The postal service is finding it tough grappling with rivals while having to provide the universal service.
Royal Mail was hit by a double-whammy of bad news yesterday after Ofcom rejected its claims that competition was undermining its ability to deliver a nationwide service.
On top of that rejection, the regulator said it was launching an investigation into Royal Mail’s ability to deliver the universal postal service, including its efficiency and parcel delivery performance.
Royal Mail had pushed for a full competition review over its concern that new postal delivery service Whistl, a unit of the Dutch mail group PostNL, posed a threat to its revenues, with the rival able to “cherry pick” more lucrative delivery areas. Under the universal service obligation (USO), Royal Mail is legally required to deliver mail across Britain six days a week at a uniform price.
However, Ofcom has ruled that the competitive environment will provide Royal Mail with a further incentive to become more efficient. Chief executive Ed Richards told journalists yesterday morning: “At this point in time, we do not believe the direct delivery competition poses a threat to the universal service – the evidence just doesn’t support that.
“But we consider that there are other areas which may have a future effect on the financial sustainability of the USO that we need to have a look at,” he added. Richards then announced that Ofcom was launching a review of Royal Mail’s running of the USO “that will include the impact of the developments in the parcels market and… the progress Royal Mail is making on efficiency”.
The former national postal service responded in a statement that it was “disappointed” with Ofcom’s decision, but it would “play its full part” in the regulator’s new review of the USO.
The FTSE 100-listed firm had previously stated that the new competition could reduce its revenues by over £200m by 2017-18. Boss Moya Greene told MPs last week that it faced competitors that rendered the universal service “unfinanceable and uneconomic”. Critics accused Royal Mail of scaremongering.
But Panmure Gordon analyst Gert Zonneveld said both Ofcom and Royal Mail had justifiable arguments. He told City A.M.: “For Ofcom, the numbers at this stage aren’t particularly significant: only 0.6 per cent of letter volumes are going to competitors. But Royal Mail are understandably worried about the future of that trend: their competitors delivered 8m letters in 2012 and that number is now 80m – so it’s growing fast. Certainly Royal Mail’s concerns aren’t going to go away.”
Royal Mail’s share price dropped 3.01 per cent in trading yesterday following the news. But analysts were divided on how it affected the company’s financial outlook. Of the 18 analysts monitored by Reuters covering the company, eight had a hold rating – which appeared to be consensus view. The remainder were equally distributed on the buy and sell sides of the fence. The jury’s still out.