Consignia buys minor stake in Mail Marketing International, citing long-term strategy, UK

Before the dust had settled on the row over the Postal Preference Service,
Consignia was already signing on the dotted line for an even more contentious
foray into the direct marketing business. The company formerly known as the Post Office says July's UKPd2m purchase of a
minority stake in Bristol mailing house Mail Marketing International (MMI) is
part of a long-term strategy to "grow and consolidate the mail medium's future
alongside other communications media". The move has provoked fears that as the delivery of mail is deregulated and
overseas operators start to encroach on Royal Mail's market, Consignia will
spread its own tentacles further round the direct marketing industry, using
its monopoly power to leverage and even cross- subsidise its position. And it
is not just the direct marketing industry that should beware of Consignia's
expansionist intentions – the company is looking to link with other marketing
services, from media buying to advertising creativity, in a bid to produce a
seamless communications process. Consignia is playing down fears that it will use its dominance in postal
delivery to bulldoze its way over the direct mail process. It says it has no
intention of becoming a major player in direct mail. Rather, it will take
minority stakes in related companies and seek strategic partners in the
industry to "support direct mail's enhanced position in the media mix". Royal Mail managing director for media markets Adam Novak suggests Consignia
has bought into MMI not so much to investigate new revenue streams, but more
as a way of lending a hand to the whole direct mail industry. "Market demand
is increasing for more targetable, responsive, flexible and value-for-money
media. We want to help meet that demand and ensure the mail medium becomes
more complementary with other advertising media," he says. Royal Mail is looking to work with businesses across the entire marketing
industry. "We recognise that we can achieve our shared industry objectives
more quickly and easily by pooling resources and working together," he says. But some in the industry believe these statements defy logic. Why bother
spending UKPd2m on buying into MMI if all Consignia is looking for is better
ways to work with the industry? Postwatch chairman Peter Carr told PM on July
6: "There are so many trade associations in this industry that Consignia could
have contacted. Why does it have to spend UKPd2m of taxpayers' money to buy
into one company? Why not talk to the DMA (UK), rather than spend what it
hasn't got?" Others fear the giant postal operator will use its market power to cross
subsidise its direct mail offer, using delivery as a loss leader to create
lower prices for production and pose a threat to the industry's cost
structure. This has been ruled out by Consignia, and it points to comments by
regulators, as well as former Trade & Industry Secretary Stephen Byers, that
if Consignia attempted any such cross- subsidies, it would be considered
illegal. However, WWAV Rapp Collins chairman and group chief executive Chris Gordon is
threatening to drag the Government into an anti-competitive fight over the
deal (PM last week). He wants assurances from Postcomm that the regulator has
probed the deal. Cramm Francis Woolf managing director Paul Woolf says if Consignia were
unregulated, its move into the world of mailing houses would be equivalent to
BT entering the telemarketing industry. He is concerned by the level at which
Consignia will be allowed to compete. If it is acquiring mailing houses as a
corporate body – "an arm's-length organisation" – he would not be so
concerned, as long as it didn't give Consignia any benefit over competitors.
But he wonders whether Consignia will be interested if this is the case. Presumably Consignia would be interested in the production end of the process,
such as fulfilment, database bureaux, data in-putting and mailing houses. "The
whole industry could suffer if it became monopolistic. Consignia's argument is
that, because the sector is being opened up, other operators will come in to
their market, so it should be allowed to compete in other markets. But
Consignia has a huge advantage, and it's unlikely anyone would take
significant share away from it," he says. One of Woolf's concerns is that UK postal delivery is "one of the best systems
in the world, on a par or better than the US and more pro- active". At the
moment, he says direct marketing agencies can buy competitively – if their
customers want four or five mailing houses, they can offer it. But he wonders
how transparent the operations of any subsidies would be if Royal Mail were
involved. "If a piece of direct mail costs 18p to deliver and 12p to pack, the total is
30p. After printing to order, it may only cost 28p, and that is a benefit. But
if clients were buying through a competitor, would they be able to get such a
good deal? Consignia has been given a monopoly for many years, so it can't
move to competition without constraints," he says. Geoff Lambert, financial and commercial director of Royal Mail media markets,
says buying the MMI stake should not frighten anyone as it has only taken a
minority stake and not made a complete purchase. But the key, he says, lies in
bringing together postal delivery and direct mail production to create an
easy-to-use process. Clients will be able to cost out the process more
efficiently and it strips out a layer of bureaucracy, as it removes the need
to find a production house separate from a delivery service, he argues. "The real benefit is the ability to get the process together quickly. You can
do it faster if you have an integrated service with other media. You can make
a television commercial very quickly and then do radio and press. You could
integrate above the line and below the line – the real value in the future
would be to pull all the media together. We would be interested in finding
people to provide that kind of service, but not to provide it on our own. We'd
need investment from other people," he says. This would be a brave experiment, and is in keeping with some recent
developments in the marketing services field. The largest agency networks have
used this argument to justify some of the massive takeovers and consolidations
of the past five years. But such an integrated approach has yet to prove its
mettle. It can work out more cost effective to adopt a "best of breed"
approach to marketing services, and get providers to compete against each
other every step of the way, making them fight to the death for each piece of
business. So why is Consignia interested in expanding its business in these areas?
Lambert says: "What's in it for us is we build the market when there's
deregulation, and we are able to sustain our position. The industry considers
us to be a player -when it comes to delivering to consumers they can only use
us. We see the market being deregulated, and we want to be an important
player. "I don't think we would become a major player in laser printing and
production, but we are working with the players to make direct mail speedier,
though our involvement in producing direct mail will remain small. "MMI is expert in producing mail, we are not. We will just drive the services
better than they are now and make it available to the wider industry," adds
Lambert. The purchase of the MMI stake comes just weeks after Consignia was cleared of
complaints made against its involvement in the Postal Preference Service, in
particular the use of Royal Mail branding on PPS survey material. But not everyone in the direct marketing industry has taken such a contrary
position to the further involvement of Consignia in their business. One source says: "Our industry has made a fool of itself over PPS by being
seen as protectionist. I hope we are more sensible about Consignia and
production houses than we were on PPS. I am not saying it is right or wrong
for Consignia to get involved, but our industry looks parochial in the way we
have attacked it." He believes the attacks on PPS have made the industry look vulnerable. "It has
encouraged Consignia to be more confident. Now it has won the PPS battle, it
will continue." Consignia's move into production houses has left many unconcerned, though they
put a lot of faith in the abilities of regulators to restrict it from abusing
its market dominance. As another observer says: "Printers have got into the business, other people
are getting into our market, and now just about every printing company in the
UK is purporting to produce mail, so one more isn't going to make much
difference to us. We are doing this for a living – others are doing it because
they think they ought to." But the issue of regulation is a tough one, as it has appeared in recent years
to have been very political, and many regulators have appeared toothless in
the face of strong lobbying by the industries concerned. The National Lottery
regulator vacillated over the reappointment of Camelot, and has been exposed
as incapable of regulating the lottery in accordance with the law. The
telecommunications regulator has been attacked over what BT's rivals say is
its weak stance on opening the telephone system to competition for fast
Internet access. Mark Hollander, director of Carlson Marketing Group, says he doesn't feel
threatened by Consignia, though any threat depends on the control it has over
the companies it is purchasing. "When clients come to us, we go to three external suppliers to get a
competitive price and ensure they are appropriate to that job. There are
factors of reputation and flexibility – some people can do it in half the
time, it is better that they shop around than have a one stop shop. "The shape of the way people use agencies is changing in the UK anyway. What
we can offer is to go out to find the right project at the right price.
Agencies have a reputation for flexibility – there's an inherent expertise in
project management as brand guardians the clients respect that knowledge." It will be some time before the industry knows whether Consignia really
represents the threat that many have predicted. A small stake in MMI is little
more than a toe in the water, but Consignia has not ruled out making further
acquisitions. The fear this prospect has provoked seems out of kilter with
what Consignia realistically can achieve – Consignia is just one more irritant
for direct marketers to worry about.