Examination of Witnesses (Questions 20
- 39)
TUESDAY 18 OCTOBER 2005
ROYAL MAIL
GROUP
Q20 Judy Mallaber: Can I follow on
with precisely these comparisons? How does the cost of the Universal
Service Obligation to national operators and other EU countries
compare to your costs?
Mr Smith: Other countries face
the same Universal Service Obligations as we face in the sense
that they have to deliver to every door every day at a uniform
price. The difference is that their stamp prices are much higher
than ours, so effectively their costs are more in line with the
prices for universal service products than ours are. A classic
example, at 60g Spain is the next cheapest country in Europe,
and that is at 44p for a first-class stamp, whereas we are at
30p.
Mr Leighton: May I mention two
things which are quite important. In a strange way what they charge,
whether it is a comparison is irrelevant because it is what we
charge here—we are only interested in this market—and
there are two things that are very important. Everybody talks
about, "What is going to happen to your business, what is
going to happen to your volumes and what are you doing about it?"
We can take a stab. Everybody talks about Finland, Albania, Sweden;
no market of this scale has been opened up. This is a big market
with big volumes, with big cash, with a big operator in it, and,
therefore, if you are another multinational player, if you are
TPG or Deutsche Post, are you interested in being
in a big market taking a share? Yes, you are. In fact TPG,
Bakker, will say he thinks we will lose 30 per cent of our market.
This has not happened before, and the reason why we get as we
do about it is that this piece of regulation for us is a key piece
of regulation because it is at the tipping point, and nobody,
whether they are us, the regulator, you or somebody who works
for Sporting Bet, has the foggiest idea about what is actually
going to happen—all you can do is make some educated guesses—and
our whole point is, having sat on this for three years and got
it to some degree of stability, we would like to make sure that
all the risk is not passed on to us, because we do not fancy the
idea of everybody coming back to us afterwards saying: can we
fix it? To your point, Peter, we are aggressively attacking in
terms of our competition. Outside of the UK we have created fantastic
abilities in GLS which we have created from nothing in three years.
It is going to do over £1 billion of sales, it is going to
make over 100 million of e-bit.
Q21 Chairman: GLS is?
Mr Leighton: General Logistics
Systems. It is our parcels business in Europe. It is the most
profitable parcels business in the world and it is the second
player in Europe. It will do a billion of sales and 100 million
of e-bit, and so we are attacking in some other markets as well.
The issue we get all the time is that we come in front of these
groups and everybody else and everybody thinks we are being very
defensive and we are trying to protect our corner and everything
else, because that is where we get to, but the fact of the matter
is we have created a platform; we do not want to let it go. We
think this piece of regulation is pivotal, and do we compete?
We complete like hell, and one day we are going to go into Deutsche's
back garden and the Dutch's back garden and everybody else's and
try and do the same thing to them, but we will only be able to
do that if we can afford to do it. What has happened in those
markets? Take the big ones, which are really the Dutch and the
Germans. They have allowed their organisation in the regulated
market to be hugely profitable: high stamp prices, not the same
level of requirement of service, hugely profitable. What do they
do with the profit? They go outside and they buy non-regulated
businesses, so when the day comes when they get the same regulation
as we do more than half of their business will be non-regulated.
Q22 Judy Mallaber: Can I ask you
to clarify the point you made about them not having the same level
of requirements on the service. You have said that their cost
structure is different, they are allowed to charge what you would
say is an economic cost, but what are the differences in terms
of the Universal Service Obligation that they have to operate?
We will be going on to question you about the changes that you
are proposing, but can you explain what will be the differences
in what they are required to do compared with what you are required
to do?
Mr Smith: A very specific difference—they
face the same obligations, collect and deliver from every collection
point and to every address every day, but the time of day is different.
In Germany I believe you can deliver a letter up to 5.00 p.m.
under their licence, whereas we have to deliver by 2.00 p.m. When
you are talking about a first-class product in a big country,
those three areas make a huge difference to your cost structure.
Mr Leighton: I do not think they
deliver on Saturdays.
Mr Smith: They do not deliver
on Saturdays, yes.
Mr Leighton: So there is a universal
service but it is a five-day universal service, and you have got
all day; you do not have a Saturday delivery on the back of it.
Q23 Judy Mallaber: Do they have other
products they have to deliver as well as that universal postal
service?
Mr Smith: They choose to deliver
business products, as we do, yes.
Q24 Judy Mallaber: Is there a requirement
on them to do it under the Universal Service Obligation?
Mr Smith: The definition of "universal
service" is unclear in their licences, so single piece stamped
mail is part of the universal service. For example, in the Netherlands
direct mail is not. In our market Mail Sort 3, until very recently,
is part of the universal service.
Q25 Judy Mallaber: We are going to
go on to explore that a bit further, but can I follow up? I appreciate
what you say about them being very small compared to the service
that you are providing. Can you tell us what has been the impact
of full liberalisation in countries like Sweden and Finland?
Mr Smith: In Sweden there is obviously
no competition in rural areas at all, but in the three major cities
in Sweden about 25 per cent of business mail has been lost to
competition, and that is despite the fact that Sweden Post has
introduced its own low prices; so its prices in cities are less
than half of its prices in rural areas, but it has still lost
25 per cent of business in the three major centres. There is no
competition in rural areas. In Finland there has been no competition
whatsoever, and that is basically because the Finish authorities
decided to put a levy on all new entrants—I cannot remember
the percentage, but a percentage of the revenues—and that
has basically stopped competition coming into the market.
Mr Crozier: Which was to pay for
their share of the universal service.
Q26 Judy Mallaber: Are Sweden in
difficulties, and, if not, how have they managed to overcome that
competition?
Mr Smith: Sweden has raised its
prices outside of cities dramatically. When competition came in
they cut its city centre prices by about 30 per cent and it almost
doubled its rural prices.
Mr Crozier: Which comes back to
Lindsay's question about what is the ultimate effect on the USO?
Unless the company goes on, somebody has to pay for that.
Q27 Judy Mallaber: You are basically
saying in those other countries, both the ones where they are
big markets and there is a danger to us and in the smaller one,
that they have been given more flexibility over a whole range
of areas?
Mr Leighton: Absolutely.
Mr Crozier: We should not forget
that Germany and Holland would fight the idea of access in their
own markets tooth and nail, in fact they do fight the idea of
access in their own markets tooth and nail, but they are very
happy to see it in someone else's market. If you view the market
as Europe, which in many ways it is, this is absolutely not a
level playing field. The chances of most other countries even
bringing any kind of competition in are very slim, and we are
at least three years ahead of anyone, probably a great deal more.
Q28 Chairman: Can I be clear, the
city pricing in Sweden, is that inside one city or is it city
to city as well?
Mr Smith: Delivery in any city.
Q29 Chairman: The city you are posting.
Mr Smith: Yes.
Chairman: You say it is a higher rate
to go anywhere else outside the city.
Q30 Sir Robert Smith: You mentioned
that some of your competitors in their regulated area are allowed
to operate so profitably they can use that to subsidise their
non-regulated business. In a sense it is the reverse here, where
the non-regulated business is keeping the universal service going.
What is your view on going down the levy route of rivals to maintain
that?
Mr Leighton: We do not like it.
In the mix of this, I do not mind competition because, as I say,
I think it sharpens us all up, and I think you have got to try
and make it as simple as you can. Basically the thrust of everything
we have said is: allow us to make a return—forget about
anything else, we have been pretty good at managing everything
within all of that and we look at it as an entity and some of
the cross-subsidised database—it is very simple—allow
us to make a return and, if you allow us to make a return close
to what are competitors make, then the probability is we will
be able to manage everything in such a way because it is quite
complex. It enables the USO to stay as it is and for us to be
as competitive as we need to be. The more complicated it gets
with levies over here, it just clouds the issue. I have always
said from day one, if you want to regulate a market and you want
to make it competitive, say anybody can come in and everybody
can be the same, just tell the incumbent—that is us at the
moment—how much money we can make and just allow us to make
sufficient money (a) to enable us to invest in our business, (b)
to do the automation and (c) in our case now to deal with our
pension deficit. It is as simple as that. When you read 596 pages
of regulation and everybody's inputs to it you do not believe
that is the case, but that is the nub of this.
Q31 Mr Weir: I want to pick up a
point that Mr Crozier made about the Swedish example that prices
were higher in rural areas. I notice in your own submission paragraph
4.34 states: "Royal Mail's product strategy will be underpinned
by a much more granular and cost reflective "Pricing Roadmap"
that includes, among others, pricing by size, delivery density,
payment channel, speed and mailing volume." Does that mean,
when you are talking about "delivery density", that
you also see higher prices in rural areas following liberalisation?
Mr Crozier: First of all that
is for business mail, not USO covered mail. With regard to USO
the whole principle for us is the `one price goes anywhere' service,
so that does not change. In order for our products to be cost
reflective, which they need to be if they are going to be competitive,
we believe we need zonal pricing. By and large that is about putting
prices down. Clearly the cost of delivering a piece of mail within
London is a lot less than the cost of delivering a piece of mail
from London to Aberdeen, so it is just for business products.
Mr Leighton: Adam's is a very
good point—I do not want to lose it—which is that
we understand to be competitive like everybody else sometimes
you have to bring prices down. To compete in business mail that
is what we will have to do. That is what that is all about. It
is not that we would put prices up; we have to be competitive,
and it is not a one-way street. One thing I will tell you. If
we put all our prices up by 10, 15 per cent, I will tell you exactly
how much market share we are going to lose. It is a very important
point.
Mr Crozier: I offer it as a small
point.
Q32 Anne Moffat: It is a small point.
I am just intrigued by the possibility of you being able to introduce
all-day mailing and stopping deliveries on Saturday. Would that
be a ripple in the ocean for you or would it be a great help if
you were to introduce such a thing?
Mr Crozier: I think the problem
with all those things is the classic thing that you start from
where you start from. The service we provide is a six-day service,
that is what people are used to, that is what they want, and we
have never tried to challenge that and we work around that. I
do not see that changing for us in the short-term, or even in
the long-term frankly. It is not something we have really considered.
Q33 Mr Clapham: Getting the balance
right is obviously extremely important. Definitions can play a
very important role, and what we have been told by Postcomm is
that you have not yet agreed the modification of the licence that
will allow for the change in the definition of the USO. Could
you tell us how the definition that is being proposed by Postcomm
differs to the definition in your licence and how it compares,
for example, with the definition in the European directive?
Mr Smith: Our licence defines
the set of products which should be considered to be universal
service products. At the moment the current licence is pretty
much all of them. Pretty much everything we do, with a few exceptions,
is considered universal service.
Mr Crozier: About 90 per cent.
Mr Smith: What Postcomm is proposing
is to allow us to take several business products out of the USO;
and if you want to get into detail they are Mailsort 120 and 700.
The crucial thing is they want to keep our biggest bulk product
in the USO. Our biggest bulk product is called Mail Sort 1400.
That they want to keep in the USO. That means that that big bulk
product would have to be priced uniformly in the UK.
Mr Crozier: Which is the main
area our competitors will attack us on. We have a very simple
view of the USO, which is that the USO should be about all of
those products which are for everyone everywhere every day, and
Mailsort 1400—less than two per cent of our customers could
ever use that product, because you have to post a minimum of 4,000
items a day; so that is not a USO product because it is for a
very, very small piece of the marketplace and the USO products
are about everyone, everywhere, every day and we think that very
clean definition is the right one.
Q34 Mr Clapham: It is crucial to
getting that balance?
Mr Crozier: Absolutely.
Mr Leighton: Let me be very clear
on the USO again. We think it is fundamental to what we do and
we have every intention of keeping it. That is what we want to
do, but we think the USO should be about all the products that
Adam determines and we should not get business products put into
the USO where only two per cent of the customers use them, where
we therefore have to keep the price and we will lose a load of
volume; but as far as what I describe as social mail, that should
be protected and we should go any time, any place, anywhere every
day. That is what we want to do.
Q35 Mr Clapham: What is the indication?
Has Postcomm got their head around this?
Mr Leighton: No.
Q36 Mr Clapham: If so, are you likely
to be able to agree a definition?
Mr Crozier: No, I think we have
a disagreement.
Q37 Chairman: What is Mailsort 1400
and why do Postcomm think it should be part of the Universal Service
Obligation?
Mr Smith: Mail Sort 1400 is mail
that is pre-sorted by customers to 1400 destinations, namely to
each of our delivery offices; so they sort the mail down to the
delivery office. That it what it is. Postcomm has always, for
some reason, said that they want one bulk mail product to be in
the universal service. They have never explained why.
Chairman: I think we will be asking them
when they come before us.
Q38 Sir Robert Smith: Would it not
be that businesses, wherever they are in the UK, should have a
level playing field for some of the products?
Mr Crozier: I could understand
it if what they wanted was one business product in the USO that
was particularly available for all businesses, small businesses
particularly, so there was some element of protection, but the
point is this product is only available for very large businesses
because less than two per cent of them ever post that number of
items; so you have to disconnect. I could absolutely buy into
that, that that would potentially be a very sensible thing to
do, but that is not what they are doing at the moment.
Q39 Mr Weir: Would you not be able
to do a mailing on one occasion? Is the point that they are not
doing this every day? Somebody may use this for one specific general
mailing?
Mr Leighton: But only two per
cent of the customers do.
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