Unit 3 Micro: Ofcom gives stamp of approval for flexible pricing in mail

Changes are afoot for the UK household mail industry - a sector that is often used by teachers as an example of a near monopoly in the UK. In 2010, 16bn letters were delivered to 28.2m addresses. Royal Mail was responsible for delivering over 99% of these. The total UK household and business mail market comprises around 16bn items and £6bn to £7bn per annum of revenue. Royal Mail has a market share by revenue of over 90%.

Just a few years after deregulation of the sector, the industry regulator Ofcom has produced a consultation document that is likely to give the Royal Mail more freedom in setting the prices of stamps. At present, the Royal Mail loses more than £2 million a week operating its letters business. Increasing competition from new entrants for bulk mail sorting allied to a shift towards email and text have contributed to a 25% decline in postal volumes since 2006. Household spending in Britain on postal services has fallen to just 40p a week. The 2010 Hooper Report on the postal sector, mail volumes are expected to continue to decline globally by between 25% and 40% in the next five years

The Royal Mail is required to maintain a Universal Service Obligation (USO) which means that it must collect and deliver letters six days a week (and packets five days a week) at an affordable and geographically uniform price to every address in the UK. The USO also sets performance standards on Royal Mail: 93% of First Class mail must arrive the next day and 98.5% of Second Class mail must arrive within three days of posting.

It has become obvious that meeting these targets whilst staying financially viable is becoming nigh on impossible. Royal Mail is strapped for cash not just because of their operating losses on household mail services but also because it has had to pay in hundreds of millions of pounds to cover deficits on pension schemes for former employees. Royal Mail reduced employee numbers by around 20,000 to 155,000 between 2007 and 2011 in a bid to control costs and raise labour productivity. It has also invested more than £2 billion in recent years in new capital equipment and sorting technology.

The Ofcom consultation document proposes to give Royal Mail freedom to set its own prices for the majority of its products although there will be a a price cap of between 45p and 55p on Second Class stamps for standard letters to protect vulnerable customers. In effect Ofcom is saying that the previous regime of RPI-X price controls on the mail industry has failed because it threatens the long-term viability of what is regarded as a socially important universal service obligation - something that no other utility industry is required to meet.

Their consultative document usefully summarises two modes of competition in the mail industry:

1/ Access competition – where a post operator receives mail from customers, and then accesses Royal Mail’s network for the letter to be delivered to the final recipient - this has been the big shift in the UK market in recent years, in 2011 nearly 40% of mail volumes are carried by access providers (but delivered by Royal Mail who charge a wholesale price for accessing their delivery network)

2/ End-to-end competition - where a post operator not only receives the letter from the customer but then delivers it to the recipient, by-passing Royal Mail’s network entirely. According to Ofcom, end-to-end competition does not currently have a significant presence in the UK, although it is the predominant form of competition in other European countries, such as Germany and the Netherlands

Suggestions for background reading here:

BBC news video - Royal Mail to get freedom to set prices

Telegraph: Focus: The rising price of stamps