The Swedish Postal Services Market 2015

Transcription

1 Report number PTS-ER-2015:3 Date 15/04/2015 The Swedish Postal Services Market 2015

2 The Swedish Postal Services Market 2015 The postal services market in Sweden Report number PTS-ER-2015:3 Reference number ISSN Authors Olof Bjurö, Lars Forslund, Anders Hildingsson, Joakim Levin, Pär Lindberg, Emma Maraschin and Gabriel Rhawi The Swedish Post and Telecom Authority Box Stockholm +46 (0)

3 Foreword In its Terms of Reference for 2015, the Swedish Post and Telecom Authority was assigned to follow-up and analyse the postal market and postal services with the following information: - developments in the postal services market, - the competition situation in various sub-markets within the postal services sector, - barriers to market entry and effective competition, - price trends in the postal services market and how the regulation of prices contained in Section 9 of the Postal Services Ordinance (2010:1049) has been complied with, - how the stipulations of Chapter 3, Section 2 of the Postal Services Act (2010:1045) for pricing and other special terms to be transparent, nondiscriminatory and cost-oriented have been complied with by the designated provider of the universal postal service, as well as - whether the density of the service points covered by the universal postal service takes account of the needs of users in all parts of the country. The Swedish Post and Telecom Authority shall also report: - the nature and extent of complaints that the general public has presented to postal operators and to the authority, as well as - any changes in the service level of services included in the universal postal service. The assignment is presented in this report The Swedish Postal Services Market Göran Marby Director-General 1 It corresponds to previous years' reports, Service and Competition 3

4 Contents Foreword 3 Summary 7 1 Current trends and events in the postal sector Background Current trends and events - internationally The universal postal service is being re-evaluated A lack of regulatory adaptation Focus on the work of the regulators organisation, the ERGP Current trends and events national E-commerce focus on the last mile Increased need to coordinate distribution networks The growing importance of the market for post-related services Digital mailboxes and My messages 19 2 Developments in the Swedish postal services market Development of volumes and market shares in the letter market The competition situation in various parts of the letter market Bulk mail Single letters Barriers to market entry Bulk mail sent overnight Bulk mail not sent overnight Market for the nationwide distribution of single letters Market for the local conveyance of single letters The parcel market and e-commerce E-commerce in Sweden The Swedish parcel market 32 3 Pricing in the postal services market Price developments in the postal services market Price development of postage for single letter consignments Price development of postage for bulk mail Regulation of prices in Section 9 of the Postal Services Ordinance Compliance with Chapter 3, Section 2 of the Postal Services Act PostNord's new pricing model 2014/ Legislation work - Chapter 3, Section 2 of the Postal Services Act Conclusions from PTS's review of PostNord's post-costing estimate for Mail & Communication - letter services Logistics - parcel services Value for money letters and packages 41 4 Complaints from the general public Complaints received by PTS PostNord's reporting of complaints PostNord's trend in complaints

5 4.3 Complaints - Bring Citymail 47 5 Service and accessibility The population's use of postal services PostNord's service network Postal outlets and stamp agents Business centres Collaboration with regional actors on postal services in sparsely populated areas Lidsjöberg, Strömsund Municipality System support for the monitoring of accessibility and changes Supervision and monitoring of the quality of mail delivery Modified delivery procedures within PostNord Distribution issues that concern other postal operators Residential customers without five day deliveries Delivery times Introduction of communal letterboxes Undeliverable letters Risk and vulnerability analysis of the postal services sector 58 Concluding remarks 61 Appendix 1: PostNord's report of the number of complaints 62 regarding letters and parcels,

6 Tables Table 1: Trend in the total letter market Table 2: Distributed volumes as well as market shares of distributed and collected volume respectively Table 3: Market shares (turnover) Table 4: Parcel services Diagrams Figure 1: Trend in the total letter market Figure 2: Diagram of the letter market Figure 3: Postage development, first class stamp Figure 4: Price development bulk mail 20 grammes Figure 5: Consumer prices in SEK (incl. VAT), domestic first class letters Figure 6: Consumer prices in SEK (incl. VAT), domestic first class postal packages Figure 7: Complaints, Domestic letters Figure 8: Complaints, International letters Figure 9: Complaints, Domestic postal parcels Figure 10: Complaints, International postal parcels Figure 11: Undeliverable letters and the total amount of letters

7 Summary The first chapter of this report describes Current trends and events in the postal sector. The international section presents the changes in market conditions that may result from current rulings of the European Court of Justice, both in regard to the opportunities to consolidate letters and the risk that some parts of the universal postal service may become exempted from VAT and the lack of legal adaptation that this entails. The lack of legal adaptation at the EU level is also addressed in view of developments regarding the preparation of a new Postal Directive and the European Commission's ambitions in the field of e-commerce. The national section focuses on different aspects of the increasing shift from physical to electronic communications in combination with the rapid growth of e-commerce. This chapter also deals with the involvement of PTS in international organisations in the postal field. Chapter 2 deals with Developments in the Swedish postal services market. To begin with, the developments concerning letter volumes and market shares are explained in more detail. Certain concepts important to providing a correct description of the competitive situation in different parts of the postal services market are then specified. The competitive situation in different sub-markets for letters is analysed, as are the different conditions for establishing oneself in these markets. A special section is devoted to the parcel market and e- commerce. Chapter 3 focuses on Pricing in the postal services market. The chapter begins with a description of the pricing developments on the postal services market and the importance of competition to keep prices down, especially with regard to large volumes of letters and parcels. Here the pricing regulations that still exist on the letter market are also covered along with the measures enacted by PTS in order for the regulation to have its intended effect. This includes a description of the conditions for the legislation work concerning PostNord's pricing that began during In a final section, the opinions of the public concerning the value for money of certain letter and parcel services are presented. Complaints from the general public are addressed in Chapter 4, both those received by PTS and those submitted to the PostNord and the other postal operators. It is partly a question of making clear what the essential nature of these complaints are in addition to a presentation, presented in a separate appendix, of the official complaint statistics that Sweden is obligated to present to the EU in accordance with a certain standard. 7

8 The report's fifth and final chapter deals with Service and accessibility of PostNord's services. Herein is described PostNord's service network and how this may be developed with regard to the changes that may result from PostNord's ongoing agent procurement. Here it is also expounded on that public opinion of the service in PostNord's service network is positive overall. A separate section covers changes in PostNord's service to sparsely populated areas and the development of coordination with other types of service, which is viewed as an opportunity to maintain this service at an acceptable level. Finally, the results of the risk and vulnerability analysis of the postal services sector carried out in 2014 are described. 8

9 1 Current trends and events in the postal sector 1.1 Background The entire postal industry is currently undergoing a seismic structural change. Never before have developments been so fast and so pervasive. Nor are there any indications that this trend is about to slow down. On the contrary, it is likely to represent a default state which will persist a long time to come. The trends and events that have been highlighted make no claim to be comprehensive, but mainly serve to highlight certain issues that in some way have been topical during the year or have been assessed as particularly important to discuss. However, it is clear that there are some key areas that, in different forms, are likely to be relevant in the coming years: Digitalisation and its implications for the postal services market the physical communication's role in a digital future; E-commerce development and its link to letter and parcel services; The difference between, on the one hand, regions where service and range increase and, on the other hand, regions where there are major challenges in meeting the needs of the general public and companies in respect of postal service; Regulation and regulatory needs in a changing postal services market. 1.2 Current trends and events - internationally The universal postal service is being re-evaluated The issue of maintaining the universal postal service in times of, in many quarters, sharply declining letter volumes has increasingly come to be the focal point of discussion in the postal sector, not only in Europe but also in other parts of the industrialised world. Thus, changes have been implemented or considered in countries such as New Zealand, Australia, Canada and the USA. This development does not only raise the question of how the universal service can be maintained in the long term, but equally important is that the declining volumes is also a sign that the users' needs have changed. These partly new needs may have to be addressed within the framework of the universal service. There are several alternatives to traditional mail as a carrier of information, and this is clearly reflected in the declining letter volumes. On the other hand, postal services, whether it concerns a letter or package, are becoming an increasingly important prerequisite for efficient e-commerce. The need for smart and customised delivery solutions is a future issue, as is achieving 9

10 transparency when it comes to prices, terms and payment solutions. As presented in Section 1.2.2, the European Commission is continuing to focus on matters relevant to this discussion. Cross-border flows represent a substantially larger share of the e-commerce chain than what the current perception would suggest. According to a study by the Boston Consulting Group 2, purely domestic e-commerce only constitutes 30 per cent of total e- commerce globally, i.e. where the whole chain from production to end consumer takes place within the country. For the remainder, there is always something or some flows that cross national boundaries. Given that Sweden is a small country with an open market, the transnational/national difference is likely even higher here. One obstacle to the development of e-commerce in Europe is the terminal dues system applied within the Universal Postal Union (UPU 3 ) that provides many non-european countries, including China and India, considerable postage discounts, which can make it difficult for European actors to compete with these countries. The reason is that these countries are considered as developing countries and therefore in that capacity receive special discounted terminal dues A lack of regulatory adaptation To a greater extent than before, there is currently a lack of regulatory adaptation associated with both the application and the impending changes in the European regulatory framework Application of the Postal Directive rules on non-discrimination On 11 February 2015, the European Court of Justice pronounced a judgment in case C-340/13 (bpost vs. BIPT 4 ). The key issue in the legal case was whether Article 12 of the Postal Directive 5 (which is an important part of the Swedish postal regulation and the basis of Chapter 3, Section 2 of the Postal Services Act) applies to operational discounts and volume discounts without distinction, or whether volume discounts 6 instead fall outside its application area. 2 Presentation on 10/02/2015, WIK 15th Königswinter Seminar on Postal Economics, Herbert Goetz, IPC 3 Universal Postal Union 4 bpost is the postal operator, the former Belgian Post Office, which is designated provider of the universal postal service in Belgium. BIPT stands for Belgisch Instituut voor postdiensten en telecommunicatie, and is Belgium's national regulatory authority for the postal and telecommunications market. 5 Directive 97/67/EC 6 The Court defines volume discounts in the following manner: volume discounts are rate reductions which increase in size in relation to the amount of postal consignments during a reference period (point 29 in the judgment). 10

11 The Court found that in terms of non-discrimination there are grounds to distinguish operational discounts from volume discounts. Non-discrimination applies always to operational discounts, but when it comes to volume discounts there may be circumstances which allow discrimination between sender and intermediary.. 7 Whether or not the companies we usually term consolidators in Sweden are impacted by the judgment is unclear. The judgment is namely based on the specific Belgian case which states that the consolidators collected several senders consignments, with the aim of granting larger volume discounts without, in that connection, conducting any form of operational activity. In Sweden consolidators often also conduct operational postal activities such as, for example, collecting unsorted post and separating it to sorted consignments which are subsequently delivered to PostNord. Until a similar case is tried in Swedish law, PTS has no reason to interpret Article 12 of the Postal Directive in any other way than before. The European Commission considers Article 12 to be of vital importance in preventing behaviour harmful to competition without necessarily having to apply competition legislation. The Commission has therefore turned to the ERGP 8 requesting that the organisation conduct an analysis of how the judgment affects the conditions in the member countries. A report on the subject is scheduled to be presented in connection with the ERGP's plenary meeting in July Exemption from VAT on postal services The European Commission has sued Sweden stating that the country is infringing the EU's VAT Directive in that Swedish legislation does not contain any VAT exemption for the public postal services, which (according to the Commission) is prescribed in the Directive. The case will be examined in the European Court of Justice as Case C-114/14. Sweden has disputed the Commission's claim and argued that the VAT exemption does not apply to the Swedish situation. A main line of argument is that Sweden has no public postal services in the sense referred to in the VAT Directive's exemption provision, but also that the VAT Directive's wording, stipulating that exceptions must not distort competition, exempts Sweden from the obligation to introduce a VAT exemption. A previous judgment in Case C-357/07 concerned the interpretation of the term public postal services and the VAT exemption's scope in the UK. This judgment states that the term public postal services shall be construed as relating to those operators who commit to, 7 Judgment, points European Regulators Group for postal services. A co-operation organisation for the national regulatory bodies of the EU/EEA area and which, among other things, shall function as an advisory body to the European Commission. Partly through cooperating on various issues of interpretation and application, the idea is to contribute to a correct implementation of the Postal Services Directive throughout the EU. 11

12 within a Member State, providing universal postal services as defined in the Postal Directive. However, the VAT exemption does not apply to services for which terms are negotiated individually. If the Commission's action is approved in accordance with that aforementioned judgment, there will be major consequences for competition in the postal services market. Banks, insurance companies, etc. not engaged in activities subject to VAT will in reality obtain a discount of 20 per cent for services for which terms are not individually negotiated and which are provided by the designated operator of the universal postal service. Thus, competing companies will in practice be excluded from this market segment. PostNord to a significant extent employs subcontractors that charge VAT on the services they provide. Since the company's ability to deduct input VAT is curtailed if the Commission's action is approved, it will also have major consequences for PostNord. Against this background, an approval may bring to the fore the question of the universal service's design and scope. Judgment in the case has been scheduled for 21 April 2015, and it is only then that the consequences and possible courses of action can be assessed Further initiatives in the field of e-commerce In the end of 2012, the European Commission presented the Green Paper An integrated parcel delivery market for the growth of e-commerce in the EU. During the summer of 2013, the International Post Corporation's (IPC) European members launched the so-called E-commerce Initiative, which primarily aimed to develop cross-border e-commerce within the EU/EEA. The Initiative was a way to satisfy the wishes for improved and increased possibilities for cross-border e-commerce put forward by the Commission in the Green Book. In December 2013 the European Commission presented A roadmap for completing the single market for parcel delivery. The intention is for the roadmap to guide the continuing work. The roadmap contains three main goals: - Greater transparency and more information for all actors in the value chain of e-commerce - More accessible delivery solutions of higher quality and at more reasonable prices - Better handling of complaints and increased possibilities for customers to receive reparations 12

13 An evaluation is to be made after 18 months, i.e. around mid-year 2015, to assess whether further measures are needed. As recently as in December 2014 the Commission clarified that no regulatory initiatives would be implemented prior to the evaluation's completion. From PTS side, this was judged as a reasonable arrangement, not least because it would then be possible to see the effects of IPC's E-commerce Initiative. Now, however, some signals indicate that there is an interest within the Commission in initiating regulatory measures without waiting for the evaluation. This creates considerable uncertainty about what future regulation may imply, the data on which it will be based and when it might enter into force Work on a new Postal Directive postponed The current EU Postal Directive was conceived in light of the conditions that prevailed in the early 1990's, when the letter volumes increased, the mail order companies were responsible for distance trade and the Union had 14 Member States with reasonably similar conditions. Since then, the situation has fundamentally changed. Steadily declining letter volumes and developed e- commerce is the reality. Furthermore, the number of Member States has doubled since the early 1990s and the distance between the countries in terms of, for example, available infrastructure and communication patterns is far greater than before. The declining letter volumes not only raises the question of how the universal service is to be maintained in the long term. Equally important is the fact that the declining volumes are also a clear signal that the users' needs have changed and that these needs must be met within the framework of the universal postal service. PTS considers that the real needs of users increasingly deviate from the universal service that is ensured by the current Directive. Up until November 2014 the Commission really urged the establishment of a new Postal Directive. The ambition as we perceived it was for a new directive to be in place by 2017 at the latest. The rapid pace inspired some concern, while at the same time it can be considered a very pressing task to revise the Directive which justified the work being carried out promptly. In December 2014 the surprising news was announced that the plans for a new directive had been put on hold. The understanding is that sights are now set on 2019/2020. With the rapid pace of development that can be observed, it appears that the differences between what users need and the universal service ensured by the Directive has become substantial. It is therefore pressing that, from the Swedish side, the work with establishing the new Directive gets underway as soon as possible. 13

14 1.2.3 Focus on the work of the regulators organisation, the ERGP With its experience of the Swedish market, PTS still has a vital role to play in the international cooperation in the postal services sector through ensuring the real impact of the measures to liberalise the markets in other EU countries. Similarly to previous years, this work has primarily taken place within the ERGP. PTS is joined by the Italian regulatory authority AGCOM, chair of one of the ERGP's working groups, which is now called The Implementation and Evolution of the USO 9. The summer of 2014 saw the publication of the report Exploration of challenges to overcome when implementing a net cost calculation methodology based on a reference scenario Benchmark of experiences, which was prepared by the working group. The working group's continued efforts have been concentrated to a report on the design of the future universal postal service and how it can be made sustainable in the long term, as well as the needs it reasonably should satisfy. The supporting data for this report has been obtained through a discussion paper being subject to an open consultation process and discussed at a workshop with an estimated 150 participants. Work on the report should be completed in The report was intended as an essential basis for the development of a new Postal Directive with a view to entering into force in 2016/2017. In light of the rapid developments in the market and the rate at which users' needs are changing, it is not surprising that many of the views put forward during the consultation process and workshop concerned the need for greater flexibility to allow for adaptation to national conditions and to changes over time. PTS shares this view and believes, as previously mentioned, that it is important that work on a new directive begin as soon as possible. For this to be possible, this need must be further clarified and the issue must be brought before the European Commission in an appropriate manner. During 2014, other working groups in the ERGP have been working on such issues as cost-oriented pricing and price regulation, quality issues and customer satisfaction, complaints management, access regulation, market indicators and cross-border e-commerce. PTS has participated in three of these working groups Other international work PTS also takes part in activities organised by the European Commission, including meetings of the Postal Directive Committee and workshops. The formation of the ERGP has resulted in a scaling back of PTS's work in the 9 Universal Service Obligation = responsibility for providing the universal service 14

15 European regulators organisation CERP 10, which has increasingly become a forum for representatives of ministries. In light of the authority's assignment to deal with issues relating to Sweden's participation in the Universal Postal Union (UPU), the engagement in CERP is focused mainly on issues of coordinating viewpoints for the UPU's congresses. The next congress will be held in 2016 in Istanbul, which is why involvement in CERP will increase during PTS also has ongoing contact with the Ministry of Enterprise, Energy and Communications and PostNord when it comes to UPU-related issues. 1.3 Current trends and events national E-commerce focus on the last mile One link in the e-commerce chain that has received considerable attention in 2014 is what is usually referred to as the last mile 11, which was particularly topical at the market meeting PTS arranged when last year's report was presented 12. It refers to the final link in the e-commerce chain, i.e. from terminal to recipient/agent. The first step of the return handling is often also included in the concept. The emergence of digitalisation and e-commerce has led to a shift of power from producer/seller to consumer. The consumers in turn impose demands on availability, convenience and flexibility on the last mile, including the possibility of returning goods. For the e-retailer it is therefore important to be able to, as rapidly as possible, sell the goods that are returned. Thus simplicity for the customer is a key to success. Put another way, it is clear that the public needs associated with larger letter consignments and parcels have changed and continue to change. These are key issues for the continued growth of e- commerce and thus the business opportunities for both existing and any future operators. The established model in the Swedish market is that larger items that can be delivered via the recipient's letterbox are delivered there. Otherwise the item ends up with an agent (where you normally also go to return goods). Within the rural postal service, larger mail items are delivered, but in this case, time, place and return handling depend on the placement of the letterbox and the design of the rural postal service's delivery routes. 10 European Committee for Postal Regulation 11 Sometimes subject to the questionable direct Swedish translation den sista milen

16 The system of agent networks can certainly be supplemented and made more flexible for the recipient, but it is hard to see how this is sufficient to meet the needs of tomorrow. Even today, many agents in the cities are overloaded and the opportunities for large-scale start-ups are limited due to difficulties in finding suitable agents. Parcel machines and various kinds of box solutions could be the solution that eventually, like what has happened in many other countries, will be established in the market. The question then is what is required in order to take the next step closer to the recipient and what problems arise from a social and regulatory perspective. Parcel machines have high fixed costs and necessitate a wide coverage to be able to serve as a realistic alternative. At the same time, there is limited availability of ground area where people frequent and are interested in being able to collect their parcels. What is needed to bring about the establishment of parcel machines and is it reasonable that different operators establish parallel infrastructure? Economically it is probably most efficient if operator-neutral stations are established. In that event, financing and access issues become important issues that may require new and/or changes to existing regulations within the areas concerned. Communal letterboxes with parcel letterboxes in multi dwelling units is another supplementation of the distribution chain that may need to be developed to respond to the somewhat changing needs of the public. It is also possible here that there may be reason to modify some regulations. Most of the regulatory issues that may come into question are likely to be found outside the postal legislation and PTS's regulatory oversight, which may consequently require coordinated efforts between different authorities to enable the development of the market. However, one issue with a more direct connection to PTS is addressing and access to addresses for postal operations. There are several interesting and challenging issues relating to this. What happens when items that traditionally have been detained within the operator's network instead take the leap into what could be termed as the extended letterbox - a parcel letterbox in the property or adjacent to the dwelling? In all probability, the addressing system would need to be modernised to handle this part, i.e. that it becomes possible to connect a 16

17 delivery point for larger items to the destination address. How should such a registry then be managed and which actors would be able to access this? A further extension of the parcel distribution seems possible: private letterboxes with the capacity to receive and return parcels. Here the main concern is the willingness to invest in a significantly more expensive private letterbox, which is a reality in some countries, but the addressing issue is also of importance. For recipients who do not live near urban areas, and thus have long distances to PostNord and other actors' agent networks, there is an increasing disparity in the ability to take advantage of the developments taking place. Will the future entail automated parcel and service stations and/or the ability to manage the receipt and return of larger mail items via private parcel letterboxes farther out in the country? Increased need to coordinate distribution networks Declining letter volumes, rising parcel volumes and an increased demand for and various types of home deliveries, as well as a declining and increasingly sparse population in some regions, is resulting in the need for change and adaptation in the production model for postal services. The development therefore creates a need for increased co-distribution and the shared use of existing distribution networks. In early 2014, PostNord consolidated the business areas Mail & Communication and Logistics with a clear intention to coordinate and, as far as possible, integrate the letter and parcel flows. There is already also established partnerships between Bring Citymail and DHL, as well as between MTD and Schenker, in order to utilise each other's respective network. Bring Citymail has also acquired a share of Bussgods to strengthen their access to agents. MTD's operation is in itself an example of postal distribution coordinated with the existing distribution of morning newspapers. For PTS it is important to monitor these processes to ensure that privacy issues and the quality of distribution are not neglected when the distribution paths change The growing importance of the market for post-related services In last year's report, PTS highlighted the consolidation and packaging of letter services. This concerns various holistic solutions where postage is included and which therefore limits the need for having to handle the payment of postage 17

18 separately. This also includes the ability to enjoy various forms of discounts that are otherwise reserved for major customers with sufficient volumes to themselves be able to perform different cost-saving measures for the postal operator. PTS emphasises here the importance of ensuring that prices, including discounts and terms, for these actors are compatible with the Postal Services Act 13 requirements that pricing should be cost-oriented, nondiscriminatory and transparent. Equally important is that no cross-subsidising occurs within the services covered by the definition of universal postal services, or between postal services included in any holistic solution offered by PostNord. If the requirements concerning pricing in the Postal Services Act are disregarded, other operators may find it hard to compete in fields where PostNord offers similar (peripheral) services and thus risk being excluded from the market. The postal production chain is complex, whether it pertains to letters or parcels, where flows are also being increasingly integrated and the number of parameters impacts service content and pricing. Postal services are therefore difficult to procure for everyone, both public and private actors, regardless of size. The complexity is further compounded by the increasing digitalisation, with a direct connection to administrative systems of businesses and management of all forms of outbound communication and dispatches. E- commerce development with demands for flexible delivery solutions and greater opportunities to choose price and service level rather than solely between operators, better service in terms of traceability and notifications, etc., also adds to the complexity. At the same time, new sub-markets are emerging and new actors of importance for development and customisation within the postal market are establishing themselves. Coinciding with this is a need for existing operators to extend the value chain when the letter volumes are declining and there is increasing pressure on prices in the parcel and logistics market. There is then a risk that small and innovative actors may be forced out by way of the existing operators' stronger market position. The more complex the market is for those purchasing postal services, the more important the availability of independent intermediaries who can balance the weak position the customer finds themselves in. This is especially true for small and medium-sized postal customers with little bargaining power. Here, an efficient market ultimately favours the end customer - in this case the recipient. 13 Postal Services Act SFS 2010:

19 The expansion of the postal services market can be seen as part of an ongoing trend towards a widening of the concept of postal operations and a disintegration of the boundaries between letters and parcels. However, the basis for PTS's oversight is still that the regulations contained in the Postal Services Act must be complied with Digital mailboxes and My messages In addition to the existing official mailbox Min Myndighetspost 14, Bring's Digimail and Kivra have been authorised to handle the official mail. Kivra is a pure mailbox operator and currently the largest actor with 600,000 registered users. Developments within this area are very important for what happens on the physical letter market. Experience from the development of the Danish postal services market shows that when public communication with citizens and businesses is digitalised, the private sector also follows suit. The consequences are that the current trend of declining letter volumes continues and perhaps even accelerates. The function My messages has not yet reached its full potential. At present the development is slowly moving forward and the impact on the Swedish letter market is not yet significant. However, there are already signs that the situation may change when certain structural problems are resolved, such as the persistent high costs for the banks' e-identification. 14 With the mailbox Min Myndighetspost, one can receive mail from government authorities and municipalities digitally instead of on paper. 19

20 2 Developments in the Swedish postal services market The term the postal services market is generally used to refer to the entire market for the distribution of letters and parcels. As the sub-markets for these differ significantly in structure, function and regulation, it is necessary to analyse the letter and parcel markets separately. For this reason, the letter market will be discussed below in Sections and the parcel market in Section 2.4. The letter market covers the distribution of addressed mail items weighing at most 2 kg 15. In order to conduct postal operations for a charge, a licence is required under the Postal Services Act. 16 However, no licence is required to distribute parcels, an activity which, beyond what is included in the universal postal service, is not regulated further in the Postal Services Act. This being the case, there is also no clear-cut definition of the term parcel. 2.1 Development of volumes and market shares in the letter market Given all the reports of declining letter volumes in recent years, one might believe that the letter market nowadays is quite small in scope. This, however, is not the case at all. Instead, the letter market in Sweden has a turnover still close to SEK 12 billion per year. While volumes have fallen by nearly 25 per cent over the past decade (since 2005), the turnover on the market has only fallen by just under 11 per cent during the same period. If you also add the closely-related distribution of unaddressed advertising, the turnover approaches SEK 14 billion, which indicates that the sector for physical distribution to our letterboxes is still of major economic importance. In 2014, over 2.4 billion letters were distributed in Sweden, representing a decrease of over 100 million letters or 4.4 per cent compared with the year before. The long-term trend of declining volumes is therefore continuing, but still at a fairly stable rate (between 3 and 5 per cent per year). Overall, the letter volume has now decreased by 29 per cent since the turn of the millennium (see Table 1 for further information). 15 Enligt definitionen i 1 kap. 2 postlagen är ett brev: en adresserad försändelse som är innesluten i kuvert eller annat omslag och som väger högst 2 kg samt vykort, brevkort och liknande försändelser. 16 The Postal Services Act (2010:1045) 20

21 Year Number of letters (millions) Index , , , , , , Table 1: Trend in the total letter market 17 Despite the overall decline in the letter volume, the amount of letters distributed by competitors of PostNord has not decreased in recent years, but instead has grown significantly (albeit from relatively low levels). In 2014, the volume growth was about 3.5 per cent for PostNord's competitors (see also Figure 1). This means both that PostNord's market share continues to decline slightly, and that PostNord's letter volume is decreasing faster than the total letter volume. However, PostNord still has a very dominant position in the letter market. 17 As of 2011, the measurement method has been made more precise in order to eliminate the risk of certain volumes being counted twice the figures reported as of 2011 are distributed volumes. The need for this more exact definition has arisen due to new business models with some of the smaller operators, which mean that a certain letter may be handled by more than one postal operator on its way from sender to recipient. Comparability with the volume figures of previous years is, however, only affected for 2010, as these business models did not exist before that time. A conversion of the 2010 volume statistics according to the more exact specification produces a figure of 2,871 million mail items, compared with the 2,875 million reported above. 21

22 Figure 1: Trend in the total letter market The biggest competitor of PostNord, Bring Citymail, has continued to increase its market share during the year and now distributes 14.4 per cent of the volumes in the market. As mentioned, PostNord has reduced its share slightly, but still has a market share of just under 85 per cent of the distributed volumes. With regard to the third largest stakeholder in the market, Svensk Morgontidig distribution (MTD), the volumes for their affiliated local distribution companies have increased to 11.7 million mail items, an increase of 48 per cent. Other operators, which largely consist of locally active small businesses, on the whole maintain a fairly stable level of around 5 million distributed mail items. With the odd exception, the small operators individually maintain stable volume levels, and most of them show either increased or unchanged volumes. 22

23 Number of distributed letters (millions) 2014 (2013) Share of distributed letters 2014 (2013) Share of collected letters 2014 (2013) PostNord 2,066.6 (2,191.2) 84.9 % (86.1 %) 83.3 % (85.2 %) Bring Citymail (341.0) 14.4 % (13.4 %) 15.3 % (13.6 %) Operators belonging to MTD (exklusive Pressens Morgontjänst) 11.7 (7.9) 0.5 % (0.31 %) 0.48 % (0.31 %) Other 4.9 (5.0) 0.20 % (0.20 %) 0.89 % (0.75 %) Total 2,433.0 (2,545.1) 100 % 100 % Table 2: Distributed volumes as well as market shares of distributed and collected volume respectively. Figures in parentheses pertain to If the number of handled letters for other operators 19 is instead calculated on the basis of the volumes that the operators collect from senders (postal customers), it emerges that the other operators received close to 22 million letters from these customers/senders. This is an increase from the previous year's corresponding number of 19 million letters. 20 However, of these 22 million letters, almost 17 million were not distributed by the small operators themselves, but were forwarded for distribution mainly by PostNord or Bring Citymail. One operator that engages other operators for the final distribution is Mailworld Office AB, whose collected volumes increased by 20 per cent in 18 The operator Pressens Morgontjänst, formerly part of MTD, has merged with Bring Citymail's distribution operation, and is now part of Bring Citymail. For accurate comparisons, the figures presented in Service and Competition 2014 regarding MTD and Bring Citymail for 2013 have been adjusted so that Press Morgontjänst is also included in Bring Citymail for the comparative year I.e. excluding PostNord, Bring Citymail and the MTD operators. 20 Note that in last year's report the MTD operators were counted in these figures. 23

24 2014. It is clear that this type of activity, consolidation, continued to increase during the year. Bring Citymail has also started to engage PostNord in this way for letters with a destination outside the company's distribution area, but has also started to cooperate with some local operators. Aside from the aforementioned postal operators, the postage optimisation company Grams AB, for example, has a large consolidation operation (which is however not included in the statistics above, due to their not being postal operators in the formal sense). In an economic analysis of the situation in the letter market, a market share estimate based solely on volume data is somewhat misleading. The reason for this is that the various operators have significantly different product offerings and business models, and thereby a substantial difference in earnings potential per letter. To gain a better picture of the relative strengths in the market, PTS also calculates market shares based on the turnovers of the operators' letter distribution (Table 3). This demonstrates even more clearly PostNord's dominant position in the Swedish letter market. Estimated market share based on turnover in 2014 (2013) PostNord 92.3 % (92.7 %) Bring Citymail 6.6 % (6.3 %) Other postal operators 1.1 % (1.0 %) Total 100 % (100 %) Table 3: Market shares (turnover) The competition situation in various parts of the letter market As the letter market is heterogeneous in terms of function, it needs to be broken down when conducting market analyses. Earlier market analyses have often broken the market down into the sub-markets bulk mail and single letters. However, it is appropriate to break it down even further when conducting a more detailed analysis, primarily in the following dimensions: priority of the letter services (i.e. overnight delivery or not), sorted and unsorted bulk mail respectively, 21 A postage optimiser helps senders to best utilise the postal operators' offers by finding the cheapest combination of operator distribution solutions based on the sender's agreements with the operators. 22 The figures for 2013 have been updated from what was reported in the Service and Competition 2014 so that, where appropriate, the reported data received following the publication of Service and Competition 2014 has replaced the previous forecast values. 24

25 single letters from office mail and letterbox mail respectively, break-down in relation to geographical coverage, structure/adaptation of various services for different customer groups, such as consumers vis-à-vis corporate customers. In schematic terms, the most important dimensions (or sub-markets) for the letter market are described in accordance with Figure 2. Figure 2: Diagram of the letter market The submarket with the greatest volume and the greatest importance for the competition situation is bulk mail not sent overnight, which constitutes approximately 62 per cent of all letters. Bulk mail in total corresponds to 79 per cent of the total letter market in terms of volume. With respect to single letters (which in total cover approximately 21 per cent of the letter market), letters delivered overnight are still the most common, with just over 70 per cent of the single letters Bulk mail The market segment called bulk mail (or industrial mail) comprises mail in the form of series of items which are deposited at the same time. They are usually produced industrially and with the help of computer support. The sender can send mail items for a substantially lower price compared to the postage for single mail items, provided the sender attains the cost-saving volume required for the postal operator to classify it as bulk mail. 25

26 Bulk mail can also be broken down into two categories: unsorted and sorted. Unsorted bulk mail is significantly more expensive than sorted. However, bulk mail is usually produced so that it has already been sorted when handed over to the postal operator, for which the sender receives a further discount for having performed this service; a sorting discount. In these cases the level of sorting can vary from the deposited mail items having been sorted by postcode to mail items being sorted in the order in which the mail should be delivered for each individual postman s route ( sorting in delivery route order ). Since 1993, development in large parts of the bulk mail segment has been characterised by tough competition between PostNord and Bring Citymail. Competition was largely based on pricing. Based on the lower price levels this has brought about with regard to bulk mail, it is probable that it is the large postal customers that are, and have been, the ones to benefit most from the competition (see Section 3.1) Market for bulk mail sent overnight (first class bulk mail) There has been a decline in the demand for first class bulk mail, i.e. bulk mail deposited for sending overnight. In recent years, however, the proportion of bulk mail being sent as first class mail has remained fairly constant at around 20 per cent (calculated in letter volume). PostNord has a virtual monopoly for first class bulk mail, as its major competitors focus mainly on letters with a longer distribution time (lower priority), known as economy class bulk mail Market for bulk mail not sent overnight (economy class bulk mail) PostNord and Bring Citymail are currently the two major competitors in the market for economy class bulk mail (i.e. bulk mail that is not sent overnight). PostNord covers the whole of Sweden, while geographically Bring Citymail s delivery operation focuses on the Stockholm region and the Mälar Valley in a broad sense, large parts of West Sweden, western Skåne and Gotland, corresponding to approximately 54 per cent of all mail recipients in Sweden. PostNord still has more than three times the volume of Bring Citymail with regard to economy class bulk mail. In the last two years, the businesses that distribute morning papers have made a breakthrough, even where letters deposited as economy bulk mail are concerned. The newspaper distribution companies that now cooperate within MTD have during the year increased their total letter volume by 48 per cent to 11.7 million items, representing less than 1 per cent of the submarket. In this submarket, Bring Citymail shows clear growth in volume (3.7 per cent) in a generally declining market. The company has carried out cost 26

27 rationalisation initiatives in the letter distribution and expanded its range of offers to customers, which as a whole has led to the company approaching a position where they can report a profit for the first time since the mid-00s. The changed market situation involving distributors of morning papers also making a breakthrough as letter distributors has perhaps affected the situation at first more for Bring Citymail than for PostNord. Because of this, it was not surprising when Bring Citymail and Pressens Morgontjänst (the morning paper distributor of the Stockholm area) just before the turn of the year 2013/14 announced a merger. The joint distribution operation in the Stockholm region in now being conducted in the newly formed company Bring Citymail Stockholm. For a long time the market for economy class bulk mail has been characterised by a tough competitive climate between PostNord and Bring Citymail. Leverage effects arise, as all of those customers who want to reach the whole of Sweden have to use PostNord, and PostNord s pricing for that part of the volume that goes with PostNord changes if the customer chooses to send parts with Bring Citymail. This means that it is not enough for Bring Citymail to have better offers for those volumes that both companies are competing for, but must also compensate for the discounts lost on that part that can only be sent with PostNord Single letters Single letters refers to letters delivered one at a time (or at least in a smaller amount) in letterboxes, to a post outlet or the like. Formally, letters are considered single if they are deposited in fewer numbers than the operators' defined limits for qualifying as bulk mail. Single letters can also be broken down into office mail and letterbox mail. The office mail segment normally comprises mail from companies that is stamped using a franking machine or marked postage paid. Office mail constitutes around 12 per cent of the total volume in the letter market. PostNord has a very strong position in terms of nationwide office mail. Mailworld Office, which has been operating for a couple of years and whose business concept is to collect office mail and convert it into bulk mail, is also on its way to becoming an established actor in this sub-market and cleared approximately 17 million mail items in Competition at a local level comprises just over twenty or so postal operators, with relatively small volumes. However, local operators have achieved a significant share of the letters distributed locally in some districts, and also compete with PostNord for post-related services, such as franking and collection and delivery services. 27