British Royal Mail in the UK Mail Industry - Assignment Example

British Royal Mail has been a monopolist of the British Mail industry for more than 350 years. Since the beginning of 2006 the mail market in Great Britain has become open for competitors, which puts new challenges to the Royal mail. The work will be discussing the issues of the monopolistic state of the Royal mail and its advantages and problems. The main question to answer in the paper is whether the Royal mail will be able to keep its leading position with the entry of new mail market players. The consequences of the competition within the UK mail industry Royal Mail of the United Kingdom has been the monopolistic player on the UK mail market for more than 345 years, offering a universal service of high quality, trying to meet the new challenges and giving no choice to those, who wanted to have this choice. On the other hand, the problems, which the Royal mail has recently faced, made consumers think about the necessity to make the mail market competitive and open for the new participants. As soon as the decision to open the mail market for new companies from the beginning of 2006 has been taken, two questions appeared: will Royal Mail stand the competition and is the competition a threat to its operations and position In order to answer this question, the position of Royal Mail on the British market should be considered from the following viewpoint: is the leading position of Royal Mail connected with the high quality of its services or with the impossibility for the similar companies to enter this marketing segment To my mind, the quality of Royal Mail service in the recent years has somewhat decreased and new competitors may create a serious threat to the Royal Mail leadership, though new companies will have to break the resistance of those consumers, who rely on their constant preferences and are not willing to change the supplier of universal mail services. Royal Mail still carries several advantages and meets some challenges, which help it to keep its profitable position. It is noted among the most reliable employers of the UK, having over 193,000 workers in its staff, which is almost 1% of the working British population. (http://www.royalmail.com) The number of addresses serviced by Royal Mail is the biggest in the country, making up to 84 million deliveries a day. As Royal Mail itself quotes, 'Since then we've undergone a huge transformation, turning losses of more than 1 million a day three years ago into a 537 million profit fromoperations in 2004-05. And we are delivering our best quality of service on record with world-class performances. This success has given giving us a base to meet the next challenge of full competition in the UK mail market from 1 January 2006. We will fight hard for every single letter. We are determined to compete successfully in the open market - but in order to do so we need a fair regulatory regime and the ability to invest in the modernization of our business.' (http://www.royalmail.com) The key words here are 'modernization and investment', which are the urgent needs of Royal Mail today to stand the competition. Despite the serious organizational changes, through which it went in the year 2001, Royal Mail is still fully owned by the Government, thus the need of about 2 billion to renew the equipment, technologies and premises should be invested from the state budget, which now seems problematic. The open mail services market becomes a threat to the Royal Mail and its profitability. Modern customers choose speed, quality and reliability, especially when it concerns such services as mail, which are in fact the foundation of everything. Mail services all over the world face the decrease of the mail volumes, with the wide spreading of emails. Speed is often a decisive factor in relation to the universal mail services, thus new technologies are crucial for Royal Mail to stay a leader on the British market. (Cohen & Waller, 2000) It can be said, that Royal Mail has 'subscribed' on receiving its competitors, as it now faces the challenge, which may influence its whole future activity - this challenge is competition. Mail delivery is the basis of all business and personal activity. The reason for opening the mail market lies in the general European liberalization of laws, making the market free and competitive. It is expected, that the opportunity to take a considerable marketing portion of the British mail market will be taken by Pitney Bowes with its market cost of $9.62 billion, French Neopost and German Francotyp-Postalia. The Bowes Company is the typical example of an old-fashioned enterprise, which has been able to receive profits out of the variety of means and methods, used for the other messages to reach us. It is mentioned in the connection with the creation of the first franking machines, and at present time the company is occupied with managing electronic databases, billing and printing commercial products. Royal Mail also tries to be up to date, but it is not so successful in its attempts to do this. The head of the Royal Mail Allan Leighton and the CEO Adam Crozier have partially succeeded in business modernization. However, from the viewpoint of the correspondence technologies and the correspondence volumes per worker, Royal Mail is far behind its European colleagues - German Deutsche Post and Dutch TPG. Royal Mail is also known for its pension budget deficit, making up to 4.0 billion, and though the company admits it as a fact and puts it as one of its challenges, the pension scheme at the enterprise needs serious improvement and changes. The pension system for all employers is presented by the scheme, according to which the amount of payments depends on the working experience and the salary amount during the pre-pensionary period. All company profits were always returned to the employers in the form of high salaries and different bonuses, while it should better have been directed at deficit compensation. (http://www.royalmail.com) Simultaneously, in the Pitney Bowes Company, which is as old fashioned as Royal Mail, and has started with only one field of activity, it became possible to find new opportunities for adjusting to the changing market. Pitney Bowes with its low-cost and effective correspondence sorting is pushing Royal Mail out of the market. The firms working with credit cards give their issues to this company, energy companies give their bills, which Pitney Bowes converts and franks. Nevertheless, this firm, being in the Fortune 500 list, negotiated with Royal Mail on the issue of sorting the multimillion correspondences, systematizing all mutual and common clients and creating the delivery scheme according to the post zones. This would decrease the amounts of work Royal Mail has to perform, giving Pitney Bowes a discount for sending each piece and item of correspondence. Consumers will also partially feel this price decrease. Though Pitney Bowes is not a direct competitor of the Royal Mail, Postcomm requires the company to unveil the state national network. Thus, in the process of modernization and the striving for keeping the leading positions, the Royal Mail will have to use some of the Pitney Bowes' initiatives. Competition is a real threat to the Royal Mail with its unwillingness and inability to put the process of modernization into an active phase. For example, Pitney Bowes tries to find common language with European state organizations in the sphere of automobile registration, to take upon the sending Calibration Stickers. The essence of this agreement is in the idea to take all the costs of sending with the government permission to include advertising materials into each item. Pitney Bowes has already made an agreement with American automobile manufacturers, and each new consumer, buying the Ford car, will automatically receive the recent models advertisement, sent by the Pitney Bowes. These ideas should be taken by Royal Mail to stay a leader on the mail market, as there appear to be more companies, making claims for this position. It should be admitted, that Royal Mail has already become more commercialized, but the market liberalization will make it move even faster than ever. However, a common opinion is that the mail market should still be in state hands, and the liberalization should be only partial. (Hammond, 2005) Thus, it is clearly seen that in the aspect of modernization Royal Mail faces serious problems, both in financing this modernization and in providing the new ideas and technologies. It is also evident, that the existing system of the Royal Mail operation can be rather easily improved, but for some reason the management of this public owned company does not encourage these changes, or they go too slowly for the Royal Mail to catch up the rivals. Thus, competition may set serious problems for Royal Mail, and only for the account of being a government company it may keep most of its customers, but not all of them. Though Royal Mail claims that the main value of it is people to whom it gives the service of the highest quality, it should be taken into account that modern customers prefer quality to other aspects as the ownership or even prices. There is a threat, that in case Royal Mail does not undertake any actions in relation to modernization the processes of mail sorting, this will be the cause of massive customers' number decrease and thus the further loss of the leading positions on the universal services market. (Crew & Kleindorfer, 2000) It is important to note, that the problem of quality in Royal Mail is one of the most urgent. Royal Mail does not want to give an access to the competitors at the stage, which is usually called 'the final mile', when the already sorted correspondence is delivered by postmen to the postboxes. In the previous financial year the Royal Mail income was about 220 million, nevertheless, the common opinion is that this monopolist offers low quality services. In the first quarter of the financial year 2006 only 88 percent of the urgent delivery mail was delivered to the receiver (the necessary index is 92.5%), becoming the reason of paying 50 million compensations, which in better situation could be directed at further modernization or eliminating the pension fund deficit. (Hammond, 2005) As an example of the low quality service, here should be mentioned the $19 million suit, for Royal Mail not taking any measures for preventing losses, damages, thefts and disclosures of letters and packages. The controlling organs of the UK claim that Royal Mail seriously breaks the given license, (secure delivery and personnel control, in particular). Postcomm sued Royal Mail for this. As the Postcomm's representative Nigel Stapleton has noted, 'our clients have the fullest right to be sure that the post they send will reach the addressee, but our investigation has revealed serious drawbacks in providing the secure post delivery by Royal Mail.' (http://www.psc.gov.uk/universal-service.html) The big sum of the suit has been explained by the 'seriousness and duration" of Royal Mail's violations. Simultaneously, the main responsibility for this should be carried by the top managers of the company. According to the Royal Mail official statistics, in the year 2005 there were 14 million packages lost, damaged, stolen or opened by the personnel. However, this number, seeming to be huge at first sight, constitutes only 0.001% of the total letters and packages number, serviced by Royal Mail annually, thus speaking about the bad quality of the Royal Mail service should be put under question. The fact, which is already known and understandable, is that 'Royal Mail will fight hard for every single letter'. (Taylor, 1996) Despite all problems, Royal Mail is rather determined to compete with other similar companies in its marketing segment. The letters market has been the privileged area of the Royal Mail, where it was the monopolist, but since January 1, 2006, the letters market in the UK has been opened for competition. Besides the already mentioned Pitney Bowes, the main competitors of Royal Mail in Britain are DHL, UK Mail, TNT Mail, and part of Deutsche Post. In order to remain the leader of the post service in the UK, Royal Mail must keep to its universal service, which is called 'one-price-goes-anywhere' stamp, that is any letter is marked with the same stamp and is able to reach any corner of Great Britain. This service is provided by Royal Mail only and it is probable, that with opening the post service market to rivals, the company will have to change this policy, striving for higher profits which are needed to provide modernization. The positive effect of modernization will be higher than the negative effect of the universal service elimination (or change), as the quality of the mail sorting and delivery is the main stimulus for such companies in their daily operation. More should be said about the pension fund deficit, which is one of the major Royal Mail's challenges nowadays. Obviously, this challenge might become even more serious than the situation with the low service quality, which is still difficult to confirm. There is a threat, that the pension deficit may rise up to 6.25 billion, which will ultimately cost the company 1 billion pounds a year, thus being equal to two annual cashflows. The whole pension system of Royal Mail should be reviewed and the scheme of work should be changed. One of the reasons for such deficit may lie in the fact, that profits might have better been directed at compensating this deficit; on the other hand, new mortality assumptions could become the reason of soaring the liabilities and the deficit. However, Royal Mail sees the new higher prices as one of the best ways out of the problem, while the Government also takes a part of the responsibility for the pension fund problems. The fact remains, that Royal Mail has the biggest pension fund membership, and thus its status, position and popularity is under question, if it does not eliminate this deficit or does not make it lower. As Royal Mail's CEO admits, that pension deficit and the need to invest 2 billion pounds into modernization are 'the tipping points and the moment when people have to decide what they want from Royal Mail' (Hammond, 2005) state regulations do not allow the Government to pay into the pension scheme. We have already described the main issues, aspects and challenges, which Royal Mail faces in its attempt to be successful in the conditions of the competitive market. Let's now see and try to forecast the future of Royal Mail as a consequence of the competition. First of all, it is rather noticeable that the bigger portion of the 28 billion items delivered around the UK annually go through Royal Mail, which is the sign that the company is on the correct way to stable profitability. From the financial viewpoint, business mail is prevailing in comparison to other kinds of correspondence. The structure of the UK mail market before 2006 has looked as comparatively small number of mail companies offers their services to a big amount of customers, and in relation to Royal Mail, its top 50 customers make up about 30% of the annual correspondence volume. 'Before 2000, Royal Mail provided all postal services within the UK for items weighing less than 350g and costing less than 1. The Postal Services Act 2000 set the stage for introducing competition into the sector by allowing other companies to provide mail services. Postcomm, the regulator, was set up to supervise, guide and control the competition.' (http://www.psc.gov.uk/universal-service.html) If there is a company, which wishes to offer the service of delivering packages less than 350g in weight and cheaper than 1 pound each, it should get a license from Postcomm; in order to see the affects of the competition in the short-term period, Postcomm provided an opportunity for such companies to receive a short-term license, thus giving them also a possibility to try themselves on the market without any huge financial losses. As for Royal Mail, it has received a 15-years-license, and to provide competition Postcomm has also allowed other companied applying for such licenses starting from the year 2003, which made it possible to give 30% of the mail market to new companies, and thus to encourage fair competition. Though Postcomm provides different kinds of licenses for those, who want to deal with bulk mail only (more than 4,000 item from the one and the same user at once), for those who want to combine activities, though can such competition can be called fair, if all consolidated mail is still given to Royal Mail for delivery to the ultimate consumer To raise the competitiveness of Royal mail and encourage it to positive changes in the strategy and general company's operations, Postcomm gave four long term licenses to four more mail operators, among which were UK Mail and Express Dairies. (http://www.psc.gov.uk/universal-service.html) However, there exist certain barriers, which should be described here as they have direct relation to the competition on the mail market. During the year 2003 Postcomm has granted 9 licenses, admitting that new mail market players have not made any significant attempts to win Royal Mail's market share. The barriers, which non-state mail operators face on their way to the UK mail market, are both economic and legal. Postcomm notes, that besides the monopolistic position Royal Mail also possesses certain privileges, among which the VAT exemption and different custom privileges, which make the competition on the mail market unequal. However, these privileges don't represent serious challenges to those who would like to play on the mail market. The main Royal Mail's advantage, which cannot be denied, is that it provides universal services, having adjusted the system of the universal mail delivery through the years, and which new mail companies will have to create during a long period of time. (http://www.royalmail.com) 'Serving uneconomic areas and customers has a positive effect on Royal Mail's brand image and corporate reputation and providing a universal service may also increase customer confidence, according to Postcomm. Customers may also choose to use Royal Mail when sending mail to wide ranging or new addresses, since they can be sure Royal Mail will deliver to all addresses. The fact that post sent by Royal Mail costs the same to send regardless of its destination may be a further advantage to both Royal Mail and customers since this is administratively easier to process' (Kline, 1997) Speaking about the consequences of the competition on the mail market, it is important to understand both for the customers and for the future market players, that after the market have been opened for the new players, monopoly will never be present in the market share in future, and this situation will cause the main consequences for the Royal Mail's operation in future. Both Europe and the whole world move towards the market liberalization and elimination of monopolies in all business areas; as UK mail market is the second biggest in Europe, this trend is seen among the UK mail operators in particular. It is the UK government initiative to encourage and provide the competitive conditions among the local mail operators. The government states, that competition is the best way for the consumers to have the choice, however, competition also causes operators to provide investments, innovations and cost-effectiveness, which also works for the benefit of the ultimate consumer. In the nearest future Postcomm also plans to give another 30% share of the UK mail market for the new private mail operators. The fact that the competition has been provided one year earlier than it has been planned, tells that it is very important for the UK mail market and this marketing strategy will remain leading in Postcomm's operations. By the year 2007 it is planned to remove all restrictions, which prevent new market players from entering the mail market share. This is more important, is that Postcomm also wishes to derive Royal Mail of certain privileges to provide fair conditions for everyone. It is expected, that Royal Mail will lose its VAT exemption, the consultations on this subject are currently being held. There has also been made a suggestion to allow the new mail operators using parts of Royal Mail infrastructure. The agreement between Royal Mail and UK Mail has been achieved on the subject of delivering the UK Mail packages and letters through the so called 'final mile', and the same negotiations take place between Royal Mail, German and Deutsche postal services to give them access to the resources of Royal Mail and use it for the mutual profits. The consequences of these actions will be both positive and negative for Royal Mail, depending on the strategy it chooses. (Ware & Winter, 1986) Competition will become beneficial for the ultimate consumer, first of all, offering him new and low-cost delivery services. Competition, on the other hand will make Royal Mail think of the ways to find additional finances and investments to modernize the process of sorting and delivering mail. Royal Mail has already everything necessary to stay a leader on the UK mail market; all it needs is to improve the existing infrastructure and the system of the universal service, adjusting it to the modern market requirements. It is still undetermined, how much of the present 99.7% market share will be lost by Royal Mail as a result of competition, and in what way it will happen, only future will make the picture clear; it is almost impossible to predict the exact way the development of the mail market will go in the nearest future, though it is definite, that Royal Mail is at risk of losing some customers who would hope new mail operators would provide better and more modern service, though it is no doubt that Royal Mail possesses the best universal delivery service, checked by the years of working experience. Compared to the similar markets in other European countries, it may be almost 100% guaranteed that Royal Mail will still 'retain a very large proportion of the market'. (Cohen & Pace, 2002) Another side of the competition on the mail market is often neglected or forgotten - there is also probability that opening mail market for the new players will ultimately lead to the worse mail services. Letting new mail operators enter the market will change the whole picture of the mail service quality - new companies will hardly provide better services from the very beginning, which will make the quality of the post service in general worse. Thus, Royal Mail will have to regain the trust of certain portion of its customers. Another consequence of the open competition is that the prices for delivering business mail will become lower, while they will simultaneously increase for domestic customers. (Posner, 1974) Such situation won't cause serious profits decrease, and it is even probable, that the profits will, on the contrary, grow, as business mail is the main source of income for Royal Mail, thus cheaper delivery will encourage businesses send more mail (the biggest portion of which is advertising and oriented at domestic recipients). Postcomm admits that those, who send bulk mails, will have the biggest benefits out of the competition. Royal Mail has already started to change its pricing policy to meet the requirements of the open mail market, creating the price structure based not on the weight of the package, as it always was, but on its size, which is considered to be more objective and correct for both the customers and Royal Mail. As Panzar (2001) writes, 'There is also evidence that countries with competitive postal markets end up severely restricting the definition of universal service. If this happens in the UK it could result in a poorer postal service for the public - some areas no longer receiving daily delivery or collection and the removal of the one price goes anywhere guarantee.' Speaking about the possible consequences of the competition on Royal Mail, the question of Royal Mail finances is of the biggest concern to the specialists. First of all, it is clear that with the appearance of the new participants in this market share, the Royal Mail profits will somewhat decrease, which will negatively affect the sub post office network. With the reduction of the mail volumes, which will go through Royal Mail, the management will have to think about the future of about 1,000 sub post offices throughout the company. It is definite, that in case other mail operators offer the customers alternative and modern kinds of services, with the use of new technologies, the mailings and stamps works as well as the amount of people, who will come into post offices, may considerably decrease. It is also possible, that sub post masters are to go through serious difficulties as result of opening the new market to the rivals. What is seen for now, is that Royal Mail hardly experiences serious decreases in mail volumes, it rather tries to face the challenges properly not to lose financial and human resources. The company looks for the ways to buy and use new technologies of sorting mail, which will make the services faster, cheaper and of higher quality. Which is even more important, Royal Mail does not deny the fact that it faces pension fund deficit and that it needs huge investments to stay on flow. However, some influential MPs groups note that opening the UK mail market for competition can be deemed untimely. They note, that the event which took place on January 1, 2006, was the event of great uncertainty, and thus it is not possible to predict the exact consequences of competitive market for Royal Mail. 'If new competitors do better than expected when the Royal Mail's 350-year monopoly ends, it may not be able to afford to deliver to every UK address. Under the universal service pledge, Royal Mail agrees to deliver post to all addresses for the same price.' (Campbell, 2002) Though many economists state competition does not set any direct threat to the existing universal service of Royal Mail, it is obvious that Postcomm should be vigilant in ensuring that this universal service remains profitable and it should do everything possible to protect the universal service which now exists in the country. 'If competition is more intense than people are expecting, that service could be threatened in all kinds of ways, particularly as private sector operators cream off more profitable parts of the market.' (Donder & Cremer, 2001) Thus, to keep a significant market share, Royal Mail should be innovative and modern, attracting customers by its technology, low costs and which is the most important, the speed of delivery combined with the quality of the service Royal Mail provides. Conclusion It is obvious, that opening a mail market for fair competition in the UK will cause serious changes in the Royal Mail strategy in its striving for keeping leading positions in this market share. The consequences of the competition for Royal Mail will depend on the strategy it chooses and on the technologies and services its rivals offer to the ultimate consumers. It is definite that Royal Mail will lose a part of its consumers, though it is still unclear how much this part will constitute out of 99.7% Royal Mail now possesses, however, having been the monopolist and the leader of the UK mail market, Royal Mail will keep its leading position. The main positive consequences of opening the market for competitors is that all mail operators, including Royal Mail will use innovations and new strategies and technologies to win more consumers' preferences, with Royal Mail being a public owned company, Government will have to consider the ways of investing considerable sums into the company to help it stay afloat. Simultaneously, Royal Mail will have to re-consider its financial strategy to cover the pension fund deficit. One of the negative consequences, which Royal Mail is likely to face, is that the mail volumes, which will go through Royal mail will somewhat decrease, making the management review the situation with sub offices and sub post masters. With the decrease of mail volumes Royal Mail will probably go through the staff shortening and closing some of the post offices, which is always supposed to be an unpopular step. It is essential to understand that Royal Mail must live in the modern world, where competition becomes the global trend, making companies look for new initiatives and solutions. The monopoly on the UK mail market will never come back, thus Royal Mail is to work hard for keeping its customers. Competition works for the benefit of the ultimate consumer, thus it should be looked at as a positive trend. Obviously, Royal Mail will make everything possible to remain the leader of the UK mail market, as it is the only company offering universal services, though it will have to work hard with the appearance of the new market players. References (1) Bot, Bernard L 1997, 'Is there a future for the postman'. The McKinsey Quarterly, issue 4. (2) Campbell, James 2002, An introduction to the history of universal postal service. The Brooklings Institution, Washington D.C. (3) Cohen, Robert H.& Waller, John D 2000, 'Universal service without a monopoly.' In M Crew & P Kleindorfer (eds) Current Directions in Postal Reform, Boston, MA: Kluwer Academic Publishers. (4) Cohen, Robert H & Pace Carla 2002, Towards a general postal service cost function. Presented at the Tenth Conference on Postal Deregulation and Delivery Economics, Potsdam, Germany. (5) Crew, Michael A & Kleindorfer Paul R 1998, 'Efficient entry monopoly, and the universal service obligation'. Journal of Regulatory Economics vol. 14, p. 103-125 (6) Crew, Michael A & Kleindorfer, Paul R 2000, 'Liberalization and the universal service obligation in postal service' In M Crew & P Kleindorfer (eds) Current Directions in Postal Reform, Boston, MA: Kluwer Academic Publishers. (7) Donder, Philippe De, & Cremer, Helmuth 2001, 'Uniform pricing and postal market liberalization. In M Crew & P Kleindorfer (eds) Future Directions in Postal Reform, Boston: Kluwer. (8) Hammond, Allen S 2005, 'Universal service: problems, solutions, and responsive policies'. Communications Law Journal, vol. 57, no. 2, pp. 187-190 (9) Kline, Allen 1997, 'As e-mail replaces snail mail, postal service goes third class.' Insight on the News, vol. 13, no. 34, p. 36 (10) Panzar, John 2001, 'Funding universal service obligations: The costs of liberalization'. In M Crew & P Kleindorfer (eds) Future Directions in Postal Reform, Boston: Kluwer. (11) Posner, Richard 1974, 'Natural monopoly and its regulation.' Stanford Law Review no. 21, pp. 548-563 (12) Taylor, Jane 1996, 'The postal debate threatens the post office monopoly.' New Statesman, vol. 125, no. 4293, p. 18-22 (13) Ware, Roger & Winter, Ralph 1986, 'Public pricing under imperfect competition.' International Journal of Industrial Organization, vol. 4, pp. 87-97. (14) http://www.royalmail.com (15) http://www.psc.gov.uk/universal-service.html Read More