Rowland Hill would be turning in his grave

James Penn
February 5, 2019

Rowland Hill would be turning in his grave.

Last week Royal Mail announced a further fall in letter volumes in a nine-month update to investors.

Addressed letters fell 8%, worse than the company’s 4-6% target range, with the run rate at the end of the quarter a disappointing -9%.

Although parcel delivery was relatively strong, with volumes and revenues both up 6%, weak letter volumes saw the share price hammered, down 13% on the day. This follows a collapse in October when the shares fell over 20% after the company said that productivity benefits had not flowed through as quickly as hoped.

Letter sending in the UK seems to be in terminal decline. Personal letter writing died out about ten years ago (I can barely remember the last time I received one) as texting, emailing and social media have taken over. Now business letters are being killed off by the automation of bill paying and electronic payment systems.

Royal Mail is also suffering from the introduction of GDPR last year, which restricted companies’ ability to retain personal information and contact people without their express permission, and which has cut the volumes of junk mail sent.

For a company with a fixed (or inflexible) asset base and costs, this is bad news. RGM has 160,000 employees and faces the Universal Service Obligation until 2021 (whereby it has to deliver letters for the same price, six days a week, anywhere in the UK).

Doubts are growing about the sustainability of the company’s dividend. Management says that this is covered by cash this year, so the full year payment may be safe. But doubts will grow if those productivity improvements don’t come through.

Letter volumes peaked in 2004/5 at about 84m per day, or 26bn a year. Royal Mail currently delivers about 14bn per annum, so volumes have nearly halved since then.

The decline began when deregulation in 2006 allowed competitors to bid for corporate accounts, while using Royal mail’s infrastructure to deliver the letters (so-called ‘downstream access’).

But the internet and e-substitution have caused further devastation since then.

It is all a far cry from Rowland Hill’s introduction of Uniform Penny Post in 1840, when cheap pre-paid postage costs at a flat rate were introduced.

The impact was huge. Before 1839 letter volumes in the UK ran at 79m per annum. By 1850, volumes had risen fivefold to 350m pa. The model was soon adopted around the world.

Where will letter volumes be in five years’ time? The decline seems inexorable at present. Will sending letters turn out to be a historical footnote, something that people did in the past?

Such bearish projections see the shares yielding 9%, with not much in the way of buying interest, a far cry from the floatation of Royal Mail Group back in 2013.

At the IPO the shares were seven times oversubscribed and rose 38% on the first day of trading.

They rallied further in the following year, and at one point were 87% above their offer price. The government, and Vince Cable, the Business Secretary at the time, faced difficult questions about underpricing the offer (the justification was possible strike action by the CWU).

Now the shares are well under the float price.

I am sure that it is not how Sir Rowland saw things panning out.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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