Thursday 29th Sep 2016 - Logistics Manager

Parcels focus drives growth and profits for Royal Mail

Parcels now account for more than half of Royal Mail’s sales helping it double its pre-tax profit, the newly privatised group revealed in its half year results. 

The group has focused on expanding its parcel business to take advantage of the growth in online shopping and fill the gap left by the decline in the traditional letters service.

Parcel revenue was nine per cent up driven by the impact of size-based pricing. It said that, as expected, parcel volumes were broadly unchanged compared with the same period last year.

Strong growth in account parcels and Parcelforce Worldwide was offset by lower volumes in consumer channels, driven by the impact of size-based pricing and a temporary slowdown in growth in e-retailing due to the good summer weather in the UK.

The size-based strategy is designed to focus the core Royal Mail network on the delivery of smaller consumer goods as it uses foot delivery, while Parcelforce is more suitable for the delivery of bulkier goods.

Chief executive officer Moya Greene said: “We changed prices as part of our size-based pricing approach and anticipated that some volume would transfer to Parcelforce Worldwide from the core network, with some larger, uneconomical items exiting our networks completely.”

The UK Parcels, International & Letters (UKPIL) division produced an operating profit after transformation costs of £224 million. It handled a total of 490m parcels which accounted for 40 per cent of UKPIL’s revenue (£1.48bn).

The core network handled 454m parcels in the first half (down one per cent) while volumes at Parcelforce, which is also part of UKPIL, increased by nine per cent to 36m parcels.

In September, the group opened a new Parcelforce parcel processing centre in Chorley, complementing the existing centre in Coventry. It has also opened ten new, replacement or extended Parcelforce depots around the country.

The European parcels delivery business, General Logistics Systems (GLS) increased its operating profit by 11 per cent to £53m on sales up six per cent to £801m for the first half.

Greene said: “Approximately 70 per cent of GLS’ revenue is generated in Germany, France and Italy. While revenue has grown in Germany, conditions continue to be challenging due to the highly competitive marketplace, and low levels of unemployment leading to increased subcontractor costs. In France, where we are in the early stages of a turnaround plan, revenue has increased marginally which, together with cost reductions has reduced losses. In GLS Italy revenue grew strongly, in part benefitting from competitor disruption. GLS continues to focus on increasing the scale of its operations in Europe on a targeted basis, including monitoring emerging markets for new opportunities.”

In contrast to parcels, revenue from Letters (including marketing mail) was four per cent lower. Addressed letter volumes declined by six per cent, compared with a decline of nine per cent in the same period last year.

The group reported a pre-tax profit of £233m – up from £94m last year on sales up two per cent to £4.52bn.

Referring to recent strike threats by the CWU, Greene said: “Since September, as expected, there has been some customer reaction to the industrial relations situation. To date this has been limited to a slowdown in the rate of business customer acquisition in parcels and switching of some volume to competitors in anticipation of strike action.

“Depending on the strength of the seasonal parcels volume growth in late November and December, this may result in Royal Mail reporting broadly unchanged parcel volumes but significant revenue growth for the nine months to December 2013.

“Our letters business had a good start to the second half and has particularly benefitted from energy company mailings. GLS continues to perform well.”