The Australian book community is well aware of the growing importance of international online retailers such as Amazon and UK-based the Book Depository (which could soon become one company if a proposed acquisition by Amazon gets the green light from regulators in the UK). The industry knows that the number of Australian consumers buying books from these retailers is increasing and know the key reason for this is price.
One topic that invariably pops up in conversations about the Book Depository in particular is free shipping. The online bookseller has been offering free shipping to Australia (and other territories) since it was founded in 2004. Recently, many of these conversations have included a reference to a ‘special deal’ that the Book Depository allegedly has with the UK postal service, Royal Mail. On May 29 this year, Melissa Fyfe wrote in the Age that the Book Depository ‘can ship books internationally for free because of a discount deal it has with the Royal Mail’, but offered no further details about the arrangement. On one hand, some say the British Government offered the Book Depository concessions for setting up its business in an underprivileged area, while on the other, there are suggestions that the retailer enjoys free postage as a way of encouraging British exports. Some members of the local industry have taken this a step further and claimed that Australia Post is ‘subsidising’ the Book Depository as the organisation delivers millions of parcels that the retailer now ships into our country on behalf of Royal Mail.
But is there any truth in these claims? Here at BOOKSELLER+PUBLISHER, we decided to look closer at the issue. Here is what we found.
BOOKSELLER+PUBLISHER asked both the Book Depository and Royal Mail about the relationship between the two companies. A spokesperson for Amazon, which is currently handling media enquiries for the Book Depository as a result of its proposed acquisition, declined to comment about the matter. Similarly, a spokesperson for Royal Mail told BOOKSELLER+PUBLISHER that the organisation ‘do[es] not comment on individual customers’.
A spokesperson for the Royal Mail told the Sydney Morning Herald in July, however, that the accusations are false, claiming that while Royal Mail’s costs are low compared to other national postal services, ‘it did not enter special arrangements with any one organisation’.
Instead, it seems to be the case that if the Book Depository receives any kind of ‘deal’ from Royal Mail, it is a volume-based discount. Indeed, the Book Depository’s managing director Kieron Smith said in 2009 that the retailer is ‘a volume-led business, and we can get very good deals with couriers as we are shipping upwards of 130,000 products per week’. A quick look at Royal Mail’s website shows that they do offer cheaper rates for businesses which spend in excess of £5000 per annum on overseas postage.
But there is another part to this equation, and that is Australia Post. What is the relationship between Australia Post, the Book Depository and Royal Mail?
A spokesperson for the Department of Broadband, Communications and the Digital Economy told BOOKSELLER+PUBLISHER that the organisation ‘does not have any special arrangements with the Book Depository, Amazon or Royal Mail on the delivery of books or parcels in Australia’. ‘The cost of shipping a package to Australia is a matter between the Book Depository and Amazon and the relevant postal administration,’ said the spokesperson.
Reflecting the idea of a volume-based discount, the spokesperson said that ‘the Book Depository and other companies may have been able to negotiate cheaper rates from Royal Mail based on the volume of parcels that they ship, or by using off-peak services. The Book Depository and other retailers appear to bundle the cost of shipping into the price they offer for their products.’
Australia Post, however, is required to deliver parcels sent through Royal Mail (and other international postal services) within Australia as a member of the Universal Postal Union (UPU). In return for delivering these parcels, Australia Post receives a payment from the Royal Mail, said the spokesperson. It makes sense then that if parcels coming into Australia are increasing because of retailers like the Book Depository, Australia Post is spending more money on delivering parcels for Royal Mail. The questions then becomes, are the payments received by Australia Post for delivering these parcels covering the costs of delivery?
The department spokesperson told BOOKSELLER+PUBLISHER that in the period 2008-09, ‘both international inward and outward bound parcels fully covered their costs and were a potential source of subsidy to other areas of Australia Post’. The spokesperson added, however, that the payments made to Australia Post from other postal administrators for the delivery of parcels within Australia are denominated in a basket of international currencies. ‘When the Australian dollar is high, the value of these terminal due payments in Australian dollars is reduced,’ said the spokesperson. ‘Conversely, the higher dollar means that Australia Post pays less to other postal operators to have Australian parcels delivered internationally.’
Price Waterhouse Coopers (PwC) also examined the cost of postage within Australia in a research report commissioned by the Book Industry Strategy Group. According to PwC, there is a substantial difference between the unit costs charged by Australia Post and Royal Mail, which means that UK businesses are able to post parcels to Australia at a much cheaper rate than what it costs for parcels to be delivered within Australia by Australia Post. More specifically, based on exchange rates in May 2011:
‘a business in the UK posting 100 parcels (500 grams) to Australia could enjoy a unit postal cost of $3.04. In contrast, a business in Australia posting the same volume and weight of parcels within Australia would pay an estimated until postal cost of $5.75 – 89 percent more than the business in the UK pays for delivery to Australia’.
PwC said there is ‘little publicly available data that helps explain’ this variance. A possible explanation may be the relative size of the UK compared to Australia, or the relative distribution of British and Australian population centres. ‘There may be other reasons … but they are not apparent to us at this time,’ wrote the researchers.
Australia Post was more forthcoming with information in its recent submission to the Productivity Commission’s public inquiry into the economic structure and performance of the Australian retail industry. Part of the submission is worth quoting at length:
‘The [Universal Postal Union’s] payments arrangement are complex, subject to price floors and caps, and do not properly reflect the true processing costs of many destination postal administrations, including Australia Post. Under the UPU’s payment arrangements, Australia Post gets paid the same amount for the processing of inbound international mail irrespective of its actual costs of delivery. As a result, the pricing of international parcels destined for Australia by origin postal administrations may be lower than it should actually be if properly costed and based on sound commercial practice.
‘In the case of Australia Post, the payments it receives under the UPU’s terminal dues systems … is well below the cost of delivery within Australia. Being a net importer, this means that Australia Post incurs a substantial loss on the processing of such mail. For example, in the financial years 2010-2012, Australia Post estimates that it will make a loss of A$1.06 per inbound international airmail packet (parcels less than 2 kilograms) on a volume of approximately 39.7 million articles.’
That’s more than $42 million over two years. And a long way from 2008-09, when the costs of delivering international mail were covered. A department spokesperson told BOOKSELLER+PUBLISHER that there are two reasons for the difference: the strength of the local currency, and the increase in Australians shopping online.
‘Terminal dues payments are based on Special Drawing Rights (SDR) which relate to a basket of currencies,’ said the spokesperson. ‘The appreciation of the Australian dollar has led to lower payments for inbound parcels since the value of an SDR in Australian dollars has fallen significantly. Inbound parcel growth of 56 percent in 2010-2011 has also increased its costs at the mail gateways.’
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