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Royal Mail says Amazon delivery service will hit its UK parcels business
Royal Mail says Amazon delivery service will hit its UK parcels business
(about 20 hours later)
Royal Mail has warned that growing competition from Amazon will hit its UK parcels business, as it reported a 21% fall in first-half profits.
Royal Mail shares slumped on Wednesday after the newly privatised postal service warned that its profits would be hit by Amazon launching its own delivery service.
The 500-year-old postal service, which was privatised last October, said operating profits before transformation costs fell to £279m in the six months to 28 September. The figure was at the top end of analysts’ forecasts. Revenues rose 2% to £4.5bn.
Shares in Royal Mail, privatised last October, dropped 8.4% to 430p after the company said losing the business from delivering many of Amazon’s 70m packages a year would cut its potential parcel growth in half.
Royal Mail shares rose 1.3% at the start of trading but later slumped nearly 9% to 427.4p – still far above the 330p at which they were sold in October 2013. At their peak, in early 2014, they were trading at over £6.
The drop knocked more than £360m off Royal Mail’s market value and left the shares languishing below the 445p they soared to on their first day of trading after being floated at 360p. Royal Mail is one of the most commonly held stocks, with more than 700,000 people applying to buy shares in the flotation. Royal Mail had hoped growth in parcel delivery fuelled by internet shopping would make up for the decline in letters. Amazon is Royal Mail’s biggest customer, accounting for 6% of all parcels. Royal Mail said its parcel growth rate would decline from 4%-5% to 1%-2% for at least two years because of Amazon’s decision.
While the results were not as weak as feared, the outlook for the parcel market is worse and took the City by surprise. The group said Amazon’s own delivery service would cut the annual rate of growth in the UK parcels market to 1-2% for the next two years. This is half the 4% growth expected for this year. Last month, Amazon launched a same-day delivery service which allows customers to collect items from local newsagents and high street shops, through a tie-up with the distribution group Smiths News.
Moya Greene, Royal Mail’s chief executive, said: “When an online retailer of the size and scale of Amazon decides to build its own delivery network, that changes the market for everybody.”
Jefferies analyst David Kerstens said: “This implies parcel revenues would remain at best stable, which compares to our assumption of 2% parcel revenue growth and compared to double-digit parcel revenue growth historically.”
Amazon launched its first same-day delivery service in the UK last month. The new service, called Pass my Parcel, promises to deliver parcels on the same day ordered to hundreds of newsagents across the country. Orders placed by 11.45am will be available to pick up from 4pm that day. Orders made before 7.45pm can be collected from 9am the next day. The service is free for Amazon Prime customers.
Pricing pressures pushed Royal Mail’s UK parcels revenues down 1% to £1.5bn in the first half, while volumes grew 2%.
Amazon plans to expand the service, which is run using the infrastructure of newspaper delivery company Connect Group, to thousands more retailers. It also plans to deliver small items by drone.
UK letter revenues rose 1% to £2.2bn, thanks to price increases and electoral mailings (such as May’s European elections and local council ballots), while volumes dropped 3%.
Greene said drones were “one of those disruptive things” that Amazon “a very big company with a lot of money to invest in technology” could do. Royal Mail’s profits are already being squeezed. Operating profits before transformation costs dropped 21% to £279m in the six months to the end of September.
Moya Greene, Royal Mail’s chief executive, said: “The UK parcels market remains challenging. As the pre-eminent UK parcels delivery company, we are targeting a number of new, growing areas, and delivered 2% volume growth in a competitive market. We had a better than expected performance in UK letters.”
David Kerstens, an analyst at Jefferies, said: “The outlook for the parcels market is worse than expected … which implies parcel revenues would remain stable at best.” Greene warned that the ability of rival firms to pick and choose to compete with Royal Mail on profitable routes could wipe £200m off its sales and undermined its universal service obligation, to deliver everywhere six-days-a-week for one price.
She added that the company was “fully prepared” for the busy Christmas period. So far, Royal Mail’s performance is in line with its expectations for the full year, it said.
The results included a plea to the government and regulators to rewrite Royal Mail’s universal service obligations. “We think there is an urgent need for a new framework that will secure the sustainable provision of the universal service for the future,” Royal Mail said.
Royal Mail is obliged to deliver to all 29m addresses in the UK from Monday to Saturday, for a fixed price. New entrants to the market do not have this restriction – giving them, the group says, a “structural cost advantage” and the ability to “cherry-pick the services they offer”. MPs have launched an inquiry into this matter.
Royal Mail estimates that the expansion plans of rival Whistl (formerly TNT Post UK) could reduce its revenue by more than £200m in 2017-18, which amounts to a “potential material threat to the universal service”.
The parcels business is Royal Mail’s main area of growth as online shopping makes up for the decline in letters due to the shift to email and social media. Currently 10% of UK retail sales happen online, which is set to rise to 13% by 2017. The company said it was offering more support to eBay sellers, “key customers of ours”. Royal Mail and Parcelforce Worldwide, its express parcel delivery business, are among the few delivery providers for eBay’s click and collect service with Argos stores across the UK.
Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said: “Having completed its first full year as a listed company, Royal Mail is now facing the harsh realities, with the initial share price euphoria having waned. Most of the key metrics are flat to negative, with a decrease in operating profit, margin and earnings per share accompanied by an increase in costs. The quiet emergence of Amazon in the parcels space, already a fiercely competitive arena, could become a medium-term threat.”
