The price of stamps is going up: Here’s why small businesses are happy about it

Independent post offices have welcomed an Australia Post proposal to increase the price of stamps, as small businesses continue to struggle with declining letter volumes.

The government-owned postie yesterday submitted a plan for a 10% increase in the basic postage rate for ordinary letters ⁠— a move estimated to cost average Aussie households an extra $1-2 per year.

But while consumers would be slugged with extra costs under the plan, the 2,900 or so licensed post offices (LPO) across the country, which for years have struggled with a combination of declining letter revenue and rising costs, would likely experience a revenue bump as a result of the change.

The last time Australia Post increased the base postage rate was in 2016, when prices went up from 70 cents to $1. The latest change, submitted to the Australian Competition and Consumer Commission (ACCC) for consultation yesterday, would see the price increase to $1.10.

“Every cent counts”

Gail Kelley, the operator of a licensed post office in Byrock, regional NSW, says the increase would be money in her back pocket at a crucial time, with the ongoing drought continuing to ravage rural communities in her area.

“Every cent counts,” Kelly tells SmartCompany.

Across the country, letter volumes have declined substantially in recent years as Australians switch to electronic messaging and bill payments ⁠— but Kelly says there are still plenty of people in her community who rely on the service.

Kelly says customers will “suck it up” and pay the increased price because those in her community believe in Australia Post as an institution, and don’t want it privatised.

“Customers will just take it on the chin because its Australia Post and everyone wants to see that still going,” Kelly explains.

“We don’t want it privatised ⁠— we’ve had a flogging with privatisation.”

Post Office Agents Association (POAAL) director Bob Chizzoniti said it is waiting to see estimates about how the price change will affect letter volumes.

“It is important Australia Post’s letters service is sustainable,” he said in a statement circulated Wednesday.

“Costs have increased since the last price increase in January 2016, while letter volumes continue to fall.

“We will wait to see Australia Post’s modelling on how the price increase will affect letter volumes.”

Why letters are in decline

Basic demand theory would suggest the price increase will exacerbate volume decline, although modelling put together for Australia Post by third parties suggests the effect could be minor, especially in the context of prevailing substitution effects.

The underlying trend here is Australians are just sending fewer letters, because, well, the internet exists.

The number of letters being posted in Australia has been declining for some time, a trend which really kicked into gear following the global financial crisis (GFC) in 2007-8.

In 2016-17, the volume of small letters posted declined 18.8%, slowing to a 10.2% decline in 2017-18, while the annual post-GFC rolling average to 2016-17 reveals a 10% decline.

Modelling conducted for Australia Post suggests the rate of decline will not increase materially as a result of the price increase, helped by inelastic demand. Or, in other words, consumption is not very sensitive to price changes.

These are all projections though, based on historical data and assumptions about market trends ⁠— although the latest price increase proposal is smaller than previous ones.

Are there better alternatives?

The POAAL said licensees have benefited from previous price increases but says that was largely thanks to many of their payments being linked to the postage rate. That system has since changed to one based on annual indices, meaning licensees are less reliant on letters for revenue.

The POAAL said there are alternatives to price increases that Australia Post could consider.

“Letter delivery could move from five days per week to alternate-day delivery, or to-door letter delivery could be replaced with delivery to community mailboxes,” the association said.

“These letter delivery options have been implemented in other countries in response to falling letter volumes and growing delivery costs.”

Such an approach would focus less on bolstering revenue and more on controlling costs associated with products that don’t attract the volume they used to. Similar initiatives are nothing new to the government-owned postie, which has partnered with major supermarket Woolworths on e-commerce delivery bins previously.

One licensee, who asked not to be named, says an increase in the basic postage rate is welcome, but won’t be enough to address ongoing issues with the licensed post offices business model.

They said the key issue is independents are required to deliver community service obligations, which they often spend hours a day working to achieve for payments that don’t make financial sense.

What happens now?

While Australia Post has filed its draft proposal to the ACCC, the competition watchdog won’t be responsible for making any decisions.

Instead, the ACCC is required to assess the price increase in accordance with the Competition and Consumer Act and will then let the postie know whether it ‘objects’ to the price increase.

Communications Minister Paul Fletcher will have the final say on whether the increase goes ahead, as he is allowed to disapprove of the proposal within the next 30 days.

“In assessing these proposed price increases, we will consider various issues including trends in the postal industry and whether Australia Post has adequately explored efficiency improvements before increasing its letter prices,” ACCC commissioner Cristina Cifuentes said in a statement circulated Wednesday.