Photo: Clemensfranz, CC BY-SA 3.0, via Wikimedia Commons

Universal Service Obligation: letter delivery services are changing, with the Nordics leading the way

National Post operators are clamouring for change, with some of the Nordic countries representing a source of inspiration for the UK and much of mainland Europe.

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Throughout Europe, national postal carriers are being put under severe pressure by the need to meet the Universal Service Obligation, which involves letters being sent 5 or even 6 days a week. Is change inevitable? And what could the future of letter delivery look like?

What is the Universal Service Obligation?

The universal service obligation (USO) is the core of the EU Postal Services Directive, and requires both letters and parcels to be delivered to homes and businesses 5 days a week.

There are exceptions to those rules in individual EU member states, while a form of the USO requiring letters to be sent 6 days a week also applies in the UK.

For example, In Germany, parcels must be delivered at least once every working day, including Saturday. In addition to this, newspapers and magazines must be delivered once every working day. Moreover, on average over the year, at least 80% of parcels posted in Germany must be delivered by the second working day.

Why is the USO becoming so hard to manage?

A significant fall in the amount of persons sending letters has coincided with a huge rise in the cost of conducting deliveries, creating a perfect storm that is burdening national postal services across Europe.

“After many years of adjusting our mail network, which is built to meet the regulatory requirement for countrywide delivery within 24 hours, further options to adapt to declining mail volumes and achieve necessary cost savings are becoming very challenging. At the same time, costs have increased significantly, resulting in a step-down in EBIT level year-over-year,” said Herna Verhagen, CEO of PostNL, reacting to the Dutch postal provider’s 2023 results.

Martin Seidenberg, Group Chief Executive Officer of International Distribution Services, who own the Royal Mail, has also made it clear that he wishes to see the USO reformed.

Offering his reaction to a Office of Communications report on the Royal Mail earlier this year, Seidenberg said:

“Ofcom’s report demonstrates that reform is urgently needed to protect the future of the one-price-goes-anywhere Universal Service. We are doing everything in our power to transform, but it is not sustainable to maintain a network built for 20 billion letters when we are now only delivering seven billion.”

Deutsche Post AG, otherwise known as DHL Group, wishes to see change come to the USO as well.

During a recent press conference regarding the opening of a state-of-the-art parcel sorting facility near Poznan in Poland, trans.iNFO took the opportunity to ask senior DHL Group representatives about the future of daily letter deliveries.

When asked if Europeans need to accept that letter deliveries 5 or 6 days a week will soon be a thing of the past, Nikola Hagleitner, CEO of Post & Parcel Germany, told trans.iNFO:

“Tobias [Meyer, CEO of DHL Group] has spent the past two years or so supporting us very heavily in Germany in getting a new, reasonable post law. I think you can’t generalise this for Europe though, because we have quite a few countries in Europe where the daily postal delivery is already a thing of the past. I look at the Nordics for example, they have less frequent deliveries per week.

We should also distinguish between priority letters, which arrive very fast the next day, and then those letters with more extended delivery times. What we have to accept, whether we like it or not, is that the amount of letters that are being written and sent out is decreasing. Just over the last one or two years we have seen a sharp drop in mail volumes in Germany.

Speaking for Germany, it’s not so much the speed that customers who send letters are looking for now. Reliability is what they really need. If it’s really something very important, or confidential, or something that needs to be covered by the postal secrecy act, then it goes out with the postal provider. So it’s not so much about speed anymore, but reliability.

It’s a very logical consequence that delivery times also need to be amended so that in a shrinking market you can still have an efficient business to run.”

Meyer himself added that it was important for the regulator and operator to do their bit to ensure efficient letter delivery for years to come:

“I think it takes two to tango. That’s also the case with a good performance in the Universal Service Obligation. You need to have a regulator that knows what the public wants, and also knows roughly what the preferences are in terms of willingness to pay, which is where some people struggle. Then you need an operator that drives both efficiency and quality.

In Germany, we took the decision some time ago to regularly integrate the delivery of mail and parcels. Given that we distribute parcels every day, the hurdle to also distribute mail every day is nowhere near as high as when you separate those networks. That is ultimately a discussion that is needed with the regulator. Then again, I think it’s important that regulators make up their mind about what the general public that they represent values the most, and then set the rules.”

Is change inevitable, and if so, what?

To get an idea how the new USO could look like, we need look no further than the Nordics, as Hagleitner indicated.

A case in point here is Norway Post, as Marek Różycki, Managing Partner at Last Mile Experts, explains:

“What they [Posten Norge] did was basically take a look at [the USO] first to understand things and to have arguments vis-a-vis the regulator. It then turned out that most of the public who were receiving non-tracked letters really didn’t notice whether they arrived 1 or 2 days later, as long as they arrived within reason. They thus implemented a system in which letters are distributed every other business day, normally Monday–Friday, in a two-week cycle [Mondays, Wednesdays and Fridays in one week, followed by Tuesdays and Thursdays the following week]. My understanding is that it didn’t actually lead to any major repercussions in the market,” said Różycki, a former Vice President of Amazon Logistics Europe.

Besides Norway, regional alternate-day delivery is already in use in many areas in Finland. As recently as last month, the catchment areas covering the towns of Lohja, Karkkila, Nummela and Saukkola became part of Posti’s alternate-day letter delivery system.

It is clear that there is appetite for a similar solution in the Netherlands too. In the aforementioned 2023 results statement, Herna Verhagen, CEO of PostNL, said:

“We intend to transition towards a service level for standard mail to be delivered within two days, moving towards within three days over time. We keep offering priority delivery, at a higher price.”

Martin Seidenberg, Group Chief Executive Officer of International Distribution Services, also appears to be interested in the USO model used in Norway and some other countries:

“Whilst other countries have grasped the opportunity to change, the UK is being left behind. There has been a lot of discussion about dropping Saturday letter deliveries in the UK, but as other countries have shown, there are a range of options to consider,” said Seidenberg, in the aforementioned statement.

While there is talk of change in countries like Germany, the Netherlands and the UK, new-look letter delivery services appear an inevitability in Denmark.

Indeed, as of January of this year, Denmark’s Universal Postal Obligation has ceased to apply. Postnord is nonetheless continuing to meet the obligations of the USO until a tendering process has been completed.

It must also be noted that Postnord is currently compensated for this by the government, while the same is true in France with La Poste, the latter of which shall receive compensation through to the end of next year.

Change, it seems, is coming, though some countries are clearly moving quicker than others.

Correction: it was initially stated that Postnord is compensated for its provision of the universal service in Sweden. This is not the case.

Here is what Postnord Sweden had to say about the universal service obligation in its 2023 results statement:

We are the proud provider of the universal postal service in Sweden. During the quarter, we continued to implement quality-enhancing measures to ensure high mail quality, going forward. A year ago, the main report from the Commission of Inquiry into Financing for the Postal Service was presented to the government. The report states that the universal service obligation involves a net cost for PostNord as a provider. We want decisions on regulatory relief, in the form of revised quality requirements, to be taken as early as possible. This would defer the time at which the mail business can no longer be operated without State aid.”

Photo: Clemensfranz, CC BY-SA 3.0, via Wikimedia Commons