We are at a crucial juncture. But not one without opportunity. If we can adapt our business quickly enough, we will be well positioned to meet our customers’ demands for more and more items, to and from more people, delivered more frequently.
If we don’t, the market will move away from us and we will be consigned to delivering a reducing volume of letters and struggling to meet demand in the growing parcels market.
Our people, our trusted brand, and our role in society all provide grounds for optimism and should provide strong foundations for a successful future. But we need to move quickly, the window of opportunity is open to us now. In the past we were accustomed to moving at a snail’s pace and believed that the market would come to us. But change in the market is there for us to capture and if we don’t rise to that challenge, others will.
Our three-step plan
When we released our financial results in June, CEO Stuart Simpson and interim executive chair, Royal Mail Group, Keith Williams, set out the below three-step plan.
- First, the immediate step-change in ways of working needed to accelerate the pace of change.
Second, the co-operative step-change needed in how we, our people and the trade unions work together to accelerate rather than slow down change.
Third, the regulatory step-change needed to ensure that our regulatory obligations allow us to meet our customers’ changing demands and deliver what they want in a financially sustainable way.
To drive a cultural change, and improve accountability and responsibility, we took the difficult decision to reduce our management population.
This change is about making us a leaner, more commercially focused organisation. But that does not detract from the fact that many hard working, highly valued colleagues are leaving our business. We are committed to conducting the consultation process carefully and sensitively, working closely with our people and their representatives.
We have also taken action to improve our financial position. We aim to keep our non-people costs in 2021-22 in line with the level of last year. And we have already identified £250m of planned spend on assets that can be saved over the next two years.
In addition, we have identified projects that are no longer necessary, projects that can be delayed, and efficiencies across a number of projects that means we can still deliver what we need, but for a lower cost.
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Achieving change together : We have been in ongoing discussions with our unions
We have been in ongoing discussions with both Unite CMA and the CWU on the changes which are needed.
We are in consultation with Unite CMA about the management restructuring, as well as discussing many other business issues with them. And in July, we began a programme of talks with CWU covering five key strands.
Both Royal Mail and CWU have entered the talks with a positive and constructive approach. We have made good progress in a number of areas and we have tabled the changes that we need to make. However, it is disappointing that we have not yet been able to reach agreement. We have increased the intensity of our discussions in recent weeks in recognition of the need to make progress more quickly.
To be clear, we will not be successful without change, and that change is best achieved together. For example, we want to work together on our network strategy to support our new parcel hubs and trials of separate daily parcel deliveries. And we need to dispense with old, outdated ways of working such as handwritten sign-in sheets, moving to automated clock-in, clock-out systems as used by other businesses for decades.
We need agreement so we can move quickly to get local sign-off on the removal of old letter-sorting machines, unneeded when letter volumes have halved since 2004. And we need to be able to review - and where needed, revise – our processing and distribution operations, and our-postmen and women’s walks, at least once a year, so that we can adapt these in line with the rapid decline in letter volumes.
These changes may seem small and obvious to the outside observer. But without them, we cannot achieve essential improvement in operational efficiency and better focus our efforts on the ever-increasing demands of our customers.
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Universal Service : Ensuring the Universal Service continues to meet our customers’ needs
The third part of the plan is about working with the Regulator and Government on the Universal Service Obligation (USO).
Royal Mail has an unparalleled opportunity for growth in the demand for parcels and possibilities beyond, given our position in the market. Letters will always be important. But we need the flexibility to deliver what our customers want.
We have surveyed the views of thousands of people and small businesses about what they want from postal services. We have also held hundreds of sessions with colleagues up and down the country about how they think the USO may need to change for the future. The headline insights that we have gained are clear.
- First, our customers want to retain the ‘one price goes anywhere’ principle of the USO.
Second, they want more ways to send letters and parcels – whether it’s online postage or parcel postboxes – and more frequent and convenient parcel deliveries. We want to look again at whether there is enough customer demand for a seven-day commercial parcel service.
And thirdly, although they are posting fewer letters, and expect to be receiving more parcels in future, they still want an affordable next-day letters service so that they don’t have to rely on more expensive couriers.
These findings tell us that the best way to ensure the Universal Service continues to meet our customers’ needs is to rebalance our service model more towards the growing parcels market, particularly urgent parcels, and urgent letters.
But to be clear, this does not mean following other countries such as New Zealand or Italy that have reduced letters delivery to three days a week in some areas, for example. We will keep delivering letters to every part of the UK, for one price. And we would like to deliver the items that customers want more often, not less.
But to do that, we need a regulatory system fit for the future rather than the past. In the last five years, the profits of the Reported Business of Royal Mail – the regulated entity – have fallen by around 95 per cent. It will be materially loss-making this financial year. The upcoming Ofcom review will be vital in securing a platform, which permits both the investment required to deliver the USO demanded by the public, and for that service to be delivered sustainably.
It does not make sense for us to be obliged to allocate our resources to delivering what our customers don’t value highly, rather than what they do. So, we are currently exploring what a rebalanced Universal Service might look like.
Over the coming weeks, we will be meeting with more customers and other stakeholders to explore these issues in more detail. We will factor the findings into our thinking and share them with Ofcom and the Government in the Autumn. Any substantive change is a matter for the Regulator, Government and ultimately, Parliament. But we need to make sure this review process is considered swiftly, given the rapidly changing customer needs and the financial sustainability of the Universal Service.
One thing is very clear – we remain committed to the universal, affordable, ‘one price goes anywhere’ nature of the USO. Our unique responsibility began in 1840 when the world’s first adhesive postage stamp, the Penny Black, was used as payment to create a uniform postage service. Times may have changed a lot, but there remains a vitally important role for Royal Mail in UK society. The recent Covid-19 crisis has underlined this.
We need to work with our Government, Regulator, unions and people to ensure a financially-sustainable Royal Mail can meet changing customer demands through the 21st century.
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Our opportunity : We have tremendous opportunities in the rapidly growing customer demand for parcels
This afternoon, we will be holding our Annual General Meeting – an opportunity for us to update our shareholders on our performance and key issues for the business.
Keith Williams, our interim executive chair, Royal Mail Group, said: 'I want to be transparent with our people about how the company is doing, so I am writing to update you at the same time.
‘While the current crisis has brought both additional challenges and extra costs to Royal Mail, the market changes accelerated by it have also offered us new opportunities.
‘As a business, we have tremendous opportunities in the rapidly growing customer demand for parcels – both big and small. However, we have allowed our legacy in letters to hold back operational changes, which we should have made long ago to anticipate a world with fewer letters and more parcels.’
Recent performance
‘That change has been accelerated and a new world is now with us,’ added Keith. ‘As you will have seen in offices throughout the UK, particularly since the arrival of Covid-19, parcel volumes are continuing to rise significantly.
‘We are announcing today that they are in fact, up 34 per cent in the first five months of the year. Conversely, addressed letter volumes excluding elections are down 28 per cent – that’s over a billion fewer letters in the past five months alone, a staggering reduction.
‘Whilst the increased parcel volumes are good news, they cost more to deliver than letters. About £70 million more in the first five months. And we are also still facing increased estimated Covid- related costs too, such as the costs of social distancing, protective equipment, absences and overtime (around £75 million).
‘These trends may slow after the pandemic is over, but we do not expect them to reverse. As we had predicted previously, Royal Mail in the UK will make a substantial loss this year and we will not reach profitability – let alone an acceptable level of profitability, without substantial business change.
‘To put it simply, too many parcels are still sorted by hand and we are failing to adapt our business to fewer and fewer letters by holding on to outdated working practices and a delivery structure that no longer meets customer needs.’
