The outlook for UK mail volumes to 2023

Transcription

1 Strategy & Economics The outlook for UK mail volumes to July 2013

2 Important notice This document has been prepared by PricewaterhouseCoopers LLP ( or we ) for Royal Mail Group and solely for the purpose and on the terms agreed with Royal Mail Group. We accept no liability (including for negligence) to anyone else in connection with this document. This document has been made publicly available for the purposes of general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this document without obtaining specific professional advice. Information in this document is obtained or derived from a variety of sources. has not sought to establish the reliability of those sources or verify all of the information so provided. No representation or warranty of any kind (whether express or implied) is given by to any person (except to Royal Mail Group under the relevant terms of the Engagement) as to the accuracy or completeness of the report, and, to the extent permitted by law,, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of anyone else acting, or refraining to act, in reliance on the information contained in this document or for any decision based on it. 2

3 Objectives was asked to develop a view on the long-term outlook for UK mail volumes (letters and parcels) Royal Mail Group commissioned to provide an independent view on the long-term outlook for UK mail volumes Our projections use information and analysis from a variety of sources, including Royal Mail Group However, our conclusions have been reached independently. Our projections are based on our own insights and analysis, supported by an extensive programme of interviews, surveys and industry research We have projected mail volumes (letters and parcels) on an annual basis over the period 2013 to

4 We have made a number of simplifying assumptions about the future market structure Key underlying assumptions 1 We assume that the overall structure of the UK mail market (e.g. delivery chain and model) will not change significantly over the projection period 2 We assume that additional regulatory change during the projection period will have a limited impact on the structure and operations of the mail market. We assume there will be no material change to the Universal Service Obligation 3 We assume price changes will be marginally higher than RPI over the projection period We have also used a number of macroeconomic assumptions in our modelling Source GDP growth, % p.a. Growth in number of households, % p.a. Based on economic forecasts Based on and ONS projections Source: Economic forecasts, Office for National Statistics (ONS) 4

5 Our projection incorporates insights gained from extensive customer interviews, surveys, independent research and international comparisons Segmented mail into 20 major categories to identify key drivers Surveyed 2,000+ consumers and 1,000+ private and public sector organisation Applied commercial and economic expertise and industry research from a range of sources Interviewed 100+ mail senders across all major mail segments Used International benchmarks 5

6 Section 1 Executive Summary 6

7 Section 1 Executive Summary Key messages 1 2 UK mail volumes have declined since 2004 The mail delivered in the UK is highly varied and the total mailbag is highly fragmented UK total inland letter volumes declined by 3.1% p.a. from 2005 to 2008, and by 6.3% p.a. from , as the economic downturn increased the rate of decline UK parcel volumes grew by 4.3% p.a. from 2005 to 2008 and by 3.7% p.a. from , mainly reflecting increasing use of online shopping by consumers The main driver of mail declines has been electronic substitution of paper communication The principal cause of the overall mail volume decline has been the substitution of paper communication by electronic methods (e-substitution) However, the maturity of this transformation varies widely within different segments of the mail bag - Some segments are already substantially online while others are just beginning this transition - The maximum likely level of electronic substitution also varies between segments depending on both recipients and senders attitudes to electronic communication. This is affected by a range of factors such as internet access and age (mail recipients) and mail costs (mail senders) 3 We expect the decline of letter volumes to continue but at a slower rate over the projection period We expect the rate of e-substitution in letters to slow gradually over the next 10 years. In the initial years of e-substitution consumers with a high propensity to switch move rapidly online, as do many lower-value communications As time goes on, the remaining base becomes more skewed towards paperloyal consumers and those being sent higher value communications. We expect demographic changes and technology evolution to have a less prominent impact on this segment A return to GDP growth as the recession ends is likely to increase overall communication volumes, partially offsetting the declining share of letters in overall communication, particularly for Direct Mail Declines in letter volumes will also continue to be partially offset by robust growth of parcels traffic, driven by specific categories of online shopping 4 Our projection suggests letter volume declines of c.4% p.a. and parcel growth of c.3% p.a. from 2013 to 2023 We therefore expect the overall UK inland mail volumes to continue to decline albeit more slowly than we have seen historically - Letters: 5% p.a. decline ; 4% p.a. decline Parcels: 3% p.a. increase ; 2% p.a. increase Overall: 4% p.a. decline ; 3% p.a. decline Despite the slowing rate of decline in overall mail, these projections imply a significant reduction from current levels of paper communication by 2023, as well as a substantial change in mix (we believe parcels will double their share of the mail bag to c.21%) We have identified a number of risks to our projections which might increase the rate of mail decline over the projection period. The potential impact of these is illustrated in Section 5 of the report 7

8 Section 1 Executive Summary UK inland letters and parcels market volumes - past, present, and future c.19.7bn items c.13.8bn items c.8.3bn items UK letters market 9% 6% 6% 6% 6% 6% Transactional mail Direct mail 31% 54% 32% 56% 38% 50% Publishing mail Social mail UK parcels market c.1.3bn items c.1.7bn items c.2.3bn items Note: International mail volumes not included due to limited data availability for the historical period. Please refer to the later section for projections by mail segment Source: Royal Mail data, analysis 8

9 Section 1 Executive Summary Total inland mail volumes peaked in 2004 and have since declined, with an acceleration in mail declines since the start of the recession UK overall inland mail volumes, Indexed mail volumes (1981=100) Mail volumes peaked in 2004 after long run growth of 3.7% p.a. between 1981 and From 2004, electronic substitution of mail began to exceed macro driven mail volume growth, leading to mail volume declines of 2.6% p.a. from 2005 to Since the recession, macro factors (such as GDP) have also driven lower mail volumes with mail declines of 5.3% p.a. from 2008 to Source: Royal Mail data, analysis 9

10 Section 1 Executive Summary We expect UK letter volume declines to continue, albeit at a slower rate, while parcel volumes will continue to grow Total inland letters historical and projected volumes, Indexed mail volumes (2005=100) Forecast (3.1%) (6.3%) (4.9%) (3.8%) Total inland parcels historical and projected volumes, Indexed mail volumes (2005=100) Forecast % 3.7% 3.3% 2.1% We expect the rate of letter volume declines to reduce over the projection period as a result of: - A return to the trend rate of GDP growth resulting in increased overall communication volumes (this will particularly affect Direct Mail which is highly cyclical) - Slowdown in letter volume declines in other segments, such as financial statements, as a baseline of non-online users or less willing online users is reached The growth in parcel volumes is expected to continue throughout the projection period We expect some slow down in the rate of growth in the later years, mainly due to: - The continued partial digital substitution of some product categories, especially Books - The gradual slowdown in the growth rate of online shopping Note: Total inland letter volumes inclusive of Transactional, Social, Direct Mail and Publishing mail volumes. International letter volumes not included due to limited data availability for the historical period. Please refer to the later section for projections by mail segment Source: Royal Mail data, analysis 10

11 Section 1 Executive Summary Our e-substitution scenario analysis suggests that in a negative case, the total cumulative decline could be 5ppt below our base-case by 2015, increasing to c.12ppt by 2023 Total inland mail projected scenarios, Indexed mail volumes (2012=100) Source: Royal Mail data, analysis We have modelled upside and downside e- substitution scenarios to demonstrate the potential impact on our projection of some of the risks we have identified These scenarios are based on changing a number of assumptions underlying our individual mail segment projections to create high and low cases for each mail segment These are not worst case scenarios, but represent plausible alternative outcomes Upside scenarios are based on factors such as a larger baseline of consumers and businesses retaining paper invoicing and slower Government digital uptake while downside scenarios are based on factors such as faster adoption of paperless bank statements and slower parcel volume growth We have used Monte Carlo analysis to illustrate the range of possible outcomes from combining these scenarios (reflecting the fact that it is unlikely that all downsides will occur together) The scenarios do not include differing GDP assumptions (illustrated later in the report) and also exclude large one off events which could significantly affect mail volumes. Examples of these events are discussed in the Main risks to projection section of the report 11

12 Section 2 Historical trends and context 12

13 Section 2 Historical trends and context Historically mail volumes closely correlated with socio-economic drivers such as GDP growth, but in recent years technology and e- substitution have become important constraints on growth Actual mail growth vs. modelled growth Modelled growth 10.0% 8.0% Illustrative Actual growth Historically econometric models have been good predictors of mail growth. But from the early 2000s structural changes (such as technology and e-substitution) have led to a gap between the modelled growth based on socio-economic factors and actual mail growth, sometimes referred to as the "technology wedge While we still expect socio-economic factors to be important drivers of mail in the future, forecasting models need to make allowances for these significant and ongoing trends 6.0% YoY growth (%) 4.0% 2.0% 0.0% -2.0% 81/82 82/83 83/84 84/85 85/86 86/87 87/88 88/89 89/90 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 Technology wedge -4.0% Source: Royal Mail data, analysis 13

14 Section 2 Historical trends and context Other developed countries have also seen declines in mail volumes, but at widely varying rates... Letter volumes have been declining around the world, with wide variation in rates Decline in inland addressed letter volumes per person from 2005 to 2011 (2005=100%) 110% Even before the declines started, letter volumes per head and the composition sent varied widely Total inland addressed letter volume per person, 2005 and % 90% 80% 70% 60% 50% Germany Finland Sweden France Canada Netherlands United States United Kingdom Norway Denmark # of postal items per person United States Netherlands Sweden United Kingdom France Finland Germany Canada Norway Denmark Note: Mail volumes for each country are submitted by postal operators and therefore may not be entirely comparable depending on survey methodologies, country data for Germany, Sweden and the Netherlands adjusted based on assumed market share of largest postal operator Source: IPC, analysis 14

15 Section 2 Historical trends and context...this reflects different initial mail bags, cultural factors and government policies in each country Denmark Germany Denmark has seen one of the fastest declines in physical mail volumes The c.50% decline in addressed inland mail between 2005 and 2011 was mostly the result of a decline in priority or standard addressed mail The main driver of the decline was the continued push by the government to move significant volumes of communication online. The government is currently in the process of implementing an ambitious digital strategy to make all government interactions paperless by 2015 In 2005, Germany had a lower level of mail items per capita than the UK and has experienced one of the slowest declines among developed countries The composition of the German mail bag was very different from the UK. In 2005, Germany sent c.84 pieces of direct mail per capita vs. 103 per capita in UK. Between 2005 and 2011, UK direct mail declined by c.24% while German direct mail declined by only c.11%. As a result, in 2011, both countries sent c.75 pieces of direct mail per person Physical transactional mail also appears to be preferred in Germany as there is lower acceptance of digital signatures In addition, the government has given comparatively low priority to the digitisation of government mail Source: Royal Mail data, IPC, analysis 15

16 Section 2 Historical trends and context The overall decline in mail in the UK has been driven by e- substitution effects in many different mail categories Growth in parcel delivery has offset some letter volume decline The UK economy is around 4% larger than in 2005 driving an increase in transactional mail Estimate of macro and e-substitution factors driving the decrease in mail volume, % 2% 5% 5% 2% (3%) (6%) (5%) (2%) (3%) (15%) Indicative (3%) (1%) 76% Total advertising spend is lower than its 2005 level, reducing spend on Direct Mail In addition, Direct Mail as a proportion of advertising spend has declined, further reducing mail volumes The shift of business volumes towards Downstream Access providers (e.g. UK Mail and TNT) has reduced average prices and so been beneficial for overall mail volumes Volume 2005 Transactional mail economic impact Growth in parcels Impact of growth in number of households Impact of business price changes & DSA* Direct Mail economic impact E-substitution of direct mail E-substitution of bank statements E-substitution of invoices E-substitution of newsletters Other transactional mail decline Other mail decline Decline in social mail (e-sub & price) Volume 2012 Despite its high profile, the impact of social mail decline has been relatively low E-substitution has occurred in most of the mail categories and cannot be fully split into its constituent parts Note: *Increased usage of downstream access providers has decreased average prices paid over this period Source: Royal Mail data, analysis 16

17 Section 2 Historical trends and context Most e-substitution is being caused by technologies which have existed for several years rather than very recent innovations Phone Fax TV World wide web launched First graphical web browser 1 st online bank Amazon E-bay Google HMRC launches online Self Assessment Google Adwords Facebook You Tube 60% of UK has internet access 50% of UK using the internet daily iphone 75% of UK has home internet access ipad Many of the technologies currently driving the major mail reductions have existed for a number of years , PDF and electronic invoicing systems enable B2B electronic invoicing Rich s allow newsletter volumes to move online Major banks launch online portals enabling paperless statements Pay-Per-Click enables growth in internet advertising The effects of recent innovation e.g. 3D printing is not likely to be felt until towards end of the plan at the earliest Recent technological enablers such as Social networks, smartphones and tablets are expected to drive further declines, e.g. impact on Direct Mail and magazines Source: analysis 17

18 Section 2 Historical trends and context Different segments of the mail bag have declined (or grown) at very different rates UK mail volume split by application, Proportion of total items (%) 5% 5% 5% 8% 8% 7% 6% 7% 7% 30% 30% 30% 5% 6% 8% 29% 6% 6% 8% 28% 6% 6% 9% 29% 6% 6% 10% 29% 5% 5% 11% 29% Social mail Publishing Parcels (3.9%) (9.5%) 4.1% 51% 50% 51% 51% 52% 51% 50% 50% Direct mail (4.6%) Transactional (4.5%) Note: International mail volumes not included due to limited data availability for the historical period. Please refer to later section for projections by mail segment; Historical parcel volumes have been estimated using a combination of parcel volume datasets and parcel specific historical growth drivers Source: Royal Mail data, analysis 18

19 Section 3 Factors influencing mail volumes 19

20 Section 3 Factors influencing mail volumes The e-substitution trend varies considerably between mail types, with each in a different position on the S-curve Mail e-substitution s-curve Illustrative Mail volumes Pre decline Early stage e-substitution Main phase of decline Approaching baseline Baseline Government Payments Invoicing Financial sector International letters Publishing Direct mail While the majority of mail volumes will follow an s-curve, the speed of decline and size of the baseline will vary by application Social Mail remains the primary form of communication Mail begins to be substituted by other forms of communication Mail volumes rapidly decline as other channels become increasingly popular Rate of decline decelerates as remaining mail users have stronger preferences for physical mail Remaining mail users are those who will not use substitute forms of communication Years Source: analysis 20

21 Section 3 Factors influencing mail volumes The steepness of the s-curve and level of the base is determined by a balance of sender and receiver incentives Sender incentives to e-substitute Incentives in example mail types Higher Mail for information only Higher Rapid e-substitution High volume Requires a response Personal tax returns Want prompt payment About a high value transaction Lower To a high value customer Receiver receptiveness to e-substitution Higher Mail item required quickly Response likely to be online Frequent or large mailing Has archive value Relative receiver demand for electronic substitution Lower B2B insurance certificates B2B Magazines B2B invoices B2C insurance certificates Benefits Bank statements B2C invoice Lower Source: analysis Aimed at lower income groups Aimed at older groups Slow e-substitution Lower Relative sender incentive to encourage electronic adoption Higher 21

22 Section 3 Factors influencing mail volumes Consumers can be split into those who embrace online services, those who do not use online services because they do not think they are suitable, and those who have no internet access c.80% of consumers are split between those who can and do use online services where possible and those who can but prefer not to. However, preferences for online services vary by mail segment c. 20% of consumers currently have limited access to online services A significant proportion of consumers are increasingly using online services to communicate 55% of consumers prefer to use online services to interact remotely with government departments These consumers prefer to use online services as they believe that they are more convenient. The services can be accessed at anytime from anywhere with an internet enabled device 55% of consumers who receive online financial statements state convenience as the main reason for stopping paper A second group of consumers have the ability to use online services but choose not to because: They may prefer to keep paper records 34% of consumers who receive financial statements by post do so to keep paper records They do not believe that online services are suitable for certain applications 42% of consumers who do not use internet banking state the main reason is concern over security A smaller group of consumers have limited access to the internet and therefore are unable to use online services UK Internet take-up and intentions, % 4% 79% Don't intend to get Don't know if will get Likely to get in next 12 months Internet connection at home This proportion of non internet users is likely decline over time Mail outlook Will continue to use online services and gradually reduce remaining mail received May convert to online services as systems develop Largely remain mail users with some online service adopters Source: Ofcom Communication Market Report 2012, surveys 22

23 Section 3 Factors influencing mail volumes While cost is the primary driver for most senders engaging in e- substitution, the decision to move away from paper is not always straightforward Potential benefits of e-substitution Potential costs of e-substitution Can offer long term cost savings and cheaper scalability Improves quantity and quality of data collected Can improve corporate image Having the option to choose channel increases customers satisfaction I prefer not to be inundated with catalogues at all, I just put them in the recycling bin while moaning about how many trees were wasted - Consumer Can generate hidden or unexpected costs Paper bill customers are much less likely to phone in with billing enquiries than e-bill ones, the true cost of e-bills needs to reflect the potential cost of phone enquiries - Telco Not all customers might be ready to move online Forcing e-substitution on customers can annoy them Physical mail is more likely to be opened and read High initial IT investment required Can provide real time information and live updates Can improve immediacy and ease of communication We thought we could do most of the client s communication online, but systems constraints prevented them from going through with it - many firms don t have the resources or appetite to do it Consultancy firm Source: interviews, surveys, analysis 23

24 Section 3 Factors influencing mail volumes Demographic changes are likely to contribute to declines in postal communication in the long term. However, we believe the impact will be relatively small over the projection period 1 The primary driver of mail declines in the short to medium term is the changing behaviour within and across all age groups All age groups increasingly have access to the internet through a range of internet enabled devices Home Internet access by age, % 90% 90% 88% 84% 86% 87% 75% 80% 60% 69% 64% 51% 40% 20% 0% % 23% 75+ Demographic and behavioural drivers of mail volumes Share of transactional mail vs. share of population, % 30% 25% 20% 15% 10% 5% 0% 1 4% 16% 1 21% 33% 1 23% 2 17% 27% 14% 25% yrs yrs yrs yrs 65+ yrs % of transactional mail % of population % However, as a person ages, the volume of post they receive increases due to the complexity of life On average, older age groups typically have greater numbers of, and more complex, transactions (e.g. Life insurance) and assets (e.g. Houses, cars and bank accounts) In the longer term, demographic change will have a gradual effect on mail reduction, as older age cohorts with more limited internet access make up a smaller proportion of the population 46% of over 65 s have home internet access vs.80% for the UK population in 2012 Source: Royal Mail data, Ofcom Communication Market Report 2012, analysis 24

25 Section 3 Factors influencing mail volumes While e-substitution has largely been negative for letters, parcel volumes have benefitted from growth in online shopping Growth of remote retail Parcel deliveries have been growing with the increasing uptake of remote shopping Consumers are increasingly opting for home shopping as it allows for convenient price and product range comparison Some items and sizes are not available in store and it saves time to order from home... Others like the anonymity of the process. Clothing & Footwear retailer While the growth rate is slowing down, online is outperforming total retail with last year s annual online expenditure in the UK increasing by c.12.9% compared to total retail growth of c.0.9% during the same time period Click & Collect service is getting more popular... It is very convenient for the customer as they do not need to have someone at home to collect the parcel. Department store retailer UK home shopping sales as % of total retail sales 6% 7% 7% 8% 8% 9% 10% 11% % of retail sales Parcels have traditionally been delivered to home or work places. More recently, customer collection models such as Click & collect and lockers have been gaining traction. These enhance flexibility, further increasing demand for remote shopping Online has been taking share from the more traditional (offline) remote ordering channels such as mail and phone ordering and driving the overall remote retail category UK consumer e-book market, est Sales ( m) est n/a % Rise of online Digitisation est Remote retail spend by channel, 2012 Mail order 12% TV 2% Online 86% While the increased use of smart phones and tablets for leisure encourages impulse buying, it also fuels digital substitution for some categories such as Books, Music & DVDs where c.30% and 60% of remote deliveries respectively are already digital Source: Royal Mail data, Mintel, Verdict, interviews, surveys, analysis 25

26 Section 3 Factors influencing mail volumes Price rises above inflation both reduce mail volumes in the short term and can increase the future rate of e-substitution International comparison of the estimated impact of 1% increase in real prices on aggregate mail volumes* Coefficient Finland Business to Consumer mail UK inland first class non-pre-sort Finland Business to Business mail US standard-mail market US inland mail market Switzerland inland mail UK inland second class non-pre-sort market UK inland transactional mail market US inland first-class mail International econometric comparisons indicate that a 1.0% increase in real prices leads to a 0.6% decline in mail volumes on average Although price elasticity is low for total mail, some applications are more price sensitive than others, such as direct mail There are low risks of price rises causing mail volume decline if future price increases are in line with inflation. We have assumed future price increases to be marginally higher than RPI therefore further downside risks from price increases are limited However, future price increases significantly above RPI could reduce volumes considerably. In addition, continued price increases would be likely to increase the pace of e-substitution as it makes electronic communication relatively more cost-efficient We believe the interaction between e-substitution and price constitute an unknown downside risk to mail volumes Note:*Price elasticities based on own-price elasticities and hence do not take into account switching between products such as first class volumes moving to second class due to price rises in the first class products Source: Research papers as noted in the Appendix 26

27 Section 4 Projections by mail segment 27

28 Section 4 Projections by mail segment Our projection looks at the entire UK letter and parcel market, including Royal Mail s various competitors Covered in our projection: the UK letter and parcel delivery market International export International import Not covered in our projection: Collection Outward processing Inward processing Delivery Unaddressed advertising mail Overnight express carriers, e.g. Yodel and Hermes Consumers Business and public bodies Royal Mail collection hubs Presorted Royal Mail outward sorting centre Royal Mail inward sorting centre Delivery offices Recipient Irregular mail products, e.g. Election mail Food and Grocery deliveries Down stream access companies, e.g. TNT and UK Mail Wholesale 2 man (items over 30kg) deliveries By-pass, e.g. TNT London trial 28

29 Section 4 Projections by mail segment We have projected mail volumes using both bottom-up and topdown approaches The top-down approach allows us to understand the macro drivers behind changes in mail use Develop an econometric model of historical relationships between mail volumes and drivers - Economic and cyclical factors (e.g. GDP, population etc.) - Time trends to account for e-substitution and e-commerce trends - Price elasticity, i.e. sensitivity to changes in the price of letters and parcels Apply forecasts of the underlying drivers to produce a projection for each of the main categories of mail The bottom-up approach allows us to understand the specific drivers behind changes in each mail segment 100+ interviews with large senders, 4 online surveys with c.3,000 respondents (including consumer, business and public bodies), desktop research and interviews with mail stakeholders Analyse each sub-segment of the mail bag to understand key industry drivers and trends Estimate the likely macro and e-substitution trends for each segment Triangulation and harmonization of results Integrated view Overlays Sensitivity analysis Short term risks Long term risks Final projection 29