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A NEW PLAYER

Australia Post has become the latest player in the Australian insurance market. They started offering their customers car insurance as of 1^st September. The move has surprised many, but clearly shows that they are not prepared to limit themselves to product lines based on their name.

Australian swimmer and Olympic gold medallist Giaan Rooney will continue her relationship with Australia Post, although now as the face of the car insurance product line. Another partner is A&G (Auto & General) Insurance Services, who will be underwriting Australia Post’s customer’s policies. A&G Insurance Services are owned by South African giant, Budget Insurance, and will partner with Australia Post on a revenue sharing basis.

Australia Post has three car insurance products planned – comprehensive, third party fire & theft, and third party property. They plan to market the products through their extensive branch network, which now consists of close to 5,000 branches, with the final sales and services will be via telephone and internet. For this, Australia Post has copied the model of a successful venture into the insurance market made by Royal Mail in Britain.

Australia Post’s head of financial services, Andrew Wiseman, said that it was a natural fit for Australia Post to move into offering additional financial services, considering that they already handle tens of billions of dollars in payments and money transfers every year. But he stopped short of declaring it would be one of the cheaper insurance options in the market, instead choosing to call their car insurance “competitively priced” and “affordable”.

NOT THE ONLY ONE

In what can only be described as a massive industry shake-up, Australia Post is just one of a number of businesses looking to make their move into the Australian insurance market. The insurance market is estimated to be worth between $25 billion and $30 billion dollars a year, and its limited number of competitors means that there is plenty of cake to share around.

Richard Branson’s famous Virgin group of companies have already got the jump on Australia Post, with Virgin Insurance having launched an online service. The move was based on estimates that 1.2 million motorists a year looked for a better insurance deal, for which they initially plan to offer car insurance and then move into other areas. Owners of an impressive website, South African owned Real Insurance are another company to make the move into the car insurance market recently.

Woolworths also has plans to join the market, following in the footsteps of their main supermarket rival, Coles. Coles will be trialling offering customers home and contents cover along with car insurance in 29 of their Tasmanian supermarkets and service stations. Like Australia Post, a copy of overseas business models will be used, with Coles looking for a successful result similar to what Tesco achieved in Britain. If the six month trial goes to plan in Tasmania, Coles will launch a national rollout shortly after.

MOVE OVER BIG BOYS

The Australian insurance market is heavily dominated by a couple of big players. Insurance Australia Group, with its brands NRMA, SGIO, SGIC and State Insurance, are one of the two big guns in insurance. The other is Suncorp, who own GIO, AAMI and Vero, as well as niche brands Australian Pensioners Insurance Agency, Shannons and Just Car.

Insurance Australia Group, Suncorp and another big player, Allianz, occupy almost three quarters of the overall insurance market in Australia. But for car insurance, the big two have an even greater share, dominated their competitors and having an estimated 75% market share.

In fact, the twelve biggest car insurance brands are owned and operated by Insurance Australia Group and Suncorp. It is statistics like these have fuelled the desires of the new entrants into the car insurance market. The car insurance market is worth $5.5 billion annually, meaning that making even a small dent into the big two’s market share could return a handsome profit.

INTO THE FUTURE

Australia Post don’t intend to stick solely to car insurance, with plans already in place for expansion into the travel insurance and home and contents insurance sectors later this year. They have also stated that their ever-expanding business model will not stop with insurance, prompting speculation of a move into the banking industry.

If they were to move into the banking industry, mortgages and deposit taking are considered the products they would introduce. But for these, a banking licence would be required, and this is a process that would normally take at least six months. So far, the Australian Prudential Regulation Authority has been unwilling to comment on whether Australia Post has already applied for a licence.

Australia Post’s Andrew Wiseman stopped short of denying the future possibility and instead chose to state that there were no such current plans on the table. This can be translated into meaning that they have discussed it and there are plans to examine the feasibility of a move in the near future. A move by a postal company into banking would not be unique, with our close neighbours New Zealand already experiencing the move when Kiwibank was launched by New Zealand Post.

WILL IT WORK?

Ultimately, people are wondering whether Australia Post’s move into car insurance will be a successful one. Andrew Wiseman is quick to point out the success of Royal Mail’s move in Britain. It is estimated that one in every 50 cars and one in every 200 homes are now covered by ‘postie’ insurance.

In fact, many postal agencies across the world have made a successful expansion into insurance, with organisations from countries such as Singapore, Italy, France, Germany and Japan enjoying positive results. Andrew Wiseman notes that the success of the model overseas gives them real confidence.

They should also gain further confidence from the fact that they are partnering with A&G Insurance, who have become known for specialising in partnerships. Plus, when you factor in their extensive branch network, many people are crying that they may have an unfair advantage in the insurance market due their large distribution network.

The branch network is larger than the combined branch networks of the four major banks. It is also responsible for processing more than 90% of Australian passports and handles 117 million transactions each year worth around $83 billion. With their huge existing customer base, they have the power to be successful in any form of product distribution and will undoubtedly give the insurance market a real shake-up.

It is the opinion of many that moves into financial markets have been forced upon Australia Post, as their traditional line of business has been deteriorating due to the advance of technologies such as e-mail. Since they are entering an untried market, they are not making any predictions of success at this stage. But given that they have a great platform to launch from; Australia Post has surely made the right move into the car insurance market. It should also be good from a consumer point of view, as the increased competition should translate into cheaper and better car insurance.

Continued from Australia Post: The Stamp Nazi’s – Part 1

FALLING COSTS

What is interesting to note is that the stamp price differential between actual cost and the inflation adjusted expected price has remained constant during a period when Australia Post has undergone massive cost reductions in its business. New technology has greatly improved efficiency and replaced many of the previous mail sorting staff. Even though the mail network has grown, the technology has resulted in falling employee numbers in recent times.

Australian Post’s annual reports detail the drastic fall in full-time staff numbers. In 1996, there were around 32,000 full-time employees, while 12 years later the number had fallen to around 25,000. These figures are even more astounding when you consider the population boom Australia experienced over that same period.

Staff reductions are just one part of the cost reduction picture. The service quality is no longer at the same standard due to a number of internal policy changes. Mail was previously delivered twice each weekday, plus once on a Saturday, but that has now been reduced to just once per weekday, if we are lucky. A reduction in deliveries mean less staff and lower costs, but the price of stamps has still risen even with these cutbacks.

When you factor in that fuel costs and interest rates are also well down on last years figures, it is very hard to substantiate another rise in the cost of basic stamps so soon after last years increase. Quite simply, costs have fallen and there is no financial basis for another price increase.

UNHAPPY CUSTOMERS

This may not have been the most appropriate time for Australia Post to announce their price increase intentions. Still reeling from the all too familiar incident of a postman failing to deliver their mail, it may have been wiser to wait for that storm cloud to clear before demanding the public to part with even more money from their pockets.

Just days ago, a postman from Wahroonga was arrested after he was found with more than 5,000 undelivered letters stored in his house; some of them even having been opened. But more bad news awaits the mails intended recipients as police are now intending to hold them as evidence for 6-12 months.

Undelivered mail is just one of the service quality complaints commonly heard regarding Australia Post, with another major issue centring around the recent delays in mail delivery times. The problem stems from a new policy designed to ‘improve efficiency’, which is effectively just another term for cutting staff numbers. 

Local mail is now likely to be sent to large sorting centres, sometimes hundreds of km’s away. After sorting, the mail is sent to the destinations in order to be delivered. Local mail that was previously delivered the same day now has to be transported away, sorted, and sent back to the exact same place before it can be delivered. How this can be considered efficient is anyone’s guess.

WHY THE PRICE RISE?

If costs are falling and service levels are declining, then what can be the real reasons for Australia Post wanting to increase the price of stamps so soon? It seems to be a case of corporate greed when you look at the profits Australia Post is generating. We can only hope that it isn’t another case of a giant CEO pay package being granted.

Australia Post staff are scheduled to receive a 4% pay rise in September, which is well above the current national inflation rate. This is an extremely surprising move considering they are seeking additional revenue in the form of a stamp price increase. Surely it would have been smarter to increase the staff pay inline with inflation to prevent the ‘need’ for increased stamp prices.

In addition to the employee pay rise, Australia Post is also inline to fork out $500 bonuses for the staff if they achieve mail delivery targets. If all 25,000 employees were to receive the bonus, it would come at a cost of $12.5 million. Senior management will undoubtedly receive a far more generous bonus, stretching the total bonus payments further into the multitude of millions.

Australia Post has been generating large profits in recent years, with approximately 90% of its profit coming from selling products and services in competitive markets. This indicates that it would be prudent not to alienate their customer base and push them towards free technologies such as email. Similar to the petrol stations business model, where the bulk of the profits are made from selling junk inside the stores, Australia Post needs to keep the stamp price low to continue to attract customer to their stores.

RECORD PROFITS

It’s not like Australia Post are struggling financially. In fact, last year was actually a boom year for them, with the 2008 financial report detailing record profit levels. Their pre-tax profits increased 5.4% over the year to record their highest ever yearly profit of $592.2 million. Their managing director even admitted in the company’s annual report that the letter delivering business was doing very well, when he stated “Our improved financial returns are the result of strong revenue performances in each of the three core business areas”.

The company report also contains further incriminating evidence, showing that the proposed stamp price increases are definitely not necessary. Managing Director Graham John once again shoots Australia Post in the foot with statements such as “Our letters business continues to perform solidly in the face of widespread changes in communications technology and behaviour” and “We expect that the letters business will earn higher profits in 2008/09″.

Even a primary school child can work out that if they are expecting to make $136 million each year from the stamp price increases, they could instead reduce their profit by that same amount and still be making in excess of $466 million each year. The postage service is supposed to be provided to the Australian public by the government and should be operated at either no profit or a loss. Why should Australians have to pay to support the lifestyles of the corporate big-wigs?

Putting aside the corporate greed shown by Australia Post’s executives, the government should also take some of the blame. Australia Post should be a 100% government owned and operated institution, and should not be paying tax on their profits. Coincidentally, if the government were to waive around half of their tax liability, it would more than cover the expected revenue from the stamp price increases.

The reasoning given for the stamp price increases is not valid, the business sense behind the request is missing, and the need for the price rise is non-existent. Greed is the only clear and logical conclusion, and whilst Australia Post remains a monopoly we may just have to bite the bullet and pay the extra money. At least they have given us another excuse not to send Birthday and Christmas cards.

STAMPFLATION

Australia Post’s recent decision to apply to the ACCC for permission to raise the price of basic stamps has ruffled a few feathers throughout Australia. They are seeking a 5c increase mid next year, which will bring the stamp price to 60c. With the last price rise occurring less than a year ago, the public has been left wondering if another increase so soon is warranted.

The basic postage stamp isn’t the only postage charge inline for a price hike. Bulk mail is also on the hitlist, with Australia Post seeking a 2.6c rise for small letters and 5c for bulk letters. The postage cost rises also follow years of hefty price increases for owning a PO Box. The PO Box costs have risen well above inflation levels, which is surprising considering they represent a significant cost reduction for Australia Post in terms of delivery expenses.

The direct marketing sector will be one of the hardest hit by the price rises. Increases in postage costs will naturally be passed on to the customers, making alternative forms of marketing and advertising more attractive. Conversely, from a consumer point of view, postage hikes would be welcomed with open arms if it meant a reduction in the amount of junk mail they receive.

While a small price rise can easily be overlooked as it is considered an insignificant amount, it is important to view the cost from a long-term perspective. The price rise is expected to cost consumers and businesses an estimated $136 million each year, which all adds up in the long run, since the businesses costs are always passed back on to the consumers over time.

REASONING REFUTED

In an effort to calm the public storm, Australia Post’s group manager of letters, Allan Robinson, has spurted out a number of junk statements which on the surface, appear to give good reason for the stamp price increases. But careful examination of his arguments reveals that they have no relevance whatsoever.

Robinson’s first comment was to state that it is only the third price rise in 18 years. If the price is increased next year, Robinson’s statement will indeed be correct. But it is simply a matter of skewing the figures to suit his objective. He has conveniently started counting immediately after 1992 price rise and avoided mentioned the extreme stamp increases throughout the 80′s, where the price rose in 9 out of the 10 years in the decade.

The main factor that discounts Robinson’s horrible reasoning is that, at the end of the day, it is totally irrelevant how many prices rises there have been in previous years. Plus, if only three were needed in 18 years, then why are they asking for another rise just one year after the last one. By bringing up previous price rises, he is blatantly trying to divert attention away from the only real indicator, which is if it is required financially.

The urban sprawl and population growth copped some of the blame as well, with large population growth experienced in areas such as western Sydney, southeast Melbourne, southeast Queensland and parts of Western Australia. 2.5 million new delivery points are expected to be added over the next ten years.

While raising these points may succeed in pulling the wool over the eyes of many Australians, already there are quite a few people questioning his logic. Population rises and housing volume growth will require new employees and delivery centres to manage the increase in mail volume, but these costs will surely be balanced and potentially even outweighed by increased revenue.

By focussing the public’s attention on expense increases, Robinson has hoped that the revenue increases will be ignored. The habitants of the new delivery addresses are new customers who will be receiving new letters and no doubt posting letters as well. More letters posted means more income. Plus it flies in the face of simple economies of scale – the greater number of users, the lower the cost.

RISING FASTER THAN INFLATION

Using the All Groups quarterly figures of Analytical measure of Consumer Price Inflation from the Australian Bureau of Statistics, we can calculate the cost of basic stamps over time if they were to have increased directly inline with inflation.

After the introduction of the decimal currency system, the stamp prices increased dramatically, at one stage increasing to more than twice the price that would have been expected if it increased inline with inflation. Back in 1992, there was a 17c price differential on the charts and the proposed price increase next year will probably bring the gap back up to 16c, meaning that the inflation rate over the last 20 or so years has been minimal.

Continued at Australia Post: The Stamp Nazi’s – Part 2