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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1841-ii
House of COMMONS
TAKEN BEFORE the
Business, Innovation and Skills Committee
Stamp Price Regulations
Tuesday 28 February 2012
Evidence heard in Public Questions 74 - 154
USE OF THE TRANSCRIPT
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Taken before the Business, Innovation and Skills Committee
on Tuesday 28 February 2012
Mr Adrian Bailey (Chair)
Mr Brian Binley
Examination of Witness
Witness: Moya Greene, CEO, Royal Mail, gave evidence.
Q74 Chair: Good morning, Moya, and thank you very much for coming to speak to the Committee. Could I just ask you to introduce yourself so that we can check voice levels for transcription purposes?
Moya Greene: Good morning Chairman, and members of the Committee. My name is Moya Greene. I am the CEO of Royal Mail.
Q75 Chair: Thanks very much. I am going to start straight away; I will open the questioning. It caused some surprise at our meeting with Ofcom last week, which I have no doubt that you followed, when Ofcom did not seem to be able to tell us what cost levels should be covered by a second class stamp-the service cost. Can you?
Moya Greene: It is quite complex, Mr Chairman, because this is a network business and it is a vast business; it has to be in order to deliver the service that we do to 29 million addresses every day, six days a week, with the on-time performance standards that have been set. Because it is such a vast network, involving 59 mail processing facilities, 11 regional facilities, 35,000 vehicles, 54 flights every day, 1,350 delivery offices, 11,500 postal outlets, 115,000 collection points-it is a vast network-it is very difficult to say what cost is attributable to a single segment of the product that we carry. I can tell you what the whole universal service costs: the universal service that we provide is probably £6.5 billion a year. But it is very difficult to say what would be attributable to a single second class stamp.
Q76 Chair: You must have done some sort of calculation of at what level you needed to pitch the second class related to the volume to cover these costs. I appreciate to a certain extent it would depend on the price of a first class stamp as well, and the volume levels for first class mail. What research have you done?
Moya Greene: For pricing of all of our products, we are looking to cover our costs and to have a commercial rate of return. As you know, this is something we have not been able to do for a number of years in the core business. In fact, the core business has lost about £1 billion in the past four years and has been cash negative until very recently; it just turned cash positive. Across the entire product set, we look to cover all of the costs and to achieve a commercial rate of return. We do a huge amount of analysis when we price anything-when we price any of our products. We have to look at the competitive landscape; we have to be prudent; we have to be aware of what our customers are prepared to pay for our service relative to other options that they might have, and we are very pleased to say that we are still, for all of our products, the highest value in the UK marketplace.
Q77 Chair: How do you define value in this context?
Moya Greene: If you look at the price of a second class stamp or a first class stamp or a packet or a parcel, and you consider the kind of service, the quality of service, that Royal Mail delivers, Royal Mail is the only participant in the market that collects the mail from all of these points every day and delivers to 29 million addresses every day; the number of addresses goes up by about 300,000 every year. We are the only one that delivers to minimum service standards across 11 different product areas. We have some of the highest minimum service standards in the world; we have some of the lowest rates in the world. In the case of the second class stamp, amongst 27 European countries only half of them have a second class stamp, and of the ones that do, the second class stamp is not uncommonly more than our first class stamp.
If we look at what our customers can expect to receive by way of service from Royal Mail, and if we look at the cost of that service and we compare it with other services, for example, the price of a first class stamp today is only about 25% of the cost of a single fare on the bus in London. People in Britain enjoy a very high quality service at a very reasonable price. There are very few things that one can buy for 46p today, Mr Chairman, and I would say for us to be able to take a letter from any part of the UK and to send it anywhere in the UK, overnight delivery, for 46p is very high value.
Q78 Chair: I suppose, crudely, the approach has to be the projected volume of first class mail plus the projected volume of second class mail, multiplied by the price of the respective stamps, factoring in a potential displacement cost of any increase. Would that be a reasonable basis for how the price of stamps is calculated?
Moya Greene: Those are some of the considerations, yes, but we have to look at all segments of the traffic that we have, all of the costs of universal service, and we have to look at the competitive landscape as well. We have to look at all factors when we are pricing our products.
Q79 Chair: I understand that these would have to be factored into the calculation. Arising from that, where would you like the second class price to be-not where you are allowed to have it, but where would you like it to be, to cover those costs?
Moya Greene: I am not in a position to say just yet, but given that we have lost in the past four years £1 billion in the core business, and that until very recently Royal Mail was cash negative, and therefore universal service has been in peril for some time-we have not had a sufficient amount of capital available to us to modernise the business-I can say that prices in the UK will have to come up.
Q80 Chair: Yes, that is generally understood. Given the losses you have made, what is your calculation for how much you would have to increase the price of a second class stamp, assuming all other factors were equal, to cover that loss?
Moya Greene: We do not look at it in isolation. As I mentioned, because it is a network business, we look at the whole cost of the network, the whole cost of universal service, and we try to take account of the competitive environment we are in and price all of our products in a way to cover those costs with a commercial rate of return.
Q81 Chair: You know from your current accounts the amount that you lost; you know the price of the stamps at the moment. Keeping all the other factors equal, what would have been the increase in the cost of a stamp necessary to wipe out that deficit?
Moya Greene: I cannot tell you offhand, Mr Chairman; I just cannot tell you that offhand.
Q82 Chair: Could you give us a written calculation of it afterwards?
Moya Greene: I can try, but as I mentioned to you, we do not look at products in isolation like that. We look at the entire product suite, the competitive landscape, the costs of universal service, and we are seeking to put our prices for all of our products at a level that would cover all of those costs.
Chair: I understand that, and it would be perfectly valid to put that as a qualifier, but it still must be possible to do a theoretical, statistical projection of what price would be needed to wipe out that particular deficit. I am going to bring in Brian Binley, and then Simon Kirby has indicated he would also like to ask a supplementary on that.
Q83 Mr Binley: I really am confused and I need your help, Ms Greene. I am a simple small businessman, who looks at his monthly P&L, looks at his budget centres, analyses his cash flow, has a knowledge of his wage and salary outgoings, and I know what each level of service provision my company provides costs. If I did not, I could not run my company successfully, because I would not know where the problems were-where the drag was on gaining additional profitability. Any business, to my mind, would want to know that information. I just wonder whether you do not want to talk about it, because it is either that or you do not have at your fingertips the information necessary to run your business. Which is it?
Moya Greene: I have explained it as best I can.
Q84 Mr Binley: You have not, or I would not have asked the question, so go from that point.
Moya Greene: It is a network business.
Q85 Mr Binley: No, you have said that. We have heard all of your talk; I am saying I do not understand the situation. Go from my question please.
Moya Greene: Let me see how else I can try to say-
Q86 Mr Binley: I asked whether you did not know, and therefore that is an inefficiency in your management, or whether you did not want to say for some reason, which is a different reason altogether. Which of those two is it?
Moya Greene: We do not attribute costs in that way, Mr Binley.
Mr Binley: Then that may be the reason why you have had so much trouble in the past, Ms Greene.
Q87 Simon Kirby: If you do not attribute costs in that way, could I put it to you that it may be possible that you are already making a profit on second class stamps, and indeed first class stamps, and there is no need for any increase at all? In the absence of that information, how do you justify any increase at all?
Moya Greene: Because we look at the entire UK business, the UK core business, and in the UK core business, our accounts-
Q88 Simon Kirby: If I may interrupt you, the people who queue up in Post Offices to buy stamps to send important letters and to send cheques off, often older people who do not have a great deal of money, are not frankly very interested in your inefficient business where you are losing money. They will want to know whether or not you are making a profit on the stamp that they buy. I put it to you that, if you are not able today to tell us that you need to charge a certain level to break even on either a second class or first class stamp, you cannot justify any increase at all.
Moya Greene: Our reported financial statements make it very clear, Mr Kirby, that we are losing money and have been losing money in the core universal service business, which includes taking mail via second class service. In fact, the amounts are very clearly stated. Last year alone in the core business we lost £120 million and, as I mentioned, over the last four years we have lost £1 billion. That is how we keep our accounts-they are there for all to see; they are audited financial statements-but we do not publish or keep accounts on a specific product such as the second class stamp. We look at the whole core business, which includes second class mailing-of course it includes it-but there are other segments and products in that category as well, and we are able to say what the losses are for the whole UK business.
Q89 Chair: But surely it is possible to at least work out a theoretical calculation there.
Moya Greene: Mr Bailey, it may be, and I can take that back if you wish, but I am saying that we do not do that as a matter of course.
Q90 Chair: Could you? It might inform our deliberations. Can I just put it to you that your vagueness on this a reflection that there are certain areas of information that you cannot discuss publicly because competitors are going to be listening?
Moya Greene: No, that is not the reason for my explanation. My explanation was given to you because that is what I know. That is how we keep the accounts in the business.
Q91 Chair: Okay. Lifting the cap on first class is likely to take the UK overnight from one of the lowest first class stamp prices in the EU to the highest. Ofcom has said there is no observable precedent for this. In this case, "Anything could happen"-that is an Ofcom quote. How are you planning for that?
Moya Greene: We have done a lot of work, analytical work-like any business would-to price all of our products, including the first class letter. We are very mindful of the options that our customers have, and in fact, as you know, most business customers do not pay that amount. There is quite a convention of discounting in the UK market for large volume mailers who are able to presort their mailings for us. We spend an awful lot of time working through elasticity information, trying to understand where the tipping points might be-how much more might go via electronic communication.
We have seen very significant declines, a structural decline, in this industry, not just here in the UK but in all other places as well, as people resort to other means of communication to get their messages to their customers. We look at all of these factors; we look at what has happened in other countries, and we, of course, look in the whole broad suite of products that we have to cover all of our costs, including a commercial rate of return. The reason why things are difficult in calculating elasticities in our business today is because it is a business that is in structural decline.
Q92 Mr Binley: I just want to know how you can assess discount when you have no idea of the cost.
Moya Greene: We do have some idea of our costs; this is of course the case. For example, we are able to figure out what some of our upstream costs are. But I have to say that, in the prior regulatory model, oftentimes costs were quite artificially attributed. We are able, for some aspects-for example we can figure out what the sortation side may cost; we can figure out what 100,000 feet on the street will cost-but we cannot figure out what is the cost attributable to a single second class letter, or at least we have not yet done that, Mr Bailey.
Mr Binley: So nobody asked that question?
Q93 Chair: No, but it is reasonable to say you should be able to figure out what the price would be to cover those costs-the volume of letters and the price of the stamp to go on them. I would have thought there was a simple formula that you could use.
Moya Greene: It is not a simple formula.
Q94 Chair: Ofcom has said that basically prices should be fixed at an appropriate level. You must have done some sort of calculation to determine what in theory would be an appropriate level to cover those costs.
Moya Greene: Yes, of course. We have a very big team that works on pricing and looks at all of the factors I have mentioned that go into our view of what is a reasonable amount for us to charge for a product. This pricing team looks at everything: the competitive landscape, the options that are available, including electronic transmission of messages; historical rates of decline; and what has happened in other countries when similar products have been priced at different levels. But there is no question that it is a very complex matter, particularly when you are in a business that has undergone the kind of structural decline that mailings have experienced.
Q95 Ann McKechin: Ms Greene, you have stated to the Committee that you are unable to break down per category of product where the actual cost is.
Moya Greene: I said that we do not do that.
Q96 Ann McKechin: Yes, okay, but given that you have a basket of products that you deliver through the Royal Mail service, by what percentage on average do you think you need to increase the price of all those products grouped together to achieve the level of profit that Royal Mail requires to be sustainable? Presumably you do have a figure for an approximate average increase in price across the range that you need to meet your costs. What would that be?
Moya Greene: Overall, we would need to improve our revenue position via all of our products by about £250 million to £300 million, in order for us to cover all of our costs. Then of course we would need additional on top of that to achieve a commercial rate of return.
Q97 Ann McKechin: What percentage are we talking about, then?
Moya Greene: If we take out the Post Office, overall we are probably talking about an increase of 8% or 9%.
Q98 Ann McKechin: 8% or 9%. Thank you very much.
Moya Greene: Overall.
Q99 Chair: What percentage would you reasonably add for a commercial rate of return?
Moya Greene: If we look at other postal administrations that are able to access capital, a reasonable commercial rate of return in this business would be between 10% and 15%.
Q100 Chair: So 8% or 9% and then 10% and 15%. We are beginning to arrive at some sort of statistical basis. You talked about discounting. If you get more pricing freedom-and Ofcom is proposing that you do-will you decrease prices as well as increase them in response to the market situation in different sectors?
Moya Greene: I am certainly not thinking about that right now, Mr Bailey, because the company has been losing so much money. I am looking across the entire suite of products; I am looking at the competitive landscape, which is vastly different today from what it was even 10 years ago. As a management team we are looking at every single product and service that we offer in the market and trying to see how we can best price them to retain the loyalty of our customers and to be successful in what is a very complex market.
Q101 Chair: Broadly, you do not think there is any scope in the market for reductions in prices?
Moya Greene: I would not like to be categoric; there may be some services that we could, but I am certainly not thinking that way now, Mr Bailey.
Q102 Paul Blomfield: I must say, I share my colleagues’ incredulity about the approach to pricing. Before I was elected to this place, I ran a much more modest commercial operation, with a turnover of about £9 million but several hundred lines in different areas of business. I cannot imagine how we could have maintained profitability without understanding each of those lines individually, their respective costs and so on. My question is building on your point on elasticity and the work you say you have done around elasticity, and also incorporating the point that my colleague Ann McKechin made a moment ago, to which you replied that, for the overall basket of products, you needed to increase prices by about 8% or 9% to wipe out your deficit. A price increase to 55p for second class mail is a 53% price rise. That is quite out of proportion with the overall level of increase you say you need. I wonder what work you have done around elasticity of demand on second class mail, and where you think the tipping point is in terms of what volume of mail might switch to other communication as a result of a price increase of that order?
Moya Greene: I am not in a position to talk about what the price of the second class stamp will be today, but we have done a lot of work with every single product area-a huge amount of analytical work-to try to anticipate what the behaviour of various categories of customer would be as you increase prices for each and every product and service that we deliver. Yes, we have done that work.
Q103 Paul Blomfield: Because there is a proposal that there should be a 55p cap for second class mail, let us assume theoretically, because I guess you must have done, you took advantage of moving up to that cap. What would be the consequence of customer behaviour if that happened? You must have done some modelling on that.
Moya Greene: When you increase the price of anything, obviously some customers look to the alternatives that they have. In the case of people who are using second class mailing, they can go to an economy mailing, they can change the channel-they do not have to use a stamp. They could go to meter mailing, so they could reduce the price by anywhere from 15% to 20% by choosing to go to a meter. They can look to other forms, other media. If they have sufficient volume and the ability to presort on our behalf, they can reduce the price even further. When we do the elasticity work, we try to anticipate all of the options that a particular category of customer might have in response to any price increase.
Q104 Paul Blomfield: If the price of second class mail did rise to the cap being considered, 55p, what does your work suggest in terms of the falloff in demand?
Moya Greene: There would certainly be some falloff in demand.
Q105 Paul Blomfield: How much?
Moya Greene: I cannot give you the exact number right here.
Q106 Paul Blomfield: Presumably your modelling would give the precise number; could you share it with the Committee in subsequent written evidence?
Moya Greene: I am just thinking-yes, I think we can do that.
Q107 Paul Blomfield: Okay, thanks. On that point, I wonder if a more modest second class price increase to the 49p, 50p level-which Consumer Focus suggest is below the tipping point that might lead the service into a spiral of decline-would signal Royal Mail’s wish to recognise affordability issues and nurture better customer relations.
Moya Greene: We think that we have great customer relations, and as far as affordability goes, I am very sensitive that this is a difficult time for anybody in the UK. Families are having difficulty putting the two ends together at the end of the month, but it is worthwhile to point out for the Committee’s benefit that the average household spends less than £50 a year on postage: about 40p a week. We do not think there is an affordability issue. This is not like electricity or gas, where households have to spend between £1,200 and £1,500 a year. This is really not even like telephone or the internet, where families would easily spend £50 a month. We do not feel there is an affordability issue, and in point of fact the former regulator, Postcomm, had done quite a bit of analytical work with consumers on that very point, and people did not feel there was an affordability issue.
That said, it is always going to be difficult for some people. One of the things we are planning to do for people who have very modest means is keep Christmas mailings in year 2012 at the same price as Christmas mailings in 2011, to recognise that that is the time of the year when about 55% of consumer mailings happen. Whilst we do not think there is a general affordability issue, Mr Blomfield, I do take your point that it is important for all corporations today to realise that this is a difficult time for many families.
Q108 Chair: Can I just pick up on that point? You are effectively telling us that you are going to have a Christmas stamp at the same price as the 2011 stamp.
Moya Greene: That is what we are trying to do.
Q109 Chair: It is an aspiration, not a commitment; is that correct?
Moya Greene: No, I think you can take it as a commitment, Mr Bailey. I have to work through the details of how to do it and how to present it, but it is more than an aspiration.
Chair: That is good news, because I was going to make the point about affordability. Most people probably spend most on stamps at Christmas, and their other commitments are at the heaviest then, so it does become an affordability issue at that point. Paul, can I bring you back in?
Q110 Paul Blomfield: Christmas mail aside, specifically on the point that you do not think there is an affordability issue with second class mail, do you think an observer looking at the process of your pricing consideration might conclude that, if you only need to raise your price levels overall by 8% or 9%, you have made a calculation that you can clobber second class mail users to the tune of 53% because they are still going to stick with you?
Moya Greene: No, I do not think that would be a fair comment, Mr Blomfield. I think it is incredible value to have a letter go anywhere in the United Kingdom, with the service standards and the quality that our people put into the delivery of that letter anywhere, to 29 million addresses every day, in all kinds of weather, at today’s rate of 46 pence. It is incredible value in and of itself, but compared with other postal administrations around the world, it is undeniable value. If this were Germany, it would be close to 60 pence; if it were Italy, it would be even more.
What has happened in the United Kingdom is that the regulatory model was quite a punitive model. There were price controls that went across about 85% of our revenue. Almost every product and service was the subject of price controls, and as a result the cherished, universal service in Britain, this great company-the company that taught the whole world how to do this business-fell into a state of true financial peril to the point where the very service that people have a right to expect of Royal Mail is in jeopardy. So I think we need to put it in that context. It is incredible value and it is just not sufficient to pay the total bill of this very high quality service.
Q111 Simon Kirby: I am very interested in your comparisons from around the world. I noticed from your CV that you were the Chief Executive Officer of the Canada Post Corporation. Am I correct in assuming that first class stamps in Canada from 16 January 2012 are 61 cents, which is some 39p in UK money?
Moya Greene: Not in terms of purchasing price parity. In terms of purchasing price parity, the stamp in Canada is much higher priced than the stamp in the UK.
Chair: Right, can I bring in Nadhim Zahawi now?
Q112 Nadhim Zahawi: Ms Greene, you have made your points very forcefully about value for money. I just want to take you back to the research you conduct and your Consumer Panel. I completely understand the point you make about the average household and the amount they spend on postage. I am really interested in the vulnerable households. What part of your panel is representative of the vulnerable households, the Ds and Es?
Moya Greene: I cannot answer that specifically for you, Mr Zahawi, because I do not know, but I can get that for you. When Consumer Focus and Postcomm did the research, it included several consumer panels. I will attempt to get back to you on that.
Q113 Nadhim Zahawi: Well, I will try to help you. I think your Consumer Panel is about 600, of which your Ds and Es are about 30%, so it is a relatively small number in that sense. In fact it is less than what Consumer Focus would consider a reliable number. Therefore, my question to you is: how would you address or deal with the accusation that the numbers you have supplied to Ofcom are not reliable, especially for those vulnerable groups? That is the just the general Ds and Es, and you do not even split out people who are low users or no users of the internet within that panel.
Moya Greene: I think they are reliable, Mr Zahawi. If I look at the share of weekly income of even vulnerable families that is attributable to post, it is less than 0.25%. I do not want to seem insensitive; I know that for many families any amount, any increase on any purchase, is difficult, but I think we have to put it in context. If we compare it with transportation, heating, telephone or electricity, even for vulnerable families it is a very small share of their weekly expenditure.
Q114 Nadhim Zahawi: Right, but you must be going on your gut instinct because your sample size is too small. I tell you that because I used to run a research company; I would like that as a point of my own declaration. Your sample does not include people who are low or non-users of the internet in your submission, so you cannot know what you have just told me is true.
Moya Greene: Well, I know what the price of a stamp is; I know how many of them are sold. I know what a vulnerable family probably has by way of income per week. I know what that family would be likely to spend on transportation, electricity, gas, telephone and food, and I can compare what they spend on average on postage with all of these other expenditures, and I can tell you that it is a fraction of 1%.
Q115 Nadhim Zahawi: Therefore, the point you have just made is we should throw away all your research from your Consumer Panel because it is unreliable. We should just look at hard data, which you quite rightly just outlined-what the price is and what vulnerable families earn. We should forget looking at your Consumer Panel because it is meaningless.
Moya Greene: I do not agree with that, Mr Zahawi, with respect. I do not think it is meaningless at all. You need several points of validation for anything you do in business, and a focus group is one point of validation. But all of the points of validation that we have used have come together to allow us to conclude that postage in the UK is not an affordability issue, and this is not a conclusion that only we have drawn. This is also a conclusion that Postcomm, the previous regulator, drew, Ofcom has drawn, and that Consumer Focus itself has drawn.
Q116 Nadhim Zahawi: Now I am confused, because I thought your Consumer Panel was quantitative data, not qualitative as in a focus group. How many in your Consumer Panel are vulnerable groups that are low users or non-users of the internet? Can you answer that question?
Moya Greene: I do not know the answer to that question. I will get that for you.
Q117 Nadhim Zahawi: Is it focus group, which is qualitative-i.e. you cannot rely on the hard number-or is it quantitative?
Moya Greene: It is both.
Q118 Nadhim Zahawi: It does both?
Moya Greene: It does both.
Q119 Nadhim Zahawi: Right. Why have you redacted so much of the evidence when it comes to vulnerable consumers in your submission to Ofcom?
Moya Greene: All of the redactions that are in our submission are in response to the sensitivity of the commercial information.
Q120 Nadhim Zahawi: You really think it is that commercially sensitive to provide data on very vulnerable users who nobody else is offering a service to?
Moya Greene: I think vulnerable users have services that are provided by others as well.
Q121 Nadhim Zahawi: Who else provides them with the service that you provide?
Moya Greene: I assume all of the vulnerable consumers have the same choices in the marketplace that anyone else does.
Q122 Nadhim Zahawi: To send a second class letter?
Moya Greene: Well, personal messages now, sadly, are a very small part of the business of Royal Mail.
Q123 Nadhim Zahawi: I do not disagree with you. I opened it by saying you were absolutely right.
Moya Greene: It is only about 6%.
Nadhim Zahawi: I do not disagree with you.
Moya Greene: If I may just continue, Mr Zahawi-and this is true, I think, for vulnerable consumers as it is for any consumer-most personal messages are now not in the mail; they are sent via electronic means. In fact if you look at the share of personal messages overall in the United Kingdom, there are probably 100 billion a year. The share that is attributable to mailing a personal message is far less than 1%. So I think vulnerable consumers have the same options to get their personal messages across as any other consumer, and that is text, telephone and email. I grant you that not everybody has email, but if I look at the statistics that Ofcom publishes on the availability of mobile telephones in the UK, it looks like there are more than two per person. I think vulnerable consumers have access to telephones as well, so it is not accurate to say that vulnerable consumers are not properly represented in our business.
Q124 Nadhim Zahawi: I hear what you say, but the message I take away from that is the message you are sending to vulnerable consumers is: send a text message, do not send a letter-do not bother us with your letter.
Moya Greene: Well, we are absolutely proud to deliver every letter that is given to us, and we have the best people in Britain on the streets of Britain in every town, village and city every day doing just that, so we are very proud. But the truth is that for the past 15 years consumers have had other options and they have used those options to convey their personal messages.
Q125 Nadhim Zahawi: I do not disagree with you. I just want to focus on that very small group who do not have those options. What is your predicted rate of usage fall off for vulnerable and vulnerable low-web-usage groups who might not be able to shift to those other communication methods like text or email?
Moya Greene: I would have to get that exact calculation for you but, as I said, this is not a big part of vulnerable consumers’ weekly expenditure today. We know that 50% of the service all consumers ask of us is at Christmas time, and we are planning to put in place a programme for vulnerable consumers that will retain the same price for Christmas mailings for them-
Q126 Nadhim Zahawi: For one year?
Moya Greene: -as it was this year.
Q127 Nadhim Zahawi: I completely appreciate that, but I hope you also appreciate that this Select Committee worries about vulnerable consumers.
Moya Greene: I do appreciate that.
Q128 Nadhim Zahawi: I would have thought that you and your staff would have had some of that data for us, because you would not have been surprised that we would be focusing on vulnerable consumers when questioning you.
Can I just move on very quickly? You stated that a price cap on standard parcels is unnecessary partly due to consumer choice increasing and, in their evidence, Royal Mail referred to the Parcel2Go website. Have you had a look at the Parcel2Go website, Ms Greene?
Moya Greene: No, I have not. I personally have not.
Q129 Nadhim Zahawi: I suggest you do, because actually there is not much choice for exactly that group I was questioning you about, the vulnerable consumer. There is choice for businesses absolutely when it comes to parcels. When you look at the packages available, other than from you, there is no choice in that, so I suspect you will be surprised to find that submission in your evidence is actually totally wrong.
Moya Greene: Well, we think there are about 50 national players in the parcel business in the UK, and there are literally hundreds of local and regional players in the parcel business. We are very proud that we have a strong share through our company Parcelforce. We are certainly not the lowest price in Parcelforce, but we have the highest customer service rating of them all, so people are prepared to pay for quality.
Last Christmas, not the one just past but the previous one, when we had worse snowfalls than the UK had seen in probably 30 years, there was one company that was out there in all kinds of weather delivering not just for us but on behalf of our competitors who could not in some cases, and that was Royal Mail. So we are pretty proud of the service that we provide in the parcel space, and I think the fact that we have been rewarded with the loyalty of consumers as well as businesses speaks volumes about how good it is. But like everything else, we have to make sure that we are pricing this very high quality service in a way that certainly retains the loyalty of our customers but does not operate as a subsidy to our customers such that we lose money whilst they make money.
Chair: Okay, can I bring in Brian Binley now on vulnerable consumers? Some of the issues you have already touched upon, so do not feel that you need to go over it again. I am conscious that time is marching on. Brian, can I just bring you in?
Q130 Mr Binley: Yes, I think my colleague Nadhim has talked about the way you attempt to estimate the actual effect on vulnerable consumers of the proposed policies, and he has dealt with that pretty well. But I am particularly concerned about the validity of looking at affordability of mail based on comparisons with fuel and water costs. I am particularly concerned with that, bearing in mind the fact that 50% of vulnerable users’ purchases with mail are at Christmas time. We have to recognise the unevenness. You talk about 1% being the cost that it impacts upon their budget, but if you looked at the costs that have impacted upon their budget at Christmas time, it would be sizeably higher. It is that peak and trough scenario that needs to be taken into account too. But I do not understand your comparisons with fuel and water costs. Would another approach be to look at whether families will be willing to stop buying a food item to switch an extra pound to mail services? Is that another way of looking at it?
Moya Greene: Vulnerable consumers are certainly, like any consumer, having to look at all of the things that they want and need to purchase, and make trade-offs all the time. So yes, to that extent, I agree with you. But I just want to point out, though, that people, individual families, whether they are vulnerable or not, do not spend a lot on postage. That is the only point I am trying to make.
Q131 Mr Binley: I understand. I just feel that the way you have presented the argument is not the most effective, quite frankly. I think it brings you into some disrepute, because it seems to me that spreading that sort of information over the sort of time period, when the thing is a much more disjointed process, does not do you a lot of credit, that is all. Can I go on to ask whether you have polled that kind of data at all? It seems to me that your polling has been very limited actually, and that concerns me because you are basing a lot of argument on surveys and polling, when in fact your polling is, from any business perspective, a very limited exercise and not a very focused one, quite frankly. So have you polled the sort of data that I have just talked about?
Moya Greene: Yes, we have relied on quite extensive consumer research that was done by Postcomm and Consumer Focus.
Q132 Mr Binley: Could you let us see it?
Moya Greene: I am quite happy to provide that to you.
Q133 Mr Binley: That would be great. You are suggesting that affordability will only be a serious issue when families are spending as much on stamps as on fuel and water; that is the other side of the coin of the argument you are making. It seems to me to be verging on the ridiculous.
Moya Greene: I agree with you, Mr Binley, that, if I had said that, it would be ridiculous, but that is not what I said.
Q134 Mr Binley: It is what you intimated.
Moya Greene: I said there is no evidence anywhere that there is an affordability issue. There is no evidence on how much people spend or the share of their weekly household income that is attributable to postage based on work that has been done by the former regulator-Postcomm-Consumer Focus or our own research. There is simply no evidence that there is an affordability issue. The price of the first class stamp is 20% of the price of a London bus ticket, so there is no evidence. That is all I am saying.
Q135 Mr Binley: But if the bill is sizeable at Christmas time, that is the point at which it matters. If you say they only spend 40p a week or whatever, they do not. In fact most weeks they do not spend anything; it is at Christmas, when half their spend goes on postal services, so your argument seems to be pretty weak in that respect. You do not know the impact of that affordability at that particular time.
Moya Greene: Well, I think we do. Even at Christmas time, it would be less than £20. As I said, whilst I do not believe-and there is no evidence to support it-that there is an affordability issue, I am sensitive to the fact that for some families any increase on any item is a problem. That is the reason why we are designing a special programme that will hold Christmas mailings at the current price for vulnerable families.
Q136 Mr Binley: In other words you do understand my point or you would not be doing that. Can I ask whether you see it just for one year only, or do you see it as a possibility for the next two or three years? Could you give them a real Christmas present and announce that now?
Moya Greene: I am talking about 2012, Mr Binley.
Mr Binley: I knew you were. I just wanted to stretch it further.
Chair: Nice try, Brian.
Q137 Mr Binley: How much realistic competition do you have in parcels provision in remote and rural areas?
Moya Greene: It is true that most of our competitors do not wish to deliver to remote areas, and we are very proud that we go everywhere in the United Kingdom, to all 29 million addresses.
Q138 Mr Binley: But you have an obligation to do that.
Moya Greene: But we are very proud to do it.
Q139 Mr Binley: I am delighted you are proud of it, but it is an obligation.
Moya Greene: That is right, and it is an obligation that is a very costly obligation. In fact the cost of delivering mail at the same price everywhere in this country is in excess of £6.5 billion, but we are still proud that we are the competitor in the marketplace that does that. That is our reputation and we are very pleased to do that.
Chair: Okay, can I bring in Rebecca Harris on small businesses?
Q140 Rebecca Harris: Could you tell me why you agree with Ofcom’s working hypothesis that small business users can afford price increases as much as consumers can, given the very complicated and different usage patterns of different SMEs?
Moya Greene: I think most small businesses can afford it. About 70% of small businesses would spend no more than £50 a month on postage. They do have other options, as you know. We are very proud that we are the highest value in the market, and I think the best service in the market. Small business pays for quality just like big business, and we are the quality provider. We have to be very cognisant of other participants in the market and their offers, and we certainly want to invest in the company so that we can provide the sort of technology underpinnings that small business and big business appreciate from parcel companies such as ours. But I do not think there is a real affordability problem there either, Ms Harris.
Q141 Rebecca Harris: Thank you. Again, as with a few of the areas we have discussed already today, your evidence on this was published in a redacted form, presumably for commercial sensitivity. How robust was that research? What kind of evidence size did you take for the impact on small businesses? We want to get a feeling for that. At the moment it is a good assertion that you have given us-that you think that you are competitive and are offering a good deal to small businesses and they can afford it-but I would like to know what kind of evidence you have got for that.
Moya Greene: The same sort of research was relied upon in relation to small business as for consumers. That is Postcomm and Consumer Focus research.
Q142 Ann McKechin: I wonder if we could turn to the issue about efficiency savings within Royal Mail. The Committee accepts that Royal Mail still has a journey to go in terms of transformation, but I wonder if you could just very succinctly explain to us why you believe the existing price control failed to produce the efficiency savings sufficient for profitability?
Moya Greene: The efficiency targets that were set were actually quite artificial, and they did not take sufficient account of the fact that this company has to have a network that is vast, because we are going to every single address. We have to be able to do that. We have to be able to do that with overnight delivery and with an incredibly high minimum service standard. It is 93% for the first class stamp, which is one of the highest minimum service standards in the world. Just to put it in comparison, the minimum service standard for Deutsche Post is 80%, and for Belgium and Italy it is below 90%. So to say that you must have a network that is sufficiently vast that it can get to every single town, village and city overnight with a 93% minimum standard is an extremely high-cost service. When efficiencies were first calculated by Postcomm, in my opinion it did not take sufficient recognition of that. That said, any business has to be aware of its costs and we have to do whatever we possibly can to control our costs, and we do.
The other problem that Royal Mail faced with respect to efficiency is that it did not have access to capital to modernise. The regulatory regime was put in place before the modernisation had even begun, and that is very unlike other postal administrations in Europe, where the postal administration was given the time and the capital to modernise before the competitive landscape was changed by regulation and before the company had the ability to price its products in a more competitive way. So Royal Mail was at a very big disadvantage. First, I think the calculations on what was achievable by way of efficiency, given the vast network that had to be put in place to deliver this service, were wrong. Secondly, the order in which things occurred-modernisation; the competitive landscape changed; the regulatory approach; the price controlling-just made it impossible.
That said, we have now started what I consider to be probably the biggest transformation programme that any company in the UK is undergoing. It will affect almost every single job in Royal Mail. In that past few years Royal Mail has sadly seen very large numbers of people leave our company. These are great people. Many of them had given decades of service to Royal Mail and universal service in Great Britain. So far we have lost about 50,000 of our people. Every year we have reduced the number of hours in our operation that we must have in order to handle the traffic that has been available to us.
Q143 Ann McKechin: I will just stop you there. I fully accept the comments you make regarding the lack of mechanisation and capital investment, and I think the Committee will be very sympathetic to that issue. But Ofcom’s presentation to this Committee in October last year said that the efficiency savings had proved very challenging, and clearly there was a very substantial, steep decline in mail, which has made that even more difficult. Does that mean that they are not going to happen under any scenario, and do you actually think you are going to be able to achieve the level of capital investment that is going to ensure that Royal Mail can compete with other European countries in the same way?
Moya Greene: I am certainly very optimistic that, if we can move the company into profitability and get the company to a state where we are making a commercial rate of return, we should have access to outside capital. I am very optimistic on that front. In terms of efficiency, the change that is currently under way in Royal Mail is vast, and I invite you, Mr Chairman, and any Member of the Committee to come to our mail processing facilities and delivery offices and just see the scale of change that is under way.
Q144 Chair: We have a pretty well annual invitation to attend sorting offices at Christmas, and whilst I cannot speak for other members of the Committee, I regularly have gone to see this at first hand.
Moya Greene: Thank you. So last year alone we were able to process all of the traffic that had been given to us, and there has been a radical change in the mix of traffic as well. If the white envelopes are declining, the parcels and packets are going up, and they take an entirely different approach to processing. Delivery of parcels and packets is much more time consuming. Not all of them are letterboxable, as you know, so we have a huge change under way. You will have seen many of our postmen and postwomen now are using trolleys. They have been equipped with these trolleys simply because of the change in the mix of the traffic. In the past 15 months we have consolidated 12 of our postal facilities. We are now down to 59.
Q145 Ann McKechin: On that point, one of the problems that has bedevilled Royal Mail for many years is, frankly, the relationship with its employees and staff, which at times has been very fractious. This is clearly a very difficult situation that Royal Mail is facing in terms of diminishing numbers of staff and changes in work shifts, etc. Obviously bringing everyone along with you is vital to achieving efficiency. Are you confident that staff relations are improving and that you are bringing your staff along with you in terms of this change process? I think that is one element where there have been a lot of problems in the past.
Moya Greene: You are absolutely correct. It has been a real issue at Royal Mail. I am confident that things have improved. I think things have improved dramatically. We have an agreement with our operating union, the CWU. We are very fortunate that the executive of the CWU know the business inside out. They know that the company has to modernise to be successful and that the income security of everybody is only going to be there if Royal Mail is successful. So in my discussions with Dave Ward, the Deputy Secretary of the CWU, I am very pleased to see the understanding that changes are unavoidable.
That said, it is very difficult; it is very hard on our people. When we talk about efficiency, most of our cost is in our people. Efficiency is an antiseptic word. What does that really mean? Sometimes it means that people that have given their careers to Royal Mail cannot finish their careers. It meant that their pensions were in jeopardy where we could not afford the pension promise that had been made. It means that their starting times may be quite different today than they were even two or three years ago. It means that they probably have to work a longer day. It means they have to contend with different traffic.
Chair: I think we have got the message. Most of us who have been to a sorting station get it in first hand. Have you finished Ann?
Ann McKechin: Yes.
Q146 Katy Clark: You will be aware that we have already heard evidence from Consumer Focus, and they talked about 5% efficiencies as modest. What level of yearonyear efficiency do you envisage in percentage terms? What do you think is realistic?
Moya Greene: Not 5% every year, certainly not-not with the change in traffic that we have, Ms Clark. As more and more of the traffic is parcels and packets, items that have to be signed for and tracked at the door, it takes longer and it is bulkier. We can certainly achieve some efficiencies because we do not have any automation for parcels and packets at all yet. It is still all handled manually, so you can certainly achieve some efficiencies as you introduce automation and technology to the business. But I think 5% year on year is simply too high a number, and it probably never was achievable.
When you start down the road of modernisation, in the earlier days of course it is easier to capture those kinds of gains, but as you get further and further down the road it gets more difficult. I think we will probably finish this year a little over 3%, and I am pretty proud that we have been able to do that, given that we are handling a different mix of traffic and that we are handling the parcel and packet side of it mostly manually. About one-quarter of our delivery offices are now enabled with the new methods, and that certainly has helped, but we have still got quite a bit to go. As I mentioned, we have managed to consolidate out of 12 mail processing facilities, so that has helped, but I am proud of the 3% that we will achieve this year.
Q147 Katy Clark: Just to be clear what we are talking about, when you say 3% efficiency, does that mean reduction in staff or in all sorts of ways?
Moya Greene: In all sorts of ways. I am really referring to the number of hours it took to process the traffic that we have-they are down by 3%. In terms of the number of people, we will probably end the year with 5,400 fewer people this year. 2,000 of them will have come from management, and the balance will have come from our core operation.
Q148 Katy Clark: I see. There is a view that price controls have not worked before. How do you think re-regulating is going to be an effective sanction in future, and how likely do you think that is with the proposed privatisation that is supposed to be happening?
Moya Greene: We have had 10 years of a failed regulatory model; there is just no other way to say it. The regulator had one company to worry about, Royal Mail, and it was supposed to protect universal service in Britain. That company is balance sheet insolvent, unable to pay the historical pension promise that it made, and has for some time been cash negative and unprofitable in the core business. Every prediction they made about cash or rates of return was wrong. I think we can look at what we had, and it was certainly the most unusual regulatory model in the world, and say we know what does not work. Price controlling every aspect of this company’s revenue in the face of the sort of decline that we had to cope with and the changing competitive landscape made it impossible for the company to be successful.
I have looked at all the work that Ofcom has put out, and the indications of their approach and the approaches that they have taken in other businesses, and I have to say that I think we are now going in the right direction. Hopefully it is not too late.
Q149 Katy Clark: Given what you were saying earlier, do you think price regulation should be kept in place and, if there is a privatisation, at least until efficiency savings have been delivered, that you are in the place that you want to be?
Moya Greene: I personally do not believe we need price regulation. That is for others to decide. The Government has given that decision to Ofcom to make, and I respect that. But personally I do not think we need price regulation because the competitive landscape is vastly different today from what it was 10 years ago.
Q150 Katy Clark: One of the issues that have been raised with us is about satisfaction levels, particularly in relation to second class mail. There is obviously a concern that if first class prices go up, people will shift to second class, and that is going to affect the quality of the service that people get. How would you respond to that?
Moya Greene: I think the quality of service that people get in the United Kingdom is outstanding. Even for all the challenges that Royal Mail has had, this is an outstanding company, and I say that as a person who ran a similar company in Canada. I thought I did a great job there. I did not have a regulator at all in Canada. With a couple of conversations, I could set the price for our products. I had much more time to deliver than we do in the UK. So where do I think service is going to go in the future? I think you can expect the same high quality service that you get now.
Q151 Katy Clark: How are you going to do that?
Moya Greene: Because people in this company are totally devoted to that, Ms Clark. On second class, I think the service standard is about 98%, and we meet it. So it is outstanding.
Q152 Katy Clark: We were talking about vulnerable customers earlier on, and you will be aware that many people are dependent on benefits. One of the debates that has been happening in this place is about shifting the upgrading of benefits and pensions from RPI, Retail Price Index, to Consumer Price Index. Given that is happening, how can you justify having a higher level of increase, and do you not think you should also be linked to the Consumer Price Index if the incomes of those on low incomes are?
Moya Greene: No, I do not. You have to look at the very low base we are talking about. The percentages are meaningless if it is from such a low base, so no, I do not agree with that.
Q153 Chair: Okay, any further questions? Can I thank you very much? It has been a pretty thorough going over. I suppose you may well have heard my comments over the session with Ofcom. Can you reassure me that, in view of what you said, I do not need to go out and buy my Christmas card stamps now, as opposed to Christmas time?
Moya Greene: Mr Bailey, I am sure that you make these judgments on all kinds of matters every day. Far be it for me to tell you what you should do about your Christmas obligations.
Q154 Chair: But regarding my previous question, you are committed to keeping the price of stamps for next Christmas the same as last Christmas.
Moya Greene: For vulnerable consumers, yes.
Chair: Ah, for vulnerable consumers. I am very vulnerable. That is very interesting. Thank you; I am glad that I have clarified that. Thank you very much, and we understand the time constraints that we have got and you have got on this issue, so we will be publishing a report very quickly. Can I thank you?
Moya Greene: Thank you.