Pace of competition underlines challenges facing Royal Mail

Royal Mail today responded to Postcomm’s newly announced review of the 2006-2010 Price and Service Quality Control, saying:

“Over the past year very significant changes have taken place in the postal marketplace:

• The UK mail market has fallen by 2% and is set to fall further.

• The drop in mail volumes compares with Postcomm’s predictions in setting the price control that the market would rise by between 1% and 2% annually.

• It is now increasingly likely that no other EU country will open its market to competition as Postcomm has done in the UK. This leaves our major rivals with protected home markets while at the same time they can enjoy a regulatory regime in the UK which is heavily tilted in their favour.

• Competition in the UK is developing at a much faster pace than originally predicted – Royal Mail’s competitors will handle around 2.5 billion letters this year, well ahead of expectations and equivalent to 25% of bulk business mail.

• That means that this year alone rivals are carrying around 600m more letters than had been anticipated when Postcomm set the price control, and although rivals require Royal Mail to deliver these letters over “the final mile” to homes and businesses, the price Royal Mail is allowed to charge for doing so doesn’t cover our costs.

• Royal Mail cannot compete fairly for business mail because the price control dictates that when we offer to lower our prices we have to reduce the amount we charge rivals to use our network by the same degree. So for example on our key business product, Mailsort 2, the price we can offer our customers must always be 20% to 28% higher than the amount we charge rivals who are competing for the same business – meaning they can always offer the same customers a price which clearly undercuts Royal Mail.

• As quality of service has improved across all our products and services our business customers are choosing to use Second Class and other cheaper services instead of First Class, reducing Royal Mail’s revenues.

It is also increasingly clear that:

• Rivals have no interest in handling stamped mail (such as personal letters and greetings cards) because it’s loss-making – stamped mail lost more than GBP 200m in the last financial year.
• Because stamped mail is subsidised by business mail our business mail prices remain artificially high, which makes it easier for rivals to “cherry pick” business customers.

This is why Royal Mail believes that the basis on which the price control was set simply isn’t working under the current market conditions – conditions that are clearly going to get even tougher in the future.”