Royal Mail weathers a tough market

Royal Mail’s half year results might be best considered as a ‘glass is half empty or half full’ question.

Britain’s former state owned mail provider and now leading email service provider has reported a set of fairly flat results in what is a tough market. These financial results could be seen as an indication as to how the rest of the world’s internet retailing logistics might pan-out as the UK is one of the largest, most advances and competitive e-commerce markets.

The key driver of Royal Mail’s business is e-commerce driven parcel demand, yet this has been hit by the decision by Amazon to insource all of its parcel requirements, taking a large chunk out of the market. The effect has been the depress short-term growth in the whole parcel delivery business to 1-2% a year. Yet Royal Mail believes that the underlying e-commerce market is set to grow by 7% a year until 2020 as internet retailing takes 18% of the overall retailing market.

The big problem that Royal Mail faces in the UK overcapacity, something it estimates at 20%. Competitors have four times as many customer collection points as five years ago and the market is innovating areas such as ‘click & collect’ as well as International routes becoming more competitive. Volumes might have been up by 4% but revenue was up only 1% year-on-year. So despite continuing to win new customers, Royal Mail is having to peddle hard to keep-up.

The good news for Royal Mail is that it seems capable of peddling hard. Its cost base has improved year-on-year by 1% aided by a 2.9% increase in productivity per head. This has kept margins steady at 7.8%.

Combined with continued reasonable performance at GLS, its Express parcel subsidiary in Continental Europe, which saw revenue increase by 8% and profits by 4.3% suggesting that both international routes and continental markets are not quite as cut-throat as in the UK.

If, as it hopes, the Internet retail market grows by more than a third in the next five years, Royal Mail may find itself with a market large-enough to absorb all of the spare capacity in the sector and possibly more if any rivals collapse under the strain of competition. If so, then Royal Mail may be able to expand its margins. It may also have the beginnings of a platform from which to expand into other, presently less competitive markets.