Mailing Houses: Tough lessons in deregulation

Postal liberalisation is revolutionising the UK's mailing house market. It may put smaller firms out of business and encourage consolidation, but canny operators that rise to the challenge will survive and could even benefit from the competition, writes Alex Blyth.

The mailing house as we know it is becoming a thing of the past.

Postal deregulation, which came into force on 1 January, will change the shape and nature of the industry forever. It will put some mailing houses out of business, and many of the smaller ones will need to merge or align themselves with postal carriers in order to survive. Those who do survive will find their role significantly altered, as clients increasingly ask them for advice on which postal carrier to use. Quite simply, this is an issue that no-one in the mailing house sector can afford to ignore.

David Robottom, director of D&S Consultants and previously the head of postal affairs at the Direct Marketing Association, believes that deregulation will affect every single mailing house in the UK. "Mailing houses have got to adapt to a rapidly changing market," he says. "Those that ignore these changes will face increasingly difficult challenges, while those that are flexible in the face of change may find that deregulation is an excellent opportunity."

The story so far

In 2004-05, the UK mail market was worth approximately £6.5 billion and 72 per cent of the sector was licensed. The 28 per cent that was open to competition covered mail that cost more than £1 to deliver and weighed more than 350 grams. Anything less than that was delivered by Royal Mail in a monopoly it had held for more than 350 years. On 1 January, that monopoly ended. New operators licensed by the regulator, Postcomm, can now collect and deliver any mail from any customer.

The Government has been liberalising the postal market gradually since 2002, when it first laid out its plans for change. In 2003, it lifted restrictions on bulk mailers sending 4,000 items or more, giving those business mailers the freedom to choose from a range of licensed operators.

In January the following year, it published its Competitive Market Review, which set out how the market was developing, explained current trends and asked for views on the main barriers to entry.

In February 2005, after a year of consultation, the Government announced that it would open up the market on 1 January 2006.

Royal Mail still dominates the UK's postal services: it accounted for more than 97 per of mail sent in 2004-05 and still enjoys exemption from VAT as well as special parking privileges. However, new operators have begun to close the gap. They provided collection, sorting and delivery on more than 193 million items in 2004-05 and their revenue rose by 121 per cent to £31m. Fifteen licensed operators can now provide mail services but the main players are TNT, UK Mail and DHL Global. Business mail makes up roughly 80 per cent of the total and many mailing houses are already dealing with these new carriers. Before long, almost all will do so.

The impact on mailing houses

For many mailing houses, the experience of deregulation has so far been largely unpleasant. DPS Direct Mail is an Orpington-based mailing house, whose 116 staff process about 60 million direct mail and customer communication items a year for clients such as e-sure, Vodafone and John Lewis. DPS is already working with all four of the main carriers.

According to David Laybourne, the company's technical director, deregulation is fragmenting DPS's operation, forcing it to maintain relationships with four vendors by spending time with them in meetings and maintaining telephone contact. "We don't believe in keeping carriers at arms length. We want to work with them and so will call each one about three times a day," Laybourne explains. There are also practical implications. DPS now needs to have a PC set up for each carrier to print each company's labels. It also has different types of sacks, cages and pallets for each carrier and needs to find storage space for all of this extra equipment.

"We're coping because we're flexible and well organised but I know plenty of mailing houses that aren't and they'll really struggle," Laybourne adds. "Ultimately, though, clients are making big savings and we have to absorb the extra costs. Margins have always been tight in this business and this is eroding them even further."

Suppliers to the market are stepping in to try to reduce the logistical problems. Paul Johnston, director of sortation at sorting equipment manufacturer Pitney Bowes, says: "If they're already using one of our Olympus letter sorters then they won't have to invest in new sortation equipment. We're currently installing upgrades so the new carriers can use them to sort mail just as Royal Mail did previously."

However, these developments are coming too late for some, and will be too little for others. Many mailing houses used to receive commission payments from Royal Mail under its Quality Standard for Mail Production (QMP) scheme and for many, this was the profit margin. However, as Peter Frings, managing director of direct marketing agency Target Direct, points out: "The new operators aren't offering any similar incentives to mailing houses to promote their alternative postal services. And because they are using Royal Mail less than they used to, most mailing houses are also losing out on QMP commission and not replacing it with commission from the alternatives."

This is affecting some mailing houses more than others. While some are struggling, international firms such as BTB Mailflight are exploring the benefits of the changes. BTB is one of the largest mailing houses in the UK, employing 180 staff in its Bedford head office and boasting an annual turnover of around £17m.

Ian Kavanagh, BTB's managing director, says: "The international mail market has been liberalised for many years. The days when the best price and service for UK-produced international mail could be obtained through the traditional services of Royal Mail, or indeed any other single postal operator, are long gone. The mailing houses that are likely to be best positioned as we enter this new era are those international mail consolidators that already have experience of working with numerous postal operators."

A new advisory role

Deregulation may mean major changes for mailing houses, but not all of them will be negative. John Ivers, UK managing director of postal carrier DHL Global, believes deregulation offers mailing houses a greater advisory role than they enjoyed in the past. "The whole process is now becoming a three-way relationship between clients, postal providers and mailing houses," he says. "While the client is still the key decision maker, mailing houses now have the opportunity to influence the client's decision-making process by providing consultation about the choice of postal provider."

Yolanda Noble, chief executive of London-based Corporate Mailing Matters, agrees that this is where the opportunity lies. "The larger and more conscientious mailing houses started gearing themselves up for deregulation long before January 2006," she explains. "Most of them are able to provide access to the range of available carriers in this country. Increasingly they will be providing consultancy to their clients, advising them on what is the most cost-effective carrier to use for each section of their mail.

Smaller mailing houses will struggle to offer this service."

So it is clear that postal liberalisation will change the nature and the shape of the UK's mailing house market. It will put many smaller firms out of business and lead to a wave of mergers and acquisitions, with mailing houses already aligning themselves to specific carriers. DHL, for instance, recently acquired Mercury International.

However, a challenge for one operator is an opportunity for another.

In 2003, mailing house Mail Marketing saw these changes on the horizon and set up Onepost, which is now a thriving independent postal services consultancy.

The company's managing director, Graham Cooper, says: "We match carriers to mailing files to find the most cost-effective combination, taking into account weight, format, service requirements and postcodes. Some of our clients save 15 per cent. We charge nothing for the audit and then £2-6 per thousand, depending on the volume. We also set up and manage the relationships with the carriers."

The challenge ahead

Clearly, deregulation is good news for mailing clients. Chris Cuffe, managing director of helpIT systems, a data cleansing software provider, says the increase in competition promises to improve services and reduce prices for mailing.

"Some experts are suggesting that it might reduce delivery times by up to 12 hours and cut costs by 5 to 10 per cent," he says. It will also be good for consultancies such as Onepost and those larger mailing houses that have geared up for the change.

For most mailing houses, however, deregulation is a major challenge to overcome. The smart operators are starting to tackle it now by getting information from sources such as the series of seminars TNT is holding up and down the country. Others are considering the equipment they need to buy in order to work with new carriers and to re-engineer their processes to minimise the impact on margins. Those that do this effectively will survive and prosper.

THE BIG ISSUE – THE COMPETITION'S PERSPECTIVE

Nick Wells, managing director of new postal carrier TNT Mail, is keen to stress that his company is working with mailing houses to minimise any cost impact on them. Mostly, this involves getting the right software in place. "In many instances, mailing houses can use existing kit or just modify it," he explains. "Admittedly, the operational presentational requirements of the new operators are more stringent than those of Royal Mail, but this is because nearly all business-to-consumer mail is delivered by Royal Mail in the final mile."

Wells believes, however, that mailing houses have to respond in kind.

"The industry is operating at excess capacity," he asserts. "Mailing houses have to change to take maximum advantage from what competition and deregulation can offer. The large transactional mail mailing houses were best placed to do this initially because most of the clients who switched to alternative competitors were financial services companies with their transactional mail. Recently, there has been a focus on large volume direct mailers, where the large direct mail mailing houses could benefit."

Mailing houses are a crucial part of the UK's postal industry, according to Wells. "TNT Mail is prepared to support them at a time when there have been a lot of industry and regulatory changes. This will be a partnership that benefits clients, mailing houses and TNT Mail."

POWER POINTS

– Royal Mail lost its monopoly in January when the market was opened up to competition

– Deregulation means mailing houses must adapt to a rapidly changing market

– Mailing houses will take on more of an advisory role as they find the best postal providers for their clients

CASE STUDY – MACDONALD MAILING

Tom Nangle is managing director of MacDonald Mailing, a mailing house that was established in the 70s and now generates most of its revenue from sending smaller mail-order catalogues or magazines. Nangle says he has a very good relationship with Royal Mail but believes that deregulation was necessary to break the stranglehold of the unions and reduce the complacency that comes with a monopolistic position.

Since deregulation, his clients have begun to ask him to work with alternative carriers. This means that since La Poste entered the market, MacDonald has needed five versions of almost everything. It has five docketing systems, five sets of paperwork, five different types of sortation, with some preferring pallets, others cages and some wanting the mail bagged. Nangle estimates this has increased his costs by 20-30 per cent. "I will struggle to pass it on," he says. "One client has agreed to invest in sortation equipment to help me make the transition but it is very much the exception." Having done all the work to adapt to the new climate, Nangle is confident MacDonald will survive. However, he does not believe deregulation will benefit his company greatly. Nangle says: "One client used to be mailing 1.2 million items a month. Now he uses Onepost to find out which carriers are the most cost-effective and only mails 700,000 a month. Deregulation will almost certainly put some mailing houses out of business."