The impact of E-substitution on the Demand for Mail: Some Results - - PowerPoint PPT Presentation

The impact of E-substitution on the Demand for Mail: Some Results from the UK

9th

th Post

stal l Conferenc ence e on E-comm

• mmer

erce: e: Digital Econo nomy y an and d Deli liver very y Servic ices es Univer versit ity y of Toul ulou

• use,

se, March h 31 – April il 1 2016 16

Frank Rodriguez (Oxera), Soterios Soteri (Royal Mail Group), Stefan Tobias (CER)

Introduction

• Letter mail and e-substitution
• Focus of our paper is empirical
• We consider trends in e-substitution for

business mail:

– In aggregate – By main sub-categories

• Importance of sender-recipient framework

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Quantifying e-substitution

How

• w to quantif

ify y the impa pact ct of e-su subs bstit itution ution?

• We use econometric time series modelling of demand for mail
• In particular, we follow approach in Veruete-McKay et al. (2011) and

make use of estimates of “unexplained” time trends identifying structural breaks and price elasticities

• Technologies underlying

e-substitution develop and change

• Concept of “large

corrugated S-curve” (Nikali, 2008)

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Slow

Fast None Fast

Speed d of substitution process

1.

• 1. Main findings

ings fr from UK econome metric ric time series models ls ca can be s sum umma maris ised d by: Qt = Q Q0 (1 (1+g.

• g. Gt

t ) (1+p.

• p. Pt

t ) Et

where 𝒉 ≅ 𝒒 ≅ 1

• 2. Updat

ated d econome metric ric est stimat ates by Veruete-McKay ay et. al

• al. (2011)

1) used to ge generat ate our indica cative ive E-index ndex, , where Et

t ≅ (1+T1 1 )

) n1t (1+T2

2 )

) n2t

• 8
• 6
• 4
• 2

2 4 6 8 (%) per annum Letter volume growth Economic growth and demographic growth

Source: EMRF using data from Office for National Statistics, Experian and Royal Mail Finance. Note: Data in chart refer to two year moving

• averages. This excludes D2D, PFW and all International traffic. Letter volume growth reported outturns from 2006/07; prior to 2006/07 the

series has been grown in line with the total addressed inland mail traffic series which contains a small proportion of parcels

Esub, (TW) Note data refers to two year moving averages. Letter traffic refers to addressed inland traffic.

Econometric estimates for UK letter demand and e-substitution

E-inde ndex = 1 in 2001 an and < 1 therea eafter er Econometric estimates suggest: 𝑈 1 ≅ -3% and 𝑈 2 ≅ -6%

𝐹𝑢 = (1 - proportionate loss to e-substitution relative to 2001)

E-ind ndex

Economic growth plus number

• f household growth

Letter volume growth Source: Royal Mail Group and Office for National Statistics

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Disaggregated Estimates of E-substitution for B2C Business Mail

• B2C business mail accounts for close to half of UK total addressed inland

letter traffic

• Our analysis disaggregates B2C business mail traffic by content type, sender

group and age of recipient

• Data sourced from internal surveys
• Key assumptions in constructing disaggregated estimates of e-substitution:

– Et (econometrically derived for total business mail) used as a proxy index for B2C business mail – GDP and population elasticities equal across disaggregations

• Disaggregated indices for a particular segment calculated as:

– Et .(segment share in period t / segment share in 2001)

• Application of plausible constraints on estimates necessary to address noise

in survey data when applying this approach

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E-Index (Et) estimates by letter content and sender group

E-index dex esti stimates by le letter er conten ent, t, 2001 to 2012 (2 (2001=1) E-index dex est stim imates es by sende der group, up, 2001 to 2012 (2001=1)

𝐹𝑢 equals (1 - proportionate loss to e-substitution) relative to a base year, where 𝐹𝑢 = 1 implies no e-substitution relative to that base year (2001) and 𝐹𝑢 = 0 implies complete loss of all mail.

0.00 0.20 0.40 0.60 0.80 1.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Other Bills, invoices Business letters Insurance/legal/ financial doc Other financial correspondence Statement Overall Source: Royal Mail

0.00 0.20 0.40 0.60 0.80 1.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Banks Gvmnt, health, education Insurance Retail Utilities Other Overall Source: Royal Mail 6

E-Index (Et) estimates by age-group and ability/willingness to receive e-communications

E-index dex esti stimates by age ge-group

• up
• f

f recipi ipien ent, t, 2001 to 2012 (2 (2001=1)

Es Estimat ates s of access b by indivi ividua duals s to the I Interne net by a age ge g group, up, %*

Age group 16-24 25-34 35-44 45-54 55-64 65-74 75+ All 2012 Q3 98 97 95 90 80 58 26 82 82 2015 Q1 99 99 97 94 87 71 33 86 86

Source: Royal Mail Group *Percentage of individuals using the Internet by any device in preceding 3 months, Source: Office for National Statistics

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0.00 0.20 0.40 0.60 0.80 1.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

16-44 45-64 65+ Overall

Summary and conclusions

• Econometric estimates suggest letter volumes are determined by four key

factors: economic activity, the number of households, prices and E-substitution

• Our E-Index estimates suggest Business letters are approximately half of what

they would otherwise have been in the absence of e-substitution and the rate of decline has increased since the Great Recession

• Indicative E-indices by letter content, senders and age of recipient suggest:

– Physical bill/invoice communications declined to a greater extent than those for ad hoc business letters and financial correspondence – E-sub. in retail & utilities sectors is more advanced than government & insurance – There is a pronounced difference in the extent of e-substitution by age of recipient

• Our analysis suggests that over the short to medium (say, 3 to 5 years) the rate
• f letter volume declines in the UK will primarily depend on:

– Older individuals ability and willingness to receive e-communications – The governments digital communications strategy – The extent to which senders and recipients of ad hoc and non-standard transactions (especially high value added business activities relating to insurance, legal and financial transactions) are able and willing to replace mail by e-communications

• An interesting question that could be further explored is the linkage between e-

substitution by content type, sender group and age-of recipient.

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