Japan Post outlines strategy to staunch Toll bleeding

Australian subsidiary part-way through three-stage costs revamp after earnings plunge and expensive writedown

Japan Post outlines strategy to staunch Toll bleeding
Toll was unprepared structurally for economic headwinds, according to Japan Post


Toll’s structural weaknesses have proved the soft underbelly of its Japanese parent company’s international expansion plan.

The plan, executed in May 2015, was to have Toll spearhead Japan Post’s tilt at becoming an international player that could reasonably compete with the likes of Deutsche Post and UPS but has now led to an expected financial year loss.

Japan Post Holdings’ announcement to the Tokyo Stock Exchange confirms recent speculation of a goodwill writedown and reports of job cuts but the extent of the writedown will come as a shock and the pain for the workforce is about to begin.

The announcement reveals Japan Post’s analysis of why its $6.5 billion purchase has resulted in a $4.5 billion reduction in goodwill – from $5.2 billion in 2015 – and $400 million in trade mark and fixed asset value.

This is put down to a failure of the business model that served it well during the period of economic expansion in Australia and China that saw it involved in more than 100 instances of mergers and acquisitions (M&A) but proved inadequate during tougher times.

While managing acquired companies as autonomous and independent business units (BUs) and clarifying their roles and responsibilities were strengths then, but it meant a lack of cost competitiveness were not apparent and units continued to carry redundant operations.

The model allowed for a lack of cohesion, with back office operations not integrated and the IT system is not centralised, resulting in a high ratio of fixed costs.

"An inefficient way of managing businesses such as multiple BUs competing with one another to get their own business partners whilst sales are declining due to the slowdown of the Australian economy," the critique reads.

Though stated at different times in the yearly cycle, 12-monthly earnings before interest and tax for Toll is given as falling from $379 million last financial year to June 2016 to $266 million in the year to March 2016 and to $69 million to March 2017.

"The financial results of the international logistics business during the fiscal year ended March 31, 2017 is expected to fall sharply below the previous fiscal year due to a sharp fall in commodity prices and a slowdown in the Australian and Chinese economy, etc," the analysis reads.

"Given this background, Toll’s senior management team was changed in January 2017 and, since then, we have taken measures to improve the financial results of Toll and lay the foundation for future growth mainly through cost reduction such as reducing headcount, cost centralization and unification of divisions.

"We will continue to position Toll as the platform for global expansion and recover its financial results as soon as possible, and will carry out a structural reform program to contribute to the enhancement of the Group’s corporate value."

The response partly recognises that some of Toll’s weaknesses were understood and being addressed three years ago with the One Toll program.

So it sees five steps to improvement:

  • reorganisation targeting at realising One Toll
  • extensive cost reduction
  • customer-centricity, improvement of quality of service, differentiation
  • fostering an integrated sales-force
  • concentration in priority regions and businesses and withdrawal from unprofitable operations.

This has come in three waves starting in January with the senior management restructure that brought in chairman John Mullen and MD Michael Byrne, the loss of 300 fulltime managerial positions in February and March and the reduction of 1,700 other positions starting this month and ending at some stage in the next financial year.

Japan Post will strengthen its oversight, with headquarters in control of approval for "material matters", making performance evaluation and decision of remuneration policy and nominating senior management.

Toll bosses will manage operations and report on the status of operations and investments and on performance and risk.

They will have four main goals:

  • establish its status in the main regions (Australia, New Zealand, Singapore and China) and industries (e.g. energy, retail sales, manufacturing)
  • concentrate management resources in areas where growth is highly expected (e.g. Asia, China and US)
  • expand into industries where growth is highly expected (e.g. pharmaceutical and agriculture)
  • ensure cost competitiveness.

By way of support, Japan Post will seek to leverage Japanese enterprises in Toll’s existing markets, open opportunities in the Japanese market for the likes of global forwarding and make use of JP’s business to consumer (B2C) know-how.

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