Ofcom publishes annual monitoring update on UK postal market

In its annual monitoring update on the UK postal market, the regulator Ofcom has reported that “the vast majority of consumers are satisfied with their postal services and that prices remain affordable for almost all consumers”. The regulator also found that: “Royal Mail continued to meet or exceeded the majority of its quality of service targets for the second sequential year.”

The Ofcom report, which was published on Friday (27 November), added that First and Second Class national targets were met, as were the Postcode Area (PCA)  results (with a small number within the margin of error).

Looking at the ongoing trends in the postal sector, Ofcom noted that total addressed letters volumes continued to fall in 2014-15, declining by 1.1% to 12.6bn items.

“Although the rate of decline has been slowing in the past couple of years, and the rate of decline in the past year is slower than the previous year (which was 3.2%), it still represents an 18% decline since 2010-11. The slower rate of decline has been attributed to the improvement in UK economic conditions.”

Despite the fall in volumes, added Ofcom, total letters revenue remained broadly flat (0.1% decline) at £4.2bn.

Business mail volumes also continued to decline in 2014-15, falling by 3.2% overall, and access volumes fell by 1.3% in 2014-15.

“However,” added Ofcom, “as total volumes fell faster than the decline in access volumes, the proportion of access in total volume has grown from c.46% in 2011-12 to c.56% in 2014-15.

“Although access volumes fell, the volume of end-to-end letter letters delivered by other operators grew. This was due to the growth of Whistl’s end-to-end delivery service during 2014-15 (largely due to further roll out in 2013-14).”

But, as Post&Parcel readers will know, this trend came to a halt when Whistl called time on the E2E postal operation in June 2015.

The Ofcom report commented: “Given that Whistl was by far the largest end-to-end competitor to Royal Mail, its withdrawal from the provision of end-to-end letter delivery services resulted in Royal Mail no longer facing the prospect of significant end-to-end competition in bulk letters mail, raising concerns that Royal Mail may have weakened incentives to deliver efficiency improvements and an increased ability to charge excessive prices.”

In its update on the UK parcels sector, the Ofcom report noted that the industry has faced a number of challenges over the past year. Indeed, one of the key operators, City Link, went into administration on Christmas Eve (24 December).

Ofcom said that it was given to “understand from conversations with stakeholders that prices have also been kept low by the level of competition in the sector”. It also reported the Royal Mail view that the nature of the competition has been shifting, “with operators that historically focused on delivering parcels to business customers beginning to deliver parcels to and from consumers, moving into what are typically called the business-to-consumer (B2C) and consumer-to-anyone (C2X) segments”.

The report relayed the perception that: “Competition in the sector combined with the expectations of consumers is helping to drive innovation.” The report offered the expansion of Click and Collection options as an example of this innovation.

Summarising the parcels sector, the Ofcom report stated: “The key findings relevant to parcels were that measured national parcel volumes increased in 2014-15 by 7%. While measured national revenues also increased, they increased at a slower rate (6%) than volumes, which is consistent with the level of competition in the sector.”

As previously reported by Post&Parcel, Ofcom announced on 16 June that it would be undertaking a “fundamental review” of the regulation of Royal Mail.

Ofcom has said that this review will “assess Royal Mail’s efficiency, consider its position within the parcels sector, and assess the company’s potential ability to set wholesale prices in a way that might harm competition” and also “address the implications of Whistl’s withdrawal”.

As this review is still ongoing, Ofcom stressed that the annual report “does not cover the outputs of the review”. However, Ofcom added that, in the event that it proposes to make changes to the regulatory framework, it will consult on proposals in the first quarter of 2016.

Click here to a view a PDF version of the Ofcom annual report.