UK Mail illustrates the danger in transformative infrastructure

UK Mail has been a strong performer for a number of years. The British mail and parcel company has consistently grown its revenue and profits up until 2014 when it began to suffer under the effects of a fiercely competitive market. Last week, the company announced financial results and revealed a profit crunch of such magnitude that it was perhaps a major contributing factor towards the resignation of the company CEO.

The Financial Times has suggested UK Mail’s problems are caused by the intense competition in the UK mail and express services sector. Certainly it has been tough, but its full year profits in May fell by just over 8%. The half-year results announced on the 18th November were very different. On a year-on-year basis profit before tax fell by 81.2%. Is competition the singular reason for such a significant decline?

Rather, it may be that the problem is a familiar one to many logistics companies that own assets, that is the risk that comes with building complex, capital intensive facilities.

In July, UK Mail opened a large highly automated sorting hub at a new location. This centred around a 187,000 sq ft facility with the capacity to handle 24,000 items an hour, four times that of UK Mail’s old facility. This had the potential to provide the platform for both volume expansion and a lower cost base.

It has not worked. Problems with the handling equipment’s inability to deal with odd-shaped parcels, staff who are unfamiliar with the equipment and issues with scheduling have obstructed the proper working of the new site. This appears to have had a knock-on effect on the transport network which is now stuck between the old and new hub facilities. These problems have resulted in both higher costs on an ongoing basis and higher one-off costs, leading to a crash in profits.

Whilst the ability to manage such a facility ought not to be a problem for the Express giants who open such facilities several times a year, for a medium sized firm like UK Mail a project like this is a once in a decade event. Consequently, the project management and logistics engineering skills are not likely to be as sharp as their big rivals. The threat they pose to the company if they go wrong can be enormous as illustrated by UK Mail.