Royal Mail warns on overcapacity in parcels market

Royal Mail Group has warned of overcapacity in the parcel market, which is leading to downward pressure on pricing, despite it handling over one billion items in a financial year for the first time.

Parcel volumes at Royal Mail Group rose 3% year-on-year to 1.01 billion items for the year-ending 29 March, but revenue from this business rose by just 1% to £3.19bn as the growth came from low average unit revenue items.

It also warned that the parcel market it is able to address will shrink between 1% and 2% “in the short-term” dependant on the speed and scope of the rollout of Amazon’s own delivery network.

Chief executive Moya Greene said: “Our continued focus on efficiency resulted in a better than expected UK cost performance, offsetting lower than anticipated UK parcel revenue.

“Our trading environment remains challenging, but we are now poised to step up the pace of change to drive efficiency, growth and innovation, while maintaining a tight focus on costs,” she added.

Volumes in Parcelforce Worldwide rose 12% year-on-year from 77 million items to 86 million items, with Royal Mail citing customer wins from the former City Link customer base. However it warned that overcapacity in the parcels market had impacted revenue growth at Parcelforce, with downward pressure on pricing.

It predicted that areas of parcel volume growth would come from clothing, footwear, toy and sports equipment.

Last month rival Whistl (formerly TNT Post) suspended its final-mile service after potential investment partner LDC, part of Lloyds Banking Group, decided against funding the company’s expansion plans.

Whistl is currently conducting a review of the potential of rolling out an end-to-end delivery service in the UK, and Royal Mail would only say it was awaiting the outcome of the review.

Royal Mail had previously claimed that Whistl’s plans to expand its final mile delivery service across the UK could knock £200m from its turnover by 2017-18, accusing it of cherry-picking more profitable deliveries in urban areas.

Letter volumes at Royal Mail fell 4%, the upper end of its predicted fall of between 4% and 6%. It said election activity offset the drop.

Overall, turnover in its UK Parcels, International and Letters business was flat year-on-year at £7.7bn. Operating profit before transformational costs rose to £615m from £608m in the previous financial year.