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

This case study of Lion Industries highlights how important a reliable, effi cient postal service is to a small fulfi lment company. Case study Lion Industries UK www.lionindustries.co.uk Company background Lion Industries UK Ltd is a distributor of professional equipment, mainly to painting contractors. It has served the UK market for 30 years. It presently employs four fulltime and three part-time staff. Sales are direct to end-users, via dealers and to equipment hire businesses. Mailing profile In terms of its fulfi lment deliveries, Lion Industries ships orders less than 3kg via Royal Mail (averaging 30 packets per week), orders less than 30kg via City Link (averaging 15 cartons per week), and orders above this weight via Palletways (averaging one per week). Product documentation and high-priority mailings are sent via fi rst class Royal Mail post (averaging 40 per week), with invoices and payments sent via second class Royal Mail post (averaging 15 per week). What are the company s thoughts on the mail market? A cost-effective and effi cient universal mail service (no losses, delays or breakages) is vital to the company because we do not have the volume to command low prices by private mail and carriers. Lion Industries is also concerned about the reliability of alternative operators, owing to its experience with parcel carriers. For both of these reasons, it has remained with Royal Mail. The organisation has also elected not to use a franking machine, due to the cost of purchasing or hiring a device capable of weighing its average order sizes. In addition, we feel that the use of postage stamps gives our post a distinctive image: more colourful and different. Has Lion Industries considered the use of alternative media, such as email or internet communications, instead of postal mail? What was the outcome? Lion Industries is sending more emails than letters due to cost savings (no postage, paper or envelope required) and the logistical benefi t of having a reply attached to the incoming email, building up a string of email exchanges. However, it believes that for certain applications traditional mail holds an advantage both in image and in the potential to attract more attention than an email message. OVERVIEW OF THE POSTAL MARKET 27

Case study (continued) What would Lion Industries like to see in the mail market in the future? The continuation of early delivery is highly important to the organisation, as the late receipt of cheque payments could potentially delay the preparation of an order for a shipment: therefore Lion Industries would like to see a guaranteed latest time of delivery for fi rst class mail. The company would also like the price of franking machines to go down, with greater affordability for higher-end devices with the potential ability to track all mail electronically. Source: Postcomm interview with Lion Industries, contacted via the British Chambers of Commerce. General business mail General business mail is the term used for non-bulk mail that is sent in the course of normal business, often being a single item. All companies send some level of general business mail, for example as a personalised response to a customer or supplier letter. It is an area of particular importance for small- and medium-sized mailers, who often send a higher percentage of their mail as single items. Franked or metered mail In April 2008, Royal Mail announced that it was increasing the discount given to franked mail products to 2p less than fi rst class stamped products, and 3p for second class stamped products. Since then, customers using printed postage impression (PPI) mail have also been able to benefi t from volume-related discounts. There are reported to be 210,000 franking machines in the UK, and supply and maintenance of the machines costs approximately 100 115 million per year. Neopost and Pitney Bowes, the top two suppliers, dominate the market with around a 90 per cent share. 37 Growth in the use of franking machines is notable among smaller mail users. Franking machines have a role to play but they need to be integrated into the mail process. They need to be complementary to the whole business. Philippe Masson, Pitney Bowes Postal Market Development Director 38 Franking machines have not been developed for use with alternative operators in the UK, therefore metered mail customers currently have no choice of provider for their franked mail. Franking equipment has been developed for alternative operators pricing structures in other European countries, and it is possible that this could happen in the UK in the future. 37 What to Buy for Business, Streamlining the mailing process, 1 July 2008. 38 What to Buy for Business, Streamlining the mailing process, 1 July 2008. 28 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

The following case study highlights the benefi ts to a small business relying on general business mail of the fl exibility that alternative operators offer, and its continued reliance on physical mail over email. Case study Past Due Credit www.pastduecredit.co.uk Company background Past Due Credit (PDC) is a debt collection company based in Glasgow that was set up in October 2005 and now employs 13 people. Mailing profile PDC currently sends an average of 20,000 demand letters per week, although its mailing needs can vary. What are PDC s thoughts on the mail market? PDC believes that Royal Mail should expand its service to deliver both twice daily and on bank holidays. It believes that competition is a fantastic thing. Why was the decision made to move some of PDC s mail from Royal Mail? Cost was the main factor in switching the bulk of the organisation s mail to TNT Post UK, although it still uses Royal Mail for ad hoc letters. What have been the benefits/experiences of moving to date? PDC has been very happy with TNT Post UK s quality of service. The main benefi ts have included: fl exibility; scalable systems for varying mail volumes; cost-effectiveness; competitive pricing structure with reduced costs; responsiveness resources and infrastructure can cope with any demand; supportiveness excellent customer support from knowledgeable account managers; and reliability commitment to quality for complete peace of mind. As part of PDC s mail usage review, did the company consider the use of alternative media, such as email or internet communications, instead of postal mail? What was the outcome? PDC does not use email for the majority of its communications, as due to the nature of the debt collection market, the company only has access to debtors postal addresses. OVERVIEW OF THE POSTAL MARKET 29

Case study (continued) What would PDC recommend other mail customers to consider when reviewing their mail use? PDC feels that it is important for organisations to feel that their outsourced postal providers are very trustworthy in terms of security, reliability and charging. In short, the company feels that operators should deliver their promises. Source: Postcomm interview with Past Due Credit, contacted via TNT Post. Hybrid mail Hybrid mail is a service that allows customers to send data to a hybrid mail provider who prints, envelopes and delivers the mail item for the sending customer. Although hybrid mail can be used for all types of post, it is especially relevant in providing competitive choice for small- and medium-sized mailers. The nature of the service allows customers to send small volumes of mail to hybrid operators, which are then consolidated with other customers mail, allowing even small mailers to benefi t from access competition. Figure 2.7 shows the steps involved in sending hybrid mail when using Royal Mail for transporting the mail. Figure 2.7 Hybrid mail Electronic sorting of documents to print location. Some operators sort this to the print site nearest to the delivery address. Hybrid mail operator prints and envelopes documents. Mail is physically transported to Royal Mail. Mail arrives at the nearest mail centre for delivery sorting. User composes documents using word processing software and sends via secure link to hybrid mail operator. Mail delivered by Royal Mail to recipient. Source: Postcomm 30 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Operators are forecasting that customers could make savings of up to 40 per cent on their mail expenditure. 39 Hybrid mail is also seen as a green option, as physical transportation can be reduced greatly if mail items are printed by the hybrid operator as close as possible to their end destination. During 2007 and 2008 there have been several developments in the hybrid mail sector. UK Mail s i-mail service will offer customers a fi rst class, next-day delivery service via a variation to its access agreement that allows them later access to Royal Mail s mail centre network. TNT Post is trialling its TNT-it hybrid mail service, which offers solutions to mailers in four categories: TNT-it SME, TNT-it Mail Merge, TNT-it Accountancy and TNT-it Pro. There are also several operators, who do not need a postal services licence, offering only hybrid mail products, including: PrintSoft/DeskDirect Global, a subsidiary of Australia Post; ViaPost, a UK-based company that launched in late 2007; and PDQit, which was set up in 2005 and is owned by Sureprint Ltd. Some of these operators who do not have their own print networks are building relationships with printers and mailing and fulfi lment houses around the country. ViaPost is working with marketing services agency Publicis Dialogue to contract printers across the country. DeskDirect Global is working with Inkfi sh and licensed mail operator Document Outsourcing Ltd to provide its hybrid mail offering. 39 www.thestrategyworks.com/articles/print_and_post.html OVERVIEW OF THE POSTAL MARKET 31

Social mail Royal Mail estimates that personal communications via mail have declined by around 5 per cent in total over the last 3 years. Postcomm estimates a decline of around 3.6 per cent over the same period. 40 However, research conducted by market intelligence company Key Note shows that the greetings card market was worth 1.4 billion in 2006, and is predicted to continue to grow at a rate of between 1.9 per cent and 2 4 per cent per year between 2007 and 2011. 41 Latest information from Royal Mail s survey of 1,000 households shows customers are sending around 135 million postcards each year an increase of 30 million compared with five years ago. 42 As yet, competitive choice has not developed for social mail users who rely on Royal Mail for their postal services. Some hybrid mail operators have expressed the possibility of expanding their hybrid service to domestic customers. This could be of particular interest to vulnerable or geographically isolated social customers who fi nd it diffi cult to get to a postbox or post offi ce. It is possible that the decline in social mail could be slowed by the use of new technology and the blending of traditional mail with new media. There are now several websites where customers can design personalised greetings cards online and then mail them to recipients. Hitwise, the online competitive intelligence service, reported in February 2008 that searches for the name Moonpig (one of the leading online card suppliers) doubled year-on-year during the four weeks ending 2 February 2008, as people searched for Valentine s cards online. The success of Moonpig and other similar sites illustrates just how popular online card delivery sites have become. Robin Goad, Director of Research for Hitwise 43 There is also evidence of mobile phone technology and mail working together, with Vodafone offering its customers a service where they can send a picture message to be printed and sent as a postcard to a recipient of their choice. 40 Postcomm s second submission to the independent review. 41 www.researchandmarkets.com/reports/c75453 42 The Times, Forget texting, a gloating postcard is still best for saying we re having a lovely time, 17 July 2008. 43 www.hitwise.co.uk/press-center/hitwisehs2004/valentines.php 32 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Fact box: Mail in a digital world Households with internet access receive more mail than those without Ireland: 73 per cent more mail UK: 67 per cent more mail USA: 51 per cent more mail The number of email messages sent in North America is predicted to decline Business emails from 2 trillion in 2005 to 1.8 trillion in 2009 Personal emails from 1.2 trillion in 2005 to 0.9 trillion in 2009 Source: Charting a Future for Mail through Innovation, Pitney Bowes presentation to Postcomm, 1 October 2007 OVERVIEW OF THE POSTAL MARKET 33

A YEAR-IN-MAIL TIMELINE October 2007 Postcomm publishes revised proposals on Royal Mail s redirections service Communication Workers Union national strike against Royal Mail Royal Mail obtains injunction banning further scheduled strikes, and enters talks with the Communication Workers Union, with the strike coming to an end December 2007 Postcomm welcomes Government s independent review of the postal market Postcomm proposals aim to simplify Royal Mail s compensation schemes Postcomm rejects Royal Mail s retail zonal pricing application made on 5 July 2006, a decision made broadly for the reason that Postcomm is not satisfi ed that the change would be introduced in a manner that avoids unreasonable changes to users, and because it involves discrimination January 2008 Postcomm launches access review consultation focusing upon the current framework under Condition 9 of Royal Mail s licence and the operation of access agreements Postcomm consults on complaint handling and redress schemes for licensed postal operators Postcomm announces simplifi cation of licensing framework (see Chapter 3) Postcomm asks for views on the regulatory framework for postal services from 2010 Postcomm publishes decision document on its Interim Review of 2006/10 Price Control, confi rming August 2007 proposals that Royal Mail should be given extra fl exibility to increase some retail prices and that access margins should be left unchanged Second anniversary of the liberalisation of the UK postal market February 2008 Postcomm consults on Royal Mail s request for exemption from some publication requirements for its Tailor Made Incentives Revocation notice for Challenger Security Services (Admin) Limited Postcomm consults on Royal Mail s request for exemption from prenotifi cation requirements for its Parts Express Service Court of Appeal upholds 9.62 million fi nancial penalty imposed on Royal Mail for failing to adequately protect the mail in its care Proposed changes to notifi cation requirements for Royal Mail s Special Delivery on account service Postcomm publishes its decision to reject Royal Mail s retail zonal pricing application 34 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

March 2008 Postcomm publishes forward work plan for 2008/11 Postcomm approves Royal Mail s application to reduce additional levels of compensation that a customer may purchase from the Special Delivery Next Day service to 500 Postcomm issues a new licence to Document Outsourcing Limited April 2008 Postcomm publishes criteria for approval of redress schemes for licensed postal operators Postcomm publishes policy on fi nancial penalties Postcomm seeks views on barriers to competition over the fi nal mile Postcomm issues a new licence to LDS Cambridge Limited Postcomm publishes fi nal proposals on Royal Mail s compensation schemes Postcomm formally advised that Royal Mail intends to seek a judicial review of the regulator s decision to reject the company s recent retail zonal pricing application May 2008 Postcomm consults on repeating the suspension of Royal Mail s bulk compensation scheme and adjustment to the C factor to 2008/09 Postcomm agrees changes to Royal Mail s retail compensation schemes Postcomm puts forward its second submission to the independent review of the postal services market Postcomm issues a new licence to Peoplepost Independent review panel publishes its emerging views from the fi rst part of its review of the postal services market Royal Mail submits its case on quality-of-service failures in 2007/08 June 2008 Postcomm publishes proposed complaint handling regulations Postcomm publishes its Annual Report for 2007/08 July 2008 Postcomm appoints Tim Brown as its new Chief Executive Postcomm issues new licence to Mr Wesley Pollock (trading as Scotpost) Postcomm approves IRDS Ltd to run a redress scheme for licensed postal services August 2008 Postcomm agrees Royal Mail s new retail compensation arrangements Postcomm publishes its observations on a Royal Mail proposal to charge its zonal access price structure OVERVIEW OF THE POSTAL MARKET 35

3 DEVELOPMENT OF COMPETITION This chapter looks at how competition has developed in the postal market, focusing on developments from alternative licensed operators. The fi rst section focuses on developments within the access and delivery areas of the market, including emerging business models and new services offered. The fi nal section investigates the role of private equity and other mail-related businesses in the market. As of September 2008 there are 22 licensed operators including Royal Mail. The alternative operators are: Citipost AMP Ltd; City Link Post (trading name of Target Express Parcels); CMS (trading name of Royale Research Ltd); DHL Express (UK) Ltd 44 (formerly Securicor Omega Express); DHL Global Mail (UK) Ltd; Document Outsourcing Ltd; DX Network Services Ltd; FedEx UK Ltd (formerly ANC Ltd); 44 Securicor Omega Express has been acquired by DHL Express. It holds an interim licence which allows it to provide internal mail services for two clients in the banking sector. It is therefore not included in any of the following analysis. 36 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Intercity Communications Ltd (trading as Mailhandlers/Southbank International); LDS Cambridge Ltd; Lynx Mail (trading name of Red Star Parcels Ltd); PeoplePost Ltd; Post 123 (trading name of Mr Aaron Leitner); Racer Consultancy Management Services; Scotpost (trading name of Mr Wesley Pollock); Secure Mail Services Ltd; Secured Mail Ltd; The Mailing House Group Ltd (trading as Northern Mail); TNT Post UK Ltd; UK Mail Ltd (UK Mail is a wholly owned subsidiary of Business Post plc); and Zip Mail Ltd. Licensing review As the market regulator, Postcomm issues licences to operators to convey mail. The licensing framework in place since January 2006 is designed to ensure that the multioperator market works effectively, while balancing the need to encourage new entrants to the mail market with Postcomm s responsibility for protecting customers interests. In January 2008, following consultation with stakeholders, the licensing framework was amended with the intention of facilitating market entry for small and medium-sized operators. Key features of this alteration include: the removal of the annual fee (formerly 1,000) for all licensees with a turnover of less than 10 million per annum in the licensed area; the reduction of the application fee (formerly 1,000) to 50 for all applicants; the removal of the requirement for applicants to provide, as part of the application process, information on exactly how they would comply with Postcomm s mandatory mail integrity code; and the removal of the requirement for both existing licensees and future applicants to provide a fi nancial guarantee. DEVELOPMENT OF COMPETITION 37

As part of its regulatory framework consultation, Postcomm will be conducting a more fundamental review of the licensing regime and its format post 2010. Market entry/exit In December 2007 Secure Mail Services Ltd, a disguised mail service provider, acquired the share capital of Challenger Security Services Ltd, another licensed operator which had provided similar services. On 26 March 2008 Postcomm revoked with consent the licence for Challenger Security Services Ltd, and the two companies now operate under the Secure Mail Services Ltd licence. In January 2008 DHL Global Mail (UK) Ltd notifi ed Postcomm that it was to withdraw its UK business-to-business (B2B) delivery service, known as Citispeed (previously licensed as Speedmail International). The service had been providing an end-to-end delivery service to business customers in 22 postcode areas in London. The decision was taken for commercial reasons by DHL Global Mail (UK), relating to what it perceived to be a lack of profi table opportunities in the marketplace. Following the changes noted earlier to the licensing framework, Postcomm has granted postal licences to the following mail operators: 13 March 2008 Document Outsourcing Ltd 2 April 2008 LDS Cambridge 1 May 2008 Post 123 (trading name of Mr Aaron Leitner) 8 May 2008 PeoplePost Ltd 24 July 2008 Scotpost (trading name of Mr Wesley Pollock) All of the above are small or medium-sized enterprises, with Post 123 and Scotpost operating as sole traders. Further information on these licensees is available later in this chapter. Market share Access Operators and large customers can apply to Royal Mail for access to its delivery network. Table 3.1 shows the numbers of access agreements, organised by type, that are in place as of August 2008. 38 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Table 3.1 Number of Royal Mail delivery network access agreements Agreement type Customer direct access agreements Operator access agreements (agency agreements) National 13 8 (4) Zonal 2 10 (5) Source: Royal Mail, August 2008 Access competition continued to grow in 2007/08, accounting for 21.2 per cent of Royal Mail s delivered volumes (up from 12.4 per cent in 2006/07). 45 This represented 4.1 billion items delivered by Royal Mail through downstream access (DSA) agreements. In the four months from April to July 2008, access mail represented 27 per cent of licensed area mail volumes. In 2007/08 access mail was split roughly 50/50 between customer and operator agreements. However, the fi rst fi ve months of 2008/09 show a split of 60 per cent operator access to 40 per cent customer direct access. Figure 3.1 shows total access volumes by month since 2005/06. Figure 3.1 Total access mail volumes 2005/06 2008/09 Monthly access mail volume (millions) 500 450 400 350 300 250 200 150 100 2008/09 2007/08 2006/07 2005/06 50 0 Period Period Period Period Period Period Period Period Period Period Period Period 1 (April) 2 (May) 3 (June) 4 (July) 5 (Aug) 6 (Sep) 7 (Oct) 8 (Nov) 9 (Dec) 10 (Jan) 11 (Feb) 12 (Mar) Month Source: Postcomm with data from Royal Mail 45 These fi gures show access mail as a percentage of operational volumes. DEVELOPMENT OF COMPETITION 39

Developments in use of access operators In addition to the general increase in volumes of access mail, there is mounting evidence of increased competition between access operators, as some of the largest mail customers are using different access operators for different parts of their mail profi le (for example, direct mail and transactional mail). Mailers have said that this allows them to benchmark the access operators against each other in terms of performance, and to ensure that they are getting the best value from their suppliers. In addition to benefi ting large mailers, access competition is gradually extending to smaller mailers; TNT Post UK recently announced that it had gained its 2,000th SME access customer, having grown its SME customer base from 600 in 2007. It has done this by offering competitive day-defi ned mailing solutions targeted at SME businesses that send over 250 unsorted items per day. 46 UK Mail similarly has targeted SME customers, and hybrid mail services should be particularly relevant to the small mailer customer base. Emerging access models In July 2008, Royal Mail Wholesale announced a new type of access agreement called a mail centre extraction agreement, which allows access customers to design and produce their own international stamps for sale in the UK and delivery to international destinations. Letters and postcards with these stamps can be posted into Royal Mail postboxes or at Post Offi ce branches; the access customer then picks up the mail at the outward mail centre, or can opt to have the items sent to a single UK address by fi rst class post, and is responsible for conveying the items to their international destination. The service is limited to items weighing no more than 20g. There is market interest in similar agreements allowing access to mail centres for extraction of mail for onward delivery in the UK. 46 TNT Post UK press release, 11 August 2008. 40 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Case study Document Outsourcing Ltd Company background Document Outsourcing is a company mainly focusing on transactional mail. Offering an integrated service for customers mailing needs, it aims to help customers achieve cost-effective mailing solutions and was granted a licence in March 2008. It is currently handling access mail for three main types of customer: Local government, where the main communication is to the local population using a zonal access agreement. For example, South Lanarkshire Council uses Document Outsourcing Ltd to issue tax and local benefi t communications to local residents. The service is effi cient, and mail is delivered to recipients the day after Royal Mail receives it. Large national organisations, which transfer data electronically to Document Outsourcing Ltd for printing and onward delivery through the Royal Mail pipeline in distinct postcode areas using a zonal access agreement. This is a hybrid mail model, which has environmental and effi ciency benefi ts as mail is printed and injected into the Royal Mail pipeline closer to the recipient. Scottish-based organisations, which continue to create their own mail to be delivered in the areas covered by Document Outsourcing Ltd s zonal access agreement. Document Outsourcing Ltd currently offers a zonal service as this fi ts its business model, and at present it does not plan to use a national access agreement. It hopes in the very near future to offer its customers further cost savings through the use of walksort sorting. Source: Document Outsourcing Ltd DEVELOPMENT OF COMPETITION 41

Delivery competition Competition in delivery of licensed volumes continued to decine in 2007/08. Alternative operators delivered 26 million items of mail within the licensed area, representing a decline of nearly 15 per cent compared with 2006/07 (which itself saw a decline of 12 per cent on 2005/06). Postcomm considers that the development of competition in delivery is important to provide choice to customers, ensure better quality and drive more competitive prices. At the time of the 2005/06 price control, Postcomm expected that competition in delivery would develop through the establishment of niche delivery models such as geographical or product specialisation, delivering in city centres or two days a week delivery, for example. There is evidence that these businesses are indeed beginning to emerge, and since January 2008 Postcomm has licensed fi ve new operators, some of which intend to start local delivery operations. These developing businesses, some SMEs themselves, intend to bring the benefi ts of delivery competition to SMEs in their local areas, although Postcomm recognises that in the short term these developments are unlikely to have a signifi cant impact on Royal Mail s dominance in fi nal-mile delivery. The following paragraphs provide examples of the various business models emerging in delivery competition. Zip Mail is offering a new delivery service, currently in the London area, called EveryHome. The service is positioned between Royal Mail s Mailsort 3 product and an unaddressed mail service. Mailers purchase contact address details, and then Zip Mail and its agents deliver the personalised addressed or To The Occupier addressed items to every home in a certain street, group of streets or postcode area. The minimum volume for this fl exible delivery service is around 5,000 items. This is aimed at existing unaddressed customers seeking to gain an increased response rate. Post 123, a new postal licence holder, has emerged as a small operator serving a specifi c section of the local community in two postcode areas of Manchester. Post 123 is currently delivering a mix of addressed and unaddressed mail through the same delivery channel. At present the volume is mainly unaddressed mail, but it expects addressed mail deliveries to grow in the future. The current business model involves customers taking their mail to Post 123 on a Wednesday for delivery to recipients on the Friday and Sunday of the same week. This new model could be replicated across the country, with small businesses like Post 123 supporting and working with targeted areas of the population. 42 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

LDS Cambridge has set up a rolling fi ve-day delivery service in Cambridge, leveraging its unaddressed mailing business. Its addressed delivery network is separate from its unaddressed network, but LDS expects to achieve synergies and economies of scale where postcode areas of unaddressed and addressed mail coincide. The Mailing House Group Ltd (trading as Northern Mail) commenced its own end-to-end services for selected postcode areas in the North East in August 2008, offering a complete mailing production, fulfi lment and delivery service to its existing clients. The Mailing House Group has employed 12 staff with experience of mail sorting and handling and is looking to double this number in the future. Currently the services are provided in postcode areas of high penetration for business-to-customer (B2C) mailings, which include customer billing statements and direct mail campaigns. The company is currently delivering only mail that is mechanically sorted to the highest degree possible, needing only one fi nal hand sort before delivery. GPS and web mapping technologies are being used to plan the most effective delivery routes. Early results are very positive, with customer feedback highlighting lower costs, better delivery times, and environmental benefi ts of keeping mail local. The Mailing House Group s growth strategy includes expanding its delivery to additional postcode areas in the North East and providing alternative, cost-effective delivery for local businesses. 47 The following case study of The Gateshead Housing Company is an example of a medium-sized mailer that has reviewed its mailing needs and decided to use three different operators for its differing mail applications. The company has also added a new weekly mailing to its portfolio because of the timeliness of delivery services offered by an alternative operator. 47 Northern Mail (The Mailing House Group Ltd), August 2008. DEVELOPMENT OF COMPETITION 43

Case study The Gateshead Housing Company www.gatesheadhousing.co.uk Company background The Gateshead Housing Company manages 22,000 homes for Gateshead Council. As well as letting homes, providing housing services and managing estate areas, it is carrying out a 330 million Decent Homes programme across Gateshead to bring thousands of properties up to a certain standard. Mailing profile The Gateshead Housing Company currently uses three mailing providers: Citylink for repairs letters, gas servicing reminders and ad hoc mailings, amounting to about 150,000 items in total per year; Royal Mail for small ad hoc mailings from local housing offi ces; and the Mailing House Group for its 25,000 quarterly rent statements and newspaper, as well as the weekly publication HomeChoice its most frequent bulk mailing, sent to a housing waiting list of around 7,000 individuals. Why was the decision made to move its mail from Royal Mail? The primary reasons for the housing company switching some of its mail were cost and what it viewed to be poor customer service. What have been the benefits/experiences of moving to date? The company reports that cost savings have been growing steadily, and that despite a few teething problems such savings have been phenomenal. In addition it has been getting better delivery quality and service than it had previously experienced. This has enabled the company to create a new weekly publication, HomeChoice a time-critical mailing containing important information for clients about homes to let. The Mailing House Group is responsible for this mailing, which would not have been affordable in such volumes under The Gateshead Housing Company s previous pricing regime. It is now the only housing company in its region to provide and mail out such a publication. It goes to print on Monday, is delivered into a mailing house on Tuesday, is posted on Wednesday, arrives on people s doorsteps on Thursday, and people s responses arrive with us on Friday. We had to make sure we would be completely satisfi ed with this service before we went live and it s been really, really good. 44 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

As part of your mail usage review, did the company consider the use of alternative media such as email or internet communications instead of postal mail? What was the outcome? Owing to low internet penetration (only around 30 to 40 per cent of people have access to the internet) and low IT skill levels in the area, moving entirely to webbased solutions is impractical for The Gateshead Housing Company. However, it has offered some applications online for those who do have internet access, and it is currently redeveloping its website with an online content management system. Even once these electronic barriers are surmounted, however, the quarterly tenants newspaper will still exist in some form. It is, in the words of Communications Manager Ian Clarkin, the kind of publication that people look forward to reading, with 98 per cent awareness and 95 per cent of recipients saying that they fi nd it useful. What would the company recommend other mail customers to consider when reviewing their mail use? The Gateshead Housing Company was originally cautious of switching, owing to potential market confusion after the initial opening of the market to competition. However, the intention was always there to make savings and so the company implemented a plan of gradual switching, mainly with regard to its regular mail rather than ad hoc letters. The company advises that it could even just be as simple as giving a mailing provider a set of postcodes that you would want delivered and seeing what savings they might offer you. It s quite easy to do and doesn t take any effort. In addition, it would recommend that organisations use multiple providers for their mailing needs, in order to get the best deals and safeguard against operational diffi culties. What would the company like to see in the mail market in the future? The organisation is excited about the possibility of operators expanding or initiating delivery operations. Its customer base is highly concentrated in certain areas for example, in the town centre there are ten multi-storey blocks with roughly 2,000 people, every single one of which is a client so it would fi nd the availability of such services highly useful. Source: Postcomm interview with The Gateshead Housing Company, contacted via The Mailing House Group DEVELOPMENT OF COMPETITION 45

Operators business models and volumes Table 3.2 gives more information on the licence holders, the services they offer and their customer bases (for those licensees that have provided this information to Postcomm). The inclusion of a licensee in the table is not an endorsement by Postcomm of any operator in particular or any service it offers. The information is intended to improve customers knowledge of alternative licensed operators, and does not include Royal Mail as its services and products are widely understood in the market. Delivered volume Access volume * Volumes are for licensed area mail, as reported to Postcomm by licensees for the fi nancial year 2007/08. Licensees marked N/A received their licence part-way through or after the end of this fi nancial year and therefore no volumes are reported. Under 0.1m 0.1m 1m 1m 10m 10m 100m Over 100m 46 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Table 3.2 Current licensee details Licensee Volumes* Services Customer base Innovation Challenger Security Services (Admin) Acquired by Secure Mail Services Ltd in December 2007 See DX Network Services Ltd and Secure Mail Services Ltd Citipost AMP Limited www.citipost.com admin@citipost.com End-to-end in London, Manchester, Birmingham, Bristol, Edinburgh, Glasgow and Liverpool. Zonal, national and unsorted DSA. Direct mailers, transactional mailers, mailing houses, SMEs all of these B2B for hand delivery, and B2B and B2C for DSA. Zonal, national, unsorted. N/A N/A City Link Post www.city-link.co.uk andrew.hs@city-link.co.uk 0770 231 3423 CMS (trading name of Royale Research Limited) www.cmsnetwork.com steves@cmsnetwork.com Worldwide distribution. Targeting a whole spectrum of businesses. Introduced electronic handheld delivery terminals. DHL Global Mail (UK) Ltd www.dhlglobalmail.co.uk dept_sales@dhlglobalmail. co.uk 0845 600 7678 Current domestic offering consists of DSA sorted and unsorted mail; coverage is national. DHL Global Mail offers a range of international mail services for business customers, details of which can be found on its website. Domestic customer base is drawn from a variety of business sectors, in particular retail services. Its international mail comes largely from the publishing and direct marketing sectors. DEVELOPMENT OF COMPETITION 47

Licensee Volumes* Services Customer base Innovation Document Outsourcing Ltd (DOL) www. documentoutsourcing.com 01698 84 79 79 N/A N/A Receipt, processing, printing and enveloping of critical mail. Clients all over the UK send data on a daily basis, from which invoices, statements, collection letters, pay slips, cheques and remittance advice are created; these are mailed using a variety of postal agencies including Royal Mail, TNT Post, UK Mail and DOL s own Primepost service. DOL processes laser documents and manages print, envelopes and post for a number of clients. It is able to cleanse data to ensure an optimally addressed mailing piece. DOL also provides a service managing gone aways, providing data back to clients so that subsequent inappropriate mailings are not made. Targeting local government, national mailers and Scottish businesses. DOL intends to expand to other regions through partnerships or acquisitions. It also works with data transferred across a virtual network so that mail can be transmitted effi ciently, costeffectively and with minimum effect on the environment. DX Network Services Ltd and Secure Mail Services Ltd www.thedx.co.uk www.securemail.co.uk DX Network Services Ltd: Provides a nationwide post-5pm collection/pre-9am delivery of mail to over 27,000 business customers through a Document Exchange network. In addition, a next-day door-to-door mail delivery service covering every high street and business district is offered every working day. Secure Mail Services Ltd: Provides registered, recorded and disguised postal services for the secure delivery of valuable items such as passports, bank cards, cheque books and event tickets to virtually all UK addresses. DX Network Services: Organisations of all sizes, from SMEs to large corporates, with a regular requirement to send next-day mail to other businesses. Targeting businesses in the legal, fi nancial services, property, professional services, government, publishing and retail sectors. Secure Mail Services Ltd: Banks, government agencies, ticket agents, voucher printers and others. Targeting organisations sending high volumes of valuable or sensitive items to business and residential addresses. DX Network Services Ltd and Secure Mail Services Ltd were brought together to form an end-to-end alternative to Royal Mail. SecureDX a guaranteed and signed for registered mail service delivering to virtually every address in mainland UK and Northern Ireland was introduced in spring 2007. 48 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Licensee Volumes* Services Customer base Innovation Intercity Communications Ltd (trading as Mailhandlers/ Southbank International) www.icityc.co.uk colinc@intercity-comms. co.uk 020 8923 8080 Central London hand delivery business-to-business. The remaining mail goes via Royal Mail. Intercity also has a mailing house function, offering design and printing, data capture, envelope enclosing (machine and manual), polywrapping, inkjet addressing and all other services relating to the preparation of material for distribution. It fulfi ls the role of a one-stop shop if required. Various customers, mainly in the fi nancial research sector. LDS Cambridge Ltd www.ldscambridge.com james@ldscambridge.com 01223 571109 N/A N/A Mail and leafl et delivery within the CB1 5 postcode area. The service is staggered, meaning that mail is delivered over a fi ve-day working period (with some mail delivered the day after collection, some the next day and so on). The organisation hopes eventually to offer a fi rst class service covering the whole of the CB postcode area. Small local businesses mailing marketing material to their existing client bases and prospective clients. Lynx Mail (trading name of Red Star Parcels Ltd) www.ups.com grothery@ups.com 0870 199 8373 C9 DSA postings with Royal Mail providing last-mile delivery for bulk mail.typically mail previously sent as Mailsort, with volumes in excess of 25,000 posting over all UK or just locally. Collection and delivery spread is nationwide, with a fully integrated national hub and UPS/ Lynx collection and delivery fl eet. UPS, the world s largest parcel company, has a full range of express package delivery products. Lynx Mail can assist in accessing all the UPS products and bring together a complete suite of services. Retailers, mail order companies, charities, utility companies and bulk mail users. Post 123 (trading name of Mr Aaron Leitner) 0161 740 1482 N/A N/A Distribution of local charity appeal letters and other mail within the local community, local to local. Residents and members of the local community in the M7 and M25 postcode areas of Manchester. Weekly service combining mail and leafl ets that until now were either delivered privately or posted in Royal Mail postboxes. Scotpost wesp@blueyonder.co.uk 07940 152507 N/A N/A Scotpost plans to expand throughout Scotland at the earliest opportunity. Secured Mail Ltd DEVELOPMENT OF COMPETITION 49

Licensee Volumes* Services Customer base Innovation The Mailing House Group (trading as Northern Mail) www.themailinghouse. co.uk admin@themailinghouse. co.uk 08700 102000 End-to-end. DSA. Consolidation for DSA. Consolidation and collection of unsorted mail. Mail/packet production. Track and trace. Pre-sorting. Undeliverable services. B2B and B2C. End-to-end, local mail delivery and user reply services. TNT Post UK Ltd www.tntpost.co.uk sales@tntpost.co.uk 0808 262 0808 Addressed mail (through access) and unaddressed mail solutions (through own and third-party networks). Large businesses, SMEs, local government, education and the health service. Launch of the UK s fi rst carbon neutral mailing service (to reduce and offset all carbon emissions with mail production and distribution), YourStamp (a customisable stamp label for direct mail that increases response) and TNT-it (a hybrid mail service enabling users to send letters and documents direct from their desktop computer with one click for printing, fulfi lment and posting). UK Mail Ltd www.ukmail.biz ukmailsales@ukmail.biz 0845 230 50 50 Next-day and two-day services for pre-sorted mail. Two-day and three-day services for unsorted mail. i-mail next-day and two-day electronic-to-physical mail. Disguised mail services. Returned mail services. Nationwide coverage. Business mailers of pre-sorted and unsorted mail. Any mail user of electronic-tophysical mail. UK Mail has recently launched its i-mail service enabling any mail user to send electronic-tophysical mail. It also offers specialist services for disguising sensitive mail and processing returned mail. Zip Mail Ltd www.zip-mail.co.uk sales@zip-mail.co.uk 020 7405 7547 UK-wide collection and delivery of mail. Next-day, economy, recorded delivery and foreign post. Mostly SMEs. EveryHome service (see page 42). 50 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Private equity, mergers and takeovers in the UK and Europe The postal market continues to attract private equity investment, and several postal businesses have been involved in mergers, acquisitions and takeover speculation. Mail operators with complementary business models have become the subject of successful acquisitions for example, Challenger Security Services was recently acquired by Secure Mail Services Ltd. In May 2008 Pitney Bowes purchased the international mail division of Citipost. Citipost s international division had shown growth in the previous year, and Pitney Bowes has ambitious growth plans which it hopes to achieve by identifying and capitalising on the synergies between the two companies. Citipost has said that the sale of this arm of the business will allow the company to focus on end-to-end delivery growth in strategic centres worldwide. In August 2008 Secured Mail Ltd, a licensed operator currently handling access mail for insurance and fi nancial services clients, received a capital investment of 1.6 million from private equity fi rm Aquarius Equity Partners. Aquarius Equity Partners manage a 20 million fund investing in businesses across the North of England. Secured Mail Ltd plans to use the investment to grow the business and expand its service offering. Having met Secured Mail in March 2008 we were immediately impressed with their management team. They are exactly what Aquarius looks for; committed managers with a well thought-out business plan, looking for investment and hands-on assistance to take them to the next stage of their business model. We look forward to working with the management team and providing support to help them realise the full potential of the company. Steve Sealey, Aquarius Equity Partners In April 2008 Post Danmark and Posten, the Danish and Swedish postal operators, announced plans to merge their businesses and create a new company. Sweden will own 58.2 per cent of the capital in the new business with Denmark owning 38.8 per cent; the remaining 3 per cent will be owned by the employees. 48 The new company will be stock market listed and with annual revenue of around $7.5 billion. It is expected that the merger will result in cost savings of $170 million a year in areas such as administration, operations and purchasing. 48 International Herald Tribune, Sweden and Denmark to create a postal giant, 1 April 2008 DEVELOPMENT OF COMPETITION 51

The merger has met with some criticism in Sweden, based on the argument that Posten will generate around 70 per cent of the new entity s revenue but hold only 60 per cent of the shares. 49 Erika Olsson, head of Posten, has said that the merger is needed to compete against foreign postal operators such as Deutsche Post, TNT NV and Itella of Finland. Private equity fi rm CVC Capital Partners owns a 22 per cent share in Post Danmark and will jointly hold shares in the new company. Furthermore, as CVC Capital Partners and Post Danmark own a share of just under 50 per cent in the Belgian postal operator De Post La Poste, there has been press speculation that the Belgian operator could become a third party in the alliance. 50 There is also speculation that FedEx, the US parcel and express company, has been in talks with TNT NV about a potential takeover of the Dutch company. In August 2008 there was new speculation that UPS was holding preliminary talks with TNT NV to buy the business for 10 billion. Neither FedEx, UPS nor TNT NV comments on market speculation, so little is known of the nature of any talks that may have occurred. There is speculation that, if such a deal takes place, the mail division of TNT NV could be sold to a private equity or buyout fi rm. Mailing houses, suppliers, brokers and consultants The mail supplier industry continues to expand, and a growing number of companies are emerging to provide mailing customers with services ranging from data provision to mail process outsourcing. Consultants and brokers facilitate competition by providing mailing customers with advice on prices and services from a range of operators whose services are continually expanding. Mail consolidators continue to play an important role in advising customers about different areas of the postal market. In general, consolidators also have a good understanding of international markets, and many have invested in developing economies such as China and India; they can therefore offer advice for mailers hoping to tailor direct marketing campaigns to overseas markets. 51 The French postal operator La Poste has bought BTB Mailfl ight, a UK-based business dealing with mail consolidation, international mail and fulfi lment. La Poste has said that this will be the fi rst of many overseas acquisitions, and that it will use this experience to gain a deeper understanding of the steps preceding fi nal-mile delivery in the UK in order to develop its offering to customers and increase its market share. The move will strengthen La Poste s involvement with the UK postal market, adding to the services offered by its international mail subsidiary La Poste UK. 49 Postcom newsletter, June 2008, www.postcom.com 50 Reuters, 31 May 2008, www.reuters.com/article/rbsstechmediatelecomnews/idusl3115237620080531 51 Global Village The New Super Economies, Mail Consolidators Association (MCA) white paper, June 2008. 52 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

The importance of procurement organisations in the mail decision making process is highlighted in the following case study. In March 2008 Procurement for Housing, a public body which sets up purchasing agreements for housing authorities across the country set up a postal services agreement, described in more detail below. Case study Procurement for Housing www.procurementforhousing.co.uk Company background Procurement for Housing (PfH) is a national purchasing consortium dedicated to the social housing sector. It was launched by the National Housing Federation and the Chartered Institute of Housing, and now has over 635 members collectively managing over 2.8 million homes. Mailing profile PfH analysed its members mailing profi les to identify potential cost savings in postal supply. This research showed that its members send an average of 194 letters per day, each spending an average of 40,856 per year on the stationery, printing, collecting, processing and postal costs involved in sending mail through traditional means. An estimated 80 per cent of the letters sent out were C5 format (small letter), which PfH considered the ideal size for making savings in effi ciency and pricing (in addition to reducing environmental impact) by using hybrid mail. It calculated that using hybrid mail would enable staff to concentrate on core activities rather than spending time collating mailings. PfH decided to set up a purchasing agreement covering both hybrid and traditional mail which would allow its members to benefi t from postal savings. Choice of providers Inkfi sh, TNT Post and Royal Mail tendered for PfH s contract. Inkfi sh, a specialist outsource provider of various mailing services operating in the non-licensed area of hybrid mail, tendered exclusively for the provision of electronic mail. TNT Post and Royal Mail tendered for both traditional and electronic provision, with the latter doing so in partnership with Paragon. The pricing options of each organisation were considered and collated, and PfH then visited the three suppliers premises in order to gain a fuller understanding of how hybrid mail would be produced and how security would be ensured, which was a key concern. DEVELOPMENT OF COMPETITION 53

Case study (continued) The end result PfH awarded contracts to all three suppliers subject to periodic performance reviews. PfH has also kept the option open to reduce the number of suppliers after 12 months. Housing organisations using the postal services agreement can make up to 58 per cent savings on the true cost of sending one letter by using PfH s electronic mail service. Signifi cant savings can also be made on traditional non-hybrid mail, with some prices available through the agreement 40 per cent lower than normal franked fi rst class mail and 13 per cent less than normal franked second class mail. Members have the option of using different operational confi gurations and providers within this agreement, depending upon their needs. To assist in overcoming a perceived cultural diffi culty in moving to hybrid mail, PfH has ensured that all three suppliers will provide training and support throughout the initial process of switching. Source: Postcomm and Procurement for Housing 54 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

The box below contains examples of how some organisations have benefi ted from the use of consultants to help with their mail procurement. OnePost www.onepost.co.uk OnePost is a UK-based independent provider of postal advice and management, using expert knowledge and specialist software to offer cost-saving postal solutions for sorted UK and international mailings, unsorted post, packets and parcels. OnePost has enabled its clients to make considerable savings on mail services. For example: A garden supplies retailer saves around 40,000 on six catalogue mailings per annum, with quantities ranging from 300,000 to 1.7 million items. An online marketing agency has saved around 20,000 on over 100 mailings (including postcards and catalogues) in the last year, with quantities ranging from 4,000 to 320,000 items. A fi rework supplier saves 2,500 per annum on an annual mailing of 500,000 catalogues. A magazine publisher saves 400 per bi-weekly mailing of 26,000 magazines. A building society has saved 1,000 on three batches of 65,000 annual statement mailings. A charity saves 40,000 per annum on 30 mailings of between 10,000 and 250,000 items. A mail order company saves 80,000 per annum on 24 mailings of between 50,000 and 450,000 catalogues. An educational publishing company saves 15,000 per annum on 18 mailings of between 20,000 and 60,000 promotional packs and magazines. A gift supply mail order company saves 80,000 per annum on six mailings of between 500,000 and 1.1 million catalogues. A fi nancial company saves 50,000 per annum on 12 mailings of between 250,000 and 700,000 items. Source: Postcomm and OnePost. DEVELOPMENT OF COMPETITION 55

4 FINANCIAL PERFORMANCE AND QUALITY OF SERVICE This chapter begins by discussing Royal Mail s fi nancial performance, taking information from its 2007/08 regulatory and statutory accounts to examine profi tability, revenue and volumes. It then considers Royal Mail s quality of service and the fi nancial implications of its performance. An update is also given on the Consumers, Estate Agents and Redress Act 2007. Overview Royal Mail Letters is the principal business unit within Royal Mail and is committed, under the licence granted to Royal Mail Group Ltd, to delivering the universal service. The universal service is a series of one price goes anywhere postal services with guaranteed delivery and collection for every UK address, each working day. Royal Mail is the UK s largest mail operator and still delivers over 99 per cent of licensed area mail. However, as discussed in Chapter 3, downstream access volumes continue to rise, and from April to July 2008 accounted for 27 per cent of Royal Mail s total delivered volumes. Royal Mail s fi nancial performance has steadily declined over the last two fi nancial years. As Royal Mail is the provider of the UK s universal postal service, this is of deep concern to Postcomm. Royal Mail s fi nancial performance for the year ended 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 a 136 million profi t to a 3 million loss; this was caused primarily by a fall in revenues driven by falling mail volumes and customers downtrading to cheaper products. For the regulated area, 52 Royal Mail recorded operating losses of 249 million in 2007/08 compared with losses of 86 million in 2006/07. 52 The regulated area comprises the price controlled products (including downstream access) and universal service non-price controlled products. 56 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

The universal service is shown as suffering a loss (of 105 million) for the fi rst time. This is a signifi cant decline on the previous year (when there was a 2 million profi t), with profi ts from fi rst class products and bulk mail failing to offset the losses on second class stamped and meter mail. A key part of the opening up of the postal market for competition has been allowing large mailers and licensed operators access to Royal Mail s delivery network. The signifi cant growth in the use of access products has continued, with access volumes of 4.1 billion items in 2007/08 compared with around 2.4 billion in 2006/07. Royal Mail s 2007/08 fi nancial year was a 53-week period compared to the 52 weeks of the 2006/07 fi nancial year. To give readers a truer understanding of Royal Mail s year-onyear performance, Royal Mail s reported fi gures have been supplemented with a like-forlike comparison. 53 Financial performance Profi tability As shown in Table 4.1, Royal Mail Letters recorded an operating loss (before exceptional items) of 3 million, compared with an operating profi t of 136 million (restated) in 2006/07; this represents a 139 million decrease in profi tability year on year. On a likefor-like basis, Royal Mail Letters revenue fell by 123 million (around 2 per cent), with costs rising by 18 million. Table 4.1 Royal Mail profi tability by business area Operating profi t/(loss) before exceptionals 2006/07 (restated) 2007/08 Change Universal service 2 (105) (107) Price controlled area (69) (201) (132) Regulated area (86) (249) (163) Royal Mail Letters 136 (3) (139) Source: Royal Mail 2007/08 regulatory accounts 53 The like-for-like compares the 2006/07 results over 52 weeks adjusted to refl ect a 53-week fi nancial year, using Royal Mail s working day methodology as outlined in the regulatory accounts. FINANCIAL PERFORMANCE AND QUALITY OF SERVICE 57

Royal Mail s profi ts across formats, classes of mail and products vary widely. The following analysis is based on Royal Mail s regulatory accounts (Parts 1 and 2 of which are available on Royal Mail s website 54 ). Overall, Royal Mail s regulatory accounts report losses on fi rst and second class mail (stamp, meter and printed postage impressions (PPI) of 68 million compared with a loss of 42 million in 2006/07. 55 Although fi rst class mail made a profi t of 73 million ( 109 million in 2006/07), this was offset by losses on second class of 141 million (losses of 151 million in 2006/07). As stated above, the universal service incurred a loss for the fi rst time in 2007/08. Within the universal service the profi ts from fi rst class products (stamp and meter), bulk mail 56 and other products of 15 million, 16 million and 12 million respectively failed to offset the signifi cant loss on second class stamp and meter of 148 million. At the product level, some products such as fi rst class meter, Special Delivery, universal service parcels and Airmail public tariff services are profi table, but the profi t failed to offset losses on other products such as fi rst class stamp, free services, incoming international mail and both the second class stamp and meter services. Mail volumes Table 4.2 Royal Mail s addressed inland letters market by volume Total volumes 2006/07 (million) Total volumes 2007/08 (million) Like-for-like volume growth/ shrinkage 57 Royal Mail end-to-end 58 18,229 16,290 (12)% Total alternative provider access 1,148 2,337 101% Customer direct access 1,292 1,754 34% Total access 2,442 4,091 65% Total 20,671 20,381 (3)% Other operators end-to-end licensed area mailings 31 59 26 (15%) Source: Postcomm with data from Royal Mail and alternative operators 54 www.royalmailgroup.com/portal/rmg 55 This excludes some minor non-price controlled products, being 0.2% of volumes. 56 Bulk mail includes Mailsort and Cleanmail. 57 As per note 53, applied to Royal Mail results only. 58 Royal Mail end-to-end has been re-defi ned to include the Other letter products category shown in equivalent table of the 2007 Competitive Market Review. 59 Figures for 2006/07 have been rebalanced to exclude DX Network Services magazine fi gures which were reported as licensed area last year; however, these are now known to fall outside the licensed area. 58 58 COMPETITIVE MARKET REVIEW UK POSTAL MARKET 59

As Table 4.2 shows, Royal Mail s addressed inland letters market 60 suffered a 3 per cent decline on a like-for-like basis in 2007/08. The loss in volumes was driven by a 12 per cent year-on-year fall in the end-to-end segment. However, there are variations in terms of rate and direction of growth within the overall fi gures: both the fi rst and second class standard tariff volumes 61 fell by 8 per cent like for like; bulk mail (including Mailsort, Cleanmail and Walksort) volumes within the price controlled area fell by 21 per cent on a like-for-like basis. This fall was primarily a result of the continued move of mail to upstream competitors volumes for total bulk mail (Mailsort, Cleanmail, Walksort and access) are fl at on a like-for-like basis; Presstream volumes fell by 16 per cent like for like; and Special Delivery volumes fell by 2 per cent on a like-for-like basis. Including international mail, total addressed mail volumes in the Royal Mail Letters business 62 decreased by around 2 per cent to 21.5 billion items in 2007/08, from 21.9 billion items in 2006/07; this was equivalent to a 3 per cent fall on a like-for-like basis. Revenue Despite an increase in prices in the price controlled area (which accounts for approximately 85 per cent per cent of total Royal Mail Letters revenue) of around 5 per cent, Royal Mail s total mail revenue fell from 6,788 million in 2006/07 to 6,744 million in 2007/08. This represents a 2 per cent decline on a like-for-like basis and was driven by both lower volumes and a change in the mix of products demanded by customers. This seems to indicate that mail customers are sensitive to the effect of price increases and are increasingly shopping intelligently for lower-priced items that better suit their requirements or selecting alternative forms of communications media. Revenue within Royal Mail s addressed inland letters market fell from 5,943 million in 2006/07 to 5,903 million in 2007/08, driven by a 6 per cent like-for-like decline in the end-to-end segment. 60 Royal Mail s addressed inland letters volumes are total mails excluding door-to-door and international services. 61 The fi rst class standard tariff includes fi rst class stamp, meter and PPI; the second class standard tariff includes second class stamp, meter and PPI. 62 Volumes fi gures are total operational volumes for the mail business, excluding door-to-door. This measure includes all regulated and unregulated mail items of all classes and weights. FINANCIAL PERFORMANCE AND QUALITY OF SERVICE 59

Table 4.3 Royal Mail s addressed inland letters market by revenue Total revenue 2006/07 ( million) Total revenue 2007/08 ( million) Revenue growth/ (shrinkage) Like-for-like revenue growth/ (shrinkage) Royal Mail end-to-end 5,616 5,333 (5)% (6)% Total access 327 571 74% 72% Total 5,943 5,903 (1)% (2)% Source: Postcomm with data from Royal Mail The revenues of the price controlled area fell by 112 million year on year (3 per cent on a like-for-like basis). Apart from access, each of the major product groups showed a decline in revenue: fi rst class standard tariff revenues fell by 4 per cent like for like; revenues for second class standard tariff fell by 5 per cent on a like-for-like basis; bulk mail revenues were down by 18 per cent like for like; and access revenues grew by 72 per cent on a like-for-like basis. Royal Mail and competition Figure 4.1 Access volumes as a percentage of total bulk mail volumes 2005/06 12 Financial year 2006/07 24 2007/08 39 Source: Postcomm with data from Royal Mail regulatory accounts 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Access volumes as a percentage of total bulk mail 60 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Royal Mail is facing increased access competition; the three largest licensed access operators are UK Mail, DHL Global Mail and TNT Post UK. Access volumes grew strongly and in 2007/08 reached 39 per cent of total bulk mail 63 volumes. Royal Mail s average unit price increase across the various bulk mail classes and access has been below the average price increase for the price controlled area for two years, and indicates that the increase in access competition may have acted as a constraint on Royal Mail s bulk mail prices. Figure 4.2 2005/06 2007/08 average unit price for bulk mail and access 0.25 Average unit price ( ) 0.20 0.15 0.10 2007/08 2006/07 2005/06 0.05 0.00 Bulk mail Product group Access Source: Royal Mail 2007/08 and 2006/07 regulatory accounts There is only one UK-based mail operator that publishes detailed fi nancial fi gures: UK Mail. Therefore, we include just UK Mail alongside Royal Mail below. 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. 64 63 Total bulk mail defi ned as Access, Mailsort, Cleanmail and Walksort. 64 The other principal licensed access operators DHL Global Mail, DX Network Services Ltd and TNT Post UK do not provide published fi gures on their UK mail divisions fi nancial performance. FINANCIAL PERFORMANCE AND QUALITY OF SERVICE 61

Table 4.4 Comparison of 2007/08 fi nancial performance for Royal Mail and UK Mail Royal Mail Universal service Price controlled area Letters UK Mail 2007/08 revenue ( million) 3,373 5,847 6,936 137.3 Like-for-like revenue growth/(shrinkage) (3.8)% (3.2)% (1.7)% 52.0% 2007/08 costs ( million) 3,478 6,048 6,939 127.3 Like-for-like cost growth/(shrinkage) (0.8)% (1.0)% 0.3% 51.7% Operating profi t/(loss) before exceptional items (105) (201) (3) 10 Year-on-year profi t/(loss) growth (5,350)% (191)% (102)% 56% Source: Royal Mail 2007/08 regulatory accounts and Business Post 2007/08 statutory accounts (UK Mail is a wholly owned subsidiary of Business Post plc) Royal Mail s quality of service Royal Mail s quality-of-service targets are specifi ed in its licence. Royal Mail is required to achieve set performance standards for end-to-end transit times for fi rst and second class stamped and meter mail, fi rst and second class bulk mail, third class bulk mail, standard parcels, Special Delivery, and European international outbound. Postcode area performance is measured according to the performance of fi rst class stamped and meter items delivered next day in the postcode area to which they are addressed. Additionally, Royal Mail has to meet targets for the percentage of collections and deliveries completed each day and the percentage of items delivered correctly. Table 4.5 shows Royal Mail s performance compared to the targets set out in its licence. In 2006/07 Royal Mail achieved 11 out of its 12 targets, compared to 10 out of 16 in 2005/06. However, in 2007/08 Royal Mail failed 9 of its 12 targets. Many of the qualityof-service failures happened because of industrial action that occurred as a result of Royal Mail undertaking transformation activities; this undermined Royal Mail s ability to deliver mail to the required standards. 62 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Table 4.5 Royal Mail s quality of service in 2007/08 Services Target Performance Difference against target First class stamped and meter 93.0% 85.2% 7.8 Second class stamped and meter 98.5% 95.7% 2.8 Bulk fi rst class 91.0% 83.4% 7.6 Bulk second class 97.5% 93.9% 3.6 Bulk third class 97.5% 96.7% 0.8 Standard parcels 90.0% 90.4% 0.4 European international delivery 85.0% 92.4% 7.4 Special Delivery (next day) 99.0% 97.8% 1.2 PCAs delivering 91.5% fi rst class mail next day 118 0 118 % collection points serviced each day 99.90% 97.76% 2.14 % delivery routes completed each day 99.90% 97.35% 2.55 % items delivered correctly 99.50% 99.66% 0.16 Source: Postcomm with data from Royal Mail Table 4.6 and Figures 4.3 and 4.4 illustrate Royal Mail s performance in fi rst and second class stamped and meter mail over the last fi ve years. Royal Mail performed above target levels for these products in 2006/07, but failed to meet its targets in 2007/08. Table 4.6 Royal Mail s performance in fi rst and second class mail, 2003/04 to 2007/08 Standard First class stamped and meter mail delivered next working day Target 2003/04 2004/05 2005/06 2006/07 2007/08 Target Target Target Target Performance Performance Performance Performance Performance 92.5% 90.1% 92.5% 91.4% 93.0% 94.1% 93.0% 94.0% 93.0% 85.2% Second class stamped and meter mail delivered within three working days 98.5% 97.8% 98.5% 98.5% 98.5% 98.8% 98.5% 98.9% 98.5% 95.7% Source: Postcomm with data from Royal Mail FINANCIAL PERFORMANCE AND QUALITY OF SERVICE 63

Figure 4.3 Royal Mail s fi rst class stamped and meter performance Percentage of letters delivered next working day 96% 94% 92% 90% 88% 86% 84% 82% Target Performance 80% 2003/04 2004/05 2005/06 2006/07 2007/08 Source: Postcomm with data from Royal Mail Figure 4.4 Royal Mail s second class stamped and meter performance Percentage of letters delivered within three working days 100% 99% 98% 97% 96% 95% 94% 2003/04 2004/05 2005/06 2006/07 2007/08 Target Performance Source: Postcomm with data from Royal Mail 64 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

In addition to the above targets, Royal Mail is required to measure and publish the percentage of deliveries that are made each day by the published latest delivery times, and the percentage of fi nal collections made from postboxes or post offi ces at or after the advertised fi nal collection times. Although targets are not set in Royal Mail s licence for these measures, performance is monitored by Postcomm and Royal Mail. Table 4.7 Royal Mail performance on collection and delivery times 2006/07 2007/08 Deliveries completed each day by latest delivery times (rural/urban) 99.7%/99.5% 99.7%/99.0% Collections completed each day at or after advertised times 97.9% 98.6% Source: Postcomm with data from Royal Mail Financial implications of poor quality of service in 2007/08 In June 2007 Postcomm received a request from Royal Mail to suspend the bulk mail compensation scheme and to adjust the C factor 65 for those periods of 2007/08 when Royal Mail considered that its quality-of-service performance was adversely affected by its employees transformation-related industrial action. Postcomm held an open meeting in May 2008 and invited stakeholders to give their points of view on Royal Mail s application. Postcomm then assessed the application and published its decision in August 2008. Postcomm largely accepted Royal Mail s application. As a result, Royal Mail will forgo 21.6 million of allowed revenue (owing to the C factor) because of poor quality-of-service performance during the year which Postcomm is not satisfi ed was caused by industrial action, but bulk mail customers will not receive compensation. If Postcomm had not accepted the application, Royal Mail would have had to pay around 77 million in bulk mail compensation to customers and would have forgone around 91 million in allowed revenue. If Royal Mail s application had been accepted in full, Royal Mail would still have forgone 12 million of allowed revenue because of its poor postcode area performance. In August 2008 Postcomm made a decision on Royal Mail s request to repeat these arrangements in 2008/09. Postcomm has agreed, provisionally, to Royal Mail s request. However, it will consider a wider range of factors in reaching a fi nal decision on relief at the end of the year, such as Royal Mail s communications with customers during strikes and the relationship between Royal Mail s performance and the incentive payments it makes to staff. 65 The C factor is one of several adjustments that may be made to Royal Mail s allowed revenue under the price control. Royal Mail may lose allowed revenue and customers may thereby get lower prices if Royal Mail s quality of service has been below target in the previous year. FINANCIAL PERFORMANCE AND QUALITY OF SERVICE 65

In addition to these decisions, Postcomm decided after extensive consultation to remove the regulated bulk mail compensation scheme for delay from 1 April 2010. The main reasons for removing this compensation scheme for delayed bulk mail are: in the developing competitive market it is more appropriate to move towards marketdriven outcomes; removing the scheme will allow customers to negotiate compensation schemes that suit their own needs; and the current scheme does not necessarily target those customers who have suffered poor performance. The Consumers, Estate Agents and Redress Act 2007 The Consumers, Estate Agents and Redress Act 2007 ( the CEAR Act ) was given Royal Assent in July 2007 and changes the current framework for consumer advocacy. The CEAR Act abolishes the current Consumer Council for Postal Services ( Postwatch ) from 30 September 2008 and establishes a new consumer advocacy body, the National Consumer Council (to be known as Consumer Focus ). The CEAR Act places a statutory requirement on Postcomm to make regulations on complaint handling standards. The regulations associated with the Act require a licensed provider of postal services, from the time it begins providing licensed postal services, to have in place, publish and comply with a procedure for handling consumer complaints from receipt through to completion. Because of these changes, Postcomm needs to make licence modifi cations to postal operators licences to refl ect the new complaint handling standards and the transfer of functions from Postwatch to Consumer Focus. Postcomm has consulted on these changes and is currently reviewing responses to the consultation. The CEAR Act also allows for the Secretary of State for Business, Enterprise and Regulatory Reform to require regulated postal operators to belong to a Postcommapproved redress scheme. Postcomm has approved IDRS Ltd s application to run a redress scheme for postal services. For more information on this work, see www.psc.gov.uk/policy-and-consultations/ consultations/consumers-estate-agents-and-redress-act-the-cear-act.html on Postcomm s website. 66 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

5 MARKET COMPARISONS AND EXTERNAL DYNAMICS This chapter begins by reviewing developments in the mail markets across Europe, highlighting key changes and trends. The second section looks at other regulated markets in the UK and how they have developed following liberalisation. The chapter then gives an overview of the concerns surrounding mail and the environment, and ends by examining the latest developments on VAT. International comparisons Mail volume trends Overall mail volumes across the European Union (EU) now appear to be declining slightly but with sometimes signifi cant differences between EU member states. Despite this overall decline, some postal segments continue to grow, although the bulk of the growth tends to come from operators other than the universal service providers. For example, German mail volumes in the licensed area increased from 16.6 billion items to 17.4 billion items between 2003 and 2006, while licence holders competing with Deutsche Post grew their volumes from 0.5 to 1.6 billion items over the same period. 66 Given that the vast majority of the letter mail traffi c carried by licence holder competitors to Deutsche Post is for higher-quality services, 67 it is possible that without such services the overall growth of the market would be constrained as such mail would not all automatically be carried by Deutsche Post. The growth in competitive services that are differentiated from the incumbent postal operator s services in countries such as Germany may therefore be helping to ensure that overall volumes remain stable or fall less than they otherwise would. 66 Mail Trends Update, Pitney Bowes research project The Future of Mail background paper No. 2008-1, February 2008. 67 Ninth Market Study: Letter Market, Bundesnetzagentur, April 2006, Table 2.2, Revenue generated by licence holders. MARKET COMPARISONS AND EXTERNAL DYNAMICS 67

Figure 5.1 and Table 5.1 show the compounded annual growth rate (CAGR) in addressed and unaddressed mail volumes across Western Europe, Canada and the USA between 1995 and 2000, and the year-on-year growth rate between 2005 and 2006 (in billions of items). 68 Figure 5.1 Percentage volume growth by national postal operator (includes unaddressed items delivered by national postal operators) Percentage volume growth 5% 4% 3% 2% 1% 0 1% 2% 2.0 1.1 3.0 3.0 3.0 1.5 1.6 4.0 0.1 3.8 3.0 0.7 1995 2000 CAGR 2005 06 growth 3% 4% 2.6 3.0 5% France UK Germany Netherlands Italy Canada USA Source: Mail Trends Update, Pitney Bowes, February 2008 68 Mail Trends Update, Pitney Bowes, February 2008. 68 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Table 5.1 Volume of Items delivered by national postal operators Country 1995 (billion items) 2000 (billion items) 2005 (billion items) 2006 (billion items) France 25 27 27.8 27.5 UK 19 22 24.3 23.9 Germany 19 22 22.4 21.9 Netherlands 7 8 10.5 10.4 Italy 5 7 7.1 7.1 Sweden 6 6 5.5 5.7 Spain 4 5 5.4 5.5 Switzerland 5 5 5.3 5.2 Austria 4 5 5.1 5.2 Belgium 6 5 4.1 4.1 Denmark 2 3 3.3 3.3 Finland 2 3 2.7 2.7 Norway 2 3 2.4 2.4 Others in Western Europe 2 3 3.4 3.5 Western Europe total 109 122 128 128 Canada 12 10 11 11 USA 181 208 212 213 Source: Mail Trends Update, Pitney Bowes, February 2008 Within the movements in total mail volumes, increased down-trading to cheaper and slower (but not necessarily lower-quality) services, the amalgamation of mailings and the use of pre-sorting and presentation discounts have been observed at differing paces across the EU. Many of the trends in mail applications noted in the UK are mirrored across other European countries. Direct mail, for example, which used to be the engine of growth for the letters business when the advertising market as a whole was stronger, has stagnated or reduced while the growth in the overall advertising market remains positive. This is a sign of a change in the advertising mix, with internet advertising the chief benefi ciary. Electronic substitution has also had an impact on direct and transactional mail. However, the growth in packets remains generally strong. MARKET COMPARISONS AND EXTERNAL DYNAMICS 69

The Pitney Bowes Mail Trends Update 69 also shows that correspondence and transactional mail fell in Western European countries between 2000 and 2006 by around 0.6 per cent a year. On the other hand, addressed direct mail registered a compound annual growth rate of 3.1 per cent, with most of the growth occurring between 2000 and 2003. Unaddressed mail registered a similar annual growth rate between 2000 and 2006 of 2.7 per cent. Whereas overall mail growth rates of 2 per cent a year were common for most of the last four decades, average annual growth rates of 0.5 per cent were observed over the period 2000 2006. 70 Growth of addressed and unaddressed mail was mainly positive between 1995 and 2005, but the fi gures for 2005/06 show that only Sweden, Spain and Denmark experienced slight mail volume growth. In Sweden, the dynamic competitive market and the continued strong growth of the overall letter mail market can be partly explained by the strong growth of the main private operator, City Mail, and a more responsive offering for direct mail and related services by the incumbent, Posten. Posten s volumes are largely fl at: 2,925.5 million items in 2006 compared with 2,949.7 million items in 2005. 71 As in Germany, this points to the growth in the market being mainly driven by alternative operators such as City Mail. Post Danmark has undertaken extensive modernisation in automation, operational restructuring and its service offering in recent years. Spain, with historically lower mail volumes per capita, has also invested signifi cantly in automation. A government decree in late 2006 established the right of independent postal operators to negotiate conditions of access to the public postal network with the universal service provider, Correos. Following this decree, Correos recently signed access agreements with four private postal companies working in specifi c regions of Spain. 72 All of these developments have helped to sustain mail volumes in these countries. The gradual slowing of growth in most other countries, which in some cases resulted in decline by 2005/06, was driven by a drop in transactional and addressed advertising mail. However, the substitution effects of increased emailing and use of the internet have not so far been signifi cant for mail which, per capita, remains stable. 69 www.upu.int/news_centre/2008/en/paper_2008-02-01_pitney-bowes_en.pdf 70 Mail Trends Update, Pitney Bowes, February 2008. 71 The Liberalised Swedish Postal Market: the situation 14 years after the abolition of the monopoly, Post & Telestyrelsen (Swedish National Post and Telecom Agency), Postal Affairs Department, March 2007. 72 www.correos.es/comun/informacioncorporativa/desarrollonoticias.asp?id=514&idnodo=desarrollonoticias 70 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Table 5.2 illustrates the differences between Western European countries in terms of letter volume received per inhabitant, which ranges widely from 55 items per person in Greece to 574 in Norway. Table 5.2 Number of letter items per inhabitant per year Country Letter items per inhabitant per year Greece 55 Italy 119 Austria 124 Spain 127 Ireland 182 Portugal 190 Denmark 224 Germany 259 France 294 Netherlands 315 Belgium 344 Great Britain 73 356 Sweden 503 Finland 521 Norway 574 USA 670 Source: UPU postal statistics 2005 (except fi gures for Belgium, Spain and Sweden which are older) The fi gures refl ect cultural, developmental, demographic, technological and national income differences between the countries. They show that the scope for mail volume growth is far from exhausted and that there is potential for further growth for example, in advertising mail and packet deliveries in southern European countries particularly as the product innovation and reliability of their mail services makes further improvements. 73 73 Figure not available for the UK MARKET COMPARISONS AND EXTERNAL DYNAMICS 71

In addition, the Mail Trends Update survey identifi es several other trends relating to the postal industry as a whole: package delivery has benefi ted from the internet and from intelligent tracking technology, which enables electronic notifi cation of a postal delivery; economic growth is no longer as strong a determinant of letter mail volumes as previously, but advertising and package growth tends to correlate closely with economic activity; population and income growth generate more households with more accounts and therefore increased volumes of statements, relationship mail and bills; growth in the number of small businesses and in overall business activity is another driver of mail volume; and the effect of changing population demographics, including economic migration, is becoming increasingly complex to analyse. Experience of the opening up of postal markets recently across Europe shows that, while large mailers gain substantial early benefits from market opening, these benefits later spread to lower-volume mailers and small and medium-sized enterprise (SME) customers. European regulatory developments 2008 was marked from a regulatory standpoint by the agreement by the Council of Ministers and the European Parliament, reached under the Co-Decision Procedure, of the revised Postal Services Directive. This establishes full market opening from 31 December 2010 for the 27 EU member states, although a further transitional period is available for 11 of those member states should it be needed. This will mark the completion of a 20-year process of opening the letters market to gradual and controlled liberalisation, which started with the Green Paper of 1992 on the development of the Single Market for postal services. Under the new Directive, monopolies will no longer be allowed as a means of fi nancing the universal service. The Directive instead offers a non-exhaustive list of other options for fi nancing the universal service, with the onus being on the postal operator to prove the existence and amount of any net cost to the satisfaction of the national regulatory authority. This is likely to have particular implications for Finland, where a compensation fund has served so far as a barrier to entry. 72 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

The new Directive also includes clauses on authorisation and licensing designed to reduce market entry barriers and to reinforce transparency, proportionality and non-discrimination. Prices need to be more strictly aligned to costs, while provisions remain for member states to maintain a uniform tariff for certain types of universal service mail as defi ned in the Directive. The requirement for the separation of accounts is maintained until competition becomes effective. Consumer protection will be enhanced through user complaint procedures now applying to all postal operators. Provision of information clauses will be strengthened, including by strengthening the rights of national regulatory authorities in this respect. There is also a new provision relating to access to the essential elements of the postal infrastructure in a multi-operator environment. This requires member states to ensure that transparent, non-discriminatory access conditions are available to elements of postal infrastructure or services provided within the scope of the universal service, but is qualifi ed by the proviso whenever is necessary to protect the interests of users and/or to promote effective competition and in the light of national conditions and national legislation In overseeing the transposition of the Directive in individual member states, the European Commission has said that it will pay close attention to potential entry barriers that would deprive users of the benefi t of a dynamic and open market. It appears that the Commission will want to be vigilant against any prohibitive requirements or conditions (such as over-onerous licensing conditions and minimum wage requirements, the application of any continuing VAT exemption in the postal sector and restricted access to letterboxes) that would make it effectively impossible for new entrants to run their businesses. Signifi cant market developments Germany The German Government s imposition of a minimum wage law in the postal sector, with the German Parliament s approval, introduced a minimum wage for workers in the postal sector of between 8 and 9.80. While this did not impact Deutsche Post, which was already paying above these rates, it posed a serious threat to competitors to Deutsche Post such as PIN AG and TNT Post Group. Axel Springer, the publisher that owned 64 per cent of PIN AG, wrote down its investment of over 600 million and the group has made over 1,000 redundancies in the period after the announcement. PIN AG Group fi led for bankruptcy in January 2008 and has since been involved in talks with investors to seek the capital that would allow it to continue trading. Two of the group s subsidiaries, PIN Mail GmbH and PIN Logistics GmbH, have been sold to Xanto, a mail transportation network, which will allow some trading to continue. MARKET COMPARISONS AND EXTERNAL DYNAMICS 73

It is clear that many of Deutsche Post s smaller competitors are also likely to be adversely affected by this measure, which was successfully challenged in the German administrative courts by TNT Post; however, this matter is now being investigated by the European Commission. This decision has also had effects in the Netherlands, where the Government decided to delay the liberalisation of its market because there would not be a level playing fi eld in the German market. Deutsche Post has continued to streamline its post offi ce network by selling its smaller branches to local businesses such as supermarkets. It was also reported in May 2008 that a German banking co-operative made up of Volksbanken and Raiffeisenbanken is planning to use its 14,000 retail outlets to fi ll the gap left by Deutsche Post s branch closures. They will collect and forward mail and parcels to GLS, TNT Post and PIN Group. Deutsche Post itself has successfully diversifi ed in other business areas such as parcels and logistics so as to be able to withstand recent reductions in letter mail volumes. As shown in Table 5.3, Deutsche Post s share of the addressed letter market remains high (around 90 per cent) and the around 900 active competitors have a combined market share of 10 per cent of revenues: the three largest competitors account for only 1 per cent of total volumes. Table 5.3 Market share of Deutsche Post and licence holders (competitors) Deutsche Post Licence holders Volumes Revenues Volumes Revenues 2002 97.2% 97.0% 2.8% 3.0% 2003 96.3% 96.1% 3.7% 3.9% 2004 94.6% 94.7% 5.4% 5.3% 2005 93.3% 92.4% 6.7% 7.6% 2006 90.9% 89.7% 9.1% 10.3% Source: Tenth Market Study in the fi eld of postal items, German Federal Network Agency for Electricity, Gas, Telecommunications, Post and Railway Netherlands In June 2007 a revised version of the Dutch Postal Act was adopted in order to prepare for full liberalisation of the Dutch postal market ahead of full EU postal liberalisation. The enactment date is conditional on there being a level playing fi eld in postal markets in the UK and Germany. Following the developments in the German market, the Dutch Government has twice postponed full market opening. 74 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

TNT NV, the universal service provider, already faces two competitors offering national twice-weekly coverage for the delivery of addressed mail: Selektmail (owned by Deutsche Post) and Sandd. Sandd offers an overnight 62 72-hour service two days a week whereas Selektmail offers a distributed this week service spread over four days. Together they have an 11 per cent share of the domestic addressed mail market or an estimated 26 per cent of the liberalised segment, which is still growing strongly. Sandd has achieved substantial growth in its volumes over the last few years and is forecasting a 15 20 per cent annual growth rate between 2008 and 2012. Sandd makes use of a fl exible parttime workforce which it can fl ex well in line with changing volumes. TNT NV has responded through its unaddressed mail subsidiary, Netwerk VSP, and introduced a service offering delayed delivery of non-time-critical addressed mail from businesses for a reduced fee. This comprises a one-week non-day-certain service for pre-sorted mail batches of at least 10,000 items, where the aim is to deliver 100 per cent quality of service against that specifi cation. Last year TNT NV announced that it was targeting savings totalling 370 million between 2007 and 2015. Recently the target was increased by a further 25 million to 395 million to refl ect further restructuring of the post offi ce network. Labour cost reduction is a key part of the savings plan, with TNT NV targeting a 125 million reduction. France In April Adrexo, the only signifi cant competitor to La Poste, announced that it was pulling out of the delivery of addressed letters. Adrexo traditionally operates in the unaddressed market, where it had also delivered a limited number of addressed mail items to use up spare capacity. In addition, it established its own separate end-to-end addressed mail delivery network to carry more substantial volumes. A number of issues are believed to have led to Adrexo s decision to stop its addressed letter delivery service, including the postponement of full market opening to 2011, the VAT advantage enjoyed by La Poste, the sole access by La Poste to mail box codes and the high switching costs that a customer needed to incur in order to separate and switch mail delivery above the current 50 gram French postal monopoly threshold. Adrexo had estimated that it needed to secure a 20 per cent share of the currently contestable French letter mail market just to cover its delivery costs. Recent reports in the French press have stated that the French Government is seriously considering partial privatisation of La Poste in preparation for the liberalisation of the market in 2011. In August 2008 La Poste s Chairman, Jean-Paul Bailly, unveiled plans by La Poste for it to restructure into a limited company in 2010 and to fl oat a minority holding on the stock exchange in 2011 in order to raise 2.5 billion to 3.5 billion for growth, including acquisitions, as the European market is liberalised. 74 74 As reported in Les Echos, 28 August 2008. MARKET COMPARISONS AND EXTERNAL DYNAMICS 75

Italy Poste Italiane recorded its sixth consecutive year of profi t in 2007/08, with improvements in all parts of its business. Its net profi t increased by 25 per cent to 844 million in 2007 and its Earnings Before Interest and Tax (EBIT) margin was 15.5 per cent, the highest among European postal operators. 75 The postal services division saw revenues rise by 3.8 per cent. The mail division outperformed this fi gure, with an increase in external revenue of 5.1 per cent refl ecting the performance of basic services and the introduction of new services. Spain In Spain, Correos increased its profi ts in 2007/08 by 5.2 per cent. Mail volumes grew year on year by 2.2 per cent, helped by election-related mailings and more added-value products. At the same time Correos undertook signifi cant investment in technology, infrastructure and operations. Most recently, Correos announced new automated sorting technology in Madrid. The new equipment, estimated to have cost around 1.2 million, is designed to enable the sender and recipient to know in real time where in the postal system the mail is. 76 The Nordic countries The proposed merger of Posten with Post Danmark is covered in Chapter 3. Regulatory comparisons with other UK markets The experience of the other regulated utilities in the UK has been that substantial effi ciencies are achieved cumulatively year on year as a combined effect of changes in ownership, introduction of regulatory price pressure and/or exposure to competition. Europe Economics found that privatised infrastructure companies have reduced unitoperating expenditure by some 1.25 per cent to 3.5 per cent per annum more than might have been expected in the absence of a privatisation effect. The privatisation effect arises from a catch-up of whole industries towards greater effi ciency following privatisation and the introduction of incentive regulation. 77 However, a review by NERA Economic Consulting of a number of studies of privatised fi rms has found that both theory and practice support the idea that the most important infl uence on cost effi ciency is competition in the product market. 78 75 Poste Italiane. www.poste.it/en/azienda/press_room/corporate_press/20070326en_comunicato_bilancio07.pdf 76 Hellmail.co.uk, 23 July 2008. 77 Scope for Effi ciency Improvement in the Water and Sewerage Industries: Final Report, Europe Economics, March 2003 78 The Performance of Privatised Industries: Effi ciency, Volume 3 A Report for the Centre for Policy Studies, LECG, August 2005. 76 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Table 5.4 Compound annual Real Unit Operating Expenditure (RUOE) reductions Regulated industry/ company Period RUOE reductions RUOE adjusted for volume growth Water 1992/93 2001/02 2.5% to 2.6% 2.5% to 2.6% Sewerage 1992/93 2001/02 0.1% to 0.9% 0.0% to 0.9% Electricity distribution 1990/91 2000/01 3.4% to 4.1% 3.1% to 3.8% NGC (National Grid) 1990/91 2001/02 4.9% to 6.0% 4.6% to 5.7% NIE (Northern Ireland Electricity) 1992/93 1999/2000 4.4% 3.9% BT (exchange lines) 1990/91 2000/01 3.5% Average 3.4% 3.4% Average excluding water and sewerage 4.3% 4.0% Source: NATS Price Control Review 2006 2010: CAA s Initial Proposals Supporting Paper 4: Top-down effi ciency analysis, CAA, November 2004 The scope for effi ciency in the postal sector should be at least as high as, if not greater than, it has been in the network industries shown in Table 5.4, given that the sector is more labour-intensive and the potential to improve operational and labour effi ciency is considerable. Consumer benefi ts from market opening Telecommunications Ofcom allowed retail price controls (RPC) on British Telecom to lapse on their expiry date of 31 July 2006. 79 In its explanatory statement to consumers, it claimed: Here in the UK, customers benefi t from some of the lowest phone charges in the world. In fact, because of competition, new technology and regulation, average prices have fallen by around 60 per cent over the last ten years. 79 www.ofcom.org.uk/consult/condocs/retail/statement/rpcstatement.pdf MARKET COMPARISONS AND EXTERNAL DYNAMICS 77

Figure 5.2 illustrates the price reductions achieved in residential local and national calls between 2002 and 2005. Figure 5.2 Residential local and national average call revenues (pence per minute) 2.5 Average revenue (pence per minute) 2.0 1.5 1.0 0.5 local calls national calls 0.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2002 2003 2004 2005 Source: Ofcom/BT The latest of Ofcom s annual Competitive Market Reports, published on 14 August 2008, 80 revealed that customers in the UK are spending more time using communications services than ever before, but are paying less for them. Overall average monthly household spend on communications services is now 4.31 (4.4 per cent) less in real terms than it was in 2004. This contrasts with large price increases for other goods, with food prices up by almost 7 per cent and the overall retail prices index (RPI) rising to 5 per cent in July 2008. Ofcom said that bargain hunting was one of the main reasons for this trend, i.e. customers now exercising choice between suppliers; this is a direct result of the liberalisation of the telecommunications market. Energy Energy is another sector to have undergone a similar process of privatisation and market opening. Between 1990 and 1999 the price of electricity to businesses was reduced in real terms by between 25 per cent and 34 per cent, with a 26 per cent reduction for domestic consumers. 81 After the domestic consumer market was opened up to competition in the late 1990s, Ofgem discontinued its price controls in 2002, deeming 80 www.ofcom.org.uk/research/cm/cmr08/cmr08_1.pdf 81 The Wincott Foundation. 78 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

that the market was suffi ciently competitive for retail customers. In its Domestic Retail Market Report published in June 2007, 82 Ofgem reported vigorous price competition between the big six suppliers for all customers ; switching was at a four-year high, it said, with about 300,000 400,000 customers switching per month. Interestingly, British Gas, the main incumbent, was receiving the highest number of complaints in the market, so the fi gures suggested that customers were leaving the incumbents for more competitive fi rms. In February 2008 Ofgem launched a probe into the electricity and gas supply markets in response to public concern about whether the market was working effectively. While Ofgem said that it had seen no clear evidence to date that the market was failing, it recognised that customer confi dence had fallen; it therefore intends to take a more detailed look at the retail market and the infl uence of global wholesale market development. 83 Environmental issues Direct mail In 2003 the Direct Marketing Association (DMA) and the Department for Environment, Food and Rural Affairs (Defra) signed a voluntary agreement setting out targets for recycling levels until 2013. In early 2007 it was announced that the direct mail industry had failed to meet its target of successfully encouraging consumers to recycle 30 per cent of direct mail by the end of 2005; it had achieved 28 per cent. The direct mail industry is now focused on achieving the next set of targets: 55 per cent of direct mail to be recycled by the end of 2009, and 70 per cent by 2013. Fact Box: Paper waste 2 per cent of household waste, in volume terms, is accounted for by direct mail in the UK equivalent to about a third of a Sunday newspaper per week 4 per cent of the UK s total paper usage is used in direct mail 95 per cent of paper used in direct mail in the UK comes from recycled or managed sources Source: www.dma.org.uk/content/env-facts.asp 82 www.ofgem.gov.uk/markets/retmkts/compet/documents1/drmr%20march%202007doc%20v9%20-%20final.pdf 83 Ofgem press release, Ofgem launches probe into energy supply markets, 21 February 2008. MARKET COMPARISONS AND EXTERNAL DYNAMICS 79

The DMA has been working extensively with industry stakeholders and outside agencies to increase the recycling of direct mail. It has to date produced four quarterly factsheets, available on its website, 84 advising direct mailers of steps that they can take to make mailings more environmentally sustainable for example, by using recycled paper and environmentally friendly glue. This is aimed at making direct mail green going out, whereas the second prong of the DMA s programme is trying to make sure that direct mail is green coming back by, for example, establishing partnerships with organisations such as Waste and Resources Action Plan (WRAP) to allow direct mailers to use recycling logos on their envelopes. The DMA and the British Standards Institution are encouraging DMA members to gain accreditation under ISO 14001, the international standard for controlling and improving environmental performance. Furthermore, in August 2008 Precision Marketing reported that the new DMA Code of Practice, due to come into force at the end of the year, will include a new section on Members Responsibility to Environmental Issues. 85 There is growing concern as to what will happen if the industry does miss the 2009 recycling target. There is a belief that the Government will consider an opt-in approach to direct mail, similar to the system for email marketing. Both the Scottish and Welsh Assemblies have discussed the possibility of direct mail bans. Currently operating in the UK is an opt-out scheme, the Mailing Preference Service, which people can join if they do not want to receive direct mail. This scheme, administered by the Advertising Board of Finance (asbof), is funded by direct mailers via a levy collected by mail operators. Until an agreement announced by TNT Post in June 2007, Royal Mail was the only mail operator collecting the 0.2 per cent of direct mail spend levy from its customers. 86 This meant that the self-regulated industry scheme had become underfunded, as a high percentage of direct mail is now being sent using downstream access operators. Asbof Chairman Winston Fletcher hopes that the TNT Post agreement to collect the levy from its direct mail customers will encourage other operators to sign up to the scheme. Pitney Bowes conducted a survey in November 2007 to measure consumers perceptions of the effects of direct mail on the environment. The report found that consumers were likely to overestimate the detrimental effects of direct mail. Half of the Americans surveyed in the Pitney Bowes research thought that direct mail contributed 53 per cent of the country s municipal waste; the reality is that it makes up only 2 per cent. 87 Furthermore, as shown in Table 5.5, the respondents greatly overestimated the amount of CO 2 produced by mail creation and delivery compared to other activities. 84 www.dma.org.uk/content/env-reports.asp 85 www.precisionmarketing.co.uk//articles/257577/dma+goes+green+with+new+code+of+practice+.html 86 Precision Marketing, TNT deal rescues MPS cash shortfall, 27 June 2008. 87 The Truth About Green, Pitney Bowes, February 2008. 80 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Table 5.5 Activities that generate the most CO 2 Perception Reality 1. New compact car 1. TV, DVD and cable box 2. Older-model refrigerator 2. An eight-minute shower 3. Mail creation and delivery 3. Clothes dryer 4. Clothes dryer 4. Older-model refrigerator 5. Newer-model refrigerator 5. New compact car 6. An eight-minute shower 6. New-model refrigerator 7. TV, DVD and cable box 7. Mail creation and delivery Source: The Truth About Green, Pitney Bowes, February 2008 The study found that, if mailers take steps to be more sustainable, customers do still value mail. The report sets out seven steps towards sustainability and good practice, highlighting that: 80.9 per cent of consumers would be more likely to do business with companies that systematically reduced unwanted mail; 64.7 per cent of consumers said companies certifi ed as eco-friendly would be likely to get more of their business; 51.9 per cent of consumers said they have a problem with mail only when it contains no useful information; and 63.1 per cent of consumers would welcome steps taken by mailers to reduce CO 2 emissions. 88 Other initiatives Mail operators are continuing to take their environmental responsibilities seriously, and Postcomm is encouraged to learn of new initiatives and programmes in the mail industry. The International Post Corporation (IPC), which provides postal measurement systems, announced in June 2008 that it was launching an Environmental Measurement and Monitoring System. Providing a common carbon measurement and reporting framework for the global postal industry, the scheme has been signed up to by over 20 of the world s largest postal organisations from Europe, Asia Pacifi c and North America. It will be 88 The Truth About Green, Pitney Bowes, February 2008. MARKET COMPARISONS AND EXTERNAL DYNAMICS 81

based around current international environmental standards such as ISO 14001 and the Greenhouse Gas Protocol, as well as current best practice from the postal and logistics industries. Trials will commence in 2008, with the fi rst set of measurement results available in 2009. 89 As described in our Competitive Market Review 2007, Earth Class Mail is an American company which has taken the idea of hybrid mail one step further by allowing customers to decide whether they want physical mail delivered to them after reviewing a scannedin document. Earth Class Mail is currently reported to be in talks with European postal operators, including TNT Post in the Netherlands, regarding the possible adoption of its services in Europe. 90 Product development TNT Post UK Carbon-neutral addressed mail TNT Post launched a carbon-neutral mailing product to the UK market in June 2008. The scheme provides an online carbon calculator allowing mailers to work out the impact of each stage of direct mail production and delivery. It also offers them advice on reducing carbon levels and offsetting carbon via the CarbonNeutral company. If a mail item can be shown to be carbon-neutral, it can carry the new TNT Post Carbon Neutral logo stamp. Customers are also encouraged to use the Recycle Now logo on envelopes and their contents. Source: www.tntpost.co.uk VAT In April 2006, the European Commission sent letters of formal notice to the UK, Germany and Sweden which opened infringement proceedings on the interpretation of the VAT exemption for postal services by those countries, as set out in Directive 2006/112/EC ( the VAT Directive ). On 24 July 2007, it opened the second stage of the infringement proceedings by formally requesting that the UK, Germany and Sweden change their legislation on the VAT exemption, which it claimed is not compatible with the VAT Directive. 89 www.ipc.be 90 http://seattletimes.nwsource.com/html/businesstechnology/2008011991_earthclass23.html 82 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

TNT Post NV, a competitor to Royal Mail for mail services, has also challenged the UK s position in the High Court. On 12 July 2007 this was referred by the High Court to the European Court of Justice (ECJ), and these proceedings were heard on 18 June 2008. Postcomm is not a party in those proceedings. TNT Post argues that, where the market is liberalised, VAT should be charged on all services to avoid market distortion. This position has already been taken by some European governments, including those of Sweden and Finland. The European Commission is one of the parties that has submitted evidence to the ECJ hearing. It explained that the UK had exempted from VAT all postal services provided by Royal Mail, on the grounds that Royal Mail had been assigned particular obligations with regards to the provision of the universal postal service. The Commission argued that, in the context of competitive postal markets, different tax liabilities were bound to distort competition and could only be justifi ed as regards the strict discharge of the universal service obligation. The Commission s position at the hearing was that the VAT postal exemption as applied in the UK hinders competition, but that it recognised the intention of the VAT Directive to exclude some public postal products from the need to charge VAT. As a result, it concluded that the appropriate position would be for universal service products to be excluded from VAT, and for other services provided by the universal service provider to be subject to VAT. In comparison the UK Government s position, which is shared by Royal Mail and some other European governments, is that the law permits the government to exempt the provider of the universal service from charging VAT on all its services. A decision is expected towards the end of 2008 or early in 2009. The decision will be binding on all European governments. The only alternative would be for all European governments to agree to change the VAT rules for postal services by way of a revised VAT Directive, which would need to be unanimously approved by all EU member states; this seems unlikely. Postcomm s position on VAT Postcomm s position on VAT has consistently been that there should be a level playing fi eld for all postal operators. One way to achieve this would be to have a reduced rate of VAT which would apply to all postal operators; this would result in no signifi cant price rises for customers. However, applying a reduced rate of VAT to all postal operators would seem to require a change to the VAT Directive, which would require a unanimous approval of all EU member states. MARKET COMPARISONS AND EXTERNAL DYNAMICS 83

Impact of the European Commission s proposals If the Commission s proposals were to be enacted, they would create an equal competitive position for most of the bulk mail services currently used by business mailers but this would be as a result of higher prices for Royal Mail s products for customers who cannot reclaim VAT (primarily fi nancial institutions). However, some services that are currently within the universal service, including Cleanmail and Mailsort 1400 (1 and 2), would continue to be exempt from VAT. Single-piece standard-tariff mail as used by individuals and small businesses (stamped mail and meter mail) would be unaffected if the Commission s view were agreed by the ECJ. However, the ECJ is independent of the Commission, and may take a different view. Postcomm s stakeholder engagement Postcomm is committed to a programme of stakeholder engagement to further its understanding of the market, and to feed into its policy and decision making. During the course of the year regular seminars, visits and meetings are held with industry stakeholders ranging from mail operators, large and small mail users and trade associations to representatives of vulnerable groups. Postcomm also monitors the mail market by carrying out market research into developments in the market, taking into account the views of business and domestic customers. Postcomm s Business Customer Survey, which monitors the impact of liberalisation on the business community, is once again published alongside this Competitive Market Review. If you would like to discuss any aspect of the mail market with Postcomm, we welcome the opportunity to hear the views and opinions of all stakeholders. Please contact: Stakeholder visit programme: Joseph Bonner joseph.bonner@psc.gov.uk Mail market information or more detail on the content of this report: Helen Purser or Ruth Heller helen.purser@psc.gov.uk or ruth.heller@psc.gov.uk Postcomm Hercules House 6 Hercules Road London SE1 7DB 84 COMPETITIVE MARKET REVIEW UK POSTAL MARKET

Crown Copyright 2008 The text in this document (excluding the Royal Arms and other departmental or agency logos) may be reproduced free of charge in any format or medium providing it is reproduced accurately and not used in a misleading context. The material must be acknowledged as Crown copyright and the title of the document specified. Where we have identified any third party copyright material, you will need to obtain permission from the copyright holders concerned. For any other use of this material, please write to Office of Public Sector Information, Information Policy Team, Kew, Richmond, Surrey TW9 4DU or email licensing@opsi.gov.uk This publication can also be viewed on Postcomm s website, www.psc.gov.uk A large-print version of this report is available from Postcomm telephone 020 7593 2100 or email info@psc.gov.uk. This report is printed on Revive Silk. Made from 50 per cent recycled de-inked post-consumer waste, it is elemental chlorine-free (ECF) and recyclable. Designed and produced by COI. October 2008 / 288321 CMR