The bright star of the mail market

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Royal Mail’s share price rose after Whistl revealed that it was abandoning its end-to-end service. However, the move was less pleasing for the regulator, Ofcom, which has now launched a “fundamental review of the regulation of Royal Mail”.


In a statement, Ofcom said: “The review will ensure regulation remains appropriate and sufficient to secure the universal postal service, given the recent withdrawal by Whistl from the ‘direct delivery’ letters market, which has resulted in Royal Mail no longer being subject to national competition.”

Whistl pulling out of final delivery is a big problem for Ofcom. Whistl is part of the Post NL and turned over £590.2m in the UK last year. That’s a decent-sized operation – in fact, it reckons that it handled about 56 per cent of the total UK downstream access (DSA) market, which accounts for about 23 per cent of the total mail market volume. The total number of items handled increased from 3.97bn to 4bn.

But even an organisation this size struggled to get its end to end service off the ground. Not only did it run into problems raising the money to develop the operation: last year the E2E business incurred an operating loss of £10.3m. That is after a loss of £2.1m the year before.

As everyone knows, the letters market is declining. For the year to 29th March 2015, Royal Mail saw revenue from letters and other mail fall by three per cent to £3.4 bn.

It handled 333 million fewer addressed letters than the year before, saying the underlying decline was four per cent. As a result it now handles 13bn addressed letters a year.

The other significant player in the market is UK Mail, which had sales of £240.5m in its Mail business in the year to 31st March 2015, down 1.9 per cent on the year before. Operating profit in the Mail business, was down 1.7 per cent on the year before. at 12.5m.

These numbers hardly paint a great picture.

However, the one sector of the mail market that is growing is e-commerce related packets and large letters. Whistl said that its business in this area grew to 60.8 million items in 2014.

UK Mail is also keen to exploit this more effectively. In its annual results it said: “A key growth element of the access mail market is the rising popularity of packets; a segment that we estimate currently represents some £200m of the total access mail market of £1.5bn.

“While we have made some progress in this area in recent years, our market share of the access packets market remains very low and we are now reinvigorating this business, investing in specialist automated packets sortation equipment and increasing the size of our sales team. We believe this area will be key to growing our mail revenues and profitability in the future.”

Whether Ofcom will ever find anyone willing to have another go at competing with Royal Mail on end-to-end delivery is a moot point. But it is very clear that in the packet sector is the rising star of the market – and competition is set to rise sharply.