Could Royal Mail be sitting on a Gold Mine?

As a prelude to its privatisation, Royal Mail has this week announced they have made a considerable profit – quite surprising when you take into account the apparent decline in traditional mailing operations.

Royal Mail has reported a 60% increase in pre-tax annual profits, as the government prepares to sell off the 497-year-old postal service in the most ambitious privatisation since British Gas.

The company, which ministers hope to float on the London Stock Exchange within a year, said its pre-tax profits in the year to the end of March increased to £324m from £201m a year earlier. No doubt the 30% increase to the price of stamps last year played an important role in this.

The surprising performance is expected to encourage the Government to cash in on the turnaround by pressing ahead with a privatisation, despite opposition from unions. While it’s great to see Royal Mail reporting a rise in profits, the organisation still faces lots of challenges which will provide for a bumpy ride.

Since 2006 Royal Mail has been thrown into a profits crisis by government-rigged competition, where private operators like TNT and UK Mail cherry pick the profitable bulk mail accounts, collecting and processing mail from banks and big business, but then using Royal Mail to deliver the mail at below cost prices dictated by the regulator. Meanwhile Royal Mail is obliged to bear the heavy costs of fulfilling the Universal Service Obligation (USO), delivering to every address, every day across Britain.

On top of this, Royal Mail has to battle with the fact that the letter business is dying as more and more of us turn to the likes of email and social media as a more effective way to communicate. The average household in the UK today spends around 50p each week on post, equivalent to just 0.1% of expenditure. Today’s postal service is all about parcels and ecommerce. If we were to rely on letters only then Royal Mail’s future would not be a bright one but with ecommerce growing ever faster, delivery services aren’t going to become redundant any time soon.

There has been speculation as to how Royal Mail will combat the spiralling declines in letters; after all there are only so many price increases and cost cutting exercises that the general public will stand for. What needs to happen now is for the business to become more aggressive in grabbing some of the opportunities which lie right beneath their noses. Within the parcel delivery and ecommerce sector the answer is obvious – data assets.

New directions

As the more successful modern companies like Google, Amazon and others are demonstrating, the key to growth lies not just in the product that you’re offering, but being able to exploit the data from the various customer interactions.

Royal Mail, along with other postal service providers, is one of the few organisations of its kind that can genuinely claim to interact with everyone in the country. It is a hugely valuable asset which, if exploited properly, could make the difference between whether the business has a future or not.

  • Kristian Sund

    The privatisation is inevitable and makes perfect sense. If private individuals don’t send (or hardly send) letters anymore, and if mail, at least over the medium term, will no longer be considered a basic necessity worthy of a universal service, then the premise for a nationalised postal operator falls away.

    The bigger question is whether RM can survive in its current form. The company consists of a portfolio of activities (a retail arm in the shape of the post offices, letters, parcels (Parcelforce), logitics company GLS) – and the big question is what is the glue that binds all this together? As part of the privatisation, or shortly after, is there any reason not to sell off GLS to the highest bidder, for example? My bet would be that RM will be a very different company 5-10 years down the line.

  • Charles Prescott

    My concern is that privatization endangers many functions of a post which get lost “in the shuffle” and dropped because no one can, or can figure out how to, monetize those functions without making them too expensive. In short, the things posts do in order to operate, and which are social goods, get dropped or overlooked. Case in point is the maintenance and expansion of the street numbering system. Another is the “social binding” function of a post office in a small community. Privatization, unfortunately, can be a way for government to shift important governmental functions to the private sector. Their value is un- or under-appreciated and sometimes impossible to value. The recent paper by the USPS Officer of Inspector General, The Untold Story of the ZipCode, is a case in point. The system has no inherent marketable value, but is calculated by reference to costs avoided. .

  • Kristian Sund

    I agree with you entirely Charles. There is a very real question there that is not yet fully answered: what organization(s) will take over the various roles that can not simply be privatized? (Or perhaps I should say: the roles that a private operator would not be interested in maintaining). My guess would be that other government agencies would be tasked with the more strategic of these roles, such as street numbering. As for the social binding, I think it is both fascinating and more than a little disconcerting to see how the high street in general is dying in some countries. Here in the UK it is claimed one in 8 shopfronts is now standing empty. After all the pub closures, the store closures, and possible post office closures, what will be left? Any upside? Continued double digit growth in ecommerce which continues to drive up parcel traffic could be one.

  • Craig Moore

    I see a risk in privatisation of postal operators. Because there is always the need to deliver to every household in the country and that makes no sense from a cost perspective. Therefore these households wouldn’t be served in the future as they are served now. Or the private postal operator will ask for subvention.

  • Michael MacClancy

    Thanks to Charles for the link to OIG paper. The situation in the UK is that maintenance and expansion of the street numbering system is the responsibility of local authorities and not Royal Mail. Royal Mail continues to be responsible for the post codes. Also, in response to Kristian’s first comment, Royal Mail is now separate from the Post Office although they do have a long term contract in place that guarantees Royal Mail’s continuing use of Post Offices.