UK postal regulator Ofcom said today that growth in the Downstream Access mail market seems to be slowing, but it is keeping a close eye on the development of new end-to-end competition for Royal Mail.
The agency issued its annual review of the postal market today, covering the five years up to the end of March 2012.
The report noted the turnaround of Royal Mail’s profitability and its improvements to operational efficiency.
It said the Downstream Access market – private postal operators collecting and processing mail before handing it to Royal Mail for final delivery – had been growing “rapidly” since 2005, but this growth was now slowing.
“This suggests that the customers who might make costs savings by taking services from other operators via the access process have now largely done so,” suggested the regulator.
Access now represents about 44% of the overall postal market, up from 41% in 2010-11.
Royal Mail delivers about 7.2bn addressed mailpieces a year that have been collected and processed by its rivals, compared to 9.2bn items it handles end-to-end.
Its own bulk mail volumes have nose-dived since 2007-08 as items have been lost to competitors, the Ofcom report shows, but Royal Mail still keeps most of the income from mail going through Access operators in order to provide final delivery.
The final delivery of Access items still brings in GBP 1.3bn in annual revenues to the universal service provider, compared to the GBP 5.3bn revenue from its end-to-end delivery. The Access market provides GBP 153m in annual revenues to Royal Mail’s rivals, who include TNT Post and UK Mail Group.
In Ofcom’s report, it stated that there is still “very little” competition in the market providing full end-to-end delivery services, although it only covered the period up to March 2012. About 8m out of the total 16bn addressed letters during the 2011-12 year were delivered end-to-end by Royal Mail’s competitors, mostly messages delivered by local bike couriers.
Ofcom said there is “significantly” more end-to-end competition in the packets and parcels market than letters, about which it is currently collecting more information.
TNT Post launched end-to-end delivery trials in West London in April
This year saw TNT Post launching fresh trials delivering mail end-to-end in West London, which has been viewed by Royal Mail as something of a threat to the sustainability of its universal postal services. The prospect of lucrative city routes being taken by private sector operators could leave Royal Mail with more of the less profitable rural routes.
The difficulty for private postal companies in providing full end-to-end delivery services is that Royal Mail enjoys VAT exemptions as universal service provider that means it can immediately charge 20% less than rivals.
Ofcom said it expected the TNT Post trial to require further testing and refinement, with new versions to be trialled in future.
But it said the service, which includes scanning on delivery and provision of operating data to customers, is to be rolled out on a broader bases in “selected parts of the country” once the current pilot has been assessed and the impact of Royal Mail’s VAT exemptions have been considered.
The regulator, which is currently developing its guidance on monitoring end-to-end postal competition, said it was keeping a watchful eye on developments, because end-to-end competition would have a “significantly higher impact” on Royal Mail’s universal service than Access services, since Royal Mail currently retains about 85% to 90% of the total revenue from mail flowing through the Access system, but would lose all revenue from competing end-to-end volumes.
“It is therefore important that we continue to monitor the development of end-to-end competition in the postal market,” Ofcom said.
Ofcom is currently accepting views on its draft guidance for end-to-end competition until 9th January, 2013. The guidance lays out how it will monitor the market and safeguard the universal service from damage if competitors “cherry pick” the best parts of the business.
The draft guidances suggests that if Ofcom is concerned about Royal Mail’s nationwide postal service suffering excessively from end-to-end competition, it could decide to set end-to-end operators certain requirements similar to those Royal Mail faces, such as running a six-day-per-week service, guaranteeing one postage rate for delivering mail nationwide, or even pledging to run a fully nationwide service.
Alternatively, Ofcom could decide to set up a central fund for private sector operators to pay into to support the nationwide universal service.
If a high amount of end-to-end competition develops, Ofcom suggested that other options to protect the universal service could include allowing Royal Mail to restrict Downstream Access to its network for end-to-end competitors, or requiring end-to-end competitors to offer their networks for Downstream Access operators to use.
The UK’s postal law also allows Ofcom to potentially put the country’s universal postal service up for tender, which could see the network split into franchises to be awarded to competitive bids. However, this cannot happen before 2021 without Royal Mail’s consent.
Ofcom’s completed end-to-end guidance is expected to be published in spring 2013.