Royal Mail continues to wrestle with the familiar problem of managing the decline of conventional mail whilst ensuring it makes money from e-retailing parcel business.

The former UK state-owned mail monopoly annual results for 2018-19 period were complex and mixed.  

Underlying revenue increased year-on-year by 2% to £10.58bn. However, the profit result was confused by a string of adjustments, charges and changes in accounting methodology. Operating profits seem to have been hit, falling by 26% if ‘transformation costs’ are not included, and by 34% if they are. Overall margins fell from 5.7% in Financial Year 2018 to below 4% in 2019, whilst profit before tax fell from £565m to £398m on “Adjusted Basis”, yet on an IFRS basis they were £241m, up from last years £212m.  

One problem that Royal Mail encountered was productivity in its UK Post operation. Over the past 18 months growth in productivity has stalled, possibly because the shift from traditional mail to parcels has happened at a slightly faster rate than expected. Rather than being a personnel problem it appears to have more to do with the management of infrastructure and technology.

That said, underlying demand is healthy. Although traditional mail volumes fell 1%, parcel volumes leapt 8%. Both Amazon and non-Amazon volumes are reported to being growing well and Royal Mail’s next day delivery and returns services leapt by 24%. In contrast, the conventional Parcel Force service grew by only 1%.

GLS, the parcel business in continental Europe, has traditionally performed well but in FY 2019 it faltered. Revenue was up 8% at £2.88bn but operating profit fell by 9% at £177m, driven by a tougher market in France and Spain. This was despite a 5% increase in volumes.

An underlying theme that emerged from these results is that Royal Mail is having to increase its capital investment. One of the reasons for the confusion around the profit numbers is that Royal Mail is stripping-out the concept of ‘transformation costs’. This seems to be in order re-focus investment in new infrastructure, including three new large parcel hubs designed to deliver improved e-retail logistics performance. Part of the financial impact of such investment has been a reduction in the dividend.

Royal Mail’s ambition is to build a parcel network across Europe and North America, with 40% of its business outside the UK. This will require continued, substantial investment. Ensuring a return on this investment will be a major challenge for Royal Mail.

Source: Transport Intelligence, May 23, 2019

Author: Thomas Cullen