POL00154182
POL00154182
Private & Confidential
Brief for Tim Parker meeting with Robert Swannell 30 March
1. Background
We understand that this is a six monthly meeting with the Chairman of UKGI -
the previous meeting took place with him on 19 July.
From Post Office’s perspective the meeting may be an opportunity to:
- Maintain high level contact
- Promote understanding of the Post Office’s development to date and its
strategy in the future
- Promote support for resolution the funding position (note - the meeting
with Greg Clark will have taken place on 28 March).
To support high level discussion a short background brief of Robert Swannell
(RS) is given at Appendix 1 and some ‘key facts’ on the Post Office are given at
Appendix 2 that may be helpful.
The following brief can support the conversation as required;
2. Post Office - current trading position
On track to exceed our 16/17 EBITDA before subsidy target of £ (10) m: this is
strong performance - effectively the first time in 15 years Post Office is on the
threshold of operating profit. In 2013 before subsidy losses were £ (116) m pa -
this has now effectively been reversed.
The target for next year is £28m EBITDAS and the business has set an ambition
in its funding submission to government of generating a sustainable profit of
over £100m. This level creates sustainability and potentially removes any need
for government funding or subsidy. (Funding update below)
Trading: the business throughput is approx £65bn cash and payments. Income
target is £984m, with performance approx 2% (£20m) off, partly externally
driven such as the impacts of post referendum low interest rates on POCA
revenues and financial products.
However we had good Christmas mails trading, bureau de change although
volatile, finished strong and we have improved efficiency through cost reduction
through the year to enable a continuation of our positive financial trajectory at
the same time as our annual network subsidy reduces year on year.
3. Post Office - progress on key issues mentioned at last meeting
This is an opportunity to update and emphasise the significant progress that has
been made in areas which were flagged as ‘issues’ at the last meeting with RS.
- Pensions — The DB scheme is closing to future accrual at end March
2017 following a full and thorough consultation process.
- Supply Chain - We have refocused this key cash distribution part of our
business away from external markets towards efficiently servicing our
network. In so doing we have reduced costs by 50% in two years. Strong
POL00154182
POL00154182
Private & Confidential
example of the transformation we are delivering - clear focus and
sharpening efficiency. Handling difficult change professionally
- Rationalisation of Central Functions - We've restructured the centre
of the business around the network/retail functions and the financial
services/digital functions - with the latest announced changes reducing
headcount by 20%
- NT Programme - This programme now delivered over 7150 branch
modernisations - improving premises, variabilising costs and increasing
opening hours and Sunday opening.
- Directly Managed Changes - Ongoing activity to improve the
performance of the larger city centre branches we run ourselves through
activity such as franchising (with parties like WHSmith). This part of the
network, traditionally loss making, is now operating profitably
- Banking framework - In January we announced our framework
agreement with all the UK banks - such that their customers can use Post
Offices for banking transactions. 99% personal banking customers in the
UK and over 75% business banking customers, whatever their bank, can
now use our 11600 strong Post Office network. A key development for the
banking infrastructure in the UK
4. Overall strategy and funding approach
Our strategy position remains as we established last summer;
Three main priorities:
e¢ strengthening our commercial partnerships, in particular by
securing our long-term relationship with Royal Mail and renegotiating
our FS partnerships to drive greater value for the Post Office;
e delivering a lean, competitive cost base, in particular by
optimising the network structure (continuing the shift towards vibrant
retail hosts) and by radically restructuring the central organisation;
and
e investing in our digital capabilities to respond to rapidly rising
customer expectations and provide the platform for future growth.
Through these measures we can deliver a significant step change in our
profitability, enabling us to reinvest in the business and support our social
purpose from our own profits rather than from subsidy. Huge opportunity to put
the business on a sustainable footing. We have a clear narrative around
improving value for money for taxpayers and improving services and
accessibility for customers.
Our performance of delivering change and financial improvements in 2016/17
shows both the capability and determination to achieve this strategy.
POL00154182
POL00154182
Private & Confidential
5. Narrative supporting the funding position
The continued importance of the Post Office:
Post Offices are crucial part of the national infrastructure:
- there is a branch within a mile of 93% of the population;
- 17 million customers, including a third of all SMEs, visit a Post Office every
week;
- it is the market leader for mails, travel money, identity checks (both online and
in-branch) and banking;
- in over 3,000 communities the post office is the only retail outlet left;
- the business creates £9bn of social value every year according to independent
research.
Our progress to date:
After decades of neglect, recent years have seen the delivery of one of the
largest transformation programmes in UK business history.
- the branch network has stabilised, with over 7,000 branches modernised
providing a million additional opening hours a month;
- the new banking framework gives 99pc of UK bank account holders access at
Post Offices;
- from a loss of £115m just a few years ago the business is on the verge of
generating an operating profit for the first time in 15 years.
All this has been delivered through a sharp commercial focus and a willingness
to take tough decisions in the face of constant union and stakeholder pressure.
The challenges still remaining:
However, the transformation is not yet complete, with major challenges still to
be addressed:
- Our core IT system is two decades old and increasingly unstable.
- Without investment in our digital capabilities we will lose ground to
competitors.
- We face an intense fight to win and retain the high street retailers who we rely
on to host our branches, and who are themselves facing significant pressures.
Unless we simplify and strengthen our offer to retailers we forecast that up to
3,000 branches could leave the network by 2020.
- We are now just 22 months away from the date at which our long-term
agreement with Royal Mail must be renegotiated. We must get match fit now to
ensure a successful outcome from these negotiations.
Our strategy and funding request:
With investment we are confident we can address these challenges - by building
digital capability, reducing costs, modernising our infrastructure and simplifying
services to make us more compelling for retailers.
POL00154182
POL00154182
Private & Confidential
With the necessary investment funding in place by the next election the Post
Office could be self-sustaining, generating a profit of around £100m a year,
enabling it to invest sustainably in its own network, systems and customers.
The business would be secured for another generation. And for the first time in
decades this would enable us to grow the network.
The risks without investment funding:
The risk is that without investment to act now, there will be a bigger bill to
rescue the business and stabilise the network a few years down the road.
Despite best efforts we would be likely to see a pattern of falling sales, lost
customers and departing retailers, tipping the network into uncontrolled
closures.
The more immediate challenge we have is that, without clarity on future
investment funding, we will be obliged to set out our underlying balance sheet
position to partners, clients and suppliers - and then later this year to the
general public. This would be exploited by some stakeholders, given the febrile
environment in which we operate, increasing both the commercial and political
risks.
The meeting with RS may be an opportunity to;
- Show appreciation for the work of the UKGI team as it works with us on
the funding position
- Emphasise the importance to the business of achieving a resolution and
ensure support from Robert within UKGI / Government to assist
- Determine if Robert has any advice in terms of Government liaison given
the critical nature of funding clarity for the business and for the
sustainability of the network.
Appendices;
1. Biography detail on Robert Swannell
2. Key messages and facts about Post Office Ltd
POL00154182
POL00154182
Private & Confidential
Appendix 1 - Background on Robert Swannell
Robert Swannell - Chairman of UK Government Investments (UKGI).
Robert (born ~j is the Chairman of UK Government Investments
(UKGI) having been Chairman of the Shareholder Executive from 2014 -2016.
UKGI is the UK Government's centre of excellence in corporate finance and
corporate governance.
Robert Swannell was appointed a Non-Executive Director of Marks & Spencer in
October 2010 and became its Chairman in January 2011 taking over from Sir
Stuart Rose. He has announced that he will retire in 2017.
Until 2010, Robert spent over 30 years in investment banking with
Schroders/Citigroup. He was formerly Vice-Chairman of Citi Europe and
Chairman of Citi’s European Investment Bank.
Robert was Senior Independent Director of both The British Land Company pic
(NED 1999-2010) and of 3i Group plc (NED, 2006-2010). Robert was Chairman
of HMV Group plc from February 2009 until March 2011. He was also Chairman
and a Member of the Governing Body of Rugby School from 2004-2014. Robert's
regulatory and government department experience includes the Regulatory
Decisions Committee of the FSA, the Takeover Panel Appeal Board and the
Industrial Development Advisory Board of BEIS (Department for Business,
Energy and Industrial Strategy).
He is an Advisory Board Member of The Sutton Trust, a founder and Trustee of
the SpringBoard Boarding Bursary Foundation, a Trustee of Teach First and a
Trustee of the Kew Foundation. He is also a Director of the Investor Forum.
Robert qualified both as a chartered accountant and barrister
Article in the Guardian December 2016
Marks & Spencer chairman Robert Swannell to retire
Former investment banker, who took on role six years ago, will remain in post until his
successor is found
The chairman of Marks & Spencer is to retire next year after six years in the role.
POL00154182
POL00154182
Private & Confidential
Robert Swannell, a former investment banker, has overseen a tricky time at the high street
stalwart, appointing long-term staffer Steve Rowe to take over as chief executive a year ago
from former boss Mare Bolland.
Swannell, 66, who was previously an adviser to M&S helping to fend off a bid attempt by the
Topshop boss, Sir Philip Green, during his 30 years in banking at Schroders and Citigroup,
Joined the company’s board as a non-executive in late 2010. He became chairman a few
months later, taking over from Sir Stuart Rose.
spring.
Rowe has since pulled back on some of Bolland’s key initiatives, including international
expansion.
Swannell said: “A year ago we chose Steve Rowe as our chief executive. Steve completed a
thorough analysis of the business and developed a detailed plan to build a simpler and more
relevant M&S.
“This plan is now under way and I feel that it is the right time for the business to look for a
new chairman. It is a real privilege to chair this iconic company and I will continue to do so
until my successor is in place.”
M&S’s senior independent director, Vindi Banga, will now lead the process to identify and
appoint the next M&S chairman.
POL00154182
POL00154182
Private & Confidential
Appendix 2 -Key background facts
« The Post Office is publicly owned, fully separate from the Royal Mail since
2012
e 11,643 branches across the UK
« 95% of the population say they use the Post Office at least once a year -
with millions of customers and small businesses visiting every day.
« Operates in commercially competitive and fast changing markets - the
retail mails, banking and financial services, government services and
telecoms. 97% of post offices are operated in conjunction with local
businesses, increasingly alongside convenience retail
« Essential services are provided for people throughout UK - mails,
banking, pensions, bill payment, and Government services. Post Offices
enable unique levels of cash accessibility in local communities.
e« Research shows that communities want a post office, bank and shop to
survive and thrive. Post Offices are increasingly providing all three
services under one roof.
e Post Office financial services (mortgages, insurance, travel) grew by
19.7% last year
e The Post Office is the number one provider of travel money in the UK
e Provision of banking services for customers of other banks is now
running at over 110m transactions a year. 99% personal banking
customers in the UK and over 75% of business banking customers can
use the Post Office for banking transactions
« Post Office leads the market in the provision of ‘identity services’ through
the Governments ‘Verify’ initiative.
« Post Office is handling around £60bn each year in payments and receipts
through its network - playing a major role in cash distribution into local
economies.
« Post Office offers widespread service provision with over 6000 branches
in rural areas and over 1300 in urban deprived areas and continues to
develop sustainable and innovative service arrangements such as mobile
Post Offices or partnerships with community run shops.
e« Social Value - Recent independent research shows that the Post Office
delivers social value in the range of over £4bn to £9bn each year to
people and businesses throughout the UK.
e Provides unique physical accessibility across the UK - the Post Office
continues to maintain the size of its network and meet all the
Government's accessibility criteria
Network size Accessibility performance
End of March Post Offices eee Total Total :
2013/14 11696 Criteria population population in
in 3 miles 1 mile
2014/15 11634 Minimum 99% 90%
requirement
2015/16 11643 I Performance I 99.7% I 92.9% I
Note the network is further supplemented for cash
access by 2,000 ‘free to use’ external cash
machines (ATMs) across the UK