The external environment and the market
PostNord conducts operations via two businesses: eCommerce & Logistics, which provides parcel and logistics services in the Nordic markets, and Communication Services, which ensures the distribution of mail items as part of the universal service obligation in Sweden and Denmark.
Two megatrends – digitalization and sustainability – are having a major impact on the market environment. Digitalization has driven a significant increase in e-commerce, while mail volumes have declined steadily for many years.
For some time now, market expectations of sustainable deliveries have been increasing. Many major customers are demanding fossil-free or zero-emission deliveries, and against that background business benefits are also to be gained by the market participants that succeed best in their sustainability work. The transport and logistics sector generally is a fiercely competitive market, with strong pressure on prices. As a result, business models are evolving not only to meet market expectations but also to reduce costs. In recent years, market conditions have in addition been severely affected by the COVID-19 pandemic, with lockdowns in societies playing a part in driving up parcel volumes.
The logistics market in 2021
The parcels and logistics market has been characterized by a trend of growing e-commerce volumes, which accelerated during the COVID-19 pandemic when societies were to varying degrees locked down. However, the pace of growth slowed over the second half of 2021, albeit from a fairly high level. In addition, component shortages and reduced transport capacity affected global supply chains, impacting us and our competitors both directly and indirectly.
Market trend, the competition and consumers
Growing international trade and consumer expectations are driving up the need for logistics and transport services. The market for parcel distribution is characterized by growth and increasingly tough competition, bringing pressure to bear on prices.
Historically, the competition has been represented by more traditional logistics operators such as DHL, DB Schenker, Bring and GLS. In recent times, the competitive landscape has become more complex with partnerships and alliances, as well as new market participants. Several of today’s competitors have established themselves with business models based on selected parts or the whole of the delivery chain and on using and selling information shared between sender, carrier and recipient.
The choice available to today's consumers has expanded markedly as market players have continued to develop their offerings. Nowadays, when buying from e-retailers, consumers can themselves often choose from several distributors, delivery options and payment models at the checkout stage. The trend of providing consumers with information on the exact time of deliveries and distribution to parcel lockers has strengthened, as has the demand for home deliveries. Home deliveries have increased significantly as a result of the pandemic, and this preference is expected to continue. To gain market shares, the logistics providers of today need to offer the best consumer experience and highest level of convenience, combined with a strong brand position.
PostNord’s position in the logistics market
PostNord has a leading position in the Nordic logistics market, thanks to an extensive network of both geographic and collaborative partnerships. Our size allows us to benefit from economies of scale and with about 8,000 distribution points, we have the potential for continued future growth. PostNord continuously focuses on retooling and optimizing its operations to get more out of existing terminals and networks, while investing in new infrastructure.
We are committed to meeting customer and consumer demand, expanding our position and growing with the market. One area of investment is the growing parcel locker segment. At year-end, PostNord had more than 6,000 parcel lockers in the Nordic region, and in 2022 the number of new parcel lockers will increase significantly.
Digital and physical communications market
Digitalization has led to a steady decline in letter volumes over a long period of time. The pandemic resulted in a certain rise in physical communications, in the form of both public information and communication between citizens, for example in the form of Christmas greetings.
Market trend, the competition and consumers
There is competition in mail delivery, especially in densely populated areas. PostNord’s main competitors are CityMail and Svensk Direktreklam in Sweden, along with Bladekompagniet and DAO in Denmark. In many sparsely-populated areas, PostNord is the only postal operator available – a clear sign of how difficult it is to achieve profitability outside the urban areas.
Our most important customers are still major public institutions, energy companies and financial institutions. With the fast pace of digitalization, mail volumes are continuing to fall. Private individuals sending letters, Christmas cards and postcards make up a minor share of the volumes. However, although direct mail represents a significant part of the business, physical advertising is also expected to decline in an increasingly digitalized world.
PostNord continues to adapt to declining mail volumes. In parallel with this trend, new services – based on both physical and digital communications and combinations of the two – are being developed.
PostNord’s position in the communications market
PostNord distributes communication services to consumers and businesses and is the sole provider of the universal postal services in Sweden and Denmark. Our communication services consist mainly of administrative communications including invoicing, newspaper and periodical distribution and advertising material such as brochures and promotional offerings. PostNord Strålfors operates in the digital communication market, enabling businesses to automate handling of information and communications via digital platforms. PostNord Strålfors also offers printing and enveloping solutions for physical communication.
The postal markets in Sweden and Denmark are governed by laws and other regulations to ensure that communication services meet a certain level of service and quality. This requirement will set the dimensions of the infrastructure, in terms of transport network, employees and vehicles, irrespective of the number of consignments to be delivered. Fewer items sent via a fixed infrastructure mean higher costs per item. The steep decline in the number of letters since the turn of the millennium therefore places strong pressure on the economic sustainability of the universal service obligation. If the business is to be financially sustainable, the conditions must be adapted to the pace at which mail volumes decline. Current laws and regulations trace their origin to the first EU Directive in 1997.
Regulation of the postal markets has changed in recent years, but the trend continues and further adjustments will be needed to ensure economic sustainability. Against that background, PostNord has restructured and rationalized operations in recent years to reduce costs as mail volumes have fallen. We have emphasized the seriousness of the situation in our continuing dialogue with elected representatives, owners, regulatory authorities and society at large. This has led to several regulatory changes.
Up to 2020, Sweden was the only country in the Nordic region to deliver mail to every mailbox every day. In 2021, the transition to a new mail delivery model began, with regular letters delivered on alternate days, and parcels, Varubrev and express letters still delivered daily. At year-end, mail was delivered to half of all recipients in Sweden via the new delivery model. The process began in Malmö, continued in Gothenburg and by the end of the year the model was also implemented in Stockholm. Despite a major adjustment, we have been able to maintain high delivery quality and the quality requirements have been satisfied. During 2022, implementation will continue in all other remaining parts of the country.
The new delivery model in Sweden represents a major cost saving. However, further changes to Sweden’s system of postal regulation will be needed in the near future to limit the risk of losses in the postal service. Steadily declining mail volumes reduce revenue and pressurize profitability when the cost per mail item rises. As mail volumes and postal income continue to fall, it is important that postal regulation should continuously adapt to the needs of society and that the mechanism for how any future financial support should be clearly defined in the system of regulation.
In Sweden, the government appointed a Commission of Inquiry into Financing of the Postal Service in autumn 2020. The Commission is tasked with assessing the future scope of the universal service obligation and determining the most appropriate model for future financing. The inquiry should be completed no later than early 2023 and PostNord looks forward to being acquainted with its findings.
In Denmark, PostNord has agreed financial compensation for the additional costs arising from the universal service obligation and political negotiations are in progress to determine the future shape of and financing for the universal service obligation. Pending the outcome of that process, the current temporary agreement with the Danish state on financial compensation was extended until the end of 2022.
Trade-offs between service level and allocation of costs
In Sweden, 95 percent of letters sent within the country must be delivered to the recipient within two days. A change to three days would mean that both costs and carbon dioxide emissions could be reduced, while the postal service could still be in line with the expectations of society at large, where digital solutions are becoming an increasingly important part of communication. In
Denmark, the requirement is that 93 percent of mail sent within the country must arrive at the recipient within five working days.
Since 2019, PostNord has been allowed to compensate for the decline in volume in Sweden through greater flexibility in pricing. This was a reasonable change, given that the cost of postage for most households is negligible. On that basis, the rate for single letters in Sweden was raised from SEK 12 to 13 on January 1, 2022.
The rate in Denmark was increased by DKK 1 to DKK 12 from January 1, 2022. The increases were balanced to address falling revenue in the wake of the declining volume of mail, without further accelerating the decline.
In Denmark, we conduct operations with compensation from the state, and we will need the support in the future. In Sweden, too, financial support will be necessary long term to secure the universal postal service in Sweden. However, further regulatory relief may delay the timing and minimize the extent of any such future financial support.