Letter volumes and COVID-19: What will be the new normal?

Letter volumes and COVID-19: What will be the new normal?

Soterios Soteri, Royal Mail’s Chief Economist, examines how the Covid-19 pandemic has affected the letters market.

The COVID-19 pandemic is having a profound impact on society and is likely to give rise to the worst UK recession in three centuries. Many public commentators and individuals believe that many of the old rules and habits that applied to people and businesses pre-Covid will be swept away as we move into a new normal environment.

For example, the current European Central Bank president, Christine Lagarde, said in her IMF 2020 Governor Talk (IMF, 2020) that we are likely to see a permanent shift in the way we work, shop and pay, with greater use of digital solutions in each case.

More specifically, with regards to challenges facing the postal industry, Lagarde said that physical retail is being significantly replaced by e-commerce, which in Europe increased by one-fifth in volume between February and June. She added that consumer attitudes and behaviours with respect to digital payments are undergoing significant structural changes as consumers become more confident with digital technology.

Postal operators and delivery companies will recognise these observations as they reflect an acceleration in trends they have been experiencing for some time. In particular, online shopping and parcel volumes in most if not all countries with advanced postal networks have increased considerably since the start of the Covid pandemic.

But the positive impact of growth in parcel volumes has been offset by a very significant decline in letter volumes. An important question with respect to this phenomenon is: to what extent has the increased willingness of private individuals to use digital technology led to changes in business and consumer behaviour that differ significantly to those of the past?

For example, do the very substantial increases in e-commerce and declines in letter volumes observed since the beginning of the pandemic reflect a reaction to changes in the external environment in line with historical experience?

Or alternatively does a permanent and structural change in the way businesses and consumers react to changes in the external environment further accelerate the rate of decline of letter volumes?

Addressed letter volumes in the UK peaked at over 20bn items in 2005/06 and by 2019/20 had fallen to around half this level to 10bn items, having experienced an annual rate of decline over this period of 5% pa. However, over the first six months of 2020/21, during which a three-month national COVID-19 lockdown occurred and there were numerous regional restrictions in place, addressed letters volumes declined by 28% compared with the same period a year ago.

This very substantial rate of decline has raised many questions and concerns in the UK postal industry regarding the outlook for letter volumes during and after the pandemic, especially amongst those whose business operations are heavily reliant on printing, processing, collecting and delivering letter traffic.

In particular, one of their most prominent concerns is whether the recent higher rate of decline heralds an acceleration in electronic substitution.

And will the shift towards the new normal be a temporary, albeit possibly lengthy, phenomenon that will eventually see letter volume trends revert back to towards their pre-Covid trends?

Historically, letter mail volumes in the UK have tended to move in line with the economy and demographic trends, as shown in the chart. However, from the early 2000s onwards this relationship became more complex and a gap, or wedge, emerged and averaged an annual decline of around 8%.

The main reason for this is the substitution of physical letter communications with new and different evolving electronic technologies that impact both sender and recipient communication preferences.

On the basis of data up to the first half of this financial year, preliminary evidence suggests this gap, the so-called technology wedge, does not appear to have widened for non-advertising mail.

But the gap may have widened for advertising mail which has declined to a greater extent (with Royal Mail total letter revenue declining by 21% and advertising letter revenue falling by 48%).

However, if, as many economists are expecting, economic activity bounces back this year and if the historical technology wedge relationship continues to hold, it is possible that we will see a strong rebound in letter volume growth rates in 2021 compared to the significant declines seen in 2020.

Furthermore, it is possible that advertising mail, which is more sensitive to economic conditions, could recover even more strongly and eliminate a temporary increase in the post-Covid technology wedge. Following the trials and tribulations of 2020 that we have all faced, let us indeed hope such an improvement materialises in 2021.

In the meantime, there continues to be much uncertainty ahead, not least from further COVID-19 restrictions recently re-introduced, and we continue to analyse the data.

Figure 1. Addressed inland letter volume trends versus economic and demographic growth

Source: Royal Mail Group
1 Traffic growth rates adjusted for number of working days.

2 Economic growth refers to annual changes in GDP and demographic growth to annual change in the number of households.