Just like Australia Post, the UK's Royal Mail is experiencing a loss of profitability from the parcel boom and mail bust. It is, however, also looking down the barrel of Amazon’s own delivery network, which threatens future growth rates.
Royal Mail has reported results for the six month period to 28 September 2014. Revenue increased 0.1% to£4,525.0 million, as operating profits, after transformation costs, fell 18.0% to £232.0 million. Continued tight cost control helped offset the impact of changes in the UK parcels market.
The Royal Mail Group operates through two core divisions: UKPIL and GLS. UKPIL operates in the UK collecting and delivering parcels and letters through two main networks, the Royal Mail Core Network and Parcelforce Worldwide. GLS operates in continental Europe and the Republic of Ireland, and has one of the largest ground-based deferred parcel delivery networks in Europe.
UKPIL revenue was flat at £3,703.0 million. Letter revenue of £2,242.0 million was up 1.0%, primarily due to election mailings. Addressed letter volumes decreased by 3.0%. This was better than an expected range of a 4.0%-6.0% decline per annum, mainly due to the improvement in UK economic conditions.
At £1,461.0 million, UKPIL parcel revenue was down 1.0%. This was primarily due to the impact of a change in the mix of the parcels carried and the highly competitive environment in the UK parcels market.
Royal Mail estimates Amazon’s own delivery network will reduce the annual rate of growth in the UK addressable market to 1.0%-2.0% for approximately two years. UKPIL parcel volume grew by 2.0%.
GLS delivered a good performance, ahead of expectations. Revenue was up 7.0%, in line with volumes.
Royal Mail is the incumbent UK parcel delivery company. It is maintaining that position while targeting higher growth areas, including clothing and footwear.
UK parcels market volume growth continues to be driven by e-retailing. Royal Mail estimates that the total number of parcel deliveries in the UK, across business-to-consumer (B2C), consumer-to-any-recipient (C2X) and business-to-business (B2B), will increase by approximately 4.0% per annum in the medium term. However, it estimates that the impact of Amazon delivering an increasing number of its own parcels using its own delivery network will reduce the annual rate of growth in the addressable market to 1.0%-2.0%. It expects this dynamic to continue for approximately two years. Additional capacity in the market has contributed to increasing price pressure, as other players seek to fill their networks.
The UK has one of the most developed e-retail markets in the world, with around 10.0% of all retail sales conducted online. This is estimated to rise to 13.0% by 2017. Online retailers and consumers are increasingly focusing on delivery. They want services that are quick, frequent, reliable and competitively priced. They also want a reliable returns service.
Royal Mal is working with e-retailers to be more flexible about the dimensions of parcels, and packaging materials. Poly-wrapped clothing and footwear, including returns, can be delivered cost-effectively on foot using trolleys. The company is also offering more support to eBay sellers.
In Europe, GLS delivered a good performance with underlying revenue growth and margin improvement. Revenue growth was delivered in all of its major countries, including Germany, France and Italy, which make up approximately 70.0% of its revenue. Volume growth was driven by better than expected volumes in both domestic and export parcels.
In Germany, GLS’ largest market, volumes and revenue increased. Sub-contractor costs have stabilised. GLS Germany has rolled out evening and Saturday services in selected cities. The turnaround plan in France is on track, focusing on top line growth and rolling out the FlexDeliveryService. GLS Italy continued to deliver a good performance, partly due to a selective acquisition strategy and the successful integration of new franchisees. The business is aiming to maintain its competitive position by focusing on SME and increasing exports.
