Introduction and Background
It could be argued that it is not necessary to regulate the postal industry. Unlike gas, electricity or telephones, there is no natural 'last mile' monopoly, and it is possible to imagine mail being delivered by competing operators, each striving hard to provide an excellent service. Royal Mail does, however, have a very strong position in the delivery market and this gives it large economies of scale and a certain amount of market power. It is therefore currently necessary to control some of Royal Mail's prices and service quality so as to ensure that it does not exploit its customers. This regulation was first done by Postcomm from 2000, when Royal Mail was given significant commercial freedom, although remaining state owned. Postcomm was subsumed into Ofcom in 2011, and Royal Mail was privatised in 2013.
But the regulator has a duty under the Postal Services Act to "exercise its functions in the manner which it considers is best calculated to further the interests of users of postal services, wherever appropriate by promoting effective competition between postal operators". And competition certainly offers a number of important benefits. Competitors will always attempt to offer customers new services, greater reliability and lower prices, and so incentivise Royal Mail itself to become more customer-friendly and efficient. This should in turn help the whole industry see off competition from 'e-substitution' (email, viewing bank statements and bills on the web, and so on).
The Universal Service Obligation
Concern is sometimes expressed that competition might mean that Royal Mail could no longer afford to provide the universal service - Royal Mail's supposedly costly obligation to deliver mail to (almost) every address in the UK six times a week. The universal service is of course anyway a legal obligation, under both European and UK law, so Royal Mail couldn't stop providing the service even if it wanted to. But even putting this on one side, it is important to remember that:
- Royal Mail's ability to offer the universal service is in fact a real benefit for the company, for their customers expect and need their mail to be delivered to every address. Individuals and small businesses would certainly not want to have to divide their outgoing mail between (perhaps less-expensive) operators who do not deliver everywhere, and the USO-holder who does. And although this is less of a problem for larger mailers, it is not very easy for non-USO operators to identify ('cherry pick') large proportions of addresses to which it is significantly less expensive to deliver mail. Indeed ...
- Delivery costs are, in the UK at least, pretty similar across the country with only minor exceptions at each end of the scale. Delivery costs are much more dependent on the speed at which postman can walk than on the cost of getting the mail to the postman in the first place. Indeed, it is more expensive to deliver in much of London than to many rural addresses. This is because of higher wage costs, higher property costs, traffic delays etc.
- Competition drives improved services and lower prices, which in turn increase mail volumes. And it is easier and more cost-effective to provide a universal service if there is lots of mail to be delivered, even to outlying communities. (Put another way, Royal Mail currently delivers around 60 million items a day, half of it posted by only 50 business customers. The marginal cost of delivering a few extra birthday cards to a small community is negligible. But the cost might become unacceptably high if there were much less business mail.)
Postcomm estimated that the loss-making deliveries cost Royal mail no more than £80m a year - a tiny cost when they were delivering approaching 80m items a day. And this did not take account of the benefits that Royal mail derived from being the sole universal service provider, both in terms of brand loyalty and ubiquity.
But the USO might in future become a burden, for instance if it continues to require daily delivery at a time when mail volumes are falling in response to competition from email and other internet transactions. This has become a particular problem in New Zealand where six-day-a-week deliveries in urban areas will drop to just three days starting in June 2015. It is interesting that services in rural areas, where customers tend to rely more on mail, will be maintained at five days a week. NZ letter volumes have dropped by at least 30% between 2006 and 2013.
And it is possible that the USO is indeed a burden in countries such as Portugal and Greece with large populations on distant islands. But there is as yet no clear evidence that the USO has become anything other than a benefit to Royal Mail in the UK.
The political and regulatory dynamics of postal regulation have been very interesting, not least because Postcomm was the first UK independent regulator tasked with controlling the activities of a wholly publicly owned company. There had been previous Monopolies and Mergers Commission investigations into the postal service but this had not led to a breach in the monopoly which served both the company and its employees so well. (Reports were published in 1980 and 1984.) (Alan Johnson notes - in his book Please, Mr Postman - that 'The Post Office and the Union of Communications Workers had a mutual interest in maintaining the monopoly and a shared concern about what the [MMC] was likely to discover. Stones would be lifted and questionable practices exposed'.)
The Labour Government obviously had mixed feelings when, in the early 2000s, Postcomm set about reducing postal prices (so as to encourage efficiency) and introducing competition, both of which lowered Royal Mail's profits - and hence both the value of the company and government revenue. Both activities were also very unpopular with the (somewhat short-sighted) postal union who happened to be the Labour government's largest donor. It was greatly to the Labour Government's credit - and to the credit of the regulator in the way in which it communicated with the Government - that HMG did not seek to interfere in Postcomm's decision making.
It is also worth noting the disconnect between the public's perception of Royal Mail (red postboxes, cheerful 'posties') and reality; Royal Mail is a huge industrialised concern, rightly focussed on providing an efficient service to the small number of customers (banks, charities, government departments) who post most of the mail. It was a brave politician who ignored the public's deep affection for the Royal Mail, although this was certainly becoming less strong as most of us began to rely much more on email than 'snail mail'.
Sweden was the first EU member state to 'liberalise' (i.e. introduce full competition into) its postal market, followed by the UK. One or two other countries began to follow suit, and the Third European Postal Directive eventually required all member states to have liberalised by 2012. But it also permits member states subsequently to ensure the continued delivery of the universal service (i.e. protect their incumbent operators), (1) through direct subsidy ('state aid') or (2) by forcing competitors to pay 'compensation' to the incumbent - i.e. tax competitors - supposedly to reimburse the usually non-existent) cost of delivering the universal service - or (3) by having them sub-contract the regional delivery of postal services.
The Germans had previously found another way of protecting Deutsche Post (whose monopoly had led to them paying their politically powerful employees very generously indeed) by mandating a high minimum wage for postal staff which made it near-impossible for competitors to compete, because they of course wanted to employ staff at normal market rates. This and other devices were deprecated by European Commissioner McCreevy when announcing the coming into force of the Third Postal directive: "These include restrictive licensing requirements for new operators, abnormally high setting of minimum wages which create a disproportionate barrier to entry, predatory pricing, discriminatory access to the postal infrastructure, operational standards that limit interoperability between operators, etc. We hear calls for all sorts of prohibitive requirements or conditions to be imposed on new entrants that would make it effectively impossible for them to run their business. This is not my idea of a Single Market. We will use the means at our disposal to address such protectionist behaviour to see to it that what we agreed will also be implemented."
Falling mail volumes have caused state owned mail services to explore offering non-postal services - especially mid-week when mail volumes are low. The Finnish Posti workers will mow lawns, and the French La Poste offers to 'Watch Over [your] Parents'.
Early Regulatory Decisions
Against the above background, the UK regulator Postcomm decided in 2002 that there were clear advantages to be gained from permitting rival operators to offer mail services in competition with Royal Mail, hoping that this would galvanise the whole postal industry and so stave off the competition from email and the internet. Put another way, Postcomm believed that competition would provide a spur that would ensure that a more efficient and customer-responsive postal service was better able to respond to the challenges of changing technologies and customer demand.
Sadly, however, Royal Mail were very slow to respond to the threat of competition, and in particular did little to address the well-known inefficiency of their 'upstream' business:- collecting and sorting mail overnight in large 'mail centre' factories. There was certainly no sign that the company recognised the huge threat of competition from e-substitution. The unions in particular were much less worried about job-destroying competition from email and other postal operators than about management's attempts to increase productivity. They called a number of strikes, which only served to encourage their largest customers to seek to communicate electronically with their customers, including by offering discounts if customers began to look at, and pay, their bills online.
The result was that Royal Mail lost over half of their upstream business, with several competitors successfully gaining contracts to collect mail from large customers, sort it and transport it to Royal Mail's local delivery offices. The upstream competitors then contracted with Royal Mail to deliver almost all their mail, paying an 'access price', set by the regulator, for this 'downstream' service. As a result, as expected, and in contrast to the upstream business, Royal Mail's 'downstream' delivery network remained strong and relatively efficient, and retained almost all its market share. (But see below re TNT's short-lived entry into this market.)
In parallel with this, total mail volumes fell as a result of e-substitution so that Royal Mail came under severe financial pressure, whilst remaining owned by a government with very little money following the credit crunch.
(Mail volumes fell from around 84m a day in 2006 to 58m in 2012 and 40 million in 2019, but the company broadly maintained its share of a rapidly increasing consumer parcels market, driven by increased e-commerce.)
As the years went by, the combination of e-substitution, the loss of upstream business, and Royal Mail having failed to cut its costs far enough and fast enough, meant that Postcomm decided that it needed to reduce the regulatory pressure on Royal Mail. The regulator therefore decided:
a) to allow (but not require) Royal Mail to increase its prices, and
b) to allow Royal Mail to introduce 'zonal pricing', so abandoning the Universal Service Obligation (USO) for business mail. (Zonal pricing supposedly allowed cost-reflective price controls for e.g. the 'final mile' delivery of business mail - although Postcomm had previously concluded that its disadvantages and imprecision outweighed its advantages.)
Comment: Unfortunately Royal Mail chose to take advantage of these short term palliative measures, rather than focus on becoming more efficient, and this inevitably drove yet further customers away and so risked encouraging the company to enter a form of 'death spiral'. In particular, although the cost of 'urban' delivery was set at 13% less than national/suburban, 10% extra was charged for London deliveries, and 14% more for rural deliveries. This would inevitably encourage competitors to establish their own delivery networks - as TNT Post did - see further below.
Developments from 2010
The post-2010 incoming coalition government government decided to re-activate its predecessor's plan to part-privatise Royal Mail, partly so as to raise some cash, but also in the hope that private sector owners would be more successful than Ministers in getting the company to tackle its deep-seated problems. The necessary legislation was passed in June 2011, including the hiving off of the company's huge pension liabilities which would have sunk any privatisation candidate. But Royal Mail's financial performance continued to deteriorate, as mail volumes continued to fall (by 25% between 2006 and 2012), so it began to look very unlikely that privatisation could be achieved without subsidising the purchaser, which might run into state aid problems.
Postcomm was subsumed into Ofcom in 2011 and price controls were almost totally removed in early 2012, the only safeguard being an inflation-linked cap on the price the public would pay for second class (2-4 day delivery) mail. It remained to be seen whether Royal Mail would use its new-found freedom to escape from its death spiral, but the omens were not looking good. In its decision document, Ofcom noted that 'the experience since 2006 is that price controls have not been effective in ensuring that Royal Mail improved efficiency - Royal Mail missed its own targets for efficiency improvements, as well as those assumed by Postcomm in setting the control'.
One particularly worrying omen was that Royal Mail immediately increased the price of a first class stamp from 46p to 60p and the price of a second class stamp from 36p to 50p - a very sharp increase which would have been political dynamite 10 or 20 years earlier. But the company continued to keep downward pressure on the price of their vital business mail. And Ofcom continued to require Royal Mail to provide competitors with access to its delivery network, so helping secure the 'final mile' service. Royal Mail were given the freedom to set the wholesale price for such access, but were subject to rules regarding the margin between its wholesale and retail prices. Ofcom felt that this should help ensure that efficient competitors could compete effectively with Royal Mail.
If Royal Mail's performance had continued to decline then one way forward might have been to relax regulation in ways which help the postal industry compete with the internet, maybe by seeking to relax the Europe-wide universal service obligation - perhaps requiring deliveries on only three days a week - but this would be politically hard to sell, and would require the agreement of other member states.
A pretty big threat to the careers of postmen and women was the arrival of door-to-door delivery by TNT Post - see photo on left. Trials began in London in 2012, a full 10 years after the market was opened to competition, so Royal Mail had been given plenty of time to show that it could offer a low-cost and efficient 'final mail' service to companies such as TNT who had taken a large slice of its 'upstream business. But TNT seemed at first to be making a success of its London operation, no doubt apparently helped by Royal Mail's decision to charge 10% more for delivering mail in London - 'though see further below.
Developments in 2014
There were some interesting - and somewhat depressing - developments in the early part of 2014, following the privatisation of Royal Mail in 2013.
Both Royal Mail and its postal competitors continued to face tough competition from email and other web-based communication and transactions, to some extent counteracted by increases in parcel deliveries on behalf of Amazon etc. Royal Mail's parcels business responded well to this opportunity, including introducing Sunday deliveries and other innovations aimed at making life easier for parcel recipients.
But the managers of its mail business continued to think and behave like monopolists. They had already lost 50% of the 'upstream' sorting/transportation business, and - as noted above - were seeing the first signs of serious competition - in London and Liverpool - from TNT Post for door-to-door deliveries. So what did they do? What does any business do that is worried about its customers switching to an alternative supplier? It raises prices, of course. (That was sarcasm, by the way.) In particular, it told TNT and other upstream operators that they would in future be charged a higher fee ('access price') for delivering the mail that they had collected and sorted.
This created two problems for Royal Mail. First, it encouraged TNT to expand its delivery business as fast as possible. TNT accordingly announced its intention to take its own direct delivery service to a number of other cities, with the aim of covering around 42 per cent of addresses by 2017. Second, it caused TNT to complain to the regulator, Ofcom, about having (in the meantime) to pay the extra charge to the still dominant Royal Mail.
Royal Mail then burnished its monopolists credentials by seeking to scare politicians and rural customers by invoking yet again the supposed threat to the universal postal service. "We are proud to deliver the Universal Service. But, the sustainability of the Universal Service depends on Royal Mail being able to use revenue from easy-to-serve urban areas to cover the cost of a nationwide network capable of serving all addresses at a uniform price... This is why we are preparing a regulatory submission calling on Ofcom to take action now and carry out a full review of direct delivery. Such a review would be in line with Ofcom’s primary duty to secure the provision of the Universal Service. It would also allow for full consideration of what regulatory interventions may be necessary. At the same time, we are raising the issue with HM Government and are seeking a legislative amendment that would require a review of direct delivery if Ofcom does not initiate one in a timely manner."
In other words, within only months after privatisation, Royal Mail went running back to Ministers claiming that it could not cope with the competition. There was no acknowledgment that Royal Mail should easily be able to offer the lowest cost deliver service, given it huge scale, its experience and its VAT exemption. Nor was there any sign that it had undertaken any serious analysis of how it was that TNT was able to offer a lower cost delivery service. Commentators and investors' reacted accordingly. Private Eye's reaction is above. And Royal Mail's share price fell around 10% in one day.
Ofcom took care not react immediately to Royal Mail's complaint, but concluded, in December 2014, that ...
- the universal service was not under threat,
- competition (from TNT Post in particular) was likely to provide Royal Mail with a further incentive to become more efficient
- continued progress on efficiency was crucial if the universal postal service is to be financially sustainable in the longer term, and
- Ofcom would not impose new regulatory conditions on Royal Mail
- but it would continue to keep the postal market under review.
TNT Post/Whistl Quits
TNT Post was re-branded Whistl in 2014 and widened its delivery operations to include Manchester and Liverpool as well as continuing to deliver in London.
The company had significant cost advantages over Royal Mail, albeit associated with lower service quality. In particular, it employed relatively less experienced (and typically younger) staff than Royal Mail, often on zero-hours contracts and lower hourly rates. It was also not possible, for instance, for householders to arrange for their mail to be redirected to a new address, nor could mail easily be returned to sender, including when mis-delivered. These costs (so to speak) fell upon recipient householders - who could not switch suppliers - and not on Whistl's business customers who benefited from lower prices.
But 'the final mile' is a more complex challenge than at first appears. Mail has to be sorted into just the right delivery sequence, taking account of side roads off main roads, apartment blocks etc. And there are significant economies of scale, which benefited Royal Mail, as well as their customers' natural desire not to have to divide their mail between two delivery companies. It also became clear that Whistl was much less reliable than Royal Mail. (I subscribed to a magazine that Royal Mail used to deliver on a Friday. Whistl never delivered it before Saturday, and often not until the Tuesday or Wednesday of the following week.)
It therefore seemed almost inevitable that Whistl's growing losses would cause the company to withdraw from 'final mile' delivery, which it did in May 2015, and Royal Mail regained its near-monopoly of that operation. However ..
Whistl called a foul, arguing that Royal Mail had abused its (undoubted) dominant position in the mail market by discriminating against Whistl in the detail of the 2014 price rises. Ofcom carried out a lengthy investigation and fined Royal Mail £50m in 2018, saying that:
The penalty is the result of an investigation into a complaint, made to Ofcom by Whistl (one of Royal Mail’s wholesale customers). The complaint was about changes Royal Mail made to its wholesale customers’ contracts in early 2014, including wholesale price increases it was introducing.
[The price increases applied to] services, known as ‘access mail’, …worth £1.5bn to Royal Mail each year. They involve access operators such as Whistl collecting and sorting bulk mail from large organisations – such as bank statements, utility bills and information from councils – before handing mail over to Royal Mail to complete delivery. At the time, Whistl was expanding its business to compete directly with Royal Mail by delivering business letters (known as ‘bulk mail’) to addresses in certain parts of the UK – becoming the first company to challenge Royal Mail’s monopoly in the large-scale delivery of bulk mail. The 2014 wholesale price increases meant that any of Royal Mail’s wholesale customers seeking to compete with it by delivering letters in some parts of the country, as Whistl was, would have to pay higher prices in the remaining areas – where it used Royal Mail for delivery.
Following notification of these new prices, Whistl suspended plans to extend delivery services to new parts of the UK. As part of our investigation, we analysed Royal Mail’s internal documents regarding the price changes. These show the changes were part of a deliberate strategy to limit competition in delivery as a direct response to the threat of competition from Whistl.
Royal Mail's appeal against that decision was unsuccessful. Those interested in the detail of the dispute might like to read the 234 page (!) November 2019 Competition Appeal Tribunal judgment which contains interesting reviews of the history of postal regulation in general, and access pricing in particular.
Ofcom reported in 2019 that access operators (other than Royal Mail) now collected and sorted around 60% of mail volumes, whereas there still remained very little competition in the delivery market.
Ofcom fined Royal Mail £1.5m in 2020 for falling 1.5% short of its licence obligation to deliver 93% of first-class post within one working day during 2018-19.
The UK letter market was reported to be amongst the largest in Europe in 2020 - 40% above the European average but falling around 25% year on year.
This list summarises the history of basic stamp prices, every five years from the introduction of uniform 'penny postage'' in 1840.
Two tier post was introduced in 1968. After this date, the first price shown is first class - i.e. over 90% delivered next day. Second class post - the second price shown - normally gets delivered on the second or third day after posting.
1p (1 new penny) = 2.4d (2.4 old pennies).
1840-1915 1d, 1920 2d, 1925-1935 1.5d, 1940-1955 2.5d, 1960 3d, 1965 4d, 1970 5d 4d, 1975 7p 5.5p, 1980 12p 10p, 1985 17p 12p, 1990 22p 17p, 1995 25p 19p, 2000 27p 19p, 2005 30p 21p, 2010 41p 32p, 2015 63p 54p, 2020 76p 65p, 2022 95p 68p
Key dates in Royal Mail's history were:
- 1516 - The first 'Master of the Posts', Sir Brian Tuke, is appointed by Cardinal Wolsey, then chancellor to a young Henry VIII.
- 1635 - A postal service is made available to the public, with the cost being paid by the recipient. The fee is determined by the distance the letter travelled and the number of sheets.
- 1657 - The General Post office was created under Oliver Cromwell
- 1784 - The service was named Royal Mail
- 1840 - The Penny Black, the world's first adhesive postal stamp is sold nationally, and the penny post led to a surge in letter writing.
- 1853 - Post boxes go nationwide in Britain, having previously only existed in Jersey
- 1968 - Introduction of second class stamps
- 1974 - UK postcodes finalised
- 1980 and 1984 - Monopolies and Mergers Commission (predecessor of the Competition and Markets Authority) reports into Postal Services
- 1986 - The Post Office's functions are split into Royal Mail Letters, Parcels and Counters.
- 1993 - First attempted privatisation
- 2000 - Postal Services Act 2000 gives Royal Mail certain commercial freedoms and established regulator charged with controlling RM's prices and, where appropriate, introducing competition.
- 2001 - The Post Office Group was temporarily renamed Consignia at a cost of £2 million. 15 months later it reverted to Royal Mail
- 2002 - Competitors allowed to carry business mail
- 2002 - Second attempted privatisation
- 2009 - Third attempted privatisation
- 2013 - Privatisation
Postcomm's 2002 decision document, announcing the staged introduction of competition, initially for business mail, may be accessed here.
The Centre for the Study of Regulated Industries published, in 2004, a useful Collection of Reviews of the Development of Postal Regulation.
Duncan Campbell Smith's Masters of the The Post contains a detailed history of the Royal Mail from the Tudors through to 2010.
A brief history of postal privatisation is here.