Postal Wider Review

In December 2014, we published a statement on the outcome of our review of direct delivery (or “end to end”) competition in the postal sector.^(-1-) This set out our conclusion that it was not necessary, at this point in time, to impose regulatory conditions on direct delivery operators in order to secure the provision of a universal service. In addition, we noted that a range of factors, other than end-to-end competition, were likely to affect Royal Mail’s future financial position.

We therefore announced our intention to broaden our review of the factors that could materially affect Royal Mail’s ability to continue to provide the universal service in the future. This will run alongside our close monitoring of the postal market.

This review is underway and will consider a range of factors including:

• developments in the parcels sector and Royal Mail’s position within it; and
• the rate of efficiency improvement Royal Mail should reasonably be able to achieve.

Developments in the parcels sector and Royal Mail’s position within it

While traditional letter volumes have been falling since 2006, in more recent years the impact of this volume decline on the universal service has been mitigated to an extent by increased parcel volumes carried over the universal service network. This is largely due to the increase in online shopping. Parcel revenues are therefore an important component of the financial position of the universal service.

The parcels sector has historically been more competitive than letters. The level of competition and innovation has intensified recently, particularly with respect to the delivery of parcels from businesses to consumers. This could have important implications in relation to the future financeability of the universal service network and we are therefore aiming better to understand the parcels sector generally, and in particular Royal Mail’s potential future competitive position.

As part of this work we intend to collect data on parcels volumes and revenues from operators to gain a greater insight into the state of the sector and likely developments. We anticipate that this data will also form part of our ongoing monitoring of the postal sector, and that we will publish aggregated information on the parcels sector in our regular publications (such as our annual monitoring update).

Assessing the rate of efficiency improvement Royal Mail should reasonably be able to achieve

We are undertaking further analysis of what might represent a reasonable rate of efficiency improvement by Royal Mail. This is important, given the role that efficiency can play in Royal Mail’s ability to continue providing a financially sustainable universal service.

As part of this work, we will review the extent to which Royal Mail’s underlying cost base provides an opportunity for efficiency improvement, and the extent to which its business plan demonstrates initiatives and ambitions to realise those efficiencies while continuing to meet its existing universal service obligations. We will consider a broad range of evidence as part of the review, including how Royal Mail’s costs change in relation to volume changes and the relative efficiency of Royal Mail’s delivery offices and mail centres. In considering what represents a reasonable rate of improvement, we will take into account that Royal Mail is an incumbent, multi-product universal service provider.

Our view of whether Royal Mail’s achieved levels and proposed targets for efficiency improvement represent a reasonable rate of improvement will take into account all of the relevant evidence.

We expect the review to continue during 2015/16.

Footnotes:

 1.- Our statement on end to end competition can be found here: http://stakeholders.ofcom.org.uk/binaries/post/end-to-end-statement/end-to-end.pdf