TRENDS IN MAIL VOLUMES

TRENDS IN MAIL VOLUMES

INTRODUCTION

At the heart of the Post Office's operations is the collection, sorting and delivery of letters. Royal Mail accounts for 80% of the turnover and 84% of the profits of the Post Office and Royal Mail employs 86% of the staff of the Post Office.

Therefore any attempt to prepare a medium-term assessment of the business prospects of the Post Office must make some effort to estimate the likely trends in the volume and composition of the mail to be handled by the Post Office over the next 5 years.

CURRENT COMPOSITION

Currently the Post Office handles some 18.4 billion items of inland mail a year. The trends for the past five years are as follows:

Volume of Inland Mail
Year ending No. of 1st Class Items (m) No. of 2nd Class items (m) Total (m) Growth Index % change
March 1994 6,167 9,376 15,543 100.0
March 1995 6,225 9,913 16,138 104.5 4.5%
March 1996 6,425 10,820 17,245 108.5 3.8%
March 1997 6,458 10,838 17,296 112.2 3.4%
March 1998 6,656 11,774 18,430 118.0 5.2%

Source : Post Office Report & Accounts

Notes
1. The traffic series and growth index show only traffic which generates external income (internal postings and freepostings have been excluded)
2. The growth indices adjust for the effects of different lengths of accounting year and exclude the impact of the General and European Elections

The composition of mail has changed dramatically in recent years :

Changes in Composition of UK Domestic Letter Market 1989-1997
Business to Business +3%
Business to Household +57%
Household to Business -13%
Household to Household +3%

Source : Royal Mail

Currently about 85% of mail originates in the business sector (a figure which has risen over time), but about 65% of this mail is sent to private households with around 35% of this mail being business to business (it is this latter category that is most liable to substitution).

Britain operates two classes of mail: First Class targeted for arrival the following day and Second Class targeted for arrival on day D+3. Over time, the shares of these services have varied: from 30%:70% in the mid-1970s to 50%:50% in the late 1980s to 36%:64% now.

POSITIVE FACTORS

When considering trends in mail volumes, there are many positive factors:

Previous efforts to forecast mail volumes – especially those suggesting a decline in volumes – have often proved very wrong. Famously the Science Policy Research Unit (SPRU) of the University of Sussex – in a report commissioned by the then UPW and published in 1980 – predicted that ".. the postal business faces a serious decline". Although it made no specific forecast of its own, it projected staffing reductions based on a decline in mail volumes of 33% over the next 10 years. In fact, in that period, mail volumes rose by 40%! Similarly past forecasts of the impact of fax on mail volumes have proved unfounded.

Recent performance by Royal Mail has been most encouraging. In the past 5 years, mail volumes have risen by 18.57%.

Royal Mail itself is confident about future growth in mail volumes. On several recent occasions, it has publicly forecast growth over the next 5 years of 20% – a forecast which is very much marketing-driven. Direct mail in particular is showing considerable growth, some 10-15% a year. Also unaddressed mail – known in the business as door-to-door – represented 580 million items in 1993/94 but is projected to constitute some 1,600 million items in 1997/98 – a rise of 175% in a mere four years.

International experience is generally positive. In 1997, the Universal Postal Union (UPU) published a study entitled "Post 2005" which forecasts that letter volumes world-wide will increase by an average of 2.5% a year between now and 2005, while growth in international mail is likely to range from 3.4%-5.2% depending on the region. Obviously these are global forecasts but, even in high-income countries, annual inland letter growth is projected to be 2.3%. Clearly circumstances will vary in different countries, but industrialised countries like Ireland, New Zealand and Canada have experienced growth in mail volumes in recent years.

More subjectively but very importantly, cultural attitudes towards the mail are very positive. There is evidence that letters are welcome and are more likely to elicit a response than other forms of communication – which is why so often a fax is followed by a copy in letter form. "The Millennium Post" – report prepared for Royal Mail by the Henley Centre in 1995 – found that 70% of consumers look forward to receiving the post each day and that 95% claim to open all personally addressed mail. The same report emphasises that the UK consumer receives less mail than the European average and about 20 times less than the almost saturated US market.

NEGATIVE FACTORS

However, there are some worrying negative factors:

The mail pipeline is sensitive to volume because there are such substantial fixed costs in the provision and operation of a nation-wide network responsible for providing universal service at uniform tariffs. Therefore even a relatively small percentage fall in mail volumes could have a serious effect on Royal Mail's profitability. Another factor to bear in mind is that Royal Mail is about to introduce second-generation sorting machines – the Integrated Mail Processor (IMP) – and, unless mail volumes continue to rise very substantially, this automation is likely to necessitate a reduction in staffing in mail centres.

There is rapid growth in electronic alternatives to conventional mail. We have long had the fixed telephone; now we have the mobile telephone as well; in recent years, fax has become commonplace; now e-mail via the personal computer (PC) is spreading at a furious pace. Very soon, it will be possible to send e-mail via interactive television sets. Meanwhile companies like Oracle are investing heavily in so-called network computers (NC). In the course of the next five years, there may be other electronic alternatives.

These electronic alternatives to conventional mail are becoming much more ubiquitous. Almost every home now has a telephone and many individuals have a mobile as well; fax has spread from the office to an increasing number of homes; and personal computers and modems – currently the essential elements for e-mail – are become standard items especially in homes with young and/or professional customers. The arrival of the relatively dumb but cheap network computer may give a big push to the penetration of computers in both the office and the home. Meanwhile the arrival of digital television will expand the possibility of e-mail from 2 million or so PC owners to some 22 million television users.

Furthermore the costs of these electronic alternatives – both in terms of basic equipment and usage – are falling at a phenomenal rate. Mobiles, faxes, and PCs are all falling in cost in real terms, the network computer will be a fraction of the cost of a present-day PC, and the set-top boxes for digital television are retailing at around £200. Meanwhile the cost of telecommunications (that is, rental charges plus local, national and international calls) has fallen by 47% since the privatisation of BT in 1984. Therefore it is already so much cheaper to make telephone calls or to send faxes or e-mails and prices are set to fall much faster both nationally and internationally as a result of market trends such as growing competition and changes in international accounting rates and technological developments like Internet telephony and data over electricity wires.

An illustration of the ability and willingness of businesses even now to transfer traffic from conventional mail to e-mail occurred in the course of the CWU strikes in 1996 over lack of progress on the "Employee Agenda". Internet service provider UUNET PIPEX reported that, in the five days following the first national stoppage, their e-mail volume increased by approximately half.

Meanwhile that part of Royal Mail's business protected by the monopoly is declining. Already 25% of the Post Office's business is outside the monopoly. The European Commission's Postal Directive will effectively reduce the monopoly from the present £1 to 92p. More significantly it is possible that in 2003 direct mail and incoming cross-border mail – currently 20% of Royal Mail's traffic but, by then, certainly more – will be opened to competition. It is important to note that those parts of the market that will be opened soonest to competition – direct mail and international – are precisely those sectors of the market where the most growth is forecast. In the medium term, more extensive liberalisation measures – such as downstream access – will continue to be pressed upon the Commission and the business-friendly New Labour Government by the private couriers.

At the same time as the postal market is being opened to more competition, there are more formidable competitors emerging, willing and able to take market share from Royal Mail. Already within 20 miles of Post Office headquarters, there are operations of the post offices of the Netherlands, Sweden, Denmark, Switzerland and Belgium competing against Royal Mail. Some of the major international parcel carriers – DHL, TNT, UPS, and FedEx – would be willing to compete for sections of the letters market when it is liberalised. Meanwhile new global alliances – such as the acquisition of TNT by the Dutch postal carrier KPN and the purchase of 25% of DHL by Deutsche Post – are being formed. Indeed the Post Office itself is now part of a private consortium which has won the licence to run the Argentinean postal service, it has joint ventures in the Netherlands and Sweden and it has just made a major acquisition in Germany.

The Coopers & Lyrand study of the globalisation of posts, "Postal Performance", anticipates a decline in growth rates from 4-6% a year in the next three years to less than 2% within a decade. It warns : "Absolute levels of revenue may decline".

Even the Universal Postal Union study "Post 2005" contains some warning signals for postal administrations in advanced industrialised countries like the UK. When the global growth projection of 2.5% a year is disaggregated into geographical regions, Western Europe & North America is forecast to experience annual growth of 2.3% over the decade 1995-2005 – a reduction on the 2.6% a year achieved in the decade 1985-1995. Furthermore, when the UPU study looks at some different scenarios for high-income countries, it projects annual growth rates ranging from an optimistic 5.08% to a pessimistic minus 0.57%.

Perhaps most significantly of all, there are now signs that post offices in a number of advanced industrialised countries with similar characteristics to the UK are already witnessing sluggish mail volumes. This finding emerges from a CWU Research Department review which differs from the UPU study in two respects: it is based on actual mail volumes in the past 5 years rather than forecast mail trends over the next 7 years and it focuses very specifically on those high-income and high-technology countries which are directly comparable to our own. We have found sluggish growth in the Netherlands, Germany, Austria, Denmark, Finland, Japan and – very importantly – the USA. Of course, in some cases the explanation is economic recession in that country. However, Germany, Japan and the USA are the most powerful economies in the world and the USA on its own accounts for half of all the world's mail, so one is bound to take seriously developments in their mail markets which suggest a decline in growth rates.

Sweden Post is so convinced that conventional mail is about to be superseded by electronic mail that it has declared that "there will be no post in eight or ten years from now" ("Times", 3.9.1997) and it has decided to allocate a free e-mail address to every Swedish citizen over the age of six. As a consequence, Sweden Post will create the largest intranet in the world using Netscape as its supplier. The service is called @Post.

Almost as an echo of the plans of Swedish Post, here in the UK British Telecom has announced that, to mark the millennium, it will give a free e-mail address service for everyone in the country over the age of nine. The service will be called Mill-e-Mail and be based on the World Wide Web.

ASSESSMENT

How is one to assess these seemingly contradictory signals about the future of mail volumes? Some basic points need to be made.

Royal Mail produces its forecasts of future mail volumes principally by assessing the likely growth of what is known as GDP(L). This is a subset of those economic elements of Gross Domestic Product which most closely correlate with the growth in inland letter traffic. This methodology is based on the knowledge that different sectors of the economy generate different amounts of mail; more specifically, it is known that much more traffic originates from business and financial services than that sector contributes to the growth of the economy as a whole. Other factors besides GDP(L) are known to be important in influencing letter mail growth, notably growth in household numbers and less certainly marketing & sales activity and new products & services.

So far, it has not proved possible to detect any significant correlation with other – seemingly obvious – variables, such as price, quality of service and electronic substitution. Although this forecasting method has proved reasonably accurate in the past 20 years, there is no guarantee that the correlations that have been true of the past will hold in the changed circumstances of the future. In particular, Royal Mail's modelling makes little account of the step changes in technology and in particular the dramatically growing scope for substitution. In the 1970s and early 1980s, British Telecom found that GDP growth was a good predictor of growth in the number of telephone calls that it would carry, but competition in the market and a growing differentiation of the market has made forecasting much more problematical – Royal Mail may soon encounter similar forecasting problems.

In the past, those factors that have proved most reliable in terms of predicting mail volumes – the performance of the national economy and growth in the number of households – have been exogenous variables, outside the control of the Post Office. It seems likely that, in the future, a number of endogenous factors – notably the level and structure of pricing, quality of service, diversification into new products, and marketing effort – will have a growing influence on letter volumes handled by the Post Office and all of these factors are (subject to some political restrictions) under the direct control of Royal Mail.

There is not a straightforward substitution process between conventional mail and other forms of communication. So far the growth of telephone calls has not led to an absolute decline in the number of letters posted ; often a fax is followed by a letter of confirmation; and many e-mail communications are of a short, informal nature that would not be sent by letter. Indeed some forms of electronic communication – for instance, telephone queries about product information (or electronic ordering of goods) – could generate more business for Royal Mail (or Parcelforce). Having said all this, it may well be that, when the penetration of PCs or interactive television reaches a certain critical mass, some substitution from conventional to electronic mail will occur and it is significant that, on the strike days in 1996, there was a significant increase in the volume of e-mails sent. When such substitution does start to occur, the process may well be rapid and dramatic.

We will see a growth of hybrid communications, that is part paper and part electronic. This means that, while the message may start and/or finish in paper form, for some part of the transmission process the message will take electronic form. Since some 80% of letters are generated electronically by word processors or computers, there is considerable scope for an increasing volume of mail to be sent electronically or to become a hybrid form of communication. A major challenge for the Post Office will be to develop electronic and hybrid systems and services. Already some post offices – notably those of Finland and Sweden – are achieving dramatic growth rates in their electronic mail services.

There has never been a finite market for letters or any other form of communications. Therefore, in the face of decline in some sectors of the letters market (notably personal communications), the Post Office has to develop other sectors of the market which are growing – the major opportunities are in direct mail, unaddressed mail and international mail – and to create new services such as time-certain delivery and home shopping.
Overall one could venture the conclusion that, taking all factors into account, current Post Office forecasts of letter growth look optimistic and are by no means certain. Royal Mail may maintain and even improve current mail volumes – at least for a few more years – but it will have to work very hard to achieve this by being much more customer-focused and developing new services.

POLICY

This analysis and assessment suggests a number of policy points for the CWU:

We need to find ways of sharing this information and this analysis with the leadership, the activists and the membership of the union. Presentations could be made to the Postal Executive and to the Divisional Representatives; the material could be used in the Five Year Plan requested by the Postal Executive; and we could have a special session of the Postal Industry Conference.

We need to review the current letter delivery specification to establish whether it genuinely meets customer needs. Currently this specification provides for all urban households (the overwhelming majority) to receive two deliveries a day, the first being by 9.30 am. The CWU/Royal Mail Joint Working Party on Delivery has recommended that the current delivery standard be reviewed by a new Joint Working Party. This should be done sooner, rather than later.

We need to press the Post Office to develop new products and services using the existing resources of the businesses, making better use of the synergies between the businesses, and investing in new technologies such as hybrid networks. The useful work already done in respect of Project Genesis needs to be followed up rapidly.

The Post Office and the CWU need to have much closer relations with customers – both nationally and locally – through regular contact with the Post Office Users' National Council and the Post Office Advisory Committees and through regular meetings with representatives of business users like the Direct Marketing Association and the Association of Household Distributors. We need to know what products and services customers actually want, why they want them, and what they are prepared to pay for them, so that we can roll-out the new services that will maintain volumes, revenues, and jobs.
ROGER DARLINGTON
Head of Research
16 July 1999

ANNEX: INTERNATIONAL EXPERIENCE

AUSTRIA
Financial Year Total number of letters
(millions) Percentage Growth
1992 2,033.9
1993 2,169.6 6.67%
1994 2,305.6 6.23%
1995 2,432.2 5.49%
1996 2,461.8 1.22%

Source : Post & Telekom Austria Annual Report 1996

CANADA

Mail volumes have grown at approximately 4.6% a year over the period 1986-1995.

Source: "Choices For A Self-Sustaining Canada Post", November 1995

DENMARK

In 1995, mail volumes were down 2%, mainly because large companies sent fewer letters.

Source: Danish Post Office Annual Report 1995

FINLAND

In 1995, the volume of mail was 830 million letters – an increase of only 1% or so. However, the growth in electronic letters was 10%.

Source: Finnish Post Office Annual Report 1995

IRELAND

In 1995, core letter volumes were up by 4.6%.

Source: An Post Annual Report 1995

JAPAN

In 1994, total mail volume was 24 billion items, a reduction of 1.8% on the previous year. This was partially caused by a price increase.

Source: Japanese Post Office Annual Report 1994

NETHERLANDS

In 1995, letter volume increase by just 1.2%.

Source: KPN Annual Report 1995

SWEDEN
Financial Year Total number of mail items (millions) Percentage Growth
1991 4,552
1992 4,380 -3.8%
1993 4,532 3.5%
1994 4,894 8.0%

Source: Swedish Post Office Annual Report 1995

UNITED STATES
Fiscal year Total number of pieces of mail (millions) Percentage growth
1992 166,443.4
1993 171,220.0 2.87%
1994 178,039.4 3.98%
1995 180,773.7 1.51%
1996 182,660.7 1.07%

Source: "United States Postal Service Annual Report", 1996