The future of letter mail: has Consignia got the message? – Ian Senior

On 14 March 2001 at a postal conference in Brussels, Deutsche Post, La Poste (France), NZ Post, Posten (Sweden) and other speakers gave bullish presentations. By contrast Jerry Cope, Consignia’s Group Managing Director, Strategy and Business Development, gave an emphatically downbeat view of the future of postal services. He warned that profit margins in the postal sector were not good. “The growth in the core profitable letter services is declining rapidly because of competition and regulation. At the same time the margins in the areas for diversification — parcels and logistics, and even e-commerce and banking — are dramatically lower than in the monopoly services?’

He then presented an extremely pessimistic chart

The slide drew laughter from the audience. Here was a board member suggesting that the proud and profitable Post Office was about to plunge into three years of losses. Nobody took it seriously.
We do so now. Consignia is apparently losing £1.5 million every day.

What has gone wrong?

At present it is unclear why an annual profit of around £300 million in the ‘90s has apparently changed into a sig
nificantly larger annual loss today. Competition has not yet started to bite. The Postal Services Commission (Postcomm”) has not imposed any form of price control. The explanation seems to be that costs have got out of hand, indicating managers’ failure rather than external pressures.

For years Consignia has assumed that it would always have a monopoly of the letter and that this birthright would see it through good times and bad. In particular the monopoly would pay for losses on parcels that have occurred almost every year in the past 50. Consignia argued that the letter monopoly was needed to pay for losses on deliveries to sparsely populated areas. It regularly threatened that without the monopoly it would not serve some areas of the country because it could not afford to do so.

Though these arguments were the accepted wisdom in 1970 when I first argued in a monograph published by the Institute of Economic Affairs that the let-
ter monopoly should be abolished, they command little support today. In 1 998 NERA estimated the net avoidable cost of the universal delivery obligation including Braille and related matter as £1 7-23 million. In 2001 an estimate by Postcomm
produced a figure of £81 million but this was based on a model developed by Consignia that classifies mail into around 30,000 types. Such a classification is academic and fails a simple sanity test because it presupposes that the 30,000 types of mail could be segregated on the sorting office floor so that loss-making types could be eliminated.

Throughout the decades while the Post Office was proclaiming that it delivered to sparse areas only because it was compelled to, the major commercial parcel carriers in the country were delivering to every address in the land (often through a shared distribution network) without any such obligation because their customers wished them to do so. Indeed Consignia’s universal delivery network is now seen as one of its most important commercial assets rather than a liability.

Shocks to the system
Three huge shocks to Consignia’s traditional outlook have occurred. Firstly the European Commission has made it illegal for incumbent postal services to subsidise services such as parcels (that compete with the private sector) from profits made by the “reserved” (ie monopoly) services, notably letters. This means that Parcelforce can no longer be subsidised by Royal Mail. Parcelforce must either become profitable, be sold off or closed.

Secondly Postcomm has issued interim licences to private operators, though these as yet can have had no impact on Royal Mail’s traffic.

Thirdly Postcomm has undertaken to open up the direct mail market by 2004 and to fully liberalise the entire postal market by 2006, partly in response to European policy that foresees open competition in 2009.

Other liberalised markets
The experience of incumbents in other countries suggests that fully liberalised postal markets are nowhere near so dire as Consignia predicts. Sweden has had a fully liberalised market since 1 993. In a recent memorandum to the Public Accounts Select Committee Posten stated:

“Competition has brought to the Swedish market a number of significant improvements, including increased efficiency and innovation in the development of new value added services. Posten has played a leading part in these developments, demonstrating that it is
possible for a state-owned incumbent with a statutory universal service obligation to compete effectively in a market environment”

Like Posten, New Zealand Post welcomed the full liberalisation of its postal market in 1998. Even before liberalisation day it cut the price of a standard letter from 45 cents to 40 cents, something no incumbent administration has done anywhere else in the world before or since.

Both Posten and NZ Post have remained profitable, though at much lower levels than when they had a letter monopoly. Both have shed staff and become substantially leaner, as has Deutsche Post, and without industrial action. And all incumbents continue to provide universal delivery without compensation for doing so.

So far competitors collectively have achieved only about five per cent of their markets, showing that Consignia’s predictions of a potential meltdown of its market share are greatly exaggerated.

The last big issue

Now that the argument about the cost of universal delivery has finally been kicked into touch, there remains one big issue for Postcomm to tackle: on what terms should other mail-handling organisations have access to Royal Mail’s network?

Royal Mail’s network of posties delivering to every address in the land would be difficult and probably uneconomic to replicate, at least on a six day a week
basis. Instead direct mailers, the utilities and consolidators will want to take mail, bundled and fully sorted, to the appropriate delivery offices, for delivery over the last mile”. If Royal Mail sets an artificially high tariff for doing so, competitors will be unable to enter the market. If Postcomm were to force Royal Mail to take such mail at too low a price, Royal Mail would have an excuse for making losses.

Conclusion
Postcomm has set the flightpath and Consignia now has just four years to prepare for a fully liberalised postal market. Posten and NZ Post had about that amount of time to prepare themselves. Deutsche Post and the Dutch postal incumbent TPG are partly privatised already and are also heading towards the liberalised market that the European Commission wishes to create.

Last year Consignia’s management squandered the huge asset of the Post Office brand name by changing it. Today it is by no means clear whether they have got the message. The threat to Consignia’s future comes not from Postcomm, not from the EC, and not from the IT revolution but from the failure of its board and managers to embrace competition.