The half year results of Royal Mail, released at the end of last week, are interesting in that they show similarities to those at Deutsche Post DHL PeP. Just like its German rival, Royal Mail’s half year numbers released saw revenue growth combined with higher costs and problems with profitability.
The numbers were unpleasant. On an “underlying” basis revenue was up 1%, with the GLS express parcel operation in continental Europe responsible for all of its growth. Profits however fell heavily, with “operating profits after transformation costs” dropping from £156m in H1 2017 to £26m in H1 2018.
The UK mail and parcels business saw revenue fall by 1% overall, with traditional mail activity falling by 7%, too fast for the 6% increase in parcel volumes to compensate for. Clearly there is pressure in the internet retail last mile sector which is preventing any rise in prices, however there are also problems internally for Royal Mail. Despite investing heavily in what it calls ‘Restructuring Costs’, it has not been able to make major inroads into its cost base. For example, it stated that its ‘people-costs’ had increased by 1% representing a productivity growth of between -0.2 and 0.1%. Although some cost pressures of £70m were “partially offset by £41m costs avoided” there was no sign of a sustained improvement in productivity that the ‘transformation costs’ investment should be delivering.
There appears to be a similar problem at GLS. Here the market is clearly strong, with 9% revenue growth, yet profits were driven down by mixture of higher wage costs and higher sub-contractor costs.
All of this is very familiar from the example of DP-DHL PeP. Both the UK and Germany have tight labour markets, but France and much of the rest of Europe do not. Yet last-mile delivery is struggling to attract workers. Sub-contractors also feel confident enough to raise prices although they too must be having problems with labour costs.
In the shorter term, despite the presence of Amazon, the higher prices for last-mile delivery seems an imperative. However, in the longer term, solving the issue of how to improve productivity at both Royal Mail and DP-DHL PeP is a strategic one if their business models are to be viable.
Source: Transport Intelligence, November 20, 2018
Author: Thomas Cullen
