Royal Mail Plc – Heavy Lies the Crown

Tracing its roots back to 1516, Royal Mail (RM) is the incumbent postal service provider in the UK, offering letter and parcel delivery and international logistics services. After almost 500 years of public ownership, the British Government IPO-ed the business in 2013 and finally sold its remaining shares in October 2015. However, the company is yet to overcome the legacy of historical under-investment, over-regulation and likely under-management which affect its operations today1.

Royal Mail is among the largest logistics businesses in the UK. For centuries it has been the dominant (currently the only) provider of end-2-end letter mail operations and it has built an extensive distribution system in order to support its business model. It is also a Universal Service Obligation designee. As such, RM is required to offer timely postal services within the UK at a uniform tariff established by Ofcom – the postal regulator, and does not have the ability to set stamp prices.

The Internet has pushed letter mail volume into a decline. As a consequence, RM has focused on leveraging its logistics platform and expanding its UK Parcelforce business in order to tap into the e-commerce driven growth in UK parcels. Unlike in mail, the parcel market is not regulated but its growth profile makes it very competitive.

Having in mind that mail is in a terminal spiral to the bottom, RM has taken active steps to reposition strategically its business to parcel. However, while the intent is in place, the operating reality is much different. RM suffers from several significant operational issues affecting its ability to create value for its shareholders.

“The Amazon drone just dropped this for you” (or RM’s lag in adopting new technologies)

RM's note indicating unsuccessful delivery attempt
RM’s note indicating unsuccessful delivery attempt



RM has relied mainly on its mail leadership position to drive parcel volumes. This has resulted in significant underinvestment in technology, labor-intensive sorting processes and excessive redelivery costs.




Distribution center automation - Royal Mail vs. DPD, a UK competitor
Distribution center automation – Royal Mail vs. DPD, a UK competitor

RM has made a significant push to overcome these deficiencies by investing in process automation. Nevertheless, there is still a long way to go and even as it rolls out its new tracking technology, its competitors have long pushed ahead and stole market share by having a technologically superior product.  They are in position to offer GPS-enabled service that pins down delivery windows within the hour2. RM management is confident that eventually the gap will be closed, however, the question remains if RM will be able to recoup the cost of automating its process at all or it will simply avoid losing more market share2.


Amazon's drone prototype
Amazon’s drone prototype

Meanwhile, the technology lag has diminished the value proposition for large customers active in the e-commerce space who were otherwise attracted by RM’s quality and reliability reputation. Retailers with brick and mortar presence have began promoting “click and collect” model which has undermined package volumes. Amazon on the other hand has announced plans to start independent delivery service and is also aggressively experimenting with technologically advanced delivery methods. Uber is also rumored as a potential new entrant in the parcel delivery business which further erodes and disrupts the status quo.



RM's largest distribution center situated in the heart of London
Mount Pleasant – RM’s largest distribution center situated in the heart of London

“Location, location, location” (or the high opportunity cost of RM’s real estate)

RM operates out of a portfolio of prime real estate properties which serve as its distribution centers. Real estate monetization has been a crucial upside for the business, however, the lack of automation has prevented RM from consolidating faster some of activities into suburbs. As a result the company implicitly pays the opportunity cost of owning assets which could otherwise bring in disposal proceeds estimated at £500 MM3.


“United we stand” (or RM’s inability to meaningfully decrease labor costs)

Protesting CWU members
Protesting CWU members

In the face of aggressive volume declines in its core mail business and the need to automate parcel handling, Royal Mail lacks the crucial ability to downsize its labor force. It cannot fire its employees and needs to rely on natural attrition. Most of RM’s employees are part of the Communication Workers Union (CWU), which prevents it from implementing forced redundancies and remains adamant on issues like workers’ pay. Furthermore, the CWU is opposing RM’s automation spending budget and argues that management should focus on human resources issues instead4. The high degree of unionization also exposes the business to frequent disruption. Historically, disputes have resulted in wide scale industrial action interfering with RM’s ordinary course of business (1988, 1996, 2007, 2009) and seriously threatened RM’s IPO in 2013.

Staff costs are among the highest among peers

Employee costs are the highest among RM’s peer group of European postal companies while revenue per employee is about half of the peer group average5. Its operating metrics are not much better either. While a Deutsche Post postal worker serves 244 families on average, a Royal Mail one will deliver to only 191 households. It is estimated that if RM was as efficient as its German counterpart in mail delivery, it could operate with 7% or 10,000 fewer staff, generating savings of £300 MM a year6. Meanwhile back at home in the UK the emerging competitors in the parcel business have cheaper and more flexible workforce giving them significant cost advantages.

Will Royal Mail ever “deliver”?

To Royal Mail’s credit, since 2006 it has managed to achieve some automation, reduce mail centers from 69 to 39 and cut labor force by 17% thanks to attrition. However, in the face of mail volume declining faster than expected and tough parcel competitive environment, the question for the company is whether its progress in aligning its operations to its business model is sufficient.

As far as its ability to create shareholder value to date is concerned, it has lost about £1.2 Bn of its market cap7 since January 2014.



  1. RBC Equity Research “Royal Mail plc. Costs getting better, staying underperform”, November 26, 2015
  2. Plimmer, “Royal Mail needs to deliver on modernisation plans, post haste”, Financial Times, June 18, 2015
  3. Evans, “Royal Mail: investors eye £500m property windfall”, The Telegraph, October 1, 2013
  4. Schram, “Royal Mail to cut 3000 jobs in light of letters decline causing profit to plummet 30%”, International Business Times, November 19, 2015
  5. Credit Suisse Equity Research “Royal Mail. Structural challenges remain”, May 14, 2015
  6. Analysis by Sam Bland, Investec
  7. Yahoo Finance


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Student comments on Royal Mail Plc – Heavy Lies the Crown

  1. One question I have is on the comparison to other European mail providers. Wouldn’t the costs be different given the local differences in real estate, unionization, infrastructure? It would be interesting to see how they compare to private providers operating within the UK.

    Also, this is pretty similar to the Indian Postal Service, which is still a national entity. Their competitive advantage is their last mile reach – places that would be absolutely unfeasible for private players to reach, as well as financial product offerings to the underserved populations. Has the Royal Mail tried to diversify in terms of any non-logistics related businesses?

    1. The cost base of peers is different and several of them boast a much more superior cost structure primarily because of stronger efforts to reduce the cost base rather than because of idiosyncratic local market characteristics. Higher mail volume decline and local competition have caused PostNL (the Dutch postal company) to develop state of the art automatic sorting capabilities while Royal Mail still sorts a lot of its volume manually. Labor cost meanwhile is second highest within the peer group of other postal companies who have done a much better job at dealing with unionized staff.

      There are currently no private postal service providers within the UK who offer end-2-end mail delivery, however, it is reasonable to expect that if they existed and had labor force that wasn’t unionized (similarly to Royal Mail competitors in parcels) they would have a much more optimal cost base.

      Unfortunately, ability to reach everyone is not so unique in the UK which is very densely populated (excluding parts of Scotland).

      The diversification point is an excellent one – this is the only way to emerge from declining mail volume and different models have been observed in Europe:

      -Royal Mail (UK) – diversifies into parcel within the UK and Europe (no diversification outside of logistics)
      -Deutsche Post DHL (Germany) – used to have a bank division (Postbank) that it spun off. Currently focuses on mail, parcel, express courier delivery worldwide through DHL Express division and global freight forwarding and contract logistics (through DHL)
      -Poste Italiane (Italy) – perhaps close to Indian example, mail business is a small part of the business. Poste Italiane has leveraged the trust it has built over the years to develop its offering of financials services (mostly savings accounts) and sell insurance
      -ctt and bpost (Portugal and Belgium) – banking services were an add-on to the IPO story but were still underdeveloped/starting a few years ago
      -PostNL and Austrian Post (The Netherlands and Austria) – these 2 are focusing mostly on mail and parcel with limited diversification, focus is on operational improvements and managing volume decline

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