MAIN DEVELOPMENTS IN THE POSTAL SECTOR

MAIN DEVELOPMENTS IN THE POSTAL SECTOR 2013-2016 Preliminary findings Prepared for the European Commission 7 March 2018 Brussels 1

Summary info on our background Copenhagen Economics Offices in Brussels, Copenhagen and Stockholm 70+ economists Postal sector experience 3 studies for the European Commission Calculation of USO net costs Terminal dues Tariff regulation Cost allocation and pricing Scope of USO Access regulation Antitrust and regulatory cases in multiple countries Data-intensive projects E-commerce and Delivery (2012) Pricing behaviour of postal operators (2011) Terminal dues study for the US PRC (2014-15) and other studies Main Developments in the Postal Sector 2013-2016 2

The project team DG Grow Dr. Henrik B. Okholm Project partner Anna Möller Boivie Project manager Dr. Bruno Basalisco Quality Assurance Mindaugas Cerpickis Team leader Martina Facino Data collection lead Subject-matter experts Team members Research assistants Data analysts Bird & Bird Legal experts Main Developments in the Postal Sector 2013-2016 3

Project timeline Activity 2017 2018 Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Initial data collection questionnaires, interviews, desk research First public workshop Interim report prelim. results, initial conclusions, and next steps Second public workshop Draft final report first version of the final study Interviews Final report Third public workshop Main Developments in the Postal Sector 2013-2016 4

PART 1 Structural letter volume decline 10:30-11:20 Q&A 11:20-11:40 PART 2 Growing volumes of e-commerce packets and parcels Q&A 12:10-12:30 11:40-12:10

1 STRUCTURAL LETTER VOLUME DECLINE

Many types of communication that were traditionally based on letter post have been digitalised Electronic communication with public institutions, 2016 Share of countries (21 countries) Mandatory Possible Future plans Not possible Other Tax returns 5% 95% Change of residency Hospital appointments 62% 63% Registrations to educational institutions 5% 84% Pensions information Other welfare benefits information 68% 68% Judiciary notifications 45% Source: Questionnaire to USPs. Main Developments in the Postal Sector 2013-2016 7

As a result, domestic letter volumes dropped by more than 10% since 2013 Development of domestic letter post volume Index, 2013 = 100 (29 countries) 100 95 90 85 80 Western Europe Total EU, EEA & CH Northern Europe Southern Europe Eastern Europe 75 2013 2014 2015 2016 Source: Questionnaire to NRAs. Main Developments in the Postal Sector 2013-2016 8

Denmark, Netherlands and Italy have experienced the highest rate of letter volume decline Development of domestic letter post volume by country Annual change in the 2013-2016 period 0% -2% -4% -6% -8% -10% -12% -14% -16% DK NL IT CZ GR FI AT BG EE LT PL ES FR EU, MT BE PT SE UK CY HU CH IE LU SI SK HR EEA & CH DE Source: Questionnaire to NRAs, USPs annual reports Main Developments in the Postal Sector 2013-2016 9

Letter post volumes are declining faster for non-uso letter services Development of domestic letter post volumes in EU, EEA & CH Percent change in volumes 2015-2016 Total domestic letter post volume Domestic USO letter post volume -3,1% -4,4% Source: Questionnaire to USPs and NRAs. Main Developments in the Postal Sector 2013-2016 10

In 2015-2016, the decline in universal services was primarily driven by declining single piece letter volumes Development of universal service volumes, 2015-2016 Percent change in volumes 2015-2016 -2,1% 0,0% -1,0% -0,3% 0,5% -0,2% -3,1% SP Letters Bulk Mail (USO) Direct Mail Publications Parcel & Express Cross Border Inbound Total change in the USO volume Source: Questionnaire to USPs and NRAs. Main Developments in the Postal Sector 2013-2016 11

In the declining letter post market, competition is still highly concentrated Market share of the incumbent in the addressed letter market Market share based on volumes, 2016 100% 4 countries 95% - 99% 5 countries 85% - 95% 6 countries 66% - 85% 7 countries Source: Questionnaire to NRAs, public sources. Main Developments in the Postal Sector 2013-2016 12

and competition is not developing Evolution of the 3 main competitors market share in the letter segment Declining 1 country Stable 14 countries Moderate growth 4 countries Strong growth 1 country Main Developments in the Postal Sector 2013-2016 13

On the other hand, barriers to entry appear to be low Market entries and exits in the letter segment since 2013 Number of entries and exits 700-750 650-700 Entries Exits -4% Top 3 countries in terms of number of market entries and exits since 2013 472 355 130 92 32 41 EU, EEA & CH DE PL LT Source: Questionnaire to NRAs. Main Developments in the Postal Sector 2013-2016 14

USPs and policymakers are searching for the appropriate reaction to market developments Increased revenues Reduced costs USPs diversify revenue streams Governments financially compensate the designated operator for the increasing net cost of the USO Governments procure services of general economic interest USPs reduce their operational costs Ministries and NRAs adapt regulations and USO Main Developments in the Postal Sector 2013-2016 15

Single piece letter post prices have increased by up to 300% Price change for 20g single piece FSC domestic letter, 2013-2016 % change 2013-2016 DK IT 138,3% FI 41,2% NL 35,2% SI 27,6% FR 27,0% CZ 23,1% ES 21,6% DE 20,7% CY 20,6% IE 20,0% LU 16,7% PT 16,0% NO 15,8% AT 9,7% SE 8,3% SK 7,7% UK 6,7% PL 6,4% HU 3,6% BE 2,6% LI No change CH No change LT No change BG No change RO -12,6% 300,0% Source: Questionnaire to USPs. Main Developments in the Postal Sector 2013-2016 17

Bulk mail prices have increased by up to 28% Price change for 20g bulk mail letter, 2013-2016 % change 2013-2016 SI NO DE FI NL UK PT SK FR AT HU BE SE LT IT LI CH CY -8 0 0 0 0 3% 6% 7% 12% 12% 11% 10% 10% 15% 17% 21% 23% 28% Source: Questionnaire to USPs. Main Developments in the Postal Sector 2013-2016 18

Express, financial, and freight & logistics services are key to the future sustainability of the USO Number of USPs identifying an adjacent service important to the future sustainability of the USO Number of USPs High Moderate Low Negligable No answer Express services 12 1 3 5 Financial services 10 3 3 1 Freight and logistics services 9 6 3 3 Retail 5 7 3 4 Printing and mail preparation 3 9 6 3 Source: Questionnaire to USPs. Main Developments in the Postal Sector 2013-2016 19

Many countries authorize different forms of compensation by law, but rarely establish them in practice Is some type of compensation authorized by law? No 9,4% No answer 3,1% Is that type of compensation established in practice? No answer 3,1% Yes 31,3% 87,5% No 65,6% Yes Source: Questionnaire to NRAs. Main Developments in the Postal Sector 2013-2016 20

Services of general economic interest are an important source of funding/ economies of scope for some USPs Distribution of press Retail banking services Social services Electoral services Other services, e.g. energy renovation, recycling Main Developments in the Postal Sector 2013-2016 21

Despite falling revenues in the letter post segment, USPs maintained profitability relatively stable at 4-5% Development of USPs profitability in the EU, EEA & CH area, 2013-2016 Average EBIT % 5,3% +5% 4,8% 4,7% 4,1% 2013 2014 2015 2016 Source: UPU database, USPs annual reports. Main Developments in the Postal Sector 2013-2016 23

As a response to rising delivery costs, postal operators employ new operational models Have you carried out a major reorganization of your logistics network? No answer 19% Other 6% 53% Yes 22% No Source: Questionnaire to USPs. Main Developments in the Postal Sector 2013-2016 24

USPs share of total employment has declined across all European regions Contribution of USP employment to the overall employment at Europeanlevel Share of total employment, % 2013 2014 2015 2016 1,0 0,9-3% 0,8 0,7 0,6 0,5-6% -4% -5% 0,4-4% 0,3 0,2 0,1 0,0 Eastern Europe Northern Europe Southern Europe Western Europe Total EU Source: Eurostat 25

USPs are outsourcing the outlet part of their business to cut costs Share of USPs outsourced post offices, 2016 Share of a total number of post offices 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% UK BG NO DE AT EE BE GR FR MT CH PL SI CZ SK Sources: Questionnaire to NRAs. Main Developments in the Postal Sector 2013-2016 26

However, cost reductions did not impact the overall service quality of letter post Evolution of domestic quality of service for priority letter % letters arrived in D+1 2013 2014 2015 2016 80 83 0% 82 80 90 90-1% 89 89 92-1% -2% 91 92 94 93 90 92 92 Eastern Europe Northern Europe Southern Europe Western Europe Source: Questionnaires to NRAs. Main Developments in the Postal Sector 2013-2016 27

although most countries have seen an increase in user complaints Evolution of user complaints sent to NRA and USP Average number complaints per 10.000 inhabitants 2013 2014 2015 2016 106 +14% 105 113 120 +5% 28 +82% 30 43 50 58 54 64 61 21 +13% 21 21 23 Eastern Europe Northern Europe Southern Europe Western Europe Source: Questionnaire to NRAs. Main Developments in the Postal Sector 2013-2016 28

We have seen cases where postal regulations were adapted to changes in demand and supply conditions 1. Social need not delivered by the market 2. USO put in place to cover the social need What the market delivers Social need What the market delivers USO Social need 3. Market and social need changes 4. USO adapted What the market delivers USO Social need What the market delivers Social need USO Main Developments in the Postal Sector 2013-2016 29

Letter delivery speed (requirement) was reduced in several cases NO Merging of A and B letters, creating a D+2 standard service (2018) SE D+2 replacing D+1 as standard product (2018) FI Merging of A and B letters, creating a D+2 standard service (2017) DK Elimination of first class letters from the USO and decreased delivery speed for B- letters (2016) IT Introduction of slow letter mail product, D+4 (2015) Main Developments in the Postal Sector 2013-2016 30

together with the reduction in mail delivery frequency (requirement) NO Mail delivery on Saturdays discontinued (2016) FI Introduction of 3-day delivery in urban areas (2017) DK Introduction of XY-delivery (2009) NL Reduced delivery frequency (2014) IT Introduction to XY delivery in rural areas (2014) Main Developments in the Postal Sector 2013-2016 31

Countries apply a number of different exceptions to the minimum requirements of the USO set out in the Postal Directive Number of countries applying exceptions to the USO minimum requirements Priority letter post delivery frequency 17 Non-priority letter post delivery frequency 6 Mode of delivery of letter post 3 Parcels delivery frequency 11 Mode of delivery of parcels 15 Main Developments in the Postal Sector 2013-2016 32

The most common reasons for exceptions are related to accessibility, safety and efficiency Number of countries applying the exception Areas difficult to access 11 Low population density areas 6 Health and security endangerment of USP s employees 2 Main Developments in the Postal Sector 2013-2016 33

The impact of these exceptions is generally limited to 1% of the population Approximate share of the population not receiving priority letters at standard frequency [20%; 25%] [5%; 10%] [1%; 5%] [0%; 1%] 0% Source: Questionnaire to NRAs. Main Developments in the Postal Sector 2013-2016 34

Looking ahead, we find that market stakeholders are considering several policy scenarios for the USO 1 Status quo Maintain the current scope and minimum requirements of the USO 2 Reduce delivery frequency From 6 to 5 days nationwide From 5 to 2.5 days nationwide From 5 days nationwide to 3 days in rural areas, 5 days in urban areas From 5 days nationwide to 3 days in urban areas, 5 days in rural areas 3 Reduce speed of delivery From D+1 to D+2 From D+2 to D+5 4 Allow different forms of delivery From delivery to the door, delivery to the street From delivery to the street, delivery to the post office From delivery to the street, delivery to the communal centre 5 Remove uniform prices requirement Remove the price uniformity requirement, i.e. allow geographic price differentiation for SP and bulk letters 6 Relax ubiquity (acessibility) requirement Reduce the required number of post offices in rural areas by 25% to 50% Reduce the required number of post offices in urban areas by 25% to 50% Allow alternative models, e.g. mobile post offices, franchise model Main Developments in the Postal Sector 2013-2016 35

Besides providing financial sustainability, changes to the USO may also have a negative impact on certain users Impact on users from reduced delivery frequency and speed Vulnerable user Affected service (need) Alternatives? Elderly and disabled citizens Urgent delivery of medicine Pick up at the pharmacy Local delivery companies Delivery with homecare Slower delivery service, from D+1 to D+3 Laboratories and SMEs E-commerce consumers and online retailers Delivery of fresh samples or food Delivery of components and spare parts Delivery of small packets Express service Express service Parcel delivery Competing networks Private households and businesses Daily newspapers Digital newspapers Retail stores Competing network Source: Desk research, Interviews with e-retailers and consumer association. Main Developments in the Postal Sector 2013-2016 36

The potential negative impact on employment should also be considered Impact on employment from reduced delivery frequency and speed Activity in production chain Potential cost effects Economic rationale Collection No impact Sorting Small impact (-) Transport No significant impact Local sorting Small impact (-) Delivery Large impact (-) The need for overnight sorting is reduced. The extra time will allow for efficiencies in production. The extra time may allow for a less dense network of sorting centers. Ambiguous whether different mode of transportation requires less labour. The need for overnight sorting is reduced. The extra time will allow for efficiencies in production. When going from five day delivery to for e.g. delivery every other day, the daily route cover only 50 percent of the households requiring fewer man hours. This, in turn means a lower need for labour. Source: Desk research. Main Developments in the Postal Sector 2013-2016 37

Conclusions Structural decline in the letter post segment triggered by digitalisation is driving multiple changes in the European postal markets: USPs are responding through price increases, diversification and cost reductions. Governments are responding by authorizing and establishing compensation mechanisms, procuring public services, and optimizing regulations. In the future, we expect to see more initiatives to optimize the USO to changing user needs and contemporary market conditions. A special care must be taken with regards to potential impact on vulnerable users and employment. 38

Q&A 20 MIN BREAK PLEASE RETURN AT 11:40

2 GROWING VOLUMES OF E-COMMERCE PACKETS AND PARCELS

In contrast to the declining letter post, parcel & express volumes grew on average 13% annually Evolution of parcel & express services volumes, domestic, 2013-2016 Index (2013=100) 150 140 130 Annual change: +13% 120 110 100 90 80 70 60 50 2013 2014 2015 2016 Source: Questionnaire to NRAs. Main Developments in the Postal Sector 2013-2016 41

The product mix of postal operators is changing: less letters, more parcels Composition of domestic mail volume %, 2013 vs 2016 Share of domestic volume Parcel & express Letter-post services (addressed) 6% 11% 100% 94% 89% 2013 2016 Source: Questionnaire to NRAs. Main Developments in the Postal Sector 2013-2016 42

Demand for parcel and express services per capita varies more than five times across the European regions Domestic parcels & express items per capita, 2016 Items per capita per year 22 10 12 6 Eastern Europe Northern Europe Southern Europe Western Europe Source: Questionnaire to NRAs; Eurostat Main Developments in the Postal Sector 2013-2016 43

The landscape of cross-border e- commerce flows and origins vary substantially across countries The most common countries of origin of inbound cross-border e- commerce (2016) China US Germany 78% 38% 24% 10% 8% 4% UK Austria Source: IPC (2016) Cross-border e-commerce shopper survey, p. 15. Main Developments in the Postal Sector 2013-2016 44

The UPU terminal dues system creates financial transfers between national operators worldwide Designated postal operators will face a financial burden, if: 1) In the domestic market, costs for last-mile handling of mail, and postal prices are high; and 2) The country is a net importer or net exporter of international letters. 45

Eastern European regions receive positive transfers, while Western Europe experiences the largest negative net transfer overall Eastern Europe & Central Asia net financial transfer Million euros 165-4 213 0 0 0 51 Western Europe net financial transfer Million euros North Eastern Africa Europe & South & Sub- Asia- North Middle Central Central Saharan PacificAmerica East America Asia Africa -993 Total Western Europe Asia- North North South Sub- PacificAmerica Africa Central Saharan & AmericaAfrica Middle East Total 58 8 25 165 8 1.256 Main Developments in the Postal Sector 2013-2016 46

In contrast to the letter post segment, competition in the parcel & express segment is fierce Market share of the USP in the domestic parcels market Market share based on volumes in 2016 > 75% 4 countries 50% - 75% 5 countries 25% - 50% 7 countries < 25% 7 countries Source: Questionnaire to NRAs, public sources. Main Developments in the Postal Sector 2013-2016 47

And overall, there were more entries than exits in the parcel segment Market entries and exits in the parcel segment since 2013 Number of entries and exits 450-500 Entries Exits Top 3 countries in terms of number of market entries and exits since 2013 130 115-60% 92 150-200 36 41 5 EU, EEA & CH PL HU LT Source: Questionnaire to NRAs. Main Developments in the Postal Sector 2013-2016 48

Competition in the parcel segment is centred around core business clients Parcel and express revenues of the USP in 2016 Parcel and express volumes of the USP in 2016 Private customers 23% Private customers 11% 77% Business & Government customers 89% Business & Government customers Source: Questionnaire to USPs. Main Developments in the Postal Sector 2013-2016 49

Due to growing ecommerce, the total employment in the postal and courier sector has increased by 4% overall Evolution of postal and courier sector employment Headcount, thousands 2013 +4% 2016 +4% 1.829 1.901 +4% -4% 457 476 317 306 330 +11% 366 726 753 Eastern Europe Northern Europe Southern Europe Western Europe Total EU Source: Eurostat Main Developments in the Postal Sector 2013-2016 50

driven solely by employment at non- USO postal service providers Total employment by USP and other postal providers, 2008-2015 Headcount, thousands USP Other postal services providers 1200 1000 800 600 400 200 0 2008 2009 2010 2011 2012 2013 2014 2015 Source: ERGP (16) 38 Report on core indicators for monitoring the European postal market Main Developments in the Postal Sector 2013-2016 51

The level of increases and declines in the postal & courier sector s employment varies across investigated countries Overall percentage change of the postal and courier sector s total employment, 2013-2016 [10%; 35%] [0%; 10%] [-10%; 0%] [-40%; -10%] Source: Eurostat Main Developments in the Postal Sector 2013-2016 52

However, there are particular challenges to maintain the social standards in employment Use of different employment models by USPs Employment model Number of countries Change in the share of contracts 2016 vs 2013 Temporary employment 19 + 15-20% Subcontracted workers 18 + 55-60% Flexible employment 10-5-10% Performance-related pay contracts 7 + 1-5% Self-employment 5 + 80-85% Part-time employment 23-5-10% Source: Questionnaire to USPs. Main Developments in the Postal Sector 2013-2016 53

USPs are setting environmental targets on own and subcontractors operations Share of USPs setting environmental targets on their operations Other Unknown Share of USPs setting environmental targets to subcontractors Other Unknown No 13% Yes 40% 48% 79% No Yes Source: Questionnaire to USPs. Main Developments in the Postal Sector 2013-2016 54

USPs are investing in new cost-efficient and environmentally friendly modes of delivery Cost-efficient and environmentally friendly modes for the last-mile delivery Number of USPs > 50% > 20% 10-20% < 10% No or no answer Delivery by foot 4 6 3 5 Bicycles 3 0 3 8 Electric bicycles 1 1 1 7 Electric vans/ cars 1 2 0 11 Source: Questionnaire to USPs. Main Developments in the Postal Sector 2013-2016 55

Looking ahead, changes (if any) in the USO may have direct and indirect effects on parcels segment Motivation Revenue effect from reduced delivery frequency and speed for the standard service Revenue effect from introducing delivery to post offices in rural areas Packets may arrive later. Some mailers are able and willing to pay more. If not they may turn to other distributors. Some users of the USP s small packet service might switch to parcels as the price for express packet service is higher than for the standard service (up-trading). Some senders of packets may switch to other delivery solutions that can deliver to the door. 56

Thank you! We look forward to seeing you in interviews. We will meet again in September to present and discuss the final results. Main Developments in the Postal Sector 2013-2016 58

Q&A MAIN DEVELOPMENTS IN THE POSTAL SECTOR 2013-2016