UK Mail profits up 25%, with customers won from Royal Mail

UK Mail Group appears to have benefited greatly from Royal Mail’s price increases this year in boosting its mail revenues and taking customers from the universal service provider. Royal Mail hiked business mail rates by 11% and retail prices by 30% on average

Birmingham-based UK Mail, one of its biggest private sector rivals, issued half-year results today stating that as a direct result of Royal Mail’s price increases, its mail business saw a 24% boost in turnover in the six months to the end of September.

As well as the affect of increasing Downstream Access prices for its customers in line with the Royal Mail hike, UK Mail said today that it has also been winning new customers, and increased volumes from existing customers, “largely due to switching from Royal Mail as their prices increase”.

UK Mail’s overall group result was an 11.9% increase in first-half turnover compared to the same period last year, to GBP 225.7m, with a 25% increase in profit after tax, to GBP 5.5m.

As well as good growth in mail, UK Mail saw a 4.4% growth in its parcel business sales and a 5.5% increase in parcel profits.

Guy Buswell, the UK Mail chief executive, said the first half of the year had been “encouraging”, adding that the second half of the year appeared to be proceeding in line with expectations.

“With our highly competitive business model, tight focus on costs, and strong balance sheet providing strategic flexibility, we are well prepared for the competitive environment and general economic backdrop, to remain tough into 2013,” he said.

Mail business

UK Mail’s mail business, which makes up 51% of its group revenue, saw its sales up 23.6% to GBP 115.9m, with operating profits up 12.9% to GBP 5.7m.

Discounting UK Mail’s increase in prices resulting from Royal Mail’s price rises, the private-sector firm’s mail turnover still increased 17%. However, the companies margins were slightly squeezed by the Royal Mail price rise, down from 5.4% a year ago to 4.9%.

Mail volumes at UK Mail grew by 2% compared to the first half of 2011, while the UK’s mail market overall saw volumes dropping about 5% year-on-year.

Along with the importance of winning customers through lower prices, Buswell suggested its hybrid mail service mail was important in attracting new business. The service that allows customers to send mail electronically to UK Mail to be turned into physical mail prior to final delivery, has seen its volumes more than double those of a year ago.

Having invested in additional services including high-speed insertion, the company said it is further developing imail to add data services, and there is a “strong pipeline” of new opportunities for the product, the firm’s CEO said.

Parcels

Parcels make up 39% of UK Mail’s overall turnover, and in a highly competitive UK market, the company said its parcel revenue grew 4.4% in the first half, compared to the same period last year, to GBP 87.2m, with operating profit up 5.5% to GBP 5.8m.

Working hard to keep costs down, with key focus on its vehicle fleet during the half and benefiting from the 2010 addition of automated sorting systems at its Birmingham hub, UK Mail’s operating margin for parcels increased by a tenth of a point to 6.7%.

More automation could be on the horizon as the company continues looking for opportunities to improve efficiency.

During this half, the company saw parcel volumes growing 10% year-on-year, with growth in both business-to-business and business-to-consumer segments, but a continuing of the general ecommerce-inspired shift toward more B2C parcels in the system.

Buswell suggested its decision not to add extra charges to customers during the summer’s Olympics meant the event had “no noticeable” impact on its volumes.

And, the company is seeing rapid growth from its consumer parcels portal, ipostparcels, which allows individuals and small businesses to arrange parcel collection and delivery, and is finding popularity among eBay traders and Amazon marketplace retailers.

“We will continue to develop and market this product, which we see as a good source of future profitability,” stated Buswell.

UK Mail is monitoring “major change” at a number of its rivals in the UK parcel market, and hinted that two of the major players in the market could be looking at potential consolidation, although it did not name the firms.

Among the big four private sector parcel carriers in the UK, Yodel is facing a particularly difficult trading period at present, while City Link’s parent company Rentokil Initial has suggested its loss-making parcel subsidiary could be sold if a suitable offer came forward. However, major acquisitions in the market in recent years have generally caused trouble for the companies making the acquisitions, with the integration process denting service quality.

UK Mail suggested it was keeping its focus on its own efforts to win new customers from high service levels, a low-cost network and innovative products. “We will seek to benefit further from this position as the market around us changes,” said the company’s chief executive.

Courier/pallets

Elsewhere in the UK Mail Group, the courier business continued its “expected” decline, of 18.4% in revenue and 6.5% in profit, with the same-day market proving “challenging”.

However, margins have increased by more than a point to 13.5%, which UK Mail said showed that it has improved effectiveness and reduced overheads.

The pallets business achieved stable revenues, up 0.8%, and a 26% drop in profitability in the first half as its network of partners experienced temporary “gaps”, which are now being addressed.