Together with all the people at PostNL, we have proven the strength of our business model under difficult circumstances related to Covid-19. Developments around the pandemic are worrying and we continue to monitor closely compliance with all hygiene and safety measures within our operations and offices. Internal Audit department perfomed reviews in our operations regarding the compliance with the guidelines of National Institute for Public Health and Environment. The health and safety of our people, customers and consumers is and will remain our number one priority.
In this section we describe the main risks in detail for the short (0 - 1 year), medium (2 - 5 years) and long term (5 years and longer) and opportunities are referenced in other sections of this report. The key risks we face in executing our strategy and business processes are described in the following tables. The identified risks are related to our strategic objectives, which are described in the 'Our strategy' chapter and have been used as input for the stakeholder materiality matrix as described in the 'Our operating context' chapter. We start with the table on our strategic risks below, followed by the operational, regulatory and financial risks we identified.
For each risk, we determine the risk level based on impact and likelihood of occurrence, using a three-point system classifying risks as low, medium and high (1-3). In addition, we have indicated the risk trend for each risk as increasing, decreasing or stable, which indicates our expectation of the risk to change in the future. Management reviewed the risk profile regularly throughout 2020 and will continue to do so during 2021.
Risk mitigation as described below is meant to provide a high-level overview of potential and initiated action items in response to the risks identified and is not to be interpreted as a comprehensive list of risk responses within PostNL. The risks related to unforeseeable events are very difficult to quantify, and while we organise comprehensive risk mitigation techniques, we are not always able to anticipate the consequences these types of events may have, if any, on our financial performance and position.
Risk level (1-3)
Link to key material topics
Pressure on market share, volumes and prices impacting revenues and profitability
Financial performance and position
Acceleration of decline in physical mail impacting revenues and profitability
Relevance of physical mail
Implementation of strategic change projects
Delay in digital transformation and the capital markets day objectives due to challenges with executing a broad range of large change projects at the same time. This may impact the ability to meet our medium-term targets in relation to operational efficiency and customer experience
Climate change and air pollution
Failure to achieve our long-term carbon emission reduction targets can have adverse impact on our licence to operate and financial performance
Description: Competition continues to put pressure on our market share, volumes and prices, which could have an adverse effect on revenues and profitability. We are faced with increasing competition particularly in our traditional parcels and international businesses as markets become more dynamic and volatile. We continue to experience competition from both established logistics players and new entrants, attracted by growth in the e-commerce market. In this area we see that new functionality, driven by the speed of IT developments, is increasing. Next to this we see the impact of the platform businesses, which has an effect on the concentration of volumes, thereby increasing purchasing power for these platforms. In addition, customer satisfaction is increasingly a decisive factor for maintaining competitive advantage. Our largest competitors have expanded their network capacity and were able to capture some of the volume growth resulting from the Covid-19 outbreak, while our initiatives to increase capacity were in progress. It remains uncertain how the volumes will develop in 2021 in case the lockdown measures will be lifted. We expect that some of the volume will return to the retail sector. In our international business we saw strong revenue growth at Spring, boosted by accelerating e-commerce-related revenue both in Asia and Europe.
Mitigation activities and opportunities: In the markets where we decide to protect our position, we are focusing on margin management by increasing efficiency and leveraging on economies of scale among other initiatives to increase the profitability per parcel. Multiple commercial initiatives are in place, such as differentiating service levels, (new) products and adequate pricing, as well as initiatives aimed at improving our customer satisfaction and quality, including investments in our network coverage and projects related to operational excellence. Our customer & quality management department continuously monitors our customer satisfaction metrics and oversees related improvement initiatives. Further information regarding competition can be found in the 'Our operating context’ chapter.
Description: The ongoing digitalisation trend amongst consumers to move to online alternatives is leading to a decline in physical mail. As a result, the volume of mail is decreasing and there is a risk that this decrease will accelerate faster than anticipated. Since the outbreak of Covid-19 in the first half of 2020 we experienced an accelerated rapid decline in mail volumes, which stabilised in the second half of this year and we do not expect further acceleration of substitution. Both during the first weeks of the pandemic and the second lockdown at the end of the year, people sent significanltly more greeting cards and gifts using letterbox parcels. This helped Mail in the Netherlands realise an exceptional performance. Overall decreasing mail volume requires us to adapt our infrastructure and delivery processes. Substitution or alternatives to our delivery services may reduce revenues and profitability. A relatively higher share of higher-margin single mail and parcel items could have an impact on the level and phasing of regulated stamp price increases in the future. A decline in the addressed mail volume mix of one percent results, on average, in a decrease of approximately €7 million in normalised EBIT.
Mitigation activities and opportunities: We continuously and consistently take commercial initiatives to slow down or adapt to substitution, leading to the introduction of a range of new services and solutions and the abolishment of existing services and solutions. Furthermore, we develop operational processes to be able to adapt more flexibly to future volume declines. In the first quarter of 2020 we completed the integration of the postal networks of PostNL and Sandd ahead of plan in delivering anticipated benefits and synergies. At the same time, international mail volumes declined further during the pandemic. More information can be found in the 'Customer value' chapter.
Description: We are implementing a strategic change programme consisting of multiple projects and company-wide initiatives to adapt to the speed of the digital transformation and to further balance between volume growth, profitability and cash conversion. There is a risk in case we are not able to achieve the accelerated digital transformation. This requires an organisational agility and stakeholder management, as well as project management expertise. Executing the broad range of projects and operational activities at the same time may cause delays and/or suboptimal solutions. Digital transformation initiatives also aim to enhance operational efficiency and to realise cost savings, and therefore may have an adverse material effect on our medium-term targets. The strategic change projects inherently increase the risk that internal controls are ineffective for a short period.
In the long term PostNL may not be able to keep up with the pace of technological development in the logistics and transportation industry and may find it difficult to compete in its core markets with e-commerce, tech giants or new start-ups using new disruptive technologies.
Operational integration of Sandd, as well as the COVID-19 pandemic, required extraordinary commitment and effort from our employees, and has put considerable pressure on our change and operating capacity which resulted in delays in other change and cost-saving initiatives during 2020. The delay due to the Sandd integration was in line with the post merger integration plan and the related business case assumptions.
Mitigation activities and opportunities: The balance between volume growth, profitability and cash conversion has improved due to Covid-19. This improved financial position has allowed us to accelerate the digitalisation of our company in several key areas as part of the transformation of PostNL. With this acceleration, we aim to strengthen our competitive position and contribute to customer satisfaction, reducing our cost base and attracting new customers. Divestment of Nexive, Spotta, Adeptiv and Cendris as well as completion of Sandd integration further contributed to the realisation of our strategic change programme allowing us to focus even more on our core postal and logistics services in the Benelux.
Description: As a logistics and postal service provider we produce GHG emissions from our national and international operations. In addition, we produce nitrogen oxides (NOx) and particulate matter (PM) emissions that negatively impact air quality. We are committed to understanding and reducing the impact of our organization on climate change, and related economic and social effects. This commitment is supported by our objectives to realise emission-free last-mile delivery in 25 city centres in the Netherlands by 2025, and across the Benelux by 2030. Achieving these objectives will involve multiple complex changes in our business operations and reporting processes. Not being able to achieve these objectives may have an adverse material impact on our reputation and our financial performance.
In the long term PostNL may not be able to adapt its business and operational model and make it commercially viable in time to meet the increasing sustainability requirements and expectations of the society and other stakeholders and as a result may lose its license to operate.
Mitigation activities and opportunities: We continue to execute our action plan to achieve our emission reduction towards 2030. These actions are directly linked to the four pillars in our environmental strategy: Network efficiency, Green kilometres, Sustainable buildings and Green products and services. We are increasing our emission-free kilometres, for example by phasing in electric vehicles which will be used from parcel sorting centres, and various light electric commercial vehicles are being tested in several cities. The availability of electric vehicles remains a challenge. Furthermore, we have established a Green Bond Committee to monitor the investment and implementation of projects to reduce CO2. We monitor, report, and evaluate the results of our strategy execution against short- and long-term targets in our planning and control cycle and review our long-term roadmap annually.
Climate adaptation risks: In 2020 we have performed a climate risk assessment workshop where we explicitly addressed the risks in relation to climate adaptation, where we have looked at the risks for PostNL and the broader supply chain, including our suppliers and customers. Regarding our own operations, we have addressed climate adaptation risks in our business continuity management process. In relation to the value chain risks, the risk assessment workshop showed that it is difficult for us to properly identify relevant risks in the value chain without engaging in close dialogue and cooperation with our suppliers and customers. Due to Covid-19, we postponed our stakeholder dialogue event to a moment when we can meet again physically.
Climate change may lead to acute physical risks that we are monitoring closely, such as extreme weather, heatwaves or floods. Such risks are addressed through specific measures as part of our regular business continuity process. For instance, during periods of extreme heat we have taken steps to improve ventilation, improve availability of fresh water, introduced longer pauses and adjusted working times. If we do prepare for these events, this may lead to action being taken by our employees or issues in our sorting centres and transport that disrupt the continuity of our services. This leads to cost increases, a negative impact on customer satisfaction and, ultimately, loss of revenues.
Risk level (1-3)
Link to key material topics
Ineffective IT management systems leading to issues in e.g. availability, integrity, confidentiality may impair the quality of our business processes, cost effectiveness and/or reputation
Digitalisation and data
Execution of cost saving initiatives
Unsuccessful or delayed cost saving initiatives, impairing cost savings and employee engagement
Relevance of physical mail
Network peak capacity
Operational failures, disruptions in logistic processes and capacity constraints due to the substantial increased volumes in our parcel business Impairing business continuity, customer satisfaction and employee engagement
Employee attraction, development and retention
Lack of motivated employees due to a tight labour market and/or not being an attractive employer.
Description: Information technology (IT) is vitally important to our business and we are increasingly dependent on it. Threats to the availability, confidentiality or integrity of our IT networks, systems or (customer) data caused by IT disturbances, cyberattacks or lack of appropriate security and infrastructure measures may damage our ability to provide timely delivery, or result in loss or theft of customer data, higher costs, penalties and damage to our reputation. Cyber attacks and online fraud attempts have become more attractive for criminals in recent years and the likelihood of this risk materialising is increasing.
In the long-term cybersecurity risks are expected to remain relevant and become increasingly important for PostNL. This relates to both internal (e.g. a super user within IT-department abuses authorities and sabotages/destroys relevant files) and external risks (e.g. a hacker gets access to critical business application through phishing or social engineering and is able to steal or destroy confidential business data, make servers and services unavailable including DDOS attacks, ransomware infection, etc.).
Mitigation activities and opportunities: Cyber security is an essential element in our IT strategy, which is centrally governed and managed by a central Cyber Security Office with decentral cyber security coordinators. Combined with ‘Security by Design’ principle this helps us ensure appropriate attention to cyber risks in all stages of the IT development process including amongst others architecture and design documents, testing and implementation plans, and awareness programmes. Given our full (public) cloud strategy, management of our cloud suppliers is one of our most important processes and subject to a strict control framework (so-called CRA methodology). We have also established a Data governance board to monitor management of data including privacy aspects and data related to customers. Furthermore, all critical applications are frequently measured and tested against our resilience criteria and actions are taken to keep the application up to date and at the required levels. We continue to phase out all the legacy systems which contributes to the improvement of the overall IT infrastructure stability.
Description: Cost saving initiatives, including streamlining our workforce, introducing greater efficiencies across our infrastructure, and reducing costs at our head office, may be delayed or not achieve the results intended. Additionally, they could cause labour unrest. This could result in the deterioration of our employee engagement.
Furthermore, this could have an adverse impact on the quality of services we provide. For example, it could lead to a drop in the delivery quality of our mail business. Other adverse results could be an impact on our reputation and financial performance. To be able to execute the Sandd integration plan according to schedule and process the additional volumes, we have delayed several cost reduction initiatives which were initially scheduled for the first half of 2020. This is in accordance with the integration business case.
Mitigation activities and opportunities: Cost savings projects are executed via enhanced programmes and are monitored continuously by a programme office. Mechanisms to adjust to changing circumstances have been implemented and are reviewed periodically. Execution via pilots and in close collaboration with the Works Council enables smooth implementation on a larger scale.
In 2020 several important changes were successfully implemented that help us realise our cost-saving initiatives, such as adjustments to the sorting and delivery process, streamlining of staff and centralising of locations. The project has a considerable impact on our customers, operations and our employees. Additional information on these initiatives can be found in the 'Customer value' chapter.
Description: The growth of e-commerce during the Covid-19 pandemic means we are facing the risk of operational failures, disruptions in logistic processes and capacity constraints due to the substantial increased volumes in our Parcels business. This is particularly acute during the peak periods when our networks operate at full capacity. In case of such major business disruption, we may not be able to fall back on our regular business continuity measures. Structurally, operating at full capacity may also lead to negative effects on our employees, such as employee motivation, commitment and eventually absenteeism. The volume growth in our Parcels business during the pandemic resulted in greater pressure being placed on our network and people, especially during the period building up to Sinterklaas and Christmas. Recent developments related to the new strain of the Covid-19 virus in the United Kingdom have led to extra measures and the introduction of a curfew, which may limit the delivery times and will put additional pressure on our network capacity.
In addition, we foresee that while the e-commerce market will continue to grow in the coming years, the infrastructure capacity may not be able to keep up at the same pace. Given the current business models of logistic service providers, this may result in more traffic congestion, which imposes a risk on our ability to deliver a growing number of parcels on time. This may have a material effect on our business as customers increasingly look for fast delivery options.
Mitigation activities and opportunities: We continuously look for initiatives that increase our operational efficiency in our sorting centres to increase the capacity of our networks. To manage significant volume growth in our Parcels business as a result of Covid-19, we continue to invest in new sorting centres and vehicles. In 2021 we will open three new sorting centers, which will considerably increase our network capacity. We also continue to invest in recruitment, development, and retention of our personnel. Over the long term, we are investigating the future logistical model for Parcels. In addition, we have worked together with industry organisations, other carriers and e-tailers to create a media campaign advising customers to prepare in time for the busy end-of-year period, and for consumers to order on time in order to achieve the optimum load of volume capacity in our network. We have updated and revised our business continuity approach for a pandemic response related to our operational processes.
Operational efficiency in road transport is an ongoing focus area. This includes, for example, optimisation of packaging and route planning to increase the occupancy rate of our road transport. During the pandemic, we implemented the Sales & Operations programme to align and optimise client demand (key client rolling forecasting) and operations planning (capacity). This programme facilitates predicting upcoming peaks (and troughs) to avoid last-minute unpleasant customer surprises.
Description: People are at the heart of the services we provide to our customers. We face the risk of not being able to attract, develop and retain qualified personnel. This risk concerns people in our operations, specialists, and management. One consequence of Covid-19 was the shift in the labour market, with some impacted by the lockdowns looking for new employment opportunities, and the general attractiveness of PostNL as an employer. However, due to the pandemic outbreak we may face an increase in health-related workplace absenteeism among employees.
Mitigation activities and opportunities: We make use of innovative online recruitment techniques and are continuously improving the employee experience. We have supported the safety and well-being of people more effectively in challenging times. In addition, we continue to invest in training, health and safety measures, development and employee retention. For example, we have added various new development programmes and learning tools and invest more in PostNL employer branding in addition to recruiting for individual jobs.
In 2020 the temporary shutdown of businesses across the hospitality sector and parts of the retail sector because of the Covid-19 crisis led to a buoyant labour market. This meant that it was easier for us to fill vacancies across the company. We can not anticipate to what medium- or long-term impact this may have on our staffing situation. Our commitment remains on retaining people who are well trained, passionate, and who want to make a difference for our customers, by offering training, mentoring and development opportunities.
Scarcity in the labour market related to high profile IT and Finance functions remains challenging. To increase PostNL’s attractiveness as an employer, we are investing in branding as well as training and development of our staff. In addition, we make use of innovative online recruitment techniques and are continually improving the employee experience.
Risk level (1-3)
Link to key material topics
Non-compliance with current or inadequate adaptation with future laws and regulation adversely impacting business operations, our reputation and on our financial performance
Relevance of physical mail
Description: We are confronted with complex legal and regulatory requirements in the countries in which we operate. These include, but are not limited to, tariff regulation, competition law, regulation related to dangerous and prohibited goods, customs regulations, labour regulation, data protection, environmental and privacy requirements. Changes in legal and regulatory requirements, and the interpretation thereof, had and may continue to have, an adverse material impact on our business operations, our reputation and on our financial performance. As of 31 December 2020, the United Kingdom is no longer part of the internal market of the EU, this results in the imposition of customs declarations, verifications, tariffs, and may also impact our logistical operations consequently leading to higher costs. We expect that Brexit may cause disruptions in the supply chain at the beginning of 2021 and we are impacted by uncertainty related to the long-term effects on our cross-border e-commerce business between the EU and the UK. Abolition of the VAT exemption ruling is also expected to have an impact on our costs but may also lead to new business opportunities.
In the Netherlands, a specific regulatory circumstance is that PostNL is appointed as the designated operator to provide services under the universal service obligation (USO). This is the basic postal service, which ensures that nationwide postal services remain accessible, affordable and reliable for all. Possible changes in the postal legislation, or adverse decisions of the Ministry of Economic Affairs or the ACM in relation to the USO, including tariff regulation could have an adverse impact on our ability to adapt to market developments and changes in customer demand in a timely and effective way and may impact our financial performance. We expect a delay in the implementation of the new postal legislation, which is currently in development. The uncertainty and potentially negative financial consequences of the new postal legislation remains a risk. Ruling on Sandd take-over and Article 47 may lead to additional costs related to appealing against the court decision.
Mitigation activities and opportunities: We implement appropriate policies, processes and internal control procedures, which limit exposure to complex legal and regulatory requirements, such as competition law and anti-bribery acts, and operate a robust integrity programme that includes business principles. We have a continual dialogue with governmental and non-governmental stakeholders about complying with regulation. We are constantly adapting our operations to changes in the legal and regulatory requirements. In addition, we continue dialogue with governmental and non-governmental stakeholders about the development of USO regulations at both EU and national levels.
Risk level (1-3)
Link to key material topics
Total cost of labour
Higher than anticipated total cost of labour and opportunity costs due to operational disruptions
Financial performance and position
Funding ratio pension fund
Economic climate and demographic variables may negatively impact the funding ratio, pension provisions or additional funding obligations
Financial performance and position
Financial risk management
Adverse effects of financial risks on financial position and results
Financial performance and position
Liability for loss or damage
Exposure to claims for loss or damage adversely impacting our financial performance
Financial performance and position
Description: Being a good employer is vitally important to us. One aspect of this is the terms and conditions under which we hire our personnel and employ outsourced labour. These terms and conditions, including salaries and other secondary benefits, represent a substantial expense for our company and is an important component of our operating model. Our financial performance could be affected by higher than anticipated total cost of labour and/or other related losses. In addition, opportunity costs due to operational disruptions as a result of action from trade unions and/or actions triggered by media attention. This could further undermine our financial performance.
Mitigation activities and opportunities: We maintain good relations with trade unions and social partners based on mutual recognition of shared interests. In addition, we are evaluating the sustainability and financial feasibility of our labour model and are researching alternative solutions to make it future-proof.
We started negotations for a renewal of the Social Plan , which ended 31 December 2020. In March 2020 PostNL and the trade unions Bond van Post Personeel (BVPP) and CNV Publieke Diensten have reached a final agreement on a new collective labour agreement for mail deliverers. The new collective labour agreement will apply retroactively from 1 October 2019 to 30 September 2021. In December, we agreed a new PostNL collective labour agreement (CLA) and a CLA for Saturday deliverers with the BVPP, CNV and FNV trade unions. The final agreements include a structural salary increase of a total of 5.5% over two years, a performance-related bonus of 1% given the exceptional results of 2020, which is on top of the 2% performance-related bonus for 2020, and a non-recurring payment of 0.5% in December 2020. This is on top of the previously announced extra net payment of €250 in appreciation for working during the Covid-19 crisis.
Description: Actuarial assumptions, such as discount rates and demographic variables, have an impact on the valuation of employee benefit plans. A decrease in equity returns or interest rates and the uncertainty of implementation of legislation in the new pension agreement with possible consequences for the transition to a new pension system may negatively affect the funding ratios of our pension fund, which may lead to an increase in the pension provision, or in multi-year additional funding obligations.
Our pensions retain an element of vulnerability. A materially bad economic climate, combining lower interest rates, declining pension fund assets and material increases in life expectancy, could still negatively impact cash and equity. In 2020, the 12-months average funding ratio decreased from 110.6% per year end 2019 to 104.4% per year end 2020. This may lead to a new recovery plan aimed at compensating further deterioration of the funding ratio. The actual year end 2020 funding ratio was 111.1%. In addition, the intended comprehensive change in pension legislation may lead to financial transition effects.
Mitigation activities and opportunities: We hold open and regular discussions with the pension fund trustee board, which is independent of PostNL. We have reduced the volatility risk of our pension provision in recent years by revising our finance agreement with the pension fund. Considering the resilience of the fund, analysis shows sufficient headroom before our financial position is materially impacted by pensions.
Description: We are exposed to a variety of financial risks, such as currency risk, interest rate fluctuations, credit risk, liquidity risk, price risk and cash flow risk. These risks can have an adverse effect on our financial position and results. This also impacts the valuation of the pension provision.
Mitigation activities and opportunities: Such risks arise in the normal course of business and we use various techniques and financial derivatives to mitigate them. For example, we hedge both currency and interest rate risks in accordance with the relevant Group policies. In November we completed the sale-and-leaseback agreement of five sorting centres in the Netherlands. The proceeds of these agreements have improved the free cash flow for 2020. The improved financial position allows us to accelerate the digitalisation of our key activities. We have reconfirmed the intention to resume dividend over full-year 2020, based on this transaction and the strong business performance in 2020. This lowered our interest expenses and improved our ratios. In June we signed an agreement with the Pension Fund to determine details and conditions of the final payment for transitional plans. For more information, see note 4.4 to the consolidated financial statements.
Description: We are exposed to claims for loss or damage. Some of these exposures are covered under conventions such as the United Postal Union, the Warsaw Convention or the Convention on the Contract for the international Carriage of Goods by Road, as well as PostNL’s general terms and conditions. Claims for loss or damage not covered under these conventions or PostNL’s general terms and conditions may negatively affect our financial performance. Our exposure to this risk is increasing as a result of the growing volume of e-commerce parcel deliveries in our portfolio, which on average are higher in value.
Mitigation activities and opportunities: We maintain insurance policies in relation to our business and assets with reputable underwriters and/or insurance companies against claims for loss or damage to the extent not covered by conventions, and to the extent that is usual for companies like ours.