Ofcom fines Royal Mail for breaking competition law
Ofcom has fined Royal Mail £50m for a "serious breach" of competition law, after a three-year investigation found the delivery company "abused its dominant position" in the business letters market.
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Royal Mail said it will appeal the decision with the Competition Appeal Tribunal within the next two months, arguing that the Ofcom's objection to its price increase in the bulk letters market announced in 2014, was never implemented or paid and "considers that the decision is without merit and fundamentally flawed".
Ofcom's investigation was launched after a complaint by Whistl, a spin-out from TNT Post and a wholesale customer of Royal Mail, about changes made wholesale customers' contracts in early 2014, specifically wholesale price increases that were going to be introduced.
Whistl had since 2012 begun rolling out a letters business, becoming the first company to compete directly with Royal Mail by delivering business letters, the bank statements and utility bills known as ‘bulk mail’, in certain parts of the UK via its door-to-door service known as E2E, beginning in London, Liverpool and Manchester.
These 'access' contracts, where other companies collect and sort mail and then pass it on to Royal Mail, which then makes the 'last mile' delivery of that post to the recipients.
In 2014, accusing rivals of "cherry-picking" only urban areas for deliveries to save on cost, Royal Mail proposed to increase its wholesale price increases, which for Whistl would mean it would have to pay higher prices in the areas where it did not deliver but relied on Royal Mail for the last-mile delivery.
In May the following year Whistl's backers, Lloyds Bank's LDC arm, decided not to fund further expansion of E2E, citing "ongoing changes in postal market in the United Kingdom dynamics and the complexity of the regulatory landscape" and in an attempt to stem losses, Whistl suspended plans to extend delivery services to new areas.
Ofcome said on Tuesday that its investigation "found Royal Mail’s actions amounted to anti-competitive discrimination against customers, such as Whistl, who sought to deliver bulk mail".
Jonathan Oxley, Ofcom’s competition group director, said: “Royal Mail broke the law by abusing its dominant position in bulk mail delivery. All companies must play by the rules. Royal Mail’s behaviour was unacceptable, and it denied postal users the potential benefits that come from effective competition.”
The former state-owned postal service, which was floated on the London Stock Exchange in 2013, long complained after the market was opened up that competitors such as Whistl were operating at an unfair advantage as they do not have to deliver to the whole country for a single price, as it does under the Universal Service rules.
In a statement responding to Ofcom's penalty, the FTSE 100 company noted that its 2014 price increase had been carried out with consideration to "robust economic and legal analysis, and following the available Ofcom guidance". The exact change it proposed to introduce was to offer 0.25p less per letter when access customers committed to advance monthly volume forecasts based on certain, wider geographic requirements but those who "chose not to commit to the approach would not benefit from the price differential" and would continue to be charged on the basis of the four existing geographies.
But as Whistl raised a complaint with Ofcom, this proposed price change was automatically suspended as part of the access letter contract rules.
Royal Mail also made the point that Whistl initially launched its E2E letters service with collection, processing and delivering business mail three days a week without using Royal Mail's network to about 42% of UK addresses, "by serving urban areas covering just 8.5% of the UK's land mass" compared to Royal Mail's legal requirement "to deliver many kinds of letters six days a week to every part of the country".
The company added that it "welcomes competition, provided it takes place on a level playing field", pointing out that financially sustainable provision of the universal service "is particularly important in light of the structural decline in letters volumes and intense parcels competition" and the UK's uniqueness as access letters account for 62% of addressed mail compared to no more than 25% in all other EU countries.
No fine will need to be paid by Royal Mail to Ofcom until the appeals process is exhausted, a process that might take two years.
Shares in Royal Mail rose 1% to 467.3p in early trading on Tuesday.
Analysts at Liberum saw "broader potential implications" from the decision, even though the fine itself is not material and the competitor that brought the complaint has long since withdrawn from the market.
"Importantly, we believe this is a reminder that Royal Mail must act with restraint given its dominant market shares in both letters and parcels, and this limits the group’s ability to grow parcels revenue over the long term."
While the significant losses racked up by Whistl in its attempt to enter the direct delivery market "makes it unlikely that anyone else will attempt the same" and "limits the implications of the specific ruling by Ofcom on the wholesale pricing arrangements", the analysts view it as "difficult for Royal Mail to gain market share in Parcels without exposing itself to regulatory scrutiny. In particular, we see scope to argue about potential cross-subsidisation between Letters and Parcels, given the shared infrastructure and cost base."