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The endgame for postal networks: How to win in the age of e-commerce

The e-commerce megatrend is a big opportunity for postal players, but market and competitive dynamics are squeezing incumbents. Three winning tactics can help these companies stay competitive.

With the rise of new competitors, new technologies, and the inexorable trend toward e-commerce, postal networks face a turning point. Our new report The endgame for postal networks: How to win in the age of e-commerce explores the strategic issues at hand and dives deeply into the actions incumbents should take to stay competitive. This article extracts highlights from the full report to outline a broad overview of the landscape, tactics that can help companies keep up and cut costs by up to 20 percent, and steps for getting started.

Time for the next move

It’s useful to look at the state of play, for the broader postal and parcel market and for incumbent companies. The decline of the mail business—the long-standing and reliable cash cow of many incumbents—due to electronic communication is structural and irreversible. Mail revenue share still stands at around 40 percent globally today, but is swiftly declining, as indicated by a shift in volumes: the global volume ratio of letters to parcels has declined from 13:1 in 2005 to 4:1 in 2015 and is expected to reach 1:1 parity by 2025 (Exhibit 1).

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In contrast, the e-commerce megatrend will fuel a $9 trillion retail opportunity by 2025, creating opportunities that no postal player should give up without a fight. After all, parcel logistics—from pickup to delivery—are steadily becoming the most crucial enabler of that growth, given that an estimated 70 to 80 percent of all e-commerce purchases are delivered via networks rather than picked up in store. Differences in e-commerce parcel penetration rates point to potential accelerated growth in less developed markets (Exhibit 2), but the general premise is global: capturing a piece of the resultant parcel-volume growth will be crucial for incumbents wishing to protect the unique benefits of their joint mail–parcel operations.

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In concurrence with such lofty growth dynamics across global parcel markets, new challenges are pushing incumbents to a tipping point. The entire logistics value chain for parcel handling is up for grabs, as indicated most clearly by the recent and sizable forward integration moves from e-commerce supergiants, such as Alibaba, Amazon, and JD.com (Exhibit 3). These moves include Amazon’s order of 20,000 delivery vans in the United States and Alibaba’s shift to offer parcel delivery to the broader market. The three supergiants alone now account for around 40 percent of online purchases globally, and the move into parcel delivery seems an obvious choice.

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In face of rising consumer demands and competitive pressures, most incumbents are still stuck with structurally uncompetitive labor costs 20 to 40 percent higher than those of their new competitors, along with legacy IT systems and risk-averse cultures, as new competitors erode their primary sources of competitive advantage: strong brands and scale benefits.

Three winning tactics

Incumbent companies can, however, focus on three tactics in seeking to stay competitive:

Earn the right to innovate. Successful postal incumbents have raised productivity by 1 to 2 percent annually over the last decade. This level of continuous improvement, however, is becoming ever harder to maintain, but at the same time, ever more mission-critical in view of current market dynamics. Before focusing on fashionable, science-fiction-like fantasies of delivery drones and droids, postal incumbents need to step up their game by further optimizing their current operations, boosting operational excellence in sorting, transport, pickup and delivery, and—often neglected—business support functions. We propose seven key initiatives that can reduce total costs by up to 20 percent (Exhibit 4). The levers with the greatest impact for many players are advanced ways of production integration, analytics-supported flexible resource planning, and an automation opportunity of up to 50 percent for operational planning and support activities that are today often too manual and inefficient.

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Build the right capacity. Building on a solid operational foundation, incumbents need a long-term plan to establish the additional capacity required to participate in continuous parcel growth. The long-term plan needs to answer three key questions: How much capacity is needed (and where) in line with evolving e-tailer fulfillment strategies and service expectations? What’s the right kind of automation technology in line with product mix and local factor costs? How can additional capacity be integrated in the best way to protect joint network economics? With about 75 percent of delivery speed issues in today’s postal networks being “structural,” strategic investments into the network offer a unique opportunity to not just create capacity for growth and improve the operating cost base, but also for a real step change in service offering.

As such, leading players are already and continuously investing billions of dollars into their networks.

Create an innovation engine. Incumbents should follow a structured approach if they are to innovate in both products and production systems. With both quality enhancements and cost reductions in mind, they should first create a consumer-centric product strategy. Next is developing a digital and data strategy. This should set critical foundations in place via a two-speed IT approach and address innovation in the core via customer experience (think personalized delivery notification and rerouting) and value-chain design (think underlying enablers to do, for instance, with track and trace). It should also consider attaining new frontiers in the production system or product portfolio (for example, with robotics or artificial intelligence). Two “must have” priorities should top any postal executive’s agenda right now. The first is raising end-to-end transparency along the production chain via both advanced software and new, increasingly economical hardware like smart sensors. The second is enhancing dynamic tour planning capabilities as the door opener to the biggest potential step changes in cost and customer experience.

Get into action mode

So how can postal players get started? Most important, they need to get into action mode and execute. Of course, major transformations touching on the operational core of the business are not easy to get underway with so many options to consider. A few elements can help:

Plan your moves with care. Incumbents should create a shared vision and gain alignment throughout the company. And they should understand customer needs in as much detail as possible in order for those needs to be translated into action.

Build momentum with early wins. To implement successfully, companies should take one step at a time, create momentum, and realize quick early wins. Top priority should be given to crucial initiatives that promise immediate payoff—without hindering bolder moves or investments in cutting-edge technologies.

Know the players. Managing both internal and external stakeholders is crucial. Everyone from staff to leadership to regulators must understand the vision and the road map, as well as the benefits the transformation will bring, if they are to understand why change is necessary. Incumbents need to become competitive parcel players if they are to sustain the core business and deliver universal services in the most economical way.

About the author(s)

Patrick Briest is a senior expert in McKinsey’s Düsseldorf office, Julian Dragendorf is an associate partner in the Berlin office, Tim Ecker is a consultant in the Frankfurt office, Detlev Mohr is a senior partner in the Tokyo office, and Florian Neuhaus is a partner in the Boston office.

The authors wish to thank Eszter Beretzky and Tim Zimmermann for their contributions to this article.

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