It can hardly come as a surprise that Royal Mail Group is struggling with the changes in the e-retailing driven parcel market. Competition from Amazon alone is depressing growth with Moya Greene, Royal Mail’s Chief Executive Officer suggesting 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 our addressable market to 1-2%.”
The financial situation is not bad. For the half-year, revenue was up 2% whilst underlying profit margins appeared to harden, up 0.2% from last year to 6.2%.
Volume was up across the network, with the core mail services seeing a 2% increase, parcels a 9% increase and GLS – the continental European parcel business – up 7%.
However after ‘transformation costs’, which include voluntary redundancy costs, profits fell by £15m to £218m for the half year.
The underlying situation is that the UK Royal Mail business is being squeezed by the competition. The UK’s ‘business-to-consumer’ delivery market is highly developed and fiercely competitive, with margins being squeezed despite continuing expansion in demand for internet retailing home-delivery solutions. Not only are the traditional providers investing in more capacity, but Amazon rolled out its own delivery service and the growth of options such a ‘packet-stations’ has also begun to affect the market.
This is hardly surprising as the size of the potential market for home deliveries is very great and the number of potential competitors tempted by it was always going to be large. Royal Mail’s existing assets are of course substantial, however many of them are not optimized for the new market-structure. In addition even medium sized players are able to replicate at least some of the depot network of Royal Mail, whilst Amazon has built on a huge scale. This suggests that Royal Mail’s competitive advantage, of a nation-wide presence with economies of scale from big volumes, is eroding.
In contrast, GLS which operates in markets such as France and Germany against incumbent state monopolies was able to grow suggesting that smaller more nimble players have considerable advantages.