Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 20-39)



Mrs Lawrence

  20. This documentation refers to revenues growing by a healthy 2.7 per cent for Consignia, but costs are growing at 13 per cent. I do not know whether you dispute that figure or agree with it, but if you do, can you give an indication of why that should be, so that we can consider it further?
  (Mr Roberts) There was one particular year at that level, and Marisa may have the figures.
  (Ms Cassoni) It was 2000-01.
  (Mr Roberts) There was one year, for reasons that we can show you—if you look at the year that has just gone, although costs are slightly ahead of revenue, it is no more than half a per cent.
  (Ms Cassoni) Costs are growing at 4 per cent, just slightly ahead of revenues.
  (Mr Roberts) I can give you a breakdown of that one year when there was that big change.

Mr Berry

  21. Turning to Post Office Counters, after years of making profits it is now making losses. Postwatch, in their submission to the Committee, point out that you have a weekly 28 million customers. They criticise management failure, as being the reason for that opportunity not being exploited. They refer to not changing trading hours to make them more acceptable to consumers. However, the message I get from Post Office Counters is that the case for so-called rationalisation of urban post offices is entirely about the effects of benefit changes that will take place in the future. Is it the fact, as Postwatch contend, that the financial problems that have arisen are as a result of management mistakes in the past as much as anything that may or may not happen in the future?
  (Mr Roberts) Inevitably, there will be management mistakes, but the best independent review of that is when the Performance Innovation Unit produced a report about two years ago, when they looked at the whole of the Counters network. Their view was that they could not discover any area of new business that we had not looked at, compared to other countries and other post offices. Their view was more around the usage of post offices and changing social habits; and, therefore, they had more worries about viability of the urban network than anything else. The biggest impact on our finances is the impact of the Horizon scheme, which turned an organisation or company that was fairly consistently making, before that, profits of around £20 million to £30 million per year, into one which took a big hit because of that project and then has added to operating costs year on year on year. If you get the change to ACT, which will affect at least 30-40 per cent of the revenue, it is still quite difficult to replace all of that. A lot of work has gone into looking at banking and other things. While I am not going to sit in front of this Committee and say that management did not make any mistakes, to say that it was all about management mistakes is going too far. I think a lot of very good work went in to preserving activity at Post Office Counters, both the sub-offices and main offices; and, as a result of that, we were profitable until we made the change with the Horizon scheme, which we debated with this Committee in quite some detail.

  22. Can I ask you about the effects of the rationalisation of the urban post office network? What are your thoughts on that and the impact that it will have on your financial position?
  (Mr Roberts) The year before last, what happened, in the light of that report, was that the Government set aside something like £270 million, which was to be used in particular to help to make changes in the urban network, and it made the distinction between urban deprived areas—the ten per cent most deprived wards in the country—and the rest of the urban network. We are talking about nearly 8,000 post offices. This was on the back of the fact that it did not believe—and nor did we—that we could really run that urban network viably. That money is still there. The Government has got to go to the European Commission, to make sure that if we do the kind of deals that allow some sub-postmasters to retire, that is not state aid. That has to be cleared, and if it is cleared, I gather there has to be a debate in the House of Commons about whether it would be right for that money to be used. If it is, then we would want to find out which sub-postmasters might wish to retire, and through a lot of locational analysis we could then combine some post offices, and merge post offices so that we have bigger ones. We would find out which sub-postmasters would be prepared to take on another office, if we were able to give them some grants out of money that we have in mind. Through that, we would make changes to the network, which in the urban areas has been pretty static over the last ten years. It is very important to try and change it because, if not, there will be areas where the town has changed and there are a lot of small-ish urban post offices that just do not make any money. We do not yet know what the impact on our finances will be because we have only just started the process of asking sub-postmasters whether they would be prepared to look at these changes. We are doing it with the Federation of Sub-Postmasters. Nobody would be forced to make a change; it will be voluntary. We are dependent on having those funds available to make the changes in the first place, so we are very much at the start of this particular road. Some of the speculation about what might happen is just that at the moment—speculation.

  23. So there is no timescale for the specific savings that you have in mind?
  (Mr Roberts) Until we know we have the money, we cannot really say. We would like to get into this over the next couple of years. If we are going to make changes, the sooner the better, but we are dependent on having the kind of clearance we have talked about. We cannot start anything until we know the money is available. We can plan and talk to sub-postmasters in urban areas and find out what their attitude will be. We are looking at areas where we can make changes, but nothing practical can be done until we are clear that the money is there.

  24. We had an exchange of views about the consultation process for branch transfers and closures last time. You quite rightly pointed out to me that under the existing code of practice Consignia does not consult on the decision, but on the possible implications, and we had a difference of opinion about the good sense of that. Postwatch, in their evidence to us on the same day, said that they were engaged in discussions with Consignia about a new form of consultation that would involve consumers at the early strategic decision-making level; there would be a consultation in relation to its strategy for urban branches and sub-post offices, in a particular area. Has there been agreement on a new, improved form of consultation about the pattern of urban post offices?
  (Mr Roberts) I believe we are almost there. The new consultation process is very much geared to what we have been talking about. It would come in as we begin that process, assuming we begin it. The last I heard—and Postwatch may be able to tell you better than I can—is that the intention is to bring that to a head either this month or next month so that it is there in advance before any changes happen on the ground, or any of the proposed changes are made on the ground.

  25. There are changes taking place as we speak, under the old system, so you appreciate the urgency from my point of view, and perhaps from Postwatch's point of view?
  (Mr Leighton) It is very important for us, trying to understand the financing of this business, to keep these things in the macro. The post office network made roughly £20 million in 10 years; it now loses £50 million because of the £100 million of operating costs in Horizon. The issue for us going forward is that a large slug of our revenues disappears. In the numbers we have looked at in terms of some of the submissions to the Regulator, we assume not only does it go back to profitability, but actually in the strategic plan, as a result of the many initiatives, it makes about £130 million profit. The thing I would be most concerned with about going forward, from our perspective—and therefore it is a good thing to think about—is turn-around. This is on products that are as yet unproven. The real issue for us, which is the work that we are really getting into now, is, when you really look at taking away ACT payments what really substitutes for that business. Our plan sees a huge acceleration in profit, not going back to the levels that it was running at before. The uncertainty among the sub-postmasters is the big issue and the thing that bothers them the most. They are thinking: "Hang on; how viable is my business going to be, going forward? What are the products that I am going to be able to sell?" That is what they are most concerned about, and that is what will drive in terms of preference. It will be a judgment call on their behalf; they will decide whether they are comfortable about these businesses, going forward. That is the real issue for us to grapple with.


  26. Mr Leighton, you made your name as a retailer. You are now responsible for Post Office Counters. What do you think of them?
  (Mr Leighton) I was in two yesterday. It is the normal thing, which is that they are very mixed.

  27. You are responsible for them, as an organisation.
  (Mr Leighton) Yes, and that is one of the things we need to do. As you know, we have just appointed a new CEO, David Mills, who is responsible for the network. There is, without any doubt, opportunity. I went to see the sub-postmasters and talked to them very candidly about the same thing, which is that there are two ways: one is that they generate income from the transactions that they do for us; and, secondly, they generate income from the transactions they do outside of us. There are some very good examples of some very good post offices that are also retail outlets, which clearly are doing extremely well. One of the things that we have to try and do—and have done to a degree but need to do more of—is to give them more of the basic retailing skills and the opportunity to strategically line up with a number of people like symbol groups who can help them, particularly on the other side of their business. Our responsibility is two-fold, not just to look after the products that they sell for us, but to see how we can help them become better at retailing generally. Without any doubt, the economics do not stack up unless we can get them to generate some more income from other areas of the business. Rest assured, Chairman, that that is one thing that is really on our agenda.

  28. It seems to us that the energy of the old Post Office was as much directed to closing post offices as anything else, and any ingenuity was involved in trying to provide a PR veneer on what was a disagreeable process; rather than seeing any major improvement in what ought to be a retail outlet that is an asset. Camelot has a very sophisticated computer programme for locational analysis. It determines where they should have their lottery ticket dispensing equipment. Account is given to population mix et cetera. Is that the approach that you would envisage Post Office Counters and the sub-postmaster empire being subject to? Would that not be a more rational way to do it because it seems that some post offices are there because they are there? They are not there because they fulfil any retailing or commercial function.
  (Mr Roberts) I agree with that. Historically, they are there because they are there; you are absolutely right, Chairman. We have been using locational analysis, and we want to use it more if we are going to make these changes in urban areas. The sub-offices have been around since the turn of the century and many of them have been in family hands for that period. Many of them have stayed in places where they are making not a very good living on a combination of their private business and the business they get from us. I agree with the PIU report, and I think we need to make changes, but they have got to be against the background of having, as Government wants, a very large, very effective network of post offices, and that is very much what we are trying to do.
  (Mr Leighton) The issue for us is how we can protect the rural piece. Again, there are 170 different products and services that each one of these sells. We need to know which of those is the most profitable and which ones are not. It sounds very simple, because it generally is, but this is quite a simple business but it is very easy to make it very complicated. That is why we are trying to bring things up to the macro level all the time.

Mr Hoyle

  29. As you say, some of the offices are in the wrong place and maybe new post offices should be opened to be in the right place. What is your expected fall-out of urban post offices?
  (Mr Roberts) I do not think we yet know, Mr Hoyle, because we are not going to force anybody out, and it will very much depend on whether people are prepared to retire or prepared to look differently at the business. I really would not want to speculate because we are very much at the beginning of that process. I guess there has to be a little bit of doubt. Government has got to clear the fact that the money is available; if it is not available, we will not be able to even start on this process. We really are very much at the beginning of it. What you may have seen within the last week was us writing quite openly to our sub-postmasters, asking them to express some preferences about their future. Some 8,000 replies have to come back, and then we can really start looking. We will have to do it in every individual area, to see what the impact might be. If you will forgive me on this occasion, I will not speculate.

  30. How many new post offices do you expect to open?
  (Mr Roberts) We have talked about mergers, and particularly, going back to the Chairman's point about locational analysis. If we have two offices in the wrong place, it may be that we would close two and open a new one, and try to get it in the best retail position for that area. That is why your point about talking to Postwatch in this kind of strategic consultation is very important. If it is going to be serious, then we do have to take the consumer view about getting it right. If you are asking if there will be a net increase in numbers, I do not think there will be. If we are talking about getting post offices in the best place, yes, that is what we are going to try and do. That is why it will take us some time to get there, because it will change from area to area and town to town.

  31. We will not see an increase but we will see a reduction, but you will not say how many.
  (Mr Roberts) To be perfectly fair, yes, that has got to be the answer.

  32. Can I just move on to the Universal Service Obligation that everybody holds up as what we expect to see, and put this to you: I believe that Royal Mail is a quality service, and a service that is well respected; but are you preparing to reduce that service offered by Royal Mail to the levels in Consignia's licence?
  (Mr Roberts) The only area at the moment where, again, we have started to consult with Postwatch, Postcomm and want to run pilots on, which could be seen as something like that, is where we are talking about the possibility of delivering once in the mornings, as opposed to twice. That is very much in line with the licence and is also in line with what happens throughout the rest of Europe and most developed postal administrations. They only do one delivery, because the second delivery is less and less economic; you spend about 30 per cent of the costs for 4 per cent of the mail. That is about the only place where we are looking to get closer to the licence. The other things that are in the licence—unless anybody wants to correct me—we have no plans to reduce towards the licence, which is the basic minimum.

  33. So all that we expect of Royal Mail at the moment will continue with the exception of second delivery?
  (Mr Roberts) That is right.
  (Mr Sweetman) I am just going through the list. Currently, we aim to complete delivery by 9.30 and that will be relaxed into a single delivery throughout the morning.
  (Mr Roberts) That is the only thing.

  34. Another area of concern is that at the moment we benefit from having at least two collections. Will that continue? That will not be reduced to one in certain areas, will it? Will we see a pepperpot of service where some areas will still see regular collections but other areas will not?
  (Mr Roberts) No, there is no question of any area not having regular collections. What has happened is that in some places the 8 am collection, the very earliest collection of the day, normally in town areas—in some cases we have not made that collection or have ceased that collection, because there is nowhere for that mail to go. What happened in the past is that we made an early collection because the mail had to be sorted very early, to get it out of post offices to collect and therefore get there the next day. As automation has come in to the processing centres, and we therefore do it quicker, you do not need to collect as early. There is no impact on service to the customer; the mail still gets out of the main processing centre the same day; and where we do not need to collect it, in certain places we have ceased that collection. There is no plan at all to stop having regular collections of the pattern that I think you are alluding to. There is no great policy to try and cut collections back to one a day, for example.


  35. What about Saturday collections?
  (Mr Roberts) No change.

  36. Why not?
  (Mr Roberts) Because on Saturday and Sunday we do collect and we do get some of the mail forward. You also get away from the enormous peak on Monday morning because that mail is then in the office to be handled.

  37. What about Saturday deliveries?
  (Mr Roberts) There is no plan to change Saturday deliveries.

  38. Although the workers would like a five-day week.
  (Mr Roberts) Yes, they would, and one of the things that we can do, Chairman, going through this single delivery in the morning, is that we believe we can create five-day weeks, although it may be an attendance over six days because your day off may not be Saturday; but five-day weeks for virtually all, if not all, delivery postmen.

  39. What about junk mail only on Saturday?
  (Mr Roberts) Are you suggesting we do it or not?

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 12 August 2002