Contract renewal

Deutsche Post Boss Frank Appel Wants Second Bite

Has Deutsche Post boss Frank Appel set his sights too high? Credit: DPA
Has Deutsche Post boss Frank Appel set his sights too high?
  • Why it matters

    Why it matters

    Amid profit warnings and disappointing results, the Deutsche Post chief exec’s wish to hold onto his post comes as a surprise.

  • Facts

    Facts

    • Deutsche Post recently issued a profit warning while admitting profits were a half-billion below projections.
    • Frank Appel’s political ties have ensured Deutsche Post received a hefty increase on letter deliveries and the corporate freight business continues to perform well and generate strong profits.
    • Other divisions, however, are producing disappointing results.
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    Audio

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Frank Appel’s contract as chief executive at Deutsche Post doesn’t conclude until  the end of 2016, but he’s already campaigning for an extension.

“I really enjoy the work and am interested in staying at my job longer,” he recently told a small group in Düsseldorf.

What’s remarkable about this statement is its timing. It came just days before Mr. Appel shocked shareholders with bad news and a profit warning for the world’s largest courier company.

The long overdue modernization of an outdated IT system in the freight division has failed disastrously while this year’s pre-tax profits of €2.4 billion ($3.0 billion) fell half a billion euros below projections.

It was the second profit warning in two-and-a-half months by Mr. Appel. In August, he reduced profit expectations by €100 million because of a strike by delivery personnel. Share prices still haven’t recovered, though he insists the company is on track to generate an additional €1 billion in profits in 2016.

The era when the former McKinsey consultant was viewed as a model in Germany’s blue chip DAX stock index, someone whose forecasts carried weight, is long gone.

“His image is tarnished,” said Michael Gierse, a fund manager at Union Investment. Mr. Appel’s goals are attainable, Mr. Gierse added, but it’s likely he won’t meet them. “It’s a calculation with too many unknown factors,” he said.

Mr. Appel’s future depends on resuscitating the freight division

The supervisory board also has doubts. One controller expressed surprise at the promise to grow profits by €1 billion next year because Mr. Appel isn’t scheduled to reveal his plans to the board until December. “Then we will still have to talk about them,” the board member added.

Mr. Appel insists that 2015 is “a year of transition” for his Strategy 2020 program, which seeks to double profits by €5 billion within the next four years. To reach that goal, however, he cannot afford a second year of transition. Thus, Mr. Appel begins a year of probation when he must prove he is still the right man for the top job.

His biggest risk is DHL Global Forwarding and Freight, which delivers packages via land, water and air. The IT debacle cost more than €300 million while Deutsche Post continues to trail behind the competition, generating profits of only 0.8 percent of revenues in the first half of 2015. That’s less than one-sixth of the margin enjoyed by competitor Kühne + Nagel.

Mr. Appel’s future depends on resuscitating the freight division. “There can’t be any more problems in the division,” a supervisory board member said.

Meanwhile, labor representatives on the supervisory board are frustrated by the tough battle over wages. Mr. Appel has no guarantee they will vote his way, so he needs the votes for those representing the employer’s side. “Whether he gets full support there depends on the freight division,” another controller said.

To some extent, Mr. Appel is personally responsible for developments in this area. As the head of freight operations, he called for a new IT system more than a decade ago. In 2010, he promoted Roger Crook to the management board from the express division to restructure the freight subsidiary of Deutsche Post, which turned out to be a bad move. While Mr. Crook was reorganizing, he lost track of the IT modernization process planned with SAP and IBM.

“Mr. Crook wanted to take the last step before the first one,” a former Deutsche Post executive said. Another manager added: “He didn’t have a clue about freight.”

Mr. Appel finally fired Mr. Crook in April and assumed control himself while also replacing managers of the most important global regions. He lured Renato Chiavi, 74, out of retirement to save day-to-day operations. He initially came to the company when it acquired the Swiss trucking firm Danzas in 1999.

It now appears that years may pass before a new IT system is finally installed within the freight division. Meanwhile it remains unclear who could actually deliver the upgrade. Mr. Appel, meanwhile, says Deutsche Post is searching for alternatives.

Contract logistics also aren’t fulfilling expectations. The division, which combines storage and delivery services, is being restructured, a move that lowered profits 11 percent to about €170 million in the first half of the year. But the restructuring must show positive results by 2016 if Mr. Appel’s ambitious goal of generating €1 billion in profits by 2020 can be met.

When Deutsche Post went public in 2000, Mr. Appel’s predecessor and former McKinsey colleague Klaus Zumwinkel promised a new future. The state company would lose its monopoly on letters, but new companies in freight, logistics and express delivery would more than make up for the loss. Yet the only area where this prophecy has come true is the express division serving commercial customers, which emerged when the U.S. firm DHL acquired by Deutsche Post in 2002. It is Mr. Appel’s biggest cash cow, exceeding margins of 10 percent long ago.

The only area that doesn’t require extensive restructuring is the shrinking letter business. Here, Mr. Appel is pursuing a traditional strategy, preserving the company’s monopoly-like position by cultivating contacts in the political establishment. His success can be measured by an announced price increase for a standard letter next year, up from 62 cents to 70 cents.

The price hike could add an additional €350 million to the coffers, and was made possible by the German government and the Federal Network Agency. Until this year, Deutsche Post was only allowed to increase prices yearly in small increments and after application. The coming price increase, however, is valid for three years and accordingly hefty. Additionally, Deutsche Post may no longer tie its demands to inflation, but can use financial performance figures from European competitors, creating more maneuvering space.

How much Deutsche Post earns on letter delivery remains a closely guarded secret. Years ago, Mr. Appel inserted the package-delivery business into the state-protected division, and now not even analysts dare estimate how much of the €1.2 billion in profits comes from the letter business.

Still, the strategy has exposed Mr. Appel to constant criticism. Competing services accuse him of subsidizing package delivery with profits from letters. Letter-delivery services complain Deutsche Post misuses its market position to keep competitors at a distance by offering discounts to bulk mailers. The Federal Cartel Office charges the company with hindering competition.

So far, Mr. Appel has gotten off lightly. When the Federal Administrative Court in Leipzing this summer ruled that postage price increases between 2003 and 2005 were too high, the fine amounted to only a few thousand euros.

But while Deutsche Post’s quasi-monopoly status helps the company weather the lack of profits in the freight business, that still won’t bring in the €1 billion in profits Appel has promised.

 

This article originally appeared in business magazine WirtschaftsWoche, which is part of the same publishing group as Handelsblatt. To contact the author: jacqueline.goebel@wiwo.de

 

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