Is it time to sell Canada Post?

Hey there, time traveller!
This article was published 23/11/2024 (350 days ago), so information in it may no longer be current.

I trundled out to pick up the mail today, then realized nothing would be there because of the strike. It was no loss. Advertising and solicitation packages seem to outnumber “real” mail by a factor of 15 to 1. And by real mail, I mean bills and a handwritten letter with a licked stamp. Most often, the latter are wedding invitations, but even these are receding in number as my cohort shuffles down the demographic bulge.

In 2023, Canada Post posted a loss of $748 million, close to its 2020 loss of $779 million. This may hit $1 billion in the next few years. In his most recent annual message, the president states that Canada Post is a “critical national infrastructure with a reach that touches all corners of the country and every community. As an essential service that is publicly owned but not publicly funded, we rely on Canadians to use and pay for the services we provide.”

I applaud the brave face and fighting words, but it is no longer an essential service. The consumer has driven a stake into the heart of Canada Post. In 2006, it delivered 5.4 billion letters to 14.3 million addresses; in 2023, it delivered 2.3 billion letters to 17.3 million. This is a brutal reality.

Let us step back… to 1848. A prominent classical economist, John Stuart Mill, could not accept that society should support two postal services. He originated the concept (but did not label it) of a natural monopoly and advocated the creation of a postal monopoly, a model since replicated around the globe.

A natural monopoly exists when production costs decline with more customers. Often, growth reaches some point where logistical and management complexity increases the unit costs (costs per customer), and the firm faces a barrier to increased size. Natural monopolies do not face these constraints since unit costs seem to fall without limit. This discourages competitors, since any new firm starts small and faces higher costs per customer. The incumbent firm can lower prices and beat back competition while still making a profit. The government typically regulates the profits, the prices or some other aspect of the operation of natural monopolies.

Innovation that prompts transformation usually destroys a natural monopoly. Consider how cellphones broke telephone monopolies such as AT&T and the Manitoba Telephone System.

Canada Post has confronted transformative technical changes that broke its monopoly. The evolution of the internet and email has supported the paperless delivery of bills and customer-service interactions. Online shopping also accelerated the creation of parcel courier services. Canada Post would have been privatized years ago without the taxpayer as a silent partner to underwrite the losses.

The obvious course of action for Canada Post is to stop home delivery. Given the frenzy that accompanied the move to neighbourhood letterboxes, this will create a political firestorm. An intermediate step would be to create a premium service where consumers could sign up for home letter delivery. One could imagine a two-tiered service, where using the local letterboxes would have a lower fee than home delivery. Consumers electing not to pay would opt out of any letter-mail service.

Canada Post could follow a more assertive policy and stop letter mail outright. With online shopping, its parcel-delivery division has become robust, handling 18 per cent of deliveries in Canada, followed by United Parcel Service at 17.3 per cent, FedEx at 15.6 per cent, Purolator at 10.5 per cent and Intelcom at 7.5 per cent.

Now what?

Two options seem to exist.

The easiest is to sell the parcel-delivery system, likely to one of the top three existing firms or even a new company owned by some current employees. This clears the books and relieves the taxpayer of any liability for losses.

One problem is that parcel delivery in Canada might become even more consolidated within a small group of firms, which economists call an oligopoly. Sometimes, a small group can create super-competition, as is occurring right now in artificial intelligence. Rapid technological advances benefit the consumer, but this period of dynamic capitalism often subsides, and the group can conspire, not overtly but tacitly, to raise prices and reduce service.

Or Canada Post could remain in the parcel-delivery business as a Crown corporation. It would still respond to government policy in this form, but seeing a public purpose for this role is challenging. With letter delivery, maintaining service throughout the country had a public purpose … in 1960. Not now, and a publicly owned for-profit parcel-delivery company might be prone to inefficiency and political interference. We have had a mixed experience with government-owned for-profit companies. The sale of Petro Canada in the early 1990s is an example.

I understand nostalgia. I enjoy the tactile experience of a book, and I recall the days many decades ago when I received handwritten, licked-stamp letters from a girlfriend while I worked in a remote bush camp.

I looked forward to a letter arriving every couple of weeks… at least until the last letter she wrote me, which was a downer.

Nostalgia does not pay the bills. Canada Post must change dramatically; we have much better ways to spend $1 billion.

Gregory Mason is an associate professor of economics at the University of Manitoba.