Royal Mail, a cherished institution in the United Kingdom, is grappling with a significant decline in its letter delivery service, sparking discussions about its future viability. The firm’s next move could be a make or break time. It has a universal service obligation to provide letter services six days a week and packet services five days a week to every single address in the UK. As the landscape of mail delivery shifts dramatically, Royal Mail’s traditional business model encounters fierce competition from private firms, which have increasingly encroached upon its market share.
The harsh truth for Royal Mail can be seen in its numbers. No wonder the number of letters sent has plummeted since 2004. At its height in 2016, it reached 20 billion, but last year it dropped down to below seven billion. This decline has raised questions about the company’s sustainability and ability to fulfill its USO effectively. This obligation mandates the delivery of letters and parcels uniformly across the country, but challenges abound as the company struggles to adapt to changing consumer habits driven by e-commerce.
The communications regulator Ofcom’s recent review might open the floodgates for increasing delivery frequency. Royal Mail is planning to cut second-class deliveries from six days a week to every other weekday. This proposed change comes in the wake of increasing falling revenues. Equally, we are under pressure from the likes of DPD, DHL, Amazon and Evri.
Royal Mail’s current environment is undoubtedly tough. Yet it’s faced an onslaught of regulatory challenges, such as a massive £10.5 million penalty imposed by Ofcom for failing to deliver mail—including first and second-class—on-time. Even more significantly, the company’s management has recognized that the company must innovate or die. Royal Mail has already trialled new postboxes that will fit small parcels. This new initiative is designed to help expand their service offerings and further adapt to today’s consumer needs.
Fiercely competitive Industry analysts have focused on another big challenge facing Royal Mail. Its historical challenges to outpace revenue growth with cost growth makes it less agile in competing on quality.
“Royal Mail is a business that has historically found it difficult to grow revenues by more than costs,” – Alex Paterson
The impact of falling letter volumes has been more than just financial, damaging employee morale and industrial relations. The company has had a hard time keeping staff on the same page with its goals while operating under all these operational headaches.
“It has seen its parcels market share eroded by more dynamic competition that has been able to invest more in technology, and it has struggled with industrial relations to keep staff working towards a common goal,” – Alex Paterson
Royal Mail’s share of the UK’s parcels market continues to decrease as competitors invest and embrace new technologies and business models. With the explosive growth of e-commerce, consumers are increasingly expecting delivery to be faster and more reliable. Consequently, Royal Mail is now playing catch-up.
Royal Mail is currently trying to dig itself out of a hole by establishing more ambitious delivery targets. They’ve committed to 99.5% of first-class, three-day delivery and second-class, five-day delivery. Meeting these ambitious targets will take major long-term investments in innovative infrastructure, technology, and workforce development in order to make it a reality.
“This is not a challenge to underestimate nor one that can be overcome quickly, but that requires considerable long-term investment in infrastructure, technology and staff,” – Alex Paterson
The eventual sale of Royal Mail was greeted with suspicion by many stakeholders, too. Serious concerns have been raised over allowing foreign private equity investors to own it. There’s been a frenzy of demand to return it back to public control.
“The CWU believes Royal Mail should be in public hands,” – Dave Ward
Further regulatory reform could be equally critical in determining Royal Mail’s fate. Analysts note that the USO can – and should – go much further, in terms of flexibility. By continuing to invest in technology, the company has a large long-term runway to run more profitable.
“There is a significant long-term opportunity to run Royal Mail more successfully with regulatory changes to the USO and greater investment in technology and out-of-home deliveries,” – Alex Paterson
It’s no surprise that British subjects love their local postmen and women so much, they refer to them as their personal ‘postie.’ Even through innumerable external pressures, this intimate connection persists. This intimate relationship highlights Royal Mail’s historical significance within British civil society.
“Royal Mail must meet their universal service obligation while trying to compete with private firms who often cherry-pick the most profitable business,” – Hazel King
Looking ahead, there are arguments that if Royal Mail can expand its parcels business and reclaim lost market share, it may create new job opportunities that could offset job losses in the declining letters segment.
“If they can grow the parcels business and claw back market share, there is every chance that they can add new jobs that could offset the reduction in jobs in the declining letters business,” – Alex Paterson
Royal Mail during this tempestuous time. Yet it is at a critical crossroads about the direction it should take and what major changes in operations are needed to remain competitive in a changing economic landscape. The ultimate result on the ground remains up in the air. There’s no denying that the company must change to survive in an era of shrinking letter volumes and added competition.