Two disruptive trends brought on by the COVID-19 pandemic, a surge in e-commerce and record fiscal deficits, shed new light on the need to privatize national postal services. Under lockdown, approximately 50 million Latin American consumers experimented with e-commerce for the first time, usually purchasing small ticket items such as groceries, sports equipment and office supplies. For the well-heeled international logistics operators, deliveries to these new e-commerce buyers are not profitable. The rash of new start-ups, using Uber-like business models, can handle much of the new business. However, for some merchants, the use of jobbers to move their goods leaves them uneasy. These start-ups also refuse to deliver to most rural or small-town destinations. As such, there is now a real market need in Latin America for postal service organizations to enter the e-commerce fulfillment space.
However, with few exceptions, Latin America’s publicly owned and operated postal services are at best inefficient, at worst a laughingstock of ineptitude and corruption. Each year, the UPU ranks 173 postal systems around the world based upon efficiency levels, reliability, reach, innovation, and market share (in e-commerce), among other factors. As a region, Latin America languishes at the bottom of the global ranking, along with sub-Saharan Africa.
With Latin American governments facing record annual fiscal deficits in 2020 that are 3-5 times the norm, many countries will look to shed state assets. With the exception of Brazil’s somewhat professional postal system, most Latin American postal privatizations will yield very little immediate pay-off to cash hungry governments. However, ending the subsidization of these inefficient bureaucracies will save billions over the long haul and more importantly, the burgeoning e-commerce economy will gain much-needed efficiencies.
Today’s postal systems in the region are still equipped to handle what are declining volumes of mail and direct marketing correspondence. They are not technologically equipped to handle the region’s leading growth industry: e-commerce. However, they are staffed and equipped to provide low-cost fulfillment to every corner of their country, a real asset to e-commerce merchants as well as international courier firms that need broader geographic reach in those LatAm markets where they tend to have domestic operations: Brazil, Mexico, Colombia, Argentina, Chile.
The first country to make the strategic shift may be Brazil. Recently, studies were launched to plan the privatization of Correios in 2022. The move is not without controversy. With 95,000 employees — who are not afraid to strike (the last one lasted 35 days), Correios is overstaffed and utilizes outdated technology. Any new owner will need to restructure, replacing Brazilian employees with imported technology. However, Correios is already a practiced partner in e-commerce to Alibaba and others. They will push hard to expand further its e-commerce volumes in the hopes of driving up the sales price, modestly estimated today at US$2.7bn. Companies including Mercado Libre, FedEx, Magazine Luiza, and Amazon are rumored to be interested in acquiring Correios. The Bolsonaro administration is keen to reform Brazil’s inefficient economy and bring in much-needed cash. The national fiscal deficit in 2020 will reach 15% of GDP, an alarming figure to ratings agencies who could remove the coveted investor grade status of Brazilian sovereign debt in 2021.
Fiscal necessity and an opportune moment to sell a coveted asset to cash rich e-commerce marketplaces and logistics firms may induce even left-wing governments to seriously consider privatization. The nostalgia once felt for postal systems has long left the collective mindset of Latin Americans who scorn the ineptitude and bureaucracy of their national postal organizations. The only thing blocking privatizations are the demands of postal workers, almost all of whom are unionized and some of which are politically powerful.
Other countries will be watching closely to see how Brazil fares with its privatization efforts. If Brazilian postal negotiators can preserve jobs and yet somehow create a profitable private or semi-private postal system (emulating the more successful European models), then other countries may very well follow, particularly if their re-election does not rely on support from postal union workers and their labor allies.
Adding to the prize of privatization is the bidding capacity of online marketplaces like Amazon, Mercado Libre, Alibaba and Magazine Luiza. Amazon and Alibaba rely on postal systems in the US and China, respectively, to keep fulfillment costs low. Outdated UPU regulations have kept cross-border postal rates at below-market pricing, benefiting these companies at the expense of U.S. and other taxpayers who support unprofitable national postal systems. In Latin America, state-owned postal systems (with few exceptions) are too unreliable for partnering purposes so the marketplaces, who dominate regional e-commerce, have relied on costly international courier firms. The volumes of these four marketplaces in Latin America is now more than large enough to justify downstream investment in a postal service. However, the conflict of interest optics of the postal systems’ largest customer (e.g. Mercado Libre, or Alibaba) taking control of said postal system could prove difficult to overcome, both perceptively as well as regulatorily.
The more natural buyer of a national postal system is a well-financed international logistics company like FedEx, UPS, or DHL (which is owned by the German postal system). These companies would find it easier to serve all customers of postal services without any conflicts of interest. Furthermore, buying a postal system in a large domestic market like Brazil, Mexico, or Colombia would help these companies overcome a challenge that has plagued them for decades — how to compete in Latin American domestic markets. Domestic e-commerce has grown faster than cross-border in the region, close to 40% during 2020. That trend will continue as a broader base of e-commerce buyers shift top selling categories away from high ticket electronics to more mundane, domestically sourced products like groceries, clothing, office supplies and cleaning products.
In addition to Brazil, we foresee at least two more countries (Peru and Ecuador) moving to privatize controlling interest (if not 100%) of their postal systems by 2023. If the first privatizations go well, many more will follow.
Contact us to find out more about how we can help your company to prepare for this privatization with due diligence and risk research — or to help you with other market intelligence for the logistics sector in Latin America.