Royal Mail is a good business but not yet a good investment
After several false starts, one of the last icons of nationalisation, the Royal Mail, is to pass into private hands. Business Secretary Vince Cable announced last week the centuries old postal operator is to finally join British Gas, British Telecom and Jaguar in the private sector, but for about 10 per cent that will be used as an olive branch to placate disgruntled staff and unions.
The Government stopped short of formally announcing an IPO so it is not known when the sell-off will happen. What is clear, however, is that investors will be buying into a company that is recovering from the losses the decline in letters volume caused to become a profitable media owner and a brand the public is ready to love.
Since taking over as chief executive in 2005, Moya Greene has turned the business around. Operating profit hit £403m in the last fiscal year from a loss a year earlier. Cost-cutting and round after round of efficiency programmes aside, the business has enjoyed great successes from revenue generating divisions closer to home.
Revenue from its letters division increased by 3 per cent in the 12 months to 31 March, with an increase in addressed and unaddressed marketing mail offsetting the 8 per cent drop in the volume of letters.
Royal Mail has previously credited full-service direct marketing service MarketReach, setup in July 2012 to convince brands of the value of direct marketing, as helping to mitigate the impact of letters decline.
The Royal Mail brand, kicked around in the way other omnipresents in British life such as the BBC and Marks and Spencer have been in recent years, has also enjoyed a recent revival. YouGov Brand Index data on perception unveiled last week found Royal Mail was the second most improved brand in the first half of the year.
Ministers have argued that a sell-off will only accelerate this growth, handing the business much needed capital to expand services such as advertising mail and parcel delivery with the potential for growth.
This is difficult to argue against. Investment is essential to compete with the likes of UPS in parcel delivery and stay out in front in advertising mail under increasing competition from the nippy TNT Post. There is also a strong argument to be made that the investment would be maximised under current management given their impressive recent track record.
There are headwinds, however, that will forever be a drag on Royal Mail’s ability to compete in the private sector. The universal service obligation, which the Government says will remain post-privatisation, means it has to spend time and money servicing parts of the country that will not reap revenues while its rivals focus on more profitable urban areas. Elsehere, a heavily unionised staff that is resistant to change.
The Royal Mail is a great brand and can be a long-term success and ally to the direct marketing industry but it is still far from being a great investment.