The perfect storm of Brexit, Covid and the invasion of Ukraine has disrupted the fulfilment industry and challenged Jersey Post’s business model. Emily Moore hears how it’s adapting.
IT has halted work on its $2.5bn Virginia headquarters, laid off thousands of staff and announced the closure of warehouses across several continents.
At first glance, though, Amazon’s cost-cutting measures appear to have little, if anything, to do with Jersey. After all, the firm does not employ any staff in the Island and any orders placed by residents are continuing to arrive.
However, the problems faced by the e-commerce giant are having a significant impact on Jersey Post, for whom Amazon is one of its biggest customers.
‘The entire fulfilment and logistics industry is facing incredibly difficult trading conditions at the moment,’ explained Jersey Post group marketing director David McGrath.
‘Our two biggest customers are Amazon and Royal Mail, both of whom are facing significant challenges. Amazon has announced plans to close three UK warehouses this year as it implements a raft of cost-cutting measures across the group, while Royal Mail has recently been hit by both a cyber-attack and considerable unrest among its workforce, leading to industrial action, which has prompted many businesses to look for alternative delivery providers. If they lose business to these competitors, we lose that business from them.’
But what is behind these problems? In simple terms, says David, the ‘perfect storm’ of Brexit, Covid and the Russian invasion of Ukraine, all of which have contributed to today’s cost-of-living crisis, have driven a sharp decline in a sector which had been booming.
‘While I have no doubt that e-commerce will continue to grow, and that the long-term future is bright, there is no doubt that we are in a tight spot at the moment because of that perfect storm,’ he reflected.
‘Trading conditions are very complex and consumer confidence is at an all-time low. With the Bank of England interest rates going up, mortgage costs rising and the cost of everything from fuel to food increasing dramatically, people do not have the disposable income that they had a year or two ago.
‘As a result, the money that might have been spent with Amazon or other online retailers is now being used to heat the house or put food on the table, which means that parcel volumes are dropping significantly.’
Acknowledging that Jersey is, in some ways, ‘insulated’ from this decline, David says that, from a global perspective, Jersey Post – which last year gained 40% of its revenue from its international operations – has seen a ‘massive decrease in volume while continuing to win new business and hold onto existing contracts’.
‘That has had an impact on the costs of doing business as logistics is very much a game of volume,’ he said. ‘The cost of transporting goods around the world has gone through the roof because of fuel shortages. The cost of running the aircraft or ship is the same regardless of how many parcels are on board, so if that carrier is not full, it is not economical to operate.
‘Competitors are looking to hold on to volume at lower prices to have some contribution to costly networks, which means that there is a risk of a race to the bottom at which mail workers are at risk of being squeezed.’
Faced with this picture, it is unsurprising that a number of postal operators – including Guernsey Post which this year announced that it would be making a tenth of its workforce redundant after posting a £2m loss for last year – are making cuts.
In contrast to this, Jersey Post, says David, has no intention of ‘managing decline’ but is, instead, committed to growing the business – despite the short-term costs associated with such an approach.
‘While e-commerce may be seeing a short-term decline, it will bounce back so we just need to weather the storm over the next two or three years,’ he said. ‘To do this, we have to find more new and diverse business opportunities to bridge that revenue gap. It is vital that we do this through both our domestic and international business so that we can continue to deliver the local services which are so important to the Island.’
In many ways, says David, the removal of low-value consignment relief in 2012 – which ‘decimated the Island’s fulfilment industry’ – has provided some valuable lessons and put Jersey Post in a stronger position to adapt to current trading conditions.
‘When LVCR was withdrawn, the fulfilment business – something which had been Jersey Post’s bread basket for many years – left the Island overnight. At the same time, letter mail was in terminal decline – in fact, traditional mail volumes have fallen by 90% in the past ten years – so we recognised that we had to reorganise and reprioritise the business. As a result, we adapted, amended our strategy and recovered strongly,’ he said. ‘And that strategy, which saw a considerable investment in automation and parcel-sorting technology in Jersey, put us in a really good position to reinvent ourselves.
‘In the intervening ten years, we have capitalised on that and, although inflationary pressures are impacting on the short-term sustainability of many areas of our business, we are confident that the future is bright.’
And not only is Jersey Post committed to its existing business operations both locally and overseas but the States-owned entity is continuing to expand and compete for increased market share.
‘We are still investing, growing and diversifying,’ said David. ‘Our revised strategy, at a time when people were beginning to trust online shopping, recognised that we needed to capitalise on the impending uptick in inbound parcel traffic.
‘Having invested in the necessary infrastructure to support this, we recognised that, with a limited population in Jersey, we could only grow the business so much within the Island. Therefore, to continue to fund our universal service obligation and maintain the standards that Islanders expect from their post office, we needed to look beyond our own shores.
‘There began our investment in UK businesses, freight-forwarding companies and Customs clearance to bring us closer to the supply chain and give us greater control over our margins.’
As part of that diversification strategy, Jersey Post started investing in businesses in the UK, America and the Far East, all of which gave the company ‘access to new revenue streams’.
But despite a ‘healthy growth’ in these business operations over recent years, David says that the current global downturn ‘is squeezing our international business’.
‘The disruption across the global supply chain means that the cost of doing business has exploded and become unprofitable in many areas,’ he said. ‘Therefore, while we have a business which is capable and ready to win new business and an infrastructure to compete in the cross-border space. These rising costs are cutting our legs from under us.
‘Having said that, while some of our business areas are now operating at a loss, we will continue to invest in, and win, new business so that when the economy recovers, we will be in a strong position to capitalise on that renewed consumer confidence.’
On the global front, the new business which Jersey Post is targeting is, says David, ‘that which is easy to onboard and doesn’t require many infrastructure changes so it offers the greatest revenue-generating opportunities’.
Locally, meanwhile, the firm is seeing ‘resilience’ across a number of areas, with its philatelic business going ‘from strength to strength’ and its foreign-exchange arm benefiting from a renewed appetite for travel following the pandemic.
‘Our digital business, Vaiie, is also trading strongly and playing a key role in supporting the Government of Jersey with some of its digital objectives,’ said David. ‘This has included the launch of JerseyMe, an identity service developed to help Islanders to access services digitised by the government.’
And, of course, central to Jersey Post’s ethos is its commitment to the local community.
‘Ultimately, we are a community business, employing a considerable number of people and having a presence on the doorstep of every household six days a week,’ said David. ‘As an organisation, our purpose is to keep Islanders connected and we are very aware of our social responsibility to residents.
‘That is why our international networks and investments are so important because they enable us to provide an asset for Jersey.’
And, on that note, David returns to the importance of building on the organisation’s strategy to ‘weather the storm’.
‘The good news is that we are in a really strong position, with the infrastructure, skills and people to grow and compete,’ he said. ‘We know that letter mail will not return. The future is all about e-commerce and our digital division. As energy prices begin to fall again and consumer confidence returns, e-commerce will bounce back.
‘While we fully expect the next two or three years to be difficult, we have to keep investing and looking forward to ensure not only that we can withstand the current turmoil but that we continue to build a business with a vision for the future, and that, in the meantime, we continue winning new business and supporting our key partners such as Amazon and Royal Mail.
‘In a nutshell, it is not pretty out there at the moment and many of the factors hitting our margins are beyond our control, but we know what we are doing. We are not sitting here feeling sorry for ourselves. We are creating opportunities and we are looking forward to a strong future.’