Just a few years ago, national post office monopolies such as Royal Mail looked obsolete; with little or no future prospects. Now, both Royal Mail and Belgium’s bpost are sparking excitement over their forthcoming stock market flotations. What has changed?
Certainly, Royal Mail is making money at the operational level. The Group- which includes both the GLS express parcel business and Royal Mail’s British postal operations- announced preliminary results for 2013 showing a 5% rise in revenue on a like-for-like basis and an operating profit after exceptional items of £440m. EBIT was £367m, up a third on 2012. The results were complicated by additional weeks in the reporting period and heavy exceptional items such as redundancy costs, however Royal Mail Group said that operating margins had hardened from 1.7% to 4.4% on a like-for-like basis.
GLS saw revenue flat for the year, however Royal Mail Group said that after stripping out currency fluctuations revenue was up 2% with volumes up 1%.
The driver of the business is increasingly parcels with this business now accounting for 48% of revenue, increasing by 9% over the year as compared to letters whose revenue rose by 3% on an 8% fall in volume. In contrast parcel volumes were 4% higher. What has helped margins as well is a considerable increase in the price of stamps for letters.
So Royal Mail is profitable. The British Government is keen to access all or part of the Group’s value, not least to support Royal Mail’s pension liabilities. Therefore, a float on the stock market may take place towards the end of this year.
However, it is also clear that this is a changing business, experiencing a steady shift away from letters and towards parcels serving the e-commerce market. Whilst the prospect of vast quantities of internet retailing derived business may sound very exciting to investors, the company will require the continued transformation of an organisation structured around very traditional types of postal operations. These operations are still some considerable distance from the highly capital intensive IT investments that characterise global air express for example. A new company will require both agile management and possibly a significant amount of capital.
The driving force behind the renewed viability of Europe’s mail services is their good fortune in finding themselves at the centre of the transformation of retailing. But this is a fast moving sector and whilst an existing infrastructure has been an advantage so far for incumbents such as Royal Mail, it might be unwise to become too comfortable about its prospects.
GLOBAL SUPPLY CHAIN INTELLIGENCE (GSCi)