Ofcom is calling on Royal Mail to modernise its network and become more efficient, so it can sustain the universal service and keep up with the changing needs of postal users.
The postal market has changed dramatically in recent years. The number of letters people send and receive has fallen by around 5% each year since 2015, as people increasingly use email and other online communications.
Growth in online shopping has seen overall parcel volumes increase at a rate of around 10% per year since 2015. And these trends seem to have accelerated during the coronavirus (Covid-19) pandemic, with Royal Mail reporting a 31% increase in its UK parcel volumes between April and September this year.
While the pandemic has made 2020 a particularly challenging year for Royal Mail, the issues facing the company due to the changing market and consumer behaviour were apparent before the pandemic started to have an impact.
Our annual monitoring report on the postal market sets out data and trends within the postal sector, and examines Royal Mail’s performance. In 2019/20, 2.8 billion parcels were sent and received in the UK – one billion more than in 2013 – in a market now worth over £10bn in revenues.
Our analysis shows that costs in the part of the business responsible for the universal service increased last year. The company failed to make efficiency gains or meet the targets it set itself for improving productivity.
Unless Royal Mail can modernise its network to adapt to parcel customers’ changing needs, and operate more efficiently, the sustainability of the universal service could be at risk in the longer term.
Royal Mail is required to deliver letters six days a week (Monday to Saturday) and parcels five days a week (Monday to Friday) to every address in the UK, at a uniform price. This is referred to as the universal postal service.
With the market continuing to change rapidly, we’ve reviewed the needs of postal users across the UK, to see if these delivery requirements still reflect what people and businesses need.
We asked people and businesses how they feel about a range of hypothetical changes to the universal service, to find out what would meet their needs. Any changes to the minimum requirements of the universal service could only be made by Government and Parliament, but the findings give an insight into how people’s attitudes to postal services have evolved.
We found that the current six-day-a-week letter delivery requirement meets the needs of 98% of residential users and 97% of small and medium-sized businesses (SMEs) in the UK. Reducing this to five days a week, but leaving all other elements of the service unchanged, would still meet the needs of 97% of these users.
This suggests that reducing letter deliveries five days a week would still reflect postal users’ reasonable needs. It would potentially allow Royal Mail to make savings of around £125m-£225m per year.
However, Royal Mail continues to face significant financial challenges and this saving alone would not be enough to ensure the longer-term sustainability of the universal service.
Our research suggests that people’s needs would still be met if letter deliveries were reduced from six days a week to five.
It would ultimately be for Parliament to decide whether this change is needed. However, Royal Mail must still modernise and become more efficient, to keep pace with customers’ changing needs.Lindsey Fussell, Ofcom’s Networks and Communications Group Director