Royal Mail parcels business shrinks in first quarter

Competition in the UK parcels sector continues to hamper Royal Mail’s results, according to the newly-privatised company’s latest quarterly data. The firm said this morning that its Group revenue grew 2% year-on-year in the three months up to 29, 2014.

Royal Mail’s domestic business grew its revenue by just 1% compared to the same period last year.

But, the important growth area of parcels has actually seen Royal Mail’s revenue slide by 1% compared to last year’s first quarter, although volumes were up by 1%.

Royal Mail has said it is still being affected by customer responses to its new size-based parcel pricing system that was first introduced in April 2013. Export parcel business has also been impacted by a stronger Pound, while June’s figures were hit by a retail slowdown, the firm said.

The company said its parcel business has also been affected by changes at e-commerce giant Amazon, which has been setting up its own delivery capabilities, and has increased its minimum order level required for free delivery.

Behind expectations

Royal Mail chief executive Moya Greene conceded that given the “increasing challenges” in the parcel business, this year’s parcels revenue looks set to come in behind expectations.

Commenting on the quarter’s results, she said today: “Trading has been characterised by a good performance in letters, with the decline in addressed letter volumes better than our expected range, but a weaker than expected performance in UK parcels, largely driven by the intensifying competitive environment in the account, consumer/SME and export channels.”

Greene said cost control measures and the better-than-expected state of addressed letters volumes should offset impacts on profits from the difficult parcels business. She also noted that European parcels business GLS was continuing to perform well.

“Our parcels revenue will be dependent on our performance in the second half, which includes the Christmas trading period, and on no further weakening in our addressable UK parcels market,” added the Royal Mail CEO.

Slowdown

UK e-commerce industry association IMRG did note that there was the steepest decline in e-commerce sales between May and June since 2008. But annual growth in e-commerce sales up to July was running at 9%.

Explanations for the e-commerce slowdown range from England’s early World Cup exit and higher-than-average summer temperatures.

Royal Mail said it has a number of initiatives now in the works to try to turn the situation around in its parcels business, including the acceptance of goods from retailers on Sundays, new Sunday delivery options at express parcels unit Parcelforce, and various new shipping tools for larger e-commerce merchants.

Meanwhile, Royal Mail’s letters business saw revenue up 3% year-on-year in the latest quarter, with addressed letter volumes down only 3% year-on-year (excluding the impact of European and local elections in May), against an expected range of 4-6%.

Revenue growth was driven by price increases and the election-related volume increase.

Royal Mail’s European express parcels business, GLS, saw its volumes and revenues up 6% year-on-year in the quarter. The company said GLS performance has been “encouraging” in most of the countries it operates, although the situation in the highly competitive German market remains “challenging” with rivals pursuing “aggressive” strategies to boost their volumes.

GLS France is subject to a potential lawsuit from French competition authorities, along with TNT Express and FedEx Express, but it is not yet known what financial impact that will have, nor when it will emerge.

Looking ahead, Royal Mail said it still expects the year as a whole to see a 4-6% dip in addressed letter volumes, while initiatives designed to boost the parcels business should kick in during the second half of the year, particularly impacting on performance during the run-up to Christmas.