Royal Mail parcels growth offsets decline in mail revenues

Royal Mail has today reported a group revenue of £4,395m for the half-year ended 27 September, compared to £4,478m for the same period last year, with growth in UK and European parcels offsetting the decline in UK letter revenue. The adjusted group operating profit was £342m – also flat compared to the £348m for the first half (H1) of  2014 (Royal Mail actually reported a figure of £279m last year, but this excluded a £69m pension adjustment).

Parcel volumes up

Parcel revenues increased by 1% and volumes were up 4%, driven by new customer wins and initiatives in account parcels, continued growth in lower AUR import products, and strong volume growth in Parcelforce Worldwide. The customer wins included John Lewis, House of Fraser, Waterstones and ASOS.

Addressed letter volumes fell by 4% (excluding elections), which was actually at the better end of Royal Mail’s forecast range of a 4-6% annual decline. Total letter revenue declined by 3%.

The performance of GLS was one of the highlights. The pan-European parcel delivery service provider saw increases of 9% in parcel volumes and 8% in revenues, while profits grew from £69m to £72m.

Competitive trading environment

Commenting on the results, Royal Mail’s Chief Executive Officer Moya Greene said: “We have delivered a resilient performance in the first half, demonstrating our ability to respond to a competitive trading environment.

“We delivered parcel volume and revenue growth in the UK, which continues to be a challenging market. Addressed letter volume decline was at the better end of our forecast range. We are driving through a range of product innovations and service improvements at pace, as well as targeting new areas of growth and enhancing our offering.

“As a result of an acceleration of our UK cost savings programme and a better than expected performance in GLS, Group operating profit before transformation costs was flat in the first half. Given our strategic focus on costs, we now expect underlying UKPIL operating costs to be down by at least 1% for the full year.

“As in previous years, the full year outcome will be dependent on our important Christmas period, for which we have extensive preparations in place.”

E-retail drives parcel volume growth

Focusing on the key e-commerce-driven parcels business, Green said: “E-retail continues to drive parcel volume growth. However, as a result of Amazon’s roll-out of its own delivery network, we estimate that volume growth in our UK addressable parcel market has, on average, been reduced to around 1-2% per annum in the short term.

“Additionally, we estimate there is around 20% annual spare capacity in the market. These factors are putting pressure on prices across the industry. While we have seen growth in account and import parcels, competitors continue to target the attractive consumer/SME and export parcels market segments.”

Investing in delivery

Green also highlighted some of the investments that Royal Mail has made to update and expand its parcel delivery business, with new initiatives focusing on IT services and e-commerce capability, as well as parcel tracking and automation.

“We know that consumers expect faster and more flexible delivery. We are responding by introducing new and improved products and services at pace,” said Green.

“We are extending our Local Collect network to our Enquiry Offices. This will create a network of over 11,700 Post Office branches and Enquiry Offices offering Local Collect, more collection points than the next two competitor networks combined.

“We have also extended acceptance times for our Royal Mail Tracked 48 parcel delivery service. We have increased the number of products we collect from SMEs and business customers at weekends.

“Royal Mail is making prudent investments in service development. This includes taking action to increase our e-commerce capability at pace. We have secured a stake in Market Engine, an online marketplace specialist that integrates the world’s largest e-commerce sites. This investment follows our investment in Mallzee, the ‘personal shopping’ app, and our acquisition of Storefeeder in February 2015.

“We are starting to leverage the benefits of our IT investment as we seek to track more parcels. We are working with our customers to put 2D barcodes on as many parcels as possible. We have introduced 3,000 finger scanners across all our Mail Centres and Regional Distribution Centres. In time, we will increase the number of items we scan both in Mail Centres and on the doorstep. We will be able to provide customers with improved quality and service data for an increasing number of parcel deliveries.”

Green emphasised that parcel automation was another priority for Royal Mail.

“The first parcel sortation machine is expected to be installed in Swindon in December,” said Green. “Over the next two years, we plan to install further machines in our busiest Mail Centres.

There are also new developments on the parcel collection front. “We have made a number of investments to expand our offering to e-retailers, and support the growth of SMEs,” added Green. “In October 2015, we launched a trial of doorstep collections in North-West England, which offers marketplace sellers and SMEs next day parcel collection service from their home addresses.”

Turning her attention to the mail business, Green noted : “While total letter revenue declined, marketing mail revenue increased by 3% in the first half.”

The Royal Mail CEO noted that over 1.5bn letters have now been sent using Royal Mail Mailmark, adding: “MarketReach has launched the second phase of its ’MAILMEN’ campaign, which aims to demonstrate the vital role mail continues to play in today’s digital world.”

Regulation review

Green made brief mention of Ofcom’s ongoing review of the regulation of Royal Mail, saying that there is “a need to consider the effectiveness of the existing regulatory framework”.

“Ofcom have said the review is expected to be completed and a revised regulatory framework in place during 2016. To sustain the Universal Service the regulatory environment must allow us to be innovative and competitive,” added Green.

Outlook

Looking forward, Green commented: “Our outlook for UK letter and parcel trends over the medium and short term, respectively, remains unchanged.”

Industry observers noted that Royal Mail is continuing to ramp up its involvement in parcels and e-commerce, to offset the decline in letters. However, they warned that the parcels business is itself a very competitive area, and companies have to be tightly focused on customers’ expectations if they are to reap the anticipated benefits.

Ryan Higginson, vice president global inside sales for SMB Solutions, at Pitney Bowes, told Post&Parcel this morning: “The postal sector is increasingly about the transport and delivery of goods as mail volumes decline, and e-commerce grows.

“As a result the parcel services market is getting crowded with Royal Mail competing alongside private parcel companies, as well as online retailers offering their own delivery services.

“To seize market share the players will need to take a customer-centric approach.

“Our research shows that UK consumers find speed of delivery and low shipping costs a priority, with 30% and 59% of respondents listing these as the most important aspects for purchasing goods online. The businesses that are able to prioritise these demands in a cost-efficient way will be well-positioned to increase their market share moving forward.”