Britain's Royal Mail posted a drop in half-year profits today after its parcels arm was squeezed by Amazon’s drive to deliver more of its own business.
Parcel volumes for the UK service were up 2% in the six months to September 28 but Royal Mail said the division’s revenues fell 1% in a “highly competitive” marketplace as Amazon’s use of its own network caused rivals to fight harder for business.
Across the group, pre-tax profits were £218 million in the six month period, compared with £233 million a year earlier.
Addressed letter volumes fell by 3% but this was better than expected due to the improvement in economic conditions. Letter revenues increased by 1% to £2.24 billion as a result of price increases and an uplift from elections mail.
In the first half of the year, Royal Mail delivered around 200 million candidate mailings, mainly due to European and local government elections in May.
For the Scottish independence referendum, the company said it delivered over seven million campaign mailings and over five million poll cards.
Royal Mail believes that the impact of Amazon's own delivery network will reduce the annual rate of growth in the UK addressable parcels market to as little as 1% for the next two years.
The company said: “Additional capacity in the market has contributed to increasing price pressure as other players seek to fill their networks.”
Royal Mail said it is targeting higher growth areas, such as clothing and footwear, in an effort to attract more business from larger retailers.
As the Universal Service provider, Royal Mail is required to provide access to competitors such as TNT for final mile deliveries.
Postal regulator Ofcom is investigating a complaint from TNT over Royal Mail’s decision to change conditions and increase the prices it charges to deliver post collected and pre-sorted by its competitors.
However Royal Mail has called for the regulator to accelerate its review of direct delivery competition, which is currently planned for late 2015.
It has argued that there is a structural cost advantage for direct delivery entrants and that they are able to cherry-pick the services they offer, putting the Universal Service at risk.
Chief executive Moya Greene said today: “We believe the current regulatory framework does not fully address the problem posed by unfettered direct delivery competition.
“We think there is an urgent need for a new framework that will secure the sustainable provision of the Universal Service for the future.”
Royal Mail’s shares opened slightly higher today after the half-year underlying profits figure came in at the top end of the City’s expectations.
Shares are currently at around 470p, having surged as high as 617p in the wake of its controversial £3.3 billion stock market flotation last year.
The Communication Workers Union (CWU) said the drop in profits was further proof that direct delivery competition was damaging the financial sustainability of the universal postal service.
CWU deputy general secretary Dave Ward warned that unfettered competition in the postal sector would make it difficult for Royal Mail to sustain its duty to deliver the universal service obligation in the coming years.
He added: “We need Ofcom to perform its primary statutory duty by urgently reviewing the threat competition poses to the universal postal service.
“We’d like to see a cap put on competition to Royal Mail. The results today are proof that direct delivery competition is damaging the financial sustainability of the universal postal service.”