Competitive Market Review

2007
COMPETITIVE
MARKET
REVIEW
UK POSTAL MARKET
3690_CMR_AW6 29/10/07 14:31 Page 1
CONTENTS
1 EXECUTIVE SUMMARY 2
2 OVERVIEW OF THE POSTAL MARKET 6
3 DEVELOPMENT OF COMPETITION 28
4 ROYAL MAIL 47
5 MARKET DEVELOPMENTS/OPPORTUNITIES 59
6 ANNEX A 71
CONTENTS 1
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1 EXECUTIVE SUMMARY
As the regulator of the UK mail market Postcomm needs to have

a thorough understanding of the market and how it is evolving.
The 2007 Competitive Market Review builds on last year’s document
to give an overview of developments in the mail market. It will help to
inform Postcomm’s policy decisions and will assist in the continued
development of a regulatory framework that facilitates the development
of competition in the context of a healthy, stable mail market.
Market size and growth
The UK addressed mail market was worth around £6.6 billion in 2006/07. Mail volumes
amounted to 21.9 billion items, down 2 per cent on the previous year1. This is the third
consecutive year of mail volume decline in the UK. While there is evidence to suggest
that substitution has caused mail volumes to decline for the last three years, there is
also evidence of areas of growth in the market which appears to be offsetting a more
significant volume decline.
In 2006/07 2.4 billion items were carried under access agreements; this represents
11.8 per cent of total operational mail volumes. This is an increase from 5.6 per cent in
2005/06. Around half of these items were handled by alternative operators. Latest
figures (cumulative volumes from August 2007) show that access mail accounts for
19 per cent of Royal Mail’s revenue-derived volumes.
1 Based on Royal Mail operational volumes, including access. Includes all regulated and non-regulated
mail, excludes door-to-door and international. 2006/07 volumes are based on operational
measurement. For the financial year 2007/08 and going forward, Royal Mail volumes will be
measured on a revenue-derived basis, as agreed between Postcomm and Royal Mail.
2 2007 COMPETITIVE MARKET REVIEW

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There was a decrease in the volume carried end-to-end by alternative operators from
39 million in 2005/06 items to 34.8 million items in 2006/07.
Table 1.1 Addressed letters’ market by volume2
Total Volumes Total Volumes Volume

2005/06 2006/07 Growth
(millions) (millions) (%)
Royal Mail end-to-end* 19,705 17,846 -9
Total Alternative Provider Access 539 1,148 113
Customer Direct Access 618 1,292 109
Total Access 1,157 2,442 111
Other letter products 280 336 33
Total 21,142 20,675 -2
Other operators’ end-to-end mailings 39 35 -2
Source: Postcomm with data from Royal Mail
Market segmentation, sectors and mail applications
Businesses generate 87 per cent of all mail; the main uses of mail for business
are advertising mail, fulfilment, general business mail and transactional mail.
Although direct mail volumes declined slightly in 2006/07, by around 2 per cent, there
are indications that direct mail use is a growing and successful medium in some
industry sectors. Distinctions between advertising mail and transactional mail are
beginning to blur and measuring trends in this area will become increasingly difficult.
2 Postcomm is working with Royal Mail and other licensed operators on a definition of mail volume
market shares. This is a complex matter, for example Royal Mail argues that self-delivered mail (such
as local authority items) should be included in these figures. To date, Postcomm’s market share figures
exclude document exchange mail. There is also difficulty with the treatment of parcels, most of which
fell outside Royal Mail’s historic monopoly.
* Royal Mail inland addressed end-to-end mail comprises price controlled products (excluding
downstream access) plus USO non-price controlled products.
EXECUTIVE SUMMARY 3
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Transactional mail is estimated to be declining by around 2-3 per cent per year, due
largely to businesses encouraging their customers and other business to move physical
bills and statements on-line. However, while businesses are trying to reduce the volume
of physical statements they send, they tend also to be committed to offering customers
a choice of communications channels. Some of this decline is predicted to be offset by
household growth and the increased volume of transactional mail generated by internet
sales. The use of blank spaces on transactional mail for advertising messages may also
extend the lifecycle of transactional mail.
Fulfilment and publications remain potential growth areas in the mail industry and
both tend to be customer driven. According to IMRG, e-retail which drives fulfilment
mail now accounts for over £4 billion worth of sales a month, which is driving small
parcel and packet growth. In the publications sector, customer magazines are exhibiting
the strongest growth. In the last 12 months the industry has seen 16 per cent year-on-
year growth as companies invest in customer magazines as a marketing tool.
Market developments
As of September 2007 there are 18 licensed operators including Royal Mail. Since
the last Competitive Market Review two new long-term licences have been granted
by Postcomm, and the UK market now has its first franchised operator. End-to-end
networks are in evidence in the UK market, however mainly in niche areas, but there
is potential for this to grow. The different operators in the postal market do have
different customer bases, target markets and business models which are outlined in this
report. The role of mail value chain innovation and suppliers to the industry is increasing
in importance year on year, and recent developments in hybrid mail are particularly
interesting for the future of the market.
Royal Mail’s performance
Royal Mail’s financial performance for the year ended 25 March 2007 was weaker than
in the previous year, with operating profits from Royal Mail’s Letters’ business falling
from £344 million to £194 million, caused by increasing costs, falling mail volumes and
constant revenues.
In 2006/07, quality of service targets changed to better reflect customer needs. Royal
Mail achieved 11 out of 12 of its targets, compared to 10 out of 16 in 2005/06. Royal
Mail’s failure to meet the target for the number of postcode areas delivering at least
91.5 per cent of first class mail the day after posting was due to industrial action in
two postcode areas.

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International, VAT and the environment
Competition is developing at different rates and in different ways across Europe

depending in part on the regulatory regime in place from country to country. Liberalised
European markets are broadly characterised by relatively stable mail volumes and
nationwide competition developing in delivery. Competitive market shares range from
8-12 per cent in Germany, the Netherlands and Spain, which have had elements of
mail liberalisation for several years.
On VAT, Postcomm continues to support a level playing field for all postal operators, with
no significant price rises for customers. It therefore believes that a reduced rate of VAT
(of 5 per cent) should be applied to all mail services. However, in light of the European
Commission’s (‘the Commission’) ongoing infringement proceedings against the UK,
Germany and Sweden on the interpretation of the VAT exemption for postal services,
Postcomm has modelled the effect that different VAT exemption scenarios might have
on the UK postal services market. The result of this modelling has shown that the
imposition of the full rate of VAT on mail services (17.5 per cent) could result in around
5 per cent decline in Royal Mail volumes, while the imposition of the reduced rate
would only result in a 1 per cent decline.
Given that Postcomm’s preferred option of 5 per cent VAT applied to all services would
require unanimous Commission Member State agreement, Postcomm intends to wait
for the outcome of the current infringement proceedings before deciding whether to
continue to support this option, or whether there is another option available.
The environment is an issue with an increasing impact on the

mail industry, and those involved in the industry, from trade bodies
to operators, are beginning to develop solutions to minimise the
environmental impact of mail production and delivery. This is a
relatively new market dynamic in the industry, and Postcomm
intends to monitor developments in this area.
EXECUTIVE SUMMARY 5
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2 OVERVIEW OF THE
POSTAL MARKET
This section offers an overview of the mail market in the UK, including
market size, growth, structure and competition. It discusses market
segmentation, mail flows and applications of mail in detail, looking
at trends where appropriate. The chapter also looks at the related
markets of unaddressed mail, express deliveries and international
outbound mail.
Market size and growth
The UK addressed mail market was worth around £6.6 billion in 2006/07. Mail volumes
amounted to 21.9 billion items, down 2 per cent on the previous year3. This is the third
consecutive year of mail volume decline in the UK. As domestic letter volumes have
been in decline for the past three years, there is growing industry concern that this
may be a structural decline based on a mature mail market subject to impacts such
as e-substitution. While there is evidence to suggest that substitution has caused mail
volume decline, there is also evidence of areas of growth in the market and significant
moves away from mail have not materialised.
This appears to be due, in part, to the fact that while email and the internet are a
substitute to physical mail, there are areas in which they also drive mail volume growth,
where there is, in other words, convergence between electronic and physical mail.
Physical delivery of on-line orders is an example of such convergence, as is using
multi-channel advertising where a customer acquired by email may then be retained
via direct mail. Indeed, according to Pitney Bowes, internet users in the UK receive
up to 65 per cent more mail than those who do not use the internet.
3 Based on Royal Mail operational volumes, including access. Includes all regulated and non-regulated
mail, excludes door-to-door and international.

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Whatever the pace and extent to which mail volumes may be declining, the role of the
postal sector is evolving, as it finds itself influenced by communications, advertising and
delivery, all of which now use multiple channels to access receivers, and which are
sometimes substitutes and sometimes complementary to mail. The extent to which mail
has growth potential will be determined, in part, by the behaviour of mail operators.
The pricing and commercial policies of operators, particularly Royal Mail, will
undoubtedly impact volume trends, as will operators’ ability to add value to mail
for customers, and to provide innovative solutions and incentives for businesses to
continue to use mail.
The chart below illustrates the changing dynamics of the postal market. The fact
that the postal market is now driven to some extent by different dynamics has
meant the economic and demographic link has weakened and volumes are
more difficult to predict.
Figure 2.1 Inland letter traffic compared with economic and demographic growth
BREAK POINT
8.0
5 year average year-on-year growth (%)
6.0
4.0
2.0
0
86/87 88/89 90/91 92/93 94/95 96/97 98/99 00/01 02/03 04/05
Inland letters Economic growth is weighted by letter demand; demographic

growth is measured by growth in number of households
Economic and
demographic growth Source: Royal Mail
OVERVIEW OF THE POSTAL MARKET 7

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This trend appears to be consistent with mature mail markets across Europe. Figure 2.2
shows that letter volumes have grown less than the economy in real terms, even in the
new member states, illustrating that letter volumes are less related to GDP across most
European countries than in the past.
Figure 2.2 Member states domestic letter post per GDP:

average annual growth, 2000/02 and 2002/04
5.0
2.5
SK AT EE DK FI MT SE DE FR LU IT EU NL PT ES CY UK GR CZ PL HU SI LV
0.0
Average annual growth (%)
-2.5
-5.0
-7.5
-10.0
-12.5
-15.0
2000/02 Notes: BE, IE, LT – confidential

2002/04 Source: WIK
Figure 2.3 shows that, in 2004, the UK was the highest per capita mailer in Europe.
If the UK mail market is the most mature in Europe, does this indicate limited room
for growth? In the United States in 2005, the average household received 1,800 items
of mail, while the average UK household received 850. This could indicate per capita
growth potential beyond that seen in Europe, although patterns of mail use differ
markedly between Europe and the US due to a variety of differences in culture
and infrastructure.

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Figure 2.3 Member states domestic letter post, items per capita 2002 and 2004
350
300
Domestic letter post, items per capita
250
200
150
100
50
0
LV PL SK GR CY EE HU CZ IT MT PT ES SI EU DE LU AT FI FR DK UK NL SE
2002 Notes: BE, IE, LT – confidential

2004 Source: WIK
Because mail trends are impacted by new forces making the market increasingly
difficult to predict, it is instructive to examine the different mail sectors to understand
their relative size and characteristics in order to understand the underlying factors
impacting mail volume trends in the UK. First we look at the overall structure of the
market, 18 months after full liberalisation.
Market structure
The UK addressed mail market has been fully liberalised since January 2006 and, as of
September 2007, there are 18 licensed mail providers including Royal Mail. Competition
has so far taken two main forms in the UK, ‘access’ competition and ‘end-to-end’.
Access
Most competitors have entered the market by using third party access to Royal Mail’s
delivery network. This is known as ‘access’ competition, and it refers to the process
by which an alternative operator collects, sorts and trunks its customers’ mail to Royal
Mail’s inward mail centres, turning it over to Royal Mail for final delivery. Around a
dozen of Royal Mail’s large customers also have ‘customer direct access’ agreements
whereby they arrange directly with Royal Mail access to Royal Mail’s inward mail
centres. Access customers and operators typically pay Royal Mail around 13p per
letter for delivery.

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In 2006/07, mail carried via access arrangements (both operator and customer direct
access) accounted for 11.8 per cent of total operational mail volumes for the year.
This is an increase from 5.6 per cent in 2005/06.
Current access competition
As of August 2007, access mail accounted for 19 per cent of addressed revenue-
derived letter volumes. Just under half of this is carried through access agreements
directly with Royal Mail’s customers.
Figure 2.4 Access volumes April 2006 – August 2007
400
300
(Millions)
200
100
0
M 6
Ju 6
06
Au 6
Se 6
06
N 6
De 6
06
Fe 7
M 7
07
M 7
Ju 7
07
Au 7
07
r0
l0
t0
r0
l0
ay
ov
ar
ay
g
Ju
Ju
Oc
Ap
Ap
Ja
Total Access volume Operator access CDA

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End-to-end
A second type of competition in the mail market is end-to-end competition, where a
competitor provides the entire mailing process from collection to delivery. End-to-end
competition is much less developed in the UK licensed mail market to date,
representing only 0.2 per cent of licensed mail volumes. While a few operators currently
offer end-to-end services, they tend to be local or high-value networks. There are a few
operators with stated ambitions to establish national end-to-end networks in the UK,
and they may achieve this either by ensuring items are of a high enough value or
by having adequate drop-density to make lower priced items profitable. End-to-end
networks have been established in other European countries with liberalised mail
markets; however, these markets have been open to this type of competition much
longer than the UK. The development of competition in European markets is discussed
further in Chapter 5.
Market segmentation
A breakdown of mail flows in the UK domestic market is shown in Figure 2.5.

Businesses send around 87 per cent of all mail and their main uses of mail are split
between advertising, transactional mail, general business mail, and fulfilment, each
explained briefly below.
Figure 2.5 Mail flows, domestic v business
Domestic-to-domestic 10%
Domestic-to-business 3%
Business-to-business 27%
Business-to-domestic 60%
Source: Royal Mail

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Mail applications
Advertising
According to Royal Mail, 5.03 billion items of direct mail were sent in the UK in 2006,
a decline of 2.1 per cent in volume on the previous year. In the past few years, direct
mail has shown a slight year-on-year decline, following strong growth from 1996-2003.
This growth was driven by large advertisers such as banks and retailers employing
national direct mail campaigns to acquire new customers, however, in the past few
years, mass direct mailings have tended to give way to smaller, more targeted
campaigns which are blended with other media. Direct mail is being used for retention
and cross-selling, which amount to lower mailing volumes, although the return on
investment of these campaigns may well be higher.
Declining volumes have fostered speculation about whether direct mail is approaching
market maturity and is destined for long-term decline, as happens in some markets in
which products become commoditised, or whether the decline is simply a result of
changing posting patterns, with the medium itself presenting further growth
opportunities.
It could be argued that the postal industry has the main

responsibility for ensuring that direct mail remains a valuable
marketing medium, particularly as postage costs can account for
up to 60 per cent of a direct mail campaign. As other costs come
down (input costs such as print, and the cost of alternative media),
mail must be seen to be competitive. The mail industry should be
in a position to lead on ensuring that mail is a trusted and valuable
direct marketing tool.

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Figure 2.6 illustrates the recent decline in direct mail volumes, which is occurring in
both business-to-consumer, and business-to-business mailings. Volumes have been
declining in both categories since 2003.
Figure 2.6 Direct mail volumes
6000
5000
4000
Millions
3000
2000
1000
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Consumer Business Total Source: Direct mail

information service

3690_CMR_AW6 29/10/07 14:31 Page 14
The chart below shows the percentage of business-to-consumer direct mail sent by
industry sector. Financial services and home shopping account for 45 per cent of all
business-to-consumer direct mail. Both these sectors have tended to move away from
mass mailings toward mailing to more targeted audiences, which may go some way to
explaining the recent volume decline.
Although overall direct mail volumes have fallen, Royal Mail has pointed to strong growth
in certain market sectors. In the last quarter of 2006, for example, direct mail spend from
building societies grew by 18.8 per cent on the same period in 2005, while the charity
sector was up 9.1 per cent, government by 6 per cent and health by 5.7 per cent4.
Figure 2.7 Consumer direct mail volume share by sector 2006 (%)
Financial 31%
Home shopping/mail order 14%
Retail 9%
Charity 10%
Utilities 6%
Media/publishing 5%
Travel/tourism 5%
Government 2%
Leisure/entertainment 2%
Manufacturing 3%
Health 1%
Car dealers 1%
Education 0%
Other 8%
Not specified 3%
Source: DMIS
4 ‘‘Royal Mail accentuates positive as mail volumes dip’’, Precision Marketing, 30 August 2007.

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Some industry experts suggest that the direct mail decline is due to the increased use
of more integrated, multi-media campaigns rather than a significant whole-scale switch
to other media, suggesting that direct mail has become just one of many media used
in a typical campaign. Indeed, direct marketing budgets overall are growing. The latest
Bellwether Report from the IPA, a quarterly survey of marketing spend, suggests that
marketing budgets have increased for the second quarter in a row, to the greatest extent
since 2004. The report revealed that business confidence is growing and budgets are
being revised upward across all marketing sectors. The strongest growth was in internet
advertising, which now accounts for 6 per cent of all advertising spend, however, there
seems to be evidence of media integration, combining email, direct mail, DRTV (direct
response television marketing), and on-line advertising5. Indeed, email marketing
overtook direct mail in terms of volume for the first time in the last quarter of 2006, when
1.6 billion emails were sent, compared to 1.2 billion items of direct mail, according to the
DMA’s Email Marketing Council6. A similar trend is shown in the table below.
Table 2.1 Advertising expenditure by medium Q1 2007, £m current prices, and Q1

2007 on Q1 2006 percentage changes in current prices
Q1 2007 adspend Current prices (£m) change year/year (%)
National newspapers (Includes supplements) 492 -1.8
Regional newspapers 705 -3.8
Consumer magazines (Excludes supplements) 188 -1.4
Business magazines 203 -6.6
Total press 1,589 -3.3

– of which display 869 -2.1
– of which classified 720 -4.8
Television 962 -0.8
Radio 127 -1.8
Outdoor 237 7.7
Cinema 30 9.9
Internet (Internet figure is a WARC estimate) 648 42.0
Direct mail 615 -3.6
Total measured adspend 4,208 3.0

(excludes directory advertising)
Source: AA Quarterly Survey of Advertising

Expenditure June 2007
5 The Q2 2007 Bellwether Report, IPA, 16 July 2007.

6 Email overtakes print in DMA’s latest report, Print Week, 16 August 2007.

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This points to a complex, multi-channel direct marketing environment that has altered
the underlying business models of agencies and suppliers. A recent article in Marketing
Week explains that whereas direct marketing agencies used to rely on a single channel
for most income, they now need to spread their activity across a range of marketing
channels. Companies are tending to move away from volume mailings toward service-
based offerings, using customer data to tailor messages and offerings, and direct mail is
a strong medium for this type of marketing. Email marketing is also good for tailored
messages, however, nine out of ten email messages are spam7, making legitimate email
marketing difficult to deliver. Direct mail is a good complement to email here, and helps
maintain the integrity of channels to market as a personalised, trusted medium.
Often email is used for large acquisition mailings, and direct mail tends to be used for
customer retention and brand building. Where large mailers used to use three or four
channels to reach their customers, they now spread their marketing budget among up
to 15 different media. Although direct mail has declined in overall volume the last two
years, there are opportunities for growth, particularly if the medium can add value to
customers in a multi-channel environment.
Direct mail continues to grow in the United States, for example,

aided by organisations such as the National Postal Forum – a
not-for-profit educational corporation that provides education to
business mailers and facilitates communication between USPS
and its business customers. There is evidence to suggest that
the UK postal industry can encourage mail use and add value
to mail as a medium, leading growth in mail volumes.
7 Quality replaces quantity, Marketing Week, 30 August 2007.

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Case Study
BSkyB
Company background
BSkyB is a media and broadcasting company with 8.5 million direct customers.
Mailing profile
BSkyB sends significant amounts of transactional mail pieces each year, including
bills, statements and welcome letters to its customers. It moved all its transactional
mail to TNT Post in 2004.
BSkyB also has a direct mail programme, targeting customers and prospects via both
addressed and unaddressed mail, the majority of which is also handled by TNT Post.
BSkyB sends monthly magazines to its customers and still uses Royal Mail for all its
magazine distribution.
Why did you switch?

BSkyB switched because it receives a 95 per cent day-two drop rate with TNT Post
compared to Royal Mail, and it finds TNT Post more flexible to work with.
What have been the benefits/experiences to date?

BSkyB has received very good benefits from gradually moving most of its mail to
TNT, driving valuable savings in its overall postal budget.
Although BSkyB has had a few issues with late delivery, they are promptly
investigated and dealt with.
What would you recommend other mail customers to consider when thinking
about switching?
You must decide to switch for the right reasons and remember that downstream
access is a new product.
What are your thoughts on the mail market?

BSkyB is concerned about the lack of innovation in the market. It feels that the
growth in the internet will have an impact on the mail market, but that mail and the
internet can be complementary.
“Internet and direct mail work well together. The internet raises awareness, whereas
people like to respond to direct mail. Our direct mail budget has not been cut.”
What would you like to see in the mail market in the future?
BSkyB would like to see more choice and innovation.
Source
BskyB

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Unaddressed mail
Unlike addressed direct mail, the unaddressed advertising mail market has continued to
grow through 2006, although at a decreasing rate8. Although not part of the regulated
mail market, it is interesting to look at the door-to-door market as it is a complementary
medium to direct mail, and its continued growth suggests there is sustained demand
amongst advertisers for physical, through-the-letterbox communication.
Figure 2.8 Size and growth of the door-to-door market
1200
1000
Expenditure (£m)
800
600
400
200
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Distribution expenditure Print and production expenditure
8 DMA door-to-door Council.

3690_CMR_AW6 29/10/07 14:31 Page 19
Table 2.2 UK door-to-door market – estimates of size, growth and spend per household
1997 1998 1999 2000 2001 2002 2003 2004 2005
Volume 6,500 7,000 7,950 8,470 9,250 10,170 11,880 12,560 13,045
(Items millions)
Year on year 7.7 13.6 6.5 9.2 9.9 9.2 9.7 3.9
increase in
volume (%)
Average Volume 5.3 5.6 6.3 6.7 7.3 8.0 9.2 9.7 10.0
Per GB
Household Per
Week (items)
Year on year 6.8 12.5 5.4 9.0 9.2 16.0 5.0 3.1
increase (%)
Source: DMA door-to-door Council
Growth is predicted in door-to-door through 2007, although growth rates are considered
to have broadly reached a plateau. According to the DMA door-to-door Council, the
door-to-door market has sustained growth for a variety of reasons. Firstly, it is
considered to be the most cost-effective way to reach mass audiences, particularly
considering the fragmentation that has been occurring in other media such as television
and press. On the other hand, it can be targeted to specific audiences when postcode
details are overlayed with demographic and lifestyle data, and it can be targeted to retail
catchment or government authority areas. Finally, the emergence of companies that
monitor door-to-door performance means that efficiency levels can be monitored and
the reputation of the industry as a whole has improved.

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Transactional mail
Transactional mail volume estimates range anywhere from 6 billion to 10 billion items
per year in the UK9. The portion of this that constitutes bulk mailings from large firms
has been one of the main arenas of the competitive postal market, and constitutes a
substantial proportion of the 2.4 billion items in access traffic handled by competitors
last year.
Transactional mail is estimated to be declining by around 2-3 per cent per year, due
largely to businesses encouraging their customers to move physical bills and statements
on-line. However, while businesses are trying to reduce the volume of physical
statements they send, they tend also to be committed to offering customers a choice
of communication channels, so the extent to which this drive in cost savings actually
reduces transactional mail volumes will depend on customer willingness to move these
items on-line. Most large transactional mailers expect to maintain 90 per cent of their
transactional mail volumes in the medium term due to customer choice10.
There is evidence to suggest that the predicted decline in

transactional mail will be offset, to some extent, by other factors.
Transactional mail experiences organic growth from the continued
growth in household numbers, which is estimated to continue at
around 1 per cent a year for example.
There is also evidence that many large mailers are integrating their transactional and
advertising messaging using inserts or printing messages on the white space of bills and
statements. This adds value to the bill or statement as a communication medium, and
sales generated in this way offset the expense of the transactional delivery.
All these factors combined suggest that transactional mail volumes will continue to
decline gradually in the short term as observed over the past few years, at a rate of
around 2 per cent. UK experience and European data suggest that transactional mail
is subject to electronic substitution11; however, it is also true that internet-driven sales
do, to some extent, generate physical, transactional mail. The use of advertising on
transactional mail pieces is blending the uses of mail. Perhaps it is because of the
complementary nature of these media that a more significant decline in physical
transactional mail has not occurred.
9 OTM discussion paper, OTM Website – Estimates that in the UK, 20,000 firms issue 6.7 billion
statements, and a further 7,500 telecoms, financial services and utilities firms issue 3 billion bills each
year. Triangle Management Services, UK Transactional Mail Survey, 2006, estimates 6.4 billion items of
transactional mail sent in the UK in 2004.
10 Based on Postcomm interviews with large transactional mailers, 2006/07.
11 Main Developments in the Postal Sector, 2004/06, WIK-Consult, May 2006.

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Case Study
HBOS
Company background
Halifax Bank of Scotland plc provides a range of financial services including savings/current
accounts, lending facilities and insurance. The company has 22 million customers and employs
64,000 people.
Mailing profile
HBOS sends out an average of 450 million items of mail per year ranging from first class
specialised mailings to bulk Downstream Access. Downstream Access mailings are typically
550,000 per day but have peaked at 1.5 million.
Why did you switch?

HBOS has decided to switch its transactional mail to TNT Post for 3 keys reasons: financial
benefits; transparency of service up to final mile; and the fact that there will be no impact to
customer service. HBOS is in the process of reviewing dual sourcing for its mail with the intention
of benchmarking service across access operators.
What have been the benefits/experiences to date?

So far HBOS has seen the following benefits: financial benefits – mailing services need to be cost
effective; transparency of service up to final mile; consistently good service standards; increased
flexibility; and the agreements have enabled collaborative supplier interaction.
HBOS found that implementation was challenging, however processes are now embedded and the
service performance is consistently good.
What would you recommend other mail customers to consider when thinking
about switching?
Carefully assess the benefits to your organisation, switching to Downstream Access is a major
change therefore a feasibility study is recommended.
Review as a holistic process including missorts, forecasting requirements, etc to ensure you
understand what is required and the implications to your organisation.
Ensure the implementation includes a slow ramp-up of volume and you focus on pre-sort mail.
What are your thoughts on the mail market?

Year on year HBOS mail volumes are slowly decreasing.
“I would like to see more competition in the Downstream Access market. An organisation of
HBOS size needs a supplier that has sufficient infrastructure which only a few licence holders
can currently offer.”
HBOS would also like to see an alternative and feasible E2E solution and, “innovation from all
sectors of the market including Royal Mail and the Downstream Access providers. One size does
not fit all so solutions need to be tailored to the customer needs.”
Source
HBOS

3690_CMR_AW6 29/10/07 14:31 Page 22
General business mail
General business mail refers to the day-to-day correspondence sent from or between
businesses, and tends to be single item, individual correspondence. Mail sent by small
and medium sized businesses (SMEs) tends to be general business mail, and it will
either be stamped, postage paid impression, or sent through franking machines.
General business-to-business mail tends to be vulnerable to e-substitution with the

implementation of electronic systems between firms to increase efficiency and cut
costs. SMEs however, still appear to be highly reliant on physical mail for most of their
transactions. According to a survey by the Federation of Small Businesses, 69 per cent
of SMEs still send invoices through the post, 59 per cent use the postal system for the
delivery of goods and services, and 88 per cent send post every day12.
Competitors have begun to enter this end of the market over the last year, and a few
operators offer to take all types of mail with a minimum daily collection of 250 items.
Hybrid mail services are also very relevant to this type of mail, as small businesses can
send information electronically and pay to have their mail printed, enveloped and
handed to Royal Mail for delivery geographically near to its destination.
Publishing
Consumer magazines
Consumer magazines are paid-for magazines covering a wide range of interest areas,
with around 3,400 titles currently in circulation in the UK. According to the Advertising
Association, consumers spent £2.09 billion on magazines in 2006. While the main
channel to market is the newsstand, postal subscriptions have been growing, and now
account for 14 per cent of magazine sales, up from 3 per cent 10 years ago. Publishers
tend to promote subscriptions as they encourage regular readership and, with sustained
sales, they offer measurability and predictability. With continuing pressure on newsstand
space, subscriptions are expected to continue to grow. Some significant titles are around
50 per cent subscription sales, including Good Housekeeping, Gardeners’ World, and
the Economist13.
12 ‘‘Small Business and the UK Postal Market’’, December 2006.

13 InCirculation, Monday, 1 January, 2007.

3690_CMR_AW6 29/10/07 14:31 Page 23
Business-to-business magazines
There are over 5,000 business-to-business (B2B) titles in the UK, and 90 per cent of
these are distributed by post. Of those, 70 per cent are controlled (free) circulation. The
B2B publishing model is advertiser-driven, with publishers targeting named individuals
in specific marketplaces. This is a particularly price-sensitive market, and with its high
reliance on postal distribution as a channel to market, it is particularly sensitive to postal
price rises. According to Postcomm’s discussions with stakeholders, it is an area of the
publishing sector that has been especially sensitive to electronic substitution.
Customer magazines
Customer magazines are those produced by companies for their customers and
they rely heavily on postal distribution. There are around 1,000 customer magazine
titles in circulation, and 72 per cent are mailed directly to customers, with a total
circulation of over 400 million. The remaining volume is either distributed through the
retailers’ own shops or increasingly via newsstands, other retailers or bundling with
other media. Mintel, the market research company, estimates that over half of all posted
magazines are customer magazines and that, as of 2005, the industry spent over £350
million on postage.
Mintel expects continued growth in this market, and predicts that the customer
publishing industry will reach a value of £1 billion by 2010. Indeed, in the last 12
months the industry has seen unprecedented growth at 16 per cent year on year with
companies including Sony, RBS, Chestertons, ASOS and Virgin Media investing in
customer magazines as a marketing tool. Further growth is expected, in particular in the
public sector, automotive and retail industries. The particular challenge for the postal
industry is the recent trend away from postal distribution toward retail outlets. Publishers
are experimenting with various cost-saving measures, including reducing postal costs by
increasing retail distribution, especially as postal costs can represent up to half of the
entire cost of producing a magazine. Most customer magazines are not highly time
sensitive, therefore the industry is more sensitive to cost than time efficiencies.

3690_CMR_AW6 29/10/07 14:31 Page 24
Fulfilment
Fulfilment mail refers to the delivery of requested goods, from items bought mail-order
to brochures and tickets. This is a growth area of the market, driven mainly by internet
sales. The IMRG14 recorded e-retail sales in July 2007 to be 80 per cent higher than the
previous year, reaching £4.2 billion for the month alone. The on-line sales growth is
projected to continue, as demonstrated by the Verdict figures in the table below.
Figure 2.9 e-Retail market size 2001/11
30
Total on-line spending (£bn)
20
10
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Verdict Research, UK e-Retails 2007
This market is a combination of items sent within the licensed area and parcel and
express traffic which falls outside the licensed area. It is also to some extent a receiver-
driven market, demanding alternative delivery services, unlike most other mail
applications where services are driven by the sender. Finally, the emergence of on-line
generated sales requires operators to enter into co-operative arrangements beyond
traditional postal processes, integrating IT platforms and forming partnerships seen
with internet based service providers. Canada Post, for example, has an integrated
on-line service with eBay allowing customers to buy postage and print shipping labels
on-line. USPS has a similar alliance that allows customers to deal with postage directly
on the eBay site, and also offers free next-day collection of packages from residential
and small business customers15.
14 Internet Media Retail Group E-Retail Sales Index, August 2007.

15 Strategic Transformation Plan, United States Post Office, September 2005.

3690_CMR_AW6 29/10/07 14:31 Page 25
Case Study
LOVEFiLM
LOVEFiLM, the on-line DVD rental company, relies heavily on first class post for the
success of its business model. It has around 450,000 active subscribers in the
UK and is growing at significant rates. Customers subscribe to a package, and
depending on their choice of subscription receive 1, 2 or 3 DVDs at a time via
Royal Mail. LOVEFiLM uses first class standard tariff PPI for the delivery of DVDs to
its customer. The customer returns the DVDs in the same packaging, via Royal Mail
first class business response.
LOVEFiLM’s rentals make up 23 per cent of the total UK DVD rental market,
including high street rentals – this equates to 2 million rentals per month and as
such 4 million first class mail transactions a month. As a large mailer LOVEFiLM
has been working to improve the machine-ability of its packaging in order to achieve
better pricing and service. As yet it has not found a solution with either Royal Mail or
an alternative provider. LOVEFiLM believes that a true end-to-end provider, offering
first class inbound and outbound services would increase current operators’ flexibility
and customer focus.
LOVEFiLM has also recently started using direct mail, both addressed and
unaddressed, as part of its marketing mix. It hopes that with improved targeting it
can continue to use direct mail as a successful customer acquisition tool. LOVEFiLM
feels that there is significant potential for growth in the on-line DVD rental. Figures
from Screen Digest show that in 2006, the on-line DVD rental business accounted for
27.9 million DVD rental transactions in the UK. Furthermore, it anticipates that the
number of on-line DVD rentals in 2007 could exceed 35 million from 700,000
British households and forecasts that this could rise to 67 million transactions
from 1.4 million households by 2011.
LOVEFiLM will continue to rely on and demand an efficient and reliable postal service.
Sources:
LOVEFiLM, October 2007.
Screen Digest Video Intelligence, 2007. www.screendigest.com

3690_CMR_AW6 29/10/07 14:31 Page 26
Express market
Closely related to the postal market, the express market is concerned with the collection
and delivery of time-specific items. It is estimated to be worth around £5 billion, or 1.3
billion items. Around 70 per cent of this is thought to be business-to-business, while
£1.2 billion comprises the business-to-consumer market. Overall, the express market is
demonstrating growth of around 6 per cent per annum16.
International postal groups have a strong presence in the UK express market, Deutsche
Post Worldwide through DHL, La Poste through Geopost, UPS through Lynx Express and
TPG through TNT Post UK. Parcels are the primary service for most players in this
market, but mail is a natural extension for some players and is becoming a more
significant component. Documents account for around 25 per cent of express
shipments in the UK. Next-day deliveries represent about 80 per cent of total revenues17.
Table 2.3 UK Express parcels market, market share 2005*
Ownership by Value (%) Domicile Positioning
TNT Express TPG 18 Netherlands Premium
DHL Deutsche Post 14 Germany Low-mid-range
Parcelforce Royal Mail Group 8 UK Low-mid-range
Business Post UK listed company 8 UK Premium
Parceline La Poste Group 7 France Mid-range
Lynx Express UPS 6 US Mid-range
Initial City Link Rentokil Initial Plc 6 UK Premium
Target Express Parcels Venture Capital 6 UK Premium
ANC Venture Capital 5 UK Mid-range
Interlink Express Parcels LaPoste Group 5 France Mid-range
UPS US listed company 4 US Mid-range
Amtrak Netfold Ltd 3 UK New focus on B2C
Nightfreight Venture Capital 3 UK Irregular dimensions

and weight
Tufnells Parcel Express Venture Capital 2 UK Irregular dimensions

and weight
Others 5 UK
100% Source: Investec Securities
* Royal Mail Special Delivery is not included in this analysis as considered to be part of ‘express letters’
rather than parcels market.

3690_CMR_AW6 29/10/07 14:31 Page 27
UK express parcel carriers tend to use one of two business models. The first is
a franchise model, where each depot is owned and operated by a third-party. The
second model is a wholly-owned, or leased, network. Both can be effective, although
the franchise model risks the franchisor subsidising losses of the franchisees.
The UK express parcels market traditionally has been related to consumer spending,
although structural changes such as the growth in internet sales and the liberalisation
of the postal market create changing dynamics in the industry. Customer demand for
alternative delivery options, growth in internet-driven sales, and opportunities in the
liberalised postal market could impact the structure of the express market and the
wider mail market.
International outbound
International outbound bulk mail from the UK is a market estimated to be worth £300
million annually18. Unlike the domestic, or internal, market operators do not need a
licence to offer international outbound mail services. Several of the large incumbent
postal operators are competitors in this market in the UK, including Deutsche Post
(DHL), TNT, La Poste, De Post (Belgium) and Swiss Post. Postcomm estimates that
Royal Mail has around a 33 per cent share of this market.
There are also several consolidators specialising in international outbound mail,

including BTB Mailflight, Pharos and Mercury (now part of DHL), and many mailing
houses offer international mailing services. The Mail Consolidators Association (MCA)
has around 20 members and represents the consolidation industry, and there are many
more competitors in this market of varying sizes outside the MCA. The consolidators
and mailing houses active in this market sector have the experience of handling
multiple mail providers in a competitive market which could benefit them in the
liberalised domestic market.
16 UK Express Delivery Market Research Report, MBD, 2007.

17 The Economic Impact of Express Carriers for UK Plc, Oxford Economic Forecasting, 2006.
18 International Postal Corporation (IPC) Market Audit Data, 2005.

3690_CMR_AW6 29/10/07 14:31 Page 28
3 DEVELOPMENT OF COMPETITION
This chapter looks at the development of competition in the postal

market. The first part of the chapter in particular looks at alternative
licensed operators, the relative market importance of access and
end-to-end competition, and the business models used by alternative
operators. Part two of this chapter looks at wider issues affecting the
mail market such as private equity, mergers and take overs, the mail
value chain and the role of external players such as mailing houses.
The chapter concludes by looking at some of the important mail related
events of 2007.
As of September 2007, there are 18 licensed postal operators in addition to Royal Mail.
They are:
• Royal Mail;
• ANC Express (trading name of ANC Limited);
• Challenger Security Services (Admin) Ltd;
• Citipost AMP Limited;
• City Link Post (trading name of Target Express Parcels);
• CMS (trading name of Royale Research Limited);
• DHL Global Mail (UK) Ltd;
• DX Network Services Limited;
• Intercity Communications Ltd;
• Lynx Mail (trading name of Red Star Parcels Ltd);

3690_CMR_AW6 29/10/07 14:31 Page 29
• Racer Consultancy Management Services;

• Secure Mail Services;
• Secured Mail Limited;
• Securicor Omega Express;
• The Mailing House Group;
• TNT Post UK Limited;
• UK Mail Limited;
• Zip Mail Limited.
Last year DHL Global Mail held two licences which have now been combined into DHL
Global Mail (UK) Ltd. DHL Global Mail UK, TNT Post UK and CMS are licensees owned
by national incumbent operators from other European countries. CMS is owned by La
Poste in France, DHL Global Mail is owned by Deutsche Post and TNT Post UK is
owned by the Dutch post office, TNT Post. These operators are seeking market
opportunities in the UK as well as other liberalised European markets, while operating
as incumbent universal service providers in their own domestic markets. This is
discussed in more detail in Chapter 4.
Securicor Omega Express has been acquired by DHL Express. It holds an interim licence
which allows it to provide internal mail services for two clients in the banking sector.
Market share
Access
Competition has continued to develop in the downstream access part of the market,
where third party operators and large mail customers gain access to and pay for
Royal Mail’s final mile delivery network at the inward mail centre stage.
Access agreements can cover the whole of the UK or just certain zones. Information
from Royal Mail is that there are 13 customers and 9 operators with national access
agreements as at September 2007. Four of these operators have Agency agreements
meaning they only have to charge VAT on the part of the mail process that they carry
out themselves. Three customers have zonal access contracts, as do seven operators,
again four of these have Agency agreements as of September 2007.
In 2006/07 access mail made up 11.8 per cent of Royal Mail’s operational volumes.
For the five months from April to August 2007 access mail represented 19 per cent of
Royal Mail’s revenue-derived volumes, compared to 11 per cent for the corresponding
period in 2006. Figure 3.1 shows a comparison of Total Access volumes for financial
years from 2005 onwards.
DEVELOPMENT OF COMPETITION 29
3690_CMR_AW6 29/10/07 14:31 Page 30
Figure 3.1 Total Access volumes 2005/06 vs 2006/07 vs 2007/08
400
300
Volume (Millions)
200
100
0
Period Period Period Period Period Period Period Period Period Period Period Period
1 2 3 4 5 6 7 8 9 10 11 12
(Apr) (May) (Jun) (Jul) (Aug) (Sep) (Oct) (Nov) (Dec) (Jan) (Feb) (Mar)
Total Access volume 2007/08

Access mail volume is roughly split 50/50 between customer direct access and operator
access.
End-to-end
In 2006/07 alternative operator end-to-end licensed area volumes declined slightly to

34.8 million items, representing a 12 per cent decline in end-to-end items carried in the
licensed area compared to the previous year19. This decline in volume is attributable to a
number of licensed operators reporting reduced volumes, combined with Express
Dairies exiting the end-to-end market.
19 International Postal Corporation (IPC) Market Audit Data, 2005.

3690_CMR_AW6 29/10/07 14:31 Page 31
End-to-end developments
TNT Post UK
TNT Post UK maintains its ambition to develop an end-to-end service in the

UK so as to be able to offer customers a complete postal and delivery solution.
As part of its growth strategy, TNT Post is currently looking at a number of
potential locations in which it can develop an end-to-end solution. To make
its own end-to-end delivery service viable, TNT Post will first need to grow its
letters business in these key areas through the acquisition of customers’ mailing
volumes. TNT Post will continue to use Royal Mail’s downstream access until
it believes it has reached the critical mass for its own distribution. TNT Post
hopes to provide further information on some of these locations later in 2007.
The company intends to offer this service to local businesses as well as big
national mailers.
Source: TNT Post, September 2007
DX Network Services and Secure Mail Services
DX Network Services and Secure Mail Services (both now part of the DX Group)
also have a foundation on which to extend their end-to-end delivery services. DX
already delivers considerable volumes of mail going to business addresses, both
within its document exchange network (see note) and to high street and other
business dense locations throughout the UK. DX’s sortation systems allow it to
segregate mail into different channels, depending on whether final delivery is
through the document exchange network, or by hand delivery to postcode
addresses within its delivery footprint. The higher value of items carried by SMS
means that it is commercially viable for SMS to deliver to virtually all addresses
in the UK – both business and residential. Opportunities for the further
development of end-to-end deliveries exist by capitalising on the combined
strengths of the businesses, including the cross-selling of services to both groups
of customers, as well as targeting new areas of business. In the case of DX, new
business growth could come by targeting mail going to business districts that can
be consolidated with existing volumes. SMS could expand by extending the offer
of its services to mailers who might not yet have realised that they have a need
for secure delivery. DX and SMS will evaluate any opportunities on their own
commercial merits.
Source: DX Network Services Ltd/Secure Mail Services Ltd, September 2007
Note 1: Document exchange is not licensed area mail, therefore not regulated by Postcomm.
31
DEVELOPMENT OF COMPETITION
3690_CMR_AW6 29/10/07 14:31 Page 32
Other licensed operators
Market entry/exit
In October 2006 Postcomm granted a new long-term licence to Zip Mail Ltd, the first
fully franchised operator to enter the UK market.
On 1 January 2007 Postcomm granted a long-term licence to DHL (Global Mail).

The work undertaken by this new licensee replaces the mail volume previously carried
by Deutsche Post Global Mail and Speedmail.
In February 2007 MailPlus exited the mail market to concentrate on its next day parcel
delivery service, which is the core business focus of Geopost UK, the parent company
of MailPlus.
In April 2007 Postcomm granted a new long-term licence to The Mailing House Group.
Further information about The Mailing House Group is available in the section on
Mail Operators.
Operators’ business models

As alternative operators are developing their businesses in different areas of the market
Postcomm has gathered the information that follows from the licensees in order that the
market place better understands their operations and business models. The services
offered by Royal Mail are extensive and widely understood by the market place, and
therefore this section deals exclusively with alternative providers.

3690_CMR_AW6 29/10/07 14:31 Page 33
Table 3.1 summarises the current business focus of the licensees.
This section gives more detailed information on each of the licence holders, their
current operations and customer base. This information was provided to Postcomm by
the licensees and is not an endorsement by Postcomm of any operator in particular or
any of the services offered by them. The information is intended to improve customer
knowledge of the current licensed operators.
Licensee End-to-end Access Focus/business model

(items costing (delivered under
less than £1 or C9 or Customer
weighing Direct Access
under 350g) Agreement)
ANC Express (trading Pouch services. Not currently operating in the

name of ANC Ltd) licensed area.
Citipost AMP Niche B2B markets. Also offers Downstream

Access (DSA) services (consolidated, zonal
and national).
City Link Post (trading Express, parcels; B2C through DSA.

name of Target
Express Parcels)
Challenger Security Disguised mail delivered by Royal Mail/couriers.

Services (Admin)
CMS (trading name of B2B (mostly London).

Royale Research Ltd)
DHL Global Mail (UK) DSA sorted and unsorted services provided on a
See section on Market national basis. Some E2E (B2B). Delivery in the
entry/exit for licence London area only, though collections can be
changes relating to anywhere in the UK.
DHL Global Mail (UK)
DX Network Services National next day B2B through own delivery

(Now part of The DX network (document exchange, business mail
Group) and parcels).
Intercity B2B niche markets, own delivery in London;

Communications international courier services.
Lynx Mail (trading National DSA, bulk pre-sorted mail, B2C

name of Red Star and B2B.
Parcels)
Racer Consultancy UK and international mail and courier services;

Management Services B2B and B2C mainly through Royal Mail (not
Access). Some B2B (not in licensed area)
through own network.
Continued
3690_CMR_AW6 29/10/07 14:31 Page 34
Licensee End-to-end Access Focus/business model

(items costing (delivered under
less than £1 or C9 or Customer
weighing Direct Access
under 350g) Agreement)
Secured Mail Ltd National consolidated and bulk mail through DSA.
Secure Mail Services National B2C and B2B through own secure
(Now part of The DX delivery network (valuable items such as
Group) bank cards, passports, event tickets) – not in
the licensed area – and through Royal Mail
(not Access).
Securicor Omega Acquired by DHL Express. Interim licence to

Express convey mail between offices of HSBC and
between the offices of Royal Bank of Scotland.
Pouch services.
The Mailing House Bulk mail through DSA.

Group*
TNT Post UK Pre-sorted and unsorted B2C and B2B letter

mail with delivery through DSA. Parcel and
packet delivery through own network and DSA.
UK Mail Pre-sorted (bulk mail), unsorted and

international B2C and B2B mail through DSA.
Zip Mail Fully franchised business in the

London/M25 area.
* Note: The volumes are as reported by Licensees for the Financial Year 2006/07. The Mailing
House Group only received its licence on 11/4/07.
Is under 100,000 mail items
Is between 100,000 and

1,000,000 mail items
Is between 1,000,000 and

Is between 10,000,000 and

Is over 1,000,000,000 mail

items conveyed

3690_CMR_AW6 29/10/07 14:31 Page 35
Citipost
www.citipost.com loakley@citipost.co.uk 0208 301 8500
Services:
End-to-end in London, Manchester, Birmingham, Bristol, Edinburgh, Glasgow and Liverpool. DSA zonal,
national DSA and unsorted DSA.
Customer base:
Direct mailers, transactional mailers, mailing houses, SMEs, all of these B2B for the hand delivery and
B2B B2C for DSA.
City Link Post (trading name of Target Express Parcels)

www.city-link.co.uk andrew.hs@city-link.co.uk
Services:
Full basket of express delivery services. Including added value elements such as Post, Sameday,
fulfilment services. Quality driven organisation aiming to become largest in UK.
Customer base:
Mostly made up of direct mailers, transactional clients, mailing houses and large brand names, with
some estate agents and travel companies.
Innovation:
Target Express has successfully merged with City Link to create the 2nd largest express operator in the
UK. “In addition, we have broken new ground with our combination of zonal and national pricing
solutions, as well as moving into the unsorted market.”
CMS (trading name of Royale Research Ltd)

www.cmsnetwork.com steves@cmsnetwork.com
Services:
Research distribution worldwide.
Customer base:
Mainly financial institutions; however targeting all industries.
Innovation:
Track and trace bar code with customer interface.
DHL Global Mail (UK)

www.dhl-globalmail.com 0208 603 3000
Services:
Downstream Access services (both sorted and unsorted products), offering national coverage.
Citispeed – A business-to-business end-to-end delivery service within 22 London postcode areas.
Citispeed will collect mail from outside these areas.
International Mail – Collection from anywhere in the UK, offering global coverage.
Customer base:
Direct mailers, transactional mailers, and mailing houses covering all sectors. International mailers and
publishers make up a major proportion of its customer base. Targeting business mailers of international,
pre-sorted and unsorted mail.
3690_CMR_AW6 29/10/07 14:31 Page 36
DX Network Services Ltd and Secure Mail Services Ltd20

www.thedx.co.uk www.securemail.co.uk
Services:
DX Network Services Ltd – Provide nationwide post 5 pm collection/pre 9 am delivery of mail to over
27,000 business customers through a Document Exchange network. In addition next day door-to-door mail
delivery services covering every high street and business district every working day is offered.
Secure Mail Services Ltd – Provides registered, recorded and disguised postal services for the secure
delivery of valuable items (e.g. passports, bank cards, cheque books and event tickets) to virtually all
UK addresses.
Customer base:
DX Network Services Ltd – Organisations of all sizes, from SMEs to large corporates, who have a regular
requirement to send next day mail to other businesses. Targeting businesses that operate within the legal,
financial services, property, professional services, government, publishing and retail sectors.
Secure Mail Services Ltd – Banks, government agencies, ticket agents, voucher printers and others.
Targeting organisations sending high volumes of valuable or sensitive items to business and residential
addresses nationwide.
Innovation:
Brought together DX Network Services Ltd and Secure Mail Services Ltd to form an end-to-end alternative
to Royal Mail. Combining the strengths of the two organisations, introduction of SecureDX in spring 2007,
a guaranteed and ‘signed for’ registered mail service delivering to virtually every address in mainland UK
and Northern Ireland.
Intercity Communications Limited

www.icityc.co.uk colinc@intercity-comms.co.uk
Services:
Central London hand delivery business-to-business. The remainder of mail goes via Royal Mail. Intercity
also has a mailing house function, offering design and printing, data capture, envelope enclosing by both
machine and manual, polywrapping, inkjet addresses and all other services relating to the preparation of
material for distribution. This fulfils the role of a ‘one-stop-shop’ if required.
Customer base:
Various customers, mainly in the financial research sector.
LYNX Mail (trading name of Red Star Parcels Ltd, a UPS company)
www.ups.com grothery@ups.com 0778 626 2851/ 0247 637 3737
Services:
C9 Down Stream Access postings with Royal Mail providing last mile delivery for bulk mail. Typically
mail previously sent as Mailsort with volumes in excess of 25,000 posting over all UK or just locally.
Collection and delivery spread is nationwide with a fully-integrated national Hub and UPS/LYNX
collection and delivery fleet.
UPS, the world’s largest parcel company, has a full range of express package delivery products
from small items to pallets, air and sea freight, UK and International services. LYNX Mail team
can assist in accessing all the UPS products and bring together a complete suite of services.
Customer base:
Many third sector21 mailers, large marketing and catalogue response mailings, financial service providers.
Targeting bulk mailers with average volume in excess of 25,000 items using either downstream access
already or Mailsort/Presstream from B2B or B2C lists – transactional and direct mail.
20 DX Network Services Ltd and Secure Mail Services Ltd hold two separate licences. Since their
acquisition by Candover in 2006, the companies are working closely together.
21 The third sector comprises of value-driven organisations, including voluntary and community
organisations, charities, co-operatives and social enterprises.

3690_CMR_AW6 29/10/07 14:31 Page 37
Table 3.2 Business

The Mailing Focus
House Group of Licensees
(trading as Northern Mail)
www.themailinghouse.co.uk malcolm.peddie@themailinghouse.co.uk 0870 010 2000
Services:
• Downstream Access (DSA); • Undeliverable/Gone-Away;
• Specialist Packet Production • Bespoke Services;
and Sortation Services; • Secure Mail Services;
• Inbound Mail Sortation and Consolidation; • International Services;
• Storage, Mailing and Fulfilment Services; • Business Reply Services.
• Track and Trace;
Geographical Areas: Midlands, North West, North East and Scotland
Customer base:
Direct Mailers, SMEs and Public Sector.
Innovation:
The introduction of specialist packet production and sortation systems.
TNT Post
www.tntpost.co.uk info@tntpost.co.uk 0162 889 1644 Fax: 0162 881 6882
Services:
TNT Post provide a range of home delivery, addressed and unaddressed postal services to business
customers delivering bills, statements, direct mail, packets and parcels to 26 million UK households.
Customer base:
Top 500 UK bulk mailers both DM and transactional, mid-market mailers, SMEs, mailing houses.
TNT Post targets all types of customers from SMEs to Blue Chips.
Innovation:
Launched:
1) AllSort, a 3 day national service for unsorted, non-machineable mail and a 4-8 day unsorted service
for international and BFPO mail.
2) PremierPacket, a nationwide packets delivery service that delivers sizeable savings.
3) Launched variants of pre-sorted and unsorted mail services e.g. EconomySort, a more cost effective
version of its unsorted mail service.
4) Established regional businesses in Scotland, the North of England, South West England and South
Wales, focused primarily on the SME sector.
3690_CMR_AW6 29/10/07 14:31 Page 38
UK Mail
www.ukmail.biz ukmailsales@ukmail.biz 08452 30 50 50
Services:
UK Mail offers nationwide collection and daily delivery of mail to all addresses, with a two day service
for a range of pre-sorted mail specifications and two or three day service for unsorted mail.
Customer base:
Transactional mailers; direct marketing; mailing houses; financial services; public sector; SMEs.
Targeting business mailers of pre-sorted and unsorted mail.
Innovation:
UK Mail was the first Down Stream Access mail operator, the first to introduce Customer Direct Access
and has established an Agent For Access agreement. UK Mail has made significant investment in
sortation capability in various locations around the UK, including high-speed sortation of Large Letters
and Packets. The company recently announced the introduction of a next day service for mail printed at
one of UK Mail’s national network of sortation centres. This is discussed in the value chain innovation
section of this report.
Zip Mail Ltd

www.zip-mail.co.uk sales@zip-mail.co.uk
Services:
Collection from M25 area; consolidated UK Next Day and Economy, and International postal services;
whole street delivery.
Customer base:
SMEs, estate agents, mailing houses, professional bodies.
Innovation:
Offered alternative postal services to SMEs and smaller volume mailers.
Licensing review
In May 2007 Postcomm began the first of a two stage review of its licensing framework,
looking to facilitate entry to the market, with the publication of a consultation document
considering amendments to the current framework. Postcomm is due to publish its
decision in November 2007, and this will be available on the Postcomm website.
Consultation about the second stage of the review, considering more fundamental
changes to the licensing framework, is due to begin in January 2008.
Private equity investment, mergers and takeovers in the UK and European

postal markets
A range of companies are responding to the emerging liberalisation of mail markets both
in the UK and across Europe. A few universal service providers in member states are
expanding their businesses both geographically and functionally. Some are expanding
into other countries’ liberalised mail markets, some are moving into upstream and
downstream activities, or into express and logistics. Local companies are also setting
themselves up in these markets across Europe, leading to mergers and acquisitions
as they become established in certain regions or market sectors.

3690_CMR_AW6 29/10/07 14:31 Page 39
Private equity companies offer a source of funding for financing developing business
models in the postal sector throughout Europe, and they are investing in competitive
postal operators who do not have the financial backing of large parent companies such
as foreign postal incumbents. They are also investing in the privatisation of universal
service providers in Europe. The evidence of private equity backing generally indicates
positive prospects for the postal market.
Most recently, the UK postal market attracted private equity and investment when
Candover Investments plc bought both DX Network Services and Secure Mail Services in
September 2006 based on leveraging the complementary delivery services of these two
companies. Private equity backing has been instrumental in much of the consolidation
that has occurred in the UK mail, express and parcels industry, which are becoming
increasingly integrated, as demonstrated by recent acquisitions relating to mail
licence holders.
Fedex, the American express transportation company acquired ANC Holdings Ltd in
December 2006, and in the same month Rentokil Initial plc acquired Target Express.
Rentokil Initial also owns City Link Ltd, and as of 1 May 2007 Target Express has been
trading as City Link Ltd. (The mail operator licence remains in the name of Target
Express, and all access mail is carried via the Target network.)
Privatisation of universal service providers (USPs) has attracted

investors across Europe. The German, Dutch and Austrian USPs
are listed on the stock exchange, and the majority of Deutsche
Post is held by private investors. USPs themselves are increasingly
looking to exploit market opportunities and position themselves for
future market developments.
Post Danmark sold 22 per cent of its shares to CVC Capital partners, and 11,000
employees also hold shares. Preparing for European liberalisation, they have a
scheduled exit for CVC, and plan to form other strategic partnerships in preparation for
share sales. Post Danmark also holds 49 per cent of the shares in De Post – La Poste,
the Belgian national operator.
Deutsche Post is among the most active in pursuing a European acquisition strategy.
In the mail market, Deutsche Post owns Speedmail and DHL Global Mail in the UK,
Unipost (38 per cent) in Spain, and Selekt Mail in the Netherlands. Deutsche Post has
acquired several logistics companies, including Exel in the UK, along with companies in
the parcels and express industry across Europe, such as Securicor and Danzas.
Deutsche Post also owns companies involved in upstream services such as Williams Lea
in the UK and Koba in France.
3690_CMR_AW6 29/10/07 14:31 Page 40
Most recently, there is speculation that UPS is interested in bidding for a stake in
Deutsche Post, backed by private equity from Apax Partners Worldwide. Over the past
years there have been rumours that UPS is interested in acquiring the 30 per cent stake
currently held by the German government, and UPS has recently been thought to be in
talks with Apax about possible funding arrangements. This announcement, helped by a
13 per cent profit increase in Q2 this year, boosted Deutsche Post’s share value by 2.3
per cent22. This share rise and investment speculation signals market confidence about
the German mail market ahead of liberalisation in January 2008.
The Dutch universal service provider, TNT Post, is expanding its European mail market
presence in the UK and Germany. In the UK it is building its mail business through TNT
Post UK, while in Germany it has acquired several regional distribution networks to offer
a nationwide end-to-end alternative to Deutsche Post.
While TNT is expanding in Germany and the UK, Sandd, the 2nd largest postal operator
in the Netherlands, has developed its business by buying regional postal companies in
the Netherlands, expanding its own network and forming partnerships with regional
distribution specialists. Sandd attracted capital from NIB Capital Principal Investments
and Fortis Private Equity. Trimortuer Holdings BV, an investment and management
company, is the major shareholder. It now has 100 per cent coverage of the
Netherlands, distributing direct mail and magazines on set delivery days twice a week23.
The scale of private equity investment and acquisition activity in liberalised mail markets
points to market opportunity. This extends to business activity in the upstream and
downstream ends of the mail industry as well as to geographical expansion, and the
business models that emerge may well involve companies that look less like traditional
postal operators and more like a new breed of business service providers offering
solutions along the mail value chain.
22 Air Cargo News International, 7 September 2007.

23 Trimoteur Holding, B.V. Website.

3690_CMR_AW6 29/10/07 14:31 Page 41
Mail value chain
Figure 3.2 The mail value chain
SOLUTIONS DISTRIBUTION
Mail creation Mail finishing Mail collection Mail processing Mail delivery
Addresses/ Printing/ Pick up/ Sorting Final mile

databases franking transport
Developments in electronic media have not only impacted the demand-side of mail
volumes, but along with developments in printing technology, have altered the mail
value chain. The mail production industry has evolved to capitalise on the technologies
which expanded the scope of mail production to include functions ranging from data
management to response handling. Information technology, data services and print
technology make it possible to substitute most traditional postal activity up to final
delivery. They also offer a variety of opportunities to add value to mail and make it
unique from other media. To the extent that innovation has occurred in the industry, it
has been driven largely by developments along the ‘back end’ of the mail value chain.
Functions traditionally performed by the mailing customer have been increasingly
outsourced to specialists, and in turn the provision of these services is being
consolidated into ‘one-stop-shop’ providers of mailing services.
The third-party provision of specialist data services has improved mail effectiveness in
that accuracy of data reduces costs associated with poor addressing, and also makes
on-going communication with customers more viable. Ranging from list provision to data
cleansing, data services have made targeted direct mail campaigns feasible, and have
refined the targeting to an individual, personalised level. It is likely that this targeting is
responsible for some of the decline in direct mail volumes in that advertisers are opting
away from mass mailings toward smaller, better targeted campaigns. On the other hand,
better targeting increases return on investment and enhances the perception of direct
mail to the receiver, which should make it a more sustainable medium.
3690_CMR_AW6 29/10/07 14:31 Page 42
Related to better targeting, technological advances in the print industry have created
new opportunities for printing tailored customer messages on both transactional and
advertising mail, and have indeed blurred the distinction between these mail streams.
They offer opportunities for mailers to become more personalised in their
communication by creating customised up-to-date messages on mail items. This in turn
ties into document management and back-end processing that includes functions such
as managing returns, digitising and archiving documents. There has also been growth in
the use and outsourcing of these functions.
Value chain innovation
Case Study
Royal Mail’s Personalised Integrated Media
In April 2007 Royal Mail announced an innovation in the advertising market.

In partnership with Sony DADC Royal Mail has developed a product which fuses
traditional post and digital media. The personalised, interactive CD can be tailored
to individuals’ needs and interests, allowing the advertiser to include videos and
information which is entirely personal and relevant. The solution, which has been
called Personalised Integrated Media, takes the concept of personalisation further
than was possible before and allows greater scope to build brand image by including
features such as 3D product tours and television advertisements.
Case Study
UK Mail launches i-mail
UK Mail is to launch a new next day mail delivery service, i-mail, which will see
it moving its business further back along the mail value chain. Customers will
electronically send their mail to a UK Mail national network of sorting centres, where
it will be printed, enveloped and transferred on to Royal Mail for delivery. Customers
using the i-mail service will be able to send their mail from any internet enabled
computer. UK Mail has secured an agreement with Royal Mail meaning that i-mail
arriving with UK Mail as late as 6pm will benefit from a first class next day delivery
service. This agreement is the first allowing a private organisation evening access to
Royal Mail mail centres around the country. Customers will benefit from reduced
administration tasks, a decreased environmental effect and greater flexibility for time
sensitive mailings.

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Case Study
ViaPost
ViaPost is a new market entrant planning to launch an ‘electronic-to-physical’ mail

service late in 2007 that will allow businesses and individuals to send letters directly
from personal computers to a secure ViaPost print facility where they are
automatically printed, folded and put into envelopes for delivery through Royal Mail
for the ‘final mile’ of the journey. By downloading the free software, businesses and
individuals who register for a ViaPost account, which can be on a pay as you send
basis, can send single or double sided mail or colour documents anywhere in the UK
without leaving their desks. As the mail is printed at a location close to the Royal Mail
inward mail centre near to the destination of the recipient, transportation costs are
kept to a minimum, and this also means that the carbon footprint of a ViaPost letter
is reduced considerably. ViaPost has no trunking network of its own, relying entirely
on distributed print for the upstream element of distribution.
Mailing houses, suppliers, brokers and consultants
Mailing houses and other suppliers such as intermediaries, brokers and consultants
have all developed the scope of their business in line with the opportunities created
by the emerging mail value chain.
While traditionally involved in mail production and finishing activities, mailing houses
are beginning to offer services along the distribution end of the value chain. Alongside
The Mailing House Group, which has been granted a postal operator’s licence,
Postcomm notes that Postal Net, a network of mailing houses across the UK, is
working in a co-ordinated manner to make it easier for large customers to get the most
cost-effective deals on postal services. The knowledge and skills of the mailing houses
involved is leveraged in this collaborative network.
Mail consolidators also form an important part of the mail market. Although many
consolidators have traditionally built their business around international mail, Postcomm
has seen evidence of mail consolidators becoming more involved in the UK domestic
market. Consolidators are able to use the knowledge and skills regarding mail collection
and processing, developed whilst working with different operators in the international
market, to benefit and advise their customers in the UK home market.
3690_CMR_AW6 29/10/07 14:31 Page 44
Also, there is an increased number of consultancy operations in the market, assisting

mainly large blue chip mailers with their postal procurement. The services offered by
these consultancies vary but are typically software or audit based. Some consultancies
have developed software which they use to match the customer’s mailing profile to the
best value mail service. Consultancies are often independent and will suggest different
providers for different types of mailing, meaning customers may end up working with
multiple mail providers.
Other consultancies look at the entire mail process, taking several months to audit the
customer’s mail services, recommending efficiency changes depending on the mailing
requirement. This would include mail sent and received and relationships and contracts
with current suppliers. Consultancy advice could also include management of address
databases, and advice on changing the format, size and content of mail in order to
optimise cost effectiveness. As the alternative licensed operators are starting to target
smaller businesses, these consultants have started to broaden their client base outside
of larger mailers and develop cost effective solutions for small and medium sized
mailers. Postcomm has details of many postal consultancies on its website.
Printers stand to benefit from innovative services such as that of ViaPost which will build
up a network of printers located near Royal Mail’s network of mail centres, to print
electronically distributed mail, which can then be taken to Royal Mail’s local inward mail
centre for sortation and delivery. Distributed print may benefit smaller mailers who do
not currently meet the minimum volume requirements of other operators, as it can
accommodate small volume down to single items, and it reduces the environmental
impact of a mailing by sending it electronically closer to its destination. The customer
further benefits from such solutions as members of their staff are no longer required to
carry out tasks such as printing the mail items, enveloping, stamping or franking mail
and taking it to the Post Office, as these tasks are fulfilled by the operator. Electronic
distributed print is currently being trialled by a number of UK operators.

3690_CMR_AW6 29/10/07 14:31 Page 45
Mailing houses are increasingly offering to share their expertise in database

management and mail targeting with their customers. Better data management and
targeting of mail allows organisations to obtain a better return on investment from their
direct mail campaigns. Regular database cleansing ensures that organisations always
have the most up-to-date contact details for their customers, meaning they can cut
down on ‘gone aways’ and return to sender mail. Targeting direct mail more effectively
means that customers only receive mail that is specifically relevant to them, therefore
increasing their likelihood to respond favourably to the call to action in the mail piece.
Mailing houses and printers have also been instrumental in suggesting ways to make
mail, especially transactional mail, work harder for customers. Customers are
increasingly working with their mailing houses and printers to develop ‘transpromo’ mail,
where mailers use white spaces on transactional mail, envelopes and bills as spaces for
advertising and other messages. This practice is highly developed in the US and is
being used increasingly in the UK. However a recent report by DSI CMM, a leading
direct mail and print services provider, shows that companies are failing to exploit
around £500 million of advertising space on their bills and statements24. This figure
equates to 22 per cent of annual UK direct mail spend and demonstrates an area of
opportunity to add value to the transactional mail stream. According to the same report,
the banking and credit card sectors combined could be missing out on over £350
million of opportunities. Developing new ways of making mail valuable is one possible
way of extending the life cycle of transactional mail in the face of environmental and
other concerns which are putting pressure on the medium.
24 Marketers fail to exploit £500m ‘transpromo’ opportunities, www.printweek.com, 6 September 2006.
3690_CMR_AW6
46
Figure 3.3 A year in the mail industry
October 2006 March 2007 August 2007

29/10/07
Postcomm opens a consultation Postcomm examines Royal Mail’s charges to new operators for access to the ‘final mile’. Postcomm announces:
on collection and delivery times. Postcomm responds to the government consultation on the Post Office Network. Consultation on proposal to reject
Postcomm issues guidelines for Postcomm welcomes a new type of access arrangement allowing non VAT exempt Zonal Pricing.
14:31
customers requesting access to organisations to take better advantage of the competitive market. Interim Review decision giving
Royal Mail’s postal facilities. Royal Mail more pricing flexibility.
Postcomm offers guidance on Royal Mail participation in competitive tendering.
Strategy Review emerging themes.
Postcomm publishes consultations
Page 46
November 2006 January 2007 April 2007 on its enforcement procedures for
2007 COMPETITIVE MARKET REVIEW

Business Customer DHL Global Mail licence The Mailing House Group licence granted. licence breaches and its statement of
Survey and Competitive granted. policy in relation to financial penalties.
Royal Mail price increases come into force.
Market Review 2006 Postcomm consults on the Postcomm agrees to Royal Mail’s
launched. Postcomm publishes updated guidelines on exceptions
issue of what is the most application to stop Sunday and Bank
to the universal postal service.
Postcomm consults appropriate notification Holiday collections.
on Royal Mail process for trials of new Postcomm consults on Royal Mail’s proposal to charge
Postcomm closes its investigation
compensation schemes. products and product large mailers by delivery location ‘Zonal Pricing’.
into Business Mail Secure, ruling that
changes by Royal Mail. there is no evidence that BMS is
predatory and insufficient evidence
May 2007 that it is discriminatory or restrictive
Postcomm begins its review of the licensing framework. to customers.
Oct 06 Nov 06 Dec 06 Jan 07 Feb 07 Mar 07 Apr 07 May 07 June 07 July 07 Aug 07 Sep 07 Oct 07
October 2006 December 2006 February 2007 April 2007 June 2007 October 2007
Zip Mail licence granted. Target Express acquired MailPlus exits Postcomm announces Postcomm announces results of collection and delivery Postcomm publishes Post
by Rentokil Initial plc. the market. its business plan. time consultation – Royal Mail agrees to examine Office Network report:
ANC Holdings Ltd Postcomm publishes. customer concerns about earlier final collections. ‘A sustainable customer
acquired by Fedex. its decision on Postcomm publishes its annual report and holds the focused network’.
Royal Mail’s future Postcomm Forum. Postcomm responds to
management of PAF. Postcomm publishes its open letter regarding the BERR’s consultation on
exemption from the requirement for a licence of consumer redress schemes.
‘pre-paid’ mail conveyed to a licence holder. Business Customer Survey
Postcomm agrees to Royal Mail’s request to suspend and Competitive Market
until the end of its current financial year the payment of Review 2007 launched.
compensation to bulk mail customers, where industrial
action has taken place and quality of service figures
have dropped.
3690_CMR_AW6 29/10/07 14:31 Page 47
4 ROYAL MAIL
This chapter discusses Royal Mail’s financial position, taking information

from its 2006/07 regulatory accounts to examine profitability, volumes,
revenues and costs. It examines Royal Mail’s quality of service in relation
to its targets, and highlights developments relating to Royal Mail’s business
transformation and the Consumers, Estate Agents and Redress Act 2007.
Royal Mail
Overview
Royal Mail’s financial performance for the year ended 25 March 2007 was weaker than
in the previous year with operating profits (before exceptional items) for Royal Mail Letters’
business falling from £344 million to £194 million, caused by increasing costs, falling mail
volumes and constant revenues. For the regulated area, Royal Mail recorded operating
losses of £29 million in 2006/07 compared with profits of £168 million in 2005/0625.
The USO remains profitable overall though less so than the previous year (operating profit
was £27 million compared with £54 million in 2005/06) with profits from non-licensed mail
weighing over 350g continuing to offset losses on licensed mail weighing 0-350g.
The use of access products has grown quickly, with access volumes of 2.4 billion
items in 2006/07 compared with around 1.2 billion in 2005/06.
Royal Mail agreed a refinancing package in February 2007 with its shareholder, which will
enable it to commence investment in its transformation plan and deliver the cost
efficiencies it needs to meet the demands of its customers.
25 In March 2007, Royal Mail requested Postcomm to review Royal Mail’s pricing flexibility and the level of
access headroom. On August 9, Postcomm published its proposals, ‘Review of Royal Mail’s pricing
flexibility and the level of access headroom (the ‘Interim Review’ of the price control)’.
ROYAL MAIL 47
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Financial performance
Profitability
Royal Mail recorded an operating loss (before exceptional items) within the regulated
area26 of £29 million, compared with an operating profit of £168 million (restated) in
2005/06, a reduction of £197 million over the two years. Revenue in the regulated area
fell by £41 million (around 0.7 per cent), but costs increased by £156 million. The main
cause of the cost increase is people costs, in particular pensions.
Table 4.1 Royal Mail profitability by business area
Operating profit/loss before exceptionals

2005/06 2006/07 change (%)
(restated)
USO 54 27 -50
Price controlled area 197 (12) -106
Regulated area 168 (29) -117
Royal Mail Letters 344 194 -44
Source: Royal Mail 2006/07 regulatory accounts
Royal Mail’s profits across weight steps, classes of mail and products are not
uniform. The following analysis is based on Royal Mail’s regulatory accounts.
Overall, within the price controlled area, first and second class mail (stamp, meter
and PPI) made losses of £18 million compared with a profit of £41 million in 2005/06
(restated). Though first class mail made a net profit of £121 million (similar to 2005/06),
this was offset by losses on second class of £139 million (£58 million worse than
2005/06).
On access products, Royal Mail retains around 13p out of a total price of about 17.5p
per item but reports that access products are loss making (Royal Mail showed losses of
£44 million in its 2006/07 regulatory accounts). However, Postcomm’s analysis for its
Interim Review27 consultation published in August 2007 suggests the loss is much
smaller, at around £12 million per annum.
26 The regulated area comprises letters weighing up to 350g conveyed in consideration of/and less than
£1, this includes the price controlled products (including downstream access) and USO non-price
controlled products.
27 See Footnote 25.

3690_CMR_AW6 29/10/07 14:31 Page 49
The USO remains profitable, although in 2006/07 the operating profit was £27 million
compared with £54 million in 2005/06. The most profitable part of the USO is for
non-licensed products (items weighing more than 350g), with Royal Mail generating an
operating margin of around 18 per cent (based on operating profit before exceptionals).
However, the profitability of USO items above 350g has reduced by 18 per cent to £198
million compared with the previous year (see Figure 4.1).
Royal Mail reports an operating loss before exceptionals of £171 million on licensed
USO items weighing less than 350g. Profit margins vary greatly between the different
weight steps and formats because of an historical misalignment between prices and
costs, although this has reduced since the introduction of PiP from August 2006.
Postcomm’s proposals in the Interim Review28, if confirmed in November 2007, would
enable Royal Mail greater price flexibility to address these misalignments more quickly
than is the case under the current price control arrangements.
Figure 4.1 USO profit/loss from operations (before exceptional items)

by weight step for 2005/06 and 2006/0729
300
200
100
£m
0-350g
0
350g +
-100
-200
2005/06 2006/07 Source: Postcomm with data

from Royal Mail
28 See Footnote 25.

29 Figures restated to take account of change to USO scope. Profits/losses are shown in nominal terms
after the effect of removing exceptional items.
ROYAL MAIL 49
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Volumes
Overall mail volumes in the Royal Mail’s Letters’ business30 have decreased by around
2 per cent to 21.9 billion items in 2006/07 from 22.3 billion items in 2005/06. However,
there are variations in terms of rate and direction of growth within this overall figure:
• First class stamp, meter and PPI mail volume fell by 7 per cent, while second class
fell by 4.9 per cent;
• Bulk mail (including Mailsort, Cleanmail and Walksort) volumes within the price
controlled area fell by 11.6 per cent, primarily as a result of a more than doubling of
access volumes;
• Presstream volumes fell by 13.3 per cent; and
• Special Delivery volumes remained broadly unchanged.
The most recent Royal Mail figures show that mailing volumes continue to decline at
around 3 per cent per annum. Meanwhile, access volumes continue to increase with
Royal Mail forecasting volumes of around 4 billion for 2007/08, an increase of around
65 per cent on the Total Access volumes for 2006/07.
30 Volumes figures are total operational volumes for the mail’s business, excluding door-to-door.
This measure includes all regulated and unregulated mail items of all classes and weights.

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Table 4.2 Addressed letters’ market by volume31
Total Volumes Total Volumes Volume

2005/06 2006/07 Growth (%)
(millions) (millions)
Royal Mail end-to-end32 19,705 17,894 -9
Total Alternative Provider Access 539 1,148 113
Customer Direct Access 618 1,292 109
Total Access 1,157 2,442 111
Total 21,142 20,672 -2
Other operators’ end-to-end mailings 39 35 -10
Revenue
Royal Mail’s total mails revenue has remained flat despite an increase in average prices
of around 5 per cent for the price controlled area. This is because of the decline in
volumes, which indicate that mail customers are sensitive to the effect of price
increases and are increasingly shopping intelligently for lower priced mail items that
better suit their needs (e.g. selecting second class or access alternatives to an overnight
first class service) or selecting alternative forms of communications media.
31 Postcomm is working with Royal Mail and other licensed operators on a definition of mail volume
market shares. This is a complex matter, for example Royal Mail argues that self-delivered mail (such
as local authority items) should be included in these figures. To date, Postcomm’s market share figures
exclude document exchange mail. There is also difficulty with the treatment of parcels, most of which
fell outside Royal Mail’s historic monopoly.
32 Royal Mail inland addressed end-to-end mail comprises price controlled products (excluding
downstream access) plus USO non-price controlled products.
ROYAL MAIL 51
3690_CMR_AW6 29/10/07 14:31 Page 52
Figure 4.2 Royal Mail revenue for the price control area by type of mail: 2006/07
First class stamp/meter/PPI 28%

Second class stamp/meter/PPI 18%
Bulk mail* 25%
Downstream access 5%
Other** 24%
* Bulk Mail includes Mailsort, Walksort

and Cleanmail
** Other includes Presstream, Packetpost,

Response Services, Special Delivery and
some International products
Table 4.3 Royal Mail’s addressed inland letters’ market by revenue
Total Revenue Total Revenue Revenue

2005/06 2006/07 Growth (%)
Total Access 152 327 115
Total inland addressed mailings 6,008 5,943 -1
33 See footnote 32.

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Costs
Table 4.5 Royal Mail’s cost of providing addressed inland letters’ market
Total Revenue Total Revenue Cost

2005/06 2006/07 Growth (%)
Total Access 166 371 123
Total 5,753 5,874 2
Overall costs for inland addressed mailings have increased by around 2 per cent, due
mainly to an increase in pension costs. Royal Mail incurred approximately £140 million
additional pension costs within the price controlled area for 2006/07. People costs
represent around 70 per cent of Royal Mail’s total costs for its Letters’ business.
Royal Mail’s quality of service
Royal Mail’s quality of service targets are specified in its licence. Prior to 2006/07, Royal
Mail’s quality of service performance was measured only on the basis of end-to-end
transit times for various products. In 2006/07, additional targets were added to Royal
Mail’s licence, to better reflect customer interests. At the same time, in order to reduce
the regulatory burden on Royal Mail, Postcomm condensed some of the end-to-end
targets so as to reduce the overall number of targets and to allow Royal Mail more
flexibility to manage its business.
Figure 4.6 compares the new targets to the old ones. Royal Mail continues to be
required to achieve set performance standards for first and second class stamped and
meter mail, as it does for the Standard Parcels, Special Delivery and Mailsort 3 services.
The four first class bulk services, which previously had individual targets, are now in a
grouping which has to achieve a group performance standard. The same is true for
second class bulk services.
34 See footnote 32.
ROYAL MAIL 53
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Postcode area performance is now measured according to the performance of first class
items delivered next day in the postcode area to which they are addressed, rather than
as was previously the case, when performance was measured on the basis of items
posted in a postcode area for delivery elsewhere. This is considered to be more effective
in identifying poor-performing postcode areas. The ‘Intra’ performance measure,
concerning delivery within the same postcode area, has been dropped.
Lastly, new targets were introduced to measure the percentage of collections and
deliveries completed each day, the percentage of items delivered correctly, and the
end-to-end transit times for European International Deliveries.
Table 4.6 New and old quality of service targets
Targets up to the end of 2005/06 New targets in operation from 2006/07
End-to-end transit times: End-to-end transit times:
First class stamped and meter mail First class stamped and meter mail
Second class stamped and meter mail Second class stamped and meter mail
Mailsort 1
First class Response Services
Bulk first class
First class PPI
Presstream 1
Mailsort 2
Second class Response Services
Bulk second class
Second class PPI
Presstream 2
Mailsort 3 Bulk third class
Special Delivery (Next Day) Special Delivery (Next Day) not posted on account
Standard Parcels Standard Parcels
European International Delivery
Standardised Measures: Standardised Measures:
Postcode Area Target: Posted Postcode Area Target: Delivered
Postcode Area Target: Intra
% Collection points served each day
% Delivery routes completed each day
% Items delivered correctly

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Figure 4.7 shows Royal Mail’s performance compared to the targets set out in its
licence. In 2006/07, Royal Mail achieved 11 out of 12 of its targets, compared to 10
out of 16 in 2005/06.
Table 4.7 Royal Mail’s quality of service in 2006/07
Services Target (%) Performance Difference

(%) against target
First class stamped and meter 93.0 94.0 1.0
Second class stamped and meter 98.5 98.9 0.4
Bulk first class 91.0 93.2 2.2
Bulk second class 97.5 98.3 0.8
Bulk third class 97.5 99.5 2.0
Standard Parcels 90.0 94.5 4.5
European International Delivery 85.0 93.2 8.2
Special Delivery (Next Day) 99.0 99.0 –
PCAs delivering 91.5% first class mail 118.0 116.0 -2

next day
% collection points served each day 99.90 99.92 0.02
% delivery routes completed each day 99.90 99.95 0.05
% items delivered correctly 99.50 99.66 0.16
The failure to meet the target for the number of Postcode Areas delivering at least
91.5 per cent of first class mail the day after posting was due to industrial action in the
Torquay and Exeter Postcode Areas. Royal Mail took action to recover its performance in
these areas towards the end of the year, and consequently missed the targets by only
0.1 per cent in Torquay and 0.3 per cent in Exeter. There are no automatic
consequences stipulated in Royal Mail’s licence for this degree of failure and there was
no suggestion that Royal Mail was not meeting its licence obligation, so Postcomm did
not take any enforcement action.
ROYAL MAIL 55
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Table 4.8 and Figures 4.3 and 4.4 illustrate Royal Mail’s performance in first and
second class stamped and meter mail over the last four years. Royal Mail once again
performed above target levels for these products in 2006/07.
Table 4.8 Royal Mail’s first and second class stamped and meter performance
Standard Target Performance Target Performance Target Performance Target Performance

2003/04 2003/04 2004/05 2004/05 2005/06 2005/06 2006/07 2006/07
% first class 92.5 90.1 92.5 91.4 93.0 94.1 93.0 94.0
stamped and
meter mail
delivered next
working day
% second class 98.5 97.5 98.5 98.5 98.5 98.8 98.5 98.9
stamped and
meter mail
delivered within
three working
days
Figure 4.3 Royal Mail’s first class stamped and meter performance
96
% letters delivered next working day
94
92
90
88
2003/04 2004/05 2005/06 2006/07
First class stamped and meter performance

First class stamped and meter target

3690_CMR_AW6 29/10/07 14:31 Page 57
Figure 4.4 Royal Mail’s second class stamped and meter performance
99
% letters delivered within
three working days
98
97
2003/04 2004/05 2005/06 2006/07
Second class stamped and meter performance

Second class stamped and meter target
2006/07 was the first year in which Royal Mail was required to measure and publish the
percentage of deliveries that are made each day by the published latest delivery times,
and the percentage of final collections made from postboxes or Post Offices at or after
the advertised final collection times.
Table 4.9 Collections and deliveries completed to times
Collections at or after final advertised times 97.9%
Deliveries by latest times: Rural areas 99.7%
Deliveries by latest times: Urban areas 99.5%
ROYAL MAIL 57
3690_CMR_AW6 29/10/07 14:31 Page 58
Quality of service in 2007/08 during business transformation
At the end of 2006/07, Postcomm received a request from Royal Mail to suspend,
until the end of its current financial year, the payment of compensation to bulk mail
customers, and to ensure that the company is not subject to a downward adjustment
to its allowed revenues (the ‘C factor’) for the years ahead. These mechanisms are
designed to compensate customers when Royal Mail fails to meet its licence obligations
on quality of service. Royal Mail’s request was made in view of its desire to transform
its business, in order to become more efficient, and the fact that Royal Mail believed
that such transformation activities could result in industrial action.
Having consulted on and carefully considered Royal Mail’s request, Postcomm sent
Royal Mail a ‘letter of comfort’, explaining that it had decided to suspend the Bulk
Compensation Scheme and to ensure that Royal Mail is not subject to the C factor in
2007/08, because to do so would be in the long-term interest of customers. Postcomm
also explained that the relief only has effect where quality of service failures are caused
by industrial action which is a response to Royal Mail’s transformation activities.
In Spring 2008, Postcomm will hold an open meeting at which Royal Mail will explain
its application for relief from the above mechanisms, and answer questions from
stakeholders.
The Consumers, Estate Agents and Redress Act 2007
The Consumers, Estate Agents and Redress Bill became law in July 2007.
The Department for Business, Enterprise and Regulatory Reform (previously DTI)
introduced the Bill to create a new, stronger and more coherent consumer advocacy
body, and to improve redress in the energy, postal services and estate agency sectors.
Under the Act, Postcomm must make complaint handling regulations for regulated
postal operators and is likely to be required to set criteria for, and approve, redress
schemes, of which regulated postal operators must become members.
Postcomm recognises the potential for the provisions of the Act to create new barriers to
entry to the postal market. In making complaint handling regulations and setting criteria
for redress schemes, it will seek to minimise any possible negative effects.

3690_CMR_AW6 29/10/07 14:31 Page 59
5 MARKET DEVELOPMENTS/
OPPORTUNITIES
Chapter five discusses relevant international comparisons with the

UK mail market, looking at market share, volume growth and the
development of competition. This is followed by a review of the current
VAT situation outlining Postcomm’s position. The final section in this
chapter handles the emerging issue of the environment and its links to
the mail market.
International comparisons
Mail volume trends

In the UK, mail volume trends are increasingly difficult to predict, and this report has
attempted to investigate the drivers behind the uses of mail to understand likely mail
volume trends in the UK for the future. It is instructive to look at other mail markets,
and the analysis below summarises mail volume growth expectations in eleven
European member states with similar volumes per capita as the UK.
WIK surveyed Universal Service Providers (USPs) and National Regulatory Authorities
(NRAs) about their views on future mail volume trends to 2011. It then segmented the
respondents according to current mailing volumes. The table overleaf shows member
states with relatively high mail volumes, which includes the UK.
While letter post is expected to decline, direct mail is expected to continue to increase
across virtually all member states.
MARKET DEVELOPMENTS/OPPORTUNITIES 59
3690_CMR_AW6 29/10/07 14:31 Page 60
Figure 5.1 Expected volume development in high-volume member states until 2011
8
7 7
Number of member states
6
6
4
3
2 2 2 2
2
1 1 1
0 0 0 0
0
Letter post Correspondance Direct mail
Strong decrease (annual decrease >2%) Notes: The chart refers to 11

member states with volumes
Slight decrease (annual decrease <2%)
above EU average (AT, BE, DE,
No change DK, FI, FR, LU, NL, SE, SI, UK).
Slight increase (annual growth <2%) For each member state,
consolidated expectations about
Strong increase (annual growth >2%) future volume development were
derived from the assessments
provided by USPs and/or NRAs.
Source: WIK
According to WIK, both transactional mail and individual correspondence are subject
to electronic substitution across Europe, direct mail is much less so.
As shown in Figure 5.2, across Europe; direct mail was still growing at an average of
six per cent per year, from 2002/04, even in countries where other mail volumes were
falling. It is impossible to draw any direct conclusions for potential direct mail growth in
the UK due to the number of variables that may be impacting the relative growth in
direct mail volumes. However, this does suggest that as mail continues to grow as an
advertising medium in neighbouring European countries there may be further
opportunities for growth in the UK.

3690_CMR_AW6 29/10/07 14:31 Page 61
Figure 5.2 Average annual growth rates of Universal Service Providers’ direct mail
(addressed and unaddressed) 2002/04
120
100
Annual average growth 2002/04 (%)
80
60
40
20
DE DK EE ES FI GR HU IE IT LU LV LT MT PL PT SI SK
0
-20
-40
-60
GDP constant EUR Sources: WIK survey (EE, ES, FI, GR, HU, IE, IT, LT,
PT, SI, SK); UPU (addressed and unaddressed: GR,
Addressed direct mail
LU, LT, LV, MT, PL, PT); DE, DK: Annual Reports,
Unaddressed direct mail Eurostat (GDP at constant EUR); DK, LT, LU, LV, PL:
no figures for addressed direct mail
Market shares
It is interesting to understand the emerging pattern of liberalisation in those countries

with relatively well developed markets in order to assess the potential prospects for
competitive development in the UK, understanding that direct comparisons are difficult
because the nature and pace of liberalisation differs between countries.
Competition has existed in the Netherlands and Germany for several years and has
developed gradually through the establishment of local and regional companies
delivering to certain areas or providing specialised services. More recently, national
end-to-end networks have developed in these countries, through the acquisition of these
small, regional companies, to establish national competitive networks. This is in contrast
to the UK market, where the large international companies have been drawn to the UK
by opportunities offered by access using Royal Mail’s delivery network. Current UK end-
to-end alternatives are limited to a few companies offering local, high value or document
exchange services, and most competition has developed in the upstream end of the
mail market.
3690_CMR_AW6 29/10/07 14:31 Page 62
Germany
In Germany, competitors have been able to offer ‘value-added’ postal services since
the late 1990s. Many publishers and unaddressed mailers set up local and regional
networks, and TNT Post and PIN AG have since established national networks through
partnerships and acquisitions with these local operators. Established in 1999, and
based in Berlin, PIN AG plans to develop its network to close to 100 per cent
geographical coverage by the end of 2007. Reflecting confidence in PIN’s growth, in
June 2007, German media group Axel Springer acquired PIN by increasing its stake to
71.6 per cent. TNT Post is the other main competitor with nearly national coverage.
Created from a joint venture between TNT and Hermes Logistics, TNT has acquired
several regional German operators and a large consolidator, PostCon Deutschland AG.
Competitor market share has grown every year since 1998, although only significantly
in the last few years. At the end of 2006, competitor market share in Germany was 10
per cent. UBS predicts that by 2017, competitor market share will have reached 30 per
cent, driven mainly by the existence of the two alternative nationwide end-to-end
networks. They predict TNT Post and PIN AG will have around 13 per cent of the
market each, while a variety of smaller local operators will share the remaining four per
cent. The main competitive market is bulk business mail and direct mail.
Interestingly, in Germany, overall mail volumes continue to grow, even though

Deutsche Post’s volumes appear to have reached a plateau.
Figure 5.3 Germany – Addressed mail market volume, 1998-2006
18000
17000
Volume (million items)
16000
15000
14000
13000
12000
1998 1999 2000 2001 2002 2003 2004 2005 2006
Deutsche Post Source: Deutsche Post, Bundesnetzagentur

Competitors

3690_CMR_AW6 29/10/07 14:31 Page 63
Netherlands
In the Netherlands, by the end of 2006, competitors’ share of the addressed mail
market was 11.7 per cent. Sandd and Selektmail are the two main competitors and
operate low cost end-to-end, nationwide delivery networks focusing on pre-sorted bulk
mail with twice-weekly delivery. They have nationwide delivery networks and carry
addressed mail, magazines and periodicals. They have continued to increase their
share of competitor market volumes, handling over 6% of total addressed mail volumes
between them. UBS estimates that competitor market share will increase to 38% in the
Netherlands by 2017.
In the Netherlands, business letter mail under 50 grams (i.e. transactional mail) is still
in the reserved area. Competition has focused on direct mail, and the business models
of Sandd and Selektmail are both built around direct mail requirements. UBS predicts
they could eventually have a combined 50 per cent share of the direct mail market.
Since 2001, addressed mail volumes in the Netherlands have been in slight decline, as
in the UK, although the decline has been less severe, amounting to 2.1 per cent over
the period, or 0.4 per cent Compound Annual Growth Rate.
Figure 5.4 Netherlands – Addressed mail market volume, 2001-06
5800
5600
Volume (million items)
5400
5200
5000
4800
4600
2001 2002 2003 2004 2005 2006
TNT Source: TNT, Sandd, OPTA, UBS estimates

Competitors
3690_CMR_AW6 29/10/07 14:31 Page 64
Spain
In Spain, domestic intra-city mail and direct mail have always been open to competition,
and around 200 small local operators provide addressed mail delivery. Unipost was
established in 2001 and has built up a network of competing operators that now
reaches over 70 per cent national coverage. Unipost (owned by Deutsche Post) is now
the main end-to-end competitior to Correos y Telegrafos with an estimated market share
of around 8 per cent in 2006, while the other 200 operators share the remaining 1-2
per cent market share35.
The pace and type of liberalisation in European countries has differed, therefore it is
difficult to draw direct comparisons with the UK, and new entrants’ business models
are based on the possibilities offered by the respective regulatory environment in each
country. However, market shares of end-to-end competitors in Germany, the
Netherlands and Spain are estimated to be between 8-12 per cent in 200636. ECORYS
concludes that market conditions for the development of end-to-end competition in the
UK are not significantly better or worse than for these European countries generally,
and, therefore, in the medium-term, prospects for some end-to-end competition
establishing similar market shares are not unlikely.
The UK end-to-end market has been slow to develop partly because the access regime
encouraged large competitors to enter the market, and potential end-to-end operators
now have to compete with both the incumbent and established access operators.
The UK enjoys among the lowest prices in Europe, with very high service quality,
meaning that emerging competition has to meet a high service expectation and
potentially strong price competition. Establishing adequate drop-densities to make
delivery profitable will require time for new entrants in the UK. The fact that end-to-end
competition has developed, at least to some extent, in the European markets outlined
above, is partly a result of the longer amount of time they have had liberalised markets,
and of the type of regulatory structure they have each adopted.
35 ECORYS.
36 Prospects for competition in the UK postal market, ECORYS, 16 January 2007.

3690_CMR_AW6 29/10/07 14:31 Page 65
United States
In the United States, the United States Postal Service (USPS) maintains a monopoly on
postal services; however, competition exists in the form of workshare agreements similar
to access agreements in the UK. USPS works closely with workshare operators and mail
preparation companies and considers this to be a key part of its transformation,
ensuring the lowest combined costs along the mail value chain to make mail more
efficient for customers. Currently, in the United States, three quarters of all domestic
mail is pre-sorted and/or barcoded by mailers and mail service providers (presorters,
printers and consolidators). USPS promotes worksharing arrangements as the lowest
cost option to promote mail growth, and overall mail volumes increased by 2.3 per cent
last year (2006/07), while direct mail volumes grew around 5-6 per cent.
“Creating more customer value in core products and services will

increase mail volume and revenue to support universal service
and the growing delivery network.”37
Another key strand in USPS’s transformation plan has been the development of
‘intelligent mail’, designed to add customer value and reduce costs. Intelligent mail
works via a machine-readable barcode that allows the identification of individual
items of mail and tracks them through the pipeline. This helps to identify operational
bottlenecks, provides mailers with data that assists them in planning and decision
making, contributes to more accurate addressing, and serves as the basis for providing
actual service measurement data for specific mailings38.
37 Unites States Postal Service, Strategic Transformation Plan, September 2006.

38 Unites States Postal Service, Strategic Transformation Plan, September 2006.
3690_CMR_AW6 29/10/07 14:31 Page 66
VAT
Introduction
In April 2006, the European Commission (‘the Commission’) sent letters of formal notice
to the UK, Germany and Sweden, which opened infringement proceedings on the
interpretation of the VAT exemption for postal services by those countries, as set out in
Directive 2006/112/EC – ‘the VAT Directive’. The Commission was not satisfied with
replies to its formal notice and so, on 24 July 2007, it opened the second stage of the
infringement proceedings, by formally requesting that the UK, Germany and Sweden
change their legislation on the VAT exemption which it claimed is not compatible with
the VAT Directive. The requests took the form of a reasoned opinion (second step of the
infringement procedure provided for in article 226 of the Commission Treaty). If the
relevant national legislations are not amended in order to comply with the reasoned
opinions, the Commission may decide to refer the matter
to the European Court of Justice. Postcomm is not a party in those proceedings.
The Commission has said that the VAT postal exemption as applied in the UK hinders
competition39. The Commission explained that the UK had exempted from VAT all postal
services provided by Royal Mail, on the grounds that Royal Mail had been assigned
particular obligations with regards to the provision of the universal postal service.
The Commission argued that in the context of competitive postal markets, different tax
liabilities were bound to distort competition and could only be justified as regards the
strict discharge of the universal service obligation. Where, for commercial reasons –
namely to fend off competition from other operators – former monopolies offered to
some high volume clients pricing and quality conditions which were not available to
the general public, their supplies should be subject to the same tax liability as their
competitors.
Postcomm’s position on VAT

Postcomm’s position on VAT has consistently been that there should be a level playing
field for all postal operators, and that there should be no significant price rises for
customers. Postcomm believes that a reduced rate of VAT (of 5 per cent) applied to all
mail services and all licensed operators is the best solution to create a level playing field
for operators without material price rises for customers. However, a 5 per cent reduced
rate of VAT for postal services would require unanimous Commission Member State
support – though Postcomm continues to maintain that this is the best solution for the
UK postal services market. Postcomm’s analysis of the impact of different VAT
exemption scenarios is contained in Annex A of this report.
39 See the Commission’s press release IP/07/1164.

3690_CMR_AW6 29/10/07 14:31 Page 67
Environmental issues
In the last year there has been much publicity about the environmental effects of mail in
general and specifically around direct mail. The government has named the direct mail
industry as a key stakeholder in reducing the amount of paper waste sent to landfill in
the UK. Direct marketing material is estimated to account for approximately 550,000
tonnes of household waste. Addressed mail makes up around 181,500 tonnes, the
remainder being unaddressed direct marketing material40.
It has been suggested that, in order to reduce waste, direct mail should become an
‘opt in’ communication medium rather than an ‘opt out’ channel. This would mean
that consumers would have to indicate that they wanted to receive advertising mail
from a company, rather receiving it unless they said that they didn’t want to. This would
make direct mail rules similar those used for email marketing. These rules have not yet
been changed, and the government and the Direct Marketing Association (DMA) are
looking at solutions to the problem that would have less of an effect on direct mailers
and consumers.
The DMA is working on a number of planned environmental initiatives, including

developing a mail opt out system for unaddressed mail, enabling households to
register if they no longer want to receive untargeted advertising mail.
The first development to be launched by the DMA in response to environmental

concerns is a quarterly publication giving advice to direct mailers on green issues,
including subjects like environmentally friendly procurement of paper and inks, and
recycling. The publication will be available to DMA members and other interested
groups. This is the first step in a number of programmes being planned by the DMA,
which are partly aimed at helping them meet targets set by Defra in 2007 to ensure
that 55 per cent of all direct mail should be recycled by the end of 2009 and
70 per cent by 201341.
40 Source: Waste Strategy for England 2007, May 2007, Defra, www.defra.gov.uk
41 Source: Waste Strategy for England 2007, May 2007, Defra, www.defra.gov.uk
3690_CMR_AW6 29/10/07 14:31 Page 68
Concerns have also been raised about the green credentials of mail operators.
Postcomm is monitoring developments to see if there is any evidence that in a
competitive market the most efficient and therefore the most energy efficient,
‘green’ operators will be most successful in the market. So far, Postcomm has seen
some encouraging signs from many of the licensed operators of green initiatives and
products including the following:
• Reducing carbon emissions from mail centres, headquarters and other locations;
• Procurement of ‘green’ electricity from renewable sources;
• Cutting business air travel;
• Buying electric or bio-fuel powered vehicles or using cleaner diesel engines;
• Developing company wide Corporate Social Responsibility programmes;
• Launching carbon neutral mail products (see case study opposite);
• In depth analysis of carbon footprints;
• Implementing ISO standards on the environment.
Recently new and established operators have been working on developing products
which are less environmentally damaging. Royal Mail’s Carbon Neutral door-to door
product is one example, and will be the first in a series of green products from Royal
Mail. The business model used by ViaPost and being explored by other licensed
operators (for example i-post by UK Mail, whereby mail is sent electronically to a centre
closest to the delivery point) will have the effect of cutting the harmful side effects of
mail transportation substantially.
TNT NV was, in September 2007, ranked first on the Dow Jones Sustainability
Index 2007, improving its overall score from 84 in 2006 to 91 in 2007 and obtaining
the top score in the ‘Industrial goods and services sector’ which it has now achieved for
three years running. TNT showed consistent improvement in its sustainability reporting
and performance. The announcement followed a statement by TNT’s chief executive
officer Peter Bakker in August 2007 launching the company’s Planet Me initiative.
The programme includes the installation of a certified system to measure, report and
manage its CO2 emissions and the reduction of emissions in its 8 most important
operational areas. The programme also encourages TNT’s 159,000 employees to extend
carbon reduction into their private lives. TNT has the stated ambition to become the first
zero emissions express and mail company in the world42.
42 http://group.tnt.com/newsroom/pressreleases/index.asp

3690_CMR_AW6 29/10/07 14:31 Page 69
An American company Earth Class Mail is taking the idea of hybrid mail one step
further, and reducing the physical delivery of mail considerably by scanning customers’
documents at a central hub. The customer is sent a pdf document with scanned
pictures of their sealed envelopes via the internet. Customers can then choose from a
number of options, for example the item itself could be scanned and emailed to them,
sent directly for recycling, archived as a paper or pdf document or physically delivered
to their preferred postal address. Statistics from Earth Class Mail show that around 50
per cent of mail is recycled directly and that 44 per cent is scanned into the secure
system. An item can have more than one action applied to it, however less than 14
per cent of mail is delivered to a home, office or alternative address43.
Case Study
Royal Mail door-to-door
In July 2007 Royal Mail launched a ‘Carbon Neutral door-to-door scheme’ to

encourage door-to-door mailers to be more environmentally aware.
To be able to participate in the scheme, mailers will have to:
• Use paper with a minimum of 50 per cent recycled content, and all virgin paper
must be Chain of Custody accredited;
• Reduce packaging as much as possible and ensure that necessary packaging
is made from recycled, recyclable or reusable materials;
• Omit windows from campaign envelopes and use cleaner varnishes;
• Include the Waste and Resources Action Programme’s ‘Recycle Now’ logo to
encourage environmentally friendly disposal.
These measures will reduce carbon emissions to a minimum and Royal Mail will then
work with carbon offsetting schemes such as the Woodland Trust’s Carbon Plus+
programme to offset the remaining carbon footprint. Once these criteria have been
met, mailers are entitled to use the Royal Mail’s carbon neutral logo.
Source:
www.printweek.com, 18 July 2007
43 Postal Sustainability, 2007/12: How Delivering Mail On-line Saved Time, Money, our Planet, and
(Most of) Our Post Offices, Cameron Powell, Earth Class Mail, 23 May 2007.
3690_CMR_AW6 29/10/07 14:31 Page 70
Postcomm’s stakeholder engagement
This report draws on secondary market intelligence sources as well as information

Postcomm gathers on its programme of stakeholder engagement. Postcomm conducts
a series on on-going meetings and seminars with a variety of stakeholders including
various industry groups, large and small mail users, trade associations, industry
suppliers, government representatives, influencers and advisors.
Postcomm is committed to monitoring market developments through regular updates

of this market review in which we seek to understand the development of competition
and its impact on the market in order to inform policy decisions and to monitor the
subsequent impact of policy decisions on the market. We also monitor the impact of
the liberalised market on business customers through our Business Customer Survey,
a primary research document, and a sister document to this Market Review, also
published this year in October 2007.
We welcome the opportunity to extend our reach into the market through our
stakeholder programme, or simply through comments or suggestions to the content of
this report. If you would like to discuss any aspect of the liberalised postal market,
please contact:
Ruth Heller or Helen Purser

Postcomm
Hercules House
6 Hercules Road
London
SE1 7DB
Email:
Ruth.Heller@psc.gov.uk
Helen.Purser@psc.gov.uk

3690_CMR_AW6 29/10/07 14:31 Page 71
ANNEX A
Postcomm’s analysis of impact of different VAT exemption scenarios
Postcomm has modelled the impact on mail volumes of the imposition of both the full
rate (17.5%) and the reduced rate (5%) of VAT on all Royal Mail services and published
some of its findings in September 200444. Because of developments on VAT, Postcomm
has updated its analysis using more recent data. Postcomm has not seen how the
European Commission intends to define the services which it describes as being
“provided in the strict discharge of the universal service obligation”and which it argues
should continue to be VAT exempt. Postcomm therefore has assumed two scenarios.
First, services provided in the strict discharge of the universal service obligation could
be first class and second class standard tariff stamped mail, Special Delivery, redirection
services and the Standard Parcel Service. Secondly, those services could be as above,
but also including metered and PPI mail. These two scenarios, together with the full and
reduced rate scenarios, give a total of four different VAT scenarios in total.
In all scenarios, Postcomm has assumed a price elasticity of 0.58 on Royal Mail
services, which we have derived from recent Royal Mail data. Customers appear to be
increasingly price conscious: some customers now fold items in order to incur lower
charges under Pricing in Proportion (PiP), or have switched from first class to second
class services, preferring to pay a lower cost and accept a reduction in delivery time
span. To illustrate the impact of this change in price elasticities, Table A1, below, shows
how volumes have changed on various Royal Mail services as a result of price changes
between 2005/06 and 2006/07.
44 Postcomm’s Competitive Market Review Consultation Document, September 2004.
ANNEX A 71
3690_CMR_AW6 29/10/07 14:31 Page 72
Table A1 Price, volume and revenue change % on various Royal Mail services between
2005/06 and 2006/07
Service Average price Volume Revenue

change (%) change (%) change (%)
First class stamp, PPI and meter 5.7 (7.0) (1.7)
Second class stamp, PPI and meter 2.8 (4.9) (2.3)
Mailsport (All) (0.3) (11.4) (11.6)
Access 2.0 111.1 114.6
Postcomm modelled various outcomes based on costs and price information provided
by Royal Mail for 2006/07. The tables below set out the result of this modelling. Table
A2 shows the volume changes on various Royal Mail services for each of the four VAT
scenarios described above. In this table, the ‘Total Royal Mail mails’ figure is based on
the volume change for the full range of Royal Mail services (except door-to-door), which
have not all been listed here for reasons of space. Table A3 shows the volume change
broken down by the VAT status of customers.
Table A2 Volume change % (decline) on Royal Mail services for different VAT scenarios
Service % change 17.5% Full 17.5% 17.5% 5% Full

in volume Partial 1* Partial 2**
First class stamp (9.9) 0 0 (2.7)
Second class stamp (10.1) 0 0 (2.9)
PPI first class (3.7) (3.7) 0 (0.9)
PPI second class (3.7) (3.7) 0 (0.9)
Meter first class (10.1) (10.1) 0 (2.9)
Meter second class (6) (6) 0 (1.4)
Mailsort (All) (3.7) (3.7) (3.7) (0.9)
Total Royal Mail mails (5.1) (3.7) (2.4) (1)
* This assumes VAT of 17.5% is applicable to all Royal Mail services, except first class and second class
stamped mail, Special Delivery, redirection services and the Standard Parcel service.
** This assumes VAT of 17.5% is applicable to all Royal Mail services, except first class and second class
stamped, metered and PPI mail, Special Delivery, redirection services and the Standard Parcel service.

3690_CMR_AW6 29/10/07 14:31 Page 73
Table A3 Volume change % (decline) by the VAT status of customers
Customer status % 17.5% Full 17.5% 17.5% 5% Full

change in volume Partial 1* Partial 2**
Residential and small (8.1) (7.1) (6.2) (2.3)

business
Non-recovery business (8.1) (7.1) (6.2) (2.3)
Partial recovery (6.8) (5.8) (5.1) (1)

business
Full recovery business 0 0 0 0
Government 0 0 0 0
departments
Discussion on data
Current data suggests that the mail market is declining at approximately 2 per cent per
year and our future estimates of the trend over the next five years range from 1 per cent
growth to 3 per cent decline. The above figures suggest that, in terms of volume
decline, an across-the-board 17.5 per cent VAT price increase on all Royal Mail services
could result in an additional volume decline of around 5.1 per cent. Postcomm believes
that the best outcome would be an across-the-board 5 per cent VAT price increase
which would, according to our modelling, only give an additional volume decline of
1 per cent.
However, of crucial importance is how any VAT price rise would impact on different
categories of customers, depending on their VAT status – and where the volume
declines will occur. Table A3 above shows that for fully recovering customers (and
government departments), VAT has no significance whatsoever on volumes. These
customers account for around half of Royal Mail’s business by value45. That is to say,
whatever VAT scenario is chosen, our modelling suggests that there will no change in
volumes mailed for these customers. On the other hand, volume decline will be very
heavy for customers unable to reclaim VAT, which includes residential users and most
small businesses. Overall volumes might decline by 8.1 per cent for these customers if
17.5 per cent VAT was applied to all Royal Mail services.
45 Tackling Barriers To Entry In Postal Services: Postcomm’s Final Decisions And Recommendations,
March 2005.
ANNEX A 73
3690_CMR_AW6 29/10/07 14:31 Page 74
Given the above, the introduction of 17.5 per cent VAT on all mail services will effectively
introduce two different sets of prices into the market: the outcome of this is very difficult
to accurately predict as there is no obvious precedent. Although the VAT status of
customers applies to all sectors of the market, any sudden change in the application of
VAT to postal services may result in confusion and uncertainty. As such, there is a very
real danger that 17.5 per cent price increases may lead some customers to move to
alternative methods of communication, which could add to the decline in total market
volumes and possibly endanger the funding of the universal postal service.
Another factor which needs to be considered (and which Postcomm cannot capture in
its modelling), is what might happen to PPI and metered mail customers, if the VAT
exemption was only applied to first class and second class standard tariff stamps. The
full 17.5 per cent VAT could result in a 6p VAT-inclusive price increase (from the current
32p to 38p) on first class PPI and metered services – and a 7p VAT-inclusive increase
on second class PPI and metered services (from the current 22p to 29p). The fact that
second class service quality is currently very good (exceeding targets) may induce
significant switching from first class to second class within PPI and meter, or from PPI
and meter to stamps. However, this would be an incorrect price signal, as Royal Mail’s
less profitable or loss making services (first class and second class stamps) would be
cheaper for a non-VAT recovering customer than its profitable services (first class and
second class PPI and meter).
Such an incorrect pricing signal could cause damage to the PPI/metered market, if
current non-VAT recovering PPI/meter customers switch to buying stamps – despite the
fact that the real costs to Royal Mail of supplying PPI and metered services is less than
supplying stamped services. Similar distortions between costs and prices and between
different types of customers might exist wherever the boundary between VAT and non-
VAT products is placed. Hence, in Postcomm’s opinion, the best solution would be a
uniform level of VAT on all mail services.
These distortions could mean that the real mail volume decline could be far greater than
5.1 per cent. A 17.5 per cent price rise could speed up the decline in mail volumes,
resulting in a ‘tipping point’ whereby major mail users unable to recover VAT seek
alternative services, such as electronic communications.

3690_CMR_AW6 29/10/07 14:31 Page 75
Bulk mail
The bulk mail situation has changed significantly since the advent of downstream
access (DSA) competition so this area is much more complex.
If a DSA operator offers a service at a price of 17.5p per item, it will have to charge VAT
on the whole 17.5p and then pay Royal Mail 13p for delivery. Having to charge VAT on
the full 17.5p makes it harder for operators to compete with Royal Mail’s VAT-exempt
Mailsort services and induce people to switch to their own services.
Where a customer holds a Customer Direct Access (CDA) agreement, it would need to
also hold a separate agreement with a third party for the ‘upstream’ service required to
get the mail to Royal Mail for delivery – which a DSA operator can supply this service.
Hence, in this situation, the CDA customer would only pay VAT on the charge for the
upstream service and not on the 13p DSA price payable direct to Royal Mail. A recent
development in the access market has been ‘Agency Agreements’, which allow the DSA
operators to act as agents for mail customers, meaning that customers only suffer VAT
on the upstream charge but they do not have to deal separately with Royal Mail and
their DSA operator. The impact of applying VAT to bulk mail would vary depending upon
which of these situations is in place.
It would seem that, under the ‘partial’ VAT exemption scenarios, both Mailsort and DSA
would become VAT-able, but the impact would be greater on Mailsort which is currently
100 per cent VAT exempt, while DSA already has VAT applicable to a small portion of
the 17.5p. Therefore, the effect is likely to be that those customers who are unable to
recover VAT will see Mailsort prices increase more than customers who use DSA. This
increase in the difference between Mailsort and DSA might induce more customers to
switch to the cheaper DSA service. It may also give a boost to the prospects of end-to-
end bulk mail competition, which has implications for Royal Mail in terms of declining
volumes and revenue and, in turn, the financing of the universal service.
ANNEX A 75
3690_CMR_AW6 29/10/07 14:31 Page 76

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context. The material must be acknowledged as Crown copyright and the title of the document specified.
Any enquiries relating to the copyright of this document should be addressed to

The Licensing Division, HMSO, St Clements House, 2-16 Colegate, Norwich NR3 1BQ
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This publication can also be viewed on Postcomm’s website at www.psc.gov.uk
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2007

2 OVERVIEW OF THE POSTAL MARKET 6

As the regulator of the UK mail market Postcomm needs to have

Market size and growth

2 2007 COMPETITIVE MARKET REVIEW

Table 1.1 Addressed letters’ market by volume2

Total Volumes Total Volumes Volume

Total Alternative Provider Access 539 1,148 113

Customer Direct Access 618 1,292 109

Total Access 1,157 2,442 111

Other letter products 280 336 33

Total 21,142 20,675 -2

Other operators’ end-to-end mailings 39 35 -2

Source: Postcomm with data from Royal Mail

Market segmentation, sectors and mail applications

Royal Mail’s performance

4 2007 COMPETITIVE MARKET REVIEW

International, VAT and the environment

Competition is developing at different rates and in different ways across Europe

The environment is an issue with an increasing impact on the

Market size and growth

6 2007 COMPETITIVE MARKET REVIEW

Inland letters Economic growth is weighted by letter demand; demographic

OVERVIEW OF THE POSTAL MARKET 7

Figure 2.2 Member states domestic letter post per GDP:

2000/02 Notes: BE, IE, LT – confidential

8 2007 COMPETITIVE MARKET REVIEW

2002 Notes: BE, IE, LT – confidential

OVERVIEW OF THE POSTAL MARKET 9

Current access competition

Figure 2.4 Access volumes April 2006 – August 2007

Total Access volume Operator access CDA

10 2007 COMPETITIVE MARKET REVIEW

A breakdown of mail flows in the UK domestic market is shown in Figure 2.5.

Figure 2.5 Mail flows, domestic v business

Source: Royal Mail

OVERVIEW OF THE POSTAL MARKET 11

It could be argued that the postal industry has the main

12 2007 COMPETITIVE MARKET REVIEW

Figure 2.6 Direct mail volumes

Consumer Business Total Source: Direct mail

OVERVIEW OF THE POSTAL MARKET 13

14 2007 COMPETITIVE MARKET REVIEW

Table 2.1 Advertising expenditure by medium Q1 2007, £m current prices, and Q1

Q1 2007 adspend Current prices (£m) change year/year (%)

National newspapers (Includes supplements) 492 -1.8

Regional newspapers 705 -3.8

Consumer magazines (Excludes supplements) 188 -1.4

Business magazines 203 -6.6

Total press 1,589 -3.3

Television 962 -0.8

Radio 127 -1.8

Outdoor 237 7.7

Internet (Internet figure is a WARC estimate) 648 42.0

Direct mail 615 -3.6

Total measured adspend 4,208 3.0

Source: AA Quarterly Survey of Advertising

5 The Q2 2007 Bellwether Report, IPA, 16 July 2007.

OVERVIEW OF THE POSTAL MARKET 15

Direct mail continues to grow in the United States, for example,

7 Quality replaces quantity, Marketing Week, 30 August 2007.

16 2007 COMPETITIVE MARKET REVIEW

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