External developments
The domestic and international e-commerce and communication markets in which we operate are dynamic, as we again saw in 2023, with external developments creating an unsettled operating environment. Macroeconomic pressures are impacting customers and consumers, who had to contend with more expensive goods and services in 2023, while the tight labour market is making it difficult for companies across a range of sectors, including ours, to fill vacancies. At the same time, customer and consumer expectations are increasing, as IT innovations, including AI-driven solutions and robotics, make it easier for consumers to order and customers to send. In this section, we explain in greater detail how these external developments influenced PostNL in 2023.
Geopolitical and economic developments
As well as causing awful human suffering, the ongoing impact of Russia's invasion of Ukraine and the outbreak of hostilities in the Middle East in October had a knock on effect across the world. These conflicts, coupled with rising interest rates, high inflation leading to more costly goods and services and rising wages resulted in severe global macroeconomic pressure. And while consumer confidence rose in 2023 compared to 2022, it remained negative during the year.
While parcel volumes returned to growth earlier than expected in the first half of the year, macroeconomic pressures continued to weigh heavily. Market conditions remained volatile in the fourth quarter, and while parcel volumes were up, we delivered fewer parcels than expected. Meanwhile, we had locked-in costs to be able to operate at maximum capacity. At Mail in the Netherlands, mail volumes further declined and we see that an increasing number of customers are transferring from 24-hour mail to non-24-hour mail.
At the same time, rising inflation led to cost increases in areas such as salary expenses, which we were not fully able to absorb through regular price increases. These issues also affected our customers, partners and suppliers. Rising energy and other costs made the transportation of goods more expensive, while ongoing global supply chain issues led to delays in the availability of products. While PostNL took adaptive measures to mitigate these pressures this impacted our profitability.
Details of steps we took to mitigate these issues can be found in the 'Risk and opportunity management' chapter.
Growth in e-commerce
The complex economic circumstances described above, including high inflation and reduced consumer confidence, meant e-commerce growth domestically in 2023 was below expectations. These economic pressures also impacted our customers, who experienced lower growth, higher costs, and less room to invest during the year. We continue to see long-term growth potential in e-commerce, driven by online penetration, shifting market share from offline. However, macroeconomic developments continue to be a volatile and uncertain factor. At CBS, we see volumes from international customers increasing, partially driven by consumers purchasing cheaper parcels from China. Across our Spring operations, we expect the strengthening of current business to fuel growth in Europe in the coming years, while we will continue to expand and diversify our customer base in Asia.
We believe our comprehensive networks, proximity to the consumer, and coverage across the Benelux enable developing sectors to grow online. In response to the growing e-commerce ecosystem, we continuously invest in our networks while increasing the flexibility of our operations. Detailed insights into what we are doing to help customers grow their e-commerce business can be found in the 'Customer value' chapter.
Labour market
The labour market in the Netherlands remained tight in 2023, illustrated by low unemployment rates and a high number of open vacancies. The tight labour market is caused by a number of factors, including an ageing population, greater segmentation in the labour market, and a higher percentage of the population that works part-time. This made it difficult for PostNL to recruit in some regions, with Mail in the Netherlands particularly badly affected. With more jobs available than workers, the tight labour market makes it easier for deliverers to exchange jobs for new positions, within and outside the sector. Alongside the tight labour market, PostNL also faced higher labour costs in 2023, following significant increases in the statutory minimum wage in the Netherlands. The labour shortage also led to delivery delays across a number of postal routes, impacting delivery quality levels. Details on how we responded to these developments can be found in the 'Social value' chapter.
Ongoing digital transformation
Rapid developments in technology impact the way businesses operate. Trends that will influence our sector include the use of data, which will help e-commerce companies manage demand peaks, provide insights into supply and demand forecasts, and help with route optimisation. This will lead to benefits for customers and consumers. At the same time, the growth in the use of data requires a greater focus on cybersecurity systems to prevent the increased risk of data breaches. This involves properly managing cybersecurity risks across the company, including implementing fundamental security measures, such as multi-factor authentication and encryption, and being prepared in case it happens.
Digitalisation will also lead to smoother ordering, automatic fulfilment services, and better payment and delivery processes, creating a more efficient value chain. Yet alongside opportunities, digitalisation is also driving digital alternatives for mail, such as electronic invoicing, social media, and other digital marketing services, which continue to contribute to declining mail volumes.
The digitalisation shift requires e-commerce service providers to operate faster and more efficiently to rapidly process all individual orders. With parts of logistic processes still being operated manually, there is greater potential for the use of automation and digitalisation. As the technology becomes faster, more accurate and more affordable, automation will play an even greater role in our industry in the years to come. More information on our digital vision can be found here,while examples of our digital transformation can be found in the 'Customer value' chapter.
Consumer in control
The voice of the consumer has never been more important than today, and we help e-tailers and consumers connect. Consumers increasingly expect digital alternatives to traditional services, and want greater control over their shipments. Examples include the purchase of (digital) stamps, re-routing of parcels and preparation of returns. In 2023, we also continued to see the rise of multi-vendorship models, where consumers purchasing online are able to select the logistics company that delivers their order.
Consumers also want to be notified about the shipment of their parcels conveniently and reliably, and this increasingly takes place through the PostNL app, which saw around a 14% increase in the number of downloads in 2023. For PostNL, this means we need to focus continually on enhancing the consumer experience and consumer journey, ensuring that we remove disruptions. More information on how we help the consumer to remain in control can be found in the 'Customer value' chapter.
Sustainable logistics
Sustainable logistics is seen as an increasingly important way to reduce the environmental impact of global supply chains, and the sector is rolling out a range of innovative solutions to reduce its carbon footprint, such as the use of electric vehicles and switching to biofuels. At the same time, customers are looking for help to develop sustainable packaging, for example through the use of eco-friendly materials and multi-use packaging.
At PostNL, we are proud of our focus on operating a company with sustainability at its core, making progress on a range of environmental, social and governance topics driven by our own convictions and a changing regulatory landscape. This includes the growing concern about climate change, increased attention for human rights, the focus on regulatory compliance and operating in accordance with social laws, greater attention on diversity and inclusion, being more transparent about how we conduct business responsibly, and employing people with a distance to the labour market. For example, while new European sustainability regulations require both attention and investments from PostNL, they can also be viewed as opportunities to increase our sustainable value and provide customers and consumers with more sustainable products and services.
Sustainability is about being a responsible business. It is also a driver for operational changes, for example by transitioning towards emission-free last-mile delivery, and enhancing our employment models, which includes safeguarding sustainable labour practices along our value chain. More information can be found in the 'Environmental value' chapter and 'Social value' chapter.
Competitive landscape
Parcels
Competition among logistics companies is fierce as large e-tailers spread their volumes through dual or multi-vendorship models, impacting the market share of operators in the sector. Logistics companies have invested in new parcel processing centres and out-of-home networks, such as lockers, while appealing to the sustainability demands of customers and consumers by shifting to low-emission delivery, all of which increases market competition. At the same time, the development of e-commerce has made the market interesting for both existing and new e-tailers.
While our competitors and clients face the same market and cost pressures as we do, we believe our customer focus, partly due to our efficient network and our strategy, including our digital transformation, enables us to create distinctive customer experiences. Going forward, and taking into account some potential loss in market share, we aim to maintain our market-leading position in the Netherlands in the B2C segment by enhancing the customer and consumer experience through digital innovations, our sustainability profile, competitive pricing, investing in and expanding our network, and focusing on further improving quality and customer satisfaction.
Internationally, the e-commerce arena is becoming more competitive. Traditional players are seeking to strengthen their position, while other players, for example those focusing on value-chain orchestration, end-to-end logistics or digital support, are growing. Large e-commerce and/or platform businesses are also expanding their geographical coverage and role in the logistics value chain, selecting the best logistic partnerships or, if needed, setting up their own logistics networks. For PostNL, our flexible and customer-focused approach enables us to respond quickly to, and profit from, market dynamics when expanding our logistical network. In Asia, for example, our cross-border activities have continued to grow as we process greater volumes from international customers.
Mail in the Netherlands
We provide a vital communications function through our postal services. While substitution by digital communication has led to a continuous decline of mail items sent in recent years, we are convinced about the long-term value of postal products for both customers and consumers (see the 'Changes needed for a sustainable mail business' box later in this chapter). For many, physical mail provides a valuable connection between friends and loved ones, especially when they receive greeting cards, personal letters, or presents. While for those who do not have easy access to the internet or digital technology, physical mail is an essential means of communication.
Many institutions, such as government agencies, law firms, and financial institutions, rely on physical mail to send contracts, bank cards, and other important items for security and privacy of sensitive information. Physical mail also has a strong social impact in other areas. For example, we work with a number of social organisations that help us provide employment for people with a distance from the labour market, including as mail deliverers. In 2023, 3,275 people with a distance from the labour market worked with or for us, and of those over 1,400 worked directly for us. In 2024, we aim to have 7.5% of all delivery hours in the Netherlands carried out by people with a distance from the labour market. At the end of 2023, this was approximately 7%.
In the Dutch postal market we see two types of competitors. A few postal operators have built a position in niche segments by combining mail volumes into large consignments and handing these to PostNL. Additionally, we see a large number of small, locally active postal operators connected to social enterprises offering postal services in their local areas, and we work together by outsourcing the delivery of our mail to them. Mail destined for outside these areas is primarily handed to PostNL.
Changes needed for a sustainable mail business
We are proud of our postal services in the Netherlands
Throughout our 225 year history, our postal network has provided a critical service to society by connecting senders and receivers, whether individuals or businesses. From a personal letter, voting card or a marketing item, society counts on PostNL to deliver. We are proud of our heritage as the postal service provider and the way we have balanced accessible, reliable and affordable services with financial stability through numerous transitions. As the designated universal service provider (USP), we are required to meet a variety of criteria defined in the Postal law, such as mandatory mail delivery of at least five days a week and delivering 95% of consumer mail within 24 hours.
How structural external factors are impacting a sustainable mail business
Over the last decade we have faced mail volume decline of around 8-10% annually, fuelled by the ongoing rise of digital communication. And while at the beginning of the century we delivered on average three letters a day to each household, today this is less than four letters a week. We also see our customers' needs and expectations changing. Today, far fewer customers require and expect the 24-hour delivery window that was once the industry standard. This situation is not unique to the Netherlands, and various countries across Western Europe have made clear changes to their regulatory service levels, replacing 24-hour delivery targets for consumer mail with 48-hour or even 72-hour delivery targets. Our current network and the costs associated with it are no longer in proportion to the current and expected 24-hour volume. These trends have led to a sharp autonomous increase in the cost per mail item, which is further raised by the ongoing growth in organic costs in both labour and other operations-related expenditures. This puts pressure on our financial position, as can be evidenced in our 2023 results. At the same time, structural shortages in the labour market mean we are trying to fill over 1,000 mail delivery vacancies that have a direct influence on, for example, quality.
Our response
PostNL has always successfully taken on the challenge of adapting to changing external circumstances. For more than 10 years we have deployed a wide range of measures to improve efficiency, cut costs, and keep our mail business financially healthy. Examples include centralising sorting locations, implementing new sorting machines capable of highly automated mail processing, using digitalisation in our processes, and introducing efficiencies to our delivery routes. We have also optimised our pricing to stay profitable while taking into account price elasticities. And in 2019 we acquired Sandd, which led to an increase in our volume base, although substitution means volumes have continued to shrink since then. However, 24-hour volume has declined significantly, while we are still obliged to deliver within 24 hours and five days a week. While we have done everything possible, we foresee this strategy of cost savings and price optimisation no longer being sufficient to provide the sound financial base we need to invest in our people, our network, and the future of postal services for our customers.
Change is required
If we want to keep mail reliable, accessible and affordable for everyone in the Netherlands, we need to look at changes to the current service framework, and both the universal service obligation (USO) and the entire mail business need to evolve with this. Without these changes the USO, as of today, and over time the entire mail organisation, will be structurally loss-making, which is unsustainable. PostNL is committed to sustaining an accessible and dependable postal network for all residents in the Netherlands, irrespective of their location. A change in regulation is necessary which will allow us to adapt our operations while continuing to fulfil our mandate as the national postal service provider, and engagement with the necessary stakeholders has started.
Regulatory themes
Markets are developing rapidly, as a world driven by innovation, digitalisation and greater connection leads to a wide variety of business opportunities, such as through increased collaboration along the supply chain. Yet with these opportunities come risks.
Two of the most pertinent compliance-related risks that we have identified are supply chain accountability and legal & regulatory developments. For supply chain accountability, working with third-party suppliers to deliver products and services to our customers comes with corresponding risks. Our company could potentially face accountability for regulatory non-compliance by our suppliers, including in some cases their failure to comply with labour laws, environmental standards, transport safety regulations, or ethical guidelines. This could result in legal disputes, fines, and damage to our reputation, potentially undermining the stability and trust in our company.
For legal & regulatory developments, we are witnessing an increase in both the number and complexity of regulatory requirements in the markets in which we operate, covering a broad range of topics including postal services, labour, transport, competition, international trading, data protection and privacy, and environmental management. Steps we are taking to mitigate these risks can be found in the 'Risk and opportunity management' chapter.
Our approach is to proactively engage with governments and other regulators on a regular basis to better understand the impact of upcoming regulatory changes. This helps us prepare effectively so that we can comply fully and in time. We are also in ongoing dialogue with regulators on existing rules and regulation in order to continuously improve on our compliance in an ever-changing operational context. PostNL's position on why we believe regulatory changes are needed to operate a sustainable mail business can be found in the separate box earlier in this chapter, and in the 'Financial value' chapter.
Compliance is vital to successfully doing business, safeguarding sound business conduct, protecting the rights and well-being of people, and operating commercially within predefined boundaries. The chapter 'Ethics and compliance' provides a detailed overview of our approach towards compliance and the chapter 'Regulatory Developments' provides the most relevant developments in different laws and regulations.