Royal Mail gets mixed bag from Ofcom postal regulation report

Concluding its review of the regulation of Royal Mail, the postal regulator has decided not to impose any new price controls on the company’s wholesale or retail products but it kept the cap on stamp prices and proposed tightening some rules in the 'access' market.

Furthermore, Ofcom warned it would closely monitor the company as it was concerned Royal Mail "has the potential to cross-subsidise its parcels business through its letters business – where it has a much larger market share and an established delivery network – in a way that might disadvantage other parcel operators".

In the access market, where rival operators collect and sort mail before handing it over to Royal Mail to complete delivery, Ofcom said Royal Mail needed to allow longer notice periods for contractual changes imposed on access operators and also demanded the company respond within six weeks when a wholesale customer requests a product similar to one already sold by Royal Mail.

However, analysts said these new access rules did not appear to be that severe.

For all postal operators, Ofcom proposed requiring them to "focus" on ensuring letters large and small arrive safely.

"Ofcom intends to introduce new rules to clarify how postal operators must look after these items – shifting the focus of regulation away from logistical and procedural requirements, towards assessing postal operators’ actual performance. Those who fail to meet the new rules would face fines," it said.

Ofcom had praise for Royal Mail's modernisation and said it had improved its return on sales to this last year reach the lower end of the 5-10% range which the regulator considers to be compatible with a sustainable universal service.

It added that the company could still do more to improve efficiency in the interests of postal users, but noted consumer satisfaction with postal services, and value for money, were high.

With consultation on these proposals finishing on 3 August, Ofcom said it expected to publish its final decisions later this year.

Broker Liberum said the initial conclusions of the review "appear benign" as no new price controls are proposed, while the proposals on protecting untracked mail and on access market rules "do not appear burdensome".

While the proposals will go out to consultation with Royal Mail and the rest of the industry, where it is possible they may be modified, the Liberum analysts said they would be surprised if there were dramatic changes.

"While Ofcom notes the scope for better efficiency, and expresses concern about the risk of parcels being cross subsidised by letters, it proposes no action. This removes a short-term negative for the group, but risks on wages and pensions remain, and online retail trends do not favour Royal Mail’s positioning in the parcels market."

Shares in Royal Mail were up 1.8% to 530.5p just before 0900 BST on Wednesday.