International Distributions Services [LON:IDS], the trading name for Royal Mail and General Logistics Systems (a European parcel delivery service formerly known as German Parcel) is coming up to its busiest time of the year.
It is the hope that the Christmas period will provide a boon for the beleaguered postal delivery service, but it is fighting a rearguard action against a multitude of competitors, not least Evri of Germany and DPD of France, who have muscled their way into Post Office branches nationally.
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Post Office (a separate, independent franchising company that decoupled from the Royal Mail in 2012)’s decision to let in the French and German delivery companies earlier this month – which generally offer cheaper services than Royal Mail/IDS – are something of a hammer-blow for the UK’s premium delivery service, which can trace its origins back to 1513, when Henry VIII created the office of ‘Master of the Posts’.
Fined for late delivery
As previously reported, IDS has a tough 2022, with industrial action, a decline in earnings and revenues, and talk of IDS decoupling from the less-profitable letter-delivery business of Royal Mail. The month (3rd November) didn’t start well for Royal Mail, with a GBP5.6m fine from Ofcom for failing to meet its delivery targets for First and Second Class letters.
Ofcom set Royal Mail the target to deliver 93% of First Class mail within one working day, with Royal Mail only achieving a 73.7% delivery rate. As for Second Class, the target is 98.5% of Second Class mail within three days, but Royal Mail only achieved 90.7% of its target. Royal Mail said that it was adversely affected this year by further industrial action, the temporary closure of Stanstead Airport and “extreme weather.”
When The Armchair Trader last wrote about IDS, the postal service just wasn’t delivering, with its share price down 45% over a year and a “disappointing performance” all around. This year there has been something of a recovery. Opening the week (13th November) at 235.6p, IDS was up 9.6% year-to-date but was down by -5.1% over the year. The company has a market capitalisation of GBP2.3bn. The company’s shares have ranged between 191.2p to 277.5p over a 52-week period.
The decision by the Post Office to supplement Royal Mail parcel deliver with DPD and Evri has been in-part a response to consumer demand. The Royal Mail has lost a lot of customer sympathy over the past few years. It now costs GBP1.25 to send a small letter by First Class post, and the perception is that First Class often doesn’t mean first-class service, with customers aggravated by late mail deliveries, especially with postal workers conducting their daily rounds in the afternoon.
Above inflation price rises doesn’t help
Back in 2021 a First Class stamp cost GBP0.95p, and to date has risen by 31.6%. In the same period, including the recent inflation scare that has seen the Bank of England consistently hike interest rates, consumer price inflation has gone up 17.1%, meaning that Royal Mail has increased First Class postage costs by almost double the rate of inflation.
Ofcom has capped Royal Mail’s ability to increase Second Class stamp costs to the rate of inflation until at least 2029, but at GBP0.75 it will affect people’s budgets when they come to send Christmas cards, and they might opt for an e-card or video message.
And that is the cusp of the problem. As society becomes more locked into technology and we increasingly communicate electronically, Royal Mail has seen a significant decline in volumes of letters sent over the last three years. This has meant less revenue for Royal Mail which has led to it needing to raise prices. But as it raises prices, it disincentivises consumers to use letter postal services, and this impacts revenues, leading to another round of stamp price hikes.
Legacy dragdown
Royal Mail had hoped that the issues it was experiencing with its retail letterbox delivery would be balanced out by its more business-focussed parcels services, where it has greater margins per kilo than its letter service. However, because of the legacy and drag from letter services, which the likes of Evri and DPD do not have to carry – being standalone parcel companies unencumbered by a statutory duty to deliver letters to the doorstep – the prices that Royal Mail charges for its parcels service are marginally higher than the private, commercially-run courier and parcel firms.
It seems that Royal Mail is caught in a death spiral, and looking at it from this perspective, you have to feel sympathy with management who want to renegotiate its Universal Service Order with the government that mandates it to deliver letters six-days-a-week, as it says in the current climate this is unprofitable and unsustainable.
This was backed up in its annual results published in May where IDS reported a GBP748m operating loss for the year to end-March, with Royal Mail losing around GBP1bn, after GBP250m profits from the year previous. The continued disagreement with Postal Worker’s Union, the CWU was a major drag, costing Royal Mail more than GBP200m. Adjusted losses were better than anticipated however, at GBP419m. However, the good news was that the firm reached an agreement on pay with CWU in April.
The company is due to release its next round of results, for 2Q23 on 16th November.
Cutting costs, by stopping Saturday deliveries would be one way to stem the haemorrhage from Royal Mail, however it would also be the thin edge of the wedge that opens the door to IDS completely divesting from the letter business and becoming a parcel service only.
As to what will happen to the iconic postal boxes on every British street, they might go the same way as the iconic red telephone boxes once managed by British Telecom, now converted into micro coffee shops, libraries and beachside shower cubicles.
The company has been promising a turnaround for a while could 2024 be the year for IDS to get back on track?
