Ofcom: Universal postal service must modernise

• Ofcom calls for national debate on future of UK’s postal service, as letter volumes halve since 2011
• Options for reform include changing letter delivery speed or days, as other countries have done, but not downgrading delivery targets
• Second Class stamps will remain affordable option as price cap continues

The universal postal service risks becoming unsustainable as people send fewer letters and receive more parcels, meaning reform is necessary to secure its long-term future, according to evidence set out by Ofcom today.

Postal services and postal workers remain essential to those who rely on them. Eight in 10 people (79%) say some things will always need to be sent by post.^[1] And three quarters of those who use postal services (74%) say they rely on the post for letters.^[2]

However, while Royal Mail’s obligations^[3] have not changed since 2011, letter volumes have halved and parcel deliveries have become increasingly important. Given the significant cost to Royal Mail of delivering the universal service,^[4] there is an increasing risk it will become financially and operationally unsustainable in the long term.

Given these challenges, Ofcom is today inviting views on a range of options for redesigning the universal postal service to secure its future, while ensuring it reflects the way people use it. Under any scenario, Royal Mail must modernise its network, become more efficient and improve its service levels.

Ofcom’s research shows that people want to get what they pay for. But people are not currently getting a reliable service because of Royal Mail’s recent poor performance, for which Ofcom fined the company £5.6m last year. We will continue to hold Royal Mail to account and expect it to turn things around as a matter of urgency.

Options for reform

At this stage, we are not consulting on specific proposals to change the universal service obligation (USO). Some of the options, which are detailed in full in our document, would require Government and Parliament to change primary legislation, while others could be made through changes to our regulations.^[5]

The two primary options we have set out are:

1. Making changes to existing First and Second Class and business products so that most letters are delivered through a service taking up to three days or longer, with a next-day service still available for any urgent letters.
2. Reducing the number of letter delivery days in the service from six to five or three. This would require Government and Parliament to change primary legislation.

We estimate that Royal Mail could achieve a net cost saving of £100m-£200m if letter deliveries were reduced to five days; and £400m-£650m if reduced to three days. If the large majority of letters were delivered within three days, it could achieve net cost savings of £150m-£650m.^[6]

Downgrading delivery targets is not an option for reform. In fact, it will be important to consider whether additional safeguards are necessary to ensure people’s needs are fully met. Any changes must improve existing levels of reliability.

Changing the specification of the universal service is likely to be preferable to using a subsidy to maintain the existing levels of service and products, given it no longer aligns with the way people use it; although this would ultimately be a decision for Government.

What do postal users want?

Fewer delivery days could still meet most people’s needs, according to what postal users have told us. Nine in 10 people (88%) say reliability is important for letter deliveries, compared to 58% for delivery on Saturdays (down from 63% in 2020).^[7]

Most participants in our research^[8] were also open to reducing some services and standards – particularly for letters – in the interests of keeping prices down and only paying for what was required. Similarly, there was strong acknowledgement that most letters were not urgent, but people still needed to have a faster service available for the occasional urgent items, even if that meant paying a premium for it.

The UK is not alone in needing to respond to these challenges. Across Europe and more widely, universal postal service obligations have been, or are being, reformed. Other countries have reduced the frequency of delivery or extended delivery times for letters – including Sweden in 2018, Belgium twice since 2020, and Norway and Denmark twice each since 2016.^[9]

Postal workers are part of the fabric of our society and are critical to communities up and down the country. But we’re sending half as many letters as we did in 2011, and receiving many more parcels. The universal service hasn’t changed since then, it’s getting out of date and will become unsustainable if we don’t take action.

So we’ve set out options for reform so there can be a national discussion about the future of universal post. In the meantime, we’re making sure prices will remain affordable by capping the price of Second Class stamps.

Dame Melanie Dawes, Ofcom’s Chief Executive

Next steps

We are inviting views from interested parties by 3 April 2024 on our analysis and the options for reform, to understand the potential impact on people and businesses. This includes vulnerable people, those in rural and remote areas of the UK’s nations, as well as large organisations who use bulk mail services.

We will hold events in the coming months to discuss the evidence and options, bringing together a range of people and organisations with different perspectives. After carefully considering the feedback, we will provide an update in the summer.

Capping Second Class stamp prices

To make sure the universal service remains affordable, Ofcom periodically reviews whether stamp prices should be capped. In doing so, we must consider the impact of any cap on the financial sustainability of the universal service. We set our last cap in 2019 and have reviewed prices for the period April 2024 to March 2027.

Royal Mail continues to be the UK’s only door-to-door deliverer of letters on a national scale. This means we cannot rely on competition to ensure prices remain affordable.

So we have retained a safeguard cap on second class letters. On average, these prices can rise by no more than inflation (CPI) from today’s prices.^[10]

Notes to editors

1. Yonder Consulting surveyed for Ofcom a nationally representative sample of 2,024 UK adults aged 16+ in October and November 2023.
2. Ofcom Residential Postal Tracker 2022-23 – Jigsaw surveyed a nationally representative sample of 5,664 UK users of the postal service between August 2022 and June 2023.
3. Since 2011, Royal Mail’s universal service obligations have included offering to deliver letters Monday-Saturday and parcels Monday-Friday as well as offering two delivery speeds for its main universal service products: First Class (next day) and Second Class (within three days).
4. We estimate that the net cost of the entire USO to Royal Mail was £325m-£675m in 2021/22. This range is based on the profits that we have calculated Royal Mail could have made if it had not been subject to the USO and had commercial freedom, compared to its actual position in that year (though the range includes the loss of the VAT exemption benefit). This net cost estimate does not necessarily represent the savings that Royal Mail would make if the scope of the USO were changed.
5. How amendments can be made to the USO specification:
   
6. The savings that Royal Mail could have achieved in 2021/22 if the changes had been in place at that time.
7. Yonder Consulting survey – 88% of UK adults told us it was important that “You can be confident that at least 90% of letters sent will be delivered on time”.
8. Jigsaw carried out eight online group discussions with typical postal users in August and September 2023, and 38 depth interviews with vulnerable and dependent users.
9. Some European comparators:
   
10. Royal Mail will be given some flexibility to set prices for individual Second Class letter products, which vary in size, but the weighted average overall price for the set of products in the ‘basket’ must not rise above inflation. Based on 2022/23 volumes, standard letters would make up a high proportion of the basket. This naturally more tightly constrains price increases on the more commonly used standard letters than on large letters, as a change in their prices would have a far bigger impact on the overall average than a change in other prices.