Royal Mail boss needs to earn his next congratulatory telegram

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Royal Mail’s new boss, Rico Back, opened something this week that began “Congratulations . . . ” But it was not a letter telling him he had won a prize draw and need send only £50 to cover administrative expenses. Nor was it any other type of junk mail. It was something far rarer: a report from that scourge of chief executives, Frank Field MP, congratulating Mr Back and his company on a “groundbreaking” pension deal with the unions — a very “model of constructive industrial relations”.

However, it seems that both types of communication — the unsolicited and the solicitous — will determine how Mr Back’s first year turns out.

Junk mail is set to become less prevalent as the European General Data Protection Regulation makes companies check who they are allowed to write to. And that is bad news for Royal Mail. In Tuesday’s first quarter trading update, the company warned that caution over data usage could mean letter volumes fall more than the 4 per cent to 6 per cent forecast. As Northern Trust’s analyst wrote — or, rather, emailed with recipients’ permission — “We suspect the GDPR effect has only just begun and will likely accelerate as consumers realise just how easily they can opt out of junk mail.”

That leaves the parcels side of Royal Mail’s UK business having to grow faster to offset the letter decline. Thankfully, a rapid expansion in online clothes shoppers — and their inability to allow for this when selecting a waist size — is helping. Retailers’ use of tracked dispatch and tracked return services increased 24 per cent in the period, pushing total parcel volumes up 7 per cent. With the GLS European logistics business increasing revenues 11 per cent, that meant group revenue was up 2 per cent on last year.

But having agreed that pension deal, plus a 5 per cent pay rise and one-hour cut in the working week, Royal Mail needs to deliver efficiency savings to keep those revenues profitable. According to analysts at RBC, labour costs per hour will rise 3.8 per cent this year and 4.6 per cent in 2019/20, requiring savings or gains to offset costs it deems “equivalent to 65 per cent of UK [division] sales”.

Communications of the solicitous variety — with workers and politicians — will therefore be crucial. Not least because RBC sees the necessary efficiency gains coming through labour flexibility. It notes that Royal Mail serves about 25 per cent fewer people and addresses than Deutsche Post, but with a larger employee base.

Mr Back is already testing new rostering and vehicle technology under agreement with the unions. But he may find it harder to keep workers and politicians onside after Thursday’s vote on his own pay. Advisers ISS and Glass Lewis are telling shareholders to oppose a package that potentially delivers more to Mr Back than his predecessor received. If sufficient numbers protest, he might find his Christmas card from Mr Field arrives second class. Or not at all.