Examination of Witnesses (Questions 20-39)|
CBE, MS MARISA
TUESDAY 16 APRIL 2002
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 youif 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.
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 areasthe ten per cent
most deprived wards in the countryand 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 believeand
nor did wethat 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 momentspeculation.
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
(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 heardand Postwatch may be able
to tell you better than I canis 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 perspectiveand
therefore it is a good thing to think aboutis 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 doand have done to a degree but need
to do more ofis 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.
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
(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
(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
(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 licenceunless anybody wants to correct mewe
have no plans to reduce towards the licence, which is the basic
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 areasin 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
(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?