Royal Mail Group, which includes the Royal Mail, Post Office and Parcelforce Worldwide brands, is entering one of the most critical periods in its history. Liberalisation of the postal market last year and a growing number of competitors are giving customers new choices. Royal Mail is facing market pressure.
This year, its competitors are expected to handle more than 2.5 billion letters and packets - a significant slice of the group’s annual mailbag of 22 billion items.
Electronic media are also hitting postal services. The total volume of the UK mail market fell by 2% in 2006 compared with the previous year - a trend also apparent in other countries. Postal services are bracing themselves for further reductions, which they attribute to the growth in electronic communications and the expansion of broadband.
Adding to Royal Mail’s woes is a massive £6.6 billion black hole in its pensions scheme. Despite the company turning a £1 million-a-day loss into a £355 million profit in 2006, the deficit continues to have a "substantial" impact on its financial results. The company’s response is to focus on operational efficiency, improving quality and reducing costs.
Postal services are a carbon-intensive business. Royal Mail’s operations emitted 810,174 tonnes of carbon dioxide in 2005/06.
The group uses 450 gigawatt-hours of electricity a year. Its energy bill is £38 million and it spends more than £200 million on fuel and transport. It is no surprise its managers have focused on reducing these costs.
"Fiscally, there’s a compelling case to drive emissions out in the first instance and only then look to carbon offset," says Dr Martin Blake, Royal Mail’s head of social responsibility and sustainability.
"Clearly there’s a responsibility to manage our carbon as with any responsible business, but also I’m of the firm belief that carbon is very much equated to money. If you are emitting carbon, somewhere down the line you are spending money to do that."
Royal Mail’s carbon management programme is a response to its current predicament. Formally adopted a year ago, it brings together a series of projects previously operating in isolation to form a coherent change-management strategy.
The strategy will help drive Royal Mail’s commitment to be carbon neutral by 2015, not only in terms of its own direct impacts, but "as far as possible through its supply chains".
Key to the strategy is a three-step approach to carbon management: reduce and eliminate carbon emissions first, consider alternative fuels second and then consider residual carbon offsetting.
A recent Carbon Trust review of the group’s operations indicated that much of the low-hanging fruit had already been picked. Even so, it still identified opportunities for the group to save £8-17.5 million.
The focus is energy monitoring and management, incentivising managers and rolling out a "second generation" of carbon management initiatives in four areas: its supply chain; a responsible mail programme; transport and buildings energy efficiency; and a communications and employee engagement programme.
Greening the fleetRoyal Mail’s 35,000 vehicles travel 1.8 million miles per day and use 160 million litres of diesel. Annually they emit 495,567 tonnes of CO2 and cost £261 million.
The group has committed to reducing its fleet’s use of fossil fuel diesel by 14% by 2010 based on 2004/05 volumes. It is focusing on route planning, engine choice and trailer design to achieve this. And by 2010 the company has ambitions to be a leading user of alternatively fuelled vehicles.
The group is currently out to tender for bulk fuel supplies. It is hoping to maximise the use of a 5% biodiesel blend at no extra cost. It has stuck to 5% because vehicle supplier warranties become invalid above this level.
"Is 5% biodiesel an appropriate blend? Should it be more? And should warranties on cars reflect that?" asks Dr Blake. Talks are under way with the Society of Motor Manufacturers and Traders to explore these points.
Royal Mail has been trialling different fuel options and vehicles for some time. Nearly 150 liquefied petroleum gas vehicles are on the road around the country and tests have been carried out on low-sulphur, natural gas, electric and hybrid vehicles, scooters and trolleys. The group is also exploring whether wind microgenerators on its properties could help recharge electric vehicles.
"The progress is ongoing," says Simon Francis, of Royal Mail’s CSR team. "We test as and when new bits of kit or technology emerge."
To increase the carrying capacity of large vehicles, the group is phasing in 200 double-decker articulated lorries this summer, which will cut its total fleet by 100 vehicles.
A 10% reduction in fuel usage is also being sought through driver training programmes and synthetic oils. The latter have a small miles-per-gallon advantage over mineral oils and have already been introduced into larger vehicles.
Route scheduling remains a major consideration. Until now the network has operated on limited information but, with new speed restrictions for 7.5-tonne lorries coming into force from January 2008, a significant overhaul of route planning is under way and telemetry technology is expected to be rolled out this year.
The company is expecting significant emission cuts, although Mr Francis said the jury was still out on the extent of the benefits. He pointed to experience in other industries which have reported savings of 5-15%.
Just over 7% of the group’s carbon emissions come from air freight but, contrary to conventional wisdom, the group maintains that the 2003 decision reduced carbon emissions. Careful planning meant emissions from its trunking network were cut by 19%, it claims.
Royal Mail owns about 2,700 properties and energy running costs are around £38 million per year - emitting 314,607 tonnes of CO2. Currently 12% of its energy is derived from combined heat and power and by 2010 the firm aims to cut the energy use of its buildings by 10% on 2004 levels.
The group is rolling out a behavioural change programme, in partnership with its power supplier, to motivate staff to be more energy efficient. But it is also turning to technological options and ‘green’ energy supplies to reduce impacts.
Royal Mail has begun exploring ways that it can maintain a high level of renewables when its 100% renewable energy contract with EDF Energy expires in 2.5 years.
Photovoltaic cells on the group’s buildings have been ruled out due to the long payback period, but heat pumps, woodchip boilers and wind turbines are being considered. Site surveys have identified two viable sites for large wind turbines and the company is measuring the wind speed to test feasibility.
Responsible mailOne area of the programme still under development and veiled in secrecy is the company’s responsible mail programme.
Continued debate over junk mail is likely to be one of the key drivers for such a programme. Despite growth in advertising, direct mail volumes have been in decline since 2004. The latest figures from Royal Mail show a 2.1% fall in 2006 to 5.3 billion items.
Nevertheless, a Which? magazine survey in January found junk mail was the main public concern regarding postal services. Nearly a third of respondents expressed dissatisfaction.
Regardless of the findings, Royal Mail is still marketing its direct mail services heavily. It is understandably keen to hang on to the revenue it pulls in and wants to persuade consumers that traditional mailing can be environmentally responsible.
At the same time, the group sees a marketing opportunity in the swell of public concern about the environment.
Details on the programme’s shape have yet to emerge, but at its core it is expected to help clients better target direct mail, reduce unnecessary mail, and offer a mailing scheme that focuses on reducing whole-life-cycle impacts, not just carbon emissions.
"If a bank wanted to offset 10,000 statements we could tell them the carbon impact of that," said Dr Blake. "But we don’t think that’s responsible. We want to facilitate a more sustainable approach."
Some of the programme’s components are starting to come to light. In January, Parcelforce Worldwide offered customers "carbon free" parcel delivery. It has calculated the carbon emitted to deliver each parcel and is giving online customers the option of offsetting postal emissions via a 5-pence donation per parcel delivered in the UK or 10p delivered overseas. The money is invested in a tree-planting programme run by the Woodland Trust.
The choice of tree-planting offsets is likely to be controversial in view of the current debate over the carbon benefits of non-tropical tree planting schemes (ENDS Report 384, p 24 ). Critics are likely to accuse the group of jumping on an already-crowded bandwagon and dismiss the move as an attempt to play the green card to gain a competitive advantage.
Royal Mail says "early indications are promising". Nonetheless, levels of uptake of the service remain confidential. The group says it is planning to roll out the service further this year.
A particularly progressive strand of Royal Mail’s approach is its supply chain focus.
The group is a major buyer of goods and services. Key areas of expenditure include technology (£2,128 million per year), conveyancing (£510 million), marketing (£479 million), fuel and energy (£309 million) and vehicles (£243 million). Optimum management of this expenditure is, the company says, critical to building and sustaining profitability.
To assess where to focus attention, the company has plotted the carbon contribution of each major area of expenditure, from rubber bands to fuel, against the scale of spend (see figure).
Product groups with a high spend and a high carbon contribution will be targeted first.
The group has also changed its supply chain management. All tender invitations now include a standard sustainability schedule based on the UN Global Compact (ENDS Report 381, p 10 ). Potential suppliers are required to report on their environmental performance as part of the contract award process. Key performance indicators have been built into contracts so suppliers’ or subcontractors’ environmental performance can be monitored and verified.
"Purchasing has been completely transformed, the way in which we rationalise our buying decisions, the way in which we procure," says Dr Blake. "We are no longer looking at things only on a cost-and-supply basis but looking at procurement in a much more strategic way."
An example is the company’s current tender for automated letter-sorting machinery, worth £1 billion, which is taking a "forward commitment" approach, similar to that currently being trialled by government (ENDS Report 384, p 23 ).
The energy efficiency of the machinery was quickly identified as a key environmental impact and Royal Mail’s purchasing power gives it the clout to trial an innovative approach.
Along with generic requirements relating to end-of-life impacts and how easy the equipment is to disassemble and dispose of, the company has included carbon-related criteria in its specification to encourage manufacturers to design in energy efficiency.
To drive the message home and, in part, to pass on carbon ‘risks’, the successful bidder will be required to offset carbon emissions generated by its equipment throughout its ten-year operational life. The offsets are to be through a scheme of Royal Mail’s choosing.
"It’s about trying to get suppliers to think about energy efficiency up front," says Dr Blake. "We want to see manufacturers building in operational energy efficiency from the outset."
Passing on carbon risksFigures on how much carbon have actually been saved and the extent of alternative fuel procurement through the programme’s first year are still awaited.
But Dr Blake thinks the group is on track: "We’ve actually made greater progress than we originally thought. Some of the targets need to be changed and made more stringent."
Alongside target revisions, the group wants to extend its carbon footprint analysis to include impacts further down the supply chain. And, following the controversy over double counting, it will not claim emission reductions from its renewable energy contract with EDF Energy until there is clear guidance on how companies should deal with renewable energy reporting (ENDS Report 386, p 9 ).
"We do have concerns. Can we count it in our carbon footprint or not?" says Dr Blake. "At the moment we aren’t taking the line of some corporates and claiming reductions while there is uncertainty regarding possible double counting."
As for carbon offsetting, Royal Mail claims its use has been "limited to date" as the focus has been firmly on demand reduction and the use of low-carbon fuels.
Like other firms, the group is cautiously reviewing offsetting schemes and the development of regulated and voluntary standards following the recent consultation by the Environment Department (DEFRA) and growing concern about sham offsetting (ENDS Report 384, p 5 ).
Either way, even with its current activities and targets, the organisation will need to buy a lot of carbon credits to abate its remaining emissions to meets its carbon neutrality commitment.
The cost to the business would be significant. Even if the group cuts emissions by 30% between now and 2015, it would still need to offset more than 550,000 tonnes of carbon emissions. And with Kyoto mechanism emission reduction credits currently selling at €6-10 each, the cost will run into millions of pounds.
But this is where Royal Mail is playing it smart. By expanding its responsible mail scheme it can pass on some of those costs to customers. The group’s procurement approach challenges suppliers to think about their products’ energy efficiency, and will increasingly pass responsibility for the emissions from energy-using products onto manufacturers. The result is that carbon neutrality becomes a more achievable goal.
At the end of April, the European postal trade association PostEurop wrote to the chief executives of its 43 members urging them to sign up to a greenhouse gas reduction programme. This is to be launched at the end of June to "help member postal operators quantify and mitigate their impact and exploit opportunities provided by progression to a low-carbon economy."
There is an opportunity here for significant reductions. A recent study by Post Danmark estimated that European postal operators combined emit 8-11 million tonnes of CO2 per year.
The PostEurop programme is aiming to cut these emissions by 10% by 2013. Signatories must pledge to set their own emission reduction targets and must agree to monitor CO2 emissions, set voluntary emission targets based on their own starting position, share best practice and report achievements to the programme. Carbon offsets, however, will be outside the programme’s scope.
PostEurop’s programme is closely aligned to Royal Mail’s approach, partly because of Dr Blake’s involvement in its development. Initially it will focus on transport; buildings and machinery; eco-efficient products and procurement; and the use of renewable energy and low-carbon fuels.
The chances are that Royal Mail’s carbon management programme provides a glimpse into the approach other postal services across Europe will adopt.