Royal Mail vs Ofcom: Round 2

After rejecting Royal Mail's complaints about unfair competition, Ofcom launches a 'fundamental review' into its regulation.

by Adam Gale
Last Updated: 21 Jan 2016

It’s in the nature of regulated industries for businesses and the bodies that oversee them to spar from time to time. But Royal Mail and Ofcom seem to have battled with an unusual regularity over the last year or so and it’s the regulator that’s been landing the body blows.

Ofcom announced a ‘fundamental review’ today into Royal Mail’s regulation, and in particular its market power in letter deliveries. Since Whistl stopped its direct delivery service last week, Ofcom says Royal Mail doesn’t have any competition, and as all regulators know, that’s bad.

Specifically, it’s looking into the universal delivery service framework agreed in 2012 before Royal Mail was privatised. Royal Mail is obliged to provide universally-priced, affordable delivery six days a week to all parts of the country. It also has to provide competitors with wholesale access to that delivery network, and it’s the prices it charges for that privilege that will be scrutinised.

Royal Mail was allowed certain freedoms on those prices that reflected the presence of direct competitors and to an extent, its financial struggles at that time. But as Ofcom itself said, there are no competitors now in letter deliveries and Royal Mail is much healthier financially than it was.

The review will decide when it reports in 2016 whether to impose charge controls if it finds Royal Mail’s prices are too high and its commercial flexibility is no longer ‘appropriate in the changing market’.

That’s got to hurt, not least because Royal Mail’s own complaint to Ofcom that the universal service obligation was actually giving its rivals an unfair advantage by allowing them to ‘cherry pick’ cheaper services was slapped down last year.

Besides, the ‘changing market’ is already giving Royal Mail a headache. We’re not sending letters any more, it seems. Volumes declined 4% last year, presumably as online billing takes off and the generation that never really converted to email fades away.

With the growth of online shopping, parcels are where it’s at, but even there matters aren’t much better. Last year, Royal Mail’s parcel volumes increased 3% but revenues only rose 1% as intense competition squeezed prices. The firm acknowledged that the roll-out of Amazon’s direct delivery service would hardly help matters.

Of course, it’s not doing too badly, as Ofcom said. Operating profits after ‘transformation costs’ were up 8.9% to £466m. Another review, though – on top of a separate investigation into abuses of market power, due in July and sparked by a complaint from, you guessed it, Whistl – is the last thing it needs. Royal Mail shares fell 1.9% this morning to 495p, after steady growth of more than 27% so far this year.

The government's certainly keen to get out. Ever keen to cut the debt, George Osborne recently announced the sale of half the state's 30% stake in Royal Mail, with the remaining 15% likely to be sold within a year.

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