Business

UK: Post Office struggles to recover from a bruising scandal

There are few businesses that have to guarantee they will be within three miles of 99 per cent of their customers. That have to put a social purpose ahead of — or at least on the same footing — as making a profit. And occupy a cherished place at the heart of British communities.

The Post Office, whose 11,500 branches are visited more than 9m times every week in the UK, fits that bill.

But all is not well in the 361-year-old institution. As well as trying to redefine its relevance and find its way in increasingly competitive markets, it faces long-term questions over its survival as a result of a bruising scandal that shredded relations with many of its own sub-postmasters who it wrongly prosecuted. The fallout from the case will force it to go cap-in- hand to the government later this year to ask for hundreds of millions of pounds in support to continue operating.

Even after a line is drawn under the scandal, the Post Office will face longer term questions over whether its business model still works. “It seems unable to generate new revenues, says Professor Barbara Casu of Bayes Business School. “It is at a crossroads and really has to make a decision on what it wants to be.”

Another round of cost-cutting and restructuring seems inevitable but risks further undermining relations with the public. Sammy Ahmed, a postmaster was recently told that his branch that dates back 190 years in Haworth in West Yorkshire — close to where the Bronte sisters wrote most of their novels — would be closed and replaced by a concession in a food store 10 minutes down a steep hill. Within days the local community had organised a 1,000 signature petition opposing the closure.

“The Post Office has been planning behind the scenes. I don’t see the reason they want to move it down there,” says Ahmed. “Apart from they want to cost-cut and save pennies.”

All is not well in the 361-year-old institution © Tolga Akmen/AFP/Getty

Since it was hived off from the newly privatised Royal Mail delivery service in 2012, the state-owned group, which rolls together banking and postal services with a travel operations, bill payments and government-related bureaucracy, has been operating as a commercial entity striving to make a profit in competitive markets.

But unlike most businesses, the Post Office also has a social purpose. Its branches provided a vital lifeline during the coronavirus pandemic, especially in rural villages where shops and bank branches have closed and where it still provides critical services for small businesses as well as the elderly and vulnerable.

Over the past decade, the Post Office has required more than £2bn of government investment to modernise its network. It received £227m from the government in 2021/22 including a £50m subsidy to keep 4,000 rural post offices afloat — a reflection of the political sensitivity attached to Post Office closures.

Column chart of £m showing Post office: profits and losses

Now it needs millions more from the government to help it pay compensation over a scandal linked to its Horizon computer system. This led to the wrongful prosecution of dozens of innocent sub-postmasters who had their lives ruined when they were imprisoned and suffered bankruptcy, marriage breakdowns and health problems in what MPs have described as the biggest miscarriage of justice in recent times.

The Post Office will have to ask for substantial support in the government’s upcoming autumn comprehensive spending review which sets ministerial budgets for the next three years. It argues that it can contribute to Prime Minister Boris Johnson’s ambitions to “level up” poorer areas and “build back better” from the pandemic. However, as the government struggles to rein in a £300bn post-pandemic deficit, competition for government money has rarely been fiercer.

“When the general public want to see money go to the NHS, police and schools, then it’s a pretty big ask for the Post Office to get a big hike in subsidy,” says Greg Smith, Conservative MP for Buckingham. “It would be a hard pill for my constituents to swallow . . . They already see the Post Office as an expensive service.”

Nick Read, chief executive of the Post Office, recognises that remuneration is an issue
Nick Read, chief executive of the Post Office, recognises that remuneration is an issue © Harry Mitchell/FT

Difficult decade

When ministers split Royal Mail from the Post Office, the aim was to free the parcel carrier from the nationwide branch network and let it compete as a privatised mail business with the advent of online shopping. The split gave the government control of a retail network bigger than any owned by the UK’s banks, but one that made an annual loss of £119m in 2012.

Although the Post Office turned a profit in 2016-17 — its first in 16 years — annual turnover has slipped below £1bn since 2014 as digitisation ate into some of its core business. Although the growth in ecommerce has kept mail services at more than a third of Post Office revenues, turnover generated by government services has collapsed 80 per cent since 2005 as car tax and payment of pensions and child benefits have shifted online. In 2019-20, the wave of litigation caused it to slump to a £305m loss.

Nick Read, Post Office chief executive, says that trading profit is expected to be between £35m and £40m in 2020-21 against £86m in 2019-20 after the pandemic hit its travel business.

The structural headwinds faced by the Post Office are compounded by around 97 per cent of its network being run by franchisees — either independent postmasters or retailers like WHSmith.

Run by the Post Office, the BankHUB operates as a shared bank branch, providing banking services for consumers and small businesses, for all major banks
Run by the Post Office, the BankHUB operates as a shared bank branch, providing banking services for consumers and small businesses, for all major banks © John Keeble/Getty

Sub-postmasters complain that they lost out a decade ago because of the move towards a payment model based on commission on each parcel, letter or bill that they handle. Under the Network Transformation Programme announced in 2010, sub-postmasters lost a fixed annual payment topped up by commission on transactions and moved to a commission-only basis. To sweeten the deal they received investment to modernise their branches and a transitional payment. The hope was that longer opening hours would bring more sales.

However, a 2019 parliamentary report into the Future of the Post Office Network found that the fees which sub-postmasters have received for providing services fell from £478m in 2012-13 to £365m in 2018-19. They can earn as little as 38p for handling a parcel. A separate 2019 survey by the National Federation of Subpostmasters found that three-quarters of its members earned below the then national living hourly wage of £8.21.

Mark Baker, 63, is the Communication Workers Union sub-postmasters’ branch secretary and for 33 years has run a post office in Larkhill near Salisbury Plain in Wiltshire. He estimates that his annual income from his Post Office business more than halved from £34,000 in 2015 to £14,000 in 2016 and he now relies on his retail business to stay afloat.

Baker believes that the pre-2010 system worked well. “It covered the costs of us being here,” he says. “The fixed payment was there to help keep branches going.”

Read recognises remuneration is an issue but says sub-postmasters’ pay has increased by 16 per cent over the past two years. “We have to build on this extraordinary balance between being commercially sustainable,” he says, “but also fulfilling a social purpose and making sure we are a modern franchise.”

The drive to be ‘commercially sustainable’

The Post Office is bound by its social commitments. That means supporting branches dotted around rural villages which are often the last shop or bank in the community allowing customers to pay in cash or cheques. The government subsidy for these Post Office branches has gradually reduced from £210m in 2012-13 to around £50m annually in the drive to make the Post Office commercially sustainable.

Read says the idea, floated internally in 2017, was to eliminate government support besides the subsidy for rural branches by 2022 but that is now unrealistic. “It would be fair to say the onset of the pandemic and the onset of the litigation is going to make that very difficult,” he says.

Yet he believes it is achievable by 2025-26. “‘Commercially sustainable’ is quite an interesting concept because clearly as part of our social obligation and social purpose, the government provides a subsidy.”

While some of the Post Office’s challenges are unique to it, the shift to a cashless society, ever-advancing digitisation and ubiquitous internet coverage pose a dilemma for postal operators around the world.

The UK is unusual in having hived off the network from the postal delivery arm that has high revenue growth potential. Most operators still have the physical network bundled together with logistics and sometimes also with savings banks or insurance in countries such as Japan and Italy.

Shopkeeper Kamran Rasool working behind the counter at a Post Office in Stoke Newington, London
Shopkeeper Kamran Rasool working behind the counter at a Post Office in Stoke Newington, London © Hollie Adams/Getty

Elmar Toime, a former senior executive in global postal services who now acts as a consultant, believes it is only a matter of time before other countries follow the UK in putting the physical postal network into government hands. “I’m tending to conclude it was the right call,” he says. “It has taken the question of community need out of the hands of the operator and into the politician.”

Several countries such as Sweden and Germany have effectively handed over responsibility for the network to commercial retail partners, who receive a small commission. Mathias Krummel, chief executive of PostNord Sweden, a state-owned, profit making postal service, says it shut all its post offices in 2001 and embedded “parcel shops” in retailers, winning the public over with longer opening hours.

Read wants to adopt automation such as self-service kiosks in 2,000 to 3,000 branches, as done by Post Canada, a move he admits will cost jobs. He also has an ambition to get a foothold in the parcel pick-up and drop-off market which could be worth as much as £500m by 2025, according to Read, and to act as agent for banks leaving the high street.

Trading profit is expected to be between £35m and £40m in 2020-21 against £86m in 2019-20 after the pandemic hit the Post Office travel business
Trading profit is expected to be between £35m and £40m in 2020-21 against £86m in 2019-20 after the pandemic hit the Post Office travel business © Chris Ratcliffe/Bloomberg

In December last year, Post Office signed a non-exclusive agreement with Royal Mail, opening the way for it to accept other carriers’ parcels — which it is trialling in 200 stores with Amazon and a slightly larger number with DPD. But parcel distribution is fiercely competitive and the deal also means that Royal Mail — the UK’s largest logistics group — is now free to have its parcels handled elsewhere.

“I don’t think the non-exclusive agreement will generate extra revenue for the Post Office,” says Nick Pendleton, a former Royal Mail Group executive. “It had an artificially high guarantee of revenue from Royal Mail [which it has now lost].”

Baker is also sceptical about whether the Post Office can thrive if it is little more than pick-up and drop-off outlets with a few extra services thrown in. “We get a few pennies for keeping stuff safe before the drivers come to pick them up,” he says. “We are all fighting for [this business] and it spreads the jam too thin.”

Equally, acting as a physical agent for retail banks will be a low-margin business unless the Post Office becomes a fully fledged lender, something which Read dismisses because of regulatory hurdles. Its challenge is to renegotiate the Banking Framework Agreement with the UK’s major lenders, which expires in January 2023, to give the Post Office greater returns for handling essential banking services. Its hand would be strengthened if the government makes access to cash a legal right.

The shift to a cashless society, ever-advancing digitisation and ubiquitous internet coverage pose a dilemma for postal operators around the world
The shift to a cashless society, ever-advancing digitisation and ubiquitous internet coverage pose a dilemma for postal operators around the world © Chris Ratcliffe/Getty

‘Flat earth’ thinking

Yet all these ambitions for the remaking of the business risk being overshadowed by the fallout from the computer scandal. The Post Office spent almost £100m fighting a High Court case brought by 555 sub-postmasters before finally agreeing to pay £57.75m to settle the case.

The decision followed an excoriating 2019 ruling in which High Court judge Peter Fraser concluded that the software prior to 2017 contained bugs which caused account discrepancies at branches. He criticised Post Office management for refusing to accept earlier that the computer system was at fault and described its position as “the 21st century equivalent of maintaining that the earth is flat”.

The bill for the Post Office could run into hundreds of millions of pounds. It has set aside £153m to compensate sub-postmasters who suffered historical cash shortfalls in their branch accounts due to the computer system but who were not prosecuted. However, a recent Freedom of Information request found that the scheme could cost up to £311m. Paul Scully, postal affairs minister, said in March 2021 that the government would stand behind the compensation scheme which is “beyond what the business can afford”.

Former subpostmaster at Hogsthorpe, Tom Hedges (C) pops a bottle of champagne in April after the court ruling
Former sub-postmaster at Hogsthorpe, Tom Hedges (C) pops a bottle of champagne in April after the court ruling © Tolga Akmen/AFP/Getty

The Post Office has pledged interim payments of £100,000 each to the 59 sub-postmasters from the Horizon case who were acquitted. However, compensation could reach £500,000 for the most egregious cases, says Neil Hudgell, a lawyer for a number of the 736 whose prosecutions are still being looked at.

“The Post Office is deeply saddened and deeply troubled and deeply sorry for what has occurred,” says Read.

Separately, more than 120 sub-postmasters are suing the Post Office over whether they should be classed as self employed or as “workers” — giving them entitlement to paid holiday, pension rights and sick pay.

All this litigation comes at a cost. In the company’s latest annual report, auditors PwC warned that in some “downside scenarios” the Post Office might not have enough cash to pay its bills — although the government has said it will support the business.

It faces ongoing probes, including retired judge Sir Wyn Williams leading a statutory inquiry examining what went so catastrophically wrong in the Horizon case. “The scandal has turned what was arguably one of the most trusted brands in Britain into one with significant toxicity,” says Paul Marshall QC, barrister for three exonerated sub-postmasters.

Read — who took over in September 2019 — argues the reputational damage is limited. But he accepts that the Post Office had a “parent-child” relationship with its sub-postmasters. To rebalance that, it has co-opted two on to its main board and is investigating the creation of a profit share scheme with sub-postmasters when it makes money.

Lord James Arbuthnot, a Tory peer who spent years campaigning to get justice for the sub-postmasters, believes the Post Office could act as a government hub for villages and towns “once this appalling reputational damage is gone”. “I think it has a very bright future but I think the government has to manage it in a more imaginative way,” he adds.

But Casu of Bayes Business School believes the purpose of the Post Office needs redefining since all the moneymaking lines have gone to Royal Mail.

“Should we make them a public service and don’t expect them to make a profit? Or do we make them profitable?” she asks. “It’s trying to sit somewhere in the middle between having a public function and making a profit. That’s very difficult to do.”

Most Related Links :
todayuknews Governmental News Finance News

Source link

Back to top button
Native News Post