Downstream access: A new kick for the letter market?

With consolidation and downstream access the letter market in Germany is going to be liberalizedeven before the official fall of the letter monopoly in 2007. But it is doubtful whether these

Officially most of the letter market in Germany is under monopoly at least until the end of2007. But now even before that date there seems to be a major movement towards liberalisation andcompetition. The keywords are consolidation or downstream access. Latest rulings from judges madeit possible for competitors of Deutsche Post to collect letters from different shippers, sort andbring them to the mail centres of incumbent Deutsche Post who has to transport and deliver them tothe consignee. For the collection and sorting services, Deutsche Post has to offer rebates whichdiffer according to the volume and the amount of sorting work done. Rebates reach up to 21 percent.At the moment there are principally three different business models with which companies want tomake use of this new opportunity and try to be an alternative or a supplement to Deutsche Post’smail service. A breed of promising new companies recently presented their business models to largeshippers at a conference organized by the chamber of commerce of Stuttgart.

Consolidation through a cooperative society

It was not a coincidence that the conference took place in the capital of Baden-Württemberg, thesouth western region of Germany. “Stuttgart will be one of the hardest-fought letter markets of thecountry”, said Jens Greve, managing director of PostCon Deutschland. PostCon, a cooperativesociety, is the pioneer of the consolidation market and is already in business since 2002. PostCondoes not collect and sort the letters on its own behalf but on behalf of its members. Throughbundling of the volumes of different shippers, the company intends to obtain the highest possiblerebate from Deutsche Post . The cost the cooperative has to bear is mainly for collection, sortingand administration of the process. Therefore, consolidators such as PostCon promise to give backabout eight percent of the postage to their members. “But there is no one consolidator who hasalready reached the eight percent postage savings”, warns Greve. Even PostCon who collects morethan half a million letters daily has paid back only 5.5% of postage in the first quarter of 2005.The company invested in nine sorting centres in large German cities with twelve automated sortingmachines working.
Although the cooperative is the largest consolidator of letters, they only manage to get apayback on standard mail. The reason for this is that a minimum volume threshold for rebates hasbeen established for each class of postage separately. An example: For collection, sortation anddelivery to one of the 96 origin Mail Centres, the so called “Briefzentren Abgang” (BZA) ofDeutsche Post, where the mail is sorted and injected into the distribution network of DeutschePost, rebates begin at 3% ( for 5.000 letters daily of one class) and 6% (for 10.000 lettersdaily). From 15.000 letters onwards, the Post has to give 10% discount, from 20.000 letters onwards14% and from 25.000 onwards 18 %. Lawyer Greve reckons that he will only reach the maximum discountcategory for higher postage classes (95 and 155 Eurocent) at his three largest locations.
“Rebates for the maxi-letters which cost 220 Eurocent would be wonderful, but are notrealistic for any consolidator”, adds Kurt Wohnhaas. He is director of PostCon´s competitorBriefGenoD. The company – also a cooperative society – is working in Frankfurt and Stuttgart sinceApril this year. The business model is similar to PostCon. While Greve´s company is collecting mailfrom very large shippers like banks, automotive manufacturers, churches and insurance companies whosend their own letters, the backbone of BriefGeno D is a large Lettershop. The company called LSDialogmarketing formally is a normal member of the cooperative. But practically it has a specificfunction in the system. With the lettershop activity, the founders try to establish a constantstream of letter volume. According to Wohnhaas, the agency is printing “between 15.000 and 30.000letters daily”. Since not all of the volume has to be printed and sent on a specific day, thenon-urgent mail is used to hedge against the considerable fluctuations, which are a main problemfor the consolidators explains Wohnhaas. During days of low volume, the consolidators achievelittle or no rebates. The fluctuation makes it difficult to establish a reasonable forecast of therebates.

Partners of the postal operator, but not an alternative

 Wohnhaas acknowledges that up to now BriefGenoD did not reach the maximum rebate everyday. But from July onwards he reckons that the Stuttgart plant will deliver 60.000 to 80.000letters a day to Deutsche Post.
 The customers of BriefGenoD – like the ones of PostCon, too – still frank the lettersby themselves. The drivers of the consolidators just fetch the mail. For customers with more than2.000 letters a day, several pick ups are done during the day. Wohnhaas explains further that “40to 50 percent of the daily volume are ready at noon.” This enlarges the time window for sorting andtransporting the letters to the mail centre of Deutsche Post.
 Although the new plant of BriefGenoD in Stuttgart is only 800 metres away from Post´smail centre it takes some hours to transport mail, sort and register it by destination and postageclass. The data entry of each letter is necessary to count the letters of one shipper for thereimbursement or for complaints. A sorting machine from manufacturer Böwe & Howell type OlympusII should do the job. “With more than 100.000 letters we need a second one”, comments Wohnhaas onhis plans. Otherwise the time would be too short to reach next day delivery through Deutsche Post. “ There are some customers who would be satisfied by a second-day-delivery but the majority wantstheir mail delivered next day.” Therefore BriefGenoD takes the last letters to Deutsche Post at 7p.m. The company plans to build up eight to ten mail plants in the next 18 months.
 Important for companies like BriefGenoD or PostCon is that they can assure theircustomers to be a “partner of Deutsche Post”. There is “no better letter logistic”, they claim. Butthese self-appointed partners will get further competitors. Large companies like Arvato, thelogistics arm of media giant Bertelsmann, already announced to establish consolidation services,too. The difference between the eight percent reimbursement offered to customers and the 21 percentmaximum rebate seems to be large enough to cover the logistics cost and still allow for aninteresting margin. But for smaller mail delivery services who cannot reach the huge amounts ofmail volume required to reach the high rebates, the air could get thin.

Consolidation with lower volumes

There are however some trials by the smaller players also to act as a consolidator. Theirbusiness model is primarily based on the sorting quality of mail rather than just volume. The firstthree competitors of Deutsche Post who got the right for downstream access of mail were small andmedium sized companies, Pin AG from Berlin and DID from Bremen, both regional private deliverycompanies. Direktexpress Brief AG from Ulm was in turn the company that presented their model inStuttgart. The company, which originally offered an express service but went bankrupt with thisconcept, today manages a nationwide overnight network. This hub and spoke system is nowadays usedto deliver special registered mail (“Postzustellurkunden” in German) – from local authorities andcourts. 79 partners of Direktexpress take care of the pick up and delivery in their region.Shipments to other regions are transported through the overnight-network DirektExpress uses. Thenew concept for the consolidation of mail items developed by Kevin Steele, Chairman of the board,and Edip Türkoglu, Chief executive officer, is based on the idea of using the network to deliverletters directly to each of the Destination Mail Centres, the so-called “Briefzentren Eingang”(BZE) of Deutsche Post rather than the Origin Mail Centres (BZA). Injecting at destination meansthat Deutsche Post only has to take care of the regional delivery of the letters. If a consolidatoris able to deliver 500 letters of one postage class for a specific postcode-area at a BZE, he isrewarded by Deutsche Post with the maximum rebate of 21 percent. In this business model, the totalletter volume required to operate profitably is therefore much less than in the first businessmodel. As a consequence, Direktexpress targets customers with a minimum daily mail volume of 200letters, while consolidators of the first model require customers to hand-over a minimum of 1.000 letters a day.

Flatrate of 30 Eurocent for any German letter?

For the acquisition of new potential shippers, the collection of mail and transportation to theinjection points of the DirektExpress network, Steele and Türkoglu try to find independentpartners. They want to sell them a “Brieflizenz 2005” for 1.000 Euro and offer a seven percentprovision of the mail postage to them. DirektExpress reckons to get one million letters per day inthe starting phase, which is announced for this summer. From 2006 onwards, Türkoglu hinted that hiscompany wants to raise the volume of Mail with another coup: it plans to offer the delivery of anyletter germanwide for a flat-price of 30 Eurocent.

Combination of consolidation and own delivery network

 Business Model number three was presented by the private mail delivery company mailXpressfrom Stuttgart. The one-year-old joint venture of two experienced mail companies sees itself as areal alternative to Deutsche Post. “The other business concepts are bounded to the system ofDeutsche Post, but we can realize customers´ wishes because we have an own delivery network”, saidgeneral manager Wolfgang Schmid. In its own region in and around Stuttgart the company uses its ownstaff for pick up, sorting and delivery. Thanks to a special licence, requiring to pick up mailafter five p.m. and deliver it on the next working day before 12 a.m., mailXpress is allowed totransport any letter without weight restrictions. The service is however only possible at aregional level. Nationwide letters, which are liberalized with more than 100 gram weight, aredelivered through the network of EP Europost, a subsidiary of the Dutch postal service TNT (formerTPG Post). For the rest of the mail – nationwide with less than 100 gram – the company wants to usethe downstream access of Deutsche Post. “Especially for small and medium sized shippers with a lotof regional mail our combination should be the cheapest, because postage for our own deliverynetwork is 20 to 50 percent below prices from Deutsche Post”, said Schmid.

Erosion of the letter margin of Deutsche Post started

 The opening of the network of Deutsche to consolidation and downstream access hasundoubtedly given a kick to the market and mail customers attending the Stuttgart event showed muchinterest in the new business models presented to them. While the deregulation offers newpossibilities the fact however remains that most letters will still be delivered by Deutsche Post.At the moment the downstream access does not seem to promote the development of true alternativesto the Mail System of Deutsche Post but will rather be the s the starting point of the erosion ofthe letter margin for Deutsche Post AG.