Royal Mail could be made to accept further controls on stamp prices as part of an inquiry announced by the communications watchdog. Ofcom said it would carry out a “fundamental review” of how it regulates Royal Mail to make sure the company maintains its obligation to deliver to all parts of the country.
The regulator decided to undertake the review after Whistl, Royal Mail’s only national competitor for direct delivery of letters, pulled out of the market.
Whistl, formerly known as TNT and owned by Dutch private postal group PostNL, suspended deliveries last month and withdrew permanently from the market on 10 June. It had planned to expand beyond its existing network in west London, Liverpool and Manchester to deliver to a quarter of the UK.
Ofcom said it was concerned that without competition for letter delivery, Royal Mail might fail to make itself more efficient, threatening the universal postal service in the long run. One of the options is to introduce additional controls on the prices Royal Mail charges for its service.
After Ofcom gave it greater commercial freedom in 2012, Royal Mail increased the price of first- and second-class stamps by 14p to 60p and 50p respectively. Prices rose to 63p for first class and 54p for second class in March.
The price of second-class stamps is capped at 55p until 2020 with increases linked to inflation but there is no cap on first-class stamps. There are also limits on the charges Royal Mail makes for competitors to use its network. Both retail and wholesale charges are part of the review.
Ofcom had given Royal Mail greater freedom to help support the fixed-price universal postal service but it is now stronger financially and operates as a public company after the government sold most of its stake in 2013.
Royal Mail shares fell 1% to 500p in afternoon trading. Ofcom said: “The review will ensure regulation remains appropriate and sufficient to secure the universal postal service, given the recent withdrawal by Whistl from the ‘direct delivery’ letters market, which has resulted in Royal Mail no longer being subject to national competition.
“Ofcom will consider ... whether Royal Mail’s wholesale and retail prices are both affordable and sufficient to cover the costs of the universal service and whether Royal Mail’s commercial flexibility remains appropriate in the changing market. And, if not, whether wholesale or retail charge controls might be appropriate.”
David Kerstens, an analyst at the stockbroker Jefferies, said further curbs on Royal Mail’s charges could make the company less profitable as people post fewer letters. He said: “Stamp prices [in the UK] are at the low end of the spectrum compared with other countries across Europe. A control on pricing would be negative [for Royal Mail] because they won’t be able to offset volume pressure to the same extent that some of their peers in Europe are able to do.”
Royal Mail is relying on increases in parcel delivery from online shopping to offset letters’ decline but it faces tougher competition in the parcel market. Ofcom said its review would take in an existing examination of Royal Mail’s efficiency and the prices it charges competitors for delivery to the door.
Royal Mail and Whistl had been in a legal battle over what Royal Mail said was Whistl’s “cherry picking” of profitable deliveries in densely populated cities. Whistl accused Royal Mail of predatory practice by threatening higher prices for letters it delivered for Whistl.
Kerstens said it looked as though Ofcom was caught unawares when Whistl quit the market and that it now needed to find other ways to drive efficiency at Royal Mail. “The fact that Whistl pulled out must have come as a surprise, which is why Ofcom made reference to potential price controls.”
Royal Mail said there was plenty of competition for delivering parcels but that the market for letters was in structural decline. “There is therefore a need for regulatory clarity and certainty for all market participants,” it said.
Dave Ward, general secretary of the Communication Workers Union, accused Ofcom of interfering with its members’ relations with Royal Mail. He said: “Royal Mail is efficient and postal workers are some of the most productive in the UK. Ofcom has overstepped its remit in criticising terms and conditions and a regulator should not be using efficiency to drive down employment standards.”
Ofcom said it would set out its initial thoughts and seek the views of interested parties next month. It will complete the review next year.
• This article was amended on 17 June 2015. An earlier version said the cost of first- and second-class stamps rose by 14p to 50p and 40p respectively in 2012. In fact they rose to 60p and 50p respectively.
