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Defending the government’s move to privatise Royal Mail in 2013, the then business secretary Vince Cable insisted it was “logical”.
The plan was “consistent with developments elsewhere in Europe”, he argued, where other privatised postal services “produce profit margins far higher than Royal Mail’s but provide high-quality services”.
A decade later, unlike many of its peers across Europe, Royal Mail has failed to deliver. The 508-year-old group has been beset by strikes, losses and late deliveries: it posted just 75 per cent of first class mail on time during the 12 months to March compared with 92 per cent 11 years earlier.
The plunge in the share price of its owner International Distribution Services (IDS) added to the woes, setting the stage for Czech billionaire Daniel Křetínský to swoop.
On Wednesday, London-listed IDS said it had reached an agreement to sell its business to Křetínský’s EP Group for 370 pence per share, a significant discount on its 455p price after Royal Mail listed in 2013. The holding company changed its name to IDS in 2022.
With Royal Mail about to get a new owner, attention is turning to Křetínský’s chances of transforming the business. Analysts say he is about to take charge at a difficult time, with the need to pump more money into modernisation to catch up with European peers and capitalise on growing demand for online shopping deliveries.
“This is what makes it an interesting bid: we’re at a point of almost maximum uncertainty [for Royal Mail],” said Alexander Paterson, an analyst at Peel Hunt. Other postal services were “generally far further advanced” with automation of mail sorting, he added.
“That’s one thing I would expect to be accelerated if Royal Mail is owned privately by someone who is able to invest more capital,” Paterson said.
Křetínský, whose takeover bid will be scrutinised by politicians and regulators, faces a tough task in growing a business that must meet its universal service obligations of delivering items everywhere in the UK for the same price.
An example of a misfiring service was highlighted in north London during May’s local elections, when many voters in Hendon failed to receive their postal ballots in time, according to local councillor Mark Shooter. Other residents have reported delays including for hospital appointment letters.
Royal Mail said the problems in Hendon were a result of “resourcing issues”, adding that it had a recruitment plan in place and had made alterations to routes to help deliver a more reliable service.
But Hendon is not alone in complaints about a deteriorating service nationwide.
One of the biggest problems for the group is the sharp decline in letter deliveries following the rise of email, which has hit revenues. It delivered 20bn letters in the year to March 2005, compared with less than 7bn during the most recent year.
Indeed, setting out the plans for Křetínský’s takeover this month, IDS warned that Royal Mail’s long-standing obligation to deliver all letters six days a week was holding back its ability to provide an “economically sustainable service”.
With the shift in demand to parcels, the company has called for regulator Ofcom to cut second-class letter deliveries to three days per week, which it said would save up to £300mn annually and free up money for investment.
But even if it can persuade the regulator to make the change, Royal Mail needs to repair its fractured relationship with the roughly 110,000 workers who deliver its mail. Even after reaching a deal on pay and working terms following 18 days of strikes in 2022, low morale and high vacancies have continued to impact performance.
“This is incorrect . . . to say, in effect, the reason Royal Mail is vulnerable to this type of bid is the government not reforming the [universal service obligation],” said Dave Ward, general secretary of the postal workers’ union, which is eager to protect employment practices as the company faces competition from delivery groups that employ staff on lower wages and temporary contracts.
“They have grossly mismanaged [and] attacked their own workers,” he said.
Some business groups have also rejected Royal Mail’s excuses over falling letter deliveries.
David Falkner, a member of the council of the Greeting Card Association, pointed out that while the decline in letter volumes had mostly been steady, the fall-off in Royal Mail’s performance took place suddenly around the time of the Covid-19 pandemic.
Besides the disruption caused by the pandemic, he said the service had been undermined by the adoption in 2020 of a “Delivery to Specification” system, which allows the company to hold second-class mail until the last permissible day for delivery, in the hope other items for the same address will arrive.
“Something systemic has changed,” Falkner said, adding that his 3D pop-up card making business Cardology now sent them by more expensive tracked post. Previously, it had been devoting the equivalent of half an employee’s working week to dealing with customer queries about delays.
Royal Mail has insisted Delivery to Specification improves efficiency by reducing the number of visits that postal workers make to each address. It insists that, because it prompts staff to deliver items on the last permissible day, it had had no effect on service quality.
Although stressing the company’s regulatory requirements had been a “heavy burden”, Peel Hunt’s Paterson said it had “under invested” as a publicly listed business. “I’ve always been surprised [that] Royal Mail has kept [its range of services] narrow,” he said.
With a vast network of postal workers already regularly visiting addresses nationwide, it could expand its services at relatively low cost, potentially collecting more online shopping returns or delivering food, he explained.
However, Křetínský has already laid out plans to plough money into Royal Mail, saying a key ambition is to invest in parcel lockers that enable consumers to collect purchases at their own convenience, an increasingly popular service offered by the likes of Amazon that has eaten into the group’s market share.
Dutch postal provider PostNL, in which Křetínský holds a roughly 30 per cent stake, had made significant progress on automation about eight years ago, while Royal Mail remains “in the early stages”, Paterson pointed out.
“That is something Křetínský might actually be able to help with,” he said.
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