Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 40-59)

MR ALLAN LEIGHTON, MR JOHN ROBERTS CBE, MS MARISA CASSONI AND MR STUART SWEETMAN

TUESDAY 16 APRIL 2002

  40. At the moment, I suspect that there is no rationale to it at all, but it has been suggested that the take-up of junk mail by consumers is greater on a Saturday because they do not go to work by and large, and that the people who like to have things delivered on a Saturday get a higher take-up of the potential selling. Therefore it could be suggested in marketing terms that it would be better to deliver only junk mail on a Saturday, when people have the time to read the stuff and throw it away slowly rather than quickly, and fewer of them throw it away. Has this ever crossed your desk as an issue before? Some people think that this is of some commercial value.
  (Mr Leighton) The only issue is that you should remember this is a logistics business and the whole P&L is driven by its ability to handle items efficiently. That is the big driver. Clearly, therefore, two things need to happen: firstly, we need to run it in the most efficient way we can, and to a degree you need an even spread of distribution, almost day-by-day, because that drives your fixed asset base much better than the other way round; secondly, cost has to come out, without any doubt at all, but it cannot be at the detriment of service. In the end, we have to improve our service levels as we take our costs out. That is what great businesses do. It is very easy to do one or the other; the trick is to be able to do both. In anything to do with service, our plan is to try and make that better. However, at the same time there is the point of the second deliveries, which is a very important point for everybody to grasp. The key number is 4 per cent of the revenue and 30 per cent of the cost. It is nuts. Therefore, we are looking to drive efficiency in the areas where we do not undermine the service of the USO. Also, remember that USO is ten per cent of the volume and 90 per cent is non-USO.

Mr Hoyle

  41. It is very important; I understand that cost is everything and it is about reducing those costs. Can we ensure that in some areas where it is more costly, you will not look to reduce the service there because those areas cost more than other areas? That will be important. The other thing is that you are doing away with the second post: are you aware that there have been a lot of concerns expressed by small businesses. Are you working with small businesses to overcome their problems and issues, to ensure that they will continue in business as well?
  (Mr Roberts) Yes, we are working very closely with the Federation of Small Businesses, Mr Hoyle. The idea of the pilots, once they start, is to try and flush out the kind of problems that you are talking about. We are not just saying it is going to happen; we really do want to try and understand—although I had a debate about it in a different committee room, where somebody said to me that everybody will be bankrupt because their mail will be an hour later. I think we have to work at these issues. I know it is important for people working from home.

Sir Robert Smith

  42. Mr Leighton is rightly talking about the big picture. At the moment, you are a universal public service organisation, but in a few years' time, having been exposed to competition, or in 12 months' time, with more information about your operation, how will you restrain yourselves from reducing, where it does not matter, to the bottom line, to the bare minimum of the licence?
  (Mr Leighton) There are two observations. Part of our issue is that we have had an identity crisis: we do not know what we are; we do not know whether we are a business, a public service, or whatever. That is why often we end up where we are. Primarily, this is a business that provides a public service. The fact that it provides a public service should help the business and should also help the business provide the public service; so the two things are very connected. Therefore, everything we do has to have the public service piece in the back of our mind. It should be a major piece of competitive edge rather than a weight around our neck, which is often how it comes across, and is largely the way we should do it. At the same time, we have to get after the other aspects of the business and drive profitability up. My answer is that if you think of this business as three separate businesses, Royal Mail, Parcelforce and the network, if we think of those in some detail then it is possible to connect the public element.

  43. A long time ago, obviously, telecoms went down the route of competition, and there you have got a service. A constituent of mine lives in a rural area trying to run a tourist/farming business, and when he cannot get his modem to connect to the Internet without hanging up, he is told by BT that under the Universal Service Obligation, they are not required to because the Universal Service Obligation is for voice telephony, and that it is basically data. My worry is that in ten years' time you will be coming here and saying, "to make our operation efficient and to deal with the competition, with all the information we have now to expose our costs and operation, we should not be going beyond the licence in those areas where we are not facing competition because, obviously, that is dead money in commercial terms".
  (Mr Leighton) You heard from John that our intention is that within the letter of the USO that is what we intend to do. Let me tell you, it is much more embarrassing to come here and tell you we are losing £1 million a day, and it is much more embarrassing to say that we have already had to talk about 12,000 or 13,000 people being made redundant. It is a pretty difficult thing to do. We cannot get away from the fact—and it is the one thing I can stress to you; this business cannot continue to go on as it is. It is heading in one direction and it needs major surgery. What we are describing is the way in which we intend to do that. Over the next two or three years the first thing we intend to do is get ourselves back to the situation of some profitability, with people who have certainty in the business and do not feel completely demoralised. We can generate some cash and improve our service at the same time. That is where we have got to be. That will take us two to three years. When we get to that stage, we will talk again about what we are going to do next, but at the moment we have to be very focused on making sure that the thing exists at all. That is the issue.

Mr Hammond

  44. Taking you back to the figures you quoted on the second delivery, they sound very dramatic: 4 per cent of the volume, 30 per cent of the costs. Have you a figure for the impact on the bottom line if you abandon the second delivery but retain an am single delivery? What would that single measure do to the bottom line?
  (Mr Roberts) It will be some hundreds of millions of pounds, we believe. The pilots that we are doing now are to try and pin that down, because it would depend entirely on how we delivered, how we did business, and what we did with small businesses, as Mr Hoyle said. Certainly, the overall effect could be some several hundred million pounds, if we did it.

  45. Would you recognise that probably the bigger issue for business is the time of the single delivery rather than the second delivery?
  (Mr Roberts) Yes.

  46. Is it the case that the saving can be extracted from abandoning the second delivery without having to spread the single delivery throughout the day?
  (Mr Roberts) We think it can be done if you spread the single delivery throughout the morning in urban areas, and also that you give businesses an earlier delivery. Businesses would get delivery roughly at the same time as now, but we would spread residential deliveries across the morning. We would be making a distinction between business and residential. We believe that can be done, but, again, we are back to the pilots. We have to test this out on the ground. We have to consult with Postwatch and Postcomm to make sure that they understand exactly what we are doing, and that is the whole point of doing the pilots.

Linda Perham

  47. You are doing the pilot schemes now, are you, or are you going to start them?
  (Mr Roberts) We are in what we hope is the last stage of discussion with the union, which has been basically supportive of the concept. As ever, the devil is in the detail, so we are talking about detail. As soon we get those talks out of the way, the intention would be for the pilots to start within the next month.

  48. There is nothing to report on because they have not started yet. I was just wondering, in view of what we have just been talking about, whether it is worth doing it anyway. Is it worth doing the pilots? It seems as though you are heading down the road of doing this anyway, especially bearing in mind the costs you mentioned.
  (Mr Roberts) Our intention is certainly to do it if possible. It is very important to make the kind of savings we talked about. Also, we do think it is the most effective way to do delivery. We wanted to do the pilots to understand in particular the point Mr Hoyle was making about the series of routes, how many businesses would we deliver up-front; how many small businesses would be affected and how many home-workers. It is getting that kind of data that is important, not to say whether we are going to do it—although, obviously, there has to be a lot of discussion with Postwatch—but to say how we can best do it to get through some of the worries, and demonstrate that we can cope with the vast majority of issues that people are currently worrying about. It is not to say, "shall we, shall we not?"; it is to say, "this is to test it, to show how it can be done and to show what the results are". We need to do it because the last big area in this country where we do things very differently from most other developed countries, and I think less effectively, is the second delivery.

  49. Mr Hoyle talked about the Federation of Small Businesses. Have you any idea about public opinion, without doing the pilots? Is it opposed to losing the second delivery?
  (Mr Roberts) I think it is very mixed. There are many people who leave home early in the morning, before the morning delivery is made, and, as a result, their perception of mail delivery is that the mail is delivered in the evening effectively, but it is not—it is when they get it. There will be others who desperately feel that to do this would be to go backwards because they are used to getting mail at a particular time of the morning. We have to try and balance between those two things. We will undoubtedly upset some people who would very much like to have mail at nine as opposed to eleven, but I think we are in a position now where we have to try and make that balance between doing things that are much more efficient for us, but at the same time providing a service to people which, hopefully when they have got used to it, will not mean a major deterioration of what they have had over the years. There is an element about the Post Office that I know to my cost: everybody has got used to it over the years, and people in general do not like us to change things, and I can understand why. There is this feeling of, "why do you need to change it?" We need to change it because it costs an awful lot of money to do it this way, and over the years second delivery has gone from something like ten per cent or 15 per cent of mail, down to about 4 per cent. It really is not worth doing it. If you do not do that, then you need to spread it to make it as effective as you can.

  50. Finally, you mentioned business and residential and delivery. I have a lot of small shopping parades in my area, and I am not quite sure how this would work where there is a residential area and then a stretch of businesses, where there are small pockets as opposed to areas where you have a large amount of industry or business?
  (Mr Roberts) Without getting too technical, a postman when he does his delivery round has an individual round to him and one of the things we would have to do would be look at the way in which we constructed all those rounds. What we have in mind at the moment is maybe it is going to be volume which will determine whether something is business or residential, in other words the amount of mail they get on average, and you would have to replan the way in which the postman does the delivery so that maybe somebody does all businesses and somebody does all the residential, and we have been testing that already so it is capable of being done. I can separately or later explain how we might do it, but it can be done is perhaps the easiest answer to your question at the moment.

  51. It would be helpful to know that.
  (Mr Leighton) If you ask anybody, "You get this today, we are going to take it away from you, do you like it?", they will all say "No". There is a one hundred per cent guarantee that everybody will say it is terrible. Is it less of a service than people get today? Yes, it is, so let us be clear about that. However, this is being done for economical reasons and it is such a small part of the revenue that, on Mr Hammond's point, for us the "what" is decided. The issue is the "how", and how can we do that in a way that particularly the small businesses caters for them in less of a dramatic way. But we have to do this. Also, some of the reasons we are doing this is to restore and repair the financial position of where we are. Our intention is to invest some of that money back. This is not just take the money and stick it on the bottom line, because what has also happened to this organisation is it has been starved of investment and, unless we start investing some of this money soon, then we will be coming every year and having exactly the same conversation in ten years' time, so we have to be pretty brutal about this.

Mr Hammond

  52. Can I ask you about the impact of competition on rural services? Consultants to Postcomm indicated in their findings that competition need not harm rural services because the cost of providing a rural postal service is not significantly dissimilar from the cost of providing an urban postal service. Now, that is a highly counter-intuitive conclusion, and I wonder whether you agree with that and, if you do not, what have they missed?
  (Ms Cassoni) As Allan said at the beginning, it depends how you cut the costs and we are currently looking at that, but if we analyse the cost of delivering a letter it depends on the geographical mix. If you have a distribution whereby there is quite a lot of urban and some rural, for example, it will cost you about 26p to deliver a First Class letter. If you look at where the mix is a lot of rural and very little urban, then it can go as high as 44p/45p, so it depends on the geographical split of the country. In certain areas it certainly costs us more to deliver than we earn. In other areas where the mix is different, we can cover the costs.

  53. So you would disagree that there is no need for competition to harm rural services?
  (Ms Cassoni) I would suggest that basically it can harm rural services because of the economics I have just described.

  54. Can or will?
  (Ms Cassoni) If it is introduced as proposed, it will.
  (Mr Leighton) It depends on the impact but clearly it must cost more money to go into outlying districts than to closer districts. It is as simple as that.

  55. Given that finding, have you commissioned any work to counter those conclusions to demonstrate why they are wrong, or how they are wrong?
  (Ms Cassoni) We are working on the costings to try and demonstrate that. As Allan said, unfortunately the costs of the business were not structured in such a way to have that data readily available.

Chairman

  56. Is not a major determinant in costs the number of hands that touch the letter, and that need not necessarily be an issue in respect of rural or urban? You could have urban mail that had to be handled by a lot of people just as much as you could rural.
  (Mr Roberts) I think it would, Chairman, you are quite right, but the biggest difference of all is the delivery cost, as you will know from your own constituency, between delivering something which goes into Edinburgh for delivery in Edinburgh or goes into one of our mail centres for delivery some way away, particularly as most rural deliveries are made by a van as opposed to a man or lady walking round the streets. That is where you see the biggest differential. What Marisa was talking about is the differential in delivery costs in particular, and that is where you see the major difference, even after it has gone through all your pairs of hands.

Sir Robert Smith

  57. So the 26p and the 44p is the last stage cost?
  (Ms Cassoni) It is the total cost.

  58. The total cost of posting to reaching the rural?
  (Ms Cassoni) Yes.

  59. So on the 44p you would be seeing a loss, and on the 26p a profit.
  (Ms Cassoni) Yes.


 
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