Royal Mail float set to heighten postal competition

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The impending privatisation of Royal Mail, the world’s oldest postal service, is set to sharpen competition in the UK’s rapidly changing, £14bn-a-year post and parcels business.

Ministers plan a stock market flotation, probably this autumn, of a majority of Royal Mail that could value it at up to £3bn. In preparation, the company is already reshaping itself as a business focused on parcels, which make up nearly half its turnover.

Private sector operators welcome privatisation, though it brings risks, such as the threat that Royal Mail may use its pricing power to undermine them.

“I think with external stakeholders there will be probably a more effective Royal Mail,” says Nick Wells, chief executive of TNT Post, a subsidiary of privatised Dutch operator PostNL. “From our viewpoint, I think it will accelerate the modernisation of the total market.”
The UK postal sector has struggled in recent years but the growth of internet shopping is creating new opportunities for smart operators. Investec, a broker, says: “For the nimble operator, with discipline around cost, strategy and innovation, there’s growth to be had in this brave new world.”

The UK postal market generates £7bn of annual revenues and express parcels £6.6bn, of which £5.3bn is domestic and £1.3bn for export, says Investec. Competition is intense in both post and parcels even though Royal Mail, with £9bn revenues, dominates large segments.

Postal competition has increased since the market was liberalised in 2006, despite declining mail volumes, which fell 8 per cent in the past year as communication shifted to electronic media. Nearly half the letters Royal Mail delivers are “access mail” – presorted mail delivered for a fee on behalf of competitors such as TNT and UK Mail, a quoted company.

TNT is now challenging Royal Mail’s near-monopoly of “final mile” delivery. TNT has launched a delivery service in west and southwest London, employing 1,500 postmen clad in orange and black. Mr Wells expects to expand this to 20,000, covering 40-50 per cent of the UK, within five years.

He insists this can be done without endangering the universal service, under which Royal Mail is required to deliver letters at a standard price anywhere in the UK, six days a week.

Privatisation critics say the universal service will come under threat, despite legal safeguards, and that deliveries could shrink within a few years to as few as three days. But that would undermine Royal Mail’s parcels strategy, which depends on exploiting its network of postmen delivering sub-2kg packets and parcels on their rounds.

Moya Greene, Royal Mail’s Canadian chief executive, is – on the contrary – contemplating an eventual move to seven-day delivery, which some rivals offer, in response to consumer demand for more convenient parcel delivery times.
In the crowded parcels market, there has been overcapacity for at least a decade, as international operators such as UPS and FedEx rub up against low-price businesses such as Hermes and Yodel.

Profits have been elusive. Rentokil Initial recently sold City Link to Jon Moulton’s private equity firm Better Capital for £1 after £300m losses and writedowns since 2007; drivers and depot staff are now threatening to strike over pay cuts. Yodel, the biggest consumer delivery group after Royal Mail, had a £108m operating loss in 2011-12.

However, internet shopping, forecast to grow by double-digit figures annually, has given some operators a chance to expand. New entrants have come into the market and strategies are changing fast.

DPD, owned by France’s La Poste, is spending £175m over five years to expand delivery capacity, creating 1,500 jobs. Royal Mail is spending £75m over four years to expand its Parcelforce business.

From our viewpoint, I think it [privatisation] will accelerate the modernisation of the total market
- Nick Wells, chief executive of TNT Post

Even Yodel, formed when the Barclay Brothers’ Home Delivery Network bought DHL’s UK business, is investing in its fleet, IT and new service centres after shedding capacity since amalgamation in 2010.

Innovation is the key, says Dwain McDonald, chief executive of DPD, which expects sales to rise 18 per cent to £650m this year. Its success is based on a GPS technology called Predict, which gives customers a one-hour delivery-time window.

Now it is adding “Follow My Parcel”, enabling them to track the driver on an online map, giving a 15-minute delivery window. If they are out, they can use their smartphone to ask for the parcel to be delivered to a neighbour or rescheduled.

Parcel2Go.com, a courier comparison website, expects to increase turnover this year by more than 30 per cent to £35m-£40m. “You can send a parcel across the country from your door for something like £3.50, which in the context of Royal Mail’s recent price rises is very competitive,” says James Greenbury, chief executive.

CollectPlus, a joint venture between PayPoint and Yodel, enables customers to collect parcels from 5,000 convenience stores. Royal Mail and the now separate Post Office are launching their own “click and collect” service in response. Others plan lockers at railway stations or shopping centres for parcel collection.

Royal Mail raised parcel prices sharply in April, but competitors fear it will strike cut-price deals with selected big clients. Rivals warn that Royal Mail could offer deals on small packets, where it dominates, in return for gaining parcels business.

“Its strategy will become more purely commercial,” says David Stubbs, a postal consultant. “But it’s a mixed bag for the competition.”