House of Commons - Post Offices - Securing their Future

Post Offices - Securing their Future - Business and Enterprise Committee Contents

2 The network and its services

33. Unplanned closures since the end of the Network Change programme mean that the post office network now has fewer than 11,500 branches, with another 500 outreach services. Services are delivered through eight different models:

Table 1: Post office network delivery models

Model Description

Crown post offices Directly managed by Post Office Ltd

Sub-post offices Run by a subpostmaster

Outreach

Partner post offices Service provided in a shop under supervision of a subpostmaster of a sub-post office

Mobile post offices Service provided through a van visiting a set location at set times each week

Hosted post offices Post offices operating in other premises; for example, a pub or church hall, often for a set period each week, using portable post office computer equipment

Home Services Postal service provided directly

Post Office Essentials A pilot scheme, based in shops, that provides a limited range of post office services from the same till and counter as shop services

Post Office Ltd also offers some services by internet and phone, such as travel insurance and foreign currency.

34. The service availability associated with each model varies. Indeed, some post offices are only open for a handful of hours a week; the Mobile post offices move from one community to another, visiting each at set times and days each week. Home delivery services do not have set hours of operation at all, but allow customers to order from a reduced range of services and products over the telephone for home delivery or central collection. Nonetheless, most Crown post offices and sub-post offices are open regular hours, six days a week.[31] Some services are available beyond post office opening hours because Post Office Ltd has introduced new equipment such as Combi Tills and Paystation terminals. However, even where post offices and sub-post offices have relatively extensive opening hours, there have been calls for longer and more convenient hours from many customers and postal service providers.

Financial viability

35. This debate must start with an acknowledgement that post offices provide many services, and many of these are available at virtually every office. Currently, services available include the following (those listed under "Bill payments" are only available where the local authority, utility or service provider have agreed to allow payment through post offices):

Postal services
Standard 1st and 2nd class post
Overseas postage
Recorded delivery
Express postal services
Philatelic
Redirection
Licences
Fishing licences
Game licences (Scotland)

Pensions and benefits
Post Office Card Account
Exceptions (cheque) service

Money management
Personal banking
MoneyGram cash transfers
Postal Orders
Savings stamps
Christmas Club

Financial services products
Credit card
Personal loans
Post Office Instant Saver
ISAs
Growth Bonds
Child Trust Fund
Access to National Savings and Investments products

Business services
Business banking services
Cash collection service
Post office payout
Travel
Bureau de change
Bill payments
Telephone, cable TV
Gas, electricity, water
Mail order
Council tax
Council/housing association rent
Inland Revenue self assessment bills
Insurance

Insurance products
Car insurance
Home insurance
Travel insurance
Life insurance
Lifestyle Protection
Over 50s life cover
Van insurance
Motorcycle insurance
Pet insurance

Telephony
Homephone
Broadband
Phonecards
Mobile top-ups

36. The full suite of services currently offered is much broader. Post Office Ltd provided us with a full list of products and services available, which can be found in Appendix A of this report. However, the NFSP also provided us with a list of available services, and these lists do not precisely match.[32] Some of the more notable services are listed below, along with the number of branches in which Post Office Ltd tells us the services are available:

Paystation bill payments[33]

Bureau de change — on demand (1,629 offer a range of currencies on demand; nearly 6,000 offer Euros or Euros and dollars on demand)

Vehicle and driving licence applications (DVLA) (4,600)

Travel insurance (available on demand in 9,000 branches)

Passport applications and check and send (2,500)

European Health Insurance Card (2,500)

Lottery (4,849)

Post office ATM (1,653)

Driving licence checking (743)

Local Collect (10,800)[34]

37. Postcomm gave the Committee the following breakdown of income for Post Office Ltd:

The most recent Postcomm network report includes the following breakdown of Post Office Ltd's revenue, showing how this has changed over the last five years:

Figure 2 - Post office revenue by pillar, expressed as a percentage of total Post Office Ltd revenue excluding the Social Network Payments

Postcomm, Eighth Annual Report on the Network of Post Offices 2007/08 , 2008

38. The National Audit Office said in its recent report on the Network Change programme:

39. Royal Mail Group's Annual Report and Accounts for the year ended 29 March 2009 show that Post Office Ltd made an operating profit of £41 million in 2008-09, compared to a loss of £34 million the previous year. Post Office Ltd's revenue position thus improved by £75 million over the previous year. However, these results depend on a Network Subsidy Payment of £150 million. An additional £152 million payment was made to Royal Mail Group under the Industrial Development Act 1982 to "compensate Post Office Limited for the other net costs of providing certain specified 'services of general economic interest'".[37]

40. Post Office Ltd's improved financial performance was attributed to "strong growth in Financial Services; Post Office Ltd now has around two million customers for these services, while the award of a new contract for the Post Office Card Account (POCA) underpinned the branch network's role in the provision of cash to millions of customers".[38] Specifically, financial services and Homephone revenue streams increased, offsetting declining revenue from government services. Royal Mail explains that POCA customers moved to other banking services, and revenues from the Driver and Vehicle Licensing Agency (DVLA) declined as more customers used online applications. Retail income also dropped. At the same time, Post Office Ltd was able to reduce costs by renegotiating key supplier contracts.[39]

41. The approach taken by Post Office Ltd to improve financial performance is in line with what Postcomm suggested was needed to sustain the network: "a combination of cutting costs and increasing revenue".[40] However, Post Office Ltd's current profitability depends on the Network Subsidy Payment, which runs until 2011. Further payments would depend on clearance under European Union State Aid rules. We believe that such payment, if necessary, would be justified, but clearly, it would be better if the network could be self sustaining.

Subpostmasters and other providers

42. The financial picture for Post Office Ltd as a whole is only part of what must be considered when assessing the post office network's financial sustainability. Post Office Ltd's finances depend on cross subsidising services. Some of the profit from new services offered either by particular branches or by Post Office Ltd centrally may go to support the wider network. Many post offices are in remote areas where custom is scarce, and three quarters of the network's branches do not make a profit.[41] Post Office Ltd clearly needs to cut costs — and to increase revenues — as much as possible, but the company is sustainable only if the independent businesses that provide many of its services are also profitable.

43. Since 2006, business transferred from offices closed through the Urban Reinvention programme or the Network Change programme should have improved the profitability of surviving post offices. Even so, sub-post offices continue to face difficulties:

many subpostmasters are finding it really hard to survive, and there is a growing database that subpostmasters, the ones that are meant to be stable, are actually handing the keys in and are walking away.

[…]

44. Even after the Network Change programme, the profitability of sub-post offices continues to concern us. Sometimes the problem does not lie with Post Office Ltd. The NFSP has expressed concern that actions to improve Royal Mail Group's efficiency and reduce costs overall might affect sub-post offices. In its report, Six Steps to a Sustainable Post Office Network, the NFSP points out that there are 900 post offices, mostly in rural areas, that provide local sorting office facilities on behalf of Royal Mail. In our recent inquiry into the Postal Services Bill, we heard that pay for providing these additional services represents about one-quarter of a sub-post office's total income from postal services.[43] The NFSP stated:

The Government response to our report indicated that mailwork centres "will not be affected by the proposed changes to the structure of the Royal Mail group of companies."[45] Nonetheless, it must be possible that measures to improve the profitability of the letters business may adversely affect the post office network.

45. There are still more pressing problems in the relationship between Post Office Ltd and its retail partners. What is efficient for Post Office Ltd may not be good for subpostmasters. Indeed, some of Post Office Ltd's efforts to improve its financial position may be directly against the subpostmasters' interests. This is obviously the case when Post Office Ltd changes contracts so that they are driven more by the number of transactions carried out, rather than fixed payments, or introduces new ways to access post office services, such as outreach, where limited services mean limited payment for the provider. A move from a fixed payment to transaction-based payments clearly disadvantages those post offices that have fewer transactions. Post Office Ltd's reported demands for back-dated fees from 400 branches that restocked cash machines with post office cash over the past two years is another example of an action that might make sense for Post Office Ltd, but damages its subpostmasters and other providers.[46]

46. The way in which individual services are promoted can also affect sub-post office profitability. Subpostmasters complain that Post Office Ltd's efforts to give consumers more choice can undermine them. One subpostmaster told the Committee that Post Office Ltd offers better rates for such products as foreign currency and travel insurance if customers purchase the products online or over the telephone. He added: "For example, turnover in foreign currency in my own branch is down £70,000+ over the last year, as customers desert us in droves to place their orders on-line. This is having a huge impact on the viability of sub-post offices across the country".[47]

47. Post Office Ltd explained to the Committee that if customers are introduced to a product in a sub-post office and then later purchase it online, they are prompted to refer to a subpostmaster, who then gets a commission on the sale.[48] Post Office Ltd also remunerates subpostmasters for other online transactions as long as the consumer identifies the sub-post office that referred them to a service. Nonetheless, subpostmasters are only remunerated for introducing customers to a new service. They are unlikely to benefit from repeat business, and payment in the first place depends on the customer's acknowledgement of the role of the subpostmaster.

48. The issue of paying subpostmasters for additional services is not easy to resolve. Post Office Ltd currently pays sub-post offices for transactions, but also provides infrastructure and investment. There is also the question of what is a fair price for these services, given that a post office attached to an associated business brings in additional custom to that business. Indeed, the payment services company PayPoint has been able to offer bill payment services to its customers at very low price because retailers are happy to accept low returns for PayPoint business since they benefit from the extra footfall generated. However, this business model depends on offering its services through existing businesses. Post Office Ltd has to sustain a network that meets government access criteria, and moreover, if the conclusions of this Report are accepted, needs to accept that sustaining the network at its present level is one of its core tasks.

49. Even if this is accepted, there are difficult issues about how to divide the amount subpostmasters receive through their basic contract and how much through individual transactions. A fixed sum payment makes it easier to assess the value of the post office to a wider business, but it will reduce the incentive for the individual postmaster to increase the activity of his or her branch. While lower rates of activity will not affect individual income, they will affect the profitability of the network as a whole. Currently, the NFSP considers that the remuneration subpostmasters receive for the services they provide is inadequate.[49] A recent NFSP survey of its members showed that most subpostmasters earn nothing from the sale of some of Post Office Ltd's financial services. While 81% of subpostmasters made income from bank account withdrawals, an average of only £32 was earned from Link Card and Alliance & Leicester card withdrawals in March 2009. Only 1% of subpostmasters surveyed earned more than £50 for vehicle insurance in March 2009, for example.[50] The extent to which this matters depends on the extent to which the pay of those providing services to the post office, be they subpostmasters or franchisees, relates to the number of transactions they make, rather than being a fixed sum. If transaction-related payments are set at too low a level they could endanger the viability of the network, particularly if volumes are lowered by increased use of online services.

50. The National Federation of SubPostmasters told the Committee:

51. The NFSP caution that the viability of the network depends on adequate payment for services,[52] and suggested to the Committee that a line might be added to subpostmasters' payslips that showed the allocation of the Network Subsidy Payment for that sub-post office to reflect the services being provided.[53] This would require Post Office Ltd, in turn, to divide the payment between branches rather than treating it as a lump sum, as now. We are not convinced by the NFSP proposal. In the longer term, the subsidy should be replaced by increasing the services to be provided through the network, including government services, and paying for them properly.

ALLOCATION OF COSTS

52. The NFSP told the Committee on its visit to Wales that subpostmasters provide infrastructure and all but the most basic technology, and that Post Office Ltd spends highly disproportionate resources on refurbishing Crown rather than sub-post offices. The Committee also heard in Wales that Post Office Ltd charges for moving terminals and other equipment in sub-post offices are extremely high. The subpostmaster is contractually obliged to have Post Office Ltd move equipment, and one subpostmaster the Committee met in Cardiff showed a bill of over £1000 for simply moving a terminal from one part of the post office to another. The subpostmaster subsequently reported that Post Office Ltd later agreed to pay the moving costs. Nonetheless, the example demonstrates that Post Office Ltd's practices may not always be in the best interests of its subpostmasters.

53. Private sector partners must pay for the staffing of their post offices themselves from the payment they receive from Post Office Ltd. They must also contribute towards the fixtures and fittings of the post office themselves; only basic facilities are provided directly.

54. The NFSP suggests that income must be increased for those post offices that remain following the closures. Also,

55. Small businesses are unlikely to continue providing a service if they cannot do so profitably. It is clear that unless the interests of partners are taken into consideration in Post Office Ltd's corporate decisions, the network itself is in jeopardy. As the NFSP states:

The Committee heard from the NFSP that in 2006, "40% of subpostmasters made a loss and were unable to cover their post office staff costs, overheads and personal drawings from the net post office pay".[56] We recognise that subpostmasters are self-employed; nevertheless, when the state provides services directly, it pays its workers at least the minimum wage. Post Office Ltd, a state-owned company, should ensure it treats its subpostmasters and Outreach operators no less fairly.

OTHER NETWORK PARTNERS

56. It is not just subpostmasters that are critical of the way Post Office Ltd has worked with them. The Co-operative Group expressed concerns about the restrictive policies of Post Office Ltd:

57. Similarly, the Association of Convenience Stores pointed out that Post Office Ltd cannot offer customers a full range of bill payment services, and the restrictions policy therefore reduces convenience for the consumer. Furthermore,

58. Post Office Ltd undoubtedly uses contract restrictions to protect the strength of the products that it offers, and in turn the profitability of the network as a whole. However, their restrictions may instead reduce the viability of a given branch, and therefore the integrity of the network itself.

59. Subpostmasters are represented by the NFSP; other operators have no single voice. Here, too, there are complaints that Post Office Ltd does not try to ensure that its interests and those of its partners are compatible. The Co-operative Group operates more than 500 post offices, but notes that Post Office Ltd:

60. The Co-operative Group complained that, while its partnership with Post Office Ltd is largely strong, their potential "as a true partner remains untapped":

The Co-operative Group submitted that it would like to work with Post Office Ltd to resolve conflicts, and that it seeks "an opportunity to become involved in the strategic vision of the Post Office at a much earlier stage to avoid those conflicts".[61]

CONCLUSION

61. Post Office Ltd has done a great deal to improve its financial situation. It is to be congratulated for facing up to difficulties, and introducing new services. Centrally provided services, such as insurance or financial services, are welcome in so far as they increase the financial viability of the network as a whole. However, we need to be absolutely clear that the health of Post Office Ltd matters primarily not because it can provide a profit to the Government, its shareholder, but because it sustains the post office network. We believe that it is time for Post Office Ltd to pay more attention to the viability of its commercial retail partners, who are essential to providing that network. This does not simply mean negotiating more with the NFSP, important though that may be. It means recognising the legitimate interests of all its retail partners.

62. Post Office Ltd must consider the impact of its decisions on its sub-post offices and other network providers as it seeks to secure the sustainability of the network. There is no doubt that the company has a very difficult balancing act to perform in ensuring that the company as a whole is as profitable and efficient as possible, while acknowledging the needs of its partners to make a profit. We are not convinced that balance is currently correct; there is a danger that a drive for efficiency could result in a rise in unplanned, voluntary closures because the needs of subpostmasters and other providers are not adequately met.

Technology and infrastructure

63. It is remarkable that the post office network's Horizon IT system was not introduced until 1999, and rollout was continuing in 2000.[62] On its visits, the Committee heard from subpostmasters that transactions needed to be simplified and streamlined. If post offices make greater use of barcodes and automation, more business can be transacted faster, which will help to reduce queues. The Communication Workers Union and Unite the Union told us that post offices need to make better use of electronic terminals for routine processes, such as stamp sales, to free up staff to provide other services.[63]

64. Transactions with the Horizon system, which links all post offices, are more complex and difficult to use than they need to be - even the total number of keystrokes needed to complete a transaction through Horizon could be reduced. Unite the Union told us post office technology needed to be improved.[64] Post Office Ltd told us that the Horizon technology is being upgraded in a project called 'Horizon Online', which it expects to produce a fully automated system,[65] and that it would start to implement this upgrade at the beginning of September.[66] Consumer Focus believes that the technology upgrades will make Post Office Ltd much more competitive when bidding for contracts like TV licences.[67]

65. It is clear that Post Office Ltd has, in the past, not been as innovative in information technology as it should have been. The Committee welcomes the Horizon technology upgrade, but views it as only a critical first step. Post Office Ltd should continue to seek technological innovations that make it more competitive at bidding for contracts, and simplify and speed up transactions in post offices.

66. The Committee heard complaints, particularly through the web forum, about post office infrastructure and access. Some problems related to post office presentation and layout stem from the fact that most subpostmasters are unable to refurbish their post offices to the same standards as Crown post offices. However, we also note that some witnesses felt that Crown post offices themselves were not sufficiently efficient.[68] There are also concerns about access; for example, we were appalled to learn that the main post office in Torquay is now located on the first floor of a W H Smith whose lift will not accommodate wheelchairs. We were told the nearest parking is more than half a mile away.[69] This is not the only example of post offices in inaccessible and inappropriate locations; for example, the Crown post office in Worcester is now located on the first floor. Similarly, many contributors complained about the inconvenient locations of those post offices which survived the Network Change programme.

67. Post office branches are housed in a wide variety of locations and buildings — a legacy of the evolution of the network. This has inevitably meant that not all post office branches are ideally sited or arranged. There is, however, no excuse for poor access either in relocated or new branches. The Committee expects Post Office Ltd's new Code of Practice to ensure that any future branch developments provide full access, particularly for those with mobility concerns. Post Office Ltd must actively improve all branches, not just Crown post offices, as necessary, to take into account technological change and new services. In some cases, it will be reasonable to expect Post Office Ltd's retail partners to bear part of the costs, but this depends on a proper share in the associated revenue.

31 1,300 branches are open less than 20 hours per week; the vast majority (9,275) are open 30-50 hours per week, and 175 branches are open more than 60 hours per week. 10,500 post offices are open on a Saturday. [WEB126D] Back

32 Ev 148 [NFSP] Back

33 Note that the NFSP reports that Paystation is only available in 10,896 branches; however, Post Office Ltd states that the aspiration was to have Paystation in all branches by April 2009. Back

34 Ev 177 [Post Office Ltd] Back

35 Ev 174 [Postcomm] Back

36 National Audit Office, Department for Business, Enterprise and Regulatory Reform: Oversight of the Post Office Network Change Programme, Report by the Comptroller and Auditor General, HC 558 Session 2008-2009, 5 June 2009, p 9 Back

37 Royal Mail Holdings plc, Report and Accounts, Year ended 29 March 2009, 14 May 2009, p 13 Back

38 Ibid, p 5 Back

39 Ibid, p 14 Back

40 Ev 174 [Postcomm] Back

41 Modernise or decline: policies to maintain the universal postal service in the United Kingdom, an independent review of the UK postal services sector, Cm 7529, p 82 Back

42 Q 122 [Mr Thomson] Back