Royal Mail highlights challenges

Shares of Royal Mail declined some 9.7% (at time of writing) following the company’s market update today (22^nd May). A warning from Moya Greene, the company’s CEO, certainly didn’t help.

For its year ended 30^th March, Royal Mail took revenue of around £9.5bn, up from some £9.2bn reported in the same period last year.

Operating profit (before “transformation costs”) came in at £671m, marking a 12% increase over the same period last year.

After said transformation costs – this includes provisions relating to its management reorganisation programme – operating profit stood at £430m, up from last year’s £403m.

The company saw growth across its businesses, including its core – UK parcels, International & Letters (UKPIL) – where growth in parcel revenue helped offset the decline in letter revenue.

Here’s the challenge for Royal Mail…

According to the company’s CEO, Royal Mail’s headwinds are twofold.

Fierce competition in parcel delivery was noted as one headwind.

Well, that’s pretty much well known and was somewhat apparent in its latest figures – parcel volumes were flat year-on-year.

That’s certainly a problem given that letter delivery is on the decline, which means future growth lies with parcel delivery (helped by e-commerce).

Still, the company is taking a number of steps to fight back; including its planned Sunday delivery service.

Then there’s competition on the letters side…

That, in the absence of “timely regulatory action”, could hurt the sustainability of its Universal Service (a six-day-a-week delivery service across the whole country, for which it has an obligation) and therefore its targeted profit margin range.

The competition, of course, is from TNT Post UK, which has been expanding its direct delivery letter service (customer to recipient delivery using its own network). It now has operations in London, Manchester and Liverpool, and, isn’t about to stop there.

The problem, according to Royal Mail, is that TNT can “cherry-pick easy-to-serve urban areas; delivering easy-to-handle post to homes less frequently than Royal Mail and to no defined quality standard”.

In other words, TNT can choose profitable areas while Royal Mail has to deliver throughout the whole country. Royal Mail reckons the impact will be revenue reduction by over £200m in 2017-18, and cost cutting to help support margins would be limited given its Universal Service obligation.

Meanwhile, the company can’t go ahead with access price increases, in a bid to plug the hole. That’s because the planned changes to its access contracts (where Royal Mail delivers the so-called final mile of letters sorted by others) is being investigated by regulator Ofcom, following a complaint from TNT.

It’s all very dramatic indeed but as results go, Royal Mail’s wasn’t exactly dismal.

The lack of growth in parcel volumes might’ve been a bone of contention but it’s the company’s warning that caused the jitters.

That warning provided reason to be downbeat – especially as it looks like Ofcom isn’t about to act – and that sentiment’s unlikely to soon subside.