BEIS0000942
BEISO000942
OFFICIAL SENSITIVE
i
Department for
Business & Trade
To: Minister Thomas Lead Official: Ed Baird
Clearing SCS: Carl Creswell Date: 30 August 2024
FOR INFORMATION: NOTE ON POST OFFICE CHANGES SINCE 2010
Summary of the issue: This note provides background information on policy and market
and changes to Post Office since 2010.
Recommendation:
e That you note the update.
Timing: routine. The note will provide useful background ahead of your meeting with
officials on the Post Office on Tuesday 3 September.
Government policy for Post Office in 2010
1. The core of the Government's policy in 2010 was the separation of Post Office from
Royal Mail, with the latter to be privatised and Post Office remaining in public
ownership due its distinct social purpose. The
2. The Government also set out its policy intent for the Post Office in November 2010
in the policy document ‘Securing The Post Office Network In A Digital Age’. The
most notable commitments included:
a. That there would be no programme of closures under the coalition
government.
b. Government would provide £1.34bn to modernise the network and safeguard
its future.
c. Government wanted to see the network become a genuine ‘front office for
Government’.
d. Government supported the expansion of accessible and affordable personal
financial services through the network.
e. Government supported greater involvement of local authorities in planning
and delivering local post office provision.
3. The document also reaffirmed the geographical Access Criteria that were introduced
under the previous Government in 2007. The paper also made clear that
Government had asked Post Office to develop a commercial strategy to put the
organisation on a path to financial sustainability.
4. The Postal Services Act 2011, which underpinned the restructuring of Royal Mail
Group, also allowed for the potential mutualisation of the Post Office in the future.
Government policy for Post Office since 2010
5. Since 2010, Government has retained a firm commitment to a stable network of at
least 11,500 branches that meets the geographical Access Criteria, and at various
points has reaffirmed an ambition for Post Office to move towards a position of
OFFICIAL SENSITIVE
BEIS0000942
BEISO000942
OFFICIAL SENSITIVE
financial sustainability. Over the past ten years the Government spoke little of its
earlier aims for Post Office to be a front office for Government, on the expansion of
personal financial services and on Post Office’s potential to work with local
authorities.
. While there has been no major policy change to the Post Office since 2010, there
have been a number of important developments:
a. In 2016, Government carried out a consultation on the accessibility of
post offices, the services available and the role of communities in the future
of the network. The consultation proposed no changes to the current
arrangements but played a significant role in securing a new funding package
for the Post Office network.
b. In 2019, the Post Office signed its latest Banking Framework with major
high-street banks. This allowed for customers of the 30 major bank and
building society brands to be able to use Post Offices to withdraw and deposit
cash in their accounts and has become a major source of income for the Post
Office, equalling its mails business for total revenue.
c. Also in 2019, Minister Tolhurst wrote to other Government departments to
seek further ideas about what government services could be provided via the
Post Office. This faced resistance from Crown Commercial Services, who
emphasised that tendering of these services should go through proper
commercial channels.
d. In 2020/21, Government developed a purpose statement for Post Office
to provide the Department with a clear focus regarding its policy position. The
statement was short and stated that Post Office was a ‘HMG-owned,
commercially-focused business with a strong social purpose... [it] delivers
essential services that are hugely valuable — to both individuals and SMEs —
in urban and rural areas across the UK [and]... The Post Office must continue
to grow a thriving commercial business together with delivery of its social
purpose.’ It then went on to set out the building blocks of Post Office’s social
purpose. The statement is included at Annex A.
e. In 2021, the Post Office’s ten-year exclusivity arrangement with Royal Mail
came to an end, allowing the Post Office to work with other networks such as
Evri, Amazon and DPD.
f. In April 2021, Government introduced changes to the definition of a post
office branch and service requirements across the network, in agreement
with Post Office. These changes were agreed across Government and were
intended to give Post Office greater flexibility to keep pace with the evolving
needs of customers by offering new, flexible, branch formats known as ‘Drop
& Collect’ branches.
g. In 2022, Government gave Post Office more flexibility in managing the
branch network within the current policy requirements, including dropping
the requirement for Post Office to use best endeavours to replace closing
branches with full-service branches and changing Post Office’s formal
network reporting requirements from monthly to yearly. This helped to reduce
some of the cost pressures of running the network.
h. Government funding to the Post Office peaked at £415m for financial year
2013-14. It steadily decreased until 2020-21 but has since increased to cover
investment costs, the Horizon replacement IT and remediation costs. Since
2019-20 the network subsidy element of government funding, designed to
cover the cost of running unprofitable post offices, has remained flat, at £50m
per annum, despite increasing costs and inflationary pressures on Post Office
Ltd and on postmasters.
OFFICIAL SENSITIVE
BEIS0000942
BEISO000942
OFFICIAL SENSITIVE
i. The Horizon scandal has had a major impact on the Post Office’s
finances. The Government asked the company to consider selling its
telecoms business (subsequently delivered) to cover the early costs relating
to redress payments made through the Horizon Shortfall Scheme. It also
asked the company to pay its own costs in relation to the Inquiry and
administration of the redress schemes, up until the point in 2023 where this
became unaffordable. The Government subsequently committed to funding
over £200m so far to enable the Post Office to continue to fulfil its Inquiry and
redress obligations.
Market changes
7. Over the last decade, the retail sector has seen steeply rising labour costs,
increased automation and falling staffing levels, alongside changing customer
expectations of in-branch experience (e.g. more self-service). The impact of these
challenges is pressure on Post Office’s partnerships model, which relies on sharing
labour with host retailers.
8. Since 2010 there has been a significant shift by individuals and businesses
towards conducting activities online, including shopping, communication and
interacting with government. This is illustrated by the 40% rise in daily, or almost
daily, internet users in Great Britain between 2012 and 2020.' The value of UK
online retail sales tripled (to £106bn) between 2012 and 20227, online messaging
volumes rose 13-fold over the same period’, and similar growth has been seen in
online banking. In addition, the number of individuals using the internet to interact
with public authorities to obtain information and submit forms have also increased.
Likewise, the Government is increasingly moving the provision of services online
and has signalled an intent to make accessing public services online quicker and
simple. While many retailers (including banks and building societies) have
responded to this trend by reducing their physical footprint, the Post Office network
has remained at around 11,500 branches since 2010.
9. Since 2013/14 letter volumes have nearly halved* while parcel volumes have
roughly doubled’, driven by e-commerce and online communication. The growth of
online shopping and the arrival of new carriers has also created demand for new
parcels services, which has increased competition for Post Office as rival networks
have arisen to serve the market. Post Office had an exclusive relationship with
Royal Mail for most of the period since 2012, until 2021 when it agreed its second
‘Mails Distribution Agreement’ with Royal Mail which allowed both businesses to
forge new partnerships with other carriers.
10.Meanwhile, use of cash and demand for in-person banking services have
declined due to the rise of digital payments (transactions made with cash fell from
52% in 2013 to 19% in 20225). In light of declining demand, there has been a
reduction in provision of access to both cash and in-person banking, with a 25%
reduction in the number of ATMs across the UK between 2018 and 2023 and a 40%
fall in the number of bank and building society branches between 2012 and 2022’.
‘ ONS, ‘Internet access - households and individuals, Great Britain: 2020’.
? Statista (2024), ‘Value of online retail sales in the United Kingdom from 2012 to 2022’.
3 Ofcom (2023), ‘Personal online communication services’.
4 Statista (2021), ‘Total addressed letter volume in the United Kingdom (UK) between 2011 and 2021’.
® Statista (2023), ‘Annual volume of packages shipped in the United Kingdom (UK) from 2013 to 2023’.
® BRC (2023), ‘Payments survey 2023’.
7 Commons Library Research Briefing (2023), ‘Statistics on access to cash, bank branches and ATMs’.
OFFICIAL SENSITIVE
BEIS0000942
BEISO000942
OFFICIAL SENSITIVE
Nevertheless, both cash and in-person banking remain important to a sizeable
minority, especially among vulnerable groups.
How Post Office has evolved since 2010
11.While Post Office’s revenue has remained broadly flat, the composition of its
sales mix has changed markedly:
a. While mails remain a key part of the business (35% of overall revenue), it is
smaller in terms of value and overall proportion of revenue than in 2011/12.
b. Cash and banking has grown considerably since 2010, facilitated by the
major Banking Framework Agreement from 2017 onwards which aligned
various existing bi-lateral contracts with individual banks. As such, cash,
banking and financial services grew by 89% between 2011/12 and 2022/23
and contributes more than half of Post Office’s total revenue.
c. Government services revenue has declined substantially (by c.80%) since
2011/12 as Government departments have moved services online (while
making significant savings to the taxpayer). Particular drivers of this decline
have been the reduction in demand for and eventual closure of Post Office
Card account and customers increasingly using online channels for motor
vehicle payments.
12.Although the overall number of branches has remained stable, the composition of
the network has changed considerably. Far more branches are now operated as
franchises and co-located within wider retail premises than in 2010, with fewer
‘standalone’ formats. The number of outreach branches (typically non-permanent
branches that might operate out of a village hall or a mobile van) rose considerably
between 2010 and 2023 however the overall number has started to fall as Post
Office has taken action to close under-used outreach branches more recently. New
branches known as ‘Drop & Collect’ have been rapidly rolled out by Post Office to
serve the growing parcels market with over 650 of these branches introduced since
2021. Banking Hubs have also been introduced during this period with nearly 70
operated by Post Office since 2021.
13.Total postmaster remuneration has fallen from £483m in 2011/12 to £402m
2022/23, a 31% decrease in real terms. This has been driven by various factors
including falling customers sessions (down 17% across the network between 2013
and 2022) and the shift to variable remuneration. At the same time the costs of
running a post office have risen, placing significant pressure on branch profitability
from the perspective of postmasters.
Clearance list
Clearance Named lead who has
Team
necessary? cleared
scs Mandatory Carl Creswell
Perm Sec No < Name >
Second Perm Sec No < Name >
Communications (inc named Press < Name >
" No
Officer)
Finance / Fiscal Events No < Name >
HR No < Name >
Legal No < Name >
Parliamentary Unit No < Name >
Devolution No < Name >
OFFICIAL SENSITIVE
BEIS0000942
BEISO000942
OFFICIAL SENSITIVE
Analysis Yes Monique Ebell
HMTC No < Name >
Other No < Name >
Annex A: The Government’s Vision for the Post Office [February 2020]
Post Office Ltd is a Government-owned, commercially-focused business with a strong
social purpose.
Through its extensive and accessible network of branches the Post Office delivers
essential services that are hugely valuable - to both individuals and SME businesses — in
urban and rural areas across the UK. These include mail, parcels, cash, basic banking,
utility bill payment facilities and Government and public services.
The Post Office must continue to grow a thriving commercial business together with
delivery of its social purpose. The building blocks of the Post Office’s social purpose are:
e Delivering a convenient and trusted local service offer that
meets customers’ needs, working closely with Postmasters who play an important
role in their local communities.
e Ensuring its services continue to be easily accessible to all consumers, but
particularly vulnerable groups who rely on them the most.
e Supporting the Government’s access to cash and financial
inclusion agenda by ensuring that basic cash and banking services are available
throughout the network to meet the needs of individual customers and SMEs.
Delivering these services enables the Post Office to also contribute to the Government's
broader social and economic priorities, locally and nationally. The Post Office has a key
role to play in high streets across the UK, helping keep town centres vibrant and playing a
role in levelling up communities throughout the country.
Consumer use has and will continue to change over time. The Post Office will need to
continually adapt its services so that these meet the needs of its diverse customer base.
The Government assesses the Post Office’s delivery of its Social Purpose through its
ongoing role as the company’s sole shareholder.
OFFICIAL SENSITIVE