Royal Mail has gone all-in on a strategy based on parcels growth and international expansion to ensure its future, after its annual operating profit collapsed by more than a quarter as the decline in letter deliveries continued apace.

In a week that saw Royal Mail unveil plans to convert post-boxes across the UK to take parcels to tap into the SME business sector, its CEO Rico Back laid out the carriers’ five-year plan at the presentation of its annual accounts.

“Our turnaround plan is challenging, stretching and ambitious... our ambition is to build a parcels-led, more balanced and more diversified international business.

“In 2018-19, after a challenging year, we delivered productivity improvements and cost avoidance in line with our expectations.

“Over the next five years, through a focus on new ways of working and extending our network, we will ensure a contemporary UK Universal Service,” he said.

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Back added: "GLS is a key part of our strategic plan and will make a major contribution to our product and geographical diversification.

“By combining the best of Royal Mail and GLS, we will enhance our cross-border proposition in this large, growing and global market.”

Back was the former head of the GLS international business before succeeding Moya Greene last year.

The plan

At the core of the five year plan announced today is confirmation of the evolution to a parcels-led business where letters (forecast to fall 25% by volume over the next five years) remain important.

Under the heading 'winning at parcels' Royal Mail highlights that it delivered 1.3 billion parcels last year, has a good reputation and, through GLS, international scope.

The operator will also be targeting productivity gains – such as a reduction in the unit cost of handling larger and smaller parcels by combining them with letter delivery, and further automation of hubs - in a bid to re-invigorate its under pressure UK business, UKPIL.

The plan also has ambitions to scale up GLS further, which has been a star performer for the group in recent years and is well established on the continent and growing in North America thanks to recent acquisitions.

Reaction and results

Broker Liberum gave the new strategic plan a mixed reception, suggesting Royal Mail “had pulled its punches”.

It said that while full-year results were in line with forecasts – following last autumn’s profit warning – letters volume, which was down 8% year on year, was weaker than expected. Conversely parcels volume growth of 8% was “a touch better” than assumed.

“Our reaction is mixed. As we had anticipated, there is to be a major expansion of parcels automation, from the current 12% to over 80% within five years.

“There appears to be reliance upon UK parcels growth (4-5% per annum targeted) without adverse productivity impacts and GLS," it said.

“Our overall initial reaction is that punches have been pulled. Avoiding major job cuts is understandable, given the risk of an adverse union reaction, but with staff costs circa 70% of UKPIL costs this would seem to be dodging the main issue,” it concluded in a note to investors.

Turnover for the period was up 2% £10.5bn (adjusted, 2018: £10.2bn), with operating profit (before transformation costs) 26% lower at £544m (2018: £509m).

Pre-tax profit (for the 53 week period) was £398m, compared with £565m in the 52 weeks ended March 2018.