Ofcom has defended its plans to allow Royal Mail to make massive price hikes to a group of MPs, denying that consumers – not businesses – will take the brunt of the increases to shore up the Universal Service.
The House of Commons’ Business, Innovation & Skills Committee took the regulator to task for its proposals yesterday, with Conservative MP Nadhim Zahawi warning: “This is likely to take the UK overnight from one of the lowest stamp prices in the European Union to the highest.”
But Ofcom group director of competition Stuart McIntosh argued that, whatever Royal Mail decided to do with its prices, it would remain affordable because low-income families and small businesses do not currently spend a lot on mail services each week.
He also dismissed MPs claims that business customers would avoid significant price increases in postage thanks to bulk mail discounts, and insisted that the impact on mail volumes would “not be that huge” in the short term.
McIntosh added that Royal Mail knew the postal market better than a regulator could, and would therefore know not to put its prices up too high for fear of driving volumes away to other communications channels.
“We believe that Royal Mail and the industry is in a much better position than the regulator to figure out how prices need to be set across the whole market in order to sustain its viability,” he said.
This view is in sharp contrast to DM industry opinion; the DMA has claimed that price hikes, combined with a potential 20% rise due to VAT changes, could trigger a mass exodus of business mailers. Finance group Nationwide has already said it will slash its reliance on direct mail.
“The changes we are putting in place are going to take away the dead hand of regulation from day-to-day management of the company, so they will have some more flexibility,” insisted McIntosh.
He told MPs that under the previous regulatory framework – overseen by Postcomm – price controls had seen Royal Mail lose hundreds of millions of pounds in its mail business since 2006, and as a result price controls should be abandoned to protect the Universal Service.
However, Consumer Focus director of policy Adam Scorer said: “We don’t underestimate the scale of the challenge that Royal Mail face to drive out efficiency from their business and build a sustainable, profitable model given the characteristics of the market.
“We just don’t want to see any pressure taken off that impetus by a price control mechanism that would allow it to do the far easier thing of raising prices in what is often a captive market.”
Scorer insisted that the group’s calculations found that even a “very modest” 5% improvement in efficiency at Royal Mail could see the company turning around its poor financial performance significantly without relying on price increases.
Royal Mail chief executive Moira Green is due to give evidence to the committee next week.
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