Ofcom is calling on Royal Mail to modernise its network and become more efficient, in order to sustain the universal service and keep pace with postal users’ changing needs.
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 rely on 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 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.
Ofcom’s 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 of Royal Mail’s efficiency 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.
Under legislation, the universal postal service requires Royal Mail 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.
With the market continuing to change rapidly, Ofcom has carried out a comprehensive review of the needs of postal users across the UK, to see if the delivery requirements Royal Mail has to meet still reflect what people and businesses need today.
We have 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 universal service’s minimum requirements could only be made by Government and Parliament, but the findings give an insight into how people’s attitudes to postal services have evolved.
Our research 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 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 residential and SME users.
This suggests that reducing the letter deliveries requirement to five days a week would reflect postal users’ reasonable needs. It would potentially allow Royal Mail to make net cost savings of around £125-225m per year.
However, Royal Mail continues to face significant financial challenges and this saving alone would not be sufficient in itself to ensure the longer-term sustainability of the universal service.
Lindsey Fussell, Ofcom’s Networks and Communications Group Director, said: “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.”
We have researched whether the minimum requirements of the universal service reflect the reasonable needs of postal users. It would be for the UK Government to determine whether any changes are needed to these minimum requirements and to bring any proposals before Parliament.
Separately, we are reviewing the future regulatory framework for post. This will consider issues affecting the broader postal sector, as people’s reliance on parcels continues to grow. For example, we will look at continuing the requirements for Royal Mail to provide wholesale access to its network, and whether extra consumer protections are required in the parcels market. We will consult on these issues next year and conclude this review in 2022.