Royal Mail has entered what is perhaps the most challenging period in its 360-year history. The country’s incumbent postal service has seen some of its biggest corporate clients take their multi million-pound contracts elsewhere since the market was opened up to full competition just over a year ago, and it seems inevitable that more will follow.
Last week, Royal Mail lost an £8.1m-a-year contract for BBC TV Licensing to UK Mail, which also scooped the Department of Work and Pensions’ £12m business last month. It is estimated that Royal Mail’s competitors have seized more than 10% of the mail-handling market from the government-owned former monopoly since postal services were fully privatised at the start of 2006.
BT and Centrica, two of Royal Mail’s biggest customers, also moved lucrative contracts last month, along with Carphone Warehouse, Europe’s biggest mobile phone retailer. Former Direct Marketing Association (UK) director of postal affairs and industry development David Robottom believes Royal Mail was slow to wake up to the threat posed by its new rivals.
Robottom, now a director of advisors D&S Consultants, admits the company has improved its level of service since competition was introduced, but says: "Royal Mail was ill-prepared and didn’t take liberalisation seriously enough. It was inevitable that it would lose business, but it was too obsessed with the regulator and things like zonal pricing. What it needs to concentrate on is giving its customers the right level of service."
Royal Mail, last week, announced that it had agreed a refinancing package involving a government loan of £1.2bn to modernise the business. The company’s marketing director Alex Batchelor, who joined from Orange almost two years ago (MW April 21, 2005), says the money will allow Royal Mail to update equipment, such as sorting machinery, which will improve the level of service it can offer customers.
"We need to find more efficient and effective ways of doing things and to improve our customer experience where it’s weak," he adds. "Sometimes that is about investments in things like systems and support."
Royal Mail executives have become increasingly frustrated over the past year because, under the terms of its licence, the company cannot offer to cut prices to keep business. The loss of so many large customers is expected to have a major impact on Royal Mail’s profits, to be announced at the end of next month. The company was losing £1m a day four years ago, but made an operating profit of £355m last year. However, Royal Mail’s 100 top business clients are responsible for 40% of its profits and it is thought to have lost about 20 of those to rivals.
Judith Donovan, chairman of customer watchdog Postwatch North, believes competition has forced Royal Mail to raise its game, but she says there is still some way to go. "Royal Mail is performing better than it has done for a long time," she adds. "It has been a very consistent, reliable and good service recently. But an organisation like Royal Mail won’t turn on a sixpence. Historically, it has been arrogant and hasn’t shown 21st-century good customer practice because it didn’t think it had to. It has to develop a more customer-friendly outlook."
TNT, the UK subsidiary of the privatised Dutch postal operator, is one of the companies that has seen its market share grow rapidly in the past year and its client list now includes BT, Sky and Lloyds TSB. But, like the other new players, TNT does not yet offer an "end-to-end" service that delivers mail to its final destination.
TNT and the rest collect post from their customers, sort it and transport it to Royal Mail for delivery over the "final mile", under the so-called downstream access arrangement. Royal Mail is paid 13p an item for the final mile delivery – leaving it with more than 97% of revenues from all deliveries. But TNT chief executive Nick Wells says the company is working on an "end-to-end" service that will eventually see TNT postmen on the streets.
UK Mail, owned by Business Post, has not yet announced any such plans and TNT’s Wells says the company is "just an agent of Royal Mail". He adds: "We are Royal Mail’s largest client but we’ve also established ourselves as its main competitor. We want to create a real alternative."
Sarah Chambers, chief executive of postal regulator Postcomm, points out that Royal Mail’s competition does not come just from new entrants, but also from other forms of communication. "Businesses are starting to communicate with consumers using the internet for things like bank statements, so another big challenge for Royal Mail is maintaining volumes," she says. "But the internet brings opportunities as well, because people are posting things they wouldn’t have done in the past, thanks to sites like Ebay."
Royal Mail is on course to meet all 12 of its performance targets for the first time in the 2006 to 2007 year. These require it to deliver 93% of first-class mail on the next working day and 98.5% of second-class mail by the third working day. Two years ago, only four of the targets were hit.
As competition increases, Royal Mail’s brand will be both its strength and its weakness. While it can boast a heritage that none of its rivals can match, its past problems are fresh in many minds.
Contracts won by Royal Mail’s rivals since the postal market was liberalised:
Department of Work and Pensions
Royal Bank of Scotland