Mark Kleinman on marketing and the City: Pushing the envelope

The sense of political hiatus in Westminster is palpable, even as the financial markets await the details of a plan to tackle the budget deficit. Given the real prospect of the first hung parliament in decades, they may still be waiting until long after the general election.

While it ranks a long way down the major parties' list of priorities, the future ownership of Royal Mail will be a subject of intense debate both during the election campaign and long into the term of the next government.

It is not only the political agenda that will be crucial. Much will also depend on the leadership of the company. For now, the direction of its commercial strategy has, to some extent, been consigned to limbo by the resignation of Adam Crozier, its chief executive.

Crozier's decision to swap one challenged organisation for another (in a few months he will be off to lead ITV) was hardly surprising after almost seven years at Royal Mail.

However, the sometimes dismissive verdict on his tenure at the helm of Britain's postal operator ignores the reality: had Crozier and Allan Leighton not engineered the brutal reforms that led to tens of thousands of jobs being cut, the business would almost certainly have been rendered insolvent years ago.

Now, at least, it has a fighting chance. This is important to the marketing community because, diminishing though its share may be, direct mail continues to represent a significant ingredient of the advertising messages of most consumer-facing brands. This despite the fact that the rise of the internet industry has made what Sir Martin Sorrell, the WPP Group chief executive, has referred to as a 'frenemy' of the advertising industry.

Last year's attempt to offload a one-third stake in Britain's postal service also underlined the structural challenges facing mail media.

There were only two serious expressions of interest in the acquisition, one from CVC Capital Partners, the private equity group with extensive experience of investing in European postal service operators. It offered just under £2bn for the stake, a price that did not meet ministerial valuations and may have stoked political controversy, given the low esteem in which the private equity industry has been held in Westminster.

The only other significant interest came from Dutch postal operator TNT, but its proposal was of little interest to business secretary Lord Mandelson, since the company was primarily interested only in GLS, Royal Mail's profitable European parcels operation.

As well as the burden of the universal service obligation (Royal Mail must deliver to every address in the country for a uniform rate) the legacy of its troubled industrial relations is another stumbling block for a company that badly needs to reinvent itself in a hostile competitive environment.

That competition is now deadly serious. The Barclay brothers, proprietors of the Telegraph newspapers and owners of the Littlewoods retail business, recently acquired DHL's home delivery parcels business to merge with Home Delivery Network, creating Britain's second-biggest domestic parcel-deliverer.

The combined business now has about 17% of the market, versus Royal Mail's 30%, and there is little doubt that it, and other entrants, will further erode the former monopoly's share.

Whether under a Conservative or Labour government, that trend will only accelerate for a Royal Mail still in need of modernisation if it is to remain relevant as a marketing medium. Any buyer of a minority stake will need to possess considerable courage - and deep pockets.

Mark Kleinman is City editor at Sky News and a columnist for The Times

30 SECONDS ON ... POSTAL COMPETITION

- The UK mail market was fully opened up to competition on 1 January 2006. The bulk mail market has been open to competition since 2003.

- Most of the initial 25 licensed operators were already running a mail or express/parcels business when they entered the market.

- Royal Mail still delivers more than 99% of all licensed mail in the UK, although its rivals handle about 30% of post at some point in its journey.

- There is little end-to-end competition because, under access agreements, rivals collect, sort and transport items that they then pay Royal Mail to deliver.

- There are now 44 licensed operators in the postal-delivery market. One of the smallest is City Centre Couriers, in Plymouth. Its licence covers the UK, but its sole full-time employee, Ken Holder, collects and delivers mail and packages across just three postcodes, by bike. It charges 32p for next-day delivery of a small letter and from 50p-£3 for parcels, although, as with Royal Mail, prices will rise from 6 April.

This article was first published on Marketing