Royal Mail needs to cost-cut to deliver growth

CUT-THROAT price wars in the parcel delivery market are set to make Royal Mail focus even harder on cost-trimming to underpin future earnings, its boss stressed yesterday.

Moya Greene admitted that 2014 had been a tough year for Royal Mail. Picture: TSPL
Moya Greene admitted that 2014 had been a tough year for Royal Mail. Picture: TSPL

Moya Greene, Royal Mail’s chief executive, said the group’s competitors, including DPD, Yodel and Hermes, had all added capacity despite the collapse of City Link last Christmas and Whistl’s recent decision to quit doorstep deliveries in three UK cities.

The group cut operating costs by 1 per cent in the year to end-March 2015, including a reduction of 5,500 workers from the UK payroll. Profit margins at Royal Mail lifted 40 basis points to 7.9 per cent, driven by tight cost control.

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Greene, unveiling an underlying operating profit before restructuring costs up 6 per cent at £740 million, said: “Our trading environment remains challenging, but we are now poised to step up the pace of change to drive efficiency… while maintaining a tight focus on costs.”

Royal Mail said its management reorganisation programme delivered cost benefits of £42m, and it was expected to deliver savings of £80m a year from 2015-16.

Greene said that it had been a tough year and highlighted the threat posed by the roll-out of Amazon’s delivery network, which is expected to have an impact on Royal Mail’s targets for parcel delivery growth.

The chief executive said: “The parcels and letters markets in the UK remain highly competitive.”

Royal Mail’s UK business saw flat revenues at £7.76 billion, with underlying profits up 1 per cent to £615m.

The group said parcel volumes were up 3 per cent, with a better performance in the second trading half, while addressed letters were down 4 per cent.

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said: “Royal Mail has posted numbers which indicate measured progress in a treacherous environment.

“Whilst the exit of both City Link and Whistl may have removed some of the competition, it also serves to underline how tough this sector can be.

“Meanwhile, the competitive threat of Amazon looms large, with Royal Mail recognising that there will be an impact to its business.”

City analysts estimate Royal Mail’s share of the UK parcels market is 39 per cent, compared with TNT on 8.6 per cent, DPD on 7.2 per cent, Yodel on 6.5 per cent and Hermes on 6.1 per cent.

Revenues at Royal Mail’s GLS business, operating in Europe and the Republic of Ireland, grew 7 per cent to £1.65bn, with underlying profits up 6 per cent to £115m.

Greene said eligible full-time employees who had received an allocation of 729 free shares in the privatisation of the former state-owned group in 2013 were in line to have received £250 in dividend payments by the end of July.

Dave Ward, general secretary-elect of the Communication Workers Union, said: “These results have been delivered by improving productivity and the hard work of postal workers. Those workers have shown they have supported the need to change to build growth in the business.

“However, we also recognise the note of caution that there remains a structural decline in the letters market of 4 per cent. Therefore, the union again calls on the regulator Ofcom to recognise this clear fact and to stop blindly increasing the competition in the sector.”

Greene said trading in the current financial year was in line with expectations, but overall performance would hinge on the key Christmas period.