Discussion paper on the future of end-to-end competition in the German letter market (No. 517)

As in many other countries, the German letter market has experienced a structural decline in letter volumes. Between 2010 and 2022, volumes decreased by over a quarter, averaging a 2.6% annual decline. Despite the decrease in demand, competitors have managed to maintain their market share of 14-15% in terms of both mailings and revenue.

The letter market data only provides a superficial overview of the developments in the German letter market and the diversity of service providers. This discussion paper analyses the end-to-end competition in the German letter market from the perspective of price and quality strategies of competitors and the incumbent Deutsche Post. We discuss the composition of delivery competition, the challenges faced by competitors, and the price and quality strategy pursued by the market-dominant Deutsche Post, as well as potential future strategies. The analysis is used to provide an outlook on the future of end-to-end competition in Germany, also considering relevant planned changes to the regulatory framework.

The structural decline in letter volumes is affecting the entire market, including competitors. Publisher-owned letter service providers are also experiencing a decline in subscriptions to printed daily newspapers. Additionally, rising labour costs and labour shortages pose further challenges for companies, which they can only influence to a limited extent. As a result, mail services are experiencing rising unit delivery costs. The strategy and support of their owners, particularly the publishing houses, will determine how they address this issue. This may involve acquiring additional volumes, increasing efficiency, or offering new products.

Based on the analysis of price and quality strategies, changes in sector-specific regulation, and the relaxation of universal service requirements, competitors may have more opportunities in the future depending on Deutsche Post’s pricing and quality strategy. Furthermore, competitors and its alliances have the potential to enhance their competitive position by improving collaboration among themselves and by refining their business models to operate as independent delivery companies.

However, because of the planned VAT exemption for access services, end-to-end competition and thus its disciplinary influence on DPAG's price and quality strategy would diminish much faster than would be expected due to structural market developments in demand and costs. It is to be feared that the implementation of the planned VAT exemption would lead to a remonopolisation of the letter market within a short period of time, despite many proposed improvements in the supervision of the letter market, such as the consistency requirement or network access for goods consignments.