The recent deal between Royal Mail (LSE: RMG) and the Communication Workers Union looks like it should solve most of Royal Mail’s industrial relations problems.
However, I recently took a closer look at the firm’s latest results, which confirmed my suspicions that the business has a bigger problem; one that could seriously affect its long-term growth prospects.
Volume vs price
Royal Mail’s letters business reported a 5% decline in volumes and a 3% decline in revenues during the first nine months of last year, but investors shrugged this off. After all, we all know that letters are history, and the new growth area is parcels from internet retailers, right?
Well, yes. According to the CAP Gemini e-retail sales index, the online retail market grew by 16% in 2013. You would probably expect Royal Mail to have picked up a slice of that action. But it didn’t.
That’s right — Royal Mail’s parcel volumes were flat during the first nine months of its current financial year, which included Christmas. Although Royal Mail reported an 8% increase in parcel revenues, this was simply the result of price rises and new, size-based, pricing.
Price hikes like this can’t be repeated very often, and although Royal Mail handles more parcels than anyone else, it’s losing market share to its competitors, who are reporting rising volumes.
Ignoring the internet?
One problem may be that Royal Mail’s exclusive contract with the Post Office means that it cannot sell its services anywhere else.
This means that it is shut out of the entire online parcel shipping market, and is excluded from the rapidly-growing parcel drop-off market, where couriers collect and deliver parcels to a network of drop-off points, such as the 5,000+ branch CollectPlus network run by Yodel.
Although Parcelforce Worldwide services are available online, Royal Mail’s parcel services are restricted to the Post Office, which also refuses to do business with online parcel services, forcing customers to visit its branch network if they want to send parcels.
I know what I think
As a regular user of both Royal Mail and courier services, I increasingly choose the online option and send via a courier.
For all but the smallest parcels, it’s just as cheap, and the convenience of booking online and having a collection from my home makes the tedium of lunchtime queuing in my town centre post office completely unnecessary.
