Royal Mail have taken a hit after Amazon has expanded it's business
Royal Mail will aim to reinvent its business given that privatisation has not seen an increase, but a 21% decrease in the first half of operating profits due to Amazon’s competition.
The FTSE 100 Company decided that its parcel division would be at the heart of its plans for growth following its £2 billion floatation last October. Parcel revenues dropped by 1% in six months despite volumes growing 2%.
The chief executive Moya Greene said that there was tough competition in the postal delivery arena as the profits were revealed as 279 million compared to 353 million last year.
Royal Mail said that Amazon’s new delivery vans are to blame and the removal of delivery charges for items purchased under £10. It is thought that Amazon now have 3% of the UK parcel delivery market- which equates to about 70 million parcels per year. Amazon is Royal Mail’s largest customer, taking 6 per cent of its parcels, or 60 million of its one billion parcels that are handled every year.
Royal Mail has responded by opening later on Saturdays and introducing a Sunday delivery service to try and get its customers back. It is also looking into areas of growth such as clothing and footwear.
But Ms Greene, who was paid £1.2m last year, said “additional capacity in the market has contributed to increasing price pressure as other players seek to fill their networks”.
“You can’t be complacent if you’re the number one player. We have people nipping at our heels,” she said.
Other competition includes DPD a section France’s La Poste, which has provided a nationwide seven day service that uses GPS technology to ensure that customers get a one hour delivery window if they wish.
Quicker delivery times have now become the focus for such as Amazon who is looking to dominate the market.
Joel Ray, analyst at Transport Intelligence, a specialist express, mail and logistics consultancy, says Royal Mail has competition from all angles. “The problem with e-retailing is that no retailers know where it is going. Everyone knows it is growing, but they don’t know the best way to fulfil orders for goods.”
Amazon now has sorting centres where goods are grouped ready for the delivery to the customer.
“This development is reducing the revenue for express companies, such as Royal Mail, and limiting the workload to last-mile delivery only. Amazon is adopting a strategy of undertaking the last-mile delivery in markets such as the US, and there is a risk that Royal Mail could also lose this last-mile segment to Amazon, should the company initiate a similar strategy here,” says Mr Ray.
Royal Mail is already in the middle of selling its three former mail centres, which will be turned into luxury flats and will have an estimated value of 1 billion collectively. The 14 acre site located at Nine Elms, close to Battersea power station is now on the market. The other two locations are Mount Pleasant in Farringdon, central London and finally a one acre plot of land next to Paddington Station, which was sold in October of £111 million.
Royal Mail were required in September at deliver post six days a week for the same price, after the universal service obligation was examined by the Business Select Committee.
Royal Mail’s other rival, Whistl has begun to deliver post directly to the customer and its thought that they will select deliveries that will bring them the most profit in highly populated cities, leaving the likes of the Royal Mail to pick up the less profitable rural deliveries.
Despite this being a worry, Whistl currently only has 1% of the national market. It aspires to deliver to 40% of UK addresses by 2017, which equates to 8.5% of the UK. Whistl postmen can already be found in London, Liverpool and Manchester- these locations mean that they are already at a distinct advantage.
Vince Cable, the business secretary, has requested another inquiry to establish if tax payers got value for money in the £2 billion sale of Royal Mail. 60% of Royal Mil was sold last year and the shares rose 38% on the first day, which encouraged people to ask the question of why they had lost out on £750 million in such a short space of time.
The profits from the first half could be explained by the amendments to accounting rules, the loss of a working day and no Vat credit one off from the tax man, which saw a £35 millon profit increase last year. Shares decreased by 5.4% in the first lot of trading.