Negotiations to end UK Royal Mails monopoly on letter delivery

Royal Mail is acquiring a taste for negotiation. Days after an agreement with the unions (public enemy number one), ending months of trench warfare over pay, it announced that it was in talks with Business Post (public enemy number two) over terms for allowing the private mail firm to use its 80,000 postmen and women to deliver letters.

The timing was interesting. The surprise announcement came a day before industry regulator Postcomm, which has been pressing for the market to be opened to competition in three stages by 2007, was due to impose terms for phase one.

Previous talks between the two companies on this phase – which allows competitors to collect and deliver more than 4,000 items or to consolidate post into large batches and hand them over to Royal Mail sorting offices for delivery by posties – had broken down. Last May, Postcomm published initial proposals that would have allowed Business Post access to the Royal Mail network for between 11.46p (for a second-class letter) and 406p. Royal Mail rejected this, saying the price, particularly at the bottom end, was too low and would jeopardise its obligation to provide a universal service. It threatened to take the issue to the Competition Commission.

With the acrimony apparently gone in a puff of smoke, Postcomm chairman Graham Corbett heralded 'excellent news'. Royal Mail chief executive Adam Crozier was more guarded, saying access agreements were 'new territory' for Royal Mail; Business Post managing director Guy Buswell was 'excited and daunted'.

Details of negotiations are being kept secret, but any agreement will mark the first significant inroad into Royal Mail's core letter operations. Business Post would sort letters, using its packet and small parcels operations, and deliver them to Royal Mail's 70 mail centres for final delivery. Other rivals will follow this carefully – there are 10 organisations other than Royal Mail holding permanent or interim licences, although some are for very specific service, such as Securicor Omega Express, whose licence allows it to deliver internal mail for Royal Bank of Scotland and HSBC.

Those holding or applying for general licences – Business Post, Deutsche Post and TPG (the Dutch Post Office, which was in merger talks with Royal Mail last year) – are expected to track progress particularly carefully, although Hays and Express Dairies hold similar licences for bulk mail and consolidation and will keep an eye on it, too.

But they all have different intentions. Deutsche is the one most likely to offer a similar service to Business Post – aiming for 5% of the market, or 4 million letters a day – after a year. TPG appears more interested in offering 'end-to-end' services – from collection to delivery, setting up parallel networks in urban areas and possibly using access agreements to reach further-flung parts of the UK. Express Dairies appears content to stick to delivering small packets and parcels – CDs, books, brochures – which it sorts and distributes via 80 depots and delivers on milkrounds. It is aiming for 6 million deliveries in its first year, a relatively tiny proportion of the overall market.

The fact that they all have different proposals means different incentives are at play for the kinds of access arrangements that are agreed.

With Business Post likely to aim for a similar amount to Deutsche, and TPG with its own ambitious targets, Royal Mail could see more than 10% come off its market share within a year. With the business in the middle of a three-year turnaround and profitability this year on a knife-edge following a spate of damaging strikes, it is imperative for Crozier to get the sums right.

Corbett believes Crozier would rather be in charge of negotiating terms than have them imposed, which could open the market more speedily. He says it was likely the prices would have been altered in Royal Mail's favour had he published his paper last week. 'The 11.46p was going to be uncomfortably low. There was an expectation you would be finding the level a little higher, but the top end of the range being a little lower.'

Crozier evidently believed he could get a better deal. 'My guess is they thought they would do better to do a deal that they had under their control,' says Corbett. 'In its simplest form, what they have accepted is that if they are faced with being open to end-to-end competition [which a high access price would encourage] or access competition, which hands back the mail to them and their delivery network, they would much rather go the second route. I think they have focused on the fact that their delivery business is the real jewel in the crown. And, don't forget, it is a good message to the unions.'

As negotiations continue, Business Post will not divulge details, but the company's Ian Paterson says: 'We have never seen the commercial benefit in seeking to replace the existing coverage and reach of 80,000 postmen and women. We have always wanted to link together our distribution expertise with the coverage.' But it wants the coverage as cheaply as it can get it. 'Clearly, for us, the lower the price the better.'

The same goes for German state operator Deutsche Post. Tony Allsop, director of Deutsche Post Global Mail UK, says it aims to offer bulk mailings and consolidation and would use the postie network to do both. It will be following the Business Post negotiations carefully – the results will be summarised in a Postcomm paper in January.

DP will examine closely conditions such as the minimum loads mail centres will accept. Royal Mail argues that additional costs for dealing with competitors' mail mean volumes of less than 2,000 items have to pay a surcharge – which means that at least 150,000 items a day must be delivered for the operation to be viable. During a four-month trial earlier this year – in which it made a loss – DP did not always make these numbers.

However, Allsop says that if terms are agreed with Business Post in January he would expect DP to enter negotiations quickly, aiming to provide services initially to its DP Global Mail and DHL customers: 'Our business plan shows we would be looking to get to 5% of Royal Mail's market share after a year. Say we entered the market mid 2004, we would look to do that by the end of 2005.'

Terms of access are vital – 'the lower the price the better' – but he recognises this would not be a universal view: 'If you were looking to put in your own infrastructure, it is in your interests for the Royal Mail entry price to be very high, because you are competing against that.'

It is a point conceded by competitors, although not necessarily for the same reasons. TPG, for example, believes that opening up competition to Royal Mail is not analogous to, for example, British Telecom, where there were rows about opening up telephone exchanges to competitors. Telephone wires are proprietorial; anyone can walk up garden paths. Providing alternative networks must therefore be considered seriously.

A spokesman confirms that the company is still looking to provide end-to-end services, although in areas far from conurbations it will consider using the Royal Mail network. But TPG is not in favour of the lowest access price: 'Royal Mail should not be hammered. If you hit them too hard you undermine the quality of service provided to the customer.'

As Corbett indicates, this is something Crozier must weigh carefully. If the price is too high, competitors could undercut the entire operation; if it is too low it may, genuinely, threaten the universal service.

If Royal Mail gets it wrong, what is at stake? It is, after all, a state-owned company. But TPG sources say: 'We were in negotiations before, when the access thing blew up. Would we do it again? You never say never – if the turnaround does not go well, or if this competition damages them. And it's not just us. Perhaps Deutsche Post would be interested.'

Given that Patricia Hewitt is a stickler for corporate governance, it is unlikely that Crozier will have a takeover bonus tacked on to his £500,000 pay package. It is in his interests to get the deal right.

Relevant Directory Listings

Listing image

FOXPOST

Leading logtech company, transforming last-mile delivery and reducing the industry’s carbon footprint through parcel locker technology. Offering the best turn-key solution on the market to companies aiming to increase last-mile efficiency. Cut the learning curve and save millions of Euros using our market-ready know-how. Cutting-edge […]

Find out more

Other Directory Listings

Advertisement

Advertisement

Advertisement

P&P Poll

Loading

What’s the future of the postal USO?

Thank you for voting
You have already voted on this poll!
Please select an option!



MER Magazine


The Mail & Express Review (MER) Magazine is our quarterly print publication. Packed with original content and thought-provoking features, MER is a must-read for those who want the inside track on the industry.

 

News Archive

Pin It on Pinterest

Share This