Blog
Has competition in postal services delivered?
7th May 2008
Two years on from the liberalisation of the postal services industry, has this supply-side policy to make the market more contestable made any noticeable difference to the quality of service, prices and investment in delivery? A new report casts doubt on the changes to the industry since the market opened up to competition at the start of 2006 to businesses such as UK Mail. Robert Peston reports for the BBC in this video clip. His feature asks whether the universal service provision is a millstone round the neck of the Royal Mail which remains in deep financial trouble.
Download the government report here: The challenges and opportunities facing UK postal services: an initial response to evidence (pdf file)
115,000 post boxes
12,0005 post offices
87,000 business addresses
Mail is collected from hundreds of thousands of points across the UK before being sorted and delivered to local, regional, national and international destinations. The Royal Mail continues to deliver the vast majority of household and business mail “the final mile” to the customers, but new entrants into the market are taking a bigger and bigger slice of the new mail at collection and sorting stages. Because the Royal Mail has huge fixed costs, even small reductions in the volume of mail it collects and sorts can have a large effect on the unit costs of their business - damaging profitability because the prices they can charge are tightly controlled by the industry regulator. According to the report “In 2006?07, Royal Mail Letters generated an operating margin of 2.8%. This compares to margins in the region of 13?15% produced by TNT Post and DHL in Netherlands and Germany…...It is estimated that 4.1 billion items were handled by alternative carriers in 2007?08.”
Reading the report for a few minutes today, I spotted a good example of monopsony power in this market - 50 companies (many of them household names) account for 40% of the mail market, their business is the subject of keen competition and they have significant power in the market place to drive down the cost of mail contracts.
Further reading
Telegraph: Royal Mail privatisation ‘hurts customers’
The Times: Nationwide post service could end as Royal Mail faces finance crisis
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.