iStock 000016349860XSmallPrice of second class stamp could rise by 50 per cent

24th October 2011

Royal Mail will be given the power to charge an unlimited price for first class stamps while the cost of sending a letter second-class could rise by more than 50%, under plans announced yesterday.

There should be no cap on prices for the vast majority of Royal Mail’s services, including business post, bulk mail, and large letters and parcels sent second class, the regulator, Ofcom, said.

The proposed seven-year deal would see the cost of a second-class stamp rise from the current 36p to between 45p and 55p

The plan to relax the limits on pricing are intended to ensure that Britain’s “universal” and “affordable” postal service remains viable, Ofcom said.

But consumer groups warned that customers could be put off if stamp prices rose too far, leading to another crisis for Royal Mail and even higher costs in future.

The take-up of mail services has been badly dented by the expansion of email, broadband internet and the widespread use of mobile phones over the past decade.

The number of postal deliveries has fallen by a quarter since 2006 and Royal Mail’s letters business made a £120 million loss last year. At the same time, increases in the price of stamps have been kept below the level of inflation, leaving the national postal service “under threat”, according to Ofcom.

The proposed seven-year deal, which could come into force in April, would see the cost of a second-class stamp rise from the current 36p to between 45p and 55p, a possible 53% increase.

There would be no limit on the price of a first class stamp, which currently costs 46p. One option could be to bring it more closely into line with countries such as Denmark, where a first-class stamp costs 67p, or Italy, where a next-day delivery costs 69p.

Ed Richards, chief executive of Ofcom, said the public “love” the “universal” British mail system. Under the law, Royal Mail must collect and deliver post six days a week, at an affordable price, to every address in the UK.

“People want their postie on the street,” Mr Richards said. “It is really popular but it’s also what determines the underlying cost.”

Mr Richards argued that Royal Mail would be unlikely to increase the cost of first class post excessively because customers would simply “trade down” to second class, or rely on email if prices rose too far.

The reforms would also encourage far more competition, allowing rival companies to collect, transport and deliver post entirely independently of Royal Mail’s network, which could also keep prices keen, he suggested.

However, Mr Richards warned Royal Mail that it must find more “efficient” ways of operating as costs had risen sharply at a time when its business was in decline.

He said the government’s plan to privatise Royal Mail would help keep prices in check, while Ofcom would be able to “intervene” if postal services became too expensive for consumers.

Businesses and individuals were urged to give their views during the 11 week public consultation on Ofcom’s plans, before reforms are introduced in next spring.

The government and Royal Mail welcomed the consultation but consumer groups expressed alarm.

Mike O’Connor, chief executive of Consumer Focus, said: “This could be the biggest shake-up to the mail market that we have ever seen. “Mail services are going to get more expensive. While the unit cost of a stamp may seem small, consumers have a right to expect value for money.”

Richard Lloyd, executive director, Which?, said many customers felt postal services were “patchy” and that pricing was “confusing”.

“It is essential that these plans don’t result in a downward spiral, with more people put off sending letters, leading to even higher prices,” he said.

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*According to the Federation of Small Businesses (FSB) "The true cost of sending a letter in the UK, including paper, envelope, toner, machine rental, post and time is between 90p and £1.20 (depends on staff hourly rate)."