Checked your post lately?

There is something comforting about the simplicity of mail. You put a letter in the post box and a day or so later a postman delivers it to its destination. Job done.
Something like that has been operating in the UK for around 350 years. But things are changing. In fact, the last four years have probably seen more changes to our mail services than the whole of the previous 350.

Open market
The most radical change has been the liberalisation of mail services. This began in January 2003 when Postcomm, the postal regulator, opened bulk business mail – a third of Royal Mail’s monopoly – to competition. Full competition followed in January 2006 and Royal Mail now shares the letters market with 17 competing companies, all licensed by Postcomm.
It’s the largest liberalised postal market in the world. Although it has declined slightly recently, in 2006/07 the UK addressed mail market was still worth around £6.6 billion. Mail volumes, at 21.9 billion items, were down two per cent on the previous year – the third consecutive year volumes have fallen – but there are some areas of growth that are helping offset the decline.
New operators currently target the business market – which makes up 87 per cent of the average postbag – by offering business mailers different options, prices and choices from services that, up to 2003, were provided on a take-it-or-leave-it basis solely by Royal Mail.

Competition for royal mail
The change did not go unnoticed at Royal Mail. Under the stimulus of competition, the company radically improved its standards of service. In 2006/07 Royal Mail met or exceeded all but one of its targets. Just over three years ago it missed all its service standards. These improvements benefit everybody – not just business mailers.
The most important part of the UK’s mail operation is the universal service. This enables anyone in the UK to post letters and parcels to any other part of the country at the same affordable rates. It guarantees one delivery of mail each working day to every UK household and business, and one collection of mail, six days a week. Royal Mail’s licence requires it to provide a universal postal service.
Delivering the universal service isn’t easy. We post more than 80 million items of mail a day. Getting this number sorted, processed and delivered to around 27 million addresses throughout the UK is a mammoth task and at the moment only Royal Mail has the capacity to do it.

Competitors working together
Among those taking advantage of the universal service are Royal Mail’s competitors. Unable to match the scale of Royal Mail’s operations, many of them – and some major bulk mailers – pay Royal Mail for its postmen and women to deliver mail for them.
It works like this: a postal operator sets up an arrangement with Royal Mail known as downstream access. The operator collects mail from his business customers, pre-sorts it if necessary, and takes it to a Royal Mail mail centre. From there Royal Mail handles delivery to the address.
The operators make a margin by having highly efficient collection, sorting and transportation systems and offering more appropriate services or better value for money than Royal Mail. However, Royal Mail’s involvement in the process means it retains more than 70 per cent of the total revenues of access transactions.
In 2006/07 downstream access accounted 11.8 per cent of mail volumes (2.4 billion items of mail) –  more than double the previous year. This amount is still growing; between April and August 2007, access mail accounted for 19 per cent of Royal Mail’s revenue-derived volume.

Monopoly of sorts
The growth of downstream access has not affected Royal Mail’s delivery services. It still retains a virtual monopoly over the ‘final mile’ with less than one per cent of the mail now being delivered end-to-end by rival operators. We don’t expect this dominance over the final mile to reduce materially over the medium term because it is proving very difficult for new operators to compete against Royal Mail’s economies of scale.
Royal Mail has another advantage – it is exempt from charging VAT on prices for its postal services, whereas alternative mail companies have to apply the full rate of 17.5 pet cent to their prices. The European Commission believes that the UK – along with Germany and Sweden – has not properly implemented the VAT Directive on Postal Services and has begun infringement proceedings against these countries. These proceedings are ongoing and Postcomm is not a party to them.
Postcomm constantly monitors the mail market, and each year publishes two reports: the Competitive Market Review and a Business Customer Survey. One charts the state of the market, the other records the views of people who are using the liberalised market.
Bigger challenge
2007’s Business Customer Survey shows that Royal Mail and its competitors are facing a far bigger challenge than pure mail-on-mail competition. Mail can be replaced by an expanding number of alternatives. Already mail revenues are being lost to e-mail, text messaging facsimile and other digital media.
More then one in five (22 per cent) of respondents to the Business Customer Survey have moved some of their mail to other media in the past 12 months. E-mail accounted for 80 per cent of this substitution. Top mailers – those spending £500,000 a year or more on post – told us they had moved 33 per cent of their mail to other media.
In parallel, direct mail, which accounts for nearly 40 per cent of the mail revenues, is competing in cost effectiveness terms with other promotional media, including Internet advertising.
What can the mailers do? Business customers tell us that what they value most in a postal service is reliable delivery and collection; they rate these higher than price, billing and account management. These values are not helped if Royal Mail’s service is hampered by industrial action – as happened last summer.
Last August Postcomm published the first report of a wide-ranging review of the UK mail industry. The information gained from the review – which is ongoing – will help us frame our regulatory strategy in the lead-up to 2010 and beyond.
A theme emerging so far from this review is that mail operators must make the most of opportunities presented by the changing mail market. We found that mail operators in the UK are not fully grasping the opportunities – or facing the challenges – of new communications media to the extent that their European or North American counterparts are.

Mail benefits
Mail is a personalised service with hand delivery to a very stable address base – characteristics that electronic media cannot match. If operators can focus on how their mail products can add value for users, there is no reason to accept the prospect of a contracting mail market. For example, there is an increasing requirement for the delivery of good bought on the Internet.
As well as electronic media, there will be challenges posed by concerns about the environment. Already hybrid mail services are beginning to emerge that aim to reduce the pollution from trucks carrying mail long distances. Hybrid mail is sent electronically from the writer to a printer near its destination. After printing it is put in an envelope and delivered by a local service provider. As well as reducing pollution, hybrid mail saves staff time for the user by reducing the need for mailroom operations.
The good news is that both our review and our Business Customer Survey found that customers are benefiting from the liberalised mail market. More than half (54 per cent) of the respondents to the survey agreed that competition has improved choice and 39 per cent believe that competition has improved Royal Mail’s quality of service. When asked to rate the statement “I am in favour of the mail market opening to competition”, they gave it 7 out of 10.
Will there be more changes? Certainly. Mail is a vital part of our national fabric and it is essential that it is able to adapt to provide the services we need in a digital age. As regulator, Postcomm will provide all the help we can.