The Royal Mail (LSE: RMG) share price has really taken off over the past few months. Year-to-date, the stock is up 36%.
Over the past year, its performance is even more impressive. Indeed, since the beginning of March 2020, the stock is up 180% excluding dividends. At just above 462p on Friday, shares in the delivery company are edging closer to their all-time high of 631p reached in May 2018.
This time last year, investors were deserting the company as it looked as if the pandemic would have a devastating impact on the business. As a result, the Royal Mail share price plunged to an all-time low of around 124p.
However, exactly the opposite has happened. Rather than devastating the group’s business, the pandemic has provided windfall profits for the firm.
Royal Mail has risen to this challenge. Management acted quickly to overhaul the group’s business, investing more in parcel delivery and operational efficiencies, which have allowed it to meet consumer demands.
Without these changes, I don’t think the organisation would be in the position it is today.
Royal Mail share price transformation
For the past few years, Royal Mail has been losing market share to smaller, more nimble players in the delivery market. Unlike Royal Mail, which is obligated to provide a service to all properties in the UK, other firms can pick and choose their markets. For example, they can limit deliveries to London to maximise profitability.
This is a challenge Royal Mail will likely always face. However, the group does have a big advantage over these firms. Its brand is recognised and trusted around the country, and most consumers know where their local Post Office is located.
While the government-owned Post Office is run independently of Royal Mail, many people see them as one and the same. It’s far easier for many consumers to visit their local Post Office to send a package via Royal Mail rather than try and figure out how to organise a collection from another firm.
Not that consumers need to visit a Post Office any more. Last year Royal Mail introduced a parcel pick-up service and parcel post boxes. These initiatives helped streamline the entire process for customers, at a time when the e-commerce market was booming.
The challenge
The big challenge Royal Mail now faces is maintaining its growth. It’s difficult to say whether or not it can hit this goal. The group faces stiff competition from all sides, and last year’s e-commerce boom may not last.
What’s more, the group’s relationship with its workers has historically been quite unstable. These are all challenges the business will have to overcome as it advances. They also suggest there’s a chance the company could give up some of the progress it made last year with its new initiatives.
Nevertheless, despite the challenges outlined above, I would buy the stock for my portfolio today. I think Royal Mail’s business changed substantially in 2020, and this deserves a higher share price in my opinion.
