Royal Mail shares fell more than 8 per cent today after the company reported a drop in half-yearprofits and warned that Amazon’s move into parcel delivery in the UK would have a material impact
on the growth potential of the UK postal operator’s own parcel business.The group’s shares started the day at £4.77 but settled at around £4.30 by early afternoonafter it reported a 21 per cent drop in first-half operating profit before transformation costs to£279 million. Operating profit after transformation costs fell by 18 per cent to £232 million inthe six months to 28 September.
Parcel revenue within the group’s UKPIL (UK parcels, international, and letters) businesswas down 1 per cent, year on year to £1.46 billion, despite a 2 per cent increase in parcelvolumes, “primarily due to a change in the mix of the parcels we carry and pressure on average unitrevenues (AURs) due to the highly competitive environment”. The company also warned that themedium-term growth prospects for its parcel business were limited because of Amazon’s move intoparcel delivery and other competitive factors.
Royal Mail Group CEO Moya Greene told analysts: “We estimate that the total number of parceldeliveries in the UK – across business-to-consumer (B2C), consumer-to-any-recipient (C2X) andbusiness-to-business (B2B) – will increase by approximately 4 per cent per annum in the mediumterm. However, we estimate that the impact of Amazon delivering an increasing number of its ownparcels using its own delivery network will reduce the annual rate of growth in our addressablemarket to 1-2 per cent.
“We expect this dynamic to continue for approximately two years. Additional capacity in themarket has contributed to increasing price pressure as other players seek to fill their networks.”
In response to questions from analysts, Greene said Amazon’s intentions in the parceldelivery market were unclear – for example whether it intended to carry parcels for third parties.But she insisted Royal Mail was “not dependent” on Amazon’s business.
“We don’t give out numbers of how much any customer has with us, but I can tell you that itis less than 6 per cent of our revenues. I have huge regard for Amazon and we are happy to deliverfor them, but they seem to have taken a decision to go down a different route.”
While she was obviously not privy to Amazon’s strategy, she said she had just finishedreading the book ‘The Everything Store’ about the company. “It is a company that is brilliantat everything it does and it is always changing its strategy,” she observed.
“I have always said to our team not to depend on any one customer, including Amazon, beingour customer in the long term, and to go out after all the traffic that is out there. This businessgoes through these kinds of things.
“Whether Amazon will start to deliver for other people, I don’t know. But I would say toAmazon and any other companies out there, Royal Mail is a very high-quality delivery company.”
Greene insisted that Royal Mail had made significant improvements in the last few years –and in the past 12 months – to make it easier to do business with for parcel customers. Forexample, it was much quicker and simpler for customers to connect with its shipping systems.
“We are targeting higher growth areas, including clothing and footwear. This is helping usto grow business with a number of large retailers and e-retailers,” she added.
“As we seek to increase our share of key growth segments, we are working with e-retailers tobe more flexible about the dimensions of parcels, and packaging materials we will accept.” Forexample, polythene-wrapped clothing and footwear, including returns, could now be deliveredcost-effectively on foot by Royal Mail using trolleys.
“We are offering more support to eBay sellers – key customers of ours. Royal Mail andParcelforce Worldwide is one of the few delivery providers for eBay’s click and collect servicewith Argos stores across the UK,” Greene added. “We have also strengthened our strategicpartnership with eBay by enabling buyers who want to return items to track their parcel through todelivery back to the seller.”
In May, the company introduced later acceptance times and weekend collections for retailersand e-retailers, allowing them for the first time to fulfil orders made at the weekend for deliveryby Royal Mail on Monday. “We saw extra volume as a result of this,” added Greene.
The company had also extended access to Local Collect – its click and collect service – toaround 20,000 contract SME customers, giving their customers the option to collect their parcelsfrom a network of around 10,500 Post Offices, which is in turn introducing longer opening hoursinto thousands of its branches.
“We have launched new parcel shipping and tracking IT solutions. New shipping and trackingtechnology allows large customers to integrate with Royal Mail faster than ever before and smalland medium customers can connect using multiple browsers and access a wider range of UK andinternational services.”
She said the group was also making progress with plans to automate its parcel sortingsystems, insisting that Royal Mail would learn from the many mistakes that others had made inmoving to greater automation of sorting. The company had now put out a tender with automationtechnology suppliers and she said it intended to pursue automated sorting, at least in its largestsort centres.
She said she believed that the company’s plans in this area would be supported by employeeunion CWU, “which recognised the need for modernisation”.
Other parcels improvements included the aim to barcode the majority of parcels by the end ofnext year and an investment of around £130 million over five years in hand-held technology. Therollout of approximately 76,000 next-generation hand-held scanners is to be completed in 2016-17,bringing enhanced functionality, including the capability to provide interactive alerts and imagecapture.
Overall revenue for the group’s UKPIL business was flat at £3.7 billion, with letter revenueof £2.24 billion up 1 per cent, primarily due to election mailings. Addressed letter volumesdecreased by 3 per cent, better than the expected range of a 4-6 per cent decline per annum, mainlydue to the improvement in UK economic conditions.
The group’s European parcels business, GLS, performed ahead of expectations with a 7 percent increase in volumes and revenues and an 11 per cent rise in operating profits. Revenuesincreased to £813 million (€1 billion), with revenue growth in all major countries (see separatearticle: “GLS improves profits by 11 per cent in H1, 2014-15”)
