Royal Mail needs to reinvent itself to compete with DPD and Amazon, with or without its postal workers

Royal Mail has reached a “crossroads” in its post-pandemic life, as the lockdown boom in parcel deliveries starts to wear off and unionised staff push for better pay.

The delivery firm’s annual pre-tax profits have dipped by 8.8 per cent to £662m, as the easing of Covid restrictions has led to a 7 per cent drop in demand for parcel deliveries, only somewhat offset by a contract to distribute virus testing kits.

Royal Mail’s chairman said that revenues were largely flat thanks to the tailwinds of the pandemic “now dissipating”. Keith Williams said that the firm was now positioning itself for a drop in economic growth and prolonged high inflation that might pose further challenges to its UK and international business.

“We are at a crossroads with the transformation of Royal Mail,” he said. “We need to adapt our business to a post-pandemic world and whilst we are making progress in some areas, more needs to be done in others”.

A large part of this transformation will mean the firm continues to pivot away from delivering letters to its more profitable parcel business. Royal Mail reported that it was handling around 60 per cent fewer letters than at its peak in 2004-2005, and 20 per cent fewer than at the beginning of the pandemic, while its parcel volume was continuing to grow.

Chief executive Simon Thompson said that although more than half of those parcels are processed automatically, it has highlighted a wider need to “accelerate the transformation” of the firm to be able to compete with its parcel rivals.

The company, which also houses the GLS unit that operates across Europe and the US, is under pressure not just from its international parcel rivals, including the likes of DPD and Amazon, but also from staff represented by the Communication Workers Union (CWU).

The threat of inflation, which reached a 40-year high of 9 per cent this week, also poses a dual threat to Royal Mail.

On one hand, the service has warned that it will have to raise prices for customers. Earlier this year, the firm hiked first class stamp prices by 10p to 95p and second class stamps by 2p to 68p. It said it would have to bring them up again to meet higher wage, energy and food costs.

On the other, the firm’s postal workers are demanding better pay in response to their own rapidly rising cost of living. Though Royal Mail has offered a 3.5 per cent rise so far, with a further 2 per cent rise for those who meet productivity quotas, the CWU is pushing for an inflation-based pay increase with “no strings attached” – that is, no performance-based targets to meet.

The union points out – fairly – that Royal Mail would not make any money without its workers. “Every single penny of the £758m [adjusted operating] profit was from letter, parcel and test kits collected, processed, distributed and delivered by key postal workers, not by board members and not by shareholders but by our members,” said Terry Pullinger, the CWU’s deputy secretary general.

“Inflationary pressures are threatening to unpick that progress and have reignited troubles with its work force as talks continue to avert a potential nationwide strike,” summarised AJ Bell investment director Russ Mould.

One ongoing problem is that we, Royal Mail’s customers, see the company as a national service: its red-liveried vans and helpful posties are as much as part of the fabric of British life as our NHS or helpful neighbourhood police officers.

But, as of 2015, Royal Mail is a fully privatised company with a duty to its shareholders as much as to its customers. The firm is already struggling to cut costs, and news that revenues are sliding and that the pay dispute is looming sent its shares sliding down 10 per cent in morning trading, stripping £400m from Royal Mail’s market value.

Combined with Thompson’s previous comments about digitisation, it may become obvious to shareholders that Royal Mail may not really need an army of helpful workers to deliver letters every day when some of that operation can be slimmed down, streamlined and digitised. There is a need, the chief executive said, to “reinvent this British icon for the next generations”.

However it shakes out, there is still a deal of ground to make up between the two sides. The last time there was such a dispute between CWU and Royal Mail, it took two years of bitter negotiations before it was eventually settled in December 2020. The firm’s reinvention may have to wait a little longer until its loyal posties are back onside.