how Royal Mail plans to deliver

The robot that empties cages full of parcels at Royal Mail’s recently opened hub in the Midlands is a potent symbol of the modernisation drive at the UK’s former postal monopoly.

Until recently most of Royal Mail’s parcels were still sorted by hand. But at the new facility — dubbed a “super hub”, near the market town of Daventry — an automated arm seizes each cage and tips its contents on to a conveyor belt with cameras reading the addresses.

A parcel takes on average just seven minutes to progress through hundreds of metres of conveyor belts before emerging sorted for onward delivery. The process is two to three times quicker than at more traditional facilities.

Such speed is vital if Royal Mail, whose roots stretch back more than five centuries, is to address its competitiveness problems. The group recorded a £319mn operating loss for the six months to September 24, its most recent full results, as rivals such as DPD, Evri, DHL and UPS snap at its heels for a slice of large online retailers’ business.

Securing more of the fast-growing parcels market — worth around £15bn annually in the UK — is especially critical for Royal Mail in order to cover the high fixed costs of providing a comprehensive delivery network designed around letters. The task of improving the competitiveness of the parcels business will be one of a series of challenges facing Emma Gilthorpe when she takes over as chief executive of Royal Mail later this year.

International Distributions Services, Royal Mail’s parent, announced the appointment of Gilthorpe, currently chief operating officer of Heathrow airport, this week.

The Midlands hub, opened last July, is part of a three-year, £900mn investment by Royal Mail in two huge new centres to transform parcels handling.

A smaller North West Parcels Hub, near Warrington, opened in 2022. The Daventry site, due to have an eventual capacity of 235mn items a year, sits amid a cluster of retailers’ national distribution centres, including those for Boohoo, Zara and Dunelm.

“It opens up new parts of the market to us,” said Nick Landon, Royal Mail’s chief commercial officer, pointing out that its proximity to many distribution centres allowed the operator to accept orders placed later in the evening — a key demand of retailers with large ecommerce operations.

“It’s really important to them for taking their orders and outputting them for delivery next day,” he said of the location.

The new hub’s efficiency means the company can also send more parcels to their destinations by lorry or rail, cutting out expensive, polluting flights. Items are also handled less. In one corner of the hub, a conveyor belt throws small parcels down chutes into cages devoted to individual local delivery offices. Previously, Royal Mail’s big regional hubs were incapable of such finely tuned sorting.

Royal Mail had a market share of around 25.1 per cent of the UK parcels market by revenue in 2022, according to figures from analytics company Apex Insight — more than twice the 10.2 per cent for its next-biggest competitor Amazon Logistics, the delivery arm of the internet retailing giant. However, Royal Mail has lost market share since 2013 after Amazon diverted to its own logistics arm parcels that it previously sent via Royal Mail.

Alexander Paterson, transport analyst at investment bank Peel Hunt, said the new sorting hub investment was “not a magic wand” for Royal Mail, which was privatised in stages between 2013 and 2015 and belongs to the wider London-listed International Distributions Services.

But he added: “This is a step in the right direction.”

Despite the high-tech parcel hubs, Landon argued that the humble “postie”, the group’s 85,000-strong network of red-uniformed last-mile delivery staff, would be a critical advantage in parcels delivery even as the traditional letters business declined. Customer surveys show that Royal Mail has a far better record of delivering items directly to householders than other delivery companies, the operator claims.

Posties deliver smaller parcels as well as letters on foot, while separate delivery networks, using vans, handle larger parcels. The company plans to offer seven-days-a-week delivery of parcels — as it does now — even if its regulator Ofcom allows it to cut back some other services.

The company argued in a submission to Ofcom on April 3 that it should be allowed to deliver second-class mail and bulk business mailings only three days a week, instead of the current six.

“What makes us different and makes us stand out — our secret sauce — is our posties,” Landon said.

Yet many of Royal Mail’s challenges involve its comprehensive distribution network.

Although it must still provide the letter delivery service the volume of this is dwindling: in 2004-5, the company delivered 20bn letters annually to 28mn addresses, whereas this year it expects to deliver 7bn letters to 32mn addresses.

Meanwhile relations with Royal Mail’s 130,000 staff have been stormy in recent years. The company suffered financial losses as a result of a 10-month dispute over pay and changes to working practices in 2022 and 2023. The dispute also lost Royal Mail market share, according to Apex.

Paterson said Royal Mail would need a “willing workforce” to introduce new, more efficient working methods, such as further parcels hubs.

Landon, however, presented the Midlands hub as a salve to Royal Mail’s staffing issues, rather than an aggravation. He pointed out the parcels business was growing at the same time as automating.

“Across our network, we’re continually making it more efficient,” Landon said. “That’s not to reduce heads — that’s to take people into this [parcels] unit. People who would have been doing manual sorting are being retrained to be machine operators or to be forklift drivers.”

The Midlands hub employs 700 people, mostly redeployed from other nearby facilities.

The question now is how quickly Royal Mail can establish further such highly efficient facilities to bring down its handling costs.

Paterson pointed out that the Midlands Hub’s 235mn-parcel annual capacity represented only a relatively small proportion of the 1.2bn parcels that the business handled in the 2022-23 financial year.

He suggested it would make sense to establish another such site nearer London, to avoid the costs of moving the many goods coming from south east England to the Midlands Hub only to be sent back again, and said there was “further to go” on Royal Mail’s transformation.

Landon agreed on the potential for further expansion — although he said there was enough scope to expand handling through the two existing hubs to cope with several years’ growth.

He insisted that the new facility marked a key step forward — and would ensure Royal Mail could make more efficient use of its delivery staff.

“This allows us to leverage that fairly efficient, relied upon delivery network . . . with an automated hub,” Landon said. “It’s a brilliant marriage of an automated, super-efficient upstream network with that postie delivery network that we have.”

Because there is not yet the demand to justify it, there remains empty space at the Midlands facility yet to be equipped.

Future hubs, Landon added, were likely to be near the distribution centres for Royal Mail’s key customers — the big retailers — clustered in central England.

“The pull for those processing sites will be to be close to where the customers are, not where the consumer is,” Landon said.