Postal Services: Special Report – Spoilt for postal choice
The industry has yet to feel the full force of postal deregulation.
But there is no doubt that a liberalised market is good news for direct marketers as the main players compete to offer cost savings, quality and flexible services, writes Holly Wright.
Talk to Carl Bridge, head of customer marketing at Virgin Money, and you would think that postal deregulation was a figment of the imagination. The company – which was one of the biggest climbers in last year's table of direct mail spenders and currently sits in 38th position – has not been approached by any UK firms offering an alternative to Royal Mail's service.
"It's surprising really," says Bridge. "They may have approached us through another route, but they've certainly not made contact with the marketing or production departments." Bridge adds that although it would consider working with an alternative provider if its offer was competitive, the company is "very happy with Royal Mail's service".
Six months after full deregulation came into force in January – the most seismic shake-up in the postal market since its inception over 350 years ago – the impact of competition has yet to be felt by many companies.
This is backed up by the rather sobering statistic released by regulator Postcomm in September last year, that Royal Mail still accounts for about 97 per cent of the volume market. Alternative providers of end-to-end solutions account for just 0.3 per cent of the market and one such company, Express Dairies, which worked in partnership with TNT to deliver heavier items direct to customers' doors, has since bowed out.
So has postal deregulation proved something of a non-event for the UK's direct marketing industry? The answer has to be a resounding no, as Phil Cresswell, head of supplier management at Lloyds TSB, would testify. "We expect to send in the region of 180 million items annually through downstream access and believe this has delivered savings to the business of about 15 per cent," he says.
Lloyds TSB, which has switched from Royal Mail to TNT Post for its transactional mail, is one of the clear beneficiaries of the deregulated market. TNT Post, formerly TNT Mail, signed a downstream-access agreement with Royal Mail in April 2004 and went live with its first client BSkyB in August that year. Since then, it has established itself as one of the leading players in the deregulated market, alongside DHL and UK Mail.
Access all areas
These three companies are, undoubtedly, providing direct mailers with an alternative solution to Royal Mail (see box, page 8), albeit one that ultimately feeds into its final delivery service. Where competition has still found to be lacking, however, is in the provision of an end-to-end solution that rivals Royal Mail. "At the moment, there are many companies offering different services in the consumer mail market, but they are all dependent on Royal Mail for access," says Graham Cooper, managing director at postal consultancy service Onepost. "My view of true competition is an end-to-end delivery option that doesn't go through Royal Mail."
David Laybourne, technical director of DPS Direct Mail, says that at present, and on paper, "there's barely anything to choose between the likes of TNT, DHL and UK Mail, bar a few cultural differences and perhaps the deal they will cut with you at any particular moment in time".
A quick glance at the three operators' two-day, pre-sorted mail offerings confirms that this is the case. The common denominator is that all have agreed similar access agreements with Royal Mail, based on a wholesale price of about 13p a letter and similar service-level agreements.
None of the players will divulge their prices, but point out that there is no standard rate-card for their services, as so many factors come into play when determining price. These include how far the mailer is located from their depots; the number of collections necessary; volume, size and weight of mailing and the degree of sortation.
However, given the tight margins rival operators are working to, you can be sure that there will be only minor differences in price – although all will, undoubtedly, vaunt the superiority of their service.
Postcomm admits that developments in end-to-end delivery have been thin on the ground, but says access-agreements with Royal Mail are an important stepping stone for companies who hope to offer an end-to-end solution. A Postcomm spokesman says: "Without access it would be a very slow process. This way companies can test the water and see if they want to do the whole delivery themselves."
End-to-end solutions
TNT Post is a good case in point. While Steve Patrick, managing director of UK Mail, says the company has "no immediate plans to move into end-to-end", TNT has made it clear that this is definitely on the agenda.
TNT Post chief executive Nick Wells describes the company as having a three-pillar strategy. "The first is to achieve market leadership in access, the second is to see accelerated growth through consolidation and the final plank of the strategy is end-to-end network development." Wells adds that this will be a gradual process requiring considerable investment, but is in no doubt that "it will have an alternative to Royal Mail".
There's no excuse for companies who have yet to explore the postal options now available to them. UK Mail, part of Business Post and the first company to sign a downstream-access agreement with Royal Mail, has a savings calculator on its website that allows users to enter their mailing volume, the mix of first and second-class mail and establish the potential annual saving available by switching to UK Mail.
If clients are unsure about which carrier to work with, companies such as Onepost should be able to help. It has developed a software solution, which features the products and services of a number of carriers – including Royal Mail, TNT and DHL – and establishes an indicative rate based on different variables.
"We use the software to give the best solution to customers for getting their mail delivered. This generally means a blend of carriers," says Cooper.
A good example is Reed Learning, which mails outs its 100-page Directory of Training Courses in significant numbers each month. Following an analysis of the mailing file, Onepost recommended using four different carriers – one of which was Royal Mail – representing an estimated postage saving of £160,000 a year.
But it's not just the financial saving that is appealing to marketers.
Creswell admits that the main driver for switching was price, but says Lloyds TSB is also getting a better service. "The mail is delivered one day earlier than Royal Mail's Mailsort 2."
Providers can also offer a day-definite service with a track-and-trace facility up until the point where the mail is delivered to Royal Mail.
Thereafter, Royal Mail works to a typical service-level agreement of 95 per cent of the mail being delivered the next morning. "Clients have been crying out for a day-definite service for some time," says Steve Patrick, managing director of UK Mail, whose clients include Powergen, Royal Bank of Scotland and Dell. "Knowing which day the mail will drop can make a huge difference in terms of maximising response rates and gearing up call centres."
Kevin Trever, head of marketing and print procurement at BSkyB, says knowing what day the mailing will drop "enables us to plan our marketing activity much more effectively. With the Mailsort three-day service, you couldn't guarantee what day the mailing would land, so it made manning the calls centres more volatile".
BSkyB first trialled TNT's service in August 2004 with its transactional mail. This is a typical entry point for mailers as volume for transactional mail, such as bills and statements, is regular and easy to predict, plus the format is standardised.
BSkyB has since extended its relationship with TNT to include its large volume direct-mail campaigns and some smaller campaigns through TNT's consolidation service.
Royal Mail ups its game
However, Trever, who is responsible for mail purchasing in three core areas of BSkyB's business – magazines, transactional mail and direct mail – has not washed his hands of Royal Mail. Its final delivery of mail is through Royal Mail's army of 68,000 postmen, which is vital for BSkyB.
"We need full coverage as we deliver to 24 million households and Royal Mail gives us that, plus the reassurance of the Royal Mail brand."
BSkyB still mails its magazine direct through Royal Mail.
Trever says there's no doubt that the service has improved in recent years. "Royal Mail has definitely got better. It's listening to its customers and has become more customer-focused. We could be wooed back, if the commercial offering was right. It's not personal, it's commercial."
Royal Mail doesn't have a win-back strategy to entice defectors back to the fold, says commercial policy and pricing director Lorna Clarkson. "We're focusing on improving the products and services we offer customers and if they are attractive to clients, they will come back," she says. A number of clients are currently reviewing their decision to adopt downstream access in view of Royal Mail's current quality of service, she adds.
There can be no disputing the fact that Royal Mail's service has improved in recent years. Both first and second-class mail have been on, or above, target level for more than a year and a total of 10 out of 13 products achieved their targets in the final quarter of last year. These include Mailsort bulk business mail services, Presstream for magazine and catalogue mail and PPI (Postage Paid Impression) services.
Royal Mail is also embarking on some major changes to its offering, simplifying its portfolio of products for direct marketers in response to customer feedback. Currently, the descriptors for its products are based on sortation levels and delivery speeds. "The descriptors are operationally driven and not customer driven," says Clarkson. "We will be moving towards simpler, more customer-focused terminology, with a menu-based pricing system."
This shake up of Royal Mail's offering, coupled with the growing recognition that it needs to offer a more flexible service, is very good news for direct marketers. And few could argue that this has been fuelled by the new competitive environment.
COMMENT – WHAT DM MAILERS WANT
ANDREW WILTON, MARKETING DIRECTOR, READERS DIGEST
"Our promotional material goes through Royal Mail's Mailsort 3 as the margins aren't there with rivals. Customer correspondence is with TNT as it hits all three buttons in terms of cost savings, quality and added-value services."
PHIL CRESWELL, HEAD OF SUPPLIER MANAGEMENT, LLOYDS TSB
"We have a customer licence with Royal Mail which means we engage TNT to provide the logistics for transactional mail and the cost of the final mile is invoiced direct from Royal Mail. Our direct mail is through Mailsort 3 as there's not much cost differential there at present."
GRAHAM HUNT, COMMERCIAL PROJECTS MANAGER, POWERGEN RETAIL
"Most of the customer-facing information sent out by Powergen Retail goes through DHL. We've saved huge sums of money. There are many other benefits too, such as later collection times, better management information and greater transparency in our processes."
KEVIN TREVER, HEAD OF MARKETING AND PRINT PROCUREMENT, BSKYB
"We're putting a lot of volume through TNT. The track-and-trace facility, two-day delivery service and flexible collection windows are all real benefits. We are also talking to Royal Mail and it is now listening."
NEED TO KNOW
The remaining barriers to competition
Two months ago, Postcomm published a decision document outlining its recommendations for tackling barriers to entry in postal services.
Some of the barriers identified by it, and additional ones, are outlined below:
1. VAT – Royal Mail is exempt from charging VAT on services, but other providers are not. This is pertinent for firms in the financial and charity sectors as they cannot claim it back. But by registering for a licence to access Royal Mail's service, firms only take a VAT hit on logistical elements of the process carried out by a rival. Postcomm believes that VAT policy is a matter for HM Treasury.
2. Parking rights – Royal Mail is exempt from parking restrictions, for example, parking on a yellow line. This doesn't apply to other providers, which has "financial implications for firms and affects the flexibility of their service", says David Robottom, a director at D&S Consultants.
3. Lack of awareness – A Postcomm survey last September found that only 25 per cent of customers identified 1 January 2006 as the date for full market opening and 58 per cent could not identify an alternative provider.
4. Low margins – Downstream-access costs are about 13p a letter. Alternative providers are concerned that the margins available at this price are not attractive enough to risk substantial investment. Royal Mail says that the low retail price of stamps in the UK is not in line with its costs or its European peers.
5. Operational difficulties – Operators accessing Royal Mail's service have to meet various criteria, some of which can be costly. Stringent mail specifications can also lead to more mail being rejected under access arrangements. If a firm thinks Royal Mail is acting anti-competitively, a formal complaint can be made to Postcomm.
NEED TO KNOW – The rival postal products
ROYAL MAIL
Royal Mail's Mailsort products require 90 per cent of the mailing to have accurate postcodes. There are nine options to chose from, based on three delivery speeds: Mailsort 1 for next-day delivery, Mailsort 2 for delivery in three working days and Mailsort 3 for delivery in seven working days, and three sortation levels.
These are 1,400, 700 and 120, which relate to the degree of sortation achieved. Customers are charged on the type of sortation achieved, speed of delivery and volume discounts.
The price agreed with operators vary according to the above criteria.
It's clear rivals cannot replicate Royal Mail's next-day service and there is a consensus that the cost benefits of Mailsort 3 through competitors are not yet significant.
DHL
DHL has one downstream-access product offering two-day pre-sorted bulk mail delivery called Suresort. It offers the reliability of using the DHL transportation network to deliver mail from the client's base to its sortation hubs and on to Royal Mail's delivery centres.
The firm offers daily reporting back to the customer, storage of large-volume mailings that can't be handed over to Royal Mail in one day and flexible collection times.
On the B2B side, DHL has a pre-sorted service for more than 1,000 items of direct mail called Citispeed. It will collect from anywhere in the country and deliver to defined postcodes in business districts predominantly in the north-west, midlands and London through its own distribution network.
UK MAIL
UK Mail was the first to secure a wholesale licence with Royal Mail and offer an unsorted-mail service. It has two downstream products.
Business Class offers a day-definite, two-day service for sorted mail, while Economy Class is a three-day delivery service for unsorted mail.
UK Mail offers a track-and-trace service, which delivers real-time data up until the point that the mail is delivered to Royal Mail. Its latest collection time is between seven and nine pm, with mail trunked through its network over night and delivered to Royal Mail's hubs for next-day delivery.
According to Steve Patrick, managing director of UK Mail, it aims to capture three per cent in volume terms of the market by the end of its third year of trading.
TNT POST
TNT Post currently sends over one billion items a year though access on an annualised basis, according to chief executive Nick Wells, making it "probably Royal Mail's largest client".
Its product range is very similar to UK Mail with Premier offering a two-day time definite service for pre-sorted mail and PremierSort offering a two or three day consolidated service for unsorted mail.
It offers all the usual benefits including tracking, late and flexible pick-up times and the promise of cost savings of up to 15 per cent dependent on mail volumes.
TNT's end game is to achieve a rival end-to-end network to Royal Mail and it has a clear strategy in place to achieve this says ?Wells.
