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Royal Mail operates in a marketplace which is undergoing profound change, driven by a structural decline in addressed letter volumes and continued growth in e-commerce. E-substitution in letters and disintermediation in the parcels market have changed our role in the value chain. In some areas, change has resulted in new opportunities. In others, our role has reduced.
The UK, like many other countries, is experiencing ongoing structural decline in addressed letter volumes. This decline is driven by e-substitution and growth in mobile and online advertising. Large businesses continue to adopt online communication methods and are strongly incentivising paperless billing. However, independent research shows that people understand information better, are more likely to take appropriate action and make better financial decisions as a result of receiving information by post rather than electronically1.
We are seeing different types of letters experiencing different rates of decline due to this structural shift. As the leading letters delivery operator in the UK, the decline in addressed letter volumes means we need to deliver letters and parcels together and seek alternative revenue pools to underpin the Universal Service network.
Direct mail provides revenue that supports the Universal Service. Research shows that direct mail advertising spend grew by one per cent during 2015, while other forms of print advertising declined around 11 per cent. Direct mail is the fourth largest advertising medium in the UK, behind TV, internet and print2. Forty-two per cent of people say they have taken direct action (e.g. purchased, spent, ordered, renewed) having received a targeted mailing3.
The UK postal access market has developed rapidly since its introduction in 2004 and is now by far the biggest and most developed mail access market in the EU4. Access operators handle about 70 per cent of all addressed letters posted by large businesses. Royal Mail continues to work with access operators to ensure sending and receiving customers enjoy a great service. Access Quality of Service was 95.7 per cent in 2015-16.
The UK parcels market is one of the most competitive in Europe, with 16 major players. It is also one of the most evolved parcel markets in Europe; it has the highest per capita spend on e-retail and this is increasing. Approximately 14 per cent of all UK retail sales are estimated to be conducted online and e-commerce expenditure per head is over 50 per cent higher than in the US5.
E-retail continues to drive overall growth in UK parcels. The rapid pace of change in the parcels industry is expected to continue, due to low barriers to entry, greater disintermediation and disruptive business models. The actions of Amazon Logistics remain the most fundamental driver of change in the market. In a highly competitive retail landscape, the delivery experience has become a key differentiator for many online retailers. They are increasing shoppers’ expectations regarding the convenience, speed and price of delivery. Several parcel carriers have invested significantly in expanding their capacity in recent years. This puts downward pressure on prices.
Clothing and footwear represents the majority of online non-food sales growth, due to frequency of purchase and a higher value per spend. Parcel returns continue to grow more quickly than deliveries, driven by the clothing and footwear sector in particular. Sales of physical books are showing some sign of resilience. This is partially offsetting the continued decline in music, film and video game sales6.
In the consumer/SME segment, there has been a very rapid expansion of click and collect, parcel shop networks and parcel locker stations, albeit from a low base. There are now more than 30,000 parcel drop off and pickup locations across the UK. Although there has been an increase in awareness and usage of click and collect and parcel shop deliveries, home delivery remains the preferred option for the vast majority of consumers7.
Consumers are increasingly shopping at a time and place which suits them. UK industry experts have stated that, for the second year running, mobile platforms accounted for all growth in overall e-retail sales in 20158. Many retailers are adopting a mobile-first channel strategy. Fashion retailer ASOS reported that almost half of its orders came through on a mobile device in February 2016.
E-commerce is similarly driving European parcels market growth. E-commerce Europe research estimates that European B2C e-commerce grew 14 per cent in 2015 to €424 billion, with four billion parcels sent annually. This growth is uneven across Europe, due to varying economic performance and e-commerce adoption. The largest parcels markets outside the UK are Germany, France and Italy.
Consumers expect a seamless cross-border delivery and returns experience. Within Europe, cross-border online purchasing is growing faster than domestic online purchasing9.
The cross-border e-commerce trend10 is expected to continue in all major European countries in the future. A recent Royal Mail study into the international ambitions of small UK e-retailers found small businesses were confident in the current climate and were looking towards new markets, building on their existing international success. It found that Europe remains the main target for exports and almost 50 per cent of small e-retailers aim to sell their products in Europe in 2016, up from 30 per cent in 201511.
Outside the EU, Chinese e-commerce marketplaces Tmall and AliExpress significantly gained in popularity among online shoppers. Chinese customers spent over £9 billion through Alibaba in 24 hours on ‘Singles Day’ on 11 November 2015 and many analysts predict that a new record will be set again this year.
driven to online or digital activity
connected with business
influenced to make online purchases
engaged in social media
Home delivery is expected to remain our customers’ preferred delivery option.
of online shoppers would prefer to have items delivered to their home13
13Source: IMRG consumer home delivery review 2016
The UK has the highest spending per capita on e-commerce and this is increasing14.
14Source: Ofcom ICMR 2015
Our business model leverages our resources and relationships (e.g. our networks, people and brand) to deliver high-quality, value for money services for customers wanting to send and receive letters and parcels. In our core network, we benefit when we deliver letters and parcels together – making the most of the Universal Service network and providing services at the lowest possible cost. Parcelforce Worldwide provides more parcel fulfilment options – particularly for business customers. Our European business, GLS, provides geographical diversification of our earnings and exposure to markets where revenues are growing above GDP. GLS’ experience and focus on parcel delivery means it is a core component of Royal Mail’s vision of being recognised as the best delivery company in the UK and across Europe. Through this, we generate cash flow to pay dividends to our shareholders, and reinvest in our business to generate sustainable growth over time.
We focus on delivering our customers’ expectations in the most efficient way possible, maximising the funds available to reinvest in the business and to pay progressive dividends to shareholders.
As the Universal Service Provider, Royal Mail has the capability to visit every address in the UK, delivering letters and parcels. Through our long-term relationship with the Post Office, we have the largest retail network for parcels and letters. We are using our footprint to increase collection and delivery options for our customers. For example, we are making returns easier with Local Collect, the largest UK click and collect network. Parcelforce Worldwide, our express delivery business, provides additional fulfilment options and is a leading provider of express parcel services. GLS, one of the largest European ground-based delivery networks, offers reliable, high-quality parcel services across Europe, complemented by logistics and express services.
We are proud to be a responsible employer, with a total workforce of around 156,000. One in 175 working people in the UK is employed by Royal Mail1. This number increases when we look at disadvantaged regions where jobs are scarce. We are also committed to ensuring that our workforce reflects the communities we serve. We were pleased to have been named in The Times Top 50 Employers for Women 2015 for our commitment to gender equality in the workplace. We have been named as the global sustainability leader of the Transportation and Transportation Infrastructure Industry in the Dow Jones Sustainability Indices for the second year running.
We have a very broad customer base. In the UK, our role as the Universal Service provider means we are able to deliver to more than 29 million businesses and consumers. GLS, our European business, has more than 220,000 customers across 41 European countries and nation states.
Our brand helps define our culture; it shapes the experiences our customers have with us and it is a unique reflection of who we are. We are the UK’s most trusted delivery company2. The trust that our stakeholders place in our people to deliver the Universal Service is down to the continuous dedication of our postmen and women across the UK. At the 2015 World Branding Awards, we were named as a national brand of the year3.
In 2015-16, we invested a net £656 million, of which £253 million was in areas to support growth. We also spent £18 million on targeted investments mainly to enhance our IT capability.
Continually improving our efficiency and productivity allows us to be more competitive. This helps us to meet changing customer needs, which means we can grow our existing customer relationships and win new business. This in turn allows us to maintain financial flexibility to fund investment in our growth and maintain our fair terms and conditions to ensure we continue to employ engaged and motivated people.
We have a clear vision to be recognised as the best delivery company in the UK and across Europe. Our strategy to achieve this leverages our strengths while aiming to deliver sustainable shareholder value and our Universal Service commitment.
We are maintaining our pre-eminent position by pursuing faster growing parts of the UK parcels market while making it easier for customers to use Royal Mail. We are building our capability to handle increased numbers of larger parcels and are winning new volumes. We are investing in tracking and automation to help us target faster-growing areas of the market.
Our letters business accounts for around 60 per cent of our UK revenues. We continue to anticipate a decline of 4-6 per cent in addressed letter volumes in the medium-term. Royal Mail is managing this decline by continuing to promote the value of mail, and increase the efficiency and effectiveness of our delivery operation.
We are making the most of our existing assets. At the same time, we are focused on service developments and increasing our capability through selected investments. We are becoming a digital organisation and acting at pace to increase our e-commerce capability to retain and attract marketplace sellers.
The highly competitive parcels market, coupled with the ongoing structural decline in letters, has resulted in increased revenue pressures for the Group. We are focusing on costs, driving efficiency in our operations and embedding a cost conscious culture throughout the organisation. We will continue to adopt a strategic approach and to seek new initiatives to control costs.
We are strengthening our technology backbone so that we can support our priorities to win in parcels, defend letters and grow in new areas. We continue to promote the value of mail, and increase the efficiency and effectiveness of our delivery operation.
Our employees drive the continued success of the Royal Mail Group. We strive to create a supportive, inclusive work environment where our people have the necessary tools and training to perform their duties at their best. This is underpinned by a proactive relationship with the unions.
Our Key Performance Indicators (KPIs) for 2015-16 are divided into People, Customer, Efficiency and Financial segments, as represented in our business model and our Corporate Balanced Scorecard. As the business transforms and faces new challenges, we may adapt our KPIs.
In 2015-16, we made the following changes to our KPIs: sick absence was introduced under People; composite parcels Quality of Service was moved to Customer; the Performance quadrant was replaced with a new Efficiency quadrant, which includes UKPIL people and non-people costs in place of total UKPIL costs; and Group revenue was moved to the Financial quadrant.
The year-on-year reduction in the number of work-related accidents resulting in an absence on the next day or shift per 100,000 hours worked1.
14%2 (above target)
31%2 (above target)
Sick Absence hours as a percentage of expected working hours.
not a KPI
not a KPI
An annual survey by Ipsos MORI measuring involvement, alignment and loyalty of colleagues through a number of questions, including: what our people think about Royal Mail, their job, supporting our strategy and their place in contributing to Royal Mail Group’s success.
56 (above target)
54 (above target)
An annual survey by Ipsos MORI measuring how focused our people are on delivering improvements in customer service.
69 (above target)
An independent, audited measure of Quality of Service for First Class retail products delivered by the next working day, which may be adjusted for force majeure3.
93.1% (above target)
93.3% (above target)
A measure of the overall Quality of Service perfomance of core network parcels delivered by their service specification, weighted by traffic volume.
95.0% (above threshold)
Mean business customer satisfaction scores include the impact of a number of issues including price, service quality and customer experience.
Number of complaints (not claims) opened by our Customer Service team.
4534 (above target)
Percentage change year-on-year in the number of weighted items per gross hour paid in Delivery Units and Mail Centre Units (delivery and processing including regional logistics and collections).
2.5% (above target)
Adjusted people costs for UKPIL.
2014-15: not a KPI
2013-14: not a KPI
Total non-people costs for UKPIL.
2014-15: not a KPI
2013-14: not a KPI
Group revenue adjusted for budgeted foreign exchange rate.
£9,556m (above threshold)
£9,436m (above threshold)
Adjusted Group operating profit before transformation costs, adjusted for budgeted foreign exchange rate.
£670m5 (above threshold)
Free cash flow before cash flows relating to London development property portfolio.
£353m (above target)