MPs warn Royal Mail against pricing SMEs out of mail

A Parliamentary inquiry has recommended caution in Royal Mail’s moves to increase postal rates, for fear that rates could reach a “tipping point” over which customers are no longer prepared to use the mail. The Business, Innovation and Skills Committee of the House of Commons issued its report on Friday generally supporting regulator Ofcom’s intention to remove most of the British postal operator’s price controls, although there was criticism of Royal Mail’s pricing transparency.

“No compelling case was made for the continued use of price controls,” said Adrian Bailey MP, the Committee chairman. “However, I was surprised at the lack of detail Royal Mail provided with regards to the cost of specific services.

“A clear grasp of underlying costs should underpin any future price changes. Without that, the scale of increases being discussed becomes far harder to justify.”

Although the Committee said some increase to postage rates would be “appropriate” given the financial difficulties at Royal Mail, “the uncertainties in the mail market mean that in setting prices Royal Mail will need to have very careful regard to the possibility of a tipping point affecting volumes”.

In highlighting the dangers of high postage rates affecting mail volumes, the Committee pointed to warning from Ofcom that there was no precedent for the impact of significant price increases at a time when mail volumes were already declining.

During last month’s hearings, the regulator confirmed its belief that price rises would result in lower volumes, and that Royal Mail’s forecasts took account of such an impact. But, with no precedent for this situation, there was “significant uncertainty and risk”.

Evidence taken from Consumer Focus last month suggested that a “tipping point” at which postal customers would stop using the mail came at around 50p for a Second Class stamp and 75p for a First Class stamp.

Affordability

With affordability a key issue for its inquiry, the Committee concluded that Royal Mail’s proposed price cap for Second Class letters, potentially the only surviving price cap under Ofcom’s new system, was being set too high.

Allowing a 53% increase in the current 36p second class stamp could not be sustained in the current economy, the MPs suggested.

The Committee said they were also “not convinced” at Ofcom and Royal Mail’s argument that affordability issues for small businesses was the same as for consumers in assessing the second class price cap, and that Royal Mail should reconsider its pricing structures to nurture its small business customer base.

“SMEs often operate on tight margins and have completely different needs to other consumers,” said Bailey on Friday.

“Unless Ofcom and Royal Mail take account of this fact, many SMEs struggling with other cost pressures in the current economic climate may find any such prices increases a real problem.”

Efficiency

The Committee expressed fears that Royal Mail’s freedom to set its own prices other than for second class could see less pressure for it to achieve efficiency improvements in its services.

The MPs recommended that Ofcom’s proposal to review the situation every seven years be shortened to every five years, with the regulator able to resume price regulation if it felt Royal Mail was not making sufficient improvements its efficiency.

Bailey said of Ofcom’s regulation: “It must also be sensitive to the possible effect on its volume of business and the need for higher prices not to operate as a disincentive against efficiency measures.”

Commenting following the publication of the Committee’s report on Friday, Consumer Focus said Royal Mail and Ofcom were right to reconsider price controls given the falling mail volumes.

But the watchdog said there could be no unjustifiable price increases, which had to be based on “convincing” analysis of the market and service costs. And, it backed the Committee’s view that Ofcom should review postal rates every five years, instead of seven.

Robert Hammond, the director of postal policy and regulation at Consumer Focus, said: “It is essential that Ofcom keeps the pressure on Royal Mail to look for efficiencies before it raises prices.

“Transparency is even more vital if regulation is to be relaxed and Ofcom must stand ready to step in if satisfactory progress is not made.”