Competitive Market Review

COMPETITIVEMARKETREVIEWUK POSTAL MARKET

2007

CONTENTS

1 EXECUTIVE SUMMARY 2

2 OVERVIEW OF THE POSTAL MARKET 6

3 DEVELOPMENT OF COMPETITION 28

4 ROYAL MAIL 47

5 MARKET DEVELOPMENTS/OPPORTUNITIES 59

6 ANNEX A 71

1CONTENTS

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As the regulator of the UK mail market Postcomm needs to have

a thorough understanding of the market and how it is evolving.

The 2007 Competitive Market Review builds on last year’s document

to give an overview of developments in the mail market. It will help to

inform Postcomm’s policy decisions and will assist in the continued

development of a regulatory framework that facilitates the development

of competition in the context of a healthy, stable mail market.

Market size and growth

The UK addressed mail market was worth around £6.6 billion in 2006/07. Mail volumes

amounted to 21.9 billion items, down 2 per cent on the previous year1. This is the third

consecutive year of mail volume decline in the UK. While there is evidence to suggest

that substitution has caused mail volumes to decline for the last three years, there is

also evidence of areas of growth in the market which appears to be offsetting a more

significant volume decline.

In 2006/07 2.4 billion items were carried under access agreements; this represents

11.8 per cent of total operational mail volumes. This is an increase from 5.6 per cent in

2005/06. Around half of these items were handled by alternative operators. Latest

figures (cumulative volumes from August 2007) show that access mail accounts for

19 per cent of Royal Mail’s revenue-derived volumes.

1 EXECUTIVE SUMMARY

2 2007 COMPETITIVE MARKET REVIEW2007 COMPETITIVE MARKET REVIEW

1 Based on Royal Mail operational volumes, including access. Includes all regulated and non-regulatedmail, excludes door-to-door and international. 2006/07 volumes are based on operationalmeasurement. For the financial year 2007/08 and going forward, Royal Mail volumes will be measured on a revenue-derived basis, as agreed between Postcomm and Royal Mail.

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There was a decrease in the volume carried end-to-end by alternative operators from

39 million in 2005/06 items to 34.8 million items in 2006/07.

Market segmentation, sectors and mail applications

Businesses generate 87 per cent of all mail; the main uses of mail for business

are advertising mail, fulfilment, general business mail and transactional mail.

Although direct mail volumes declined slightly in 2006/07, by around 2 per cent, there

are indications that direct mail use is a growing and successful medium in some

industry sectors. Distinctions between advertising mail and transactional mail are

beginning to blur and measuring trends in this area will become increasingly difficult.

3EXECUTIVE SUMMARY

2 Postcomm is working with Royal Mail and other licensed operators on a definition of mail volumemarket shares. This is a complex matter, for example Royal Mail argues that self-delivered mail (suchas local authority items) should be included in these figures. To date, Postcomm’s market share figuresexclude document exchange mail. There is also difficulty with the treatment of parcels, most of whichfell outside Royal Mail’s historic monopoly.

* Royal Mail inland addressed end-to-end mail comprises price controlled products (excludingdownstream access) plus USO non-price controlled products.

Total Volumes2005/06

(millions)


(millions)

VolumeGrowth

(%)

Royal Mail end-to-end* 19,705 17,846 -9

Total Alternative Provider Access 539 1,148 113

Customer Direct Access 618 1,292 109

Total Access 1,157 2,442 111

Other letter products 280 336 33

Total 21,142 20,675 -2

Other operators’ end-to-end mailings 39 35 -2

Source: Postcomm with data from Royal Mail

Table 1.1 Addressed letters’ market by volume2

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Transactional mail is estimated to be declining by around 2-3 per cent per year, due

largely to businesses encouraging their customers and other business to move physical

bills and statements on-line. However, while businesses are trying to reduce the volume

of physical statements they send, they tend also to be committed to offering customers

a choice of communications channels. Some of this decline is predicted to be offset by

household growth and the increased volume of transactional mail generated by internet

sales. The use of blank spaces on transactional mail for advertising messages may also

extend the lifecycle of transactional mail.

Fulfilment and publications remain potential growth areas in the mail industry and

both tend to be customer driven. According to IMRG, e-retail which drives fulfilment

mail now accounts for over £4 billion worth of sales a month, which is driving small

parcel and packet growth. In the publications sector, customer magazines are exhibiting

the strongest growth. In the last 12 months the industry has seen 16 per cent year-on-

year growth as companies invest in customer magazines as a marketing tool.

Market developments

As of September 2007 there are 18 licensed operators including Royal Mail. Since

the last Competitive Market Review two new long-term licences have been granted

by Postcomm, and the UK market now has its first franchised operator. End-to-end

networks are in evidence in the UK market, however mainly in niche areas, but there

is potential for this to grow. The different operators in the postal market do have

different customer bases, target markets and business models which are outlined in this

report. The role of mail value chain innovation and suppliers to the industry is increasing

in importance year on year, and recent developments in hybrid mail are particularly

interesting for the future of the market.

Royal Mail’s performance

Royal Mail’s financial performance for the year ended 25 March 2007 was weaker than

in the previous year, with operating profits from Royal Mail’s Letters’ business falling

from £344 million to £194 million, caused by increasing costs, falling mail volumes and

constant revenues.

In 2006/07, quality of service targets changed to better reflect customer needs. Royal

Mail achieved 11 out of 12 of its targets, compared to 10 out of 16 in 2005/06. Royal

Mail’s failure to meet the target for the number of postcode areas delivering at least

91.5 per cent of first class mail the day after posting was due to industrial action in

two postcode areas.

4 2007 COMPETITIVE MARKET REVIEW

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International, VAT and the environment

Competition is developing at different rates and in different ways across Europe

depending in part on the regulatory regime in place from country to country. Liberalised

European markets are broadly characterised by relatively stable mail volumes and

nationwide competition developing in delivery. Competitive market shares range from

8-12 per cent in Germany, the Netherlands and Spain, which have had elements of

mail liberalisation for several years.

On VAT, Postcomm continues to support a level playing field for all postal operators, with

no significant price rises for customers. It therefore believes that a reduced rate of VAT

(of 5 per cent) should be applied to all mail services. However, in light of the European

Commission’s (‘the Commission’) ongoing infringement proceedings against the UK,

Germany and Sweden on the interpretation of the VAT exemption for postal services,

Postcomm has modelled the effect that different VAT exemption scenarios might have

on the UK postal services market. The result of this modelling has shown that the

imposition of the full rate of VAT on mail services (17.5 per cent) could result in around

5 per cent decline in Royal Mail volumes, while the imposition of the reduced rate

would only result in a 1 per cent decline.

Given that Postcomm’s preferred option of 5 per cent VAT applied to all services would

require unanimous Commission Member State agreement, Postcomm intends to wait

for the outcome of the current infringement proceedings before deciding whether to

continue to support this option, or whether there is another option available.

The environment is an issue with an increasing impact on the mail industry, and those involved in the industry, from trade bodiesto operators, are beginning to develop solutions to minimise theenvironmental impact of mail production and delivery. This is arelatively new market dynamic in the industry, and Postcommintends to monitor developments in this area.

5EXECUTIVE SUMMARY

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This section offers an overview of the mail market in the UK, including

market size, growth, structure and competition. It discusses market

segmentation, mail flows and applications of mail in detail, looking

at trends where appropriate. The chapter also looks at the related

markets of unaddressed mail, express deliveries and international

outbound mail.

Market size and growth

The UK addressed mail market was worth around £6.6 billion in 2006/07. Mail volumes

amounted to 21.9 billion items, down 2 per cent on the previous year3. This is the third

consecutive year of mail volume decline in the UK. As domestic letter volumes have

been in decline for the past three years, there is growing industry concern that this

may be a structural decline based on a mature mail market subject to impacts such

as e-substitution. While there is evidence to suggest that substitution has caused mail

volume decline, there is also evidence of areas of growth in the market and significant

moves away from mail have not materialised.

This appears to be due, in part, to the fact that while email and the internet are a

substitute to physical mail, there are areas in which they also drive mail volume growth,

where there is, in other words, convergence between electronic and physical mail.

Physical delivery of on-line orders is an example of such convergence, as is using

multi-channel advertising where a customer acquired by email may then be retained

via direct mail. Indeed, according to Pitney Bowes, internet users in the UK receive

up to 65 per cent more mail than those who do not use the internet.

2 OVERVIEW OF THE POSTAL MARKET


3 Based on Royal Mail operational volumes, including access. Includes all regulated and non-regulatedmail, excludes door-to-door and international.

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Whatever the pace and extent to which mail volumes may be declining, the role of the

postal sector is evolving, as it finds itself influenced by communications, advertising and

delivery, all of which now use multiple channels to access receivers, and which are

sometimes substitutes and sometimes complementary to mail. The extent to which mail

has growth potential will be determined, in part, by the behaviour of mail operators.

The pricing and commercial policies of operators, particularly Royal Mail, will

undoubtedly impact volume trends, as will operators’ ability to add value to mail

for customers, and to provide innovative solutions and incentives for businesses to

continue to use mail.

The chart below illustrates the changing dynamics of the postal market. The fact

that the postal market is now driven to some extent by different dynamics has

meant the economic and demographic link has weakened and volumes are

more difficult to predict.

7OVERVIEW OF THE POSTAL MARKET

Figure 2.1 Inland letter traffic compared with economic and demographic growth

0

2.0

4.0

6.0

8.0

5 y

ear

aver

age

year

-on-

year

gro

wth

(%

)

86/87 88/89 90/91 92/93 94/95 96/97 98/99 00/01 02/03 04/05

Inland letters

Economic anddemographic growth

Economic growth is weighted by letter demand; demographicgrowth is measured by growth in number of households

Source: Royal Mail

BREAK POINT

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This trend appears to be consistent with mature mail markets across Europe. Figure 2.2

shows that letter volumes have grown less than the economy in real terms, even in the

new member states, illustrating that letter volumes are less related to GDP across most

European countries than in the past.

Figure 2.3 shows that, in 2004, the UK was the highest per capita mailer in Europe.

If the UK mail market is the most mature in Europe, does this indicate limited room

for growth? In the United States in 2005, the average household received 1,800 items

of mail, while the average UK household received 850. This could indicate per capita

growth potential beyond that seen in Europe, although patterns of mail use differ

markedly between Europe and the US due to a variety of differences in culture

and infrastructure.


Figure 2.2 Member states domestic letter post per GDP: average annual growth, 2000/02 and 2002/04

Aver

age

annu

al g

row

th (

%)

2000/02

2002/04

Notes: BE, IE, LT – confidentialSource: WIK

-7.5

-10.0

-12.5

-15.0

-5.0

-2.5

0.0

2.5

5.0

SK AT EE DK FI MT SE DE FR LU IT EU NL PT ES CY UK GR CZ PL HU SI LV

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Because mail trends are impacted by new forces making the market increasingly

difficult to predict, it is instructive to examine the different mail sectors to understand

their relative size and characteristics in order to understand the underlying factors

impacting mail volume trends in the UK. First we look at the overall structure of the

market, 18 months after full liberalisation.

Market structure

The UK addressed mail market has been fully liberalised since January 2006 and, as of

September 2007, there are 18 licensed mail providers including Royal Mail. Competition

has so far taken two main forms in the UK, ‘access’ competition and ‘end-to-end’.

AccessMost competitors have entered the market by using third party access to Royal Mail’s

delivery network. This is known as ‘access’ competition, and it refers to the process

by which an alternative operator collects, sorts and trunks its customers’ mail to Royal

Mail’s inward mail centres, turning it over to Royal Mail for final delivery. Around a

dozen of Royal Mail’s large customers also have ‘customer direct access’ agreements

whereby they arrange directly with Royal Mail access to Royal Mail’s inward mail

centres. Access customers and operators typically pay Royal Mail around 13p per

letter for delivery.


Figure 2.3 Member states domestic letter post, items per capita 2002 and 2004D

omes

tic

lett

er p

ost,

ite

ms

per

capi

ta

2002

2004

Notes: BE, IE, LT – confidentialSource: WIK

100

50

0

150

200

250

300

350

LV PL SK GR CY EE HU CZ IT MT PT ES SI EU DE LU AT FI FR DK UK NL SE

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In 2006/07, mail carried via access arrangements (both operator and customer direct

access) accounted for 11.8 per cent of total operational mail volumes for the year.

This is an increase from 5.6 per cent in 2005/06.

Current access competition

As of August 2007, access mail accounted for 19 per cent of addressed revenue-

derived letter volumes. Just under half of this is carried through access agreements

directly with Royal Mail’s customers.


Figure 2.4 Access volumes April 2006 – August 2007

0

100

200

300

400

(Mill

ions

)

Apr 0

6

May

06

Jun

06

Jul 0

6

Aug 0

6

Sep

06

Oct 06

Nov 0

6

Dec 0

6

Jan

07

Feb

07

Mar

07

Apr 0

7

May

07

Jun

07

Jul 0

7

Aug 0

7

Total Access volume Operator access CDA

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End-to-endA second type of competition in the mail market is end-to-end competition, where a

competitor provides the entire mailing process from collection to delivery. End-to-end

competition is much less developed in the UK licensed mail market to date,

representing only 0.2 per cent of licensed mail volumes. While a few operators currently

offer end-to-end services, they tend to be local or high-value networks. There are a few

operators with stated ambitions to establish national end-to-end networks in the UK,

and they may achieve this either by ensuring items are of a high enough value or

by having adequate drop-density to make lower priced items profitable. End-to-end

networks have been established in other European countries with liberalised mail

markets; however, these markets have been open to this type of competition much

longer than the UK. The development of competition in European markets is discussed

further in Chapter 5.

Market segmentation

A breakdown of mail flows in the UK domestic market is shown in Figure 2.5.

Businesses send around 87 per cent of all mail and their main uses of mail are split

between advertising, transactional mail, general business mail, and fulfilment, each

explained briefly below.


Figure 2.5 Mail flows, domestic v business

Domestic-to-domestic 10%

Domestic-to-business 3%

Business-to-business 27%

Business-to-domestic 60%

Source: Royal Mail

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Mail applications

AdvertisingAccording to Royal Mail, 5.03 billion items of direct mail were sent in the UK in 2006,

a decline of 2.1 per cent in volume on the previous year. In the past few years, direct

mail has shown a slight year-on-year decline, following strong growth from 1996-2003.

This growth was driven by large advertisers such as banks and retailers employing

national direct mail campaigns to acquire new customers, however, in the past few

years, mass direct mailings have tended to give way to smaller, more targeted

campaigns which are blended with other media. Direct mail is being used for retention

and cross-selling, which amount to lower mailing volumes, although the return on

investment of these campaigns may well be higher.

Declining volumes have fostered speculation about whether direct mail is approaching

market maturity and is destined for long-term decline, as happens in some markets in

which products become commoditised, or whether the decline is simply a result of

changing posting patterns, with the medium itself presenting further growth

opportunities.

It could be argued that the postal industry has the mainresponsibility for ensuring that direct mail remains a valuablemarketing medium, particularly as postage costs can account forup to 60 per cent of a direct mail campaign. As other costs comedown (input costs such as print, and the cost of alternative media),mail must be seen to be competitive. The mail industry should bein a position to lead on ensuring that mail is a trusted and valuabledirect marketing tool.


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Figure 2.6 illustrates the recent decline in direct mail volumes, which is occurring in

both business-to-consumer, and business-to-business mailings. Volumes have been

declining in both categories since 2003.


Figure 2.6 Direct mail volumes

Mill

ions

Consumer Business Total Source: Direct mailinformation service

1000

0

2000

3000

4000

5000

6000

1996 1997 1999 2001 2003 20051998 2000 2002 2004 2006

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The chart below shows the percentage of business-to-consumer direct mail sent by

industry sector. Financial services and home shopping account for 45 per cent of all

business-to-consumer direct mail. Both these sectors have tended to move away from

mass mailings toward mailing to more targeted audiences, which may go some way to

explaining the recent volume decline.

Although overall direct mail volumes have fallen, Royal Mail has pointed to strong growth

in certain market sectors. In the last quarter of 2006, for example, direct mail spend from

building societies grew by 18.8 per cent on the same period in 2005, while the charity

sector was up 9.1 per cent, government by 6 per cent and health by 5.7 per cent4.


Figure 2.7 Consumer direct mail volume share by sector 2006 (%)

Financial 31%

Home shopping/mail order 14%

Retail 9%

Charity 10%

Utilities 6%

Media/publishing 5%

Travel/tourism 5%

Government 2%

Leisure/entertainment 2%

Manufacturing 3%

Health 1%

Car dealers 1%

Education 0%

Other 8%

Not specified 3%

Source: DMIS

4 ‘‘Royal Mail accentuates positive as mail volumes dip’’, Precision Marketing, 30 August 2007.

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Some industry experts suggest that the direct mail decline is due to the increased use

of more integrated, multi-media campaigns rather than a significant whole-scale switch

to other media, suggesting that direct mail has become just one of many media used

in a typical campaign. Indeed, direct marketing budgets overall are growing. The latest

Bellwether Report from the IPA, a quarterly survey of marketing spend, suggests that

marketing budgets have increased for the second quarter in a row, to the greatest extent

since 2004. The report revealed that business confidence is growing and budgets are

being revised upward across all marketing sectors. The strongest growth was in internet

advertising, which now accounts for 6 per cent of all advertising spend, however, there

seems to be evidence of media integration, combining email, direct mail, DRTV (direct

response television marketing), and on-line advertising5. Indeed, email marketing

overtook direct mail in terms of volume for the first time in the last quarter of 2006, when

1.6 billion emails were sent, compared to 1.2 billion items of direct mail, according to the

DMA’s Email Marketing Council6. A similar trend is shown in the table below.


5 The Q2 2007 Bellwether Report, IPA, 16 July 2007.

6 Email overtakes print in DMA’s latest report, Print Week, 16 August 2007.

Q1 2007 adspend Current prices (£m) change year/year (%)

National newspapers (Includes supplements) 492 -1.8

Regional newspapers 705 -3.8

Consumer magazines (Excludes supplements) 188 -1.4

Business magazines 203 -6.6

Total press– of which display– of which classified

1,589869720

-3.3-2.1-4.8

Television 962 -0.8

Radio 127 -1.8

Outdoor 237 7.7

Cinema 30 9.9

Internet (Internet figure is a WARC estimate) 648 42.0

Direct mail 615 -3.6

Total measured adspend (excludes directory advertising)

4,208 3.0

Table 2.1 Advertising expenditure by medium Q1 2007, £m current prices, and Q12007 on Q1 2006 percentage changes in current prices

Source: AA Quarterly Survey of AdvertisingExpenditure June 2007

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This points to a complex, multi-channel direct marketing environment that has altered

the underlying business models of agencies and suppliers. A recent article in Marketing

Week explains that whereas direct marketing agencies used to rely on a single channel

for most income, they now need to spread their activity across a range of marketing

channels. Companies are tending to move away from volume mailings toward service-

based offerings, using customer data to tailor messages and offerings, and direct mail is

a strong medium for this type of marketing. Email marketing is also good for tailored

messages, however, nine out of ten email messages are spam7, making legitimate email

marketing difficult to deliver. Direct mail is a good complement to email here, and helps

maintain the integrity of channels to market as a personalised, trusted medium.

Often email is used for large acquisition mailings, and direct mail tends to be used for

customer retention and brand building. Where large mailers used to use three or four

channels to reach their customers, they now spread their marketing budget among up

to 15 different media. Although direct mail has declined in overall volume the last two

years, there are opportunities for growth, particularly if the medium can add value to

customers in a multi-channel environment.

Direct mail continues to grow in the United States, for example,aided by organisations such as the National Postal Forum – a not-for-profit educational corporation that provides education tobusiness mailers and facilitates communication between USPS and its business customers. There is evidence to suggest thatthe UK postal industry can encourage mail use and add value to mail as a medium, leading growth in mail volumes.


7 Quality replaces quantity, Marketing Week, 30 August 2007.

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BSkyB

Company backgroundBSkyB is a media and broadcasting company with 8.5 million direct customers.

Mailing profileBSkyB sends significant amounts of transactional mail pieces each year, including

bills, statements and welcome letters to its customers. It moved all its transactional

mail to TNT Post in 2004.

BSkyB also has a direct mail programme, targeting customers and prospects via both

addressed and unaddressed mail, the majority of which is also handled by TNT Post.

BSkyB sends monthly magazines to its customers and still uses Royal Mail for all its

magazine distribution.

Why did you switch?BSkyB switched because it receives a 95 per cent day-two drop rate with TNT Post

compared to Royal Mail, and it finds TNT Post more flexible to work with.

What have been the benefits/experiences to date?BSkyB has received very good benefits from gradually moving most of its mail to

TNT, driving valuable savings in its overall postal budget.

Although BSkyB has had a few issues with late delivery, they are promptly

investigated and dealt with.

What would you recommend other mail customers to consider when thinking about switching?You must decide to switch for the right reasons and remember that downstream

access is a new product.

What are your thoughts on the mail market? BSkyB is concerned about the lack of innovation in the market. It feels that the

growth in the internet will have an impact on the mail market, but that mail and the

internet can be complementary.

“Internet and direct mail work well together. The internet raises awareness, whereaspeople like to respond to direct mail. Our direct mail budget has not been cut.”

What would you like to see in the mail market in the future?BSkyB would like to see more choice and innovation.

Source

BskyB

Case Study

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Unaddressed mail

Unlike addressed direct mail, the unaddressed advertising mail market has continued to

grow through 2006, although at a decreasing rate8. Although not part of the regulated

mail market, it is interesting to look at the door-to-door market as it is a complementary

medium to direct mail, and its continued growth suggests there is sustained demand

amongst advertisers for physical, through-the-letterbox communication.


Figure 2.8 Size and growth of the door-to-door market

Exp

endi

ture

(£m

)

Distribution expenditure Print and production expenditure

200

0

400

600

800

1000

1200

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

8 DMA door-to-door Council.

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Growth is predicted in door-to-door through 2007, although growth rates are considered

to have broadly reached a plateau. According to the DMA door-to-door Council, the

door-to-door market has sustained growth for a variety of reasons. Firstly, it is

considered to be the most cost-effective way to reach mass audiences, particularly

considering the fragmentation that has been occurring in other media such as television

and press. On the other hand, it can be targeted to specific audiences when postcode

details are overlayed with demographic and lifestyle data, and it can be targeted to retail

catchment or government authority areas. Finally, the emergence of companies that

monitor door-to-door performance means that efficiency levels can be monitored and

the reputation of the industry as a whole has improved.


Volume (Items millions)

6,500

1997

7,000

1998

7,950

1999

8,470

2000

9,250

2001

10,170

2002

11,880

2003

12,560

2004

13,045

Year on yearincrease involume (%)

7.7 13.6 6.5 9.2 9.9 9.2 9.7 3.9

Average VolumePer GBHousehold PerWeek (items)

5.3 5.6 6.3 6.7 7.3 8.0 9.2 9.7 10.0

Year on yearincrease (%)

6.8 12.5 5.4 9.0 9.2 16.0 5.0 3.1

2005

Table 2.2 UK door-to-door market – estimates of size, growth and spend per household

Source: DMA door-to-door Council

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Transactional mail

Transactional mail volume estimates range anywhere from 6 billion to 10 billion items

per year in the UK9. The portion of this that constitutes bulk mailings from large firms

has been one of the main arenas of the competitive postal market, and constitutes a

substantial proportion of the 2.4 billion items in access traffic handled by competitors

last year.

Transactional mail is estimated to be declining by around 2-3 per cent per year, due

largely to businesses encouraging their customers to move physical bills and statements

on-line. However, while businesses are trying to reduce the volume of physical

statements they send, they tend also to be committed to offering customers a choice

of communication channels, so the extent to which this drive in cost savings actually

reduces transactional mail volumes will depend on customer willingness to move these

items on-line. Most large transactional mailers expect to maintain 90 per cent of their

transactional mail volumes in the medium term due to customer choice10.

There is evidence to suggest that the predicted decline intransactional mail will be offset, to some extent, by other factors.Transactional mail experiences organic growth from the continuedgrowth in household numbers, which is estimated to continue ataround 1 per cent a year for example.

There is also evidence that many large mailers are integrating their transactional and

advertising messaging using inserts or printing messages on the white space of bills and

statements. This adds value to the bill or statement as a communication medium, and

sales generated in this way offset the expense of the transactional delivery.

All these factors combined suggest that transactional mail volumes will continue to

decline gradually in the short term as observed over the past few years, at a rate of

around 2 per cent. UK experience and European data suggest that transactional mail

is subject to electronic substitution11; however, it is also true that internet-driven sales

do, to some extent, generate physical, transactional mail. The use of advertising on

transactional mail pieces is blending the uses of mail. Perhaps it is because of the

complementary nature of these media that a more significant decline in physical

transactional mail has not occurred.


9 OTM discussion paper, OTM Website – Estimates that in the UK, 20,000 firms issue 6.7 billionstatements, and a further 7,500 telecoms, financial services and utilities firms issue 3 billion bills eachyear. Triangle Management Services, UK Transactional Mail Survey, 2006, estimates 6.4 billion items oftransactional mail sent in the UK in 2004.

10 Based on Postcomm interviews with large transactional mailers, 2006/07.

11 Main Developments in the Postal Sector, 2004/06, WIK-Consult, May 2006.

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HBOS

Company backgroundHalifax Bank of Scotland plc provides a range of financial services including savings/current

accounts, lending facilities and insurance. The company has 22 million customers and employs

64,000 people.

Mailing profileHBOS sends out an average of 450 million items of mail per year ranging from first class

specialised mailings to bulk Downstream Access. Downstream Access mailings are typically

550,000 per day but have peaked at 1.5 million.

Why did you switch?HBOS has decided to switch its transactional mail to TNT Post for 3 keys reasons: financial

benefits; transparency of service up to final mile; and the fact that there will be no impact to

customer service. HBOS is in the process of reviewing dual sourcing for its mail with the intention

of benchmarking service across access operators.

What have been the benefits/experiences to date?So far HBOS has seen the following benefits: financial benefits – mailing services need to be cost

effective; transparency of service up to final mile; consistently good service standards; increased

flexibility; and the agreements have enabled collaborative supplier interaction.

HBOS found that implementation was challenging, however processes are now embedded and the

service performance is consistently good.

What would you recommend other mail customers to consider when thinking about switching?Carefully assess the benefits to your organisation, switching to Downstream Access is a major

change therefore a feasibility study is recommended.

Review as a holistic process including missorts, forecasting requirements, etc to ensure you

understand what is required and the implications to your organisation.

Ensure the implementation includes a slow ramp-up of volume and you focus on pre-sort mail.

What are your thoughts on the mail market?Year on year HBOS mail volumes are slowly decreasing.

“I would like to see more competition in the Downstream Access market. An organisation ofHBOS size needs a supplier that has sufficient infrastructure which only a few licence holderscan currently offer.”

HBOS would also like to see an alternative and feasible E2E solution and, “innovation from all

sectors of the market including Royal Mail and the Downstream Access providers. One size does

not fit all so solutions need to be tailored to the customer needs.”

Source

HBOS

Case Study

3690_CMR_AW6 29/10/07 14:31 Page 21

General business mail

General business mail refers to the day-to-day correspondence sent from or between

businesses, and tends to be single item, individual correspondence. Mail sent by small

and medium sized businesses (SMEs) tends to be general business mail, and it will

either be stamped, postage paid impression, or sent through franking machines.

General business-to-business mail tends to be vulnerable to e-substitution with the

implementation of electronic systems between firms to increase efficiency and cut

costs. SMEs however, still appear to be highly reliant on physical mail for most of their

transactions. According to a survey by the Federation of Small Businesses, 69 per cent

of SMEs still send invoices through the post, 59 per cent use the postal system for the

delivery of goods and services, and 88 per cent send post every day12.

Competitors have begun to enter this end of the market over the last year, and a few

operators offer to take all types of mail with a minimum daily collection of 250 items.

Hybrid mail services are also very relevant to this type of mail, as small businesses can

send information electronically and pay to have their mail printed, enveloped and

handed to Royal Mail for delivery geographically near to its destination.

Publishing

Consumer magazinesConsumer magazines are paid-for magazines covering a wide range of interest areas,

with around 3,400 titles currently in circulation in the UK. According to the Advertising

Association, consumers spent £2.09 billion on magazines in 2006. While the main

channel to market is the newsstand, postal subscriptions have been growing, and now

account for 14 per cent of magazine sales, up from 3 per cent 10 years ago. Publishers

tend to promote subscriptions as they encourage regular readership and, with sustained

sales, they offer measurability and predictability. With continuing pressure on newsstand

space, subscriptions are expected to continue to grow. Some significant titles are around

50 per cent subscription sales, including Good Housekeeping, Gardeners’ World, and

the Economist13.


12 ‘‘Small Business and the UK Postal Market’’, December 2006.

13 InCirculation, Monday, 1 January, 2007.

3690_CMR_AW6 29/10/07 14:31 Page 22

Business-to-business magazinesThere are over 5,000 business-to-business (B2B) titles in the UK, and 90 per cent of

these are distributed by post. Of those, 70 per cent are controlled (free) circulation. The

B2B publishing model is advertiser-driven, with publishers targeting named individuals

in specific marketplaces. This is a particularly price-sensitive market, and with its high

reliance on postal distribution as a channel to market, it is particularly sensitive to postal

price rises. According to Postcomm’s discussions with stakeholders, it is an area of the

publishing sector that has been especially sensitive to electronic substitution.

Customer magazinesCustomer magazines are those produced by companies for their customers and

they rely heavily on postal distribution. There are around 1,000 customer magazine

titles in circulation, and 72 per cent are mailed directly to customers, with a total

circulation of over 400 million. The remaining volume is either distributed through the

retailers’ own shops or increasingly via newsstands, other retailers or bundling with

other media. Mintel, the market research company, estimates that over half of all posted

magazines are customer magazines and that, as of 2005, the industry spent over £350

million on postage.

Mintel expects continued growth in this market, and predicts that the customer

publishing industry will reach a value of £1 billion by 2010. Indeed, in the last 12

months the industry has seen unprecedented growth at 16 per cent year on year with

companies including Sony, RBS, Chestertons, ASOS and Virgin Media investing in

customer magazines as a marketing tool. Further growth is expected, in particular in the

public sector, automotive and retail industries. The particular challenge for the postal

industry is the recent trend away from postal distribution toward retail outlets. Publishers

are experimenting with various cost-saving measures, including reducing postal costs by

increasing retail distribution, especially as postal costs can represent up to half of the

entire cost of producing a magazine. Most customer magazines are not highly time

sensitive, therefore the industry is more sensitive to cost than time efficiencies.


3690_CMR_AW6 29/10/07 14:31 Page 23

Fulfilment

Fulfilment mail refers to the delivery of requested goods, from items bought mail-order

to brochures and tickets. This is a growth area of the market, driven mainly by internet

sales. The IMRG14 recorded e-retail sales in July 2007 to be 80 per cent higher than the

previous year, reaching £4.2 billion for the month alone. The on-line sales growth is

projected to continue, as demonstrated by the Verdict figures in the table below.

This market is a combination of items sent within the licensed area and parcel and

express traffic which falls outside the licensed area. It is also to some extent a receiver-

driven market, demanding alternative delivery services, unlike most other mail

applications where services are driven by the sender. Finally, the emergence of on-line

generated sales requires operators to enter into co-operative arrangements beyond

traditional postal processes, integrating IT platforms and forming partnerships seen

with internet based service providers. Canada Post, for example, has an integrated

on-line service with eBay allowing customers to buy postage and print shipping labels

on-line. USPS has a similar alliance that allows customers to deal with postage directly

on the eBay site, and also offers free next-day collection of packages from residential

and small business customers15.


14 Internet Media Retail Group E-Retail Sales Index, August 2007.

15 Strategic Transformation Plan, United States Post Office, September 2005.

Figure 2.9 e-Retail market size 2001/11

0

10

20

30

Tota

l on

-lin

e sp

endi

ng (

£bn

)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Verdict Research, UK e-Retails 2007

3690_CMR_AW6 29/10/07 14:31 Page 24


LOVEFiLM

LOVEFiLM, the on-line DVD rental company, relies heavily on first class post for the

success of its business model. It has around 450,000 active subscribers in the

UK and is growing at significant rates. Customers subscribe to a package, and

depending on their choice of subscription receive 1, 2 or 3 DVDs at a time via

Royal Mail. LOVEFiLM uses first class standard tariff PPI for the delivery of DVDs to

its customer. The customer returns the DVDs in the same packaging, via Royal Mail

first class business response.

LOVEFiLM’s rentals make up 23 per cent of the total UK DVD rental market,

including high street rentals – this equates to 2 million rentals per month and as

such 4 million first class mail transactions a month. As a large mailer LOVEFiLM

has been working to improve the machine-ability of its packaging in order to achieve

better pricing and service. As yet it has not found a solution with either Royal Mail or

an alternative provider. LOVEFiLM believes that a true end-to-end provider, offering

first class inbound and outbound services would increase current operators’ flexibility

and customer focus.

LOVEFiLM has also recently started using direct mail, both addressed and

unaddressed, as part of its marketing mix. It hopes that with improved targeting it

can continue to use direct mail as a successful customer acquisition tool. LOVEFiLM

feels that there is significant potential for growth in the on-line DVD rental. Figures

from Screen Digest show that in 2006, the on-line DVD rental business accounted for

27.9 million DVD rental transactions in the UK. Furthermore, it anticipates that the

number of on-line DVD rentals in 2007 could exceed 35 million from 700,000

British households and forecasts that this could rise to 67 million transactions

from 1.4 million households by 2011.

LOVEFiLM will continue to rely on and demand an efficient and reliable postal service.

Sources:

LOVEFiLM, October 2007.

Screen Digest Video Intelligence, 2007. www.screendigest.com

Case Study

3690_CMR_AW6 29/10/07 14:31 Page 25

Express market

Closely related to the postal market, the express market is concerned with the collection

and delivery of time-specific items. It is estimated to be worth around £5 billion, or 1.3

billion items. Around 70 per cent of this is thought to be business-to-business, while

£1.2 billion comprises the business-to-consumer market. Overall, the express market is

demonstrating growth of around 6 per cent per annum16.

International postal groups have a strong presence in the UK express market, Deutsche

Post Worldwide through DHL, La Poste through Geopost, UPS through Lynx Express and

TPG through TNT Post UK. Parcels are the primary service for most players in this

market, but mail is a natural extension for some players and is becoming a more

significant component. Documents account for around 25 per cent of express

shipments in the UK. Next-day deliveries represent about 80 per cent of total revenues17.


* Royal Mail Special Delivery is not included in this analysis as considered to be part of ‘express letters’rather than parcels market.

Ownership by Value (%) Domicile Positioning

TNT Express TPG 18 Netherlands Premium

DHL Deutsche Post 14 Germany Low-mid-range

Parcelforce Royal Mail Group 8 UK Low-mid-range

Business Post UK listed company 8 UK Premium

Parceline La Poste Group 7 France Mid-range

Lynx Express UPS 6 US Mid-range

Initial City Link Rentokil Initial Plc 6 UK Premium

Target Express Parcels Venture Capital 6 UK Premium

ANC Venture Capital 5 UK Mid-range

Interlink Express Parcels LaPoste Group 5 France Mid-range

UPS US listed company 4 US Mid-range

Amtrak Netfold Ltd 3 UK New focus on B2C

Nightfreight Venture Capital 3 UK Irregular dimensionsand weight

Tufnells Parcel Express Venture Capital 2 UK Irregular dimensionsand weight

Others 5

100%

UK

Source: Investec Securities

Table 2.3 UK Express parcels market, market share 2005*

3690_CMR_AW6 29/10/07 14:31 Page 26

UK express parcel carriers tend to use one of two business models. The first is

a franchise model, where each depot is owned and operated by a third-party. The

second model is a wholly-owned, or leased, network. Both can be effective, although

the franchise model risks the franchisor subsidising losses of the franchisees.

The UK express parcels market traditionally has been related to consumer spending,

although structural changes such as the growth in internet sales and the liberalisation

of the postal market create changing dynamics in the industry. Customer demand for

alternative delivery options, growth in internet-driven sales, and opportunities in the

liberalised postal market could impact the structure of the express market and the

wider mail market.

International outbound

International outbound bulk mail from the UK is a market estimated to be worth £300

million annually18. Unlike the domestic, or internal, market operators do not need a

licence to offer international outbound mail services. Several of the large incumbent

postal operators are competitors in this market in the UK, including Deutsche Post

(DHL), TNT, La Poste, De Post (Belgium) and Swiss Post. Postcomm estimates that

Royal Mail has around a 33 per cent share of this market.

There are also several consolidators specialising in international outbound mail,

including BTB Mailflight, Pharos and Mercury (now part of DHL), and many mailing

houses offer international mailing services. The Mail Consolidators Association (MCA)

has around 20 members and represents the consolidation industry, and there are many

more competitors in this market of varying sizes outside the MCA. The consolidators

and mailing houses active in this market sector have the experience of handling

multiple mail providers in a competitive market which could benefit them in the

liberalised domestic market.


16 UK Express Delivery Market Research Report, MBD, 2007.

17 The Economic Impact of Express Carriers for UK Plc, Oxford Economic Forecasting, 2006.

18 International Postal Corporation (IPC) Market Audit Data, 2005.

3690_CMR_AW6 29/10/07 14:31 Page 27

3 DEVELOPMENT OF COMPETITION


This chapter looks at the development of competition in the postal

market. The first part of the chapter in particular looks at alternative

licensed operators, the relative market importance of access and

end-to-end competition, and the business models used by alternative

operators. Part two of this chapter looks at wider issues affecting the

mail market such as private equity, mergers and take overs, the mail

value chain and the role of external players such as mailing houses.

The chapter concludes by looking at some of the important mail related

events of 2007.

As of September 2007, there are 18 licensed postal operators in addition to Royal Mail.

They are:

• Royal Mail;

• ANC Express (trading name of ANC Limited);

• Challenger Security Services (Admin) Ltd;

• Citipost AMP Limited;

• City Link Post (trading name of Target Express Parcels);

• CMS (trading name of Royale Research Limited);

• DHL Global Mail (UK) Ltd;

• DX Network Services Limited;

• Intercity Communications Ltd;

• Lynx Mail (trading name of Red Star Parcels Ltd);

3690_CMR_AW6 29/10/07 14:31 Page 28

• Racer Consultancy Management Services;

• Secure Mail Services;

• Secured Mail Limited;

• Securicor Omega Express;

• The Mailing House Group;

• TNT Post UK Limited;

• UK Mail Limited;

• Zip Mail Limited.

Last year DHL Global Mail held two licences which have now been combined into DHL

Global Mail (UK) Ltd. DHL Global Mail UK, TNT Post UK and CMS are licensees owned

by national incumbent operators from other European countries. CMS is owned by La

Poste in France, DHL Global Mail is owned by Deutsche Post and TNT Post UK is

owned by the Dutch post office, TNT Post. These operators are seeking market

opportunities in the UK as well as other liberalised European markets, while operating

as incumbent universal service providers in their own domestic markets. This is

discussed in more detail in Chapter 4.

Securicor Omega Express has been acquired by DHL Express. It holds an interim licence

which allows it to provide internal mail services for two clients in the banking sector.

Market share

AccessCompetition has continued to develop in the downstream access part of the market,

where third party operators and large mail customers gain access to and pay for

Royal Mail’s final mile delivery network at the inward mail centre stage.

Access agreements can cover the whole of the UK or just certain zones. Information

from Royal Mail is that there are 13 customers and 9 operators with national access

agreements as at September 2007. Four of these operators have Agency agreements

meaning they only have to charge VAT on the part of the mail process that they carry

out themselves. Three customers have zonal access contracts, as do seven operators,

again four of these have Agency agreements as of September 2007.

In 2006/07 access mail made up 11.8 per cent of Royal Mail’s operational volumes.

For the five months from April to August 2007 access mail represented 19 per cent of

Royal Mail’s revenue-derived volumes, compared to 11 per cent for the corresponding

period in 2006. Figure 3.1 shows a comparison of Total Access volumes for financial

years from 2005 onwards.

29DEVELOPMENT OF COMPETITION

3690_CMR_AW6 29/10/07 14:31 Page 29

Access mail volume is roughly split 50/50 between customer direct access and operator

access.

End-to-end

In 2006/07 alternative operator end-to-end licensed area volumes declined slightly to

34.8 million items, representing a 12 per cent decline in end-to-end items carried in the

licensed area compared to the previous year19. This decline in volume is attributable to a

number of licensed operators reporting reduced volumes, combined with Express

Dairies exiting the end-to-end market.


Figure 3.1 Total Access volumes 2005/06 vs 2006/07 vs 2007/08

0

100

200

300

400

Volu

me

(Mill

ions

)

Period1

(Apr)

Period2

(May)

Period3

(Jun)

Period4

(Jul)

Period5

(Aug)

Period6

(Sep)

Period7

(Oct)

Period8

(Nov)

Period9

(Dec)

Period10

(Jan)

Period11

(Feb)

Period12

(Mar)

Total Access volume 2007/08



19 International Postal Corporation (IPC) Market Audit Data, 2005.

3690_CMR_AW6 29/10/07 14:31 Page 30

End-to-end developments


TNT Post UK

TNT Post UK maintains its ambition to develop an end-to-end service in theUK so as to be able to offer customers a complete postal and delivery solution.As part of its growth strategy, TNT Post is currently looking at a number ofpotential locations in which it can develop an end-to-end solution. To makeits own end-to-end delivery service viable, TNT Post will first need to grow itsletters business in these key areas through the acquisition of customers’ mailingvolumes. TNT Post will continue to use Royal Mail’s downstream access untilit believes it has reached the critical mass for its own distribution. TNT Posthopes to provide further information on some of these locations later in 2007.The company intends to offer this service to local businesses as well as bignational mailers.

Source: TNT Post, September 2007

DX Network Services and Secure Mail Services

DX Network Services and Secure Mail Services (both now part of the DX Group)also have a foundation on which to extend their end-to-end delivery services. DXalready delivers considerable volumes of mail going to business addresses, bothwithin its document exchange network (see note) and to high street and otherbusiness dense locations throughout the UK. DX’s sortation systems allow it tosegregate mail into different channels, depending on whether final delivery isthrough the document exchange network, or by hand delivery to postcodeaddresses within its delivery footprint. The higher value of items carried by SMSmeans that it is commercially viable for SMS to deliver to virtually all addressesin the UK – both business and residential. Opportunities for the furtherdevelopment of end-to-end deliveries exist by capitalising on the combinedstrengths of the businesses, including the cross-selling of services to both groupsof customers, as well as targeting new areas of business. In the case of DX, newbusiness growth could come by targeting mail going to business districts that canbe consolidated with existing volumes. SMS could expand by extending the offerof its services to mailers who might not yet have realised that they have a needfor secure delivery. DX and SMS will evaluate any opportunities on their owncommercial merits.

Source: DX Network Services Ltd/Secure Mail Services Ltd, September 2007

Note 1: Document exchange is not licensed area mail, therefore not regulated by Postcomm.

3690_CMR_AW6 29/10/07 14:31 Page 31

Other licensed operators

Market entry/exitIn October 2006 Postcomm granted a new long-term licence to Zip Mail Ltd, the first

fully franchised operator to enter the UK market.

On 1 January 2007 Postcomm granted a long-term licence to DHL (Global Mail).

The work undertaken by this new licensee replaces the mail volume previously carried

by Deutsche Post Global Mail and Speedmail.

In February 2007 MailPlus exited the mail market to concentrate on its next day parcel

delivery service, which is the core business focus of Geopost UK, the parent company

of MailPlus.

In April 2007 Postcomm granted a new long-term licence to The Mailing House Group.

Further information about The Mailing House Group is available in the section on

Mail Operators.

Operators’ business modelsAs alternative operators are developing their businesses in different areas of the market

Postcomm has gathered the information that follows from the licensees in order that the

market place better understands their operations and business models. The services

offered by Royal Mail are extensive and widely understood by the market place, and

therefore this section deals exclusively with alternative providers.


3690_CMR_AW6 29/10/07 14:31 Page 32

Table 3.1 summarises the current business focus of the licensees.

This section gives more detailed information on each of the licence holders, their

current operations and customer base. This information was provided to Postcomm by

the licensees and is not an endorsement by Postcomm of any operator in particular or

any of the services offered by them. The information is intended to improve customer

knowledge of the current licensed operators.


UK and international mail and courier services;B2B and B2C mainly through Royal Mail (notAccess). Some B2B (not in licensed area)through own network.

DHL Global Mail (UK)See section on Marketentry/exit for licencechanges relating toDHL Global Mail (UK)

DSA sorted and unsorted services provided on anational basis. Some E2E (B2B). Delivery in theLondon area only, though collections can beanywhere in the UK.

ANC Express (tradingname of ANC Ltd)

Pouch services. Not currently operating in thelicensed area.

Citipost AMP

Express, parcels; B2C through DSA.

Challenger SecurityServices (Admin)

Disguised mail delivered by Royal Mail/couriers.

CMS (trading name ofRoyale Research Ltd)

B2B (mostly London).

IntercityCommunications

B2B niche markets, own delivery in London;international courier services.

National DSA, bulk pre-sorted mail, B2Cand B2B.

Racer ConsultancyManagement Services

Licensee End-to-end(items costingless than £1 orweighingunder 350g)

Access(delivered underC9 or CustomerDirect AccessAgreement)

Focus/business model

Niche B2B markets. Also offers DownstreamAccess (DSA) services (consolidated, zonal and national).

City Link Post (tradingname of TargetExpress Parcels)

DX Network Services(Now part of The DXGroup)

National next day B2B through own deliverynetwork (document exchange, business mailand parcels).

Lynx Mail (tradingname of Red StarParcels)

Continued

3690_CMR_AW6 29/10/07 14:31 Page 33

* Note: The volumes are as reported by Licensees for the Financial Year 2006/07. The Mailing

House Group only received its licence on 11/4/07.


Is over 1,000,000,000 mailitems conveyed

Securicor OmegaExpress

Acquired by DHL Express. Interim licence toconvey mail between offices of HSBC andbetween the offices of Royal Bank of Scotland.Pouch services.

The Mailing HouseGroup*

Bulk mail through DSA.

TNT Post UK Pre-sorted and unsorted B2C and B2B lettermail with delivery through DSA. Parcel andpacket delivery through own network and DSA.

Licensee End-to-end(items costingless than £1 orweighingunder 350g)

Access(delivered underC9 or CustomerDirect AccessAgreement)

Focus/business model

UK Mail Pre-sorted (bulk mail), unsorted andinternational B2C and B2B mail through DSA.

Zip Mail Fully franchised business in the London/M25 area.

Is between 10,000,000 and100,000,000 mail items

Is between 1,000,000 and10,000,000 mail items

Is between 100,000 and1,000,000 mail items

Is under 100,000 mail items

National B2C and B2B through own securedelivery network (valuable items such as bank cards, passports, event tickets) – not inthe licensed area – and through Royal Mail (not Access).

Secure Mail Services (Now part of The DXGroup)

Secured Mail Ltd National consolidated and bulk mail through DSA.

3690_CMR_AW6 29/10/07 14:31 Page 34


Citipostwww.citipost.com [email protected] 0208 301 8500

Services:End-to-end in London, Manchester, Birmingham, Bristol, Edinburgh, Glasgow and Liverpool. DSA zonal,national DSA and unsorted DSA.

Customer base:Direct mailers, transactional mailers, mailing houses, SMEs, all of these B2B for the hand delivery andB2B B2C for DSA.

City Link Post (trading name of Target Express Parcels)www.city-link.co.uk [email protected]

Services:Full basket of express delivery services. Including added value elements such as Post, Sameday, fulfilment services. Quality driven organisation aiming to become largest in UK.

Customer base:Mostly made up of direct mailers, transactional clients, mailing houses and large brand names, with some estate agents and travel companies.

Innovation:Target Express has successfully merged with City Link to create the 2nd largest express operator in theUK. “In addition, we have broken new ground with our combination of zonal and national pricingsolutions, as well as moving into the unsorted market.”

CMS (trading name of Royale Research Ltd)www.cmsnetwork.com [email protected]

Services:Research distribution worldwide.

Customer base:Mainly financial institutions; however targeting all industries.

Innovation:Track and trace bar code with customer interface.

DHL Global Mail (UK)www.dhl-globalmail.com 0208 603 3000

Services:Downstream Access services (both sorted and unsorted products), offering national coverage.Citispeed – A business-to-business end-to-end delivery service within 22 London postcode areas.

Citispeed will collect mail from outside these areas.International Mail – Collection from anywhere in the UK, offering global coverage.

Customer base:Direct mailers, transactional mailers, and mailing houses covering all sectors. International mailers andpublishers make up a major proportion of its customer base. Targeting business mailers of international,pre-sorted and unsorted mail.

3690_CMR_AW6 29/10/07 14:31 Page 35


20 DX Network Services Ltd and Secure Mail Services Ltd hold two separate licences. Since theiracquisition by Candover in 2006, the companies are working closely together.

21 The third sector comprises of value-driven organisations, including voluntary and communityorganisations, charities, co-operatives and social enterprises.

DX Network Services Ltd and Secure Mail Services Ltd20

www.thedx.co.uk www.securemail.co.uk

Services:DX Network Services Ltd – Provide nationwide post 5 pm collection/pre 9 am delivery of mail to over27,000 business customers through a Document Exchange network. In addition next day door-to-door maildelivery services covering every high street and business district every working day is offered.Secure Mail Services Ltd – Provides registered, recorded and disguised postal services for the securedelivery of valuable items (e.g. passports, bank cards, cheque books and event tickets) to virtually allUK addresses.

Customer base:DX Network Services Ltd – Organisations of all sizes, from SMEs to large corporates, who have a regularrequirement to send next day mail to other businesses. Targeting businesses that operate within the legal,financial services, property, professional services, government, publishing and retail sectors.Secure Mail Services Ltd – Banks, government agencies, ticket agents, voucher printers and others.Targeting organisations sending high volumes of valuable or sensitive items to business and residentialaddresses nationwide.

Innovation:Brought together DX Network Services Ltd and Secure Mail Services Ltd to form an end-to-end alternativeto Royal Mail. Combining the strengths of the two organisations, introduction of SecureDX in spring 2007,a guaranteed and ‘signed for’ registered mail service delivering to virtually every address in mainland UKand Northern Ireland.

Intercity Communications Limitedwww.icityc.co.uk [email protected]

Services:Central London hand delivery business-to-business. The remainder of mail goes via Royal Mail. Intercityalso has a mailing house function, offering design and printing, data capture, envelope enclosing by bothmachine and manual, polywrapping, inkjet addresses and all other services relating to the preparation ofmaterial for distribution. This fulfils the role of a ‘one-stop-shop’ if required.

Customer base:Various customers, mainly in the financial research sector.

LYNX Mail (trading name of Red Star Parcels Ltd, a UPS company)www.ups.com [email protected] 0778 626 2851/ 0247 637 3737

Services:C9 Down Stream Access postings with Royal Mail providing last mile delivery for bulk mail. Typically mail previously sent as Mailsort with volumes in excess of 25,000 posting over all UK or just locally.Collection and delivery spread is nationwide with a fully-integrated national Hub and UPS/LYNX collection and delivery fleet.

UPS, the world’s largest parcel company, has a full range of express package delivery products from small items to pallets, air and sea freight, UK and International services. LYNX Mail team can assist in accessing all the UPS products and bring together a complete suite of services.

Customer base:Many third sector21 mailers, large marketing and catalogue response mailings, financial service providers.Targeting bulk mailers with average volume in excess of 25,000 items using either downstream accessalready or Mailsort/Presstream from B2B or B2C lists – transactional and direct mail.

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Table 3.2 Business Focus of Licensees


The Mailing House Group (trading as Northern Mail)www.themailinghouse.co.uk [email protected] 0870 010 2000

Services:

Geographical Areas: Midlands, North West, North East and Scotland

Customer base:Direct Mailers, SMEs and Public Sector.

Innovation:The introduction of specialist packet production and sortation systems.

• Downstream Access (DSA);• Specialist Packet Production

and Sortation Services;• Inbound Mail Sortation and Consolidation;• Storage, Mailing and Fulfilment Services;• Track and Trace;

• Undeliverable/Gone-Away;• Bespoke Services;• Secure Mail Services;• International Services;• Business Reply Services.

TNT Post www.tntpost.co.uk [email protected] 0162 889 1644 Fax: 0162 881 6882

Services:TNT Post provide a range of home delivery, addressed and unaddressed postal services to businesscustomers delivering bills, statements, direct mail, packets and parcels to 26 million UK households.

Customer base:Top 500 UK bulk mailers both DM and transactional, mid-market mailers, SMEs, mailing houses.TNT Post targets all types of customers from SMEs to Blue Chips.

Innovation:Launched:1) AllSort, a 3 day national service for unsorted, non-machineable mail and a 4-8 day unsorted service

for international and BFPO mail. 2) PremierPacket, a nationwide packets delivery service that delivers sizeable savings. 3) Launched variants of pre-sorted and unsorted mail services e.g. EconomySort, a more cost effective

version of its unsorted mail service. 4) Established regional businesses in Scotland, the North of England, South West England and South

Wales, focused primarily on the SME sector.

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Licensing review

In May 2007 Postcomm began the first of a two stage review of its licensing framework,

looking to facilitate entry to the market, with the publication of a consultation document

considering amendments to the current framework. Postcomm is due to publish its

decision in November 2007, and this will be available on the Postcomm website.

Consultation about the second stage of the review, considering more fundamental

changes to the licensing framework, is due to begin in January 2008.

Private equity investment, mergers and takeovers in the UK and Europeanpostal markets

A range of companies are responding to the emerging liberalisation of mail markets both

in the UK and across Europe. A few universal service providers in member states are

expanding their businesses both geographically and functionally. Some are expanding

into other countries’ liberalised mail markets, some are moving into upstream and

downstream activities, or into express and logistics. Local companies are also setting

themselves up in these markets across Europe, leading to mergers and acquisitions

as they become established in certain regions or market sectors.


Zip Mail Ltdwww.zip-mail.co.uk [email protected]

Services:Collection from M25 area; consolidated UK Next Day and Economy, and International postal services;whole street delivery.

Customer base:SMEs, estate agents, mailing houses, professional bodies.

Innovation:Offered alternative postal services to SMEs and smaller volume mailers.

UK Mailwww.ukmail.biz [email protected] 08452 30 50 50

Services:UK Mail offers nationwide collection and daily delivery of mail to all addresses, with a two day service for a range of pre-sorted mail specifications and two or three day service for unsorted mail.

Customer base:Transactional mailers; direct marketing; mailing houses; financial services; public sector; SMEs. Targeting business mailers of pre-sorted and unsorted mail.

Innovation:UK Mail was the first Down Stream Access mail operator, the first to introduce Customer Direct Accessand has established an Agent For Access agreement. UK Mail has made significant investment insortation capability in various locations around the UK, including high-speed sortation of Large Letters and Packets. The company recently announced the introduction of a next day service for mail printed atone of UK Mail’s national network of sortation centres. This is discussed in the value chain innovationsection of this report.

3690_CMR_AW6 29/10/07 14:31 Page 38


Private equity companies offer a source of funding for financing developing business

models in the postal sector throughout Europe, and they are investing in competitive

postal operators who do not have the financial backing of large parent companies such

as foreign postal incumbents. They are also investing in the privatisation of universal

service providers in Europe. The evidence of private equity backing generally indicates

positive prospects for the postal market.

Most recently, the UK postal market attracted private equity and investment when

Candover Investments plc bought both DX Network Services and Secure Mail Services in

September 2006 based on leveraging the complementary delivery services of these two

companies. Private equity backing has been instrumental in much of the consolidation

that has occurred in the UK mail, express and parcels industry, which are becoming

increasingly integrated, as demonstrated by recent acquisitions relating to mail

licence holders.

Fedex, the American express transportation company acquired ANC Holdings Ltd in

December 2006, and in the same month Rentokil Initial plc acquired Target Express.

Rentokil Initial also owns City Link Ltd, and as of 1 May 2007 Target Express has been

trading as City Link Ltd. (The mail operator licence remains in the name of Target

Express, and all access mail is carried via the Target network.)

Privatisation of universal service providers (USPs) has attractedinvestors across Europe. The German, Dutch and Austrian USPsare listed on the stock exchange, and the majority of Deutsche Post is held by private investors. USPs themselves are increasinglylooking to exploit market opportunities and position themselves forfuture market developments.

Post Danmark sold 22 per cent of its shares to CVC Capital partners, and 11,000

employees also hold shares. Preparing for European liberalisation, they have a

scheduled exit for CVC, and plan to form other strategic partnerships in preparation for

share sales. Post Danmark also holds 49 per cent of the shares in De Post – La Poste,

the Belgian national operator.

Deutsche Post is among the most active in pursuing a European acquisition strategy.

In the mail market, Deutsche Post owns Speedmail and DHL Global Mail in the UK,

Unipost (38 per cent) in Spain, and Selekt Mail in the Netherlands. Deutsche Post has

acquired several logistics companies, including Exel in the UK, along with companies in

the parcels and express industry across Europe, such as Securicor and Danzas.

Deutsche Post also owns companies involved in upstream services such as Williams Lea

in the UK and Koba in France.

3690_CMR_AW6 29/10/07 14:31 Page 39

Most recently, there is speculation that UPS is interested in bidding for a stake in

Deutsche Post, backed by private equity from Apax Partners Worldwide. Over the past

years there have been rumours that UPS is interested in acquiring the 30 per cent stake

currently held by the German government, and UPS has recently been thought to be in

talks with Apax about possible funding arrangements. This announcement, helped by a

13 per cent profit increase in Q2 this year, boosted Deutsche Post’s share value by 2.3

per cent22. This share rise and investment speculation signals market confidence about

the German mail market ahead of liberalisation in January 2008.

The Dutch universal service provider, TNT Post, is expanding its European mail market

presence in the UK and Germany. In the UK it is building its mail business through TNT

Post UK, while in Germany it has acquired several regional distribution networks to offer

a nationwide end-to-end alternative to Deutsche Post.

While TNT is expanding in Germany and the UK, Sandd, the 2nd largest postal operator

in the Netherlands, has developed its business by buying regional postal companies in

the Netherlands, expanding its own network and forming partnerships with regional

distribution specialists. Sandd attracted capital from NIB Capital Principal Investments

and Fortis Private Equity. Trimortuer Holdings BV, an investment and management

company, is the major shareholder. It now has 100 per cent coverage of the

Netherlands, distributing direct mail and magazines on set delivery days twice a week23.

The scale of private equity investment and acquisition activity in liberalised mail markets

points to market opportunity. This extends to business activity in the upstream and

downstream ends of the mail industry as well as to geographical expansion, and the

business models that emerge may well involve companies that look less like traditional

postal operators and more like a new breed of business service providers offering

solutions along the mail value chain.


22 Air Cargo News International, 7 September 2007.

23 Trimoteur Holding, B.V. Website.

3690_CMR_AW6 29/10/07 14:31 Page 40

Mail value chain

Developments in electronic media have not only impacted the demand-side of mail

volumes, but along with developments in printing technology, have altered the mail

value chain. The mail production industry has evolved to capitalise on the technologies

which expanded the scope of mail production to include functions ranging from data

management to response handling. Information technology, data services and print

technology make it possible to substitute most traditional postal activity up to final

delivery. They also offer a variety of opportunities to add value to mail and make it

unique from other media. To the extent that innovation has occurred in the industry, it

has been driven largely by developments along the ‘back end’ of the mail value chain.

Functions traditionally performed by the mailing customer have been increasingly

outsourced to specialists, and in turn the provision of these services is being

consolidated into ‘one-stop-shop’ providers of mailing services.

The third-party provision of specialist data services has improved mail effectiveness in

that accuracy of data reduces costs associated with poor addressing, and also makes

on-going communication with customers more viable. Ranging from list provision to data

cleansing, data services have made targeted direct mail campaigns feasible, and have

refined the targeting to an individual, personalised level. It is likely that this targeting is

responsible for some of the decline in direct mail volumes in that advertisers are opting

away from mass mailings toward smaller, better targeted campaigns. On the other hand,

better targeting increases return on investment and enhances the perception of direct

mail to the receiver, which should make it a more sustainable medium.


Figure 3.2 The mail value chain

Mail creation

Addresses/databases

Mail finishing

Printing/franking

Mail collection

Pick up/transport

Mail processing

Sorting

Mail delivery

Final mile

SOLUTIONS DISTRIBUTION

3690_CMR_AW6 29/10/07 14:31 Page 41

Related to better targeting, technological advances in the print industry have created

new opportunities for printing tailored customer messages on both transactional and

advertising mail, and have indeed blurred the distinction between these mail streams.

They offer opportunities for mailers to become more personalised in their

communication by creating customised up-to-date messages on mail items. This in turn

ties into document management and back-end processing that includes functions such

as managing returns, digitising and archiving documents. There has also been growth in

the use and outsourcing of these functions.

Value chain innovation


Royal Mail’s Personalised Integrated Media

In April 2007 Royal Mail announced an innovation in the advertising market.

In partnership with Sony DADC Royal Mail has developed a product which fuses

traditional post and digital media. The personalised, interactive CD can be tailored

to individuals’ needs and interests, allowing the advertiser to include videos and

information which is entirely personal and relevant. The solution, which has been

called Personalised Integrated Media, takes the concept of personalisation further

than was possible before and allows greater scope to build brand image by including

features such as 3D product tours and television advertisements.

Case Study

UK Mail launches i-mail

UK Mail is to launch a new next day mail delivery service, i-mail, which will see

it moving its business further back along the mail value chain. Customers will

electronically send their mail to a UK Mail national network of sorting centres, where

it will be printed, enveloped and transferred on to Royal Mail for delivery. Customers

using the i-mail service will be able to send their mail from any internet enabled

computer. UK Mail has secured an agreement with Royal Mail meaning that i-mail

arriving with UK Mail as late as 6pm will benefit from a first class next day delivery

service. This agreement is the first allowing a private organisation evening access to

Royal Mail mail centres around the country. Customers will benefit from reduced

administration tasks, a decreased environmental effect and greater flexibility for time

sensitive mailings.

Case Study

3690_CMR_AW6 29/10/07 14:31 Page 42

Mailing houses, suppliers, brokers and consultants

Mailing houses and other suppliers such as intermediaries, brokers and consultants

have all developed the scope of their business in line with the opportunities created

by the emerging mail value chain.

While traditionally involved in mail production and finishing activities, mailing houses

are beginning to offer services along the distribution end of the value chain. Alongside

The Mailing House Group, which has been granted a postal operator’s licence,

Postcomm notes that Postal Net, a network of mailing houses across the UK, is

working in a co-ordinated manner to make it easier for large customers to get the most

cost-effective deals on postal services. The knowledge and skills of the mailing houses

involved is leveraged in this collaborative network.

Mail consolidators also form an important part of the mail market. Although many

consolidators have traditionally built their business around international mail, Postcomm

has seen evidence of mail consolidators becoming more involved in the UK domestic

market. Consolidators are able to use the knowledge and skills regarding mail collection

and processing, developed whilst working with different operators in the international

market, to benefit and advise their customers in the UK home market.


ViaPost

ViaPost is a new market entrant planning to launch an ‘electronic-to-physical’ mail

service late in 2007 that will allow businesses and individuals to send letters directly

from personal computers to a secure ViaPost print facility where they are

automatically printed, folded and put into envelopes for delivery through Royal Mail

for the ‘final mile’ of the journey. By downloading the free software, businesses and

individuals who register for a ViaPost account, which can be on a pay as you send

basis, can send single or double sided mail or colour documents anywhere in the UK

without leaving their desks. As the mail is printed at a location close to the Royal Mail

inward mail centre near to the destination of the recipient, transportation costs are

kept to a minimum, and this also means that the carbon footprint of a ViaPost letter

is reduced considerably. ViaPost has no trunking network of its own, relying entirely

on distributed print for the upstream element of distribution.

Case Study

3690_CMR_AW6 29/10/07 14:31 Page 43

Also, there is an increased number of consultancy operations in the market, assisting

mainly large blue chip mailers with their postal procurement. The services offered by

these consultancies vary but are typically software or audit based. Some consultancies

have developed software which they use to match the customer’s mailing profile to the

best value mail service. Consultancies are often independent and will suggest different

providers for different types of mailing, meaning customers may end up working with

multiple mail providers.

Other consultancies look at the entire mail process, taking several months to audit the

customer’s mail services, recommending efficiency changes depending on the mailing

requirement. This would include mail sent and received and relationships and contracts

with current suppliers. Consultancy advice could also include management of address

databases, and advice on changing the format, size and content of mail in order to

optimise cost effectiveness. As the alternative licensed operators are starting to target

smaller businesses, these consultants have started to broaden their client base outside

of larger mailers and develop cost effective solutions for small and medium sized

mailers. Postcomm has details of many postal consultancies on its website.

Printers stand to benefit from innovative services such as that of ViaPost which will build

up a network of printers located near Royal Mail’s network of mail centres, to print

electronically distributed mail, which can then be taken to Royal Mail’s local inward mail

centre for sortation and delivery. Distributed print may benefit smaller mailers who do

not currently meet the minimum volume requirements of other operators, as it can

accommodate small volume down to single items, and it reduces the environmental

impact of a mailing by sending it electronically closer to its destination. The customer

further benefits from such solutions as members of their staff are no longer required to

carry out tasks such as printing the mail items, enveloping, stamping or franking mail

and taking it to the Post Office, as these tasks are fulfilled by the operator. Electronic

distributed print is currently being trialled by a number of UK operators.


3690_CMR_AW6 29/10/07 14:31 Page 44

Mailing houses are increasingly offering to share their expertise in database

management and mail targeting with their customers. Better data management and

targeting of mail allows organisations to obtain a better return on investment from their

direct mail campaigns. Regular database cleansing ensures that organisations always

have the most up-to-date contact details for their customers, meaning they can cut

down on ‘gone aways’ and return to sender mail. Targeting direct mail more effectively

means that customers only receive mail that is specifically relevant to them, therefore

increasing their likelihood to respond favourably to the call to action in the mail piece.

Mailing houses and printers have also been instrumental in suggesting ways to make

mail, especially transactional mail, work harder for customers. Customers are

increasingly working with their mailing houses and printers to develop ‘transpromo’ mail,

where mailers use white spaces on transactional mail, envelopes and bills as spaces for

advertising and other messages. This practice is highly developed in the US and is

being used increasingly in the UK. However a recent report by DSI CMM, a leading

direct mail and print services provider, shows that companies are failing to exploit

around £500 million of advertising space on their bills and statements24. This figure

equates to 22 per cent of annual UK direct mail spend and demonstrates an area of

opportunity to add value to the transactional mail stream. According to the same report,

the banking and credit card sectors combined could be missing out on over £350

million of opportunities. Developing new ways of making mail valuable is one possible

way of extending the life cycle of transactional mail in the face of environmental and

other concerns which are putting pressure on the medium.


24 Marketers fail to exploit £500m ‘transpromo’ opportunities, www.printweek.com, 6 September 2006.

3690_CMR_AW6 29/10/07 14:31 Page 45

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3690_CMR_AW6 29/10/07 14:31 Page 46

47ROYAL MAIL

25 In March 2007, Royal Mail requested Postcomm to review Royal Mail’s pricing flexibility and the level ofaccess headroom. On August 9, Postcomm published its proposals, ‘Review of Royal Mail’s pricingflexibility and the level of access headroom (the ‘Interim Review’ of the price control)’.

This chapter discusses Royal Mail’s financial position, taking information

from its 2006/07 regulatory accounts to examine profitability, volumes,

revenues and costs. It examines Royal Mail’s quality of service in relation

to its targets, and highlights developments relating to Royal Mail’s business

transformation and the Consumers, Estate Agents and Redress Act 2007.

Royal Mail

OverviewRoyal Mail’s financial performance for the year ended 25 March 2007 was weaker than

in the previous year with operating profits (before exceptional items) for Royal Mail Letters’

business falling from £344 million to £194 million, caused by increasing costs, falling mail

volumes and constant revenues. For the regulated area, Royal Mail recorded operating

losses of £29 million in 2006/07 compared with profits of £168 million in 2005/0625.

The USO remains profitable overall though less so than the previous year (operating profit

was £27 million compared with £54 million in 2005/06) with profits from non-licensed mail

weighing over 350g continuing to offset losses on licensed mail weighing 0-350g.

The use of access products has grown quickly, with access volumes of 2.4 billion

items in 2006/07 compared with around 1.2 billion in 2005/06.

Royal Mail agreed a refinancing package in February 2007 with its shareholder, which will

enable it to commence investment in its transformation plan and deliver the cost

efficiencies it needs to meet the demands of its customers.

4 ROYAL MAIL

3690_CMR_AW6 29/10/07 14:31 Page 47

Financial performance

ProfitabilityRoyal Mail recorded an operating loss (before exceptional items) within the regulated

area26 of £29 million, compared with an operating profit of £168 million (restated) in

2005/06, a reduction of £197 million over the two years. Revenue in the regulated area

fell by £41 million (around 0.7 per cent), but costs increased by £156 million. The main

cause of the cost increase is people costs, in particular pensions.

Royal Mail’s profits across weight steps, classes of mail and products are not

uniform. The following analysis is based on Royal Mail’s regulatory accounts.

Overall, within the price controlled area, first and second class mail (stamp, meter

and PPI) made losses of £18 million compared with a profit of £41 million in 2005/06

(restated). Though first class mail made a net profit of £121 million (similar to 2005/06),

this was offset by losses on second class of £139 million (£58 million worse than

2005/06).

On access products, Royal Mail retains around 13p out of a total price of about 17.5p

per item but reports that access products are loss making (Royal Mail showed losses of

£44 million in its 2006/07 regulatory accounts). However, Postcomm’s analysis for its

Interim Review27 consultation published in August 2007 suggests the loss is much

smaller, at around £12 million per annum.


26 The regulated area comprises letters weighing up to 350g conveyed in consideration of/and less than£1, this includes the price controlled products (including downstream access) and USO non-pricecontrolled products.

27 See Footnote 25.

2005/06(restated)

Operating profit/loss before exceptionals

2006/07 change (%)

USO 54 27 -50

Price controlled area 197 (12) -106

Regulated area 168 (29) -117

Royal Mail Letters 344 194 -44

Source: Royal Mail 2006/07 regulatory accounts

Table 4.1 Royal Mail profitability by business area

3690_CMR_AW6 29/10/07 14:31 Page 48

The USO remains profitable, although in 2006/07 the operating profit was £27 million

compared with £54 million in 2005/06. The most profitable part of the USO is for

non-licensed products (items weighing more than 350g), with Royal Mail generating an

operating margin of around 18 per cent (based on operating profit before exceptionals).

However, the profitability of USO items above 350g has reduced by 18 per cent to £198

million compared with the previous year (see Figure 4.1).

Royal Mail reports an operating loss before exceptionals of £171 million on licensed

USO items weighing less than 350g. Profit margins vary greatly between the different

weight steps and formats because of an historical misalignment between prices and

costs, although this has reduced since the introduction of PiP from August 2006.

Postcomm’s proposals in the Interim Review28, if confirmed in November 2007, would

enable Royal Mail greater price flexibility to address these misalignments more quickly

than is the case under the current price control arrangements.

49ROYAL MAIL

28 See Footnote 25.

29 Figures restated to take account of change to USO scope. Profits/losses are shown in nominal termsafter the effect of removing exceptional items.

Figure 4.1 USO profit/loss from operations (before exceptional items) by weight step for 2005/06 and 2006/0729

£m

2005/06 2006/07

-200

-100

0

100

200

300


0-350g

350g +

3690_CMR_AW6 29/10/07 14:31 Page 49

VolumesOverall mail volumes in the Royal Mail’s Letters’ business30 have decreased by around

2 per cent to 21.9 billion items in 2006/07 from 22.3 billion items in 2005/06. However,

there are variations in terms of rate and direction of growth within this overall figure:

• First class stamp, meter and PPI mail volume fell by 7 per cent, while second class

fell by 4.9 per cent;

• Bulk mail (including Mailsort, Cleanmail and Walksort) volumes within the price

controlled area fell by 11.6 per cent, primarily as a result of a more than doubling of

access volumes;

• Presstream volumes fell by 13.3 per cent; and

• Special Delivery volumes remained broadly unchanged.

The most recent Royal Mail figures show that mailing volumes continue to decline at

around 3 per cent per annum. Meanwhile, access volumes continue to increase with

Royal Mail forecasting volumes of around 4 billion for 2007/08, an increase of around

65 per cent on the Total Access volumes for 2006/07.


30 Volumes figures are total operational volumes for the mail’s business, excluding door-to-door. This measure includes all regulated and unregulated mail items of all classes and weights.

3690_CMR_AW6 29/10/07 14:31 Page 50

RevenueRoyal Mail’s total mails revenue has remained flat despite an increase in average prices

of around 5 per cent for the price controlled area. This is because of the decline in

volumes, which indicate that mail customers are sensitive to the effect of price

increases and are increasingly shopping intelligently for lower priced mail items that

better suit their needs (e.g. selecting second class or access alternatives to an overnight

first class service) or selecting alternative forms of communications media.

51ROYAL MAIL

31 Postcomm is working with Royal Mail and other licensed operators on a definition of mail volumemarket shares. This is a complex matter, for example Royal Mail argues that self-delivered mail (suchas local authority items) should be included in these figures. To date, Postcomm’s market share figuresexclude document exchange mail. There is also difficulty with the treatment of parcels, most of whichfell outside Royal Mail’s historic monopoly.

32 Royal Mail inland addressed end-to-end mail comprises price controlled products (excludingdownstream access) plus USO non-price controlled products.


(millions)


(millions)

VolumeGrowth (%)

Royal Mail end-to-end32 19,705 17,894 -9

Total Alternative Provider Access 539 1,148 113

Customer Direct Access 618 1,292 109

Total Access 1,157 2,442 111


Total 21,142 20,672 -2

Other operators’ end-to-end mailings 39 35 -10


Table 4.2 Addressed letters’ market by volume31

3690_CMR_AW6 29/10/07 14:31 Page 51


Figure 4.2 Royal Mail revenue for the price control area by type of mail: 2006/07

First class stamp/meter/PPI 28%

Second class stamp/meter/PPI 18%

Bulk mail* 25%

Downstream access 5%

Other** 24%

* Bulk Mail includes Mailsort, Walksort and Cleanmail

** Other includes Presstream, Packetpost,Response Services, Special Delivery and some International products

33 See footnote 32.

Total Revenue2005/06

(millions)


(millions)

RevenueGrowth (%)


Total Access 152 327 115


Total inland addressed mailings 6,008 5,943 -1


Table 4.3 Royal Mail’s addressed inland letters’ market by revenue

3690_CMR_AW6 29/10/07 14:31 Page 52

Costs

Overall costs for inland addressed mailings have increased by around 2 per cent, due

mainly to an increase in pension costs. Royal Mail incurred approximately £140 million

additional pension costs within the price controlled area for 2006/07. People costs

represent around 70 per cent of Royal Mail’s total costs for its Letters’ business.

Royal Mail’s quality of service

Royal Mail’s quality of service targets are specified in its licence. Prior to 2006/07, Royal

Mail’s quality of service performance was measured only on the basis of end-to-end

transit times for various products. In 2006/07, additional targets were added to Royal

Mail’s licence, to better reflect customer interests. At the same time, in order to reduce

the regulatory burden on Royal Mail, Postcomm condensed some of the end-to-end

targets so as to reduce the overall number of targets and to allow Royal Mail more

flexibility to manage its business.

Figure 4.6 compares the new targets to the old ones. Royal Mail continues to be

required to achieve set performance standards for first and second class stamped and

meter mail, as it does for the Standard Parcels, Special Delivery and Mailsort 3 services.

The four first class bulk services, which previously had individual targets, are now in a

grouping which has to achieve a group performance standard. The same is true for

second class bulk services.

53ROYAL MAIL

34 See footnote 32.


(millions)


(millions)

CostGrowth (%)


Total Access 166 371 123


Total 5,753 5,874 2


Table 4.5 Royal Mail’s cost of providing addressed inland letters’ market

3690_CMR_AW6 29/10/07 14:31 Page 53

Postcode area performance is now measured according to the performance of first class

items delivered next day in the postcode area to which they are addressed, rather than

as was previously the case, when performance was measured on the basis of items

posted in a postcode area for delivery elsewhere. This is considered to be more effective

in identifying poor-performing postcode areas. The ‘Intra’ performance measure,

concerning delivery within the same postcode area, has been dropped.

Lastly, new targets were introduced to measure the percentage of collections and

deliveries completed each day, the percentage of items delivered correctly, and the

end-to-end transit times for European International Deliveries.


Targets up to the end of 2005/06 New targets in operation from 2006/07

End-to-end transit times: End-to-end transit times:

First class stamped and meter mail First class stamped and meter mail

Second class stamped and meter mail Second class stamped and meter mail

Mailsort 1First class Response ServicesFirst class PPI Presstream 1

Bulk first class

Mailsort 2Second class Response ServicesSecond class PPI Presstream 2

Bulk second class

Mailsort 3 Bulk third class

Special Delivery (Next Day) Special Delivery (Next Day) not posted on account

Standard Parcels Standard Parcels

European International Delivery

Standardised Measures:

Postcode Area Target: Posted Postcode Area Target: Delivered

Postcode Area Target: Intra

% Collection points served each day

% Delivery routes completed each day

% Items delivered correctly

Standardised Measures:

Table 4.6 New and old quality of service targets

3690_CMR_AW6 29/10/07 14:31 Page 54

Figure 4.7 shows Royal Mail’s performance compared to the targets set out in its

licence. In 2006/07, Royal Mail achieved 11 out of 12 of its targets, compared to 10

out of 16 in 2005/06.

The failure to meet the target for the number of Postcode Areas delivering at least

91.5 per cent of first class mail the day after posting was due to industrial action in the

Torquay and Exeter Postcode Areas. Royal Mail took action to recover its performance in

these areas towards the end of the year, and consequently missed the targets by only

0.1 per cent in Torquay and 0.3 per cent in Exeter. There are no automatic

consequences stipulated in Royal Mail’s licence for this degree of failure and there was

no suggestion that Royal Mail was not meeting its licence obligation, so Postcomm did

not take any enforcement action.

55ROYAL MAIL

Differenceagainst target

Performance(%)

Target (%)Services

1.094.093.0First class stamped and meter

0.498.998.5Second class stamped and meter

2.293.291.0Bulk first class

0.898.397.5Bulk second class

2.099.597.5Bulk third class

4.594.590.0Standard Parcels

8.293.285.0European International Delivery

–99.099.0Special Delivery (Next Day)

-2116.0118.0PCAs delivering 91.5% first class mail next day

0.0299.9299.90% collection points served each day

0.0599.9599.90% delivery routes completed each day

0.1699.6699.50% items delivered correctly

Table 4.7 Royal Mail’s quality of service in 2006/07

3690_CMR_AW6 29/10/07 14:31 Page 55

Table 4.8 and Figures 4.3 and 4.4 illustrate Royal Mail’s performance in first and

second class stamped and meter mail over the last four years. Royal Mail once again

performed above target levels for these products in 2006/07.


Target2003/04

Standard Performance2003/04

Target2004/05

Performance2004/05

Target2005/06

Performance2005/06

Target2006/07

Performance2006/07

92.5% first classstamped andmeter maildelivered nextworking day

90.1 92.5 91.4 93.0 94.1 93.0 94.0

98.5% second classstamped andmeter maildelivered withinthree workingdays

97.5 98.5 98.5 98.5 98.8 98.5 98.9

Figure 4.3 Royal Mail’s first class stamped and meter performance

88

90

92

94

96

% let

ters

del

iver

ed n

ext

wor

king

day

2003/04 2004/05 2005/06 2006/07

First class stamped and meter performance

First class stamped and meter target

Table 4.8 Royal Mail’s first and second class stamped and meter performance

3690_CMR_AW6 29/10/07 14:31 Page 56

2006/07 was the first year in which Royal Mail was required to measure and publish the

percentage of deliveries that are made each day by the published latest delivery times,

and the percentage of final collections made from postboxes or Post Offices at or after

the advertised final collection times.

57ROYAL MAIL

Collections at or after final advertised times 97.9%

Deliveries by latest times: Rural areas 99.7%

Deliveries by latest times: Urban areas 99.5%

Table 4.9 Collections and deliveries completed to times

Figure 4.4 Royal Mail’s second class stamped and meter performance

99

98

97

% let

ters

del

iver

ed w

ithi

n th

ree

wor

king

day

s

2003/04 2004/05 2005/06 2006/07

Second class stamped and meter performance

Second class stamped and meter target

3690_CMR_AW6 29/10/07 14:31 Page 57

Quality of service in 2007/08 during business transformation

At the end of 2006/07, Postcomm received a request from Royal Mail to suspend,

until the end of its current financial year, the payment of compensation to bulk mail

customers, and to ensure that the company is not subject to a downward adjustment

to its allowed revenues (the ‘C factor’) for the years ahead. These mechanisms are

designed to compensate customers when Royal Mail fails to meet its licence obligations

on quality of service. Royal Mail’s request was made in view of its desire to transform

its business, in order to become more efficient, and the fact that Royal Mail believed

that such transformation activities could result in industrial action.

Having consulted on and carefully considered Royal Mail’s request, Postcomm sent

Royal Mail a ‘letter of comfort’, explaining that it had decided to suspend the Bulk

Compensation Scheme and to ensure that Royal Mail is not subject to the C factor in

2007/08, because to do so would be in the long-term interest of customers. Postcomm

also explained that the relief only has effect where quality of service failures are caused

by industrial action which is a response to Royal Mail’s transformation activities.

In Spring 2008, Postcomm will hold an open meeting at which Royal Mail will explain

its application for relief from the above mechanisms, and answer questions from

stakeholders.

The Consumers, Estate Agents and Redress Act 2007

The Consumers, Estate Agents and Redress Bill became law in July 2007.

The Department for Business, Enterprise and Regulatory Reform (previously DTI)

introduced the Bill to create a new, stronger and more coherent consumer advocacy

body, and to improve redress in the energy, postal services and estate agency sectors.

Under the Act, Postcomm must make complaint handling regulations for regulated

postal operators and is likely to be required to set criteria for, and approve, redress

schemes, of which regulated postal operators must become members.

Postcomm recognises the potential for the provisions of the Act to create new barriers to

entry to the postal market. In making complaint handling regulations and setting criteria

for redress schemes, it will seek to minimise any possible negative effects.


3690_CMR_AW6 29/10/07 14:31 Page 58

Chapter five discusses relevant international comparisons with the

UK mail market, looking at market share, volume growth and the

development of competition. This is followed by a review of the current

VAT situation outlining Postcomm’s position. The final section in this

chapter handles the emerging issue of the environment and its links to

the mail market.

International comparisons

Mail volume trendsIn the UK, mail volume trends are increasingly difficult to predict, and this report has

attempted to investigate the drivers behind the uses of mail to understand likely mail

volume trends in the UK for the future. It is instructive to look at other mail markets,

and the analysis below summarises mail volume growth expectations in eleven

European member states with similar volumes per capita as the UK.

WIK surveyed Universal Service Providers (USPs) and National Regulatory Authorities

(NRAs) about their views on future mail volume trends to 2011. It then segmented the

respondents according to current mailing volumes. The table overleaf shows member

states with relatively high mail volumes, which includes the UK.

While letter post is expected to decline, direct mail is expected to continue to increase

across virtually all member states.

59MARKET DEVELOPMENTS/OPPORTUNITIES

5 MARKET DEVELOPMENTS/OPPORTUNITIES

3690_CMR_AW6 29/10/07 14:31 Page 59

According to WIK, both transactional mail and individual correspondence are subject

to electronic substitution across Europe, direct mail is much less so.

As shown in Figure 5.2, across Europe; direct mail was still growing at an average of

six per cent per year, from 2002/04, even in countries where other mail volumes were

falling. It is impossible to draw any direct conclusions for potential direct mail growth in

the UK due to the number of variables that may be impacting the relative growth in

direct mail volumes. However, this does suggest that as mail continues to grow as an

advertising medium in neighbouring European countries there may be further

opportunities for growth in the UK.


Figure 5.1 Expected volume development in high-volume member states until 2011

Num

ber

of m

embe

r st

ates

Strong decrease (annual decrease >2%)

Slight decrease (annual decrease <2%)

No change

Slight increase (annual growth <2%)

Strong increase (annual growth >2%)

0

2

4

6

8

Notes: The chart refers to 11member states with volumesabove EU average (AT, BE, DE,DK, FI, FR, LU, NL, SE, SI, UK).For each member state,consolidated expectations aboutfuture volume development werederived from the assessmentsprovided by USPs and/or NRAs.Source: WIK

2

6

2 2

0

1

7

1

2

0 0 0

1

7

3

Letter post Correspondance Direct mail

3690_CMR_AW6 29/10/07 14:31 Page 60

Market shares

It is interesting to understand the emerging pattern of liberalisation in those countries

with relatively well developed markets in order to assess the potential prospects for

competitive development in the UK, understanding that direct comparisons are difficult

because the nature and pace of liberalisation differs between countries.

Competition has existed in the Netherlands and Germany for several years and has

developed gradually through the establishment of local and regional companies

delivering to certain areas or providing specialised services. More recently, national

end-to-end networks have developed in these countries, through the acquisition of these

small, regional companies, to establish national competitive networks. This is in contrast

to the UK market, where the large international companies have been drawn to the UK

by opportunities offered by access using Royal Mail’s delivery network. Current UK end-

to-end alternatives are limited to a few companies offering local, high value or document

exchange services, and most competition has developed in the upstream end of the

mail market.


Figure 5.2 Average annual growth rates of Universal Service Providers’ direct mail(addressed and unaddressed) 2002/04

Ann

ual av

erag

e gr

owth

2002/0

4 (

%)

GDP constant EUR

Addressed direct mail

Unaddressed direct mail

Sources: WIK survey (EE, ES, FI, GR, HU, IE, IT, LT,PT, SI, SK); UPU (addressed and unaddressed: GR,LU, LT, LV, MT, PL, PT); DE, DK: Annual Reports,Eurostat (GDP at constant EUR); DK, LT, LU, LV, PL:no figures for addressed direct mail

120

100

80

60

40

20

0

-20

-40

-60

DE DK EE ES FI GR HU IE IT LU LV LT MT PL PT SI SK

3690_CMR_AW6 29/10/07 14:31 Page 61

GermanyIn Germany, competitors have been able to offer ‘value-added’ postal services since

the late 1990s. Many publishers and unaddressed mailers set up local and regional

networks, and TNT Post and PIN AG have since established national networks through

partnerships and acquisitions with these local operators. Established in 1999, and

based in Berlin, PIN AG plans to develop its network to close to 100 per cent

geographical coverage by the end of 2007. Reflecting confidence in PIN’s growth, in

June 2007, German media group Axel Springer acquired PIN by increasing its stake to

71.6 per cent. TNT Post is the other main competitor with nearly national coverage.

Created from a joint venture between TNT and Hermes Logistics, TNT has acquired

several regional German operators and a large consolidator, PostCon Deutschland AG.

Competitor market share has grown every year since 1998, although only significantly

in the last few years. At the end of 2006, competitor market share in Germany was 10

per cent. UBS predicts that by 2017, competitor market share will have reached 30 per

cent, driven mainly by the existence of the two alternative nationwide end-to-end

networks. They predict TNT Post and PIN AG will have around 13 per cent of the

market each, while a variety of smaller local operators will share the remaining four per

cent. The main competitive market is bulk business mail and direct mail.

Interestingly, in Germany, overall mail volumes continue to grow, even though

Deutsche Post’s volumes appear to have reached a plateau.


Figure 5.3 Germany – Addressed mail market volume, 1998-2006

Volu

me

(mill

ion

item

s)

Deutsche Post

Competitors

13000

12000

14000

15000

16000

17000

18000

1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: Deutsche Post, Bundesnetzagentur

3690_CMR_AW6 29/10/07 14:31 Page 62

NetherlandsIn the Netherlands, by the end of 2006, competitors’ share of the addressed mail

market was 11.7 per cent. Sandd and Selektmail are the two main competitors and

operate low cost end-to-end, nationwide delivery networks focusing on pre-sorted bulk

mail with twice-weekly delivery. They have nationwide delivery networks and carry

addressed mail, magazines and periodicals. They have continued to increase their

share of competitor market volumes, handling over 6% of total addressed mail volumes

between them. UBS estimates that competitor market share will increase to 38% in the

Netherlands by 2017.

In the Netherlands, business letter mail under 50 grams (i.e. transactional mail) is still

in the reserved area. Competition has focused on direct mail, and the business models

of Sandd and Selektmail are both built around direct mail requirements. UBS predicts

they could eventually have a combined 50 per cent share of the direct mail market.

Since 2001, addressed mail volumes in the Netherlands have been in slight decline, as

in the UK, although the decline has been less severe, amounting to 2.1 per cent over

the period, or 0.4 per cent Compound Annual Growth Rate.


Figure 5.4 Netherlands – Addressed mail market volume, 2001-06

Volu

me

(mill

ion

item

s)

TNT

Competitors

4800

4600

5000

5200

5400

5600

5800

2001 2002 2003 2004 2005 2006

Source: TNT, Sandd, OPTA, UBS estimates

3690_CMR_AW6 29/10/07 14:31 Page 63

SpainIn Spain, domestic intra-city mail and direct mail have always been open to competition,

and around 200 small local operators provide addressed mail delivery. Unipost was

established in 2001 and has built up a network of competing operators that now

reaches over 70 per cent national coverage. Unipost (owned by Deutsche Post) is now

the main end-to-end competitior to Correos y Telegrafos with an estimated market share

of around 8 per cent in 2006, while the other 200 operators share the remaining 1-2

per cent market share35.

The pace and type of liberalisation in European countries has differed, therefore it is

difficult to draw direct comparisons with the UK, and new entrants’ business models

are based on the possibilities offered by the respective regulatory environment in each

country. However, market shares of end-to-end competitors in Germany, the

Netherlands and Spain are estimated to be between 8-12 per cent in 200636. ECORYS

concludes that market conditions for the development of end-to-end competition in the

UK are not significantly better or worse than for these European countries generally,

and, therefore, in the medium-term, prospects for some end-to-end competition

establishing similar market shares are not unlikely.

The UK end-to-end market has been slow to develop partly because the access regime

encouraged large competitors to enter the market, and potential end-to-end operators

now have to compete with both the incumbent and established access operators.

The UK enjoys among the lowest prices in Europe, with very high service quality,

meaning that emerging competition has to meet a high service expectation and

potentially strong price competition. Establishing adequate drop-densities to make

delivery profitable will require time for new entrants in the UK. The fact that end-to-end

competition has developed, at least to some extent, in the European markets outlined

above, is partly a result of the longer amount of time they have had liberalised markets,

and of the type of regulatory structure they have each adopted.


35 ECORYS.

36 Prospects for competition in the UK postal market, ECORYS, 16 January 2007.

3690_CMR_AW6 29/10/07 14:31 Page 64

United StatesIn the United States, the United States Postal Service (USPS) maintains a monopoly on

postal services; however, competition exists in the form of workshare agreements similar

to access agreements in the UK. USPS works closely with workshare operators and mail

preparation companies and considers this to be a key part of its transformation,

ensuring the lowest combined costs along the mail value chain to make mail more

efficient for customers. Currently, in the United States, three quarters of all domestic

mail is pre-sorted and/or barcoded by mailers and mail service providers (presorters,

printers and consolidators). USPS promotes worksharing arrangements as the lowest

cost option to promote mail growth, and overall mail volumes increased by 2.3 per cent

last year (2006/07), while direct mail volumes grew around 5-6 per cent.

“Creating more customer value in core products and services willincrease mail volume and revenue to support universal service and the growing delivery network.”37

Another key strand in USPS’s transformation plan has been the development of

‘intelligent mail’, designed to add customer value and reduce costs. Intelligent mail

works via a machine-readable barcode that allows the identification of individual

items of mail and tracks them through the pipeline. This helps to identify operational

bottlenecks, provides mailers with data that assists them in planning and decision

making, contributes to more accurate addressing, and serves as the basis for providing

actual service measurement data for specific mailings38.


37 Unites States Postal Service, Strategic Transformation Plan, September 2006.

38 Unites States Postal Service, Strategic Transformation Plan, September 2006.

3690_CMR_AW6 29/10/07 14:31 Page 65

VAT

IntroductionIn April 2006, the European Commission (‘the Commission’) sent letters of formal notice

to the UK, Germany and Sweden, which opened infringement proceedings on the

interpretation of the VAT exemption for postal services by those countries, as set out in

Directive 2006/112/EC – ‘the VAT Directive’. The Commission was not satisfied with

replies to its formal notice and so, on 24 July 2007, it opened the second stage of the

infringement proceedings, by formally requesting that the UK, Germany and Sweden

change their legislation on the VAT exemption which it claimed is not compatible with

the VAT Directive. The requests took the form of a reasoned opinion (second step of the

infringement procedure provided for in article 226 of the Commission Treaty). If the

relevant national legislations are not amended in order to comply with the reasoned

opinions, the Commission may decide to refer the matter

to the European Court of Justice. Postcomm is not a party in those proceedings.

The Commission has said that the VAT postal exemption as applied in the UK hinders

competition39. The Commission explained that the UK had exempted from VAT all postal

services provided by Royal Mail, on the grounds that Royal Mail had been assigned

particular obligations with regards to the provision of the universal postal service.

The Commission argued that in the context of competitive postal markets, different tax

liabilities were bound to distort competition and could only be justified as regards the

strict discharge of the universal service obligation. Where, for commercial reasons –

namely to fend off competition from other operators – former monopolies offered to

some high volume clients pricing and quality conditions which were not available to

the general public, their supplies should be subject to the same tax liability as their

competitors.

Postcomm’s position on VATPostcomm’s position on VAT has consistently been that there should be a level playing

field for all postal operators, and that there should be no significant price rises for

customers. Postcomm believes that a reduced rate of VAT (of 5 per cent) applied to all

mail services and all licensed operators is the best solution to create a level playing field

for operators without material price rises for customers. However, a 5 per cent reduced

rate of VAT for postal services would require unanimous Commission Member State

support – though Postcomm continues to maintain that this is the best solution for the

UK postal services market. Postcomm’s analysis of the impact of different VAT

exemption scenarios is contained in Annex A of this report.


39 See the Commission’s press release IP/07/1164.

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Environmental issues

In the last year there has been much publicity about the environmental effects of mail in

general and specifically around direct mail. The government has named the direct mail

industry as a key stakeholder in reducing the amount of paper waste sent to landfill in

the UK. Direct marketing material is estimated to account for approximately 550,000

tonnes of household waste. Addressed mail makes up around 181,500 tonnes, the

remainder being unaddressed direct marketing material40.

It has been suggested that, in order to reduce waste, direct mail should become an

‘opt in’ communication medium rather than an ‘opt out’ channel. This would mean

that consumers would have to indicate that they wanted to receive advertising mail

from a company, rather receiving it unless they said that they didn’t want to. This would

make direct mail rules similar those used for email marketing. These rules have not yet

been changed, and the government and the Direct Marketing Association (DMA) are

looking at solutions to the problem that would have less of an effect on direct mailers

and consumers.

The DMA is working on a number of planned environmental initiatives, including

developing a mail opt out system for unaddressed mail, enabling households to

register if they no longer want to receive untargeted advertising mail.

The first development to be launched by the DMA in response to environmental

concerns is a quarterly publication giving advice to direct mailers on green issues,

including subjects like environmentally friendly procurement of paper and inks, and

recycling. The publication will be available to DMA members and other interested

groups. This is the first step in a number of programmes being planned by the DMA,

which are partly aimed at helping them meet targets set by Defra in 2007 to ensure

that 55 per cent of all direct mail should be recycled by the end of 2009 and

70 per cent by 201341.


40 Source: Waste Strategy for England 2007, May 2007, Defra, www.defra.gov.uk

41 Source: Waste Strategy for England 2007, May 2007, Defra, www.defra.gov.uk

3690_CMR_AW6 29/10/07 14:31 Page 67

Concerns have also been raised about the green credentials of mail operators.

Postcomm is monitoring developments to see if there is any evidence that in a

competitive market the most efficient and therefore the most energy efficient,

‘green’ operators will be most successful in the market. So far, Postcomm has seen

some encouraging signs from many of the licensed operators of green initiatives and

products including the following:

• Reducing carbon emissions from mail centres, headquarters and other locations;

• Procurement of ‘green’ electricity from renewable sources;

• Cutting business air travel;

• Buying electric or bio-fuel powered vehicles or using cleaner diesel engines;

• Developing company wide Corporate Social Responsibility programmes;

• Launching carbon neutral mail products (see case study opposite);

• In depth analysis of carbon footprints;

• Implementing ISO standards on the environment.

Recently new and established operators have been working on developing products

which are less environmentally damaging. Royal Mail’s Carbon Neutral door-to door

product is one example, and will be the first in a series of green products from Royal

Mail. The business model used by ViaPost and being explored by other licensed

operators (for example i-post by UK Mail, whereby mail is sent electronically to a centre

closest to the delivery point) will have the effect of cutting the harmful side effects of

mail transportation substantially.

TNT NV was, in September 2007, ranked first on the Dow Jones Sustainability

Index 2007, improving its overall score from 84 in 2006 to 91 in 2007 and obtaining

the top score in the ‘Industrial goods and services sector’ which it has now achieved for

three years running. TNT showed consistent improvement in its sustainability reporting

and performance. The announcement followed a statement by TNT’s chief executive

officer Peter Bakker in August 2007 launching the company’s Planet Me initiative.

The programme includes the installation of a certified system to measure, report and

manage its CO2 emissions and the reduction of emissions in its 8 most important

operational areas. The programme also encourages TNT’s 159,000 employees to extend

carbon reduction into their private lives. TNT has the stated ambition to become the first

zero emissions express and mail company in the world42.


42 http://group.tnt.com/newsroom/pressreleases/index.asp

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An American company Earth Class Mail is taking the idea of hybrid mail one step

further, and reducing the physical delivery of mail considerably by scanning customers’

documents at a central hub. The customer is sent a pdf document with scanned

pictures of their sealed envelopes via the internet. Customers can then choose from a

number of options, for example the item itself could be scanned and emailed to them,

sent directly for recycling, archived as a paper or pdf document or physically delivered

to their preferred postal address. Statistics from Earth Class Mail show that around 50

per cent of mail is recycled directly and that 44 per cent is scanned into the secure

system. An item can have more than one action applied to it, however less than 14

per cent of mail is delivered to a home, office or alternative address43.


43 Postal Sustainability, 2007/12: How Delivering Mail On-line Saved Time, Money, our Planet, and (Most of) Our Post Offices, Cameron Powell, Earth Class Mail, 23 May 2007.

Royal Mail door-to-door

In July 2007 Royal Mail launched a ‘Carbon Neutral door-to-door scheme’ to

encourage door-to-door mailers to be more environmentally aware.

To be able to participate in the scheme, mailers will have to:

• Use paper with a minimum of 50 per cent recycled content, and all virgin paper

must be Chain of Custody accredited;

• Reduce packaging as much as possible and ensure that necessary packaging

is made from recycled, recyclable or reusable materials;

• Omit windows from campaign envelopes and use cleaner varnishes;

• Include the Waste and Resources Action Programme’s ‘Recycle Now’ logo to

encourage environmentally friendly disposal.

These measures will reduce carbon emissions to a minimum and Royal Mail will then

work with carbon offsetting schemes such as the Woodland Trust’s Carbon Plus+

programme to offset the remaining carbon footprint. Once these criteria have been

met, mailers are entitled to use the Royal Mail’s carbon neutral logo.

Source:

www.printweek.com, 18 July 2007

Case Study

3690_CMR_AW6 29/10/07 14:31 Page 69

Postcomm’s stakeholder engagement

This report draws on secondary market intelligence sources as well as information

Postcomm gathers on its programme of stakeholder engagement. Postcomm conducts

a series on on-going meetings and seminars with a variety of stakeholders including

various industry groups, large and small mail users, trade associations, industry

suppliers, government representatives, influencers and advisors.

Postcomm is committed to monitoring market developments through regular updates

of this market review in which we seek to understand the development of competition

and its impact on the market in order to inform policy decisions and to monitor the

subsequent impact of policy decisions on the market. We also monitor the impact of

the liberalised market on business customers through our Business Customer Survey,

a primary research document, and a sister document to this Market Review, also

published this year in October 2007.

We welcome the opportunity to extend our reach into the market through our

stakeholder programme, or simply through comments or suggestions to the content of

this report. If you would like to discuss any aspect of the liberalised postal market,

please contact:

Ruth Heller or Helen PurserPostcomm

Hercules House

6 Hercules Road

London

SE1 7DB

Email:[email protected]

[email protected]


3690_CMR_AW6 29/10/07 14:31 Page 70

Postcomm’s analysis of impact of different VAT exemption scenarios

Postcomm has modelled the impact on mail volumes of the imposition of both the full

rate (17.5%) and the reduced rate (5%) of VAT on all Royal Mail services and published

some of its findings in September 200444. Because of developments on VAT, Postcomm

has updated its analysis using more recent data. Postcomm has not seen how the

European Commission intends to define the services which it describes as being

“provided in the strict discharge of the universal service obligation”and which it argues

should continue to be VAT exempt. Postcomm therefore has assumed two scenarios.

First, services provided in the strict discharge of the universal service obligation could

be first class and second class standard tariff stamped mail, Special Delivery, redirection

services and the Standard Parcel Service. Secondly, those services could be as above,

but also including metered and PPI mail. These two scenarios, together with the full and

reduced rate scenarios, give a total of four different VAT scenarios in total.

In all scenarios, Postcomm has assumed a price elasticity of 0.58 on Royal Mail

services, which we have derived from recent Royal Mail data. Customers appear to be

increasingly price conscious: some customers now fold items in order to incur lower

charges under Pricing in Proportion (PiP), or have switched from first class to second

class services, preferring to pay a lower cost and accept a reduction in delivery time

span. To illustrate the impact of this change in price elasticities, Table A1, below, shows

how volumes have changed on various Royal Mail services as a result of price changes

between 2005/06 and 2006/07.

71ANNEX A

ANNEX A

44 Postcomm’s Competitive Market Review Consultation Document, September 2004.

3690_CMR_AW6 29/10/07 14:31 Page 71

Postcomm modelled various outcomes based on costs and price information provided

by Royal Mail for 2006/07. The tables below set out the result of this modelling. Table

A2 shows the volume changes on various Royal Mail services for each of the four VAT

scenarios described above. In this table, the ‘Total Royal Mail mails’ figure is based on

the volume change for the full range of Royal Mail services (except door-to-door), which

have not all been listed here for reasons of space. Table A3 shows the volume change

broken down by the VAT status of customers.


Revenue change (%)

Volume change (%)

Average pricechange (%)

Service

(1.7)(7.0)5.7First class stamp, PPI and meter

(2.3)(4.9)2.8Second class stamp, PPI and meter

(11.6)(11.4)(0.3)Mailsport (All)

114.6111.12.0Access

* This assumes VAT of 17.5% is applicable to all Royal Mail services, except first class and second classstamped mail, Special Delivery, redirection services and the Standard Parcel service.

** This assumes VAT of 17.5% is applicable to all Royal Mail services, except first class and second classstamped, metered and PPI mail, Special Delivery, redirection services and the Standard Parcel service.

5% Full17.5% Partial 2**

17.5% Partial 1*

(2.7)00

(2.9)00

(0.9)0(3.7)

(0.9)0(3.7)

17.5% Full

(9.9)

(10.1)

(3.7)

(3.7)

Service % change in volume

First class stamp

Second class stamp

PPI first class

PPI second class

(2.9)0(10.1)(10.1)Meter first class

(1.4)0(6)(6)Meter second class

(0.9)(3.7)(3.7)(3.7)Mailsort (All)

(1)(2.4)(3.7)(5.1)Total Royal Mail mails

Table A1 Price, volume and revenue change % on various Royal Mail services between

2005/06 and 2006/07

Table A2 Volume change % (decline) on Royal Mail services for different VAT scenarios

3690_CMR_AW6 29/10/07 14:31 Page 72

Discussion on data

Current data suggests that the mail market is declining at approximately 2 per cent per

year and our future estimates of the trend over the next five years range from 1 per cent

growth to 3 per cent decline. The above figures suggest that, in terms of volume

decline, an across-the-board 17.5 per cent VAT price increase on all Royal Mail services

could result in an additional volume decline of around 5.1 per cent. Postcomm believes

that the best outcome would be an across-the-board 5 per cent VAT price increase

which would, according to our modelling, only give an additional volume decline of

1 per cent.

However, of crucial importance is how any VAT price rise would impact on different

categories of customers, depending on their VAT status – and where the volume

declines will occur. Table A3 above shows that for fully recovering customers (and

government departments), VAT has no significance whatsoever on volumes. These

customers account for around half of Royal Mail’s business by value45. That is to say,

whatever VAT scenario is chosen, our modelling suggests that there will no change in

volumes mailed for these customers. On the other hand, volume decline will be very

heavy for customers unable to reclaim VAT, which includes residential users and most

small businesses. Overall volumes might decline by 8.1 per cent for these customers if

17.5 per cent VAT was applied to all Royal Mail services.

73ANNEX A

5% Full17.5% Partial 2**

17.5% Partial 1*

(2.3)(6.2)(7.1)

17.5% Full

(8.1)

Customer status %change in volume

Residential and smallbusiness

(2.3)(6.2)(7.1)(8.1)Non-recovery business

(1)(5.1)(5.8)(6.8)Partial recoverybusiness

0000Full recovery business

0000Governmentdepartments

45 Tackling Barriers To Entry In Postal Services: Postcomm’s Final Decisions And Recommendations,March 2005.

Table A3 Volume change % (decline) by the VAT status of customers

3690_CMR_AW6 29/10/07 14:31 Page 73

Given the above, the introduction of 17.5 per cent VAT on all mail services will effectively

introduce two different sets of prices into the market: the outcome of this is very difficult

to accurately predict as there is no obvious precedent. Although the VAT status of

customers applies to all sectors of the market, any sudden change in the application of

VAT to postal services may result in confusion and uncertainty. As such, there is a very

real danger that 17.5 per cent price increases may lead some customers to move to

alternative methods of communication, which could add to the decline in total market

volumes and possibly endanger the funding of the universal postal service.

Another factor which needs to be considered (and which Postcomm cannot capture in

its modelling), is what might happen to PPI and metered mail customers, if the VAT

exemption was only applied to first class and second class standard tariff stamps. The

full 17.5 per cent VAT could result in a 6p VAT-inclusive price increase (from the current

32p to 38p) on first class PPI and metered services – and a 7p VAT-inclusive increase

on second class PPI and metered services (from the current 22p to 29p). The fact that

second class service quality is currently very good (exceeding targets) may induce

significant switching from first class to second class within PPI and meter, or from PPI

and meter to stamps. However, this would be an incorrect price signal, as Royal Mail’s

less profitable or loss making services (first class and second class stamps) would be

cheaper for a non-VAT recovering customer than its profitable services (first class and

second class PPI and meter).

Such an incorrect pricing signal could cause damage to the PPI/metered market, if

current non-VAT recovering PPI/meter customers switch to buying stamps – despite the

fact that the real costs to Royal Mail of supplying PPI and metered services is less than

supplying stamped services. Similar distortions between costs and prices and between

different types of customers might exist wherever the boundary between VAT and non-

VAT products is placed. Hence, in Postcomm’s opinion, the best solution would be a

uniform level of VAT on all mail services.

These distortions could mean that the real mail volume decline could be far greater than

5.1 per cent. A 17.5 per cent price rise could speed up the decline in mail volumes,

resulting in a ‘tipping point’ whereby major mail users unable to recover VAT seek

alternative services, such as electronic communications.


3690_CMR_AW6 29/10/07 14:31 Page 74

Bulk mail

The bulk mail situation has changed significantly since the advent of downstream

access (DSA) competition so this area is much more complex.

If a DSA operator offers a service at a price of 17.5p per item, it will have to charge VAT

on the whole 17.5p and then pay Royal Mail 13p for delivery. Having to charge VAT on

the full 17.5p makes it harder for operators to compete with Royal Mail’s VAT-exempt

Mailsort services and induce people to switch to their own services.

Where a customer holds a Customer Direct Access (CDA) agreement, it would need to

also hold a separate agreement with a third party for the ‘upstream’ service required to

get the mail to Royal Mail for delivery – which a DSA operator can supply this service.

Hence, in this situation, the CDA customer would only pay VAT on the charge for the

upstream service and not on the 13p DSA price payable direct to Royal Mail. A recent

development in the access market has been ‘Agency Agreements’, which allow the DSA

operators to act as agents for mail customers, meaning that customers only suffer VAT

on the upstream charge but they do not have to deal separately with Royal Mail and

their DSA operator. The impact of applying VAT to bulk mail would vary depending upon

which of these situations is in place.

It would seem that, under the ‘partial’ VAT exemption scenarios, both Mailsort and DSA

would become VAT-able, but the impact would be greater on Mailsort which is currently

100 per cent VAT exempt, while DSA already has VAT applicable to a small portion of

the 17.5p. Therefore, the effect is likely to be that those customers who are unable to

recover VAT will see Mailsort prices increase more than customers who use DSA. This

increase in the difference between Mailsort and DSA might induce more customers to

switch to the cheaper DSA service. It may also give a boost to the prospects of end-to-

end bulk mail competition, which has implications for Royal Mail in terms of declining

volumes and revenue and, in turn, the financing of the universal service.

75ANNEX A

3690_CMR_AW6 29/10/07 14:31 Page 75


3690_CMR_AW6 29/10/07 14:31 Page 76

© Crown Copyright 2007

The text in this document (excluding the Postcomm logo and any other logo) may be reproduced free ofcharge in any format or medium providing that it is reproduced accurately and not used in a misleadingcontext. The material must be acknowledged as Crown copyright and the title of the document specified.

Any enquiries relating to the copyright of this document should be addressed to The Licensing Division, HMSO, St Clements House, 2-16 Colegate, Norwich NR3 1BQ Fax 01603 723000, email [email protected]

This publication can also be viewed on Postcomm’s website at www.psc.gov.uk

Any enquiries concerning this document should be sent to Postcomm at 6 Hercules Road, London SE1 7DB, telephone 020 7593 2100, email [email protected]

A large print version of this report is availablefrom Postcomm, telephone 020 7593 2100,email [email protected].

This report is printed on Revive/Evolution* material. It is made from 75% recycled de-inked post-consumer waste, is ECF**/TCF*** chlorine free and recyclable.

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