Royal Mail parcels business under pressure

SHARES in Royal Mail today dropped below their first day closing price as the company revealed competition is taking its toll on its parcels business.

Chief executive Moyna Greene expects to keep full-year expectations on track. Picture: Getty

Sales in the division were hit by rivals cutting their prices and by the stronger pound, which affected export volumes. With lower-than-expected revenues from parcels, the firm will need to rely on tight cost control and its traditional letters business to hit full-year profit forecasts.

Parcels account for about half of Royal Mail’s turnover and its growth in an industry buoyed by online shopping is a key investment focus for shareholders in light of declining letter volumes.

But the group, sold off amid much controversy last October in the UK’s biggest privatisation in decades, faces stiff competition in its main UK parcels market from the likes of UPS, TNT and Yodel.

It was dealt a blow in the past year when online retailer Amazon, its single biggest customer worth 6 per cent of sales, moved to launch its own delivery service.

The group, which is also facing regulatory probes in Britain and abroad, said higher stamp prices lifted group revenue 2 per cent in the three months to 29 June, the first quarter of its financial year, meeting analyst forecasts.

But chief executive Moya Greene said with the “increasing challenges we are facing in the UK parcels market”, revenue for the year in the division is likely to be lower than anticipated.

“However, through cost control measures and with continued good letters performance we expect to be able to offset the impact on profit such that our overall performance would remain in line with our expectations for the full year.”

Cantor Fitzgerald analyst Robin Byde said: “The key challenge remains weakness in parcel pricing in the UK. In our view, the company faces a considerable volume and pricing challenge in parcels in the next 18 months.” He is keeping a “sell” rating on the shares.

Paul Simmonds, of Warwick Business School, who researches privatisations, also said he believed significant challenges lie ahead. “The reasons behind Royal Mail’s fall in parcel revenues look set to continue,” he warned.

“The change from weight to size-based pricing in April 2013 initially helped revenues, but customers – both private and business – have now become more efficient in their packaging, while changes at Amazon, including expansion of its own delivery operations, has reduced Royal Mail’s volumes.

Royal Mail said UK letter volumes declined 3 per cent in its first quarter – better than its expected range of a 4-6 per cent fall per year – as consumers increasingly use e-mail, but revenue rose by the same amount thanks to price increases and an uplift from mail related to European and local elections.

The company said that cost management remains a “key focus” with a management reorganisation programme announced in March on track to realise cost savings of around £25 million, which will benefit the second half of the year.

The shares today closed down 16p, or 3.43 per cent, at 450p compared to the first day close of 455p.

The shares were floated at 330p, and then soared as much as 87 per cent, prompting criticism from unions and the Labour Party that taxpayers had been short-changed in the privatisation.