Royal Mail given extra pricing flexibility but urgent imperative must be transformation of its business
9 August 2007
- Royal Mail must transform its business and put greater emphasis on customers.
- Royal Mail to be given greater flexibility to align some of its retail prices with costs.
- The case has not been made for Postcomm to take any action on access margins.
Postcomm, the independent regulator for postal services, has proposed that Royal Mail be given extra flexibility to increase some retail prices but has decided to leave access margins unchanged in response to the company’s request to review some aspects of the 2006-10 Price Control (see Note 1).
Nigel Stapleton, Postcomm chairman, said:
“Postcomm is giving Royal Mail all the help it can to tackle its deteriorating financial situation; the ball is now firmly in Royal Mail’s court to address urgently its very high cost base. Reining back on competition, which is providing some growth momentum to the mail market, is not the answer. We have always supported a successful transformation of Royal Mail and, more importantly, the continued health of a universal service that reflects customer need. Accordingly, Postcomm is providing short term help by giving Royal Mail greater pricing flexibility from April 2008 to align the prices of some loss-making products more closely with costs.
“It is plainly wrong to suggest that competition from new mail operators is to blame for Royal Mail’s problems. In those parts of the mail market where competition has developed, volumes are growing but Royal Mail has lost share. This reflects competitors’ greater efficiency and customer focus. In all other parts of the mail market, where Royal Mail is not yet challenged by competition, mail volumes have declined in the past 12 months, because customers are resisting the higher prices that the company charges to recover its costs. Last year Royal Mail underperformed the 3% efficiency target in the price control and their projections suggest this gap will more than double over the next three years.”
Royal Mail will be allowed to increase prices on certain loss-making products in April 2008 and April 2009 by more than was originally agreed when its four year price control was set. If it wishes, Royal Mail will be able to raise the price of a second class stamp to 29p by 2010, subject to inflation (the original price cap was 26p). The price cap on a first class stamp will not be affected by these proposals.
Postcomm is rejecting requests from TNT and UK Mail to widen the margin between Royal Mail’s prices for bulk mail products and the amount Royal Mail charges them for access to its network and delivery of bulk mail over the ‘final mile’. Royal Mail had also made an application on access, to narrow the margin. However the company has not provided sufficient evidence to support this application and has been unable to justify the level of loss it claims it is making on access mail.
Mr Stapleton said:
“It is regrettable that Royal Mail was unable to provide Postcomm with satisfactory cost information to enable us to decide whether to allow it to raise the prices it charges competitors on some bulk mail products for delivery over the ‘final mile’. However, the information that is available suggests that access prices overall are set at a fair level. We would urge UK Mail, TNT and Royal Mail to try to reach an agreement on these commercially negotiated contracts rather than asking Postcomm to intervene if they believe changes are necessary.”
Postcomm’s Interim Review document contains information extracted from Royal Mail’s regulatory accounts which were submitted to the regulator on 31 July in accordance with Royal Mail’s licence obligation. Royal Mail has informed Postcomm that the sections of the regulatory accounts, which it normally makes public, will be published by no later than 15 August.
Notes for editors
- The full document - Review of Royal Mail’s pricing flexibility and the level of access headroom - is published today.
- Full list of related documents.
Postcomm had to announce its proposed response to Royal Mail’s applications by mid-August to allow time for a two month consultation, following which the final decision will be confirmed by December (when Royal Mail has to announce any price increases to take affect from 1st April 2008).
| Product Group | Average Price Change % (see Note A) | Volume Change % | Revenue Change % |
|---|---|---|---|
| First class standard tariff | 5.7 | -7.0 | -1.7 |
| Second class standard tariff | 2.8 | -4.9 | -2.3 |
| Presstream | 4.8 | -13.3 | -9.1 |
| Mailsort Bulk | -0.2 | -11.4 | -11.6 |
| Downstream Access Bulk | 2.0 | 111.1 | 115.3 |
| Subtotal - Bulk Mail (see Note B) | 0.4 | 5.1 | 0.6 |
| Door to Door | 4.0 | -4.3 (see Note C) | -0.4 |
| Standard Parcels | 8.3 | -1.3 (see Note C) | 6.9 |
- Note A: In calculating average price changes for individual product groups, we have assumed a constant volume mix across years.
- Note B: In calculating price changes for Bulk Mail, because of the huge mix changes between retail and access products, we have used a weighted average of the average price changes for each of the constituent product groups.
- Note C: It is estimated that the 'leaflet market' grew (in volume) by 4% in 2006 following a trend of significant growth (according to Letterbox Consultancy Ltd, August 2007). Parcel and packet volume generated by on-line shopping increased by over 50% in the last 12 months (according to IMRG).
The table above compares Royal Mail’s pricing behaviour to changes in its volumes between the years 2005/6 and 2006/7. It illustrates that in those parts of the mail market where competition has developed, volumes are growing but Royal Mail has lost share. In all other parts of the letters market, where Royal Mail is not yet challenged by competition, mail volumes have declined in the past 12 months, suggesting that customers are resisting the higher prices that the company has charged to recover its costs.
The 2006-10 Price Control has set Royal Mail the target of increasing its efficiency by 3% in each year of the control. Using Postcomm’s measure of efficiency, It has been calculated that Royal Mail achieved a 1.9% efficiency improvement in 2006/7 and its most recent forward projections target an improvement averaging 0.6% per annum over the remaining three years of the price control.
Note 1: The regulator examined requests from TNT, Royal Mail, and UK Mail to adjust the margin between the price Royal Mail charges its customers for bulk mail products and the amount Royal Mail charges other operators for access to its network and delivery of mail over the ‘final mile’. Royal Mail is seeking to reduce the average margin between ‘access’ prices and its retail prices, while TNT and UK Mail are seeking to increase this difference.
Separately, Royal Mail asked Postcomm to amend a second key feature of the 2006-2010 Price Control: the pricing flexibility within its captive and non-captive price baskets, which, it says, would help it increase the extent to which, and speed with which, it can more closely align its prices to its costs. This would offer Royal Mail greater scope to lower the prices of business mail (where it is exposed to competition) and to increase the prices charged on other mail (where there is currently little or no competition). The price cap on first class letter stamps will not be affected by Postocomm’s proposals to offer Royal Mail some greater flexibility. Postcomm expects Royal Mail to also use this greater flexibility to reduce the prices of other products which are profitable and face competition.
