Ofcom is concerned that Royal Mail could potentially cross-subsidise its parcels operation through its letters business, as its market share and delivery network is much more established in the latter.
The strength of its operation in the letters sector could give the carrier an unfair advantage in the parcels market, and Ofcom said it will “closely monitor whether Royal Mail is appropriately allocating its costs between parcels and letters”.
The comments appeared in a report on Ofcom’s review into the postal market, which it launched last year after Whistl, Royal Mail’s only competitor in door-to-door postal services, stopped its final mile operation.
The review found that Royal Mail’s return on sales – which it said is “at the lower end of 5%-10%” - was compatible with a sustainable universal postal service, and said it would not place new pricing controls on the carrier “given the declining letters market”.
However Ofcom does intend to introduce new rules on how postal operators handle untracked mail, which it said will move the onus from logistics and procedures and onto the performance of the operator.
Royal Mail said it “welcomed” Ofcom’s finding that “customer satisfaction with postal services and value for money is high”.
A spokesman for the company said: “Ofcom notes that, following price increases introduced in 2011-12 and 2012-13 in order to return to profitability, our price increases have been broadly in line with RPI.
Ofcom's review also demonstrates that there is strong competition in the access market.”
The report also suggests that if Royal Mail were to increase the efficiency of all of its hubs to the standard of its top performing 10% of sites, the group’s overall efficiency could increase by 10%.
Royal Mail said: “In relation to efficiency, Royal Mail has a stretching efficiency programme in place and is targeting to avoid around £500 million of annualised costs by 2017-18.”
A separate investigation by Ofcom into whether or not Royal Mail breached competition law with proposed cost hikes in 2014 is still ongoing.
