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Market overview

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.

UK letters market

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.

UK parcels market

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.

Growth areas

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.

International parcels

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.

Notes
  1. London Economics behavioural economics study for Keep Me Posted
  2. WARC UK expenditure report, April 2016. Data from January to December 2015
  3. Quadrangle, Valued Mail 2014
  4. FTI consulting, September 2015
  5. Ofcom IMRC 2015
  6. Verdict e-Retail 2015
  7. IMRG UK consumer home delivery review 2016
  8. Capgemini mRetail Sales Index, March 2016
  9. PostEurop December 2015
  10. Forrester research. Online cross border retail forecast 2016-2021
  11. Royal Mail Group SME seasonal research, December 2015
  12. Source: Royal Mail MarketReach, Mail and Digital Part 2, Quadrangle, 2014

Mail drives customers online

And mobile is making it easier than ever for people to access and use the internet12. Having received a mailing:

driven to online or digital activity

connected with business

download something

influenced to make online purchases

engaged in social media

Delivery matters

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

Leading in e-commerce

The UK has the highest spending per capita on e-commerce and this is increasing14.

14Source: Ofcom ICMR 2015

Our business model

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.

Our business model

Resources and relationships

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.

Our networks

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.

Our people

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.

Our customers and our brand

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.

Investment in our business

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.

Inputs

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.

Continually improving efficiency

  • Continuing to deliver efficiency improvements and meet our productivity targets.
  • Rolling out parcel sorting machines to gather better management information and identify efficiency opportunities.
  • Getting paid fairly for what we do through using new technologies, like Mailmark® and 2D barcodes.
  • Nationwide review of national and regional routes to help us reduce mileage.
  • Targeted cost reduction through streamlined delivery process and network optimisation in GLS.

Maintaining financial flexibility

  • Since 2012-13, we have invested approximately £1.3 billion designed to grow and make the business more effective.
  • Over the same time period, net debt has reduced by around £700 million, providing the headroom to invest further as opportunities arise.
  • Over 70 scoped and resourced projects across UKPIL are targeted to avoid around £500 million of additional annualised costs by 2017-18.

Meeting changing customer needs

  • Offering later acceptance times and opening up our network for longer, including weekends.
  • Demonstrating the value of letters through our MarketReach business and campaigns.
  • Investment in innovative B2C delivery solutions in GLS.

Engaged, motivated people

  • Increasing employee engagement and alignment through initiatives like our Together for Growth programme. Over 6,000 managers and union representatives have taken part.
  • Continuing to provide market-leading rewards and fair terms and conditions to our people.
  • In total, each eligible full-time employee has received a maximum of 832 Free Shares in our Company.

Outputs

  • Continuing to deliver a high-quality, financially-sustainable Universal Service, and therefore maintaining our trusted brand.
  • Delivering a consistently high-quality, flexible service to grow existing relationships, win new business and make sure we are fairly paid for our services.
  • Driving the generation of cash to support progressive dividends for our shareholders.
  • Continuing to invest in our business and our people, through effective management of our financial resources, including a strategic focus on costs.
Notes
  1. Cebr research, conducted for Royal Mail in May 2016
  2. Delivery Matters, 2015
  3. Royal Mail winner in Logistics-Postal Services category: https://awards.brandingforum.org/brands/royal-mail/

Our strategy

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.

Our strategic priorities

Winning in parcels

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.

Key initiatives:

  • Opening our network for longer and pushing back our latest acceptance times
  • Rolling out sorting machines for smaller parcels to gain better management information and identify efficiency opportunities
  • Piloting mechanised parcel conveyor at Leeds Mail Centre, building our capability to handle larger parcels
  • Rolled out GLS ParcelLock System to four countries in Eastern Europe. New options for private customers to send, pick-up and pay for parcels

Defending letters

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.

Key initiatives:

  • MarketReach’s MAILMEN campaign is demonstrating the value of mail
  • Recovering revenue and preventing revenue leakage, for example, through stamp cancellations
  • We have improved large letter sorting machines and we are upgrading Optical Character Reading technology to sort more mail automatically
  • Keep Me Posted campaign support base has broadened to 87 charities, trade unions, businesses and consumer groups

Growing in new areas

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.

Key initiatives:

  • Trialling third-party vehicle maintenance services for vehicles at our fleet workshops
  • Secured a stake in Market Engine, an online marketplace specialist that integrates the world’s largest e-commerce sites. This follows our investment in Mallzee, the personal shopping app
  • Furthering our in-house IT capability, providing customers with e-commerce solutions to better manage the shipping and tracking of parcels
  • Acquired Intersoft, a provider of delivery management software for international parcel shipments, complementing the purchases of data management and labelling provider NetDespatch and delivery software developer Storefeeder

Enabling our strategic priorities

Strategic focus on costs

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.

Key initiatives:

  • Over 70 scoped and resourced projects across UKPIL targeted to avoid around £500 million of additional annualised costs by 2017-18
  • We continue to target 2.0-3.0 per cent productivity1 improvements per annum
  • Extending Collections on Delivery and continuing to deploy Operations Standards across the core network
  • Reducing costs in the logistics network
  • Optimising property portfolio and facilities management savings
  • Targeted cost reduction through streamlined delivery process and network optimisation in GLS

Technology and innovation

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.

Key initiatives:

  • Rolled out 3,000 finger scanners and commenced the rollout of 76,000 new PDAs across our Operation
  • Approximately one-third of our parcels traffic is currently tracked by customers in some way. In time, we will increase the number of items we scan in Mail Centres and on the doorstep
  • Continued roll out of Mailmark®, targeting 90 per cent of suitable letters by 2016-17
  • We have deployed an online booking-in tool ‘Service-Point- System’ in 460 Enquiry Offices. The tool allows colleagues to locate customers’ items quickly and easily, providing a better, more efficient service
  • GLS FlexDelivery Service now available in 13 countries. This delivery notification service includes delivery date and time window

An engaged and motivated workforce

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.

Key initiatives:

  • Over 6,000 managers and union representatives took part in joint training through Together for Growth programme
  • Around 23,000 colleagues involved in the ‘Big Conversation’, used to identify improvements we can make to be better and more efficient
  • Full support pledged for mental health campaign, Time to Change, which aims to reduce the stigma associated with mental health issues
  • Customer and You training rolled out to around 4,000 employees
  • Operations Standards give us a standard approach to key processes and tasks, helping colleagues tackle complaints
  • Focusing on first time delivery through Nominate a Neighbour, With your Neighbour and Safeplace
Notes
  1. Collections, processing and delivery in UKPIL core network

Key performance indicators

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.

Key

Below threshold

Threshold

Target/stretch

People

KPI and strategic link(s)

Safety (%)

Measured by

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.

Key activities and achievements in the year

  • We continue to deliver reductions to Lost Time Accident Frequency Rate
  • Reduced number of road traffic collisions
  • Driver training programmes, directed by a Road Safety Taskforce of vehicle operators across Royal Mail, including our unions
  • Upgraded Royal Mail Group Safety, Health and Environment (SHE) Management System
  • Established a Dog Working Group to undertake a national review of the Group Management of Dog Attack Risk Standard and to identify best practice engagement

Performance against target

2015-16

Actual: 30%

2014-15:

14%2 (above target)

2013-14:

31%2 (above target)

KPI and strategic link(s)

Sick Absence (%)

Measured by

Sick Absence hours as a percentage of expected working hours.

Key activities and achievements in the year

  • We have reduced Sick Absence across Royal Mail
  • Focus on compliance with management procedures and wellbeing support
  • One of only four companies to have achieved number one company status in BITC (Business in the Community) Wellbeing benchmark
  • ’Time to Change’ Pledge affirms our commitment to our mental health programme, First Class Mental Health

Performance against target

2015-16

Actual: 4.51%

2014-15:

not a KPI

2013-14:

not a KPI

KPI and strategic link(s)

Employee engagement (score)

Measured by

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.

Key activities and achievements in the year

  • We achieved our employee engagement index score
  • Promoted employee engagement within the business through: ‘My Future’, a career development website accessible to all employees; ‘Appreciate’, a recognition scheme to recognise our people for a job well done; and ‘My Bundle’, a new employee benefits portal
  • ‘Big Conversation’ with 23,000 colleagues
  • Embedding our Operations Standards, with a focus on safety quality; efficiency; and people

Performance against target

2015-16

Actual: 57

2014-15:

56 (above target)

2013-14:

54 (above target)

KPI and strategic link(s)

Employee customer focus (score)

Measured by

An annual survey by Ipsos MORI measuring how focused our people are on delivering improvements in customer service.

Key activities and achievements in the year

  • Our employee customer focus index score reduced in 2015-16
  • Introduced new and improved products and services at pace for sending and receiving customers
  • Last acceptance times in Mail Centres and RDCs now as late as midnight
  • Delivered a great Christmas – even better than last year. Extensive planning ensured we had the capacity to accommodate additional volumes from retail customers and other delivery operators

Performance against target

2015-16

Actual: 67

2014-15:

69 (threshold)

2013-14:

69 (above target)

Customer

KPI and strategic link(s)

First Class Quality of Service (%)

Measured by

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.

Key activities in the year

  • We narrowly missed the 93.0 per cent First Class mail target
  • Exceeded 98.5 per cent Second Class mail target
  • Met or exceeded the minimum target of 91.5 per cent for First Class delivery in 104 out of 118 postcode areas

Performance against target

2015-16

Actual: 92.6%

2014-15:

93.1% (above target)

2013-14:

93.3% (above target)

KPI and strategic link(s)

Composite Parcels Quality of Service (%)

Measured by

A measure of the overall Quality of Service perfomance of core network parcels delivered by their service specification, weighted by traffic volume.

Key activities in the year

  • Embedding our Operations Standards to support high Quality of Service
  • Improvements in first time delivery rates through Delivery to Neighbour, Nominate a Neighbour and ‘With your Neighbour’

Performance against target

2015-16

Actual: 94.4%

2014-15:

95.0% (above threshold)

2013-14:

95.1% (target)

KPI and strategic link(s)

Mean business customer satisfaction (score)

Measured by

Mean business customer satisfaction scores include the impact of a number of issues including price, service quality and customer experience.

Key activities in the year

  • We maintained good levels of satisfaction amongst our business customers
  • Expanded support to key business customers and online marketplace traders, including eBay sellers
  • Extended e-retailers’ access to our network to seven days a week
  • More flexible about the size and shape of parcels we can deliver

Performance against target

2015-16

Actual: 76

2014-15:

76 (stretch)

2013-14:

75 (target)

KPI and strategic link(s)

Customer complaints ('000)

Measured by

Number of complaints (not claims) opened by our Customer Service team.

Key activities in the year

  • Customer complaints have increased in two out of our four major categories: redirections, redeliveries, misdeliveries and ‘Something for You’ cards
  • Operations Standards help us to work more efficiently and consistently across the business
  • Rolling out Customer and You training to around 4,000 employees as we seek to improve our customers’ experiences at the Enquiry Office

Performance against target

2015-16

Actual: 476

2014-15:

4534 (above target)

2013-14:

466 (stretch)

Efficiency

KPI and strategic link(s)

Productivity for collections, processing and delivery (%)

Measured by

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).

Key activities in the year

  • An improvement in productivity was achieved through a reduction in frontline hours despite an increase in workload

Performance against target

2015-16

Actual: 2.4%

2014-15:

2.5% (above target)

2013-14:

1.7% (threshold)

KPI and strategic link(s)

UKPIL people costs (£m)

Measured by

Adjusted people costs for UKPIL.

Key activities in the year

  • UKPIL people costs reduced by one per cent due to a 2.0 per cent reduction in frontline hours, savings from the management reorganisation programme last year and the impact of our cost avoidance programme

Performance against target

2015-16

Actual: £4,764m

2014-15: not a KPI

2013-14: not a KPI

KPI and strategic link(s)

UKPIL non-people costs (£m)

Measured by

Total non-people costs for UKPIL.

Key activities in the year

  • Total non-people costs reduced three per cent, driven by our cost avoidance programme

Performance against target

2015-16

Actual: £2,294m

2014-15: not a KPI

2013-14: not a KPI

Financial

KPI and strategic link(s)

Group revenue (£m)

Measured by

Group revenue adjusted for budgeted foreign exchange rate.

Key activities in the year

  • Group revenue increased by one per cent
  • Revenue growth in GLS offset a decline in UKPIL revenue

Performance against target

2015-16

Actual: £9,191m

2014-15:

£9,556m (above threshold)

2013-14:

£9,436m (above threshold)

KPI and strategic link(s)

Group operating profit before transformation costs (£m)

Measured by

Adjusted Group operating profit before transformation costs, adjusted for budgeted foreign exchange rate.

Key activities in the year

  • Adjusted Group operating profit before transformation costs increased
  • Tight cost control meant that UKPIL underlying operating costs before transformation costs reduced by one per cent

Performance against target

2015-16

Actual: £738m

2014-15:

£620m5 (target)

2013-14:

£670m5 (above threshold)

KPI and strategic link(s)

Free cash flow (£m)

Measured by

Free cash flow before cash flows relating to London development property portfolio.

Key activities in the year

  • Free cash flow before net cash flows from the London development property portfolio was £315 million

Performance against target

2015-16

Actual: £315m

2014-15:

£353m (above target)

2013-14:

£398m (stretch)

Notes
  1. For 2015-16 the lost time accident KPI was changed from an absolute in-year metric to a year-on-year reduction metric
  2. Prior year results are stated on a year-on-year reduction basis as per the 2015-16 KPI metric definition
  3. This accounts for the impact of factors which are beyond Royal Mail’s control, such as weather
  4. Total number of complaints for 2014-15 has been restated from 445,476 to 452,538 to include 7,062 complaints relating to mail consumables
  5. Prior year results are on a Reported basis, adjusted for budgeted foreign exchange rate
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