Royal Mail, the IBA and POL

At the same time the Government announced their plans for POL in 2010, they also announced the sell off of RMG while POL would become an ‘independent’ company.   Critics at the time warned that removing ownership of POL from RMG was a step too far and would result in problems down the line.   These critics were chastised by the government as being scaremongers and to highlight this they relied on what was known at the time as a 10 year Inter Business Agreement (IBA) between the soon to be privatised RMG and the newly independent POL.

Little detail was made public at the time of this MDA but subsequently the publication of RMGs prospectus (see my links page) for the Initial Public Offering contained a great amount of detail.   Not about an ‘IBA’ but about a Mails Distribution Agreement.  This MDA, while tentatively set at 10 years contains a significant renegotiation clause after 5 years has passed.

That is now not so far away – 2017 – and subsequent events to the 2010 agreement may significantly alter the prospects of a successful renegotiation of the MDA by POL.

What has changed

Well originally the Government said they would keep a significant stake in RMG – enough to provide them with a certain amount of control over strategic issues such as the relationship between POL and RMG.

The Government has now sold off its remaining stake and control of RMG is now solely in the hands of Institutional Investors who are far more concerned about RMG becoming more profitable and hence seeing a return on their investment than cross subsidising a top heavy, bureaucratic nightmare such as Post Office Ltd.

While Moya Greene the MD of RMG stated originally that it was inconceivable that RMG would not maintain a close business relationship with POL after the two companies split, she was of course obliged to say that as her bosses at that time were the Civil Servants in Whitehall.    Ms Greene’s bonus payments now rely on RMG’s bottom line and continuing with an expensive MDA arranged by the Government for POL’s benefit may well now be under closer scrutiny.

What do POL actually bring to the party?

Well not much really if you were to consider the alternative solution which would be for RMG to deal directly with independent retail outlets.    RMG already provide franking machines to businesses as well as providing online PPI (printed postage impressions) services – all at a notable discount to what even SPMRs eventually receive from POL for their efforts.

In fact the relationship between RMG and POL does not appear to be particularly great at the moment.   RMG actively seek out and recruit for direct sales heavy internet postage customers that currently use Post Offices.    Hardly in the spirit of a ‘close business relationship’!

It could be said that POL provide much needed branch standards for postage as well as implementing first line mail segregation but on the other hand POL take a special payment to cover this from RMG and are not particularly successful in controlling their branches.   Even less so in fact now that PO Locals earn considerably less than the traditional offices they replaced and whose focus is on retail and not on postal services.   RMG’s customers have certainly come off second best there.

RMG do allow wholesalers to sell stamps to ordinary retailers but at not much of a discount however it does at least point to a supply chain that could be used in the event of a breakdown in the relationship with POL.

What would happen if the MDA was not renewed?

Well hopefully there would be agreement as to the outcome.  POL could hardly threaten their branches not to take on a direct supply from RMG if not for the most likely reason that POL would actually cease to exist if the relationship broke down.   Surely a transition arrangement would be put in place to protect the network from collapse and maintain the necessary subsidy to the small branches that rely on it.

But of course that is the worst case scenario – it is hardly likely it would come to that – BUT it emphasizes the bargaining position RMG are now in as the prepare for the 2017 renegotiation of the MDA.   What can POL do about it if RMG reduce their expenditure on POL and increase their direct sales?   The government can certainly not interfere with the running of a listed FTSE 100 company like RMG.

POL would have to respond by either seeking an increase in subsidy, reducing their overheads or reducing the transaction payments to their branches.   Wise readers will already know which of those options is most likely!

The Breaking Point

There is an obvious point where having POL sitting in the middle of the relationship between Post Office Branches and RMG becomes a financial burden to both sides.   It would surprise many to learn that if you take the amount of money RMG pay POL on an annual basis and add a reasonable subsidy then distribute that total amount to SPMRs the amount each branch would receive is very close to exceeding what they receive now for selling not only postal services but all the other products POL sell as well. (should POL pay less and less to SPMRs then the breaking point will become even closer)

When?

Well if it is as likely as I think it is to happen in 2017 but doesn’t then in my opinion it is absolutely certain to happen in 2022 – there can be no question that the MDA will be renewed.  It would not make sense to RMG or its stakeholders.

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One thought on “Royal Mail, the IBA and POL

  1. RMG is already setting POL up for a fall.

    The first line segregation that SPMRs do (for 0 reward) is now being ruthlessly policed and POL fined for transgressions, transgressions that mainly arise from RMG posties mixing mail from PO collections with mail from boxes, when volumes are low

    We now have to seal all bags, however empty, to avoid these penalties, and even then if a customer comes in at 5.01 and the postman is waiting and takes that single item, if it then gets put in a bag with other mail, WE are criticised.

    However, it’s not all bad news.

    Other operators are handling parcels, but the relative simplicity of these transactions; home shopping, click and collect, returns etc when compared with the myriad possibilities involved with any PO transaction means that RMG would have to be VERY sure that any incoming operator would have the necessary skill and attention to detail. POs also have the space already set aside for the volumes handled, rather than a corner cupboard of a filling station counter

    Frankly, it would seem far more likely that RMG would directly approach those SPMRs it wanted to deal with and cut POL out of the loop altogether, rather in the same way that supermarkets contract with specific farms to buy their produce.

    Given the enormous cut POL take, RMG could pay SPMRs the current or a higher transaction rate and still cut costs, giving RMG the skill base it needs, whilst cutting out the POL dead wood and reducing the network served to a manageable/profitable scale.

    And if RMG could just increase their small parcel limit to 3kg, they could immediately get back an enormous volume of trade that goes to other carriers because of RMGs ridiculous gap between the 2kg RM cut off and the 6/7kg PF economic entry point.

    Like

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