22nd Jul 2014 09:32
LONDON (Alliance News) - Royal Mail PLC said Tuesday that group revenue in its first quarter rose 2%, supported by good trading in its letters business, while increased competition hit the UK parcels division.
In an interim management statement for the three months to June 29, 2014, and including the period from March 31 to date, the company said the low single digit growth in group revenue was in line with its strategy.
Trading has been characterised by a good performance in letters, said Royal Mail, with the decline in addressed letter volumes better than its expected range, but a weaker-than-expected performance in UK parcels during the period has been largely driven by the intensifying competitive environment in the account, consumer/ small-medium enterprise and export channels, it said.
On a divisional basis, UK parcel volumes rose 1%, while revenue declined 1%, impacted by the phasing of customers' reaction to the introduction of size-based pricing in April 2013, said Royal Mail.
Export parcel volumes were lower than expected due to the impact of stronger sterling and increasing competition in the export market, resulting in UK parcels revenue growth reducing by around 150 basis points during the period. This is not expected to reverse in the full-year, said Royal Mail.
The parcels business has also had to face increased competition during the quarter. Online marketplace Amazon has changed its minimum order level for free delivery and has expanded its own delivery network, this has reduced addressable market volumes, said Royal Mail. Competition in the account and consumer/SME parcels has intensified more than expected as other carriers seek to fill capacity in their networks by aggressively reducing prices, it added.
In order to address and mitigate the impact of such issues, the company has created a number of initiatives, including opening the network longer on Saturdays and on Sundays to receive goods from e-retailers; Parcelforce Worldwide has commenced a Sunday delivery service for online shoppers; and it has also introduced new shipping tools for large online retailers. Royal Mail said that it expects to see the benefits of these initiatives in the second-half of the year
UK Letters revenue was up 3% while addressed letter volumes declined 3%. The decline was better than the expected 4-6% decline per annum; Royal Mail attributes this to the improvement in UK economic conditions while revenue rose on the back of price increases and the uplift from elections traffic, it said.
The launch of its Mailmark service has added additional value to Royal Mail's bulk letters and meter mail products, it said. The company, which also said that the overall quality of service is exceeding its targets, said that it has made a formal evidence submission to the regulator and competition authority for the UK communications industries, Ofcom, setting out the "threat to the universal postal service posed by unfettered cherry-picking of high density urban areas for direct delivery competition."
The General Logistics Systems business has performed well in Europe during the period, said the company; revenues and volumes both rose 6%. "The situation in Germany remains challenging with competitors pursuing aggressive volume strategies but delivery costs have stabilised," said Royal Mail. GLS Italy continues to perform well, benefiting from new franchisee acquisitions, it added.
The turnaround in GLS France continues to progress well but the resulting profit improvement is expected to be offset by increased IT investment across the network, said Royal Mail. Earlier this month the group said that certain group companies had received notice from Autorité de la Concurrence, the French competition authority, that its GLS France subsidiary is involved in an nvestigation which alleges breaches of antitrust laws by the business in connection with a broader investigation into "alleged activities within the industry in France."
"The turnaround in GLS France continues to progress well but the resulting profit improvement is expected to be offset by increased IT investment across the network," said Royal Mail Tuesday.
The FTSE 100-listed company said that on a cost basis, its performance in the period was better than expected. The increase in the cost of sales is slowing due to lower export mail volume growth, added the company.
Cost management remains a key focus for Royal Mail; its management reorganisation programme announced in March 2014 remains on track and is expected to realise cost savings of around GBP25 million which will benefit the second-half of the year, it said.
Looking ahead, Royal Mail said that due to increased competition in the UK parcels market, Royal Mail said that parcels revenue for the year is likely to be lower than anticipated. "Through cost control measures and with continued good letters performance we expect to be able to offset the impact on profit such that our overall performance would remain in line with our expectations for the full year," said CEO Moya Greene.
Parcels revenue will be dependent on the group's performance in the second-half, it said, which includes the Christmas trading period, and on no further weakening in its addressable UK parcels market. "We expect that the continued strength of Sterling and increasing competition in the export market will impact export parcels revenue for the rest of the year," said the company.
Royal Mail shares dropped at the market open Tuesday, trading 3.43% lower at 450.00 pence per share, the biggest faller on the FTSE 100.
By Alice Attwood; [email protected]; @AliceAtAlliance
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