Competition might mean the end of the Royal Mail's monopoly, but the 350-year-old organisation could still deliver surprises

THESE are testing times for Adam Crozier. The Royal Mail's Falkirk-born chief executive has been facing the prospect of open competition for his pounds-6 billion-plus monopoly since January 1. Foreign players, including TNT and DHL, owned respectively by the Dutch and German national post offices, as well as Birmingham-based UK Mail, part of Business Post, are all eyeing up a slice of the action. Most of the 14 players who have been awarded UK operating licences by regulator Postcomm are hoping to cherrypick the most profitable parts of Royal Mail business.

Since 2003, rivals have been allowed to provide restricted services to companies that send out batches of more than 4000 items at a time, giving them access to the Royal Mail's "final mile" to allow delivery to individual addresses. But, much to the chagrin of the Communications Workers' Union, Postcomm opted to introduce a market freefor-all four years ahead of the European Union's requirement to do so, partly in the belief the threat of open competition would chivvy up the Royal Mail's own performance. The EU requirement does not take effect until 2009.

Despite the success of its "renewal" programme – which has seen 33,000 jobs go in three years but has also restored Royal Mail to profitability after the strike-riven days of 2001-2002, when it was losing pounds-1.2 million a day – it is clearly going to struggle to hold on to its 97-per cent market share.

The state-owned group has had a protected monopoly of UK postal services since Charles I established it in 1635, and even with a charismatic leader such as Crozier, change does not come easily to a heavily unionised group with 190,000 employees. This is one of the reasons Crozier and chairman Allan Leighton want to introduce an employee share-ownership scheme giving around 20-per cent of equity to employees.

"Sixty-five percent of their costs are labour, which is why Leighton is so keen on the idea of giving staff part-ownership, " says Paul Jackson, chairman of the specialist management consultancy, Triangle. "Such a move is essential if they're going to be able to improve productivity and flexibility.

"As the market changes, flexibility is going to be the key. For example, they're going to need to start making deliveries on Sunday, a much more convenient date for bulkier deliveries to households than weekdays. That's going to be more acceptable to staff if their interests are aligned with the company's."

However, fears that the group – which includes Royal Mail, the Post Office and Parcelforce – is going to be swiftly emasculated by overseas rivals seem overblown. The same probably applies to concerns that its customer base is going to be so eroded that it will struggle to deliver the universal service obligation (a statutory requirement to collect and deliver mail to all parts of the UK for a standard rate).

Industry sources seem confident that Royal Mail will, in fact, retain a market share of at least 80-per cent even five or 10 years on. They point out that incumbents in the two markets that have already been liberalised both clung on to their dominant shares. In Sweden, whose postal market was opened up in 1993, 94-per cent of mail was still being delivered by state-owned monopoly Sweden Post a decade later. New Zealand Post lost its monopoly in 1998, but five years later, controlled 98-per cent of the market.

However, the big danger for Crozier is that the group's most profitable businesses – which include bulk deliveries for large consumerorientated businesses such as banks and between large cities – will prove the most vulnerable. One Royal Mail insider says: "The danger is that the competition skims off our most profitable business and we are left dependent on social mail on which we do not make a profit. We need a regulatory regime that permits us to compete fairly for business post."

Most industry commentators are less pessimistic about Royal Mail's future. "I predict it will still have around 90-per cent in five years' time, " says Paul Kehoe, chief executive of DX Services, a mail provider spun out of Hay Group in 2004, which has its main Scottish base in Edinburgh's Rutland Square.

"It is still the principal provider and has become a far sharper and leaner operator over the past couple of years. They have cleaned up their act. Indeed they would have got away with paying Adam Crozier pounds-2.6 million last year unless they had cleaned up their act."

The Royal Mail group's biggest secret weapon is its army of 65,000 posties who deliver mail to 26 million UK addresses, six days a week. There are parallels between this and the "final mile" of telephone wires owned and operated by BT, which was recently rebranded as Openreach to make it more accessible to rival telecoms.

For Royal Mail's 14 rivals, the economics of replicating this network do not stack up. So most have entered deals which give them access to the delivery network for around 16p per standard letter. However, there have been calls for this "pipeline" to be treated as a separate profit centre within the group as a means of ensuring rivals are given equal access to it, and these calls are likely to get louder.

Jackson predicts that, while the jobs of the Royal Mail's posties are safe, it is the 130,000 people working in areas including sorting who are most vulnerable. To ensure Royal Mail does not see its sorting business ebb away, Crozier has called on the government to make a pounds-2 billion investment in automated sorting technology, an area where both Deutsche Post and TNT have a massive headstart thanks to the foresight of the German and Dutch governments.

However, Chancellor Gordon Brown may have qualms about endorsing a cash injection on this scale at this time. A DTI spokesman says: "The government, as a shareholder, would only consider making such an investment were there to be a commercial case for doing so. The impact of the Postcomm settlement of December 2005 is still being assessed. Any further investment must be on a commercial basis as well as being assessed against the government's spending priorities."

Most commentators agree that it'll be some time before consumers are given real choice about which mail provider they use. Millie Banerjee, the watchdog Postwatch's new chairwoman, says the main focus of competition will remain in the business post arena for some time. She says: "Post competition is not going to begin with a bang. Customers should be reassured it will not mean lots of different coloured post boxes or armies of posties in different uniforms fighting to be first to letter boxes."

She says that, in practice, the Royal Mail will continue to deliver the vast majority of mail and continue to serve the whole of the UK.

Paul Carvell, who stood down as chief executive of Business Post Group, parent of UK Mail, predicted last year that Royal Mail will retain a profitable 80-per cent share of the UK market and that three-quarters of the 20-per cent share it would lose would be picked off by four competitors providing a nationwide service, while one-third would be mopped up by city-centre specialist deliverers.

"I think the consumer postal market will continue to grow, despite some substitution by e-mails. There is a pounds-1bn market opportunity out there for companies like ours and so the market will change. There will be, however, one constant. Posties are here to stay."

Jackson also predicts Royal Mail will lose 10-per cent-20-per cent market share within five years. "I expect Business Post and TNT will be the most successful in taking away share. What they have been doing until now is account management – which means picking up mail from business customers and giving it to the Royal Mail for delivery. The next step for them will be to offer more integrated mail services, where there is much greater scope for innovation."

Jackson adds: "The real issue is whether the end-to-end market will develop on a definite day basis. This is what direct marketers are crying out for. For example, it enables them to ensure a mailshot is delivered to households in Norfolk on a Thursday, to coincide with a TV campaign on Anglia and follow-up call from a call centre on the Friday."

A spokesman for TNT – which already has significant mailing contracts for BSkyB, Barclays, Lloyds TSB and npower – claims the Dutch-owned group boosted its share of the UK market to 5-per cent in the weeks before Christmas. He says it will trial end-to-end deliveries "somewhere in the UK" later this year. This is likely to be in a major conurbation such as London or Birmingham.

And DX, which grew out of the Document Exchange, a specialist transmission service for lawyers, is already offering doorstep deliveries to certain business addresses in London and in other major urban centres including Edinburgh and Glasgow. Its chief executive Paul Kehoe says: "We are one step ahead of other competitors in that we inherited a bespoke network, with 31 service centres serving 27,000 customers, which we believe covers 70-per cent of UK postcodes.

"But to create a universal service would be just impossible. We are also about 25-per cent cheaper than Royal Mail, but can provide a guaranteed delivery at 7am to 9am the next day."

Jackson believes there is also scope for unexpected players to enter the fray. "Others could well come out of the woodwork, ones we aren't even thinking about."

Having partially won his battle with Postcomm over price controls last December, the other major issue on Crozier's radar screen is the Royal Mail's pension deficit, which is expected to soar from pounds-4bn to pounds-6bn at the next review in March, owing to revised mortality expectations for its 440,000 members. He sees this as a legacy problem, and therefore one over which the government should shoulder the burden. But given Brown's present finances, this might be another tall order.

"Royal Mail will fight for every single letter, " says Royal Mail Group spokesman Ian Smith. "We're determined to compete successfully in the open market but in order to do so we need a fair regulatory regime and the ability to invest pounds-2bn in the modernisation of the business."

"Royal Mail is already delivering record quality of service to its customers and is determined to do even better."

TIMELINE

1969: The General Post Office (GPO), a government department, becomes a nationalised industry.

1974: Postcodes extended across UK.

1979: Prestel videotex system launched.

1981: Telecommunications services transferred to British Telecom. GPO is renamed the Post Office.

1986: The business of delivering letters, delivering parcels and running of post offices are separated.

1990: Girobank sold to Alliance & Leicester Building Society.

1995: John Roberts succeeds Bill Cockburn as chief executive.

2000: Post Office renamed Consignia.

2001: Government sets up postal regulator, Postcomm, and says it will deregulate the market between 2003 and 2007. Postwatch created for consumers to express concerns.

2002: New chairman Allan Leighton announces "renewal" plans after the group, which has the worst strike record in the UK, declares a pounds-1.1 billion loss for financial year to March 2002. Group renamed Royal Mail Group plc. Thirty thousand jobs to go.

2003: Adam Crozier succeeds John Roberts as chief executive.

2004: Deliveries cut to once daily. Mail trains end. SmartStamp introduced.

2005: Mail trains re-introduced on some lines.

2006: Royal Mail loses its 350-year-old monopoly as Postcomm liberalises the postal market three years ahead of other European postal markets.