The future of the UK Mail Market

1

• The future of the UK Mail Market
• Stephen Agar
• Director Regulatory Affairs Wholesale

2
Market Position 1 January

• Current market size 25.1bn items
• Currently 15 licensed operators
• There are already a number of key national
  players in the market, providing effective
  competition through real choice and gaining
  noticeable market share gains in key business
  mail markets
• DPAG/DHL 5 mail centres
• TPG/TNT 9 mail centres
• UK Mail 6 mail centres
• DX 4 main sites
• Communisis Supercentre for HSBC
• Other key European markets not open to full
  competition until 2009 (if then)

3
Current Royal Mail position the positives

• Completed biggest turnaround in recent UK
  corporate history
• Royal Mail currently delivering the best quality
  of service in a decade (94.2 in Q2 2005-06)
• Lost mail almost halved - 99.92 arrives safely
• 218m given back to our people - 1,074 each
• Pay for Postmen and women up almost 25 since
  March 2002
• 5-day week introduced for everyone
• More of our people enjoy working here and
  bullying and harassment issues being tackled
  robustly
• From loss to profit

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What is the future for customers

• Social The basic USO, one price anywhere
  service will be maintained, customers will have
  limited choice in price and provider
• SME more choice in provider, services and price
  as new entrants gain critical mass in volumes and
  start to seek wider customer base through
  consolidating STL
• Business real choice, innovation and effective
  competition, though some parts of the market will
  be increasingly commoditised, dominated by price
• E-substitution will continue to increase,
  offering all customers more choice in delivering
  statement, invoicing and marketing information

5
What is the future for Industry Entrants

• National continued expansion of existing mail
  or parcel operations, utilising existing scale
  and network synergys. Marginal pricing and lower
  cost bases will allow them to quickly gain
  critical mass in volumes but building national
  delivery networks is difficult
• Local we expect to see the expansion of
  existing unaddressed networks and local couriers,
  targeting utilities, councils and high streets to
  gain volumes and offering services to SME and
  possibly providing posting boxes for social
  customers
• Consolidators and Business Process Outsourcers
  increasing pressure on the upstream value chain
  will drive existing printers and mailing houses
  to investigate ways to increase customer value by
  investing in sortation and remote distribution
  technology

6
What is the future for volumes?
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What is the future for Access

• Volumes
• Current 1 billion this year to forecasted c.3
  billion next year
• Customers
• 13 Contract Holders to 30 customers to next year
• Postcomm Regulation
• Increased role of Postcomm within Access
• Quality of Service measure for Access Services
• RM to provide terms for new access services
  within 3 months of request Inevitable increase
  in number of services via Access
• Systems
• Improved way of working for RP using handheld
  devices
• Future systems development to support forecasting
  RP

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What is the future for Access

• Access is the least worst option for RM
• Delivery competition is the real threat - RM
  receive no revenue for mail as opposed to c.13p
  an item for Access
• Although market has grown 10-12 since Postcomm
  was set up 5 years ago volumes going to Access
  are now approx. c5 6
• Compliance
• Need to ensure that Mail Centres dont
  discriminate and follow agreed processes
• Realignment of duties
• Increased RP activity on early shift at Mail
  Centres
• Increased inward sortation on late shift at Mail
  Centres
• RDC resource needs to be realigned due to RDC
  volume decreases

9
What is the future for Delivery Competition

• Postcomm project that new entrants will be
  delivering more than ½ billion items end to end
  by 2009/10
• Up to now we have assumed that new entrants are
  more likely to enter the market by identifying
  market niches rather than by heavy investment in
  in-house technologies but is this true?
• Entrants are likely to build up a business
  incrementally and flexibly using subcontractors,
  low cost labour and a very focused service
  offering.
• Significant opportunities for both local and
  national operators to cream skim profitable city
  centre and cross town mail through operating on a
  lower cost base and making less deliveries per
  week

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Future for Royal Mail

• The core of Royal Mails strategy is to
  strengthen our market position by introducing
  better products, more cost-reflective pricing and
  rebuilding our brand attributes of trust,
  reliability and reach
• Cost-reflective pricing and discounting to
  incentivise machineability over sortation
• Creation of a new business product portfolio
  focused on meeting key customer applications
• Making us easy to do business with
• To deliver competitive products consistently,
  Royal Mail will modernise our network through a
  phased investment programme that further
  automates our pipeline and introduces uniform
  best practice processes
• Letters and flats automation
• Walk sequencing and new delivery model

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Future for Royal Mail

• Royal Mail will only succeed with a
  transformation of the scale envisaged if we bring
  our people with us by engaging them in and
  rewarding them for business success
• Teamworking and greater flexibility (e.g., sick
  absence cover)
• Employees to share in the success of the business
• A new relationship with our trade unions

12
Regulatory and political impacts

• There remains some key regulatory issues
• Competition is a driver of efficiency and is good
  for all stakeholders including the incumbent
• Given the USO, Royal Mail believes that an
  effective monopoly in delivery will be the most
  efficient industry model, although thats not the
  way liberalisation has gone
• Royal Mails open approach to access is creating
  a vibrant upstream market, while protecting our
  delivery network
• Geographic pricing of delivery for bulk products
  is necessary to prevent cream skimming and to
  protect the USO
• The regulator may be good for stimulating
  innovation in the market, but it is important
  they do not create an unlevel playing field by
  constraining the incumbent's commercial freedoms
  and so encourage inefficient outcomes and
  eventually threaten universal service

13
Regulatory and political impacts

• Funding of our investment programme remains a
  problem
• The market needs a viable and financially secure
  Royal Mail to deliver the USO and provide
  customer confidence in the mail industry
• The government is short of cash, but we need 2bn
  of investment
• We have a pension deficit of over 4bn and
  getting bigger
• We will continue to negotiate with all
  stakeholders and have not ruled out going to the
  Competition Commission over the current Price
  Control. Decision will be made in the next 4
  weeks.

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Conclusions

• The future of the UK Mail market is unclear, with
  ongoing concerns over volumes and regulatory
  certainty
• Competition will inevitably drive efficiency
  within the industry and if Royal Mail does not
  become more efficient it will lose more volume
• Large customers will benefit from increased
  choice and price reductions, though at the
  expense of social customers
• Royal Mails position as a stable and financially
  viable USO provider remains at risk without
  sufficient investment and commercial freedom to
  respond to competition