Competition in e-retailing makes life tougher for Royal Mail

Perhaps it is too much of a stretch to connect the tougher competition that the Royal Mail is facing with the prospect of heavy investment by UPS in Europe, but it is still tempting.

Royal Mail announced today (July 20, 2014) that it saw revenue at its parcel operation fall by 1% for the three months to June 29, despite a 1% increase in volume.

Unsurprisingly the impact of e-retailing was substantial. Royal Mail’s Interim Management Statement said that one of the problems that the group was facing was that Amazon had changed the “minimum order level for free delivery” as well as having expanded its own delivery network, which reduced the addressable market volumes. This had combined with increased competition from other carriers in the home delivery and small and medium enterprise sector as they “seek to fill capacity in their networks by aggressively reducing prices.”

The Royal Mail also found life tougher in the export sector with lower volume growth and more competition.

In continental Europe, Royal Mail’s GLS subsidiary continues to do well with a 6% increase in volumes and revenues, although it reported that the German market was tough with “competitors pursuing aggressive volume strategies.” GLS also faces a continuing demand for heavy IT investment.

Overall, Royal Mail Group’s results benefitted from the increase in stamp prices for letters leading to a 2% increase in revenue for the period year-on-year.

Whilst it might be wrong to rely too much on a quarterly results from a business disproportionately exposed the UK market, these results do shed some light on the condition of the market for e-retailing logistics services. For instance they demonstrate that Amazon remains a huge force in the market and is focussed on developing its in-house capabilities. They also suggest that competition between carriers is fierce and focussed on volume over profitability.

With the prospect of the likes of UPS entering the market with the promise of investing US$1bn on both logistics and parcel delivery in Germany and elsewhere in Europe, as was mentioned by the chief financial officer Kurt Kuehn earlier this month, it is unlikely that the market will get any easier for Royal Mail.