Rivals snap at the heels of UK Royal Mail

Royal Mail, the state-owned postal service, expects to lose "billions" of mail items to its rivals over the next 12 months, following the opening up of the market to full competition on January 1.

And in the change that will follow the New Year's day revolution in the postal services market, it is business customers that are expected to be in the lead.

Royal Mail lost its monopoly on mailings of 4,000 and more items in April 2003. Next week, the rest of the Pounds 6.5bn market, including lower volumes of mail sent by small businesses, is being opened up.

Companies account for more than 80 per cent of the licensed market: mail costing less than Pounds 1 and weighing less than 350g. It is the public's custom, rather than the letters they send, that Royal Mail's 14 rivals will be fighting for.

Liberalisation will take five years to have its full impact, according to Nigel Stapleton, chairman of Postcomm, the postal regulator.

But he argues that the pace of change should be faster than in the liberalisation of the UK's telecoms and energy services. And the battle for the postal market has already begun.

The opening of bulk mailings to competition 30 months ago is having an impact on Royal Mail. It lost an estimated 1.5 percentage points of its market share in the first six months of this financial year, compared with only 0.3 points during the first 12 months of competition in 2003-04, according to Postcomm.

Royal Mail's main competitors include TNT Mail, the UK arm of TPG, the Dutch postal group; DHL Global Mail, the UK arm of Deutsche Post, the German postal operator; and UK Mail, owned by Business Post, a quoted express delivery company. Those competitors say they intend to use the January 1 liberalisation as a catalyst to step up the pressure on the state-owned operator, using a combination of pricing and product innovation to try to woo more of its business customers.

Nick Wells, chief executive of TNT Mail, told the Financial Times: "The UK is a very important market for us. Mail volumes are in decline in Holland and we've got to expand internationally. The UK is the second largest market in Europe, it's very strategically important for us; it's critical that we're successful in it."

But he is under no illusions about the scale of the task facing the Royal Mail's rivals. "It's not a walk in the park. We're up against a 350-year-old business that's a dominant player and probably always will continue to be the dominant player in the market. We've got to be pretty smart about how we compete," Mr Wells said.

The tactics used by those rivals vary. Until now, in the run-up to full market liberalisation, the most widely favoured method, which is forecast to remain the main form of competition in the near future, is the "access" arrangement. Under this, the rival operator collects and sorts post for its corporate customers but then hands the sorted post to Royal Mail, which delivers it the "final mile" to the doorstep in return for a fixed fee.

These access arrangements accounted for more than 1bn of the 24bn items of mail delivered this year, and there are likely to be "billions more" sent that way in 2006, Royal Mail says.

Several of the new operators are also offering businesses "end-to-end" services, from collection to delivery. More than 100m items were carried end-to-end by Royal Mail's rivals in the past financial year, and this competition is also expected to intensify. DHL Global Mail said that it had "embarked on the largest roll-out of a national domestic business-to-business mail service since deregulation was announced".

The only attempt to offer an end-to-end service competing with Royal Mail by taking post to individual households foundered in September, when Express Dairies announced it was ending the postal delivery service it ran in partnership with TNT.

Mr Stapleton conceded the decision was disappointing. But the Postcomm chairman said the nature of the service – trying to piggy-back post on to a declining base of doorstep milk deliveries – meant its demise should not been seen a portent for the future. "It's a disappointment but I don't think it leads us to feel that the prospects of end-to-end competition are mortally wounded."

TNT intends to take on Royal Mail head-on with a new end-to-end service. "We do have a stated ambition to create an alternative final mile delivery. It won't happen overnight. But we'll probably make an announcement in the next few months on how we're trying to achieve that," Mr Wells said.

The different services offered by competitors present different threats to Royal Mail. Access arrangements squeeze the operator's margins. But end-to-end services mean it loses the relevant business altogether.

As Alex Batchelor, Royal Mail's director of marketing, puts it: "Does bypass (end-to-end delivery) potentially pose a much more dangerous risk longer term than access? Answer, yes. It's the difference between having some lunch and no lunch at all."

Royal Mail argues it needs Pounds 2bn to upgrade its sorting machinery and other equipment to survive such competitive risks in the long-term, as well as funding to deal with its Pounds 4.25bn pensions deficit.

Fraught negotiations with Postcomm this year persuaded the regulator to agree that the price of a first-class stamp can rise from 30p to at least 36p by 2010, under price controls that allow Royal Mail Pounds 1.25bn for modernisation.

It has warned that failure by the regulator and government to get the price control and market structure right could threaten the long-term future of the universal service: its legal duty to deliver post to every address in the land for a fixed price.

Some rivals dismiss such warnings. Guy Buswell, chief executive of Business Post, said: "All this speculation about Royal Mail not being able to maintain its universal service is absolute baloney: there's no way it won't be able to afford the universal service." Increased competition "can only benefit the consumer, there's no question about that. Choice in the marketplace will help Royal Mail improve their service."

Business the winner as postal services open to competition
Independent, First, Sec. Business, p 43 12-31-2005
By By Susie Mesure

Businesses are tipped to be the main beneficiaries of the opening up of the postal service to full competition on 1 January.

Royal Mail will lose the right to monopolise the pounds 6.5bn market when Britain goes back to work on Tuesday after the festive break, ending 350 years of postal history.

Its 14 competitors " which include TNT Mail, the UK arm of the Dutch postal group TPG; Business Post's UK Mail; and DHL Global Mail, part of Deutsche Post " are expected to target businesses with a host of new services to try to lure them away from Royal Mail.

Nigel Stapleton, the chairman of the postal regulator Postcomm, said: 'With full competition from January 2006, all of us will begin to see new choices across the full range of postal services, and licensed operators will be free to offer mail users the services they demand.'

Business mail, which accounts for 80 per cent of the market, was partly liberalised two years ago when Royal Mail lost its monopoly on mailings of 4,000 and more. But although this opened up almost one-third of the market to competition, Royal Mail's dominant position meant that it has ceded just 3 per cent of its market share.

Rival companies could choose to set up their own local delivery services or work in partnership with Royal Mail to use its delivery network. They will target the top 10 mail users, such as the major financial institutions, which account for one in five of all letters sent.

Postcomm, which believes liberalisation will take five years to have its full impact, believes the new regime has already forced Royal Mail to sharpen up its act. 'Limited competition has already delivered significant benefits, with Royal Mail's quality of service at an all-time high and business customers enjoying more innovative products and later mail collection times,' Mr Stapleton said.

Adam Crozier, Royal Mail's chief executive, said there was a downside from competition because the postal group would no longer be able to use the profits it makes from business mail to cross-subsidise the price of stamps for the general public. He warned that stamp prices, which are set to increase by 2p to 32p in April, would have to rise to compensate.

A spokesman for Royal Mail added that it would 'fight hard for every letter'. He said Royal Mail was 'determined to compete successfully in the open market' but would need a fair regulatory regime to do so and the ability to invest pounds 2bn in modernising the business.

Britain is only the third country in the world to open up its postal market to competition, following New Zealand and Sweden. Royal Mail will doubtless glean comfort from the fact that in both those countries the original postal service still supplies at least 90 per cent of mail sent. It will also continue to enjoy certain advantages, such as its exemption from sales tax.