Royal Mail upbeat on 'substantial shift' to parcels

Royal Mail reported a “substantial shift” in its business from letters to parcels in its first five months on Tuesday, with parcel volumes up 34%, or 177 million more parcels, and revenue up 33.1% year-on-year.

The FTSE 250 company said addressed letter volumes, excluding elections, were down 28%, or 1.1 billion fewer letters, with letter revenue falling 21.5%.

Total revenue was up £139m, the firm said in its trading update ahead of its annual general meeting.

In addition, it said costs related to Covid-19, including elevated absence, social distancing, additional protective equipment and other costs, came in at £75m in the first five months.

“While the current Covid-19 crisis has brought both additional challenges and extra costs, the market changes accelerated by it have created opportunities,” the company said in its statement.

“GLS is well positioned to achieve further success in its markets and has continued to benefit from the growth in B2C parcel volumes, in addition to its strong position in B2B parcels, with both volumes and revenues up by around 19%.”

Royal Mail said revenues had increased “significantly” in GLS companies which already had a relatively high proportion of B2C volumes pre-Covid-19, for example Spain and in its Europe East geography.

“Performance has also been better in the previously underperforming ‘focus countries’ of France, Spain and the US.”

Royal Mail said that, given the ongoing levels of uncertainty, it was still unable to provide specific guidance for the 2021 financial year.

The company had, however, updated its so-called ‘scenario 1’ illustration, with total UK parcel revenue now picked to be ahead 22% for the 2021 financial year, with Royal Mail UK revenue rising by £75m to £150m.

It said performance so far had been better than its previous ‘scenario 1’ illustration, but added that ‘scenario 2’ remained unchanged as a “downside stress test”.

The net cost of the mix change from letters to parcels under ‘scenario 1’ was increased to between £140m and £160m, while the cost of Covid-19 was reduced to £120m from £140m for the full year.

For GLS, the company said revenue growth was now illustrated to be between 10% and 14% higher, with its adjusted operating profit margin put at 7%.

Looking at that mix change, Royal Mail said too many parcels were still sorted by hand, adding that the company was “failing to adapt” the business to fundamentally lower letter volumes, and holding on to “outdated working practices” and a delivery structure that no longer met customer needs.

Royal Mail said it had been in ongoing discussions with both Unite CMA and the CWU on the changes needed, including dispensing with “old, outdated ways of working”, agreeing on the removal of old letter-sorting machines, and implementing regular reviews of its processing and distribution practices.

“It is disappointing that we have not yet been able to reach agreement,” the board said.

“Without these changes, we cannot achieve essential improvements in operational efficiency and better focus our efforts on the ever increasing demands of our customers.

“We have increased the intensity of our discussions in recent weeks in recognition of the need to make progress more quickly.”

At 0859 BST, shares in Royal Mail were up 13.97% at 199p.