Innovation Needed For UK Mail Processing Says Report

Key Note has just released an 85 page market assesment of business postal services in the UK.

The assessment report examines the market as it stands, focusing on the part of the industry for which licences are required. The report looks at how the mail markets operate on an international level, and suggesting how the market will develop in the future. Extensive research was conducted using information from the regulatory body Postcomm, as well as individual companies and European and international information sources. Key Note also invited key industry practitioners to take part in a virtual roundtable, to elicit views from within the industry itself.

According to Postcomm’s 2007 Competitive Market Review, published in October 2007, the UK addressed mail market was worth around GBP 6.6bn in 2006/2007, a figure, Postcomm confirms, that is largely based on The Royal Mail’s revenues.
However, Key Note estimates that the market size as slightly higher for that period, looking at The Royal Mail’s reported revenues and factoring in an estimated size for Royal Mail competitors, to arrive at a market size of GBP 6.9bn for 2006/2007. The Royal Mail Holding’s annual report for its 2007/2008 financial year shows revenues for its letters business as GBP 6,830m, a 0.3 pct decrease in 2006/2007 revenues (reported as GBP 6.8bn, rather than the GBP 6.6bn cited as market size by Postcomm in its Competitive Market Review). Key Note observed that, while The Royal Mail’s revenue had declined slightly, revenue from competitors has risen to compensate, which means that the market size remains at GBP 6.9bn.

Looking at volumes for the 2005/2006 and 2006/2007 periods, Postcomm shows a decline of 2.5 pct in the latter year. (Volume figures for the total market for 2007/2008 are unavailable, but Royal Mail reports a 3.2% decrease on the volume of letters it handled in that period and it is likely that the overall trend will also show a decrease).

A number of views were put forward from industry practitioners, including Michael Mackay of Courier Ltd, an independent postal consultancy:
“VAT, charged on postal services when a supplier other than Royal Mail is used, is hindering the benefits of deregulation from applying to all mail users. This needs to be addressed as soon as possible — charities are particularly affected by this situation.

There is a lack of competition for magazines presently mailed using Royal Mail’s Presstream service that, uniquely, offers a range of additional discounts that only apply to what is actually being sent through the post. Likewise, if next-day delivery is required there are limited viable alternatives to Royal Mail’s 1st Class service.

Declining mail volumes in the face of growth from other forms of advertising affect the entire industry and more must be done to encourage greater use. Pricing and innovation are key areas the carriers can use to positive effect to encourage growth.” he said.

Peter Frings, Managing Director of Brightsource said:
“Lack of innovation from any of the major players (RM [Royal Mail], TNT, UK Mail, DHL). Specialist operators (DX) and intermediaries (Brightsource/FASTRACK, and companies like Onepost) are innovating, but only in small niche areas — these smaller companies don’t have the scale or resources to build alternative end-to end-networks, new products for the bulk mail."

Steve Lawson, editor for Hellmail the postal industry news site said:
“Whilst responsibility of the universal service obligation [USO] falls to Royal Mail and other European postal giants, clearly for a truly competitive market, the cost would have to be shared — if the USO is to remain. In addition, many competitors complain that VAT exemption for state-owned postal operators makes for a less-than-level playing field."

“With the very real interest shown by local authorities in taking over the running of post offices, more flexibility is required in terms of creating competition for post office services. Postwatch needs greater powers if communities and local authorities are to question or challenge what is still a centralised approach to reforming the UK mail market.” he said.
Neil Fleming-Smith of Mosaic Online Systems said:
“Current downstream access processes do not lend themselves to co-operative working between carriers, due to the risks they place on causing delay or disruption to their own traffic. This is a barrier to entry to smaller regional carriers that do not necessarily have the national reach of a major logistics partner. Co-operative working and hand-off between Logistics partners is the only way that smaller regional carriers can effectively enter
the mail market, and cost-effectively provide national reach for their clients. This can only be achieved with simplified processes and information exchange throughout the delivery process, irrespective of how many partners are involved in the logistics and delivery chain.”

Steve Patrick, Managing Director of said:
"There is a need for the mail industry, regulator, government and, most importantly, Royal Mail to recognise the potential of the USO as a commercial asset that Royal Mail needs to use to the benefit of the market, customers and Royal Mail itself."

The report concluded that based on research and comments made by industry practitioners, there is a need for an innovative new approach to the way in which mail is processed in the UK. There were a few comments regarding the lack of innovation from service providers, which are all more concerned with ‘cherry picking’ the most lucrative, and manageable, city-centre business services, and expressing a desire to take more DSA business, but on an even playing field as far as VAT is concerned.

There is also acknowledgement of the dependence that competitors have on The Royal Mail, and more specifically its USO, which provides the backbone of the DSA service — however, at present, The Royal Mail bears all of the cost of maintaining it. Clearly there is a need for new models to emerge, in the way The Royal Mail is structured and for new pricing models, with questions over the way this element of the industry is regulated.

All commentators believe, however, that it will be many years before the current position, with the incumbent providing ‘final mile’ services, will change.