Conventional wisdom has it that traditional mail services, whether in the public or private sphere, are in a slow death spiral. The eclipse of 'snail mail' in the age of instant electronic communication has been standard thinking for a decade or so, but we would do well not to exaggerate the extent of the decline in postal services.
For some, the idea of personal mail, away from the digitalised format, must seem as anachronistic as the Yellow Pages, but it’s worth noting that the average UK household receives twice as many pieces of mail a day as it did in the 1970s – the difference, of course, is that much of the paper chase wends its way via private operators. And instead of a copperplate letter from a maiden aunt, you're more likely to receive a catalogue from a garden centre – commercial direct mail (despite the internet) shows little sign of flagging.
Figures from Ofcom reveal that in 2016-17, total letter volumes fell 5 per cent to 11.7bn items, the result of e-substitution and economic uncertainty. By contrast, addressed letter volumes – where a postal operator collects mail from a customer and gives it to the Royal Mail to complete delivery – actually held up through the period. Rather than structural decline, we're witnessing an evolutionary process – with all the inherent challenges and opportunities for industry.
As technology advances, online shoppers increasingly want their purchases to be delivered as soon as possible. A report from PwC stated that the growing expectations from consumers for flexible delivery options, clear communication and greater reliability continue to put pressure on margins for companies with high fixed costs. This pressure is unlikely to let up and is creating an opportunity for new entrants to steal a march. Amazon (US:AMZN) could be one to watch out for, as its new logistics business could spell disaster for traditional shipping companies (see Expert View).
Snail mail
The first thing that may come to many minds on the topic of post is Royal Mail (RMG). Some may see it with nostalgia as a British institution, others as a company past its prime. It’s been subject to controversy since its early days as a public company after it listed in October 2013 amid speculation of underpricing and accusations that perhaps it should never have become a public company to begin with.
At each set of results for Royal Mail, analysts and investors alike have come to expect a reported decline in the number of letters sent. Indeed, the division has become a game of managing expectations by management. In the nine months to December 2017 addressed letter volumes fell 5 per cent while revenue here fell 3 per cent. Chief executive Moya Greene called the performance “better than expected”, although this was mainly due to a weak comparative period in the year before.
At the half-year results management set out a defence for letters, even though a medium-term 4-6 per cent decline is still anticipated each year in addressed letter volumes. Management said the performance of the division tends to be reliant on GDP as a “material driver” and admitted that the UK economy had been “challenging”.
Online ordering
The bright spot every time Royal Mail reports results tends to be the parcels and general international logistics (GLS) divisions. Customers paying to have their parcels tracked helped boost sales from parcels by 4 per cent, as did a 6 per cent increase in the volume of packages sent. Italy, Denmark and Eastern Europe were the main drivers for the 10 per cent increase in revenue during the first nine months of its financial year.
So far these divisions have managed to make up for the continued decline in letters, with revenue up 2 per cent at group level. But investors must wonder how much longer the letters deficit can continue to be compensated for by parcels, especially considering the warnings from management on the outlook for the UK economy. Analysts at Liberum echoed this sentiment, as they’re “not convinced” that parcels can continue to sustain the decline in letters. They reckon the current valuation does not adequately reflect the risks surrounding the company. And as operators such as Amazon enter the logistics industry, this could put further pressure on traditional businesses like Royal Mail to keep up with the competition.
Clipper Logistics (CLG) is one that is benefiting from the popularity of online shopping. At the half-year results in December, sales were up by more than a fifth to £200m while pre-tax profits improved by 16 per cent to £7.9m. This was aided by new contract wins, with retailers such as SuperDry and Urban Outfitters looking to improve their click and collect services for online shoppers, which Clipper Logistics helps to operate. This was a similar case with its existing contracts, including with Marks and Spencer and River Island, where it expanded its logistical services. Even its international clients, such as Asos in Poland, are trying to make online shopping more convenient for customers by improving returns services. Not only are consumers wanting to buy their clothes and shopping online, but their furniture too. Rather than haul it home yourself, Wincanton (WIN) delivers items for companies including Ikea and Wilco.
The Pass My Parcel business at Connect Group (CNCT) allows packages to be sent to a shop for pick-up, rather than sending them to your home. It looks as though this prospect has proved to be popular with Brits who cannot be home when a delivery arrives. Volumes delivered in this division of Connect Group had more than trebled in the year to date as at a trading statement in January, while sales more than doubled to £2.5m. Performance here helped to make up for tough times in the news distribution and media business.
These businesses will perhaps look to DX Group (DX.) for a lesson in what not to do as a parcel delivery company. Towards the end of 2016 the company had 70 per cent wiped off its market capitalisation after it warned it would miss profit expectations. Volumes sent with the business had been in steady decline, which made it all the more difficult to deal with rising costs. The shares have still yet to make a material recovery.
Ships ahoy
One company that has managed to navigate its way through an industry in tough times is Clarkson (CKN). The global shipping market has spent recent years in a downturn after overordering of ships ahead of the financial crisis took time to correct. But this industry is showing early signs of recovery after its lows of 2016. The amount of dry cargo shipped globally, as tracked by the Baltic Dry Index, rose 42 per cent last year. The amount of trade done by sea as measured in tonnes was up 3.9 per cent year on year, or by 5 per cent by miles. Even Clarkson’s own measure of shipping activity saw a 14 per cent improvement, reported at its recent full-year results. The oversupply of ships in the market, which drives down the prices those ship makers can charge, is also on the decline. The number of orders for new-build ships fell to a low of 231 compared with 2,905 on order back in 2007.
Technology is playing an increasingly important role across many industries, including global shipping. Analysts at Panmure Gordon reckon this is where Clarkson’s competitive edge will come from. Its Clarkson Cloud product is being used both in-house and within external clients. It’s also looking to expand usage of SeaNet, its vessel-tracking system, and Gateway, its operations platform.
