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Study Notes

Privatisation of the Royal Mail

AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

In 2013 the government part-privatised the Royal Mail.

Revision presentation on the privatisation of the Royal Mail

In October 2013, the Government priced Royal Mail shares at 330p per share.

The opening price on 11 October closed at 455p. Since then the share price has risen to a high of 615p before falling back below £5 per share in the summer of 2014. The Government has retained 30% of the shares. Total proceeds of the sale were £1,980 million – critics of the sale claimed that the Royal Mail was undervalued at floatation costing taxpayers many hundreds of millions of pounds.

Trade union leaders opposed the plans fearing that a move to the private sector would cost jobs and that the commitment to a universal postal service might eventually end. 10% of shares in Royal Mail were tranferred to an employee share scheme designed to boost incentives for those who work for the business.

Background on the Royal Mail:

  1. Jobs: Royal Mail has over 150,000 employees in the UK - a number of years of rationalisation have cut this figure by tens of thousands.
  2. Volumes: The traditional letters market remains in structural decline. Volumes in this market have fallen by more than 25 per cent since 2005-06.
  3. Universal service requirement: The Royal Mail is required by law to provide a universal postal service - including delivery to any address throughout the UK six times per week, and a sufficient network of letter boxes and post offices
  4. Revenues: the Royal Mail has annual revenue of £9.3 billion of which just under half comes from letters, around £4 billion from parcels and the remainder from marketing mail services.
  5. Improving finances: Royal Mail Group has improved its financial performance considerably in recent years; the latest gross operating profit margin was 4.4% although this is less than businesses such as Deutsche Post which has achieved operating profit margins closer to 8%. Operating profits for the Royal Mail in the year to the end of March 2013 was £403m
  6. Competition: The main rivals in the UK mail industry for the Royal Mail are Deutsche Post and TNT
  7. Parcels: The collection, sorting and delivery of letters has been a loss-making exercise for the Royal Mail for some years now but the parcels business is much more profitable helped by the rapid growth in online shopping and fulfilment. The government believes Royal Mail needs access to private sector capital to invest as it continues to change into a parcel-focused business.
  8. Prices of letters: In the last two years, the Royal Mail has been given more freedom by industry regulator OFCOM to decide on the price of a first class stamp, but with a cap set on the cost of a second-class stamp at 55p.
Royal Mail faces mounting challenges

The postal services market has been opened up to increasing competition in recent years with postal businesses able to apply for a licence to operate in competition to the Royal Mail.

  • Access competition is where the operator collects mail from the customer, sorts it and then transports it to Royal Mail's Inward Mail Centres, where it is handed over to Royal Mail, who are paid to deliver it. Nearly 40% of mail is now covered by access competition
  • End-to-end competition – this is where an operator other than Royal Mail undertakes the entire process of collecting, sorting and delivering mail to the intended recipients. Thus far few businesses have chosen to offer this. TNT Post began trailing end-to-end delivery operations in West London in April 2012

Competitive challenges for the Royal Mail

  • Retailers and e-retailers
    • Amazon own-delivery network adds capacity equivalent to a new operator
    • Same day delivery services bought by eBaY
    • Retailers e.g. Tesco developing in-house Click & Collect / returns services
    • Third party Click & Collect continues to grow
  • Contestable parcels industry – rival parcel/mail firms are growing
    • DPD and Hermes announced Sunday deliveries
    • Yodel launches courier collection for online traders
    • TNT has started direct delivery of mail in a number of UK cities
  • Other challenges to their volumes and revenues
    • E-mail and secure cloud storage – substitutes for handling mail – long term decline in volume of addressed letters sent in the UK
    • 3D printing at home / business may reduce parcel volumes
    • Shift of marketing to social media reduces volumes of direct mail
    • Advanced screen technology and increased e-cards / biometrics recues need for banks to send out new cards

Recent articles on the Royal Mail

Royal Mail reports profit rise (BBC, May 2015)

Whistl suspends delivery service (BBC, May 2015)

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