Postal delivery pricing: econometric analysis

2. Context

Unfair delivery pricing in Scotland

According to the Scottish Affairs Committee, at least one million people in Scotland are subject to higher postal delivery fees, longer delivery times or refusal of service, a particularly acute problem for people living in the Highlands and Islands of Scotland.^[3] Royal Mail, the UK’s Universal Service Provider, operates under the “one price goes anywhere” rule, delivering to more than 30 million addresses in the UK and charging the same price for each. However, many online businesses use private delivery companies, which are not subject to the same service obligations as Royal Mail.^[4]  

A report by Citizens Advice Scotland (CAS) found that individuals living in the North and North East of Scotland pay at least 30% more than consumers in the rest of the UK, while residents of the Scottish Islands have to pay 50% more on average.^[5] The report also found that higher prices were not only charged to rural areas but affected all addresses north of the central belt of the country, including urban areas such as Inverness and Aberdeen. According to the same report, heavier items incurred higher surcharges for consumers in the Highlands and Islands, with prices ranging from 13% higher for smaller parcels to 300% higher for parcels above 30kg. Moreover, in 2016 Ofcom interviewed five national delivery companies and found that out of all areas in the UK, only Northern Scotland and Northern Ireland faced surcharges.^[6]

Consumers have noted a range of inequitable service experiences. For example, retailers and delivery companies often state that they offer free delivery across the UK except for remote and rural areas in Scotland. In addition, some companies have policies explicitly stating that they do not deliver to the Scottish Highlands or more remote parts of Scotland; if they do, consumers will be subject to higher prices.^[7] 

Box 1: Timeline of progress and actions

This section lists the main policy activities regarding fair delivery pricing that have taken place since 2012.

November 2012: The then Minister for Business, Energy, Enterprise and Tourism, Fergus Ewing MSP, chaired the Parcel Delivery Summit in Inverness, bringing together a range of stakeholders across industry, government and regulators.

February 2013: A second Parcel Delivery Summit was organised in Edinburgh.

November 2013: The Scottish Government launched the Statement of Principles for parcel deliveries.

December 2017: Paul Wheelhouse MSP wrote to the UK Consumer Minister asking for UK Government action; and a Westminster Hall Debate was secured to discuss unfair delivery charges in Scotland.

February 2018: The UK Government’s Scottish Affairs Committee held an evidence-gathering session on delivery charges.

April 2018: According to the Advertising Standards Authority’s (ASA) new Enforcement Notice, online retailers now need to clearly state any parcel delivery surcharges on product pages.

June 2018:

• A Parcel Delivery Roundtable was hosted by Paul Wheelhouse MSP aiming to find sustainable solutions for all key stakeholders in the sector, including consumers, parcel delivery companies and online retailers.
• During the same month, the Consumer Protection Partnership (CPP) launched the website www.deliverylaw.uk, which brings together advice for consumers, businesses and specialists and support about misleading delivery charge advertising.

November 2018: One of the outcomes of the roundtable discussion in June was “Fairer deliveries for all: An action plan”, a list of 8 actions aiming to reduce both unjustified delivery costs for people across Scotland and justified costs by trying to tackle some of the challenges of delivering to rural and remote areas in Scotland.

Another common phenomenon that residents of the Highlands and the Islands experience are misleading advertisements about parcel delivery costs. Retailers sometimes advertise free UK-wide delivery, but customers are informed only upon reaching checkout that surcharges apply for their area. The Advertising Standards Authority (ASA) published a new Enforcement Notice on Advertised Delivery Restrictions and Surcharges for online and distance sellers in April 2018. Online retailers now need to clearly state any parcel delivery surcharges on product pages.^[8]

Furthermore, ASA has received over 400 complaints since 2016 about unfair postal delivery pricing in Scotland, while MSPs and MPs such as Richard Lochhead, Drew Hendry and Michael Russell have also received numerous complaints from consumers. However, this potentially understates the true scope of the problem, as consumers do not always report incidents to the ASA, liaising instead with online retailers directly or paying excess charges without registering a complaint.^[9]

Consequences of unfair delivery pricing

Unfair delivery pricing discriminates against individuals living in rural and remote areas and affects peoples’ lives in several different ways:^[10] 

• People in parts of Scotland are unable to take full advantage of the digital economy

According to a recent survey of consumers living in postcodes identified by Ofcom as experiencing parcel delivery surcharging, increased convenience and choice and reduced costs are among the top reasons behind the attractiveness of online shopping. However, residents in remote areas are often excluded from the benefits of the digital economy. Instead, these individuals must pay much higher prices for deliveries despite experiencing lower incomes and higher costs of living compared to urban areas.

• For small businesses in rural and remote areas, higher delivery charges can be a barrier to development

The majority of the interviewees highlighted the negative impact of delivery surcharges and delays on small local businesses. As one respondent mentioned, running a business in a remote area is in and of itself a challenging undertaking. However, unfair surcharges and unreliable deliveries “is like closing the door to these businesses”. Interviewees stressed that small businesses face problems with both inbound and outbound deliveries, while most reports focus only on parcels sent to remote areas of Scotland. Businesses with an outward focus have to pay a much higher price to send products to their customers than businesses operating in large urban areas. This results in a competitive disadvantage that can ultimately disincentivise entrepreneurship and impact economic growth in certain communities.

For example, a woman with a small sewing business saw the demand for her products growing rapidly. However, the long delay in the delivery of the materials she needed acted as a barrier to the quicker development of her business. The same is true for certain industries such as tourism and fishing. Though both industries are growing steadily and present an important source of income for the Highlands and Islands, businesses in these sectors face substantially higher costs than those in other areas of the country.

• Vulnerable people may be adversely affected (such as people who rely on timely delivery of medical supplies)

In addition to the economic consequences, unfair delivery pricing and delay in deliveries have important social consequences for people who depend on medicines and medical equipment. For example, an ill woman in Keith, Moray faced a £50.00 delivery charge for a mobility scooter, despite the website advertising free delivery across the UK.^[11]

Drivers of high delivery costs in remote areas

Delivery costs in remote and rural areas are higher for retailers and delivery companies due to challenges in accessing destinations (e.g. requiring a plane or boat), long distances for couriers to travel, and overall lower delivery volumes. This section discusses key drivers of high delivery costs in remote areas in Scotland based on the findings from the desk-based research and stakeholder consultations.

• High fuel and labour costs

The fuel costs incurred by delivery companies are higher due to the longer distances involved when traveling to remote and rural areas of Scotland. Similarly, labour costs tend to be higher since drivers have to work for longer hours to reach certain destinations.

• Low parcel volumes

Due to the low delivery volumes it is far costlier for couriers to reach certain destinations; traveling to a remote area to deliver one parcel is expected to cost considerably more than delivering 15 parcels to one single road in central London.

• Reliance on ferries or airplanes

Companies undertaking deliveries to Scotland often must transport parcels via ferry or plane. Contracting ferry companies and airlines presents additional costs for delivery companies which may be passed on as surcharges for consumers.

• Working time regulations

Several delivery companies noted that working time regulations drive higher delivery costs, as due to the long driving hours required to reach remote areas in Scotland companies had to use more than one driver to complete a job in order to comply with these directives.

• Reliance on third-party companies

Many delivery companies rely on third parties for parcel delivery. Due to the low parcel drop density in remote and rural areas, delivery companies often sub-contract services to third parties, usually local delivery companies, for the “last-mile”. According to a report by Ofcom, four out of the five largest delivery companies in the UK – Hermes, Parcelforce, DPD and Yodel – rely on third-party operators, and each of these four charged higher prices for delivery to the Highlands and Islands – the addition of an extra player, the sub-contractor in the supply chain, pushes costs up. Costs incurred by the main delivery companies varied significantly depending on the third-party provider used and area of the delivery, ranging from £2.32 to £4.56 per parcel.^[12]

Reasons for deliberate delivery surcharges

Based on interviews, residents of the Highlands and Islands expect to pay more for deliveries and recognise that there are factors pushing costs upwards for delivery companies and retailers. However, consumers’ experiences often include excessive surcharging, unjustified refusal of delivery and new conditions imposed towards the last steps of the online order. Potential reasons for this behaviour from retailers and carriers include:

• Lack of transparency on price calculation

There is often lack of transparency in the way prices are calculated, especially for surcharges for deliveries in remote rural areas such as the Highlands and the Islands.^[13] Both retailers and parcel operators operate on tight profit margins and may try to pass any additional costs on to consumers. However, retailers can take advantage of the lack of transparency surrounding price calculation to impose surcharges far higher than the actual delivery costs incurred in order to make profit. According to a 2016 report by Ofcom, the surcharge applied by each of the four delivery companies who use third-party operators for the Highlands and Islands was higher than the price paid to the third party by the companies.^[14]

• Exclusive contracts

Prices in the postal delivery market are determined by retailers and delivery companies. Contracts between the two parties tend to be exclusive, meaning that a retailer is not allowed to use more than one carrier. In return, the parcel operator offers volume discounts that disincentivise the retailer from working with another courier. This sort of exclusive contract means that retailers cannot offer consumers a wider selection of couriers to choose from – which could potentially provide them access to preferential regional rates.^[15]

• Misapplication of postcode categorisation

Current postcode mapping does not always accurately reflect location information, as it uses only the first two characters of the postcode and leads some urban areas to be mistakenly considered as rural. Due to mistakes from postcode software and the lack of the ability to manually change such categorisation once an order has been received, numerous consumers have been asked to pay substantially higher charges or have been denied delivery. This phenomenon is particularly common for addresses in the Paisley postcode area (postcodes starting with PA), the Inverness postcode area (postcodes starting with IV) and the Kirkwall postcode area (postcodes starting with KW).^[16] For example, a big terrain of the KW postcode is on the Orkney Islands. Given that postcode software generally does not take into account the full postcode, this can result in misjudgements in delivery charges. Similarly, though the Isle of Skye is connected to the mainland by road, there also appear to be surcharges due to the fact that it is an island.

Policy context 

In recent years, the Scottish Government has undertaken a range of actions to bring together key stakeholders, promote good practice in the parcel delivery sector and increase awareness on cases of unfair delivery pricing. These include organising a series of Summits and Roundtable discussions, launching a Statement of Principles for parcel deliveries and publishing an action plan. Box 1 includes a more detailed summary of the actions to date.

In November 2013, the Scottish Government launched the Statement of Principles for parcel deliveries. The principles were developed with input from retailers, consumers and service providers, aiming to set out best practice guidelines for retailers to provide delivery services that meet the needs of their customers. By July 2014, the Statement of Principles had been adopted across the UK.^[17] The principles are listed below:

• Principle 1: Online retailers should ensure that their delivery pricing policies do not discriminate against consumers on the basis of their location. The level of any necessary geographic surcharges applied should reflect the true additional cost of delivery.
• Principle 2: Online retailers should ensure that their delivery coverage policies do not discriminate against consumers on the basis of their location. They should provide the widest possible delivery coverage, refusing delivery only when this can be justified by objective criteria.
• Principle 3: Online retailers should ensure that consumers can easily access clear, timely and transparent delivery policy information at the earliest possible stage in the online buying process.
• Principle 4: Online retailers should aim to offer innovative delivery options that are responsive to the changing market and needs of their consumers. They should also provide consumers with transparent information about delivery options before they complete their order.
• Principle 5: Online retailers should provide consumers with other relevant delivery information that they hold at the time the order is completed and/or dispatched.

These principles were furthered through the introduction of a new enforcement notice by ASA, which stated that online retailers need to clearly state any parcel delivery surcharges on product pages.

Box 2: Summary overview of actions contained in Action Plan (2018)

1. Develop an interactive Data Hub: allowing users to identify whether a delivery price is fair or not, helping to improve transparency and drive behaviour change.

2. Develop a Scottish Parcel Delivery Map to understand consumer experiences and target interventions, allowing anyone to track discrepancies between and within areas and identify when delivery pricing is significantly different from a “fair” price. 

3. Celebrate best practice by retailers and parcel delivery companies.

4. Work with the industry to explore how to increase the impact and reach of the Statement of Principles.

5. Make it easier for consumers to know and exercise their rights.

6. Improve the accuracy of postcode classification tools.

7. Establish the Improving Consumer Outcomes Fund to explore new approaches to tackling long-standing consumer issues, including misleading and unfair delivery charges in rural and remote areas of Scotland. 

8. Shape UK Government action to further strengthen consumer protection to ensure fair and transparent delivery charges for Scottish consumers.  

One of the most influential policy documents to date has been “Fairer deliveries for all: An action plan”, released in November 2018, which listed key actions required to reduce unjustified delivery discrepancies for people across Scotland as well as justified discrepancies through tackling some of the challenges of delivering in rural and remote areas in Scotland. The action plan published by the Scottish Government is described below:^[18]