22 May 2014: A Red Letter Day For The Royal Mail
With profits jumping by 12%, i.e., £671m, surely Royal Mail boss Moya Greene should be celebrating? Despite her company announcing a 19pc rise in profits in its first annual report as a part-private business, Greene took this moment to warn of dangerous ‘headwinds’ in the form of unfair competition from the likes of TNT Post UK. The Canadian chief executive went so far as to say the company’s earnings target might ‘never sustainably be achieved’. A spooked market quickly saw the share prices dropping 7.5% in one day. So, what’s going on?
Part and Parcel of the Business
Moya Greene has radically restructured the Royal Mail. The 350-year-old leviathan has had an extreme makeover in preparation of its coming out into our deregulated, 21st century marketplace. One of Greene’s main innovations was to refocus the Royal Mail on delivering profitable parcels. Previously the Mail indiscriminately delivered everything under the sun, but now only delivers simple parcels. This led to an 8% jump in revenue from parcel-delivery.
Again this seems like good news, but it disguises an underlying problem. There has been no growth in the number of parcels delivered and parcel-delivery is a volume game. Even more troubling, Amazon, which accounts for 6% of Royal Mail’s parcel business, has announced their own seven-day delivery service. Reacting to this stagnation, analysts at Espirito Santo said: ‘given that parcels are the major growth driver for the group, this is an extremely negative development’.
Universal Service Obligation
The Royal Mail, lest we forget, is only partially private. The Royal Mail’s Universal Service Obligation means they have to deliver to every address in the UK at an affordable, uniform tariff. Ofcom safeguards this one-price-goes-anywhere service. The Postal Services Act 2011 enshrines the Royal Mail as the provider of Universal Service until 2021.
It’s easy to see what the problem is. There is little-to-no money in delivering a letter from Land’s End to John o’Groats. Greene complains that the Mail’s competitors, like TNT, can ‘cherry pick’ where they deliver, favouring ‘easy-to-serve urban areas’. Indeed, TNT has begun a direct letters delivery service in London, Liverpool and Manchester. This level of competition could see the mail lose something like £200m-a-year by 2017-18.
The Royal Mail is increasingly trying to escape their Universal Service Obligation straight jacket, claiming the situation ‘threatens the fundamental economics of the universal service’ and demanding ‘immediate action’ from Ofcom. The postal service regulator, however, has rejected any calls to review the obligation and has instead encouraged the mail to ‘take appropriate steps to respond to the challenge posed by the competition, including improving efficiency’. TNT boss Nick Wells concurred, telling them to ‘stop whinging’.
Is the Royal Mail’s initial market success built on sand? The company’s high heid yins certainly seem to think so, as do many industry analysts. While something certainly had to change (their operating at a £1bn loss in 2002 being a notable low), this controversial partial privatisation could just be the worst of both worlds for this geriatric, fledgling company.