Outlook: Post Office in retreat over price deregulation

Sainsbury/Prosser; Opec blinder
Click to follow
The Independent Online

Great news. All that junk mail could soon begin dropping through your letter box courtesy of someone other than Royal Mail. Not that the average householder will notice the difference, of course, or be any slower in binning it. The familiar postie will deliver the mail; it's just that another company will be paying him to do so.

Yesterday Royal Mail signed its first "access" agreement with a rival operator. It may not sound very thrilling but it is about the only way that competition is going to start eroding the organisation's 300-year-old monopoly.

Nobody in their right minds would replicate a network with 1,450 local delivery offices, 80,000 staff, 20,000 vans and tens of thousands of letter boxes. So the next best thing is to piggyback on Royal Mail, using its "final mile" to deliver the post more cheaply than it can.

The Business Post subsidiary UK Mail is first out of the traps, but only after two years of wrangling with Royal Mail and the threat from Postcomm that it would impose a settlement if the two sides could not agree.

UK Mail will pay Royal Mail 13p to deliver each letter and charge the sender about 15p, which leaves it with 2p to cover its own collection costs and turn a profit. Not bad when a first class stamp costs 28p.

The Business Post model works (just) with big business customers such as utilities and store card providers who send out mailers and bills by the thousands. But don't expect to start sending birthday cards for half price any time soon, if indeed ever. Virtually every piece of mail that begins life in a letter box is unprofitable, which is why Royal Mail has fought so hard to prevent the competition stealing its business customers.

When Postcomm suggested last May that Royal Mail should only be allowed to charge 11p for delivering on behalf of UK Mail, the howls of protest could be heard all the way to John O' Groats. Now it has discovered that it can live happily with just 2p more. Either the Royal Mail chairman Allan Leighton has made remarkable strides in cutting his cost base or he realises that, with these sorts of margins, there is not going to be a rush of competitors following UK Mail into the market.


Sir Ian Prosser should have spoken to his successor as chairman at InterContinental Hotels, David Webster, before signing up to be chairman elect of J Sainsbury. Mr Webster, about to step down as chairman of Safeway (boardroom musical chairs time again, I'm afraid), could have told him just what a chalice it is to be No 4 in the supermarkets league table, out traded and squeezed by the ever-growing buying power of Tesco and Asda. Now that Safeway is being taken over by Wm Morrison, Sainsbury's automatically moves down to fourth place. Despite the "transformation programme" of the past three years, it's not going to be a comfortable position to occupy.

That said, Sir Ian may never make it to the chairmanship, as Sainsbury's already has one chairman elect. That's Sir Peter Davis, who controversially steps up to become chairman next month upon the arrival of the new chief executive, Justin King. Sir Peter will occupy the chair until July next year. In the meantime, Sir Ian takes the title of deputy chairman and senior non-executive director. Sir Ian knows little about supermarket retailing as things stand, so there may be some merit in the transition period. Nonetheless, it looks messy, and with Sir Peter sitting there on top of him, Mr King may not have the free hand he needs to turn Sainsbury's around.

If you believe Sir Peter, the turnaround has already been done; all that's required is time to allow the transformation programme to show through in the results. Sainsbury's still lowly stock market rating compared with peers demonstrates a considerable degree of City scepticism. For the time being, the Sainsbury family's near 40 per cent stake is an insurmountable barrier to potential boarders. Philip Green, the retail financier, and other private equity buccaneers, would dearly love to fire a broadside, but without the family's support, they are stymied.

Emotional attachment alone makes the family reluctant sellers. The largest block of family shares is in any case owned by Lord Sainsbury who, because of his position in the Government, is obliged to hold them through a blind trust. That further paralyses the chances of bid activity. As if all this were not enough, Sainsbury's continues to pay one of the biggest dividends in the FTSE 100. While that remains the case, the family wouldn't be willing sellers, if only because they'd find it difficult to invest the money elsewhere for the same income. All of which makes the dividend yield Sainsbury's most potent poison pill. Sir Peter is confident he can continue to finance it, but then he only has to run with the problem for the next 18 months.

After that, it's Sir Ian's turn. Sir Ian is a somewhat unimaginative and worthy choice as Sir Peter's successor. His record as executive chairman of Six Continents was a chequered one; he overpaid for InterContinental, but he got a good price for the Bass breweries and eventually he did the right thing in returning cash to shareholders and breaking the company up. Sir Ian also knows all about the particular problems of out of favour companies; the wolves have been at his own door often enough.

Yet Sainsbury's is quite a challenge for anyone, even with the protection of the family. Let's hope that Sir Ian, now in the last lap of his career, realises what he's taking on.

Opec blinder

Let's get one thing straight. Opec is not a cartel and it is a complete nonsense to describe it as one. I know this because I had the pleasure of sitting at the same table as the Saudi oil minister, Ali al-Naimi, at a recent lunch, and the mere suggestion that the Organisation of Petroleum Exporting Countries acts like a cartel had him positively foaming at the mouth with indignation. So if Opec, an organisation that regularly sits down to decide how much oil each of its members is allowed to produce, is not a cartel, what is it?

According to Mr Naimi, Opec is just a responsible manager of the price of oil in the interests of producers and consumers alike. If the price of oil gets too high, then it adds to industrial costs and stunts growth. If it gets too low, there's no incentive for exploration and development, leading to shortages and higher prices down the line. It is therefore in everyone's interests that the price is kept stable by controlling supply. Indeed, we should all be jolly grateful to Opec for the public service it selflessly undertakes.

Bravo, but you have to wonder after yesterday's totally unexpected 1 million barrels a day cut in quotas. The reduction is made all the more surprising because for some months now the price of oil has been trading way above Opec's target range of $22 to $28 a barrel. Mr Naimi attributes the relatively high price to the activities of speculators, who mistakenly anticipate developing supply shortages. There is no chance of that, he would suggest, as Saudi and others can so easily turn up the taps.

Yet on the evidence of yesterday's decision, the speculators seem to have had it about right. Mr Naimi insists there is no desire to move to a higher benchmark, and he can at least point to forecasts from the International Energy Agency suggesting that demand in the second quarter will be lower than usual. I've got my doubts. The oil price is relatively high in dollar terms, but in euros and yen it is not so bad. Relatively, it may not be far off the mid-point of the target range. As compensation, Opec is surreptitious discarding the established benchmark. But don't worry. Cartel-like behaviour this is not. It's only about responsible management of the oil price.