When was the last time you mailed something? I mean, really mailed it? Stamp, envelope, dropping it off in a red box? Alternative forms of communication have clearly replaced traditional letter mail and Canada Post is suffering as a result. Badly. If you take a moment to think about the business model of Canada Post, you realize that a large portion of their costs must be the delivery process which is primarily done by individuals walking through neighbourhoods, hand delivering … flyers, packages from Amazon, and the odd letter from Grandma. We used to complain about our mail boxes being full of bills but even those are being delivered electronically now. The graph below summarizes the basic problem with Canada Post’s business model – shrinkage:
But even that doesn’t tell the whole story. The other side of the problem is the increasing number of houses/addresses that require some delivery:
So we’ve got a business with a delivery system that needs to expand, but shrinking revenues. No surprise then that Canada Post is losing money,
But wait. Maybe its not losing money. Fo the year ended December 31, 2012 they had net income of $94 million, that looks pretty good. Yes, except that net income is inflated by $152 million due to a one-time, non-cash pension correction. If you look at the second line under “Cost of operations” you will notice that the employee benefits are about $130 million less than the prior year. Essentially Canada Post squeezed the union in their latest round of of negotiations and was able to reduce some of the pension and benefits. That reduction shows up as a one-time gain in 2012. I’ll admit that Canada Post is very upfront about that adjustment in their annual report. I would argue that they are more transparent about their true loss than most for-profit businesses that I have seen.
The most latest quarterly report (June 2013) isn’t any more favourable, showing losses for the first two quarters of 2013:
There is one more view of this that I want to point out – the Statement of Cash Flows. Remember that the statement of cash flows summarizes how the business got cash and where it spent cash. That summary is broken down into three main categories: Operations (the main business activities), Investing activities, and Financing activities. I’ve written about the importance of analyzing the statement of cash flows before, you may want to read that post as well.
What do we see here? On a first glance it looks OK. Canada Post is obviously a mature business so we should expect the operating activities to be generating sufficient cash to support the investing activities and the financing activities. In 2012, it looks like it does. Let’s ignore the financing activities for a moment since (a) the total financing activity cash flows are very small and (b) its a non-traditional business that is owned by the Government. Now focus on the investing activities and pick out just the capital asset expenditures. This is for items like new delivery trucks and sorting machines. In each of the last two years, the capital expenditures have been pretty constant, about $1/2 a billion per year. Now compare the operating cash flows to the capital expenditures required and you will see the rest of the problem. Canada Post is struggling to earn enough money to replace its necessary capital assets. Without those capital assets for delivery, Canada Post has no business model. No cash, no assets. No assets, no business. No business, no cash. And the death cycle begins.
Canada Post has one massive financial problem that I haven’t mentioned yet – pensions. I won’t go into that here since I talked about that in the last post.
The Globe and Mail had a terrific story about the issues that Canada Post is facing and included some potential solutions such as less-frequent delivery or not doing door-to-door delivery. Neither of those likely affect you or I since we get very few traditional letters. I am sure that the older generations are more frequent users/receivers of traditional mail and I suspect they’re not going to be very happy with any reduction in service. Perhaps its our job to explain the dilemma that Canada Post finds itself in? One weekend when you visit your parents, friends’ parents or grandparents I encourage you to ask them what they think about Canada Post, explain the financial issues, and see what solutions you can come up with. Then submit your ideas to Canada Post, they’re actively soliciting them on the the homepage. You might as well put your financial acumen to work and help solve this problem.
Note: this blog was originally posted on my site hosted by Pearson Education(http://php2.pearsoncanada.ca/highered/inthenews/accounting_in_the_news/)