Royal Mail consistently raises UK postage costs year on year. The latest price hike in October saw the price of a First-Class Stamp (0-100 gms) rise to £1.25 (+14%). Other tariffs have increased by between 22% and 35%.
These increases are attributed to growing cost pressures, the challenging economic environment, and the lack of reform in the Universal Service Obligation (USO). The USO mandates the delivery of letters Monday through Saturday and parcels Monday through Friday. It also offers two delivery speeds for its main universal service products: First Class (next day) and Second Class (within three days).
The business also announced an adjusted operating loss of £319 million in the six months to September 2023. This was largely due to a reduction in revenues. The profit (EBIT) margin for the Reported Business decreased to -6.3% (compared to 3.6% in 2021-22). This decrease is significantly below the indicative 5% to 10% range for a reasonable commercial rate of return.
However, it is believed that Royal Mail’s long-term future will be significantly shaped by the postal and communications regulator, Ofcom. In September, it began examining options to alter the USO.
Royal Mail has blamed the USO for rising stamp prices. Last summer the government denied its request to stop delivering post on Saturdays – a move which would have needed approval by Parliament. Ofcom previously confirmed that such a move could save £125 million to £225 million a year.
The most significant indicator of the long-term strategy may come from Royal Mail’s recent moves with its bulk mail customers.
These companies, which include UKMail, Whistl, and Citipost, specialise in sorting and processing mail for big businesses. This mail is typically marketing letters or household bills to consumers.
These bulk letters, which are taken on the “final mile” by Royal Mail, make up the majority of all letters sent. Although volumes here are also in decline as companies favour email or social media to reach customers and clients.
So, what does the future landscape look like for UK postage and Royal Mail?
The demand for sending letters has dropped from 14 billion in 2011 to seven billion in 2022-23. This will likely lead to price increases, workforce cuts, and reduced mail deliveries from six days to four or three. This would undoubtedly lead to a raft of changes in how First and Second Class and business products are delivered. If legislated, most letters would take up to three days or longer to arrive, with a pricier next-day option still available for urgent mail.
Although Royal Mail and the Unions have frequently been in disagreement about pay and working practices, it would seem that the stark reality of the condition of the business is being realized.
Dave Ward, General Secretary of The Communication Workers Union, said:
“We need to think about new products and services and an expanding role for workers. Royal Mail has the biggest fleet in the country and the greatest presence in every community, which should be seen as an advantage, but withdrawal of the USO resulted in the loss of tens of thousands of jobs.”
However, from an economic standpoint, despite its size and market presence viewpoint, it would appear that Royal Mail, which has roots going back to 1516 when Henry VIII appointed a Master of the Posts, is a business in decline.
Homes and businesses will always want an efficient delivery service, but other providers such as Document Exchange (DX), Amazon, and Hermes (particularly with their ‘locker system’) are providing stiff competition.
There will always be a need for the postal system, but the numbers just don’t add up in a declining business. Royal Mail will need to adapt significantly to the market, but prices, reductions in employee numbers, and less frequent deliveries seem inevitable.
