The outlook for UK mail volumes to 2023

Strategy & Economics The outlook for UK mail volumes to 2023 15 July 2013

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

Objectives was asked to develop a view on the long-term outlook for UK mail volumes (letters and parcels) Royal Mail Group commissioned to provide an independent view on the long-term outlook for UK mail volumes Our projections use information and analysis from a variety of sources, including Royal Mail Group However, our conclusions have been reached independently. Our projections are based on our own insights and analysis, supported by an extensive programme of interviews, surveys and industry research We have projected mail volumes (letters and parcels) on an annual basis over the period 2013 to 2023 3

We have made a number of simplifying assumptions about the future market structure Key underlying assumptions 1 We assume that the overall structure of the UK mail market (e.g. delivery chain and model) will not change significantly over the projection period 2 We assume that additional regulatory change during the projection period will have a limited impact on the structure and operations of the mail market. We assume there will be no material change to the Universal Service Obligation 3 We assume price changes will be marginally higher than RPI over the projection period We have also used a number of macroeconomic assumptions in our modelling Source 2013 2014 2015-2023 GDP growth, % p.a. Growth in number of households, % p.a. Based on economic forecasts Based on and ONS projections 1.2 2.1 2.4 1.0 1.0 1.0 Source: Economic forecasts, Office for National Statistics (ONS) 4

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

Section 1 Executive Summary 6

Section 1 Executive Summary Key messages 1 2 UK mail volumes have declined since 2004 The mail delivered in the UK is highly varied and the total mailbag is highly fragmented UK total inland letter volumes declined by 3.1% p.a. from 2005 to 2008, and by 6.3% p.a. from 2008-2013, as the economic downturn increased the rate of decline UK parcel volumes grew by 4.3% p.a. from 2005 to 2008 and by 3.7% p.a. from 2008-2013, mainly reflecting increasing use of online shopping by consumers The main driver of mail declines has been electronic substitution of paper communication The principal cause of the overall mail volume decline has been the substitution of paper communication by electronic methods (e-substitution) However, the maturity of this transformation varies widely within different segments of the mail bag - Some segments are already substantially online while others are just beginning this transition - The maximum likely level of electronic substitution also varies between segments depending on both recipients and senders attitudes to electronic communication. This is affected by a range of factors such as internet access and age (mail recipients) and mail costs (mail senders) 3 We expect the decline of letter volumes to continue but at a slower rate over the projection period We expect the rate of e-substitution in letters to slow gradually over the next 10 years. In the initial years of e-substitution consumers with a high propensity to switch move rapidly online, as do many lower-value communications As time goes on, the remaining base becomes more skewed towards paperloyal consumers and those being sent higher value communications. We expect demographic changes and technology evolution to have a less prominent impact on this segment A return to GDP growth as the recession ends is likely to increase overall communication volumes, partially offsetting the declining share of letters in overall communication, particularly for Direct Mail Declines in letter volumes will also continue to be partially offset by robust growth of parcels traffic, driven by specific categories of online shopping 4 Our projection suggests letter volume declines of c.4% p.a. and parcel growth of c.3% p.a. from 2013 to 2023 We therefore expect the overall UK inland mail volumes to continue to decline albeit more slowly than we have seen historically - Letters: 5% p.a. decline 2013-18; 4% p.a. decline 2018-23 - Parcels: 3% p.a. increase 2013-18; 2% p.a. increase 2018-23 - Overall: 4% p.a. decline 2013-18; 3% p.a. decline 2018-23 Despite the slowing rate of decline in overall mail, these projections imply a significant reduction from current levels of paper communication by 2023, as well as a substantial change in mix (we believe parcels will double their share of the mail bag to c.21%) We have identified a number of risks to our projections which might increase the rate of mail decline over the projection period. The potential impact of these is illustrated in Section 5 of the report 7

Section 1 Executive Summary UK inland letters and parcels market volumes - past, present, and future 2005 2012 2023 c.19.7bn items c.13.8bn items c.8.3bn items UK letters market 9% 6% 6% 6% 6% 6% Transactional mail Direct mail 31% 54% 32% 56% 38% 50% Publishing mail Social mail UK parcels market c.1.3bn items c.1.7bn items c.2.3bn items Note: International mail volumes not included due to limited data availability for the historical period. Please refer to the later section for projections by mail segment Source: Royal Mail data, analysis 8

Section 1 Executive Summary Total inland mail volumes peaked in 2004 and have since declined, with an acceleration in mail declines since the start of the recession UK overall inland mail volumes, 1981-2012 250 1 2 3 Indexed mail volumes (1981=100) 200 150 100 50 Mail volumes peaked in 2004 after long run growth of 3.7% p.a. between 1981 and 2004 1 From 2004, electronic substitution of mail began to exceed macro driven mail volume growth, leading to mail volume declines of 2.6% p.a. from 2005 to 2008 0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2 Since the recession, macro factors (such as GDP) have also driven lower mail volumes with mail declines of 5.3% p.a. from 2008 to 2012 3 Source: Royal Mail data, analysis 9

Section 1 Executive Summary We expect UK letter volume declines to continue, albeit at a slower rate, while parcel volumes will continue to grow Total inland letters historical and projected volumes, 2005-23 120 Indexed mail volumes (2005=100) 100 80 60 40 20 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005-08 2015 2016 2008-13 2017 2018 2013-18 2019 2020 Forecast 2021 2018-23 (3.1%) (6.3%) (4.9%) (3.8%) Total inland parcels historical and projected volumes, 2005-23 Indexed mail volumes (2005=100) 200 180 160 140 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005-08 2015 2016 2008-13 2017 2018 2013-18 2019 2020 2021 2022 2023 Forecast 2018-23 4.3% 3.7% 3.3% 2.1% 2022 2023 We expect the rate of letter volume declines to reduce over the projection period as a result of: - A return to the trend rate of GDP growth resulting in increased overall communication volumes (this will particularly affect Direct Mail which is highly cyclical) - Slowdown in letter volume declines in other segments, such as financial statements, as a baseline of non-online users or less willing online users is reached The growth in parcel volumes is expected to continue throughout the projection period We expect some slow down in the rate of growth in the later years, mainly due to: - The continued partial digital substitution of some product categories, especially Books - The gradual slowdown in the growth rate of online shopping Note: Total inland letter volumes inclusive of Transactional, Social, Direct Mail and Publishing mail volumes. International letter volumes not included due to limited data availability for the historical period. Please refer to the later section for projections by mail segment Source: Royal Mail data, analysis 10

Section 1 Executive Summary Our e-substitution scenario analysis suggests that in a negative case, the total cumulative decline could be 5ppt below our base-case by 2015, increasing to c.12ppt by 2023 Total inland mail projected scenarios, 2012-23 Indexed mail volumes (2012=100) 120 100 80 60 40 20 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: Royal Mail data, analysis We have modelled upside and downside e- substitution scenarios to demonstrate the potential impact on our projection of some of the risks we have identified These scenarios are based on changing a number of assumptions underlying our individual mail segment projections to create high and low cases for each mail segment These are not worst case scenarios, but represent plausible alternative outcomes Upside scenarios are based on factors such as a larger baseline of consumers and businesses retaining paper invoicing and slower Government digital uptake while downside scenarios are based on factors such as faster adoption of paperless bank statements and slower parcel volume growth We have used Monte Carlo analysis to illustrate the range of possible outcomes from combining these scenarios (reflecting the fact that it is unlikely that all downsides will occur together) The scenarios do not include differing GDP assumptions (illustrated later in the report) and also exclude large one off events which could significantly affect mail volumes. Examples of these events are discussed in the Main risks to projection section of the report 11

Section 2 Historical trends and context 12

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

Section 2 Historical trends and context Other developed countries have also seen declines in mail volumes, but at widely varying rates... Letter volumes have been declining around the world, with wide variation in rates Decline in inland addressed letter volumes per person from 2005 to 2011 (2005=100%) 110% Even before the declines started, letter volumes per head and the composition sent varied widely Total inland addressed letter volume per person, 2005 and 2011 800 100% 90% 80% 70% 60% 50% 2005 2006 2007 2008 2009 2010 2011 Germany Finland Sweden France Canada Netherlands United States United Kingdom Norway Denmark # of postal items per person 700 600 500 400 300 200 100 0 United States Netherlands Sweden United Kingdom France Finland 2005 2011 Germany Canada Norway Denmark Note: Mail volumes for each country are submitted by postal operators and therefore may not be entirely comparable depending on survey methodologies, country data for Germany, Sweden and the Netherlands adjusted based on assumed market share of largest postal operator Source: IPC, analysis 14

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

Section 2 Historical trends and context The overall decline in mail in the UK has been driven by e- substitution effects in many different mail categories Growth in parcel delivery has offset some letter volume decline The UK economy is around 4% larger than in 2005 driving an increase in transactional mail Estimate of macro and e-substitution factors driving the decrease in mail volume, 2005-12 100% 2% 5% 5% 2% (3%) (6%) (5%) (2%) (3%) (15%) Indicative (3%) (1%) 76% Total advertising spend is lower than its 2005 level, reducing spend on Direct Mail In addition, Direct Mail as a proportion of advertising spend has declined, further reducing mail volumes The shift of business volumes towards Downstream Access providers (e.g. UK Mail and TNT) has reduced average prices and so been beneficial for overall mail volumes Volume 2005 Transactional mail economic impact Growth in parcels Impact of growth in number of households Impact of business price changes & DSA* Direct Mail economic impact E-substitution of direct mail E-substitution of bank statements E-substitution of invoices E-substitution of newsletters Other transactional mail decline Other mail decline Decline in social mail (e-sub & price) Volume 2012 Despite its high profile, the impact of social mail decline has been relatively low E-substitution has occurred in most of the mail categories and cannot be fully split into its constituent parts Note: *Increased usage of downstream access providers has decreased average prices paid over this period Source: Royal Mail data, analysis 16

Section 2 Historical trends and context Most e-substitution is being caused by technologies which have existed for several years rather than very recent innovations Phone Fax TV World wide web launched First graphical web browser 1 st online bank Amazon E-bay Google HMRC launches online Self Assessment Google Adwords Facebook You Tube 60% of UK has internet access 50% of UK using the internet daily iphone 75% of UK has home internet access ipad 1990 2000 2010 2013 Many of the technologies currently driving the major mail reductions have existed for a number of years Email, PDF and electronic invoicing systems enable B2B electronic invoicing Rich emails allow newsletter volumes to move online Major banks launch online portals enabling paperless statements Pay-Per-Click enables growth in internet advertising The effects of recent innovation e.g. 3D printing is not likely to be felt until towards end of the plan at the earliest Recent technological enablers such as Social networks, smartphones and tablets are expected to drive further declines, e.g. impact on Direct Mail and magazines Source: analysis 17

Section 2 Historical trends and context Different segments of the mail bag have declined (or grown) at very different rates UK mail volume split by application, 2005-12 Proportion of total items (%) 5% 5% 5% 8% 8% 7% 6% 7% 7% 30% 30% 30% 5% 6% 8% 29% 6% 6% 8% 28% 6% 6% 9% 29% 6% 6% 10% 29% 5% 5% 11% 29% Social mail Publishing Parcels 2005-12 (3.9%) (9.5%) 4.1% 51% 50% 51% 51% 52% 51% 50% 50% Direct mail (4.6%) Transactional (4.5%) 2005 2006 2007 2008 2009 2010 2011 2012 Note: International mail volumes not included due to limited data availability for the historical period. Please refer to later section for projections by mail segment; Historical parcel volumes have been estimated using a combination of parcel volume datasets and parcel specific historical growth drivers Source: Royal Mail data, analysis 18

Section 3 Factors influencing mail volumes 19

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

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

Section 3 Factors influencing mail volumes Consumers can be split into those who embrace online services, those who do not use online services because they do not think they are suitable, and those who have no internet access c.80% of consumers are split between those who can and do use online services where possible and those who can but prefer not to. However, preferences for online services vary by mail segment c. 20% of consumers currently have limited access to online services A significant proportion of consumers are increasingly using online services to communicate 55% of consumers prefer to use online services to interact remotely with government departments These consumers prefer to use online services as they believe that they are more convenient. The services can be accessed at anytime from anywhere with an internet enabled device 55% of consumers who receive online financial statements state convenience as the main reason for stopping paper A second group of consumers have the ability to use online services but choose not to because: They may prefer to keep paper records 34% of consumers who receive financial statements by post do so to keep paper records They do not believe that online services are suitable for certain applications 42% of consumers who do not use internet banking state the main reason is concern over security A smaller group of consumers have limited access to the internet and therefore are unable to use online services UK Internet take-up and intentions, 2012 15% 4% 79% Don't intend to get Don't know if will get Likely to get in next 12 months Internet connection at home This proportion of non internet users is likely decline over time Mail outlook Will continue to use online services and gradually reduce remaining mail received May convert to online services as systems develop Largely remain mail users with some online service adopters Source: Ofcom Communication Market Report 2012, surveys 22

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

Section 3 Factors influencing mail volumes Demographic changes are likely to contribute to declines in postal communication in the long term. However, we believe the impact will be relatively small over the projection period 1 The primary driver of mail declines in the short to medium term is the changing behaviour within and across all age groups All age groups increasingly have access to the internet through a range of internet enabled devices Home Internet access by age, 2010-2012 100% 90% 90% 88% 84% 86% 87% 75% 80% 60% 69% 64% 51% 40% 20% 0% 16-24 25-34 35-54 55-64 65-74 2010 2011 2012 27% 23% 75+ Demographic and behavioural drivers of mail volumes Share of transactional mail vs. share of population, 2011 35% 30% 25% 20% 15% 10% 5% 0% 1 4% 16% 1 21% 33% 1 23% 2 17% 27% 14% 25% 16-24 yrs 25-44 yrs 45-54 yrs 55-64 yrs 65+ yrs % of transactional mail % of population 1 1 20% 3 2 3 However, as a person ages, the volume of post they receive increases due to the complexity of life On average, older age groups typically have greater numbers of, and more complex, transactions (e.g. Life insurance) and assets (e.g. Houses, cars and bank accounts) In the longer term, demographic change will have a gradual effect on mail reduction, as older age cohorts with more limited internet access make up a smaller proportion of the population 46% of over 65 s have home internet access vs.80% for the UK population in 2012 Source: Royal Mail data, Ofcom Communication Market Report 2012, analysis 24

Section 3 Factors influencing mail volumes While e-substitution has largely been negative for letters, parcel volumes have benefitted from growth in online shopping Growth of remote retail Parcel deliveries have been growing with the increasing uptake of remote shopping Consumers are increasingly opting for home shopping as it allows for convenient price and product range comparison Some items and sizes are not available in store and it saves time to order from home... Others like the anonymity of the process. Clothing & Footwear retailer While the growth rate is slowing down, online is outperforming total retail with last year s annual online expenditure in the UK increasing by c.12.9% compared to total retail growth of c.0.9% during the same time period Click & Collect service is getting more popular... It is very convenient for the customer as they do not need to have someone at home to collect the parcel. Department store retailer UK home shopping sales as % of total retail sales 6% 7% 7% 8% 8% 9% 10% 11% % of retail sales 2005 2006 2007 2008 2009 2010 2011 2012 Parcels have traditionally been delivered to home or work places. More recently, customer collection models such as Click & collect and lockers have been gaining traction. These enhance flexibility, further increasing demand for remote shopping Online has been taking share from the more traditional (offline) remote ordering channels such as mail and phone ordering and driving the overall remote retail category UK consumer e-book market, 2007-12est Sales ( m) 2008-12est n/a 2007 4 2008 27 2009 184% 71 2010 Rise of online 138 2011 Digitisation 261 2012est Remote retail spend by channel, 2012 Mail order 12% TV 2% Online 86% While the increased use of smart phones and tablets for leisure encourages impulse buying, it also fuels digital substitution for some categories such as Books, Music & DVDs where c.30% and 60% of remote deliveries respectively are already digital Source: Royal Mail data, Mintel, Verdict, interviews, surveys, analysis 25

Section 3 Factors influencing mail volumes Price rises above inflation both reduce mail volumes in the short term and can increase the future rate of e-substitution International comparison of the estimated impact of 1% increase in real prices on aggregate mail volumes* Coefficient 0-0.2-0.4-0.6-0.8-1 -1.2-1.4-1.6-1.8-2 Finland Business to Consumer mail UK inland first class non-pre-sort Finland Business to Business mail US standard-mail market US inland mail market Switzerland inland mail UK inland second class non-pre-sort market UK inland transactional mail market US inland first-class mail International econometric comparisons indicate that a 1.0% increase in real prices leads to a 0.6% decline in mail volumes on average Although price elasticity is low for total mail, some applications are more price sensitive than others, such as direct mail There are low risks of price rises causing mail volume decline if future price increases are in line with inflation. We have assumed future price increases to be marginally higher than RPI therefore further downside risks from price increases are limited However, future price increases significantly above RPI could reduce volumes considerably. In addition, continued price increases would be likely to increase the pace of e-substitution as it makes electronic communication relatively more cost-efficient We believe the interaction between e-substitution and price constitute an unknown downside risk to mail volumes Note:*Price elasticities based on own-price elasticities and hence do not take into account switching between products such as first class volumes moving to second class due to price rises in the first class products Source: Research papers as noted in the Appendix 26

Section 4 Projections by mail segment 27

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

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

Section 4 Projections by mail segment Our top down approach uses econometric models with time trends to account for technology and e-substitution E-substitution, linear and non-linear time trend* We have considered two ways to include technological factors in our econometric modelling Letter volumes Historical data Illustrative Linear trend (best fit based on historical data) E-substitution Non-linear trend (best fit based on historical data) 1. Analyse the impact of different technological drivers for e- substitution, e.g. social media use for social mail or online banking penetration for financial mail. There are two limitations to this approach: Technology is continuously evolving and so it is impossible to include an exhaustive list of the technological factors that might impact each mail type in the future; Forecasting how the selected driver will evolve in the future is often as difficult as forecasting how mail volumes will evolve 2. Estimate the shape and impact of technology on mail volumes by including time trends in the model (while remaining agnostic about what technology is driving the trend). Different types of time trends (linear and non-linear) can be used to estimate the shape of the historical technology wedge and then applied to estimate future mail volumes The limitation of this approach is that the past may not be a fair representation of the future. For example, a trend that has been increasing historically may flatten out or even start to decrease Note:*Most suitable shape of the time trend varies by application Source: analysis Time On balance, we believe that time trends provide the best way to create a sensible and robust model 30

Section 4 Projections by mail segment Our bottom-up projection breaks down the mail bag into c.20 main segments and looks at the drivers and outlook for each UK inland and international mail volume by type, 2012 100% Transactional mail Direct mail Publishing Social mail Parcels International mail Key segments 90% 80% 70% 60% 50% 40% 30% 20% Invoices B2B Central Government Other B2C Other B2B Other C2X Payments Local Government Financial Services Other Financial Services Legal / Terms and Conditions Financial Services Insurance B2C bills Healthcare Education Advertising Catalogues Newsletters Magazines B2C B2B + Parcels Letters 10% Financial Services statements C2X 0% 0% 20% 40% 60% 80% 100% Key mail type Source: Royal Mail data, analysis 31

Section 4 Projections by mail segment These high level categories in turn break down into thousands of different types of mail from different senders. Each of these types of mail exhibits different growth dynamics Total Mail Government Mail Transactional Mail Central Government Not to Scale Source: Royal Mail data, analysis 32

Section 4 Projections by mail segment Total inland letter volumes have been declining historically. The contraction is expected to continue albeit at a slower rate year-onyear Total inland letters historical and projected volumes, 2005-23 Forecast 120 2005-08 2008-13 2013-18 2018-23 100 (3.1%) (6.3%) (4.9%) (3.8%) Indexed mail volumes (2005=100) 80 60 40 Position on s-curve 20 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Note: Above analysis exclusive of parcel, i.e. reflecting letter volumes only. International letter mail volumes not included due to limited data availability for the historical period. Please refer to the later section for projections by mail segment Source: Royal Mail data, analysis 33

Section 4 Projections by mail segment While letter volumes continue to fall, parcels will grow their share of total inland mail volume Total mail volume forecast by type, 2012-23 100% 90% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% Forecast Social mail 80% 11% 12% 13% 14% 15% 16% 17% 18% 19% 19% 20% 21% 70% Publishing mail 29% 28% 28% 28% 28% 29% 29% 29% 30% 30% 30% 30% Proportion (%) 60% 50% 40% 30% Parcels Direct mail 20% 50% 49% 48% 47% 46% 45% 44% 43% 42% 41% 40% 39% Transactional mail 10% 0% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Note: International mail volumes not included due to limited data availability for the historical period. Please refer to the individual section for projections Source: Royal Mail data, analysis 34

Section 4 Projections by mail segment Transactional Mail Financial Services Rapid decline in transactional mail volumes is expected to continue before slowing down towards the end of the projection period Transactional mail historical and projected volumes, 2005-23 100 90 80 2005-08 2008-13 2013-18 2018-23 (2.5%) (6.2%) (5.4%) (4.5%) Forecast Indexed mail volumes (2005=100) 70 60 50 40 30 Position on s-curve 20 10 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Note: Excludes Royal Mail Large Letters (packets) which are included in parcel estimates Source: Royal Mail data, analysis 35

Section 4 Projections by mail segment Transactional Mail Financial Services Financial institutions have already captured many of the quick wins from e-substitution. Consequently substitution of the more fragmented remainder will be slower 25% of transactional mail in the UK is sent by the top 5 banks, with other financial services companies accounting for another 10% Statements constitute approximately half of mail sent by banks, 50% of which is current accounts Paperless current accounts are now c.40% of the total Proportion of UK individuals registered for internet banking, 1998-2011 100% 80% 60% 40% 20% 0% 1998 2000 2002 2004 2006 2008 2010 We expect growth in the penetration of online banking to slow in the next five years as the remaining offline consumers become harder to convert There will be a continued shift to paperless among online banking users. The current 44% of consumers who state they will always want to receive paper statements is likely to reduce over the projection period RBS changed from monthly to quarterly statements in Feb 2013 and we expect other banks may follow suit. This will have a significant impact on current account volumes, but monthly credit card statements are seen as more important as they prompt payment and other statements are already sent less frequently As our digitisation increases it isn t straightforward that our letter volumes decrease. There s baseline growth and a significant amount of non-statement mail, e.g. credit card renewals. Digitisation cannot offer a viable substitute for many of these items Top five UK bank The direction banks are going in is about communicating in the medium of choice. Paper is now just one of a number of media and we have been very successful at improving the online proposition Top five UK bank We estimate that of the non-statement mail sent by financial services companies, around 30% is difficult to substitute due to regulation (e.g. the requirement for a wet signature) or is the delivery of a physical item (e.g. a credit card) While the substitutable remainder is early on in its substitution S-curve, its fragmented nature means the rate of decline is likely to be longer and flatter than that of statements Source: British Banking Association Annual Abstract 2012, interviews, surveys, analysis 36

Section 4 Projections by mail segment Transactional Mail Government We expect Government mail volumes to decline faster than historically driven by budgetary pressures and Central Government s Digital by Default strategy The majority of Government mail is transactional in nature, relating to services such as benefits and taxation We believe the Government sector as a whole is towards the beginning of the s-curve with significant scope for further mail reductions However, there are large variations as some government services have achieved significant online penetration, while others are not expected to substitute at all Central government mail sent to the general population vs. vulnerable groups (Illustrative) Sent to vulnerable groups Sent to general population 46% of the public have used a government online transactional service83% of Annual Self Assessment forms were submitted online to HMRC in 2011/12* We expect a continued decline in Government mail volumes as a result of: Increased budgetary pressures. Government surveys estimate the cost of a digital transaction can be c.30x lower than a postal transaction Demand for a better digital service for customers However, in a number of areas, declines will be limited by customer acceptance and technological challenges Many online services will need to seamlessly link to multiple government databases Certain customer groups have more limited online access, e.g. only 46% of people aged 65 and over have home internet access Digital by Default Note: *Of on time Self Assessment submissions Source: Royal Mail data, Central Government data, Digital Efficiency Report, Government Digital Strategy, Ofcom Communications Report 2012 We will continue to push for more people to use paperless as it is so much cheaper Local Authority We are constrained by what our ICT can handle Local Authority The Government s Digital Strategy was released in November 2012 to drive the development and use of online government services to reduce non-digital transactions (post, phone and face to face meetings). Digital by Default is a major initiative which may accelerate the post decline Central Government Department 37

Section 4 Projections by mail segment Transactional Mail B2B mail B2C companies are increasingly encouraging consumers to switch to online communications to reduce costs. Rapid declines are therefore expected to continue Mail costs are an increasing focus of B2C businesses... B2C businesses with large customer bases are increasingly seeking to switch customers from paper to digital interactions to reduce costs As a result we expect B2C businesses to significantly reduce mail usage over the next ten years...however, customer demand for paper is likely to act as a significant inhibitor Businesses recognise that a proportion of their customer base will continue to prefer paper copies of transactions, predominantly for record keeping. As companies reach this baseline of paper customers, the rate of mail decline will reduce 53% of B2C businesses will encourage their customers to switch to digital with a further 16% planning to stop paper transactions at some point in the future We will never get everybody online but we are aiming for as many as possible to cut down our mailing costs B2C company 47% of B2C SMEs will continue to use mail because their customers will continue to request paper We are dependent on customer preferences and some will not switch off paper billing as they like to file the bill B2C company Examples Billing B2C invoicing continues to move online and we expect significant mail declines in the next 3 years as businesses develop their online billing processes We are targeting a significant increase in the amount of online billing so the vast majority is online B2C Company Insurance Recent regulation changes allowed insurance certificates to be sent electronically. Companies have plans to move significant volumes online, but many are held back by the IT investment required. The largest impact is likely to be in the middle of the projection period Source: surveys, interviews 38

Section 4 Projections by mail segment Transactional Mail B2B mail B2B transactional mail volumes are more fragmented than B2C, but the inhibitors to substitution are lower Mail costs are generally less of a direct focus for B2B companies than B2C... B2B mail is more fragmented and represents lower volume, higher value transactions than B2C mail. The printing and mailing costs are usually a lower proportion of the overall transaction or customer value than in B2C, reducing the incentive to reduce mail The barriers to reducing mail are lower, with less investment often required to allow online communication and a smaller base of businesses resistant to electronic interaction than the base of consumers 63% of B2B businesses encourage their customers to switch to digital vs. 53% for B2C...but lower barriers mean the mail reduction is expected to accelerate and decline to a smaller base If we re insuring something for multimillions, like an ocean liner we send fancy documents. We send a lot physically as it makes people feel like they have bought something valuable. It s the bottom-end, mass markets that will go more online, like car insurance Large Insurance Company Examples Invoicing B2B invoicing is likely to follow a similar trend to B2C, with declines in the next few years leading to a low baseline of businesses which prefer paper by the end of the projection Some businesses like to receive a one page paper summary for their accounts B2B Invoicer Insurance Rate of decline is lower than for consumer insurance, with relatively low demand for paperless insurance in the marketplace. There s some element of demand, but we haven t seen a massive appetite B2B Insurance advisor Source: surveys, analysis 39

Section 4 Projections by mail segment Direct Mail We expect direct mail volumes to stabilise towards the end of the period. The weak economy was a major driver of the rapid declines seen in recent years Direct mail historical and projected volumes, 2005-23 Forecast 120 2005-08 2008-13 2013-18 2018-23 100 (2.7%) (6.1%) (2.9%) (1.3%) Indexed mail volumes (2005=100) 80 60 40 Position on s-curve 20 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Note: Excludes Royal Mail Large Letters (packets) which are included in parcel estimates Source: Royal Mail data, analysis 40

Section 4 Projections by mail segment Direct Mail Historically, direct mail declined as a share of total advertising, but it is likely to reach a new equilibrium level as internet advertising matures Total advertising expenditure follows GDP and is now recovering from the recession. Direct mail declined along with total advertising, but also lost share of marketing spend to fast growing online marketing. The decline rate is slowing as online advertising matures and the economy recovers 1/3 of British consumers still prefer to receive posted catalogues rather than using websites 47% of British retailers use mail as a marketing channel Direct mail share of total advertising spend, 1982-2011 25% 20% 15% 10% 5% 0% Growth due to improvements in printing quality and costs 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: The Advertising Association/ WARC Expenditure Report, interviews, surveys, analysis The companies that are most successful at using direct mail integrate it with other channels to use all the available data to improve the targeting and relevance of direct mail messages Direct mail is a relationship builder and for high-value customers it can demonstrate the value of the relationship Leading advertising agency Return on investment (ROI) in direct mail is comparable with other media and is becoming more measureable due to innovation in direct mail response tracking Direct mail is a massively important medium and it works Marketing consultant There remains a threat that new technologies such as mobile will upset the balance of ROI in the industry again, but declining volumes increase the attractiveness of direct mail as mailings stand out more easily When volumes drop below a certain threshold some savvy marketers will realise the channel is underutilised and rediscover it Mailing house 41

Section 4 Projections by mail segment Publishing Mail The rapid decline in publishing mail in recent years was largely driven by the majority of newsletters going online... Publishing mail historical and projected volumes, 2005-23 Forecast 100 90 2005-08 2008-13 2013-18 2018-23 (9.1%) (9.4%) (5.0%) (3.0%) 80 Indexed mail volumes (2005=100) 70 60 50 40 30 Position on s-curve 20 10 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Note: Excludes Royal Mail Large Letters (packets) which are included in parcel estimates Source: Royal Mail data, analysis 42

Section 4 Projections by mail segment Publishing Mail... the publishing segment is now largely comprised of magazines, which have proven more resilient to e-substitution, resulting in a slower decline over the projection period B2C magazines B2B magazines Newsletters Historical trends B2C Magazine subscription volumes 2007-12 Items (m) 100 50 B2B Magazine subscription volumes 2007-12 Items (m) 200 150 100 50 Estimated newsletter volumes 2007-12 Items (m) 800 600 400 200 0 2007 2008 2009 2010 2011 2012 0 2007 2008 2009 2010 2011 2012 0 2007 2008 2009 2010 2011 2012 Current developments Consumer print magazine circulation declined by c.34% between 2007-2012 but subscriptions grew by c.17% The uptake of digital editions has been slower then expected and has not replaced print Digital brands generated an estimated 15% of consumer magazine publisher revenues in 2012 We believe digital subscriptions are attracting new customers and not replacing existing ones Leading publisher Substitution will accelerate slightly but remain relatively slow Business media customers are generally high value, paying much higher subscriptions than consumers and are targets for on-sell of data and other services The print and distribution costs are a small percentage of our revenue per customer Large B2B publisher The incentives for both the sender and receiver to stop the print edition are low so we expect declines to continue to be relatively slow Newsletters moved online very quickly, only 25% are still offline We switched about 2 years ago because it was not cost-effective University This decline will slow towards the end of the period as a baseline is reached of senders that see a benefit from newsletters sent physically, such as charities encouraging donation We send newsletters to previous donors, to make them aware of the results of their help. Newsletters are costly but they will stay offline National charity Source: Enders, Mintel, Entertainment and Media Outlook, interviews, surveys, analysis 43

Section 4 Projections by mail segment Social Mail Social mail volumes are not expected to decline radically in the next 10 years. While some contraction is expected, most of the electronic substitution has already occurred Social mail historical and projected volumes, 2005-23 100 90 80 2005-08 2008-13 2013-18 2018-23 (1.9%) (5.3%) (3.8%) (3.2%) Forecast Indexed mail volumes (2005=100) 70 60 50 40 30 Position on s-curve 20 10 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Note: Excludes Royal Mail Large Letters (packets) which are included in parcel estimates Source: Royal Mail data, analysis 44

Section 4 Projections by mail segment Social Mail Personal letter use has declined rapidly, but greetings cards are more resilient and now represent the majority of social mail Average social mail received per person, 2006, 2009 & 2012 Split of social mail, 2012 Innovation 18 16 13 Letters/ Postcards 20% Some decline in Social mail may be mitigated by innovative platforms that drive usage of mail: Greetings cards 80% Moonpig allows online design and personalisation of cards The TouchNote app sends smartphone photos as postcards 2006 2009 2012 Econometric drivers Historical relationships suggest social mail has a number of underlying economic drivers such as number of households, price and quality of service. Price rises have contributed to more than half of the decline in social mail volumes during the last five years Social letters and postcards have been declining rapidly as consumers move to the wide range of alternatives Consumers are also sending fewer greetings cards, but the decline is slower as electronic alternatives have not gained wide acceptance The overall decline in social mail is likely to slow as the mix continues to move towards greetings cards How will the number of cards you send through the post this Christmas compare with last year? 65% Response frequency (%) 2% 5% Increase significantly Increase slightly Stay the same 16% Decrease slightly 8% Decrease significantly Source: Royal Mail data, Ofcom Postal Tracker Q4 2012, analysis 45

Section 4 Projections by mail segment Parcels Parcel volumes have been growing steadily and this is expected to continue during the projection period Parcels historical and projected volumes, 2005-23 200 Forecast 180 160 Indexed mail volumes (2005=100) 140 120 100 80 60 Position on s-curve 2005-08 2008-13 2013-18 2018-23 4.3% 3.7% 3.3% 2.1% 40 20 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Note: Includes Royal Mail Large Letters (packets), DSA parcels and couriers Source: Royal Mail data, analysis 46

Section 4 Projections by mail segment Parcels Despite strong growth in B2C, overall growth in parcels is reduced by the lower growth rates of B2B and C2X Parcel projected volume growth by segment,2013-23 (%) 3.7% 3.0% 1.8% B2C B2B C2X TOTAL 3.3% 1 Consumer-to-consumer 2 Business-to-business (B2B) / business (C2X) The market is less exposed to the risks of digital Growth will be substitution because it is mainly composed of mainly driven by physical items that need to be delivered online sales (e.g. 77% of ebay) Volumes are expected to consumers grow at c.2-4% p.a. by 2023, 61% of Social parcel think the trending with the improving retailers think volumes will number of UK economy click & collect remain stable with parcels they will reach only limited send will The growing popularity of growth limits population growth stay the Click & Collect and similar in 3-5 years and behavioural same delivery formats will create or even change expected an additional uplift in the earlier medium term** 2.0% 2.3% 2013-18 2018-23 1.0% 2.1% 3 Business-to-consumer (B2C) Increased uptake of online shopping via PC, tablet or smart phone is to remain the key growth driver, especially in Clothing, Footwear and Health & Beauty Online is growing but the growth rate is slowing down Health & Beauty retailer Online growth is fast for clothing where it has been encouraged by free returns Department store retailer Volumes through traditional remote channels (mail, phone, store orders) are expected to continue declining and represent a gradually smaller portion of overall B2C volumes (now c.15%) Fulfilment of Music & DVDs, Video Games and Books (c.40% of current parcel deliveries) will remain under pressure until 2023 due to intensifying digital substitution Note: *Click and collect parcels transported by retailers own fleets; **As the Click & Collect delivery is within the retailer s network, this drives the B2B market rather than B2C Source: Royal Mail data, interviews, surveys, analysis 47

Section 4 Projections by mail segment Parcels Underpinning the growth in B2C parcels is greater online ordering of items such as clothing and footwear. However, this will be offset by ongoing digital substitution of categories such as books and DVDs UK B2C parcels market volumes, 2012-23 Total 2013-18 3.7% 2018-23 2.0% Homewares 23% 24% 24% 24% 25% 25% 25% 25% 25% 25% 25% 26% DIY and gardening Other Other 4.5% 2.7% Clothing and footwear Total items 36% 39% 42% 44% 47% 49% 50% 52% 53% 54% 55% 56% Health andhigh beauty growth Electricals 9.3% 4.5% 41% 37% 34% 31% 29% 27% 25% 24% 22% 21% 19% 18% Music and DVDs Substitutable Books (4.2%) (4.7%) Video games 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: analysis Outlook for UK mail volumes to7 2023 48

Section 4 Projections by mail segment International Mail Despite the historical contraction in letter volumes, international mail volumes have benefited from the growth in parcels International letters historical and projected volumes, 2012-23 120 Forecast Indexed mail volumes (2012=100) 100 80 60 40 20 Position on s-curve 2005-08 2008-13 2013-18 2018-23 n/a n/a (5.5%) (4.8%) 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 International parcels historical and projected volumes, 2012-23 Indexed mail volumes (2012=100) 180 160 140 120 100 80 60 40 20 2005-08 2008-13 2013-18 2018-23 n/a n/a 4.4% 3.2% Position on s-curve Forecast 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: Royal Mail data, analysis 49

Section 4 Projections by mail segment International Mail E-substitution continues to erode international letter volumes, but parcel volumes continue to grow, boosted by investment in online exports Letters International mail by type, 2012 Export as well as import letter volumes have suffered a declining trend over the past 10 years (c.6-7% p.a. since 2007) driven by e-substitution The latest market data suggests that the decline may have slowed slightly in the last couple of years even though it is expected to persist until 2023 In the medium and long term, international GDP growth should create a partial uplift in overall letter volumes in line with increased global trade. International letter volumes have remained relatively flat over the last 3 years although spend has come down Central government department Imports 55% Exports 45% Parcles 26% Letters 74% Parcels International parcels can be split into B2C, B2B and C2X shipments B2C and B2B parcels represent the majority of volumes (c.90%) and are expected to grow, especially on the export side where UK based businesses are investing for online growth in Europe and Asia in particular Import volumes are expected to remain more stable for social and small business parcels, growing at c.1-3% p.a., in line with the domestic demand for online traded products as the economy recovers We see international as an area with a big potential for growth Department store retailer 5.9% Australia is used to buying a lot online from the UK and so is the US Department store retailer Expected future change in B2C export parcels Response frequency Strong increase 23.1% Increase 50.6% No change 0.9% 2.7% Decrease Strong decrease Response rates across 338 surveyed UK retailers 16.9% Don't know Source: Royal Mail data, interviews, surveys, analysis 50

Section 5 Main risks to projection 51

Section 5 Main risks to projection There are a number of short term risks which could have one off negative impacts on the projection which we have not modelled 1. Macroeconomic downturn Our projection assumes a return to trend GDP growth in 2015 A future macroeconomic downturn would have a significant impact on postal volumes by reducing transaction volumes and direct mail 3. EU Regulation on Direct Mail The EU Commission has recently proposed changes to consumer data protection rules The proposed changes include the right to be forgotten to allow people to have their data deleted and limitations on the use of customer profiling The requirement for more explicit consent for personal data to be used could significantly impact the ability of companies to engage in Direct Marketing, both by mail and in digital formats 2. Service disruptions The disruption of delivery volumes (e.g. from weather or industrial action) can have a significant impact on mail volumes The majority of this impact is temporary. However, service disruptions may also encourage greater e-substitution as a result of customer switching to alternative methods of communication The impact of service disruptions on postal volumes can be modelled on the basis of the historic correlation between previous disruptions and mail volumes. 4. VAT Treatment Royal Mail Wholesale (Downstream Access) is currently VAT exempt. However, Royal Mail s exemption may become subject to a judicial review If all Wholesale services became VAT taxable, organisations that are unable to reclaim VAT, such as charities and financial services firms, would see a significant effective price increase and this could encourage further e-substitution of mail If Downstream Access becomes taxable, it would lead to a 20% increase in our costs and would have a serious impact on our mail use Insurance company Source: interviews, analysis 52

Section 5 Main risks to projection Some of the longer term risks applicable to mail volume projections cannot yet be quantified and so are included in a contingency within the projection Unlikely but possible within projection period Known risks Potential projection risks Unlikely within projection timescale Identified Unknown risks Unidentified Identifiable one-offs that could fall within the time frame of the projection, e.g.: o Large scale Internet security breach that encourages consumers to revert to mail o Widespread adoption of digital mailboxes Identifiable trends that will materialise eventually but are unlikely to take place within the projection period, e.g.: o Electronic invoices mandated for all government procurement o 3D printing of remotely purchased goods that would reduce parcel deliveries Risks arising from known trends (e.g. technology development, ageing population) which cannot currently be specifically identified, e.g.: o The development of new marketing technologies that further reduce direct mail s share of advertising spend Risks arising from any changes to our projection assumptions relating to the operation and structure of the market Rare black swan event that cannot be predicted easily but could have a significant impact on projected mail volumes and the structure of the postal market Shifts could occur through any channel, e.g. technological, political, macro economic Source: analysis 53

Section 5 Main risks to projection Our e-substitution scenario analysis suggests that in a negative case, the total cumulative decline could be 5ppt below our base-case by 2015, increasing to c.12ppt by 2023 Total inland mail projected scenarios, 2012-23 Indexed mail volumes (2012=100) 120 100 80 60 40 20 The balance is towards more downside risk 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 We have modelled upside and downside e- substitution scenarios to demonstrate the potential impact on our projection of some of the risks we have identified These scenarios are based on changing a number of assumptions underlying our individual mail segment projections to create high and low cases for each mail segment These are not worst case scenarios, but represent plausible alternative outcomes Upside scenarios are based on factors such as a larger baseline of consumers and businesses retaining paper invoicing and slower Government digital uptake while downside scenarios are based on factors such as faster adoption of paperless bank statements and slower parcel volume growth We have used Monte Carlo analysis to illustrate the range of possible outcomes from combining these scenarios (reflecting the fact that it is unlikely that all downsides will occur together) The scenarios do not include differing GDP assumptions (illustrated later in the report) and also exclude large one off events which could significantly affect mail volumes. Examples of these events are discussed in the Main risks to projection section of the report Source: analysis 54

Section 5 Main risks to projection In addition, the total cumulative decline in mail volumes could be c.6ppt below our base-case by 2023 if GDP growth were to be at the bottom of our projected range Total inland mail projected GDP scenarios, 2012 & 2023 Indexed mail volumes (2012=100) 120 100 80 60 40 Our upside GDP scenario assumes a stronger recovery of the UK economy with c.4% growth in 2014 and a return to trend growth rate of 2.5% p.a. Our downside GDP scenario assumes a period of stagnation with negative growth in 2013 followed by weak growth in 2014 before recovering to a trend growth rate of 2% p.a. We have also considered upside and downside GDP scenarios and their impact on our mail projections Our upside GDP case assumes a stronger than expected recovery and marginally higher trend growth over our base-case in the outer years Our downside GDP case assumes a period of stagnation and lower trend growth than our base-case in the outer years The shaded area shows the range of potential outcomes resulting from the GDP scenarios described above 20 0 2012 2013 2014 2015 2016 2017 20232018 2019 2020 2021 2022 Source: analysis 55

Section 5 Main risks to projection The fragmentation of the mail bag means a significant number of discrete downside risks need to materialise to have a significant impact on the projection What would happen if we saw large risks materialise across multiple categories on top of the currently projected decline? Impact of multiple downside scenarios on total inland addressed mail volumes, 2012-2023 Advanced screen technology and increased e-card penetration drives a 60% reduction in card mail No growth in B2C parcel volumes after first five years as 3D printing substitutes some online shopping delivery The Digital by Default strategy drives an 80% reduction in mail sent by central government Paper bank statement volumes decline by 80% after banks start charging for paper current account statements in 2018 B2B invoicing mail drops by 80% after government mandates e- invoicing for its procurement Technology and legislation reduce direct mail s share of total advertising from c.10% to 3% Items (bn) 18 16 14 12 10 8 6 4 2 0 18 2009 2010 2011 16 2012 2013 72% of 2012 volumes 2014 2015 2016 2017 2018 56% of 2012 volumes 2019 2020 2021 2022 2 9 2023 Basecase Illustrative Downside scenario Cheques discontinued as a payment system Improvements in tablets reduces physical magazine subscriptions by 50%* The fragmentation means a large proportion of mail remains unaffected even if all of these discrete events were to occur simultaneously Note: *From 2012 levels Source: analysis 56

Section 5 Main risks to projection There are also a number of possible upsides which have the potential to offset some of the volume decline Low Impact High High profile internet security breach Changing consumer attitudes to environmental concerns Government opts to maintain a high proportion of mail to promote inclusion New online privacy restrictions affect internet advertising Stronger than expected economic growth Reduction in the cost of document production and processing Likelihood Improvements in targeting and ROI measurement of direct mail Low Innovation by mail companies e.g. Tracked delivery for all letters New products or companies using mail High Source: analysis 57

Section 6 Appendix 58

Section 6 Appendix Research papers consulted Publication details Soteri, S., F. Fève, J.P. Florens and F. Rodriguez (2009). Internet advertising and direct mail: trends and analysis for the UK, in M.A. Crew and P.R. Kleindorfer (eds), Progress in the Competitive Agenda in the Postal and Delivery Sector, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 209-22 Veruete-McKay.L, R. Sheldon, P. Burge and A. Lawrence (2013). Electronic substitution and postal price elasticities: a customer market approach, in M. A. Crew and P. R. Kleindorfer (eds), Reforming the Postal Sector in the Face of Electronic Competition, Edward Elgar, pp.226-40. Buser, M., C. Jaag and U. Trinkner (2007). Economics of post office networks: strategic issues and the impact on mail demand, in M. A. Crew, P. R. Kleindorfer and J. I. Campbell Jnr (eds), Handbook of Worldwide Postal Reform, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Nikali, H. (2011). Does the level of price elasticity change with the progression of substitution?, in M. A. Crew and P. R. Kleindorfer (eds), Reforming the Postal Sector in an Electronic Age, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Analysis of Postal Price Elasticities Office of Inspector General, United States Postal Service (May 2013) Implications of Declining Mail Volumes for the Financial Sustainability of the Postal Service Office of Inspector General, United States Postal Service (September 2010) 59

Section 6 Appendix Glossary Term B2B B2C Base-case By-pass C2X Click & Collect Direct mail Downstream access Econometrics E-substitution GDP HMRC Inland Mail Monte Carlo analysis Pay-Per-Click PDF Price elasticity Publishing mail RPI SME Social mail Transactional mail VAT Definition/Meaning Business to Business Business to Consumer Case in our opinion most likely to materialise Mail which is collected and delivered by companies other than Royal Mail Consumer to Consumer or Consumer to Business Compound Annual Growth Rate A service offered by retailers in which items are purchased online and then delivered to a store chosen by the customer for collection Advertising mail, e.g. Promotional leaflets Mail which is collected and distributed by companies other than Royal Mail but which is then passed on to Royal Mail for final delivery Statistical methods used in Economics Substitution of paper communication by electronic methods e.g. email Gross Domestic Product Her Majesty s Revenue and Customs Includes all addressed letters and parcels sent within the UK (excludes unaddressed mail and all international letters and parcels) A method of repeated random sampling An internet advertising model in which advertisers pay the publisher each time an advert is clicked Portable Document Format A measure of the impact on mail volumes due to changing price Includes mail such as Newsletters and Magazines Retail Price Index Small and Medium sized Enterprises Cards, letters and postcards Typically mail that is sent in relation to a business or Government service, e.g. Invoices, insurance documents Value Added Tax 60

This document has been prepared only for Royal Mail Group and solely for the purpose and on the terms agreed with Royal Mail Group. accepts no liability (including for negligence) to anyone else in connection with this document.