Royal Mail CEO reveals parcel growth needs to double the decline in letters

Royal Mail recently published their half year results for the 6 months ending September 29th and the top line figures are solid if not stellar. As has been the case for many years, the decline in letters volume is being replaced by an increase in parcel volume brought about by the ever-growing popularity of ecommerce. 

In that context, Royal Mail CEO Rico Back's commentary on the release was revealing.

“Currently, we estimate for every 1 per cent of letter volume decline, we have to grow parcel volumes by over 2 per cent to make the same contribution”

This is the core challenge for Royal Mail. 500+ years of setting up an infrastructure to process and deliver letters creates something of a legacy. What is now clear is that the infrastructure required for parcels is fundamentally different to that required for letters. This is tacitly addressed in the release too, with mentions of three new parcel processing hubs, new investments in sortation and 1400 new parcel postboxes being rolled out.

Royal Mail is not unique in having this challenge - it's something pretty much every post in the world is reckoning with. However, Royal Mail's approach appears to be quite different. Rico Back again:

“If we can successfully put the new parcel hubs and separate van deliveries in place by 2023-24, this will result in a major increase in delivery frequency for consumers and small and medium-sized enterprises (SMEs). Accordingly, we will introduce two deliveries a day in most parts of the country. Firstly, consumers will receive the usual letters and small parcels delivery. Secondly, there will be a delivery later that day of larger or Next Day parcels they have ordered, in many instances, less than 24 hours before”

Where other posts and carriers like Post Nord, UPS, Australia Post, Yamato and many more appear to be diversifying their delivery proposition, accepting that consumer behaviour is changing and recognising the consolidation benefits of PUDO, Royal Mail is (literally!) doubling down on the daily post rounds. The twice-daily delivery offer appears to fly in the face of the kind of sustainability concerns which are starting to motivate consumers' purchase decisions.

We won't know how effective Royal Mail's plan will be until we see it, but it doesn't appear to be reckoning with the fundamental unit economics of parcel delivery in the last mile. Carriers and retailers alike are realising the necessity of consolidation and are pushing PUDO as an alternative to ease their burden.

We'll leave you with this intriguing line: 

"Domestic account (excluding Amazon) (up 7 per cent) and Tracked 24®/48® and Tracked Returns® (up 20 per cent) delivering good growth."

There are a couple of inferences from this single sentence. Firstly, Amazon volume is still significant enough to warrant calling out its exclusion from these figures. Secondly, it's excluded, presumably because Amazon volume is declining. This is absolutely in line with their expansion of their own last-mile capabilities and to be expected - more on that here from our US CEO Dan Nevin

Third, Tracked 24 and 48 services increasing represents an uplift in the percentage of fast deliveries, suggesting a continuing shift in consumer preferences towards faster deliveries. Finally, Tracked Returns growth shows that the returns conundrum is in no way shrinking for retailers, as consumers become ever more used to packing stuff up and sending it straight back if they're less than happy.

You can read the full report here.