Ofcom calls on Royal Mail to modernise its network and become more efficient

Ofcom,  UK’s communications regulator, is calling on Royal Mail to modernise its network and become more efficient, in order to sustain the universal service and keep pace with postal users’ changing needs.

Ofcom’s annual monitoring report on the postal market sets out data and trends within the postal sector, and examines Royal Mail’s performance. In 2019/20, 2.8 billion parcels were sent and received in the UK – one billion more than in 2013 – in a market now worth over £10bn in revenues.

The organistion said: “Our analysis of Royal Mail’s efficiency shows that costs in the part of the business responsible for the universal service increased last year. The company failed to make efficiency gains or meet the targets it set itself for improving productivity.

Unless Royal Mail can modernise its network to adapt to parcel customers’ changing needs, and operate more efficiently, the sustainability of the universal service could be at risk in the longer term.”

Lindsey Fussell, Ofcom’s Networks and Communications Group Director, said: “Our research suggests that people’s needs would still be met if letter deliveries were reduced from six days a week to five.

“It would ultimately be for Parliament to decide whether this change is needed. However, Royal Mail must still modernise and become more efficient, to keep pace with customers’ changing needs.”

Keith Williams, interim Executive Chair, Royal Mail Group, commented on Ofcom’s recommendations: “Royal Mail is proud to deliver the ‘one price goes anywhere’ Universal Service which is so valued by customers across the UK. Our unique responsibility began in 1840 when the world’s first adhesive postage stamp, the Penny Black, was used as payment to create a uniform postage service. Times may have changed a lot, but the Universal Service remains vitally important. With changing user needs, which have been accelerated as a result of the pandemic, there is a clear need to move with the times.

“To stay relevant and sustainable, the Universal Service must adapt to life in the 21st Century. Ofcom’s User Needs Review has shown that reducing letter deliveries to five days a week would still meet the needs of nearly all people and businesses. In the last six months alone, letter volumes have fallen by around a third. The reduction in letter volumes has had a significant impact on the finances of the Universal Service which lost £180 million in the first half of the year. This, along with our own comprehensive customer research, demonstrates the need to rebalance the Universal Service in line with growing consumer demand for parcels, and lower usage of letters.

“We are working hard to improve efficiency and transform our parcels operation. We have increased the automation of parcel sorting and are investing in two new parcel hubs.  But at the same time we recognise that the business has failed to make the progress it would have liked on operational productivity and agree that this must change. Too many parcels are still sorted by hand, and we have not adapted quickly enough to the decline in letters. We’ve taken immediate steps to stabilise business performance and set Royal Mail back on a path towards profitability. But as we have said previously, these measures and the delivery of our transformation plan will not be enough, in themselves, to ensure the USO is financially sustainable in the long term.”

“We will consider Ofcom’s findings very carefully. We look forward to engaging further with Government, Ofcom, our unions and other stakeholders to ensure the Universal Service continues to meet the changing needs of consumers, and ensure it remains financially sustainable.”

Next steps for Ofcom

The organisation said: “We have researched whether the minimum requirements of the universal service reflect the reasonable needs of postal users. It would be for the UK Government to determine whether any changes are needed to these minimum requirements and to bring any proposals before Parliament.

Separately, we are reviewing the future regulatory framework for post. This will consider issues affecting the broader postal sector, as people’s reliance on parcels continues to grow. For example, we will look at continuing the requirements for Royal Mail to provide wholesale access to its network, and whether extra consumer protections are required in the parcels market. We will consult on these issues next year and conclude this review in 2022.”