Berlin S-BahnWe will get to know the Berlin-based company Francotyp-Postalia better at our Value Investing Conference ValueWeekend 2018. If you’d like to join us spontaneously, there are still a few vacancies. Simply contact us on the conference page.

Francotyp-Postalia, according to its own information, offers “products and services for efficient mail processing, consolidation of business mail and digital solutions for companies and public authorities”. In the first part of our small series on Francotyp-Postalia, we got to know the company by looking at what (value) investors have invested in it. We also evaluated the analyses of Francotyp-Postalia on the net. In the second part of our series, we want to get to know the company, its products and its strategy better. We ask the question: What does Francotyp-Postalia actually do?

In order to get an answer to this question, we recommend that you also take a look at the company’s homepage and in particular at the annual reports in addition to our article. All annual reports since 2006 can be found on the homepage of the franking machine manufacturer. They provide a good overview of the company’s activities. If you want to learn more about the history of the company, this YouTube video on the 90th anniversary of the company provides a good insight. By the way: All texts were translated with DeepL.

What does Francotyp-Postalia from Berlin produce?

An insight into production

In order to get a feel for the company’s products, I find this video from the RBB Abendschau from 2016 helpful. It gives an insight into the Berlin headquarter:

This video makes gives insight in what demands Francotyp-Postalia’s products must meet. The standards of the respective postal partners must be adjustable. The machines must be compatible with national regulations. In particular, they must offer security for payments/franking. In a certain way the machines “print money”. To manufacture successful products, a great deal of knowledge, a high degree of specialisation and investment are required.

This speaks for a moat around the products and services of the company. The moat should be strengthened by the structurally shrinking market. The declining mail volume makes it unattractive for competitors to enter the market. Capital is rather allocated where there are interesting growth rates. This can be a great opportunity for existing companies in these markets.

Francotyp-Postalia also wants to use the movement of its two competitors Neopost and Pitney Bowes away from the franking machine market to gain customers with its advanced products:

Our two major competitors have set different priorities for some years now. Their traditional business is no longer the focus of their strategy. We, on the other hand, are going on the offensive, investing again in service, marketing, research and development and sales with ACT – and our customers appreciate this very much. Source: Interview with CEO Rüdiger Andreas Günther

Compared to the machines from Neopost and Pitney Bowes, the franking machines from Francotyp-Postalia look much more modern to me. In addition to an appealing design, I notice a color touch display at Francotyp-Postalia. The machines of the competitors, on the other hand, look a bit like a calculator from the 2000s.

Best seller PostBase

The PostBase seems to be the bestseller product of Francotyp-Postalia. Over 100,000 machines have already been delivered to customers. These YouTube videos give an impression of the PostBase and the PostBase Mini:


What is the current situation at Francotyp-Postalia?

A, B and C segments of the franking machine market

As already mentioned in our first article, Francotyp-Postalia is particularly strong in the market for smaller franking machines. In technical terms, these are the A and B segments for franking systems (see Annual Report 2017, p. 46). We speak of the A segment when 1-200 letters are sent per day. The B segment is in the range of 200-2000 letters. The C segment starts with over 2000 letters.

Francotyp-Postalia assumes that the A and B segments could benefit in the future: Although letter volumes are decreasing, letters will continue to be sent. This is also underlined by the data from the FP Efficiency Report. Official letters, donation receipts, health insurance information, tickets or even contracts are just a few examples where digitisation is not (yet) effective. Therefore, there will continue to be a demand for franking machines. The company’s argumentation is that smaller solutions –  in which Francotyp-Postalia is particularly strong – are much more in demand.

The figures for recent years suggest that there is something to this thesis. Francotyp-Postalia was able to increase its global market share from 10% to 11%. Revenue development was also characterised by annual, single-digit growth:

Revenue Performance

Francotyp-Postalia Revenue development
Source: Annual report 2017, p. 61

Another driver for the revenue development is the international expansion of the Berlin-based company. This can also be seen from the number of employees: While 380 employees were still working in international sales in 2013, this figure rose to 429 in 2017. As part of its ACT strategy, Francotyp-Postalia has set itself the goal of gaining international market share.

Francotyp-Postalia Workers
Source: Annual report 2017, p. 51

Business segments

Francotyp-Postalia’s revenue/business is divided into three areas: “Franking and Inserting”, “Mail Services” and “Software”. I have taken all the segment descriptions from page 44 of the 2017 Annual Report:

Franking and enveloping

The FP Group develops and manufactures franking systems. It sells and rents them as well as inserting systems and also offers comprehensive services. The franking systems enable customers to frank their mail automatically in a short period of time and reduce postage costs. The most important revenue driver is the after-sales business with its recurring revenues from the rental of franking systems, the sale of consumables such as ink ribbon cassettes and ink cartridges, services, software solutions for cost centre management and Teleporto.

Mail Services

The Mail Services product area comprises the franking service – picking up unfranked outgoing mail and taking over franking – and the consolidation of business mail. This includes the collection of letters from companies, sorting them according to postal codes and delivery to a Deutsche Post AG mail centre or alternative mail delivery agents. The corresponding business is operated by freesort, which, with eight sorting centres in Germany, is the leading independent consolidator of business mail on the German market.

Software

In the area of software solutions, the FP Group combines its business with hybrid mail services and solutions for all aspects of fully digital communication. With the hybrid mail services of the FP subsidiary IAB, the sender sends the document via the Internet while guaranteeing the highest security standards; the recipient normally receives a classic letter. The FP Group handles the entire production process up to the delivery of the letters to a delivery service provider (FP Outbound). In addition, the FP Group also offers its customers universal complete solutions for processing incoming mail (FP Inbound). All incoming mail is digitised, analysed according to customer-specific criteria, evaluated and then sent to the customer’s data or document system in electronic form. The fully digital communication services provided by the subsidiary Mentana-Claimsoft primarily comprise products for long-term storage and for securing electronic documents using encryption and signature software. A pioneering product in this area is FP Sign, a cloud-based solution for the legally secure digital conclusion and exchange of contracts and documents.

The ability to plan the business model appears to be very high. Almost 80% of Francotyp-Postalia’s revenues appear to be recurring revenues.

Francotyp-Postalia Revenue by area
Source: Annual report 2017, S. 63

Where should we go with Francotyp-Postalia?

ACT Strategy

The ACT strategy provides the answers here. A stands for Attack, C for Customer Journey and T for Transformation.

With Attack, Francotyp-Postalia blows an attack on its core business. The company wants to grow in its core business and also develop subsequent business areas, such as parcel shipping.

The Customer Journey is intended to increase the number of existing customers. Existing customers are to be offered additional (digital) services from the Francotyp-Postalia universe. This should also increase customer loyalty.

T stands for Transformation and is described by the company as follows:

The development into a companion for the digitalisation of processes also presupposes that the FP Group also changes. Essentially, the requirements here are the implementation and use of new agile innovation methods for better and faster strategic positioning and adaptation of the core business in line with changing customer needs.
This results in the exploration and testing of future markets, products and business models on the basis of FP’s own DNA (cryptography, sensor technology, actuator technology, connectivity) and the further consideration of strategic options for the transformation of FP. In addition, the FP Group is rolling out the “Structure & Organisation” project in the 2018 financial year with the aim of reducing complexity in the FP Group and significantly increasing the effectiveness and agility of a company in transformation. (Annual Report 2017, p. 48)

For me, this reads like an attempt to implement a cultural change in the company. In the process, it is to be realigned in many areas. Existing competencies are to be further developed and transferred into new products and business models. This is also made clear by these statements made by the Management Board member Rüdiger Andreas Günther:

At the beginning of 2017, when we launched ACT, we did not yet have any significant sales in this new area. We are now on the verge of entering the market with the first new digital products and business models. Their share of sales is expected to increase disproportionately from next year onwards. For 2020, we are already aiming for revenues of up to EUR 30 million.

Future fields of business

One focus is the Internet of Things (IoT):

On our servers in Berlin, we have been receiving data from our customers’ franking machines for decades and transmitting updates to these machines. More than 100,000 machines worldwide are connected to one of the most modern and secure Internet of Things. These competencies in cryptography and connectivity are our most important assets in which potential customers in various industrial sectors are very interested. In the area of the Internet of Things, data from machines or vehicles, for example, must be securely transferred to the cloud.

Strategic acquisitions at value prices can also play a role in the future development of the company:

We are operating from a position of financial strength – thanks to our solid balance sheet and a credit line of up to 150 million euros. However, we will only make an acquisition if the company in question fits in perfectly with Francotyp-Postalia and the takeover price is not too high. The current planning does not include any acquisitions. Nevertheless, we will of course carefully examine acquisition opportunities. After 2020, as we have announced, we intend to make acquisitions with revenues of around 80 million euros.

Irrespective of this, we will continue to enter into cooperation agreements with interesting start-up companies, thereby combining our core competencies in sensor technology, actuator technology, connectivity and cryptography with innovative digital know-how. Berlin is the start-up capital of Europe, and it is here that we can find exciting opportunities.

During our visit on 21 September, we will be able to find out more about the current status of developments. We are very curious about this, as Francotyp-Postalia’s goals for the coming years are definitely ambitious:

Francotyp-Postalia Goals
Source: Annual report 2017, p. 48
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