantage of free shipping offers in those countries by directing their orders to SingPost branches overseas.

All these new services, as well as a continued drive to improve efficiency and productivity, have allowed the company to consistently grow underlying profits — despite a fall in public mail volume from 181.1 million items for FY03 ended March to 134.3 million in FY11.

For the year, it announced a 1.2% improvement in underlying net profit to S$149.6 million (RM365.9 million). And it paid out a total dividend of 6.25 cents a share, representing a yield of 6.6%, based on the stock’s close at 94 cents on Dec 14.

Yet, the contribution of these new services to SingPost’s bottom line remains small. In FY11, 68.6% of operating profit came from mail and 20.2% from property. SingPost rents out space at some of its post offices. Another 6.6% came from logistics and 4.6% from retail.

Baier says it could be a while before SingPost’s traditional business of delivering letters is overtaken by its newer initiatives.

“We’ve had more than 150 years to optimise it. Singapore has one of the lowest postal rates and one of the highest efficiency rates,” Baier says. In the past 15 years, the cost of a local postage stamp increased by four cents — about one-tenth the increase of feeder bus fares.

Meanwhile, the sorting system is fully automated: Letters are fed into one of five machines that can read postal codes and addresses and sort them into bags at the rate of 30,000 pieces an hour. This makes it possible for at least 98% of mail posted to be delivered the next day. “Singapore’s postal system is a real machine,” Baier adds.

New frontier

Can SingPost achieve similar efficiencies and economies of scale in delivering parcels and packages? “If you give me three million parcels a day, yes. But for that, the two of us need to do a lot of e-commerce shopping. There are simply more letters than parcels. And there are some limitations, because you cannot carry 100 parcels at once, but you can carry 100 letters. But we are achieving good margins in our logistics business,” Baier says.

One of Baier’s top priorities, therefore, is to drive volumes further. While technology has meant that Singaporeans may not send or receive as many letters as they used to, Baier says it has also led to an increase in the number of parcels in the mail, whether from individuals running small retail businesses on their own, small companies just entering e-commerce or larger ones that are branching out overseas.

Recently, SingPost announced a new product offering called EZsuite that aims to help small and medium enterprises (SME) move into e-commerce. EZsuite provides customers with a web platform that includes web hosting and e-fulfilment, allowing customers to create websites from 100 ready-made online store designs, track inventories, manage product catalogues and generate business or sales performance reports. Customers can also take advantage of integrated shipping and payment systems.

To support local online retailers, SingPost launched SmartPac, a postage-paid, next-day delivery solution in October last year. The SmartPac is designed to fit into most letter boxes and can be used for accessories, clothing, electronic products, books, toys and other items of up to 3kg.

For SME, the company launched the SpeedPost SaverPac Prepaid, which allows customers to send packages of up to 3kg to 10 countries while saving up to 33% in shipping costs, as costs are based on actual rather than volumetric weight. And, it has launched the SpeedPost Customised Import service to help SMEs import products from China, Hong Kong and Malaysia.

In September, the company also announced the expansion of its vPOST service into Hong Kong via a joint venture with a Hong Kong logistics company called 4PX Worldwide Express.

Earlier this year, it acquired 95% of an e-commerce operator called SuperToken. The business, which has been renamed Clout Shoppe, sells luxury goods online at discounted prices.

“Having an internal customer is very helpful,” says Baier. “It keeps us on the pulse of e-commerce. E-commerce is pushing us forward and we need to anticipate customer needs. To stay relevant, we need to stay ahead.”

Building a regional network
Another way to raise volumes is to look for them beyond Singapore. Thus, expanding regionally has become a priority for Baier too. Through its wholly-owned subsidiary Quantium Solutions International, which was acquired in 2009, SingPost has a logistics business with a presence in 10 countries across Asia-Pacific: Australia, Hong Kong, India, Japan, Malaysia, New Zealand, Singapore, Taiwan, Thailand and the Philippines.

Quantium provides cross-border mail services and other services such as lettershopping, data management and printing, mailroom management, freight logistics, warehousing, fulfilment and international distribution and hand delivery.

However, Baier is seeking to grow the network further, both through acquisitions and organic investments. This year, SingPost has several times raised its stake in a Bursa Malaysia-listed company called Efficient E-Solutions, which provides data and document management services. SingPost and Efficient have also signed a memorandum of understanding to jointly set up a data and document management business in Indonesia.

In August, SingPost acquired a 30% stake in Vietnam-based Indo Trans Logistics Corp, which offers air and sea freight forwarding services as well as third-party logistics and distribution services, for US$10.8 million (S$14.07 million).

In July, it bought a 20% stake in Shenzhen 4PX Express, which provides international express delivery services, international freight forwarding, and import and export of goods and technology, for 60 million yuan (RM29.9 million).

In May, it acquired the remaining 30% of DataPost that it did not already own for S$6 million. DataPost is in the business of electronic printing and despatching services with a presence in Malaysia, Hong Kong, the Philippines and Thailand.

And in March, it increased its stake in GD Express Carrier, a Malaysian express delivery and customised logistics services provider, to 27.1% from 5%.

It appears to be a haphazard collection of small opportunistic stakes, but Baier says the acquisition strategy is being built on five pillars: mail, logistics, retail and financial services, e-commerce and digital services.

“In each of those areas, we want to build independent businesses that can support each other,” Baier says. He explains that rather than buying companies out, SingPost is looking for good-quality partners that can help it build capabilities in those areas.

“I’ve been in the logistics industry doing M&A for more than a decade and I’ve seen many things go wrong in the acquisition area. We are very stringent in selecting our partners because we only have a few managers, so we cannot invest in companies that are not well run where we basically need to take over the whole ship.”

He is also looking for synergies. “For example, some of the companies we have bought into are focused on their domestic businesses, so we can add in the regional part,” he says.

“And we cannot rely purely on our postal network. We need to build up a commercial alternative too, where we have partners that can then deliver for us or ship for us. It looks as if [the stakes are small], but this actually builds up into one bigger change over time. Wherever we see interesting markets based on our shipping volume, we then want to look into strengthening our partnerships.”

Rising expenses
Analysts had been optimistic about SingPost’s new direction earlier this year. In September, Kim Eng analyst Anni Kum wrote in a report entitled “Marvellous makeover” that “SingPost has demonstrated earnings resilience in the face of structural changes in the global mail industry.”

According to Kum, “compared with its global rivals, SingPost appears more nimble in terms of cost management. Labour is the group’s largest cost component and has hovered around 38% to 40% over the past five years. In contrast, the other postal companies recorded higher labour-related expenses as a proportion of total expenses, for example, 80% for USPS and 62% for POS Malaysia.

Also, Kum notes that SingPost’s operating expenses as a percentage of sales for labour, volume-related expenses, administrative and selling expenses have remained stable over the past five years. “Hence, its operating margins, particularly for its mail business, have remained stable.”

The company’s most recent set of results, however, have changed the minds of a few analysts. For 2QFY12, SingPost reported a 2.4% y-o-y rise in revenue to S$140.9 million but a 22.5% fall in profit to S$30.6 million, slightly behind consensus estimates.

The weak bottom line was attributed partly to mark-to-market losses of S$4.2 million from equity-linked notes, foreign exchange losses from trade liabilities and lower amortisation of deferred gain on intellectual property rights. However, higher costs on human resources also contributed.

In a report, OCBC Investment Research analyst Low Pei Han highlights that the company’s margin on earnings before interest, taxes, depreciation and amortisation has declined from 39.9% in 3QFY11 to 35.6% in 2QFY2012 owing to higher labour and related expenses.

“The group also continued to invest in capabilities and resources to step up its regionalisation efforts. With Singapore’s inflation expected to remain elevated till 1H12, the tight labour market and SingPost’s investments in its own capabilities, we are not expecting operating margins to recover significantly in the short to medium term,” Low says.

Meanwhile, DBS Vickers analyst Sachin Mittal has lowered his estimates for the group’s underlying profit by 12% for FY12. Although Mittal is encouraged by SingPost being more pro-active in growing new businesses under Baier, he believes it will take 12 to 18 months for the company to reap the benefits of its efforts.

He sees an additional S$3 million to S$4 million of additional profits for the company in FY12 from its new investments. Mittal has downgraded SingPost to a “hold” with a price target of S$1.10 from S$1.17 before.

Despite the higher costs, however, many analysts continue to like SingPost for its dividends. In an August report, CLSA says investors seeking stability should consider the stock for its sustainable dividend yield.

SingPost has committed to paying out a minimum annual dividend of five cents a share, barring unforeseen circumstances.

And CLSA notes that the company consistently generates free cash flow above its dividend payout. A recent share price correction has also made the stock more attractive. It currently trades at about 12 times its estimated earnings.

Three generations down
At just 37, Baier is the youngest SingPost CEO since the company was listed in 2003. He has a lot to prove, not just because of his age, but because of his background. Baier is actually the third generation of postal service employee in his family.

“Both my grandfather and my mother worked with the Austrian postal service,” he says. “So, in the back of my mind, there is a very positive image of the post office.” Although he did not start out working in postal services — his career started out at McKinsey & Co, the consultancy firm, in 2001 — he naturally gravitated towards this sector.

“Logistics and transportation for me was basically what [I identified with]. It connects people across the globe.”

For the last decade, Baier has been advising post and logistics companies on strategies for the future. In the last five years, he has actually worked closely with SingPost to help it build its logistics division.

Now, at the helm of SingPost, he is implementing many of the strategies he has recommended to other companies in the past. Last month, Baier announced a new hire for the position of chief operations officer. Sascha Hower, a 33-year-old German national, formerly a consultant at McKinsey, will oversee optimisation and synergies across all group operations.

“We as a management team have committed to the board to really look at quick wins across cost as well as revenue opportunities. One of the reasons that the new COO is coming on board is to look at the whole operations set-up and lean it out,” Baier says.

The multi-purpose sorter that Baier has just acquired is one example of how such synergies can be achieved. Although purchased primarily to sort the small parcels and flats that the company still classifies as mail, the machine will be utilised by the logistics division when there is spare capacity.

“We are also bringing in much more analytical tools into our sales set-up to identify pockets of growth.”

Baier assures investors that transformation is on the way.

“Our investments will pay off. The things that we are doing — the acquisitions, the investments into IT, the multi-purpose sorter, we have also invested in a second sorting centre at Changi Airport to cope with regional mail, we are investing in a track and trace system, we’ve invested in a couple of talents, web booking tools and so on — these investments will pay off. They will be a game changer,” he says.

“We are heading towards this strong, diversified, five-pillar company, which should give investors much more confidence that this is a company that will survive because we are investing early on, ahead of the curve.” — The Edge Singapore

This article appeared in The Edge Financial Daily, December 22, 2011.