Investors in Royal Mail (RMG) were delivered some good news this week, courtesy of Ofcom. Following a year-long review, the postal industry's regulator decided not to reintroduce price controls on the carrier’s wholesale or retail price products in the so-called 'access' market.
The relatively benign report, whose publication sparked a 2.5 per cent jump in the company's shares, was commissioned after rival Whistl suspended its door-to-door delivery services in London, Liverpool and Manchester last May. That move effectively left the UK’s dominant postal group as the only provider of end-to-end letter delivery services. As a result, Ofcom decided it needed to review its own regulatory role, amid concerns Royal Mail was operating in a competitive vacuum.
Despite Royal Mail’s monopoly, Ofcom says it is broadly happy with the state of the market, and that given the declining letters market and heavy competition in parcels, pricing controls would be unnecessary. The regulator has now decided the framework it introduced in 2012 to guarantee consumers a universally priced and affordable postal service six days a week – and provide Royal Mail with greater commercial freedom in a challenging market – should be kept for another five years.
Ofcom also found Royal Mail’s current return of sales at the lower end of the 5-10 per cent range which is "compatible with a sustainable universal service", although the company "could still do more to improve efficiency in the interests of postal users". Those users nonetheless report high satisfaction with postal services and value for money.
The regulatory oversight is not about to go away entirely, though. Royal Mail is likely to face greater scrutiny of the way it cross-subsidises its parcels business through its letters business, where it has a dominant market share. Broker Liberum reiterated its sell rating as while it acknowledged the Ofcom report removed a short-term negative for the group, "risks on wages and pensions remain and online retail trends do not favour Royal Mail's positioning in the parcels market".
The company is still being investigated by Ofcom over a separate allegation of anti-competitive behaviour, which Whistl said had caused it to bow out of end-to-end delivery markets last year. A decision is due later this year.
