Forgoing Monopoly
The first phase of deregulation intended to open up 30 per cent of Royal Mail's letter market to competition is under way. While it is far too early to say how much impact this has had, a question that does need addressing is how direct mailers are going to respond.
Will they be looking to switch to other postal carriers? Will they be able to adopt a more flexible approach to their mailing schedules? And what will be the best way to buy in this new, competitive environment?
A number of mailing houses remain wary of new postal carriers entering the market, and from what they have seen so far, cannot see them persuading mailers to switch from Royal Mail. A sceptical John Burbidge, managing director at SR Communications, bluntly states: "A cheaper alternative is pointless if your mailing ends up in a dump bin."
This comment refers to an international postal carrier service offered last year which resulted in a major mailing failing to reach its intended destination. He adds: "The problem with competitors to Royal Mail is that they simply cannot match the coverage it offers. Those that do appear to offer a cheaper or more efficient service are selective in the areas that they cover, and are more suited to smaller, more targeted mailings.
"We have gone so far to make this industry credible, it worries me that some people may come along looking to cut costs. While other services may be cheaper, you can virtually guarantee they will not be as reliable as Royal Mail."
Aside from reliability, one of the biggest assets Royal Mail has is its credibility, which is why it will continue to be business as usual, regardless of rival services entering the market. With no other postal carrier geared up to provide nationwide coverage, the familiar red vans will still be seen outside both consumer and business addresses in the majority of cases.
What appears likely to happen is that the new players will either utilise the Post Office to provide the final leg of the delivery, or they will pick the big UK cities and aim to provide a cheaper, faster delivery service there. However, the full nature of the new postal market remains unclear.
Barry Eley, UK national account manager of the international sorter division at Pitney Bowes Document Messaging Technologies, explains that under the current Mailsort re-engineering proposals, the discounts offered for Mailsort 120 products are expected to be on a par with or even better than those currently offered for Mailsort 1400.
The upshot of this is mailers being offered a better discount rate for doing a lot less; the intention being that by giving them the incentive to carry out a rough 120 sort to mail centre level, this will preclude Royal Mail's competitors from 'cherry picking' fine sorted mail at the point of production.
He concludes: "Until Postcomm ensures that a truly open market develops, it is difficult to see how mailers can plan campaigns that will benefit from either better prices or service levels. Currently a lot of noise is being generated about a few embryonic services that lack sufficient capacity to provide a credible threat to Royal Mail for the vast majority of mailers."
One postal carrier that does believe it can offer a credible alternative is Deutsche Post. Given the fact consumers are loyal to the Royal Mail brand, and its infrastructure at the delivery end is second to none, it intends to use the Royal Mail for final delivery. Where it hopes to shake up the market is at the 'front end' of postal services.
Deutsche Post's proposition is to collect the mail, transport it, sort it, and then position it into the Royal Mail network. This is simply a case of moving the mail from the mailing house or customer's premises to one of the 74 mail centres that does the final sorting and delivery. The recipient will not notice any difference.
John Wilkinson, managing director for Deutsche Post, UK mail division, explains: "The mailing house or direct mailing company will have a choice about who they choose at the front end, which reaps benefits in commercial relationships, new pricing structures, material handling processes and better invoicing."
Deutsche Post hopes to bring new products to market that will prove appealing to direct mailers, such as day or time specific deliveries. This will aid mailers enormously in being able to synchronise their call centre's manpower based around a campaign.
Wilkinson adds: "We are confident that with products like Mailsort 2 and Mailsort 3 we can bring much later collection times, improve production processes and help mailers ease their manpower planning and asset utilisation.
"We want mailers to think about the total supply chain – of the benefits not just in the price of mail distribution, but the cost of the manufacturing and production process."
Deutsche Post provides UK-wide coverage, as well as international mail, and it owns Securicor and DHL, so it can offer an express parcel carrying service too.
Wilkinson believes Deutsche Post can provide at least 95 per cent of customer needs, in terms of completeness of service and coverage. This is important because part of its proposition is not to force mailers into dual supply, or at least, only in very limited areas.
He says: "If we do not take care of it all, we will be putting the customer in a difficult situation by splitting things between us and other players. We do not think that is a proposition the market will buy as regularly."
Aside from Deutsche Post, rivals to Royal Mail in the direct mail arena are thin on the ground. SR Communications has explored the possibility of using a new carrier service, but discovered it simply lacked sufficient coverage and was only able to do around 25 per cent of its mailings. "What is the point of giving them 25 per cent and Royal Mail the rest?" asks Burbidge. "For the areas it covered, it was just not cost-effective to use."
Graham Cooper, operations director at Mail Marketing International, says some of his clients have started to do a benefit/risk analysis, testing different carriers. Although at present, none of MMI's clients have made the switch, he expects to see this situation change in the future.
He says: "The market will fragment and there is a genuine belief that mailings could be split. Users will be faced with a choice: simple and best value, or more expensive and complex. A significant effort will be needed to monitor regulations, track prices, update computer processing and mail sorting, and the need to prepare mail in the presentation required for each carrier."
The one area of postal delivery new carriers will definitely chase is bulk mail, because it is the least labour intensive product to handle. John Pembrook, managing director at City Financial Mailing, explains: "They can take bagged, labelled material from us to the 1,500 sorting offices in the UK. The final delivery to the front door will still be handled by Royal Mail. Effectively, what they are becoming is a trucking rather than postal organisation."
The consensus is that the first switchers to alternative carriers will be some of the bigger direct mailers looking to save costs by using them for bulk mailings. Pembrook says: "We will certainly see a company like Barclaycard or a utility such as Seven Trent Water partner with one of these guys in a big way."
In some instances, however, Royal Mail will definitely remain the service provider. For legal reasons, some post has to travel first class with Royal Mail, such as certain financial and share documentation.
Realistically, the new carriers must have a three to five year plan before they make a significant impact. There are confidence issues to overcome, and despite the fact Royal Mail is said to be losing over #1m a day, it remains one of the best world postal authorities.
In an environment where there has been a postal service monopoly, there is now a real opportunity for mailers to try something new. In future, buying on price and access will be a key requirement of the direct mail service industry, and the way in which campaigns are planned and deployed is likely to reflect postal carriers' specific reach and coverage.
Direct mailers can also expect to see major price reductions in bulk mail as a result of greater competition. "Currently, 30 to 40 per cent of total mailpack costs are postage charges. This could fall to 15 per cent by 2007," says James Middlehurst, senior partner at John Watson Partnership.
As far as bulk mail is concerned, city postcodes will be far more attractive to postal carriers than rural and remote areas. As a result, direct mail will become clustered around the most profitable parts. The key will be the service level that each new carrier offers, and for certain campaigns, guaranteed day deliveries could be exceptionally valuable for direct mailers if they have a call centre waiting to kick off in unison with the drop.
Royal Mail will need to take the threat seriously that mailers will try a new supplier just for the sake of change. Burbidge points out that it took years for the likes of BT and British Gas to recover customers lost when their monopolies were removed. To minimise attrition rates, Royal Mail will have to work hard on its culture and customer service levels before it is too late.
Competition is clearly good news for direct mailers, because a more competitive environment is ultimately a more efficient one. And the breadth of services offered should stretch the gamut of postal services way beyond what Royal Mail is currently capable of offering on its own.
Copyright: Centaur Communications Ltd. and licensors
