4 Competition and efficiency
Royal Mail is the dominant incumbent and has huge
efficiencies of scale. It has a massively trusted brand. It has
so much going for it. The extent to which it will maintain that
level of dominance or market power will depend on how it is able
to deliver products […] that will enable it to win in what
will become a very competitive market. [Adam
Scorer, Citizens Advice Service][73]
Competition in the postal sector
50. The third Postal Services Directive 2008 requires
all EU postal markets to be opened to competition, and the Postal
Services Act 2011 reflects that requirement. Our written evidence
highlighted the benefits of such competition. BBC TV Licensing
wrote that:
Continued development of competition with the
proviso the universal service is not impacted, will lead to continued
improvements in quality of service, continued downward pressure
on prices, greater choice and continued product innovation. As
a mailer who mails across the UK on a regular basis such developments
are vital to our activity and can go some way to protecting our
budgeted expenditure on mail. Such a development is extremely
important as our activity is funded from the public purse.[74]
The Mail Users' Association wrote that competition
in the postal sector had enabled sustainability in the market
and that competition had benefited "an otherwise declining
commercial scenario".[75]
Not surprisingly, this view was supported by Royal Mail's competitors.
Nick Wells, the CEO of Whistl, argued that without competition
there was "no catalyst to keep prices low",[76]
while UK Mail believed that competition was "a vital spur
to improved choice for mail users, and to increased efficiency
by all operators, including Royal Mail".[77]
51. Ofcom also highlighted the benefits of competition
in the postal sector:
There are a number of potential benefits from
other postal operators competing with Royal Mail in the delivery
of mail. Most importantly entry can strengthen the incentives
on Royal Mail to improve efficiency and reduce its costs.
In addition, if end-to-end competition results
in lower prices for certain types of users, it may reduce the
rate at which volumes decline for the whole industry. Competition
may also benefit customers through increased innovation and value
added services.[78]
Royal Mail efficiency
52. Under Section 29 of the Postal Services Act 2011,
Ofcom has to have regard to: "the need for the provision
of a Universal Provider Service to be efficient before the end
of a reasonable period and for its provision to continue to be
efficient at all subsequent times".[79]
In its discharge of that duty, Ofcom monitors both those services
provided by the USO and Royal Mail's so-called 'Reported Business',
which means that it has a duty to comment on the efficiency of
services that are in Royal Mail's Reported Business, but not necessarily
within the USO.
53. In evidence to us, Ofcom clarified what the term
'Reported Business' covered:
The 'Reported Business' is that part of Royal
Mail Group that uses the universal service network (also known
as the core network) for collection, sortation, transportation
or delivery of postal packets (both letters and parcels). As such
it includes both Universal Service products such as First and
Second Class letters and parcels, Special Delivery Next day, etc.
and non-Universal Service products such as Royal Mail retail bulk
mail, access mail, unaddressed mail, etc. The Reported Business
is part of Royal Mail's UK Parcels, International and Letters
(UKPIL) business unit but excludes the activities and products
of ParcelForce International and Royal Mail Estates Ltd.[80]
54. Royal Mail's regulatory financial statements
for 2013/14 provides a graphic of its products included in the
Reported Business:
Royal Mail Group Regulatory Financial Statements
2013-14 [81]
55. In its Report, Review of end-to-end competition
in the postal sector, published in December 2014, Ofcom returned
to the matter of Royal Mail's efficiency in relation to the viability
of the Universal Service:
Beyond the next few years, our assessment of
the sustainability of the universal service becomes less certain.
However, to a significant extent, this uncertainty is due to factors
other than end-to-end competition, including Royal Mail's ability
to reduce its costs to reflect the reduced workload, and deliver
efficiency savings, and the success of its parcels strategy. Relatively
small changes in parcel volumes, hours worked, pay increases or
pension costs could significantly affect its future EBIT margins
by as much as, or more than, the impact of end-to-end competition.[82]
UK PARCELS MARKET
56. Ofcom described the three priorities contained
in Royal Mail's overall strategy: being a successful parcels business;
managing a decline in letters; and being customer focused.[83]
The chart below, included in Ofcom's written evidence, highlights
the competitive nature of the UK parcel market:
UK domestic parcel revenue market share
Source: UBS / Triangle, 2014[84]
57. Ofcom cited RBC Capital Market in July 2014 describing
'parcels, not Ofcom, as its biggest concern'[85]
and described Royal Mail's own uncertainty surrounding parcel
revenues:
As noted by Royal Mail, the parcels market is
very competitive and competition has recently intensified, particularly
from UK Mail, DPD, Hermes and Amazon's roll-out of its own delivery
service, which started in January 2014. […] Parcel operators
compete with Royal Mail both on price, and technological and service
innovations. Many operators are using digital technology to drive
innovation. Royal Mail notes, in its June 2014 submission, that
innovation is a key feature of the UK parcels market. For example,
earlier this year, Parcelforce launched an interactive service
enabling customers to arrange for a parcel to be delivered on
a different day or to a different address by SMS or email. In
March 2014, parcel operator DPD also announced enhancements to
its 'Predict' service, which notified recipients of the time of
delivery to within a 15 minute window.[86]
58. But Royal Mail's competitors have gone further,
as explained by evidence from the Mail Competition Forum:
Competitors to Royal Mail have also brought innovation
to mail services in vital areas such as hybrid (physical-to-electronic)
mail. Hybrid mail combines electronic communication (including
mobile telephony and the internet) with physical communication
to allow business and social users to send items using the electronic
devices common in everyday life. [...] The MCF believes these
benefits from competition have had an important (if unmeasurable)
impact in mitigating the decline in mail volumes, by encouraging
continued or even new use of mail.[87]
59. Royal Mail is free to respond to competition
in the bulk-mail market and the parcel market (over 20kg) in any
way it sees fit, as those areas are not included in the Universal
Service Obligation. However, in November 2014, Royal Mail published
its Financial Report for the half year (from April to September
2014), and highlighted the fact that parcel revenue was down by
1 per cent:
At £1,461 million, UKPIL parcel revenue
was down one per cent. This was primarily due to the impact of
a change in the mix of the parcels we carry and the highly competitive
environment in the UK parcels market. We estimate Amazon's own
delivery network will reduce the annual rate of growth in the
UK addressable market to 1-2 per cent for approximately two years.
UKPIL parcel volume grew by two per cent.
Its trading update for the nine months ended 28 December
2014 showed an increase in volume of UK parcels by 3%, but revenue
stayed flat.[88]
60. Written evidence from the Mail Competition Forum
(MCF) stated that:
The Mail Competition Forum believes and provides
evidence that Royal Mail has persistently failed to achieve reasonable
productivity improvement and it is that inefficiency, rather than
the commercial effect of efficient competition, which represents
the major threat to USO provision.[89]
61. The Citizens Advice Service told us:
Competition has not benefitted all groups of
social consumers equally, particularly those in rural and remote
areas who have limited choice and are more reliant on the USO.
We have a significant body of evidence of detriment to rural and
remote consumers in a parcels market including non-deliveries,
delivery surcharges and lengthy journeys to collect undelivered
items.[90]
UK BULK MAIL
62. Ed Richards, the then CE of Ofcom, told us that
bulk mail was not supervised by the regulator and that it was
"a commercially-determined service",[91]
which was determined by business decisions:
When they go to Whistl, for example, or others,
they say, 'We are content with a three-day-a-week service', which
is precisely why Whistl has offered a three-day service. If business
users wanted a six-day service for their bulk mail, Whistl would
have to offer it, so there is a big difference.[92]
Chris Rowsell, Competition Policy Director at Ofcom,
highlighted the fact that this approach worked efficiently in
the Netherlands and Denmark, where the USO items are delivered
on the required days, but non-USO items were delivered in larger
quantities, on fewer days.[93]
Ed Richards summarised this point:
Business users can determine their needs in the
way that normal commercial arrangements are determined, and we
need to make sure that developments in that area are consistent
with the USO and the six-days-a-week delivery.[94]
63. The
evidence that we received suggest that Royal Mail still has to
match the technical innovations introduced by many of its competitors.
These innovations more clearly match the expectations of consumers,
as well as contributing to the efficiency of competing postal
operators.
Royal Mail's price structure
for national average prices and zonal prices
64. Royal Mail's price structure varies depending
on whether the postal operator asks Royal Mail to deliver the
Final Mile, across the United Kingdom, or whether the postal operator
asks Royal Mail to deliver to certain parts of the United Kingdom
only. Written evidence from Ofcom explained the difference between
the pricing:
Royal Mail offers two types of pricing plan for
access: national average prices and zonal prices. To qualify for
national average prices an access operator must be asking Royal
Mail to deliver mail across the whole of the UK, in the same geographical
pattern as Royal Mail delivers. If an access operator is asking
Royal Mail to deliver in just certain areas or geographies of
the UK, Royal Mail can set zonal prices which reflect the costs
in those geographic areas.[95]
65. Zonal pricing helps to protect Royal Mail against
any artificial competitive advantage from its competitors. For
example, it ensures that Whistl must have a genuine source of
competitive advantage over Royal Mail in the areas it chooses
to enter. While this is a useful safeguard, Adam Scorer, from
Citizen's Advice, cautioned that it should not be used for restrictive
reasons and that "Royal Mail does not protect its incumbent
position in unfair ways".[96]
66. In January 2014, Royal Mail proposed several
changes to its zonal charges which reduced the charges for the
Urban and London Zones, while significantly increasing charges
for the Suburban and Rural Zones. Moya Greene, the CEO of Royal
Mail, told the Committee:
What I will say about the zonal pricing that
we had attempted to put into the market is that it was meant to
partially offset this threat of siphoning off the very, very high-volume
urban mail, siphoning it out of the Royal Mail system, so that
neither that traffic nor the revenues that go along with it would
be available to underpin the economics of a Universal Service.[97]
67. On 2 December 2014, Ofcom announced that it would
be reviewing Royal Mail's proposed increase in zonal access pricing
because it was concerned that the changes could "act to discourage
and potentially prevent entry and expansion into bulk mail delivery
by another operator" and therefore have a negative impact
on consumers.[98] Ed
Richards told us that Royal Mail's proposed zonal pricing had
the potential to skew its access prices in order to inhibit competition:
What we have said on zonal pricing is that Royal
Mail has the freedom to set its margin as it chooses. However,
what we have said to ensure that, that is consistent with a fair
approach for the market overall, is that that should be consistent
from zone to zone, and that the prices should be reflective of
the costs in the zones. That seems, to us, to be a reasonable
and fair basis. In other words, where Royal Mail has higher costs,
it is able to charge a higher price, but it is not able simply
to select a price that suits its ability to inhibit, or to risk
inhibiting, competition when that competition can offer something
useful for consumers and the market.[99]
68. We support Ofcom's consultation on the level
of zonal pricing set by Royal Mail. Any recommendations arising
from that consultation must balance the need for Royal Mail to
retain the freedom to set its prices, dependent on the cost of
delivering in that area, with the benefits of retaining an open
market and increasing competition. Royal Mail are free to set
zonal pricing, but it should be based on actual costs of delivering
to those zones, and not as a device to deter, or even stifle,
competition. There is a fine balancing act to be set. Ofcom must
set out the timetable for this consultation, and when a decision
will be made.
Labour costs
69. The major part of the costs in the postal sector
are labour costs because letters and parcels have to be delivered
by a person. Adam Scorer, from Citizens Advice, was concerned
that recent developments could lead to a "race to the bottom"
in terms of services:
We have seen it in lots of other markets on the
customer services side. [It] inevitably leads to a lower level
of service, higher degrees of complaint and a lack of trust and
confidence in engaging in those markets. I could see clear detriment,
if that was done as a necessary, kneejerk, fast response to the
growth of competition.[100]
That said, greater competition does not necessarily
require cutting labour costs. As supplementary evidence from the
CWU highlighted:
All the evidence is that if you pay people well
and if you have a collaborative approach to solving problems,
it makes for a successful company. Decent terms and conditions
of employment will help to maintain a committed, motivated workforce
leading to higher productivity and a better quality postal service
for customers.[101]
70. Evidence from Royal Mail also highlighted these
points about labour terms and conditions:
Royal Mail believes that industry standards need
to be improved and that this can be best achieved through either
an industry-wide quality standard and/or regulation. We believe
that current basic requirements would help to ensure the parcels
industry delivers a better service for consumers.[102]
Royal Mail's written evidence then went on to highlight
differences in terms and conditions between their own staff and
staff from other companies:
Royal Mail written evidence[103]
71. CWU's written evidence contrasted the terms and
conditions of Royal Mail employees with those of its competitors:
In the parcels sector, several carriers including
Hermes and Yodel use low-cost lifestyle couriers who are treated
as self-employed and are therefore not entitled to the National
Minimum Wage. They are routinely paid a rate per successfully
delivered item which often makes it impossible to earn a reasonable
rate of pay. In one company, rates are as little as £0.20-£1.20
per successful delivery, equating to only £3.70-£5.30
per hour.[104]
72. However, supplementary evidence requested by
the Committee from Royal Mail's competitors would seem to question
Royal Mail's assertion. TNT UK Ltd has one employee on a zero-hours
contract, out of a total of 9,000 staff.[105]
UK Mail wrote that they have no employees on zero-hours contracts.[106]
Whistl gave detailed information on its staff's terms and conditions:
at the time of writing, there were: 6.9% of staff who had contracts
for under 13 hours per week (predominantly Saturday workers and
students); all employees who had completed three months' service
were paid above the adult national minimum wage (excluding some
apprenticeships); employees' basic pay range is £6.50 to
£6.57 (outside London) and £7.10 to £7.37 (London);
CRB checks are made either when staff are engaged or on a random
basis after employment; Nearly half of all Whistl employees (48%)
are on zero hour contacts.[107]
In reference to those on zero-hour contracts, Whistl's supplementary
evidence stated that:
Whistl has recently reached agreement in principle
with its recognised Trade Union, Community, that an employee will
be offered an alternative, fixed hours contract after the end
of an appropriate probation period. The employee may elect to
remain on a flexible (zero hours) contract.[108]
73. However, as Ed Richards, pointed out, Ofcom has
no responsibility in this area::
Labour costs, and employment law and the regulation
of the price of labour—the minimum wage and all those sorts
of things—are clearly not part of our remit. We cannot deal
with that. We are very much a creature of statute. We do what
the statute tells us to do, and it is very clear that that is
not part of our duties.[109]
When he was asked whether Ofcom would study the quality
of service across the entire postal industry, not just those of
Royal Mail, he replied:
Quality of service is something that we look
at, and we will, I am sure, have a further discussion with Royal
Mail about whether there are issues to do with quality of service
or mail integrity—all those kinds of things—that we
need to look at on a forward-looking basis. We would be very happy
to do that.[110]
74. Ofcom has rules on mail integrity, which require
regulated postal operators to ensure that their mail is protected
against loss, damage or theft, and is delivered to its intended
destination. We asked the different postal operators who gave
oral evidence about the number of prosecutions and complaints
they had experienced. TNT Express UK could not answer the Committee's
question about the number of formal complaints relating to staff,
for the following reason:
TNT UK Ltd does not hold data to record the number
of complaints specifically relating to its staff which it receives
from its customers and is therefore unable to assist the Committee
with this question.[111]
In the year to March 2014, Whistl received 1,627
complaints about their delivery services, which represents one
complaint for every 49,000 letters delivered.[112]
Royal Mail handled 14.3 billion items of mail in 2013-14, and
received 735,637 consumer complaints,[113]
which represents one complaint for every 19,439 items of mail
delivered.
75. We are opposed to a 'race to the bottom' of
postal sector employees' wages, terms and conditions, and such
a race should not be an inevitable result of greater competition
in the sector. Indeed, Royal Mail's negotiations with the CWU
have resulted in pay increases and job security. Our evidence
suggests that, while Royal Mail's criticism of its rivals' treatment
of their staff is not wholly proven, there are certainly examples
of where the wages, terms and conditions offered by other companies
in the sector fall short of the standards offered by Royal Mail,
including what appears to have been a disproportionate use of
zero-hours contracts by Whistl.
76. If standards of pay in the postal sector,
as in other sectors, fall short, then the taxpayer is left to
pick up the difference, because in-work state benefits will cost
more. Furthermore, it is unacceptable that delivery of the Universal
Service Obligation should require downward pressure on the terms
and conditions of staff delivering that service. We recommend
that Ofcom investigates the impact on customers and the service
provided to customers of any downward pressure on terms and conditions
of postal sector staff. We further recommend that the Government
considers extending Ofcom's remit to include consideration of
labour costs, conditions and standards in the postal sector.
73 Q135 Back
74
BBC TV Licensing (USO 16) paras 3.1.1. and 3.1.3 Back
75
Mail Users' Association (USO 23) para 2 Back
76
Q27 Back
77
UK Mail (USO 27) para 1.4 Back
78
Ofcom, End-to-End competition in the postal sector: final guidance
on Ofcom's approach to assessing the impact on the universal postal
service, 27 March 2013, paras 3.15 and 3.16 Back
79
Section 29, 3b, the Postal Services Act 2011 Back
80
Ofcom (USO 57) Back
81
Royal Mail, Regulatory financial statements, 2013-14
Back
82
Ofcom, Review of end-to-end competition in the postal sector,
2 December 2014, paras 3.105 to 3.107 Back
83
Ofcom (USO 29) Back
84
BIS Committee analysis of UBS data, Ofcom (USO 29) Back
85
Ofcom (USO 29) Back
86
Ofcom, Review of end-to-end competition in the postal sector,
2 December 2014, paras 3.84 and 3.86 Back
87
Mail Competition Forum (USO 01) paras 2.4 and 2.5 Back
88
Royal Mail trading update for the nine month ended 28 December
2014 Back
89
Mail Competition Forum (USO 01)
executive summary Back
90
The Citizens Advice Service (USO 20) para 4.4 Back
91
Q178 Back
92
Q174 Back
93
Q183 Back
94
QQ 186 and 187 Back
95
Ofcom (USO 29) Back
96
Q137 Back
97
Q34 Back
98
Ofcom, Royal Mail access pricing review, 2 December 2014,
para 1.4 Back
99
Q162 Back
100
Q132 Back
101
CWU (USO 55) para 2 Back
102
Royal Mail (USO 37) para 4.7 Back
103
Royal Mail (USO 37) table 1 Back
104
CWU (USO 18) para 24 Back
105
TNT UK Ltd (USO 51) Back
106
UK Mail (USO 50) Back
107
Whistl (USO 49) Back
108
Ibid Back
109
Q200 Back
110
Q201 Back
111
TNT UK Ltd (USO 51) Back
112
Whistl (USO 49) Back
113
Royal Mail (USO 52) Back
|
