The Royal Mail is a huge multibillion pound business whilst UKMail is a fraction of its size, yet the larger of the two is finding life much tougher in the fast changing world of e-commerce parcels, mail and last mile delivery.
Reported at the beginning of the month, UKMail’s annual results showed a business growing rapidly, driven by internet related business of several kinds. Revenue saw a 7% increase over the twelve months to March 31, whilst profits before tax leapt by 28.2%. The volume of business is generally very strong, with even the mail business seeing a 2% rise in volumes, although the real driver of the business is the e-commerce related parcels business.
The Royal Mail Group saw revenue up by 2%, while the core ‘UK Parcels, International and Letters’ also saw a rise in revenue of 2%. Operating profits for the group were up by 5%. The core ‘UK Parcels, International and Letters’ has been the driver of this profit increase over the past 12 months with e-commerce related parcel volumes up 4.5-5.5%, although mail volumes fell slightly. The big problem that Royal Mail faces is its size. It is spending huge amounts on ‘transformation costs’ to re-orientate its business to the market and improve its productivity. Yet it is also threatened by rivals ‘cherry-picking’ its business with TNT Post being the latest threat.
The contrast between Royal Mail and UKMail is that the latter has been able to exploit its moderate size to adapt to different market opportunities, jumping from Mail – where it uses Royal Mail’s trunking operations – into parcels, where it is just large enough to create economically attractive networks. In contrast Royal Mail is on the defensive, looking to the regulator to protect it from smaller competitors and apparently unable to use its economies of scale to drive-down unit costs. This has always been the problem with realising the potential of Royal Mail. The inertia of its enormous network makes the business slow to adapt and hard to manage in terms of costs.
Such is the risk of any business building a very large logistics infrastructure in order to gain economies of scale, something that a number of big businesses may face as the internet retail market evolves.