1. Deregulation in the UK postal sector
The Niche Players Perspective
Nigel Burke
Speedmail International Limited
ABSTRACT
Postal services in the United Kingdom provide a vital role in
modern economic and social life, providing communications
between citizens, governments and business. These services and
the way they are provided are expected to change significantly as
a result of the liberalisation of European postal monopolies, the
growth of electronic mail and the globalisation of postal services.
In response to these changes, the Government established in 2000
the Postal Services Commission (Postcomm) to secure the
continued provision of a universal service at a uniform price and
to further the interests of postal service users. To achieve these
goals, Postcomm have been given the power to issue licences for
the provision of postal services below £1 or 350 grams.
Speedmail International was issued with an interim licence on
27th
July 2002.
1. OVERVIEW OF THE UK POSTAL INDUSTRY.
It is difficult to frame precise definitions of postal products as
there is no current and agreed standard. EU Notice 98/C39/02
defines postal services as services involving the clearance,
sorting, transport and delivery of postal items1
. The UK letters
market has been valued at £6 billion.
The UK Postal industry is currently dominated by the Royal Mail
who control around 95% of the market. Through it's Royal Mail
and Parcelforce worldwide operations it serves 26 million
addresses, handling nearly 20 billion letters and packages a year
through 150,000 public collection points and 84,000 business
collections.
1
Official Journal of the European Communities C39/6 6.2.98

2. It is one of the largest organisations in the UK with nearly
200,000 employees and 35,000 vehicles. Its most recent
annual accounts show UK turnover of over £7 billion in 2000-
01.
In July 1999 the UK Government published their proposals for
reforming the postal service2
. A key element of these
proposals was the introduction of a independent regulator,
known as Postcomm. Postcomm have interpreted their
principal objectives as being to :
• Ensure the continued provision of a universal postal
service at a uniform tariff3
• Promote effective competition with the Royal Mail
• Control Royal Mail prices and service standards
One of the main tools in achieving these objectives is the issue
of licences for the provision of postal services below £1 or 350
grams to new operators.
2. BARRIERS TO ENTRY.
Despite the obvious attractions of the postal industry, there are
a number of factors which may dissuade potential new
entrants4
. The most important of these include.
2.1 Brand and presence of the incumbent post office
Royal Mail is said to be the best known brand in the United
Kingdom after Coca-cola5
. Despite an ill-advised name change
to Consignia, which was reversed after 15 months, the brand
still represents a global, reliable service linked to over 260
2
Post Office reform : A world class service for the 21st
Centuary
3 This has been defined by the Postal Services Act 2000 as being the delivery of mail every working day to all homes and premises
in the UK, and the collection every working day from each postbox
4 The impact of competition in the postal sector - A report by the Association of International Courier and Express Services - June
2001
5 The Times, 14 November 2000, Christine Buckley

3. years of history. Convincing customers to move from such an
institution to an untested, unknown start-up has proved to be
one of the most difficult tasks for Speedmail.
2.2 Pricing policy of incumbent post office
Given the dramatic economies of scale available to the Post
Office there is a risk that they would seek to compete against
new operators by reducing prices. This is particularly
important where the incumbent seeks to cross-subsidise
activities. Royal Mail's business pricing strategy is strictly
controlled by Postcomm6
and any material price changes have
to be agreed in advance by the regulator and not be seen to be
anti-competitive. In addition, as a consequence of it's
obligation to provide a universal service the Royal Mail is
exempt from VAT, which is not the case for it's competitors.
2.3 Licensing procedures and legal uncertainty
Ensuring a company is 'licence ready' includes preparing a
business plan, putting in place security systems and providing
a material bond. These activities are costly and time-
consuming operations, which may deter potential new entrants.
In addition the licensing requirements are liable to change as
Postcomm refines it's approach. This affected the approach
adopted by Speedmail who initially piloted a mailing service
for publication sector letters7
This option was no longer
available when the long-term licence was applied for.
2.4 Access to universal service providers services
Where an operator wishes to enter the upstream market it will
be necessary to rely on the universal service providers services.
Access pricing and service quality issues have arisen and
Postcomm have intervened in the setting of access prices
between the Royal Mail and UK Mail8
and Deutsche Post
6 Review of Royal Mail Group plc's price and service quality regulation - Postcomm March 2003
7 Temporary licence granted to Speedmail International 25th July 2002
8 Notice of a proposed direction to Royal Mail on downstream access, by UK Mail, to Royal Mail's postal facilities, Postcomm,
19th May 2003

4. 3. MARKET SEGMENTATION
Given the difficulties highlighted above it is unlikely that any
new entrant would aim to develop an alternative universal
service provision. This means that some form of market
segmentation will take place, either through targeting certain
customers or through providing a limited range of products.
Figure 1 developed by Dietl and Waller9
identifies seven
business models for entrants and assesses these models in
terms of market potential, comparative advantage in the target
segment, and entry barriers.
A number of these models have been adopted by different
operators in the UK mail market, with varying degrees of
success. Speedmail’s approach can be classified as that of a
local mail service.
An alternative approach to market segmentation is through
type of mailflow. Table 2 shows the division between
"business" and "household" mail flows. This suggests that
9 Helmt Dietl and Peter Waller, University of Paderborn in “Competing with Mr. Postman : Business
Strategies, Industry structure and competitive prices in liberalized letter markets” June 2001

5. 86% of all mail is sent from businesses and only 14% is sent
from households. Household to household mail ("social" mail)
accounts for only 9% of all mail flows10
Given these mailflows it is expected that new entrants will
primarily seek to develop business customers. Even this
segmentation leaves a very large potential market and further
levels of granularity are possible, for example, specific types
of business to business activity (for example financial services,
business-to-business publishers)
Mail flow Volume %
Business to Household 58%
Business to Business 28%
Household to Household 9%
Household to Business 5%
Table 2. UK Mail flows
The approach taken by Speedmail has been to target London
business-to-business mail flows predominately in the business
publishing and financial services sectors.
4. COMPETITION STRATEGIES
Having identified a target market, two primary strategies are
available to compete against the incumbent operator, offering
either similar products but at lower prices or differentiated
products at similar prices.
Statistical modelling of the postal industry carried out by
Frontier Economics11
suggests that in order to maximise
profits, a new entrant should usually seek to differentiate its
product as much as possible from that of the incumbent,
especially if the incumbent has a strong brand. This
differentiation can come from a number of sources including
10 NAO report
11 Message in a model, managing competition in postal services,Frontier economics

6. Operational excellence: Providing customers with reliable
services at competitive prices and delivering these with
minimal difficulty or inconvenience.
Product leadership: Offer customers leading-edge products
and services thereby making rivals products obsolete.
Customer focus: Combines a detailed understanding of
customers with the flexibility to respond to customer
requirements.
4.1 Operational excellence.
There are a number of links in the Postal Supply Chain12
where
it is possible to add value to the end user.
4.1.1 Collection
Defined as the pickup of mail from street collections,
businesses or customers on the street, 25% of large users cite
consistent collections as their main need13
. Speedmail collects
from over 200 addresses every day and has achieved its target
of 100% reliability on collection days. In contract in the 15
months to 31/03/02 Postwatch received 2,849 complaints in
Greater London, the majority of these were about the reliability
of collections14
12 European Commission Notice 98/C39/02
13 Opening the post, National Audit Office
14 Postwatch annual report
Collection Outward
sorting
Transport Inward
sorting
Delivery

7. 4.1.2 Sortation and transport
14% of large users state security as their main need15
. All
sortation is performed in-house at our 20,000 sq.ft. warehouse
based in South East London. Regular audits of international
mail as part of Royal Mail DUET agreement. Only London
delivery company with a full-time security manager.
4.1.3 Delivery
The act of taking mail from the mail operator to the 15% of
large users stated knowing specific day of delivery as
their main need with a further 5% citing delivery within 24
hours. Speedmail delivers overnight to over 5,000 addresses
and has achieved its target of 100% reliability for correctly
addresses items. In contract recently published figures
indicate that the London postcodes are amongst the worst
performing in the UK
4.2 Product excellence.
One of the key benefits of the introduction of competition into
the postal sector is that it is expected to breed innovation
leading to the emergence of new products and services16
. In
the case of Speedmail this is illustrated by our use of
Information Technology and Global Positioning Systems. All
our vehicles are fitted with satellite tracking which allows us to
locate the van’s position, speed and direction of travel to street
level, this is used to confirm collection times and optimised
fleet management. In addition we are developing this system to
offer a track and trace facility at significantly lower costs than
alternative courier companies.
15 Opening the post, National Audit Office
16 The impact of competition in the postal sector : AICES report June 2001

8. 4.3 Customer focus.
Finally being a niche operator we are able to develop close
relationships with have with our customers. Thanks to these
relationships we are able to add value to the customers postal
activities in a number of ways. For example, we have
developed a number of customer specific reports showing
activity levels, mailing trends and cost savings achieved. We
are also able to arrange pick-up and delivery times to suit
individual customer requirements.
5. SUMMARY
The Postal Services Commission (Postcomm) has stated it’s
duty as furthering the interests of postal users, wherever
appropriate by promoting effective competition. A key element
of introducing competition has been the granting of licences to
alternative mail operators, one of which is Speedmail
International.
Speedmail has chosen to operate as a local mail service in the
London business to business market. In targeting this segment
it aims to benefit from operational advantages, innovative
products and a strong customer focus.