It took a downgrade from Credit Suisse Tuesday morning to send Royal Mail share prices down 5% but the decline has been in the offing for a while.
The formerly state-owned Royal Mail’s core business of post and parcel delivery has been losing volumes to newcomers like Doddle and Whistl.
Although Royal Mail still holds about 50% of the UK parcel delivery market the competition in this field is steadily increasing. Uber already runs a delivery service in the US, Uber Rush, and is considering opening offices in the UK. Uber’s competition Taxify is also moving into the UK and the idea of expanding their business model from just running a taxi service to adding a delivery service in the UK is likely to come on the agenda sooner rather than later.
Post delivery volumes are declining for 21st century reasons – more emails, more text messages, less old-fashioned cards and letters. Berenberg Bank has a relatively conservative forecast in place expecting mail delivery volumes to drop by 4% a year going forward, but in reality this number is likely to be higher. In this environment the Royal Mail has to keep running just to stand still and cover its high fixed costs, including buildings, transport fleet and staff cost.
The company is currently embroiled in a bitter pay dispute with the Communications Workers’ Union who have threatened to walk out for 48 hours in the crucial pre-Christmas period. The Union initially planned to start a strike on 19 October but Royal Mail fended it off by obtaining a high court injunction. Still, Union representatives remain as determined as before and say that industrial action is inevitable unless an agreement over wages is reached.
The final nail Tuesday came from Credit Suisse pegging the Royal Mail share price target at 325 pence when the company was trading at 389.7 pence.
The swift decline this morning is unlikely to be the last we see of Royal Mail shares losing value.