UK Royal Mail hit as bank junk mail falls
A drop in credit card junk mail has hit Royal Mail's core business, with volumes for flagship products falling up to 7 per cent in the six months to September, the postal operator has revealed.
Royal Mail's regulator said the new figures were forcing it to rework the calculations underlying price controls to be finalised this month. Royal Mail attributes the fall in its volumes – the first for 25 years, bar a dip three years ago – to a general economic slowdown and the impact of competition.
High street banks are sending less direct mail than last year, due in part to a switch from blanket to targeted mailshots, according to the Direct Mail Information Service. Such fluctuations in volumes, with banks easing off hard-sell mailshots when personal debt levels are rising, are inevitable, said Royal Mail.
The decision by Royal Mail to release the commercially sensitive volume figures to the Financial Times reflects the intensity of lobbying surrounding the bitterly disputed price controls, which will have a critical impact on the company's future.
Royal Mail claims the regulator's proposed tough cap on average prices, 2.5 per cent below inflation for the next four years, will send it into a spiral of decline. Its battle to be allowed to charge higher prices, increasing the price of a first-class stamp to 39p rather than the proposed 34p, will be helped if it can persuade Postcomm, the regulator, to reverse its assumption that volumes will grow by an annual average of 2 per cent over the price control period.
As ammunition, Royal Mail has revealed that the number of items sent using Mailsort, its leading business product, fell to about 4.1bn in the six months to September, a drop of about 7 per cent on the previous year.
In the same period, the first half of Royal Mail's financial year, the number of items sent by first-class post fell about 4 per cent to almost 2.5bn, and second class post volumes 3.5 per cent to about 2.5bn.
The falls were accompanied by a 2,700 per cent rise, albeit from a tiny numerical base, in the volume of mail handled by Royal Mail's competitors, up from about 13m items in the six months to September last year to more than 350m in the same period this year. This rise relates to mail sent via a system set up when the postal market was partly opened to competition in 2003, in which companies can use competitors to Royal Mail for bulk mail.
Rival operators have to pay Royal Mail 13p for the "final mile" delivery of each item from sorting office to front door. The fact Royal Mail counts part of these deliveries in volume data explains why its total mail volume fell only 1 per cent in the six months despite the greater drops in the products it handles on its own. It said the figures showed why Postcomm should reconsider the assumptions underpinning its price cap proposals. "Regulators can't assume that the market is growing; the current trend is downwards," said Royal Mail.
The regulator appears sceptical of these arguments, however. Nigel Stapleton, Postcomm's chairman, said he recognised the market had now "gone into decline". But he said it was "not surprising growth has slowed a little bit. With so many credit card bad debts, it's not surprising they've not been promoting as assiduously as they were".
Pointing out that volumes dipped before the last price control in 2003, he said the fall in volumes was "not a structural phenomenon that needs to be written into a four-year price control if it happens and then we go back to long-term trends".
With less than a month to go before Postcomm needs to issue the final version of its contentious controls, Mr Stapleton admitted the new figures meant the regulator had "got to reassess all the volume forecasts for up to five minutes before midnight. It's another piece of new information". But he stressed that Postcomm had to be "cautious about over-reacting."
Mr Stapleton suggested Royal Mail was overplaying the competitive threat it faces when the market opens to full competition on January 1. Royal Mail has faced competition for bulk mailings, which "inevitably offer the most attractive target for new entrants", since April 2003 and yet still retained a "hugely dominant market position", Mr Stapleton said.
Analysis released by Postcomm this week put Royal Mail's share of the letters market at 97.2 per cent. The regulator said that by Royal Mail's own calculations, it will still have nearly 90 per cent market share when the next price control ends in 2010.
