Rob Jenson: Strong case for a review of the postal market

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ROYAL Mail and its postmen and women are proud to provide the universal postal service the length and breadth of the UK. 

We collect mail from 115,000 post boxes, and deliver letters six days a week to 29 million addresses. All for a single price anywhere in the United Kingdom. The service we provide connects our cities with our most remote communities. It links businesses to their customers, and to other businesses. Our 150,000 people work in all weathers to deliver over 13 billion items a year. In short, we are part of the glue that holds the social fabric of this country together.

We all know that the communications market is changing – and changing fast. Over the past decade, the digital revolution has inevitably led to people sending fewer letters. Banks, utility companies, telecoms, and public services are all making a fast transition into e-communication.

Royal Mail has been meeting the challenge of declining letter volumes. We’ve been growing our parcels business and we have been driving efficiencies across our operations. Around 50,000 employees have gone from Royal Mail in the last 10 years. We have rationalised our mail centres and delivered a huge modernisation programme across our network. And we’ve been revising all of our working methods, a challenging process for all of our people.

Now we face a new threat.  Recently we have seen companies like TNT Post UK establish their own mail delivery operations which bypass Royal Mail’s network for collection, sorting and delivery of mail. 

So far, TNT Post has launched a rival service in London, Liverpool and Manchester. But this is set to expand to 42 per cent of UK households, covering 8.5 per cent of the UK’s area by 2017. TNT Post has indicated this will include Leeds and much of West and South Yorkshire.

This is not competition in the normal sense of the word. We strongly support competition – where it is on a level playing field and where there are benefits for consumers. Instead, what we are seeing with direct delivery in the UK is just cherry picking of what remains of the profitable parts of the letters market.

The fundamental economics of the universal postal service require a series of cross subsidies to support it. Revenues generated from areas of high population and mail density help fund operations in areas of lower population and mail density. This is now being undermined by new entrants’ cherry-picking in the following ways.

Firstly, they choose where they want to deliver, which is only in urban, populous areas – whereas Royal Mail must deliver mail to less populous areas of the UK which are costly to serve.

Secondly, they choose when they deliver, as they are not bound by the same stringent regulatory requirements as Royal Mail. For example, TNT Post typically provides an ‘every other day’ service. Royal Mail must collect and deliver letters six days a week.

Thirdly, direct delivery competitors choose what they deliver – which is only bulk business mail, much of which is machine-sequenced and easy to process. This type of mail is valuable to the universal service provider and helps support the cost of processing items that have to be sorted by hand. Companies like TNT Post already control around 70 per cent of the bulk business mail market, leaving Royal Mail to deliver consumer mail such as the barely-legible handwritten addresses without postcodes which no machine can read.

Unlike true competition, direct delivery doesn’t provide an extra spur to make the postal market more competitive and efficient. Declining mail volumes driven by e-substitution, combined with the disciplines of being a publicly listed company, provide a strong incentive for Royal Mail to drive efficiency. Our business plan targets productivity improvements of two to three per cent per annum over the medium term.

The universal service obligation means our delivery costs are relatively fixed. Royal Mail cannot choose not to deliver in certain areas or on certain days – the universal service requires postmen and women to walk every street, six days a week, whatever the mail volume. Direct delivery reduces productivity and increases total delivery costs as rival postal companies’ postmen or women deliver the same overall declining volume of mail to the same street.

We fear a point could soon be reached where direct delivery competition leads to the universal service being unviable. Were this to happen, it could represent the loss of a vital service upon which thousands of communities rely.

We believe that there is sufficient evidence to support an immediate review of the postal market by Ofcom. Effective interventions may take years to implement. It would be far more difficult to unwind a situation once direct delivery is established in parts of the country than to set an appropriate framework now which safeguards the universal service.