• Nick

Privatising Royal Mail is a distraction

The UK Government is making a serious effort to de-nationalise Royal Mail. This has been mooted for a while – but up until now without success as the politics, and the economics, haven’t been favourable.

What’s different this time is that Royal Mail is already a lot more liberated commercially than it has been before. Specifically it has offloaded its crippling pension hole onto you and me, and also successfully managed to install significant price hikes to standard postal prices. So – seen from afar and through some pinky spectacles the Royal Mail looks as if it has turned a corner and is now “firmly in profit”.

i.e. ready to sell.

Royal Mail is fascinating – full of contradictions, desperately in need of revival, critically important. How this plays out is by no means certain. Here are some of the dimensions:

Royal Mail needs investment

No question. The fundamentals of mail have changed. Private letter writing has all but disappeared. For years more than 90% of Royal Mail letter volumes have been business correspondence – Direct Mail, statements, that kind of stuff – but electronic communication has steadily and consistently eroded those volumes.

The growth in ‘delivering things’ is all in parcels, not in letters. And the infrastructure of the Royal Mail needs to adapt. Pillar boxes, post bags, even letter boxes are all designed around letters, not parcels. There’s only so much weight a postie can carry. Parcels need to be signed for, need to be delivered in specific windows, not as and when, and that all requires a significant investment in technology and facilities.

To survive, let alone thrive, Royal Mail needs a lot of money to become a state of the art parcels delivery service. And – so the story goes – that investment can’t come from the public purse. That was the conclusion of the Hooper report (both of them) and that’s why we’re here right now.

It’s not an easy sell

There’s going to be a lot of financial spin around this to make Royal Mail look like a good bet. It’s hard to see how the “Royal Mail is now firmly in profit” story is going to stack up. There are – still – some very obvious, big and deep challenges threatening the long term viability of the delivery business:

– much of the letter volume is still in direct marketing mail. How sustainable is that? As prices go up it becomes less attractive to business senders. More people opt out of unsolicited mail. There’s still deep antipathy to “junk mail”. It’s hard to see anything but decline here.

– Royal Mail is great for small parcels, not so great for big ones. What’s the future for the physical distribution of small items like books, DVDs and CDs? What does the future hold for biggish clients like Lovefilm (DVD rental by post)? DVDs, CDs, books are being digitised just as letters have been. (There’s been an absolute decline of 60-70% since 2007 for CDs etc – which is probably steeper than letters decline).

– (although they have been cast as the bogeymen here I’m not sure the unions are quite such a risk. They seem in broad agreement that Royal Mail needs to change, it’s the ‘how’ that they dispute. Besides – there hasn’t been an all out strike for a long time. It’s well worth listening to what the CWU have to say).

maybe betting on DVD and CD sales might not be a smart idea

Where’s the future growth?

If existing revenue streams look threatened – long term letter decline, small parcel digitisation – then the question of big new revenue streams becomes more important to potential investors. Especially as much of the costly infrastructure – people, vans, sorting centres – will need to remain to ensure the universal service obligation (single price, every address, six days a week).

As e-commerce grows people are buying bigger items, and increasingly doing so cross border. For a national postal service this poses big challenges – competing with well established integrated delivery services like FedEx, UPS and DHL. It’s a cut throat business, requiring state of the art infrastructure, and characterised by low margins. It’s hard to see how Royal Mail can take these brands on and win without some serious upgrading.

And beyond delivery there are some other high potential revenue streams – media for example – which are still fledgling and unproven. What’s exciting about Royal Mail is its capability and potential – it could succeed in all sorts of business areas. It has loads of advantages – strong consumer connection, people, buildings, vehicles, astonishing reach, the ability to distribute at scale and at a price nobody can match – but only now, only at 11.59 is it beginning to look seriously at how to grow.

Which means for now the only credible growth story is parcels – and that may not be sustainable.

Super Pat – can the brand stretch?

And the greatest paradox of all is that the brand strength lies almost wholly in the social provision. Royal Mail is different from UK Mail, TNT, DHL etc. precisely because it has a duty of care to everyone. The “we carry everything, everywhere, every day” heart of the universal service obligation (USO) is the core strength, and the core weakness, of the Royal Mail brand.

It’s a brand with strong consumer connection but almost all its revenues from business.

As Royal Mail becomes more commercial, goes head to head with high tech, low touch players those core brand strengths become problematic. “Friendly, reliable, once a day, personal, PostMan Pat, pillar of the community” are fabulous attributes. But on their own, without “high tech, expert, ruthlessly efficient, super convenient” they simply aren’t enough to underpin a serious play in the big parcels space.

Pat’s getting shares whether he likes it or not

But Royal Mail could be a trailblazer – delivering social impact is in integral to the commercial model

The most exciting aspect of all for me is this. Royal Mail has an indisputable social purpose. It does something for our society and our economy that nobody else can. This purpose is recognised and enshrined in the USO. Royal Mail matters in a way that few businesses do nowadays.

And what Royal Mail is attempting to do is to fuse that social purpose with a sustainable, healthy commercial model. Which could make it an amazing role model for all big businesses.

Making a social business more commercial might just be easier than making a commercial business more social. This is one to watch.

The advantage Royal Mail has is its people – they all share some pretty special DNA. They may not realise it but they have been wrestling with how to “do the right thing” whilst building a commercially sustainable business in a way which other companies are only just beginning to address. They deserve to succeed.

Privatisation – wrong time, right time

Ultimately this privatisation comes at both the right and the wrong time for Royal Mail. It’s the right time because the company desperately needs both capital and new direction. It’s the wrong time because Royal Mail hasn’t yet worked out what its future could or should be. A bit like RBS the leadership has been digging the company out of a hole. And a bit like RBS it could do with some new, different visionary leadership right now to help plot a path to the future. Which would make it an easier sell.

The big challenges Royal Mail faces aren’t going to be solved by privatisation. Sure there will be money but that’s not enough. What Royal Mail urgently needs is a clear vision for its future and a cogent plan to grow. The share offering will be a dangerously soothing distraction rather than a solution.

But this story could and should have a happy ending – just maybe not quite yet. Far from writing Royal Mail off as an anachronism in a digital age I think we should watch closely as it reinvents itself. Done right, with the right resources and with the right leadership, the new Royal Mail could – just could – be a template for better business.

Watch closely.

#PostmanPat #RoyalMailbrand #RoyalMailprivatisation #newbusinessmodels #nickkeppelpalmer

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