UK POSTAL MARKET COMPETITIVE MARKET REVIEW

2008 UK POSTAL MARKET COMPETITIVE MARKET REVIEW

CONTENTS 1 Executive summary 2 2 Overview of the postal market 4 3 Development of competition 36 4 Financial performance and quality of service 56 5 Market comparisons and external dynamics 67 CONTENTS 1

1 EXECUTIVE SUMMARY Postcomm s Competitive Market Review provides an analysis of the UK mail market and helps Postcomm to monitor developments in the market that it regulates. This year s document considers developments in the wider mail market including unaddressed mail, parcels and the express and courier markets as developments in these areas are increasingly related to the traditional mail market. The Competitive Market Review informs Postcomm s policy-making and will supplement the work being undertaken this year in support of the post-2010 regulatory framework consultation. Market overview The UK addressed mail market was worth 6.6 billion in 2007/08. Volumes declined by around 2 per cent on the previous year to 21.5 billion items. 1 Access competition continued to develop, accounting for 21 per cent of Royal Mail delivered volumes in 2007/08, up from 11.8 per cent in 2006/07. This amounts to 4.09 billion items. Delivery competition in the licensed area declined by 15 per cent in 2007/08. Certain mail applications, such as transactional and advertising mail, are in continued decline. In spite of this, there remain areas of the market that show potential for future growth, such as express and parcel delivery. Development of competition As of September 2008 there are 22 licence holders including Royal Mail. There have been fi ve new entrants to the market since Postcomm made changes to the licensing regime in January 2008. Some of these new, smaller operators have developed their own local delivery networks, while one more-established operator, TNT Post, launched 1 Based on Royal Mail operational volumes, including access. Includes all regulated and non-regulated mail, excludes door-to-door and some international mail. 2 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

delivery trials in the North East. Access operators are increasingly targeting smaller mailers and developing business models making use of zonal access agreements. New hybrid mail operators (electronic transfer and print) and hybrid products from traditional operators are becoming more established in the market, presenting further opportunities for small and medium-sized businesses to benefi t from the competitive market. Financial performance and quality of service Royal Mail s fi nancial performance for the year ending 30 March 2008 was weaker than in the previous year, with operating profi ts (before exceptional items) for the Royal Mail Letters business falling from 136 million profi t to a 3 million loss. In contrast to the deterioration in profi ts experienced by Royal Mail, UK Mail showed a strong performance between 2006/07 and 2007/08, with signifi cant growth in both revenue and profi ts. 2 In 2007/08, Royal Mail failed to meet 9 out of its 12 quality-of-service targets, compared to 2006/07 when it achieved 11 out of 12 targets. Many of these quality-of-service failures occurred due to industrial action caused by Royal Mail undertaking transformation activities. Market comparisons and external dynamics Mail volumes are generally continuing to decline slowly across Europe, albeit with signifi cant differences between growth rates in individual member states of the European Union. In 2008 a new European Postal Directive was agreed, establishing full market opening from 31 December 2010 for the 27 member states, with a transition period available to 11 of those states if needed. The experience of the other liberalised and regulated utilities (for example, telecoms and energy) in the UK has been that substantial effi ciencies have been achieved cumulatively year-on-year due to the combined effect of a change in ownership, the introduction of regulatory price pressure and exposure to competition. Research carried out by Pitney Bowes has shown that consumers believe mail to be more environmentally damaging than it is in reality. 3 Many operators and industry bodies are continuing with initiatives to make mail more environmentally friendly. Regarding VAT, Postcomm has consistenty taken the position that there should be a level playing fi eld for all postal operators. The European Court of Justice is considering a challenge to the UK s current VAT position by TNT Post NV, and a decision is expected in late 2008 or early 2009. The decision will be binding on all European governments. Postcomm is not a party to these proceedings. 2 The other principal licensed access operators DHL Global Mail, TNT Post and DX Network Services do not provide comparable published fi gures on their UK mail divisions fi nancial performance. 3 The Truth About Green, Pitney Bowes, February 2008. EXECUTIVE SUMMARY 3

2 OVERVIEW OF THE POSTAL MARKET This chapter contains an overview of the mail market. It describes the market structure, explaining access and delivery competition, and then looks in detail at growth and decline trends within the main mail applications. It also contains case studies of small and medium-sized enterprises that use mail as an important part of their business. The chapter concludes with a timeline highlighting important events in the mail industry. Previous versions of the Competitive Market Review have tended to focus on the addressed letters segment of the market, worth around 6.6 billion in 2007/08. This contains mail within the licensed area (mail that is prohibited to be carried without a licence by the Postal Services Act 2000) of the market; therefore it is a particularly relevant market segment for Postcomm to monitor. It has become evident throughout the last few years that the postal industry is undergoing signifi cant structural changes. Much of the market s growth falls outside the licensed area, while many postal operators simultaneously use the same distribution network to carry items that fall both within and outside the licensed area. At the same time, adjacent markets such as unaddressed mail and parcels are highly useful markets to monitor, as they are related industries with similar dynamics to the addressed mail market. For these reasons, we have widened the review s analysis of the market to include the wider postal industry, in order to more closely understand the drivers that impact Postcomm s statutory duties in relation to the universal service and the development of competition. The UK postal services market, in its broadest defi nition, is worth around 11 billion annually. The market can be broken down into segments based on service type, ranging from leafl et delivery to guaranteed express delivery. The postal market tends to be segmented according to letters, unaddressed, express and courier, and standard parcels markets, as illustrated in Table 2.1 and Figure 2.1. These markets can be broadly defi ned as follows: 4 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Letters refers to addressed letterboxable items, including both licensed area mail (weighing less than 350g and/or costing less than 1) and non-licensed mail that can fi t through a letterbox. This segment is made up of letters, large letters, magazines and some small packets. Unaddressed items without an address that are delivered through the letterbox, such as leafl ets and magazines. All unaddressed mail falls outside the licensed area. Express and courier time- or day-guaranteed items falling outside the licensed area, including same-day, next-day and two-day delivery, or items requiring a signature or with a track-and-trace facility. (Time-guarantees tend to be by 9am, 10am, 12am, 1pm or close of business.) Standard parcels refers to non time-guaranteed, two-day plus, usually non-letterboxable items. By this defi nition, all parcels fall outside the licensed area. The mail market can also be segmented according to the use of mail, and tends to be broken down into the following applications: Transactional refers to business mail generally used in fi nancial transactions, such as bank statements and credit card bills. Advertising mail is addressed direct-advertising mail. Publications refers to regularly produced publications such as periodicals and magazines. Fulfilment refers to requested goods including tickets, brochures, packets and parcels. Social mail is mail originating from residential customers. Table 2.1 and Figure 2.1 show the revenue from the different mail applications and segments. Table 2.1 The UK postal services market, revenue by segment and application Transactional Fulfi lment Advertising mail Publications Social mail Total Letters 1.8bn 0.8bn 1.3bn 1.0bn 0.5bn 5.4bn Unaddressed n.a. n.a. 0.4bn 0.1bn n.a. 0.5bn Express and courier 0.4bn 3.0bn n.a. 0.4bn 0.2bn 4bn Standard parcels n.a. 1.2bn n.a. 0.2bn 0.1bn 1.5bn Source: Postcomm s fi rst submission to the Independent Review of Postal Services OVERVIEW OF THE POSTAL MARKET 5

Figure 2.1 The UK postal services market, revenue by segment and application 6,000 Social mail Publications Revenue ( million) 5,000 4,000 3,000 2,000 Advertising mail Fulfilment Transactional 1,000 0 Letters Unaddressed Express and Standard courier parcels Source: Postcomm s fi rst submission to the Independent Review of Postal Services Market structure The UK addressed mail market has been fully liberalised since January 2006. As of September 2008, there are 22 licensed postal operators in the UK, including Royal Mail. Competition has developed most signifi cantly in access, which refers to customers and competitors using third-party access to Royal Mail s delivery network. Downstream access agreements allow alternative operators to collect, sort and trunk customers mail into Royal Mail s inward mail centres, turning it over to Royal Mail for delivery. Alternatively, under similar agreements, high-volume customers may deliver their pre-sorted mail to inward mail centres, as illustrated in Figure 2.2. 6 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Figure 2.2 The postal pipeline Collection Sorting Trunking Sorting Delivery Postbox Business collection Post offices Road Outward mail centres (69)* Air Rail Road Inward mail centres (69)* Delivery offices (1,400)* Postman Road Home Business Downstream access is utilised by alternative operators who collect mail from their customers. Mail is injected into the inward mail centre, from where the mail is taken to delivery offices for delivery by Royal Mail. Alternative operators could gain access to inward or outward mail centres to extract mail for delivery to their clients. * Inward and outward mail centres are in the same building. The figures for mail centre and delivery office numbers are correct as of August 2008. Access can be negotiated for other points in Royal Mail s network, and the potential to develop alternative access arrangements is discussed in the following chapter. Access competition Access volumes for 2007/08 accounted for around 4.1 billion items, or just over 20 per cent of Royal Mail s total inland addressed mail volumes, as shown in Figure 2.3. Several large mailing customers have signed access agreements directly with Royal Mail, and this customer direct access accounted for 43 per cent of total access volumes. OVERVIEW OF THE POSTAL MARKET 7

Figure 2.3 Quarterly access volumes 1,400 1,200 Total access 1,000 Millions of items 800 600 Operator access 400 Customer direct access 200 0 2005/06 2006/07 2007/08 Source: Postcomm with data from Royal Mail Delivery competition Licensed area mail delivered by other postal operators totalled around 26 million items in 2007/08, compared to Royal Mail s 21.5 billion items. This represents a decline of around 15 per cent on the previous year, and is the second year of decline for licensed delivery competitors. 4 This fall in licensed area traffi c is due to the decline in addressed mail volumes generally, alongside the withdrawal of some operators from licensed activity in city centres (where addressed mail delivery did not fi t their wider business models). These licensed operators carry far more volume outside the licensed area, estimated to be around 270 million items last year, compared to the 26 million items delivered within the licensed area. The unlicensed area includes items within many growth areas of the market such as packets, parcels, heavy publications and items delivered within a document-exchange network. Market segmentation The postal market is highly concentrated. Nearly 90 per cent of all mail originates from business, and as shown in Table 2.2, half of all mail comes from just 500 customers. It is clear that the provision of postal services to private customers and small businesses is dependent on the critical mass of volume sent by large business customers and the business-to-consumer volume that they generate. 4 This is based on restated fi gures. Postcomm reported end-to-end volumes of 34.8 million items in 2006/07; however, fi gures have been restated owing to reporting anomalies. 8 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Table 2.2 UK business customer mail volumes Number of business mailers Percentage of total UK mail volumes (cumulative) 10 18% 20 28% 500 50% Source: Will liberalisation end monopoly returns? UBS Investment Research, July 2006 Around half of this volume is generated by the fi nancial services sector in the form of transactional and direct advertising mail. Other large-volume mailing businesses come from the home shopping, retail and government sectors. Mail applications Transactional mail Transactional mail volumes account for around 6.5 billion items of mail per year, and most stakeholders estimate that transactional volumes are declining by around 3 per cent per year. According to Postcomm s annual Business Customer Survey, which polls 1,800 business mailers, 79 per cent of mailers sent transactional mail in 2008, compared to 87 per cent in the 2007 survey. In a March 2008 survey of nearly 1,000 businesses, the British Chambers of Commerce (BCC) found that more than half of respondents had increased their use of paperless billing in the past fi ve years, while only 3.5 per cent used it less. 5 The study also found that 86 per cent of businesses that would have gone through Royal Mail fi ve years ago now use the internet and email for transactions. The biggest reason for this increase in paperless billing was the availability of improved technology, with 76.5 per cent of respondents citing this as a main factor. However, 49 per cent also said that they had made a conscious decision to use less paper, 48 per cent said that it was to save money, and 30 per cent said that it was due to perceived unreliability on the part of Royal Mail. Out of all applications of mail, transactional mail is particularly susceptible to electronic substitution. Trends in online transactions and online banking are undoubtedly affecting these volumes. According to UK payments association APACS, the number of card payments on the internet reached 426 million in 2006, while the number of people using online banking has increased from 3.5 million in 2000 to just over 21 million last year. 5 British Chambers of Commerce survey of 967 respondents in March 2008. OVERVIEW OF THE POSTAL MARKET 9

There is evidence that access-based competition has slowed this decline in mail volumes by keeping bulk mail prices lower than they otherwise would have been. Access competition has also provided additional advantages such as shorter delivery windows and better management information, offering customers better value. Another development that could help to slow the switch away from transactional mail is the increasing emergence of transpromotional or transpromo mail. This entails the blending of transactional and advertising mail, creatively using white spaces on bills and statements to present advertising messages to customers. This allows mailers to sell related or upgraded products to their existing customers at little extra cost. Mailing houses and print suppliers are driving the uptake of the transpromotional concept, as developments in personalised and digital printing have been instrumental in the growth of this technique. Mail users can integrate personalised web addresses on to statements, tickets or bills, to drive existing customers to websites with specific targeted offers. France Telecom has recorded a five-fold increase in response rate when it personalises statements for its customers, and estimates that the cost per response is cut by 75 per cent. 6 Transpromotional mail in the USA is forecast to grow signifi cantly InfoTrends has forecast that the North American transpromotional digital output will increase from 1.62 billion images in 2006 (at a compound annual growth rate of 91 per cent) to reach 21.72 billion images by 2010. 7 According to qualitative research carried out by The Strategy Works in the UK, suppliers (business-process outsource companies) are reporting an increase in demand from customers for transpromotional mailings. The research points to the falling cost of improved technology, growing recognition of the opportunities available, better return on investment and environmental benefi ts. Mail users are utilising transpromotional mail as a way to reinforce and leverage existing customer relationships, as it offers a unique opportunity to contact customers on a regular basis. The research also found that the key sectors for transpromotional mail were fi nancial services, followed by retail. Transpromotional mail can be said to be turning inserts into onserts. 8 We have historically used transpromotional on bills to promote the use of such things as direct debit, energy-related services and other energy products. We do tend to fi nd that there is a signifi cant increase in uptake where the message is on a bill rather than inserted with the bill. Transpromotional mailing is very much an untapped resource that we are looking to extend to other appropriate types of transactional mail beyond the bills, as well as using it more intelligently on the bills. Postcomm interview with npower 6 Charting a Future for Mail through Innovation, Pitney Bowes presentation to Postcomm, 1 October 2007. 7 www.infotrends.com/public/content/infostats/articles/2008/02.19.2008.html 8 Transpromo an in-depth study of the UK market, The Strategy Works, presentation at the Mail and Express Delivery Show, 1 July 2008. 10 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Advertising mail Direct mail advertising has been a key growth driver of mail volumes since the mid- 1990s, but volumes have been in decline since 2003. Royal Mail reports that direct mail volumes fell by 7.4 per cent in 2007 to 4.65 billion items. There is a good deal of industry speculation about whether electronic substitution and environmental concerns will drive further direct mail volume decline, or whether the medium has a sustainable future due to its ability to be highly targeted and measurable. The current weak economic climate is expected to have an impact on advertising budgets, although direct marketing has traditionally tended to benefi t from declining advertising spend in other areas, due to a desire among clients for measurable results. On the other hand, restrictions on budgets could force the industry towards digital advertising. Direct mail can be comparatively expensive, and although the industry has been slow to embrace digital advertising, budget cuts could give the industry the incentive it needs to move into the digital space. Marketing Direct has issued a Top 100 Mailers report, compiled from more than 6,000 consumers, which shows that spend on direct mail in 2007 dropped by 9 per cent. Capital One, formerly one of the UK s top three spenders, fell eight places to number ten as it reduced its expenditure by 65 per cent to 11.4 million in 2007. 9 According to fi gures from the Advertising Association, published by www.mad.co.uk, the direct marketing industry saw a drop in year-on-year growth of 6.5 per cent, while online marketing grew by almost 40 per cent in 2007. The Advertising Statistics Yearbook 2008 confi rmed that digital marketing has now overtaken direct marketing as the third-largest channel by market share. Digital expenditure represents 15.6 per cent of advertising expenditure, while direct marketing now accounts for only 11.2 per cent, or 2.17 billion in 2007. Press advertising was still the biggest marketing channel overall, with expenditure of 7.71 billion and a 39 per cent share of the market. This was followed by TV at 4.6 billion and a 24 per cent share. The UK advertising industry as a whole grew by 4.2 per cent in 2007 to a total of 19.4 billion. 10 Precision Marketing magazine notes that mailers are increasingly using direct mail as a reactive tool in response to competitors actions or to market trends. 11 Suppliers report an increase in the last six months of customers enclosing non-standard items in mailings. This potentially signals a return to the creative use of mail that had previously suffered after the introduction of the Pricing in Proportion system. Although large mass mailing campaigns appear to be a thing of the past, there is evidence that the complementary 9 Marketing Direct, Top 100 Direct Mail Spenders 2008, July/August 2008. 10 http://dmweekly.mad.co.uk/articles/article.aspx?uiarticleid=055aa961-4f1e-4c55-8b98-5efd947e5a58 11 Precision Marketing, Taking the long view, 27 June 2008. OVERVIEW OF THE POSTAL MARKET 11

nature of direct mail with other media, such as email, will mean that direct mail has a lasting role, even if at slightly lower volumes. The effectiveness of direct mail as a medium has been underlined in research completed by the Direct Marketing Association (DMA), which has demonstrated that responses to direct mail are almost twice as positive in reality as fi rst perceived. 12 Research by Quadrangle in February 2007, on behalf of Royal Mail and the Direct Mail Information Service (DMIS), considered how direct mail and online marketing could be used successfully together. The survey, weighted towards those who rated themselves as confi dent web users, found that 59 per cent agreed that direct mail is effective at supporting online information. 13 Also, as shown in Figure 2.4, respondents were more likely to remember campaign information and act on it if a combination of online creative and traditional mailings had been used. Furthermore, where a campaign used direct mail and online marketing in a blend of creative methods, respondents were found to be more likely to both spend more and buy something as a result. Figure 2.4 Respondents recall of advertising medium I am more likely to remember something if it is communicated to me by post and online 69 I am more likely to read mail from a company if I have already seen advertising for the company online 56 I am more likely to click on an online advert if I have already received something from the company in the post 54 I am more likely to respond to something if it is communicated to me by post and online 57 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents agreeing with the statement Source: DM and online report, DMIS DMIS research also showed that email and direct mail complement each other. Email, for example, was thought to be better at communicating brief messages and was seen as easier to respond to, whereas direct mail was believed to be better for presenting detailed messages and a professional image. 12 2007 Participation Media The Consumer Experience of Direct Marketing, DMA Research Centre, April 2008. 13 DM and online report, DMIS, www.dmis.co.uk/research/dmandonline.cfm 12 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Product development TNT Post UK yourstamp Personalisation is seen to be an important element of direct mail offerings. In June 2008, TNT Post UK launched an access mail stamp product. This allows mail users to customise their direct mailings with a stamp that they have designed themselves. TNT Post UK prints the unique stamp and attaches it to the user s direct mailings. Trials of the product have proved successful in terms of response rates and brand awareness, as the mail appears more personal and stands out from traditional mail items with indicia. The stamps can be used on a selection of TNT Post UK products, including the AllSort product, and are suitable for both local and national mailings, conducted by both large and small-and-medium-enterprise mailers. Source: www.tntpost.co.uk OVERVIEW OF THE POSTAL MARKET 13

Product development Royal Mail In the last year Royal Mail has launched three products targeted at business direct mailers: Sensational Mail A product launched to target direct mailers who want to appeal to customers senses. Royal Mail can enclose tastes, smells and sounds of products into direct mail pieces, to stimulate recipients senses and allow engagement in a way that only a physical mail item can. Dialogue Mail A personalised direct mail piece designed to drive a customer online to a unique website, where they are involved in a customer journey where the brand and customer exchange information. Matter Royal Mail is working with Matter Media Limited to send customers Matter boxes. Households opt in to receive free direct mail packages, which will fi t through their letterbox and are delivered on a Saturday, containing promotional materials from companies wishing to target a specifi c set of Matter recipients. The trial box sent in early 2008 contained soap crayons promoting the Nissan brand, a Nintendo Wii sweat band and Original Source shower gel, among other items. Over 30,000 people have already signed up to receive Matter boxes. Sources: www.royalmail.com, www.matterbox.co.uk, www.precisionmarketing.co.uk 14 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

The case study below highlights the benefi ts of hybrid mail. It demonstrates how this small mailer started sending more direct mail because of the effi ciency and cost savings made through the use of hybrid mail. Case study Quality Ornamentals Company background Quality Ornamentals is a sales and marketing company jointly owned by three of the North West s leading bedding plant producers. Its primary function is to market the three companies products to leading independent and chains of garden centres across the UK. Mailing profile Throughout the year the organisation typically sends an average of 50 statements per month and between 80 to 100 invoices per month (rising to an average of 400 per month between April and June, owing to the seasonal nature of Quality Ornamentals market). It has recently begun to send about 500 direct mailing items per month at times that are appropriate. Why was the decision made to move some of Quality Ornamentals mail from Royal Mail? Quality Ornamentals was introduced to TNT-it (TNT Post s hybrid mail product) at the Manchester Sage exhibition, and switched from Royal Mail after becoming aware of the benefi ts of hybrid mail technology and the savings in cost and effi ciency that could be made by outsourcing, rather than using internal labour to package envelopes. Such savings were considered especially important for the company, as bedding plant sales are a highly seasonal business and very competitively priced. What have been the benefits/experiences of moving to date? For the fi rst six months after signing up with TNT (January June 2007), direct postage and stationery costs were cut by 43.1 per cent against budget in a year when sales had increased by 7 per cent. Quality Ornamentals considers its main benefi ts to have been a reduction in paper and envelope stocks, saving time, freeing-up staff to concentrate on core tasks, a reduction in waste, and improved mail quality and sorting. In addition, signifi cant cost savings and an improved cash fl ow have given the organisation the ability to mount its fi rst large-scale direct mail campaign. This had not been considered before the organisation had begun using hybrid mail, but with the reduced cost and labour times, direct mailings have been possible, and have brought Quality Ornamentals an average 5 per cent response to mailings, which in their own words, we think is fantastic. OVERVIEW OF THE POSTAL MARKET 15

Case study (continued) As part of Quality Ornamentals mail usage review, did it consider the use of alternative media such as email or internet communications instead of postal mail? What was the outcome? Quality Ornamentals considered a greater use of email, but due to the ease of obtaining a postal address over an email address has decided to implement a twostep policy to establish customer bases through traditional mail and then to begin to use email contact with established clients. What are the company s thoughts on the mail market? I ve spoken to a lot of people that have small businesses about this service with TNT and lots of them have never heard of it before. It seems to be that in terms of alternatives, not a lot is being done to make the market aware of the benefi ts. I ve never had anybody approach me and there are an awful lot more small businesses out there than there are giants. Source: Postcomm interview with Quality Ornamentals, contacted via TNT Post UK Unaddressed mail Unaddressed mail accounts for around 13 billion items a year. Unaddressed volumes have been growing for the last ten years, although according to DMA (UK) fi gures on door-drop expenditure, growth has slowed. Offi cial DMA fi gures for the unaddressed market in 2007 are still being prepared, but the attitude across the industry is that volumes will be, at best, fl at compared to 2006. 14 Reduced marketing budgets could see further cuts in volume, and this year will also see the introduction of a new preference service that might affect volumes. The Your Choice scheme is still under development, but will allow consumers to register to say that they do not want to receive unaddressed mail. Conversely, the current weak economic climate in the UK could benefi t the unaddressed mail industry. Unaddressed mail is often considered to be a more cost-effective medium than direct mail, and unaddressed mail can be up to ten times less expensive. 15 Furthermore, declining direct mail volumes could offer unaddressed advertising mail the opportunity to stand out more to recipients, meaning leafl ets could be used increasingly at this time when marketing budgets are under pressure. 14 Precision Marketing, Doors of perception Door-to-door direct mail, 2 May 2008. 15 Now you can target your door drops more effectively than ever before..., The Letterbox Consultancy, July 2007. 16 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

There are three main routes to market for unaddressed mail: free newspapers, dedicated unaddressed mail distribution companies, and Royal Mail s Door to Door service. Free newspapers, which account for around 50 per cent of all unaddressed mail deliveries, have an estimated 62 per cent coverage of the country and can include up to 11 inserts. 16 Royal Mail delivers around 25 per cent of all unaddressed items and has 100 per cent national coverage. Royal Mail limits the number of items per postcode per week, and ensures that items from similar product or service categories are not delivered simultaneously. Specialist unaddressed mail distribution companies account for the remaining unaddressed mail volume. Many are developing increasingly sophisticated targeting tools, allowing mailings to be aimed at particular streets, which can then lead to an increased return on investment. These tools can overlay postcode areas with social and demographic data to identify areas with high concentrations of the target population for a marketing campaign, while postcode areas with low penetration of the targeted demographic can be removed from the campaign. Return on investment has increased as a result of targeting facilities that all distributors offer. You are now able to get down to street-level distribution. Targeting should drive more relevant offers and propositions. Chris Roxburgh, Managing Director of Link Direct 17 As for the ability of unaddressed mail to attract customers attention, Figure 2.5 shows average recall of delivery for different methods of unaddressed mail distribution. Research has shown that even in controlled delivery situations, recipient recall never reaches 100 per cent, and is normally found to be in the low 90 per cent range. 18 The data shown in Figure 2.5 represent a high level of recall for unaddressed mail, and demonstrate that recall is improving in the area of solus leafl ets (delivered separately from other items). 16 Precision Marketing, Doors of perception Door-to-door direct mail, 2 May 2008. 17 Precision Marketing, Doors of perception Door-to-door direct mail, 2 May 2008. 18 Now you can target your door drops more effectively than ever before..., The Letterbox Consultancy, July 2007. OVERVIEW OF THE POSTAL MARKET 17

Figure 2.5 Percentage recall by method of door-to-door delivery 100% 2003 (Base: 104,162) 2004 (Base: 104,719) 2005 (Base: 99,897) 2006 (Base: 102,314) 2007 (Base: 103,971) 90% 80% 84.7 84.0 83.8 84.2 84.4 84.2 83.5 82.2 81.8 82.5 79.8 79.4 79.3 79.5 80.0 Percentage of respondents 70% 60% 50% 40% 30% 20% 10% 0% 65.4 66.8 65.3 67.4 68.1 Free newspapers Royal Mail Solus or crew delivery Newspaper solus Delivery method Sources: The Front Door and The Letterbox Consultancy Publications Consumer magazines There are around 3,400 consumer magazines in circulation in the UK. Expenditure on these magazines reached 2.18 billion in 2007, up from 2.09 billion in 2006. 19 The majority of consumer magazines are bought in shops and newsagents (the news-stand channel). Postal subscriptions have been growing, and now account for 14 per cent of magazine sales, up from 3 per cent 10 years ago. 20 Gaining space on news-stands is increasingly diffi cult, especially for new titles, thus leading many to believe that subscriptions will continue to grow. Indeed, a few big titles have reached 50 per cent subscription sales or above, including The Economist, Gardeners World, Good Housekeeping and The Week. In the consumer magazine market, digital publishing is not a viable substitute for the hard (print) copy, but rather it acts as a sales channel. Recent fi gures suggest that a growing number of subscribers to print copy magazines are buying from internet sites (up to 30 40 per cent for some large publishers). 21 Digital editions are also being used as samplers to get consumers interested in the print copy. 19 Advertising Association and Periodical Publishers Association. 20 Periodical Publishers Association. 21 Periodical Publishers Association. 18 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Business-to-business magazines Ninety per cent of business-to-business publications are delivered to readers by post. There are nearly 5,000 of these titles in the UK, 70 per cent of which are controlled (free) circulation. 22 Advertisers targeting specifi c readers in specifi c markets drive the businessto-business publishing model. High reliance on the mail channel means that business-tobusiness magazines are very sensitive to postal price rises. Stemming from discussions with stakeholders, the business-to-business magazine market is often particularly quick to adopt digital publishing compared to consumer or customer magazines. Customer magazines Customer magazines are publications created by businesses to communicate with their customers, often with the aim of promoting customer loyalty. Turnover in the customer magazine sector is around 385 million making it the second-fastest growing advertising sector after online, 23 and a specifi c growth area within the larger publishing market. In the ABC (the independent organisation that verifi es and reports media performance) rankings from 2007, seven of the top ten consumer magazine titles were customer magazines. 24 A customer magazine was launched for every working day of the year in 2007, leading to the customer magazine industry delivering year-on-year growth of 10 per cent. This market is forecast to be worth over 531 million by 2009. 25 Precision Marketing also reports that using a customer magazine can increase average sales by 8 per cent, and brand loyalty can increase by around 30 per cent. Many customer magazines are distributed by mail, especially in industries such as automotive or travel where customers don t make regular trips to companies retail outlets, or for example television companies, where there is no actual contact with customers. Research from the Association of Publishing Agencies highlights that customer magazines achieve a longer period of engagement with customers than most other media. Customers on average spend 25 minutes reading customer magazines, which is more than twice what they spend looking at the websites of the top 100 retailers. 26 The research estimates that around 70 per cent of customer magazines are sent by mail, representing a spend of around 350 400 million. Over half of all magazines sent by post are now customer magazines. 27 22 Periodical Publishers Association. 23 Precision Marketing, Why customer magazine sector is relishing title fi ght, 14 July 2008. 24 Internet Retailing, Engaging with customers, May 2008. 25 Precision Marketing, Why customer magazine sector is relishing title fi ght, 14 July 2008. 26 www.crm2day.com/content/t6_librarynews_1.php?news_id=125118 27 Association of Publishing Agencies. OVERVIEW OF THE POSTAL MARKET 19

Publishers are working to increase mail subscriptions to all types of magazines (consumer, customer and business-to-business). Subscriptions offer publishers a guaranteed revenue stream, increased stability of circulation volumes, and the assurance that they do not have to rely on physical space in newsagents for distribution. Many publishers also still use direct mail as part of their acquisition mix, fi nding postal addresses to be more reliable than email addresses. Many different initiatives are being used to boost subscriptions, such as offering free-gift incentives against price-led offers, testing different lists of prospective customers with different creative content, and using alternative mail suppliers. Product development Magazine subscriptions In late 2006, market research into subscriptions carried out by the Periodical Publishers Association, Royal Mail and Brandlab showed that the infl exibility of subscriptions was one barrier to growing subscription volumes. IPC Media, publisher of consumer magazines including Marie Claire, Pick Me Up, Ideal Home and Rugby World, took this research and developed a new type of subscription product called The Mix. This provides customers or those who receive gift subscriptions with the opportunity to sample four magazines of the same genre over the course of a year through the subscription. The product has been launched initially in the highly competitive homes and fashion segments, and has raised many challenges for the mailing house responsible for fulfi lment. IPC Media has set itself targets to convert readers of The Mix to one or more of the publications that they sample during the year. Initial results are positive, with the campaign generating 20 per cent more sales than the previous voucher-based campaign. Sources: InCirculation, Pick-n-Mix, May/June 2008; www.ipcmedia.com 20 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

The following case study highlights that even smaller businesses with variable mailing profi les do not feel tied to their mail suppliers. Case study Direct Contact Exhibitions www.directcontactexhibitions.com Company background Direct Contact Exhibitions (DCE) produces publications and organises exhibitions for the building trade. The organisation has been operating since 1987 and currently employs seven people. Mailing profile (Presstream 2, Mailsort 3) DCE s mailing profi le varies hugely on a regional and seasonal basis. Its magazine business is composed of four quarterly titles: External Environment Product Review (average mailing of over 16,000) Roof, Floors and Walls Product Review (average mailing of over 12,000) South East England Construction Product Digest (average mailing of over 10,000) Irish Building Solutions Product Review (mailing split into 6,000 southern and 4,000 northern). A mailing related to these publications is also sent out in between the release of each quarterly publication, with a product card pack, with roughly the same mailing volume. In terms of its exhibition mailings, DCE carries out around 7 mailings per year, with an average of 4,000 C5 or DL size Mailsort items per mailing. Has DCE reviewed its use of mail since the market was opened to competition, and what was the outcome? DCE has twice moved its mail to alternative operators owing to perceived quality-ofservice and culpability issues with Royal Mail. As a business that runs exhibitions, it regularly sends invitations to its stakeholders and clients. As these are mailed up to six weeks before the exhibition, there is a necessarily small time frame in which the organisation has to notice and correct postal errors. This sometimes led to DCE re-mailing the entire run rather than spending time working through Royal Mail complaints procedures. OVERVIEW OF THE POSTAL MARKET 21

Case study (continued) DCE s experiences with alternative operators brought up many similar problems. In addition, these issues were compounded by operators offering a service that involved the organisation having to split its databases. Due to its advantage of having national end-to-end coverage, DCE has since returned to Royal Mail. Did DCE make any changes to the Royal Mail products and services it uses, and what have the benefits/experiences been? DCE has expanded into the Irish market due to lower prices, and has found that it is cheaper to use Royal Mail for Republic of Ireland deliveries due to its competitive euro pricing. DCE believes that the service it receives has immeasurably improved during the last 12 to 18 months, especially with Presstream 2, although it continues to have problems with Mailsort 3. It would be a bit of a coincidence if there was no relation between these improvements and the opening of the market to competition. As part of DCE s mail usage review, did it consider the use of alternative media such as email or internet communications instead of postal mail? What was the outcome? People are less inclined to open and read an email inviting them to an exhibition, whereas receiving and opening a pretty ticket in an envelope works much better for what we do. What are DCE s thoughts on the mail market, and what would it like to see within it in the future? DCE believes that there cannot be truly effective competition until an alternative operator is able to provide a universal end-to-end delivery service, as otherwise any service is still fully dependent upon Royal Mail s fi nal-mile quality of service. In terms of the future, DCE would strongly object to any proposal for postal operators to charge by mileage, because as a small business it would cripple us. Source: Postcomm interview with Direct Contact Exhibitions, contacted via the Federation of Small Businesses (FSB) 22 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Fulfi lment Fulfi lment continues to be a growth area in the mail market, driven largely by internet sales. The Internet Media in Retail Group (IMRG) estimates that 860 million parcels were delivered in the UK during 2007. IMRG estimates that the value of internet shopping for 2008 will be 62 billion (up 35 per cent on 2007), of which 20 per cent will represent non-physical purchases (i.e. travel) and 26 per cent will be for groceries. New fi gures from the IMRG Capgemini e-retail Sales Index show that UK shoppers spent over 26.5 billion online in the fi rst six months of 2008, despite the recent economic downturn. This fi gure is up 38 per cent on the 19.2 billion recorded for the fi rst half of 2007. Capgemini and IMRG report that for the fi rst half of 2008, 17p in every pound was spent online. This is roughly equivalent to half of all supermarket sales and larger than all retail sales for clothing and footwear. A. T. Kearney estimates that the UK courier and express parcels (CEP) market was worth 6.9 billion in 2007, with 74 per cent of shipments being domestic. 28 It is widely believed that the CEP market will continue to be a growth area of the wider mail market across Europe, driven by higher-speed broadband connections and wider acceptance of internet shopping both in domestic markets and across international borders. The UK parcel market is one of the most fragmented in Europe, with the top three operators (Royal Mail, Home Delivery Network and Parcelnet) making up just over 40 per cent of the market. 29 Business-to-consumer (B2C) deliveries are the fastest growth area in the UK market; as shown in Table 2.3 and Figure 2.6, they make up just under half of the volume of deliveries, despite representing only 27 per cent of the total value. 30 This is due to the generally lower value of B2C items, usually under 30. A. T. Kearney predicts that the UK B2C market will continue to see growth for at least two years. 28 European CEP Market, Market Structure and Trends Key Findings, A. T. Kearney, June 2008. 29 European CEP Market, Market Structure and Trends Key Findings, A. T. Kearney, June 2008. 30 European CEP Market, Market Structure and Trends Key Findings, A. T. Kearney, June 2008. OVERVIEW OF THE POSTAL MARKET 23

Table 2.3 UK domestic market sub-segmentation, 2006 and 2007 volumes ee 2006 (million shipments) 2007 (million shipments) Growth 06 07 Business to business 458 462 1% Business to consumer 438 504 13% Consumer to consumer and consumer to business 48 53 9% Source: European CEP Market, Market Structure and Trends Key Findings, A. T. Kearney, June 2008 Figure 2.6 UK domestic market sub-segmentation, 2007 volumes Consumer to consumer and consumer to business 5.2% Business to consumer 49.4% Business to business 45.3% Source: European CEP Market, Market Structure and Trends Key Findings, A. T. Kearney, June 2008 The consumer-to-consumer (C2C) parcel delivery segment is also a strong growth area in the UK, driven by internet sales from sites such as ebay, although it only accounts for 5 10 per cent of the market. 31 ebay estimates that 178,000 users run a business or use ebay as their primary or secondary source of income, 32 many of whom depend on an affordable and reliable range of delivery options. ebay estimates that at any one time it has more than 14 million items on sale on its site, the majority of which are sent via the postal service. 31 The Future of B2C Parcel Delivery, Datamonitor, March 2008. 32 www.ebay.co.uk data, January 2008. 24 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

The business-to-business (B2B) delivery market has not experienced the growth seen in the B2C or C2C markets, and there is growing evidence that traditional B2B express operators are fi nding that adapting to the less predictable area of B2C delivery is diffi cult. For example, during 2008, TNT Post UK withdrew from the UK packets market, and in June 2008 sold its courier network to Parcelnet. This included the JD Williams network of lifestyle couriers acquired by TNT Post UK in 2006. As part of the agreement, Parcelnet has become TNT Post s preferred home delivery partner. 33 In spring 2007, DHL Express launched DHL@HOME, a range of B2C delivery products, offering a 24-hour service and a 48-hour service for standard deliveries. DHL Express has agreements in place with over 1,000 self-employed lifestyle couriers who work fl exible hours, making deliveries in their own cars between 7.30am and 9pm. Couriers leave their personal mobile number for customers to contact them to arrange for re-delivery at a convenient time, and make three attempts to deliver parcels. Home delivery is still a big challenge for many internet retailers. With a B2B delivery, it is much more likely that someone will be available to receive a parcel during the day, compared to B2C deliveries where recipients are often out during delivery hours. First-time delivery rates are a crucial benchmark between successful internet retailers and parcel delivery companies. Drop-box solutions (where couriers leave parcels in secure lockers in convenient locations) and parcel pick-up networks (where parcels are left, for example, at a local convenience store with long opening hours) are a vital and emerging support network to the parcel delivery industry. Many companies offering such solutions are beginning to work with delivery companies and internet retailers in the complex and fragmented UK parcels market. IMRG works closely with internet retailers and delivery providers, and has produced a voluntary code for members called Internet Delivery Is Safe (IDIS), which means that internet shoppers using accredited websites have the right to: clear delivery information before placing an order; a convenient and reliable delivery service; notifi cation of any delivery limitations/conditions; charges that are complete and simple to understand; access to information on order progress/history; delivery within the agreed time frame; 33 www.imrg.org OVERVIEW OF THE POSTAL MARKET 25

helpful support with failed/late/attempted deliveries; expect their goods to arrive in good condition; and a clear returns process, with any limitations/conditions notifi ed prior to purchase. 34 One of the challenges for the continued growth of the fulfi lment market is electronic substitution. At present, physical fulfi lment (e.g. books, CDs, clothes) and digital fulfi lment (e.g. tickets, hotel reservations) sectors are growing at similar rates. 35 However, the more widespread availability of high-speed broadband will begin to have an impact on the physical sector of fulfi lment with, for example, the digitalisation of CDs and books reducing the demand for certain physical products. The impact on the currently high growth area of DVD rental is already evident in the USA. Traditional DVD rental companies are already moving to new distribution methods, such as, for example, preparing for the move to internet-based streaming of fi lms using high-speed internet connections, and providing fast-download kiosks in stores. However, research from the United States Postal Service s Household Diary Study in 2005 shows that broadband users send 45 per cent more packages, and receive 25 per cent more packages than dial-up users. This shows that while access to highspeed internet connections may drive digital substitution, it may simultaneously increase the need for physical distribution. 36 Product development Royal Mail s Delivery Promise Tool In May 2008, Royal Mail launched a new internet-based Delivery Promise Tool that can analyse a website and report on the quality and availability of delivery information that the site gives its customers. The tool has been developed in response to research showing that delivery options are a primary concern of internet shoppers, and in particular they are a major cause of shopping basket abandonment. The tool will check if information such as price, speed of delivery, type of delivery and contact details are clearly communicated to customers as they purchase from the website. The service then provides users with a detailed report and recommendations on how the website can be improved to support and encourage online shoppers. Source: Royal Mail 34 www.imrg.org 35 The Future of B2C Parcel Delivery, Datamonitor, March 2008. 36 Charting a Future for Mail through Innovation, Pitney Bowes presentation to Postcomm, 1 October 2007. 26 COMPETITIVE MARKET REVIEW UK POSTAL MARKET