Costs and margins
Despite its recent increase in annual profit, as a company 500 years in the making Royal Mail needs to move with the times. But is privatisation the best way forward?
I can't remember that last time I sent a letter; I send birthday cards to those less technologically savvy, but a quick ‘hello and best wishes’ via Facebook or an online greeting card have started to become the norm for me. Both are infinitely cheaper, more convenient and more conducive to a busy lifestyle.
It may sound impersonal and lacking in thought, but I’m certainly not alone in this move. The physical letters business in the UK alone has been suffering a decline for quite a while, with an average of only 58 million letters now sent every day; this is down significantly from the 63 million per day recorded in 2011-2012.
Given that no one has yet invented a ‘telepod’ that can transport inanimate objects, parcel delivery is nevertheless on the up. The number of parcels delivered in the UK has increased by 70 million to 1.4 billion compared to last year. This is mainly thanks to the increase in online shopping, so, while the internet has subtracted business in terms of letters, it has added to it greatly it terms of the parcel delivery business arm.
As a result of the online shopping boom, Royal Mail more than doubled its annual profit this year. A 60% increase in pre-tax annual profit was reported, taking the figure to £324 million. However, this new strategy to focus on parcels rather than letters is hardly rocket science, and is in truth borne out of necessity.
The company dates back to the 16th century and, while history is important, it is necessary to move with the times. Yet in light of the perceived profitability, is privatisation the way to go? The privatisation of the state postal operator would be the biggest in decades, with CEO Moya Greene aiming for a £2.5 billion flotation on the London Stock Exchange.
The idea has been greeted with opposition from trade unions and Royal Mail staff who fear that a sale to a private equity firm would destabilise workforce morale, contribute to greater workloads and lead to more redundancies as cost-cutting sets in. Postal services minister Michael Fallon has stated that ‘very few people now question whether the likes of BT, BP or Rolls Royce should have remained state owned’. Yet, in the aftermath of the privatisation of British Gas in the mid-1980s, much controversy was stoked when the then chairman received a pay rise of 66% on the back of a reported 42% rise in profit in 1991.
However, compared to other floated postal companies such as Austria Post and Deutsche Post, Royal Mail’s profit margins are significantly higher. The argument put forward is that in order to modernise, a capital injection is much-needed.
Postal staff have been promised 10% of the shares in the company, possibly for free rather than at a discount, which could be worth as much as £1500 each when privatised. If profitability continues to increase, based on the models of the aforementioned companies, these shares have the propensity to be of significant value in the medium term.
The deal is not yet struck, but it is on the cusp. Clinging to the past will not sway the decision. We can expect additional opposition to the move, but as the great philosopher Socrates put it: ‘The secret of change is to focus all of your energy, not on fighting the old, but on building the new’.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
Find out the purpose of major and minor stock indices and how they are compiled. Learn how to gain exposure to these volatile markets through some of the most popular trading products in the world.
Psychology is a key element of financial trading, and how you perceive and react to your trading can have a major impact on your success. In this module we go through some elements of trading psychology and identify a few common mistakes to watch out for.
In this section we introduce our trading platform and illustrate the ease with which you can place a bet on a wide range of markets. We also cover features such as stops and limits and explain how spread betting with leverage works.