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Royal Mail (RMG) has announced a potential split of its two business arms in response to its employees planning to go on a strike. However, this might be a negotiation strategy, as the company struggles with reduced profit margins.
As public sector wages lag inflation rates, pressures rise on many employers across the UK, including Royal Mail (RMG). An overwhelming 97% of its union members voted to go on strike as frustrations regarding wage rates continue to grow.
The UK based postage company reported a 40% drop in its net profit margin during the first quarter of 2022, as online shopping surge seen during the lockdown came to a halt. This followed a significant drop in Royal Mail (RMG) share value, pushing it out of FTSE 100 (UK100).
Royal Mail (RMG) Price Chart
There may be a chance Royal Mail (RMG) is now planning to split into two separate brands, to capitalise on its more profitable General Logistics Systems (GLS) arm which operates across Europe. On the other hand, this could be a tactic to show union leaders that there is a limit to how far it can go in negotiations.
Wage dispute
Dave Ward, General Secretary of the Communication Workers Union, said in an announcement the reason behind their Royal Mail Group (RMG) members voting to go on a strike is that “they feel like they are being ripped off,” after the company posted record profits last year “they chose to prioritise share owners over the workers”
Staff at Royal Mail are a part of a number of employees across the UK who are seeking wage increases in line with the historically high inflation rates. A similar story has been seen with UK rail employees and with employees at British Telecom (BT.A).
Danni Hewson, financial analyst at AJ Bell, believes that for Royal Mail in particular “issues on this front are more longstanding” and potentially stemming from problems beyond the current inflationary pressures.
FTSE 100 (UK100) Price Chart
Underwhelming earnings
This comes at a challenging time for Royal Mail (RMG) as demand for its services appears to be stalling.
During lockdown, demand for parcel delivery soared, mainly due to a surge in online profits. However, as per Hewson, during the same period “some of the long-term structural decline in letters has actually reversed”
The group released a much sobering earnings report for the first quarter of 2022, “demonstrating its inability to get costs down and create a more efficient service in line with its plans” says Hewson.
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A Split?
At present, Royal Mail (RMG) has two separate operating brands. First, UKPIL (United Kingdom Parcels International & Letters) responsible for deliveries in the UK via Royal Mail Core Network.
Second, the more profitable arm, GLS, which is responsible for deliveries across Europe.
Hewson says: “The plan to change the group’s name to the extremely boring International Distribution Services and create a clearer separation between the GLS and Royal Mail businesses may lead to speculation over a full break-up of the group.”
However, Hewson suspects that this might be a negotiation strategy “painting a bleak picture may be a way of sending a message to union bosses that there is only so far it can go in negotiations”
