How Christmas Revealed The Future Of Royal Mail PLC

It’s easy to make promises, but harder to keep them. Just ask the many thousands of parents in the US who had to explain to their gift-less children that Santa Claus was running late this year, when presents bought online failed to show up in time for Christmas.

Behind the slick, one-click ease of online shopping is a logistical feat that would boggle the minds of history’s greatest bureaucrats. And it seems that the wheels came off the annual Yuletide delivery airlift in America this Christmas, when both FedEx and United Parcel Service found themselves unable to get parcels to the homes of all the customers who’d been assured by cyber retailers that they were still buying within the delivery window for 25 December.

The post-mortem to discover exactly what went wrong is ongoing, with everything from unrealistic guarantees made by internet retailers to a freak snowstorm in Memphis getting the blame. But it seems likeliest that the sheer volume of last-minute parcels stretched the system to breaking point. Cyber Monday in the US saw volumes rise 20% year-over-year — an enormous increase given how big online retail has already become.

Better in Britain

Still, what’s painful for little Johnny in San Francisco should be music to the ears of Joe Shareholder in the UK, presuming he’s an investor in Royal Mail (LSE: RMG).

It’s a truism that where America leads, we eventually follow, and it’s no secret that online retail has boomed in Blighty over the past few years. While so-called click-and-collect services ­– where you pick up your online order in-store — are becoming more popular, I think the appeal of getting goods delivered to your door will long prevail. And that’s a fabulous opportunity for Britain’s newly privatised national delivery giant.

You see, what the American experience proved is that you can’t beat a ground-based distribution network for reliability and the ability to handle huge volumes. Indeed, the US Postal Service has been praised for quietly getting orders to homes on time, in contrast to its more glamorous stock market listed peers.

In the UK — which is geographically much smaller than the US, of course — there’s no reason why Royal Mail cannot promise 24-hour delivery in all but the harshest conditions. It has a distribution network built for delivering scraps of paper to every corner of the country, with hundreds of branches, local depots and sorting offices, and tens of thousands of knowledgeable and streetwise staff. That’s an enormous competitive advantage to boast ahead of the coming tidal wave of package delivery with e-commerce at its epicentre.

Unwrapping the future

Think I’m exaggerating? I know, a lot of people shop online already — it’s the only way I’ve ordered Christmas presents for years — but there’s plenty more growth to come.

According to accountants PwC, the UK parcel market expanded from 1.3 billion items in 2005 to 1.7 billion items in 2013. It expects parcel volume to ramp up another 35% by 2023, to a whopping 2.3 billion items.

Parcels are clearly the future of Royal Mail’s business, whereas letters are in decline; between now and 2023, the number of letters we post is forecast to fall 40%. Expect to see this changing mix reflected in the years ahead, from more postmen swapping their bicycles for box-shifting vans to changes in the relative cost of sending a letter versus posting a parcel.

Parcel delivery already makes up 51% of Royal Mail’s revenues, according to its latest half-yearly results. Crossing the symbolic 50% mark is only the beginning.

All in it together

Of course, Royal Mail isn’t the only company offering parcel delivery in the UK. Those two US companies I mentioned earlier have large operations here, too. Closer to home, London-listed UK Mail Group has focused on bulky package delivery for years.

I think though that there’s plenty of growth ahead for all these firms for the foreseeable future. You might even argue that the different companies benefit from there being a variety of networks available, as this ensures there’s redundancy in the system, and so makes online retailer’s sometimes rash-sounding promises of superfast delivery less of a stretch.

The worst thing that could happen from Royal Mail’s perspective is the sort of widespread outrage about non-deliveries that hit the US over Christmas. Such disappointment could encourage more consumers to shop earlier in future – which would be good for everyone – but it could also prompt more to choose click-and-collect type services where they put in the miles, not the postman.

Parcels to pay dividends

For Royal Mail to benefit from the seemingly inevitable further expansion of online shopping, it needs retailers to get even bolder with their promises about delivery, rather than encouraging in-store collection.

It can then charge the retail world a nice fat fee for making their online aspirations come true.

Only then can the company grow its dividend — still equivalent to a reasonable 3.4% yield, despite the soaring price of Royal Mail shares since flotation — which attracted so many to the flotation. 

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> Owain does not own shares in Royal Mail.