https://www.ft.com/content/7dde094a-fbca-459d-b197-b9fc26daca27 Rutter Pooley SEPTEMBER 8 2020
“Wait a minute, please Mister Postman,” The Marvelettes crooned back in 1961 as they anxiously awaited a letter bringing good tidings.
Royal Mail shareholders have been waiting too, holding out through two years of anxiety-inducing decline in the company’s share price. Tuesday’s trading update finally brought some cheer, and with it a 20 per cent rise in the stock. Parcels revenues are performing better than expected thanks to the online shopping boom. The current financial year looks just a little more promising.
Exuberant investors should take heed from the Marvelettes’ patience, however. While shares have rebounded in recent months, aided by the exit of chief executive Rico Back, the structural pressures that bedevilled his tenure persist.
The long-term decline in letters — more profitable than parcels in the domestic market — remains pressing, as does the hunt for productivity gains. The frayed accord with the unions, held together under the years of Mr Back’s predecessor Moya Greene, has not yet been mended despite positive progress from chairman Keith Williams. Even aided by a buying spree from Czech billionaire Daniel Kretinsky, at roughly 210p the share price still lingers two-thirds below the 2018 high and one-third below the 2013 IPO price.
And wait a minute, wait a minute more, Mr Postman. Parcels come with higher costs than letters, requiring major changes to Royal Mail’s UK parcel delivery systems to cut those costs — not all of which will be welcomed by posties. Though it will have to make those eventually, the company is vulnerable to nimbler competitors able to steal a march in the meantime.
Two things could really transform the fortunes of Royal Mail and its investors. The first is the sale or spinout of GLS, the international division — a prospect that has become more tantalising since its founder Mr Back departed. But selling the only profitable bit of the group without a true UK turnround seems politically impossible.
Similarly challenging is reform of the Universal Service Obligation, the regulatory requirement to deliver six days a week anywhere in the UK at the same price. An Ofcom review is due to report by 2022, so change is possible. But an overhaul could run into resistance from the government’s constituency of older voters.
Royal Mail is right to warn “substantial business change” is needed to restore profitability. But even then it will not be easy. Pleading with the postie will not do any good. Investors holding out for a revival are likely to be in for a wait.