Logistical Problems

As DHL Unit Flounders on Freight, Deutsche Post Struggles to Deliver Results

Deutsche Post CEO Frank Appel needs to get better results from his DHL unit. Source: DPA
Deutsche Post CEO Frank Appel needs to get better results from his DHL unit.
  • Why it matters

    Why it matters

    A focus on creating new revenue streams at Deutsche Post cannot conceal serious problems with its DHL division, where sales are dropping and costs are rising.

  • Facts

    Facts

    • The shipping and freight division is the only one of four corporate divisions of Deutsche Post not carrying its weight.
    • While company officials blame a weak economy for the problem, competitors have seen increases in business and profits.
    • Financial forecasts have been thrown into turmoil by the impact of the problems with DHL.
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    Audio

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Frank Appel, Deutsche Post’s chief executive, was crystal clear when he proclaimed the Bonn-based logistics company would enjoy massive growth under his “Strategy 2020” plan by focusing on parcel deliveries and its own online shops.

Additionally, he said, to become a major player in the markets of the future, Deutsche Post would introduce letters with electronic postage, organize long-distance bus tours with the German automobile club ADAC and use drones to deliver parcels from the company headquarters along the Rhine River.

His focus on high-flying, high-tech projects apparently caused him to lose sight of Deutsche Post’s slowest business sector. The shipping and freight business acquired in March 1999 with the purchase of Switzerland-based Danzas Group is faltering. Sales have dropped by 2.1 percent in the first half of 2014, compared to the same time period last year, while pre-tax and pre-interest earnings dropped precipitously by 30 percent to €149 million ($199.1 million), a troubling development for the company, which is one of 30 German firms that make up the DAX index on the Frankfurt Stock Exchange.

Shipping and freight is the only one of the four corporate units not carrying its own weight. In the first two quarters of 2014, the operative cash flow was at minus €55 million after generating positive cash flow €167 million during the same period last year. This is an enormous headache for company executives since the unit, which includes DHL Global Forwarding and DHL Freight, generates a fourth of the firm’s earnings.

Mr. Appel blamed the flagging global economy for the poor results, but analysts see it differently.  “DHL’s shipping and freight problems are of their own making,” said one expert, who requested anonymity.

There is, in fact, little evidence of a cyclic crisis based on market conditions in the freight business.

Shipping and freight is the only one of the four corporate units not carrying its own weight.

“Contrary to all expectations, the freight market has maintained a high level since the beginning of the year,” said Stefan Blickensdörfer, project manager of the Düsseldorf logistics consulting company, SRTS GmbH.

The half-year earnings of DHL’s competitors support his view. The German Rail subsidiary, Schenker Logistics, for example, reported a few days ago additional transport volumes in overland shipping as well as in sea and air freight. As a result, earnings rose by 8.8 percent, enough to again catch up with rival DHL for the first time in several years.

Another rival , Kühne +Nagel, also reported sharp increases in transport volumes for the first half of 2014. For the Swiss-based company, that meant growth of 8.2 percent and ensured shipping billionaire Klaus-Michael Kühne’s company a margin of 4.9 percent. In comparison, the Deutsche Post’s freight business generates a paltry 2.1 percent profit margin.

The Deutsche Post board said in a telephone conference Tuesday the real problems lie with the ”New Forwarding Environment” program, an information technology (IT) upgrade designed to guide and monitor freight traffic globally. Thirty countries are currently being converted to the new system with another 60 to follow soon, but the project has run anything but smoothly. The company admitted it is having “serious problems with data migration.”

That’s why the conversion is not only taking longer than planned, but also growing more expensive, Mr. Appel said. It will clearly have a financial impact on the coming fiscal year.

 

DHL employees may need to move a notch faster to keep up with the competition. Source: DPA
DHL employees may need to move a notch faster to keep up with the competition. Source: DPA
DHL employees may need to move a notch faster to keep up with the competition. Source: DPA

 

The problems with the shipping and freight business have thrown previous financial forecasts into turmoil. Although Deutsche Post insists pre-tax and pre-interest earnings will be €2.9 billion to €3.1 billion for 2014, the company now expects revenues will be generated by different drivers. The mail sector, recently expanded by parcel service and e-commerce, is running so well that it will deliver around €1.3 billion this year rather than the previous estimate of €1.2 billion. In contrast, DHL “not only must deal with often very difficult market conditions, but also shoulder the considerable costs for the (IT) project,” said Mr. Appel, who has led the company to reduce the pre-tax and pre-interest earnings forecast by €100 million.

Even though Deutsche Post has earned more than expected since the beginning of the year in its parcel and express business and grown market share by 2.7 percent, analysts are wary. Andy Chu, a stock analyst at Deutsche Bank, lowered the target price of the company’s stock. The company is still “facing many challenges” in the international shipping sector, which led him to lower his earnings projections, he said.

Johannes Braun, an analyst at Commerzbank, advises selling Deutsche Post stock because of the additional burden of technology upgrades and the shifting earnings projections.

The company that has embraced a high-tech future must now focus on improving one of its core divisions to impress analysts and investors.

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