Service focus pays off, Deutsche Post DHL CEO says
Deutsche Post DHL has survived a painful retrenchment involving its Express delivery business in the United States and emerged from the recession as a much stronger company poised to take advantage of recent increases in demand for parcel and freight services, CEO Frank Appel said Wednesday.
Speaking before a large audience at the U.S. Chamber of Commerce in Washington, the German logistics chief executive said the restructuring 'delivered even better results than expected,' and led to a fundamental shift in the company's attitude towards customer service.
The DHL Express pullout from the U.S. domestic market in early 2009 accelerated the 20 percent to 30 percent volume decline Deutsche Post experienced across its logistics business lines during the global economic crisis, according to Appel.
After losing $1.5 billion in 2008, Deutsche Post decided to shutdown the DHL Express domestic ground and air service in the United States, which was plagued by service glitches, customer defections and high fixed costs. The German postal and logistics conglomerate acquired Airborne Express in 2003 and invested another $1.2 billion building an extensive ground hub network in an effort to compete with FedEx and UPS on domestic delivery service because it felt it needed a U.S. presence to be a true global package delivery company.
But DHL wasn't able to achieve sufficient volume or market share to justify building a dense network to serve every ZIP code. Amputating the bleeding U.S. division and its heavy cost structure after several years of large losses was expensive, but viewed as a necessary evil to prevent damage from spreading to the rest of the company during a time of falling revenues.
DHL Express continues to operate in the United States with 35,000 employees providing international express service. DHL also has a strong U.S. presence through its contract logistics and international freight forwarding units.
Following a 567 million euro ($731 million) loss in 2008 heavy with one-time write downs and charges, Deutsche Post DHL generated net income of 644 million euros and 1.47 billion euros ($2 billion) in operating profit last year, exceeding its November forecast of 1.35 billion euro, according to its most recent earnings report. It projects operating income will reach 1.6 billion to 1.9 billion euro this year, equally split between the Mail and Logistics divisions.
Despite a 15.2 percent drop in revenue due to lower transport volumes, the company's extensive cost-cutting program, lower restructuring expenses and reduced losses for the U.S. Express business helped return the company to profitability. DHL Express' operating profit was 231 million euro compared to a 966 million euro loss in 2008.
The belt-tightening program was achieved without any service disruptions and increases in customer satisfaction surveys, Appel said. Last year Deutsche Post DHL reduced indirect costs by more than 1 billion euros. DHL last week announced it was able to offer money-back guarantees for on-time delivery in many major international markets due to network improvements in the past 12 months.
Appel was unabashedly blunt about DHL's failures, calling the U.S. domestic venture a 'disaster,' and saying the company's tunnel vision on growth led to poor customer service. DHL entered the domestic U.S. market because of how it viewed itself 'instead of offering a different value proposition to FedEx and UPS,' he said.
'That didn't work out. We made a mistake. If you offer the same value proposition as the much larger players then how are you going to succeed? We never answered the question of what is the value add for the customer.'
DHL learned from its embarrassing stumbles and the threat posed by the global financial crisis that it had to aggressively focus on costs and customer service, Appel said.
The changed mindset means the company will continue to tightly manage cost, especially variable costs such as labor, even as sales pick up. One goal is to develop more flexible labor strategies so it can better adjust to volume fluctuations. DHL opted to reduce salaries in Asia during the crisis instead of laying off people so it would retain talent when the economy bounced back, Appel said.
'We can't go back to free spending ways. So we need to make permanent those changes — however distasteful they were at the time — to maintain health,' he said.
During the past two years Deutsche Post DHL has made achieving customer and employee satisfaction as important as financial results, Appel said, but he acknowledged that changing the culture of a company with 500,000 employees that operates in 222 countries will take more time.
The keys to sustaining service excellence, he said, are to create repeatable solutions and deliver them with a highly engaged workforce.
The new emphasis is reflected in performance reviews of top managers, who are judged on customer and employee satisfaction as well as financial progress. Last year, internal surveys showed an increase in customer and employee satisfaction.
'That gives me hope that we're headed in the right direction,' he said.
The Deutsche Post DHL chief dismissed any suggestions that the company might split up its mail and logistics divisions or seek to expand through mergers, saying the company was well-positioned in the market and hinting that its acquisition spree early last decade contributed to some of its problems.
'We are so much on track to improve our performance I don't want to have anybody distracted by portfolio discussions, because at the end of the day what creates value for shareholders is improving performance through improved services for our customers,' Appel said.
'The focus of the management team,' after the company made logistics acquisitions, sold its stake in Deutsche Bank and went through restructuring, 'should be on customers, customers, customers and improving operational performance,' he said.
Last spring, Deutsche Post began integrating its DHL forwarding, logistics and express divisions.
Meeting with reporters afterwards, Appel added, 'We have no strategic need to do anything.' But he didn't rule making small tuck-in acquisitions if they are a good value.
He was upbeat about DHL's current prospects, noting that the Express business is gaining new customers, DHL Global Forwarding is gaining market share as shippers switch to companies with a full suite of transportation management capabilities and that Exel contract logistics in the United States has the potential for significant growth.
In the wake of the contentious health care reform debate, he made a pitch for DHL to help reduce health care distribution costs. In 2006, DHL won the contract to manage logistics for the entire National Health Service in the United Kingdom. The job involves purchasing, warehousing and delivering more than 600,000 products used in hospitals, care centers and patients' homes. DHL projects that it will save the U.K. government more than $1 billion over 10 years.
'So there are huge opportunities for the U.S. health system to reduce logistics costs,' Appel said.
And, he said, Deutsche Post is developing virtual products in response to losing mail business to the Internet. The idea is to make Deutsche Post the trusted custodian of Internet deliveries just as it is for confidential physical mail, especially for transactions involving many people. Deutsche Post, he said, will ensure documents are encrypted and cannot be read or printed until they hit the computer of the designated recipient.
Appel expressed optimism about the sustainability of the global economic recovery, especially in Asia, as long as hyperinflation, a spike in unemployment or another financial collapse don't occur.
'The worst is over without a doubt,' Appel said, pointing to a continuation of shipment volume growth from the fourth quarter of 2009 through the first quarter of 2010. DHL's year-over-year air freight volumes rose 13 percent in the fourth quarter, according to a copy of prepared remarks on the Chamber's Web site in which Appel went into additional detail.
The primary reasons for increased shipping volumes are a big jump in U.S. auto industry sales, investment in manufacturing and companies rebuilding inventories, he told reporters.
Logistics companies like DHL help economic growth by making international trade easier for companies. But Appel said their work is complicated by high customs duties and regulatory barriers to trade.
He said 'Buy American' provisions in the American Recovery Act are not in the spirit of free trade, and wondered why the United States is not pushing to ratify pending free trade agreements with Panama, Colombia and South Korea, but applauded President Obama for his new initiative to double exports within five years.
'Trade liberalization needs to be at the center of the National Export Initiative,' he noted.
The United States and the European Union should lead the campaign for multilateral free trade agreements by doing more to grow trade faster between their huge consumer markets, starting by reviving the Trans-Atlantic Economic Council and including the respective legislatures on both sides in the dialogue on how to harmonize regulations, Appel said.
He called on both sides to liberalize the transatlantic aviation market too, saying the existing open skies treaty has not fully opened up trade and investment opportunities.
DHL's attempt to penetrate the U.S. domestic market, he said, was made more difficult by U.S. law that restricts foreign ownership of U.S. airlines. That meant DHL had to sell off Airborne Express' airline and use outside contractors, limiting its ability to control operations and maintain reliability. ' Eric Kulisch