The postal regulator Ofcom has warned Royal Mail (RMG) that it faces significant fines if it continues to miss delivery performance targets. In the last financial, Royal Mail failed to meet its target of delivering 93% of first class mail within one working day. It escapes a fine - but Ofcom is clearly saying that’s the last time it will be let off.
This tough stance overshadows Ofcom’s decision to keep current postal rules in place for another five years and not introduce new price controls, thereby removing some of the key risks hanging over Royal Mail from an investment perspective.
Investors don’t see cause for celebration as the letters and parcel delivery group sees its share price fall 1.2% to 409.7p.
LOSING MARKET SUPPORT?
Royal Mail shares are so far down 11% year to date. A trading update in January disappointed investors with no growth in group revenue and ongoing reduction in letter volumes.
Ofcom introduced a new framework for postal regulation five years ago in response to the universal service losing £100m in 2011 as people continued to send fewer letters. Part of this framework was to allow greater commercial freedom for Royal Mail.
Its profit margin for 2015/16 was within the desired 5% to 10% range, albeit at the lower end of the range. Royal Mail has been focused on improving efficiencies within its business, yet Ofcom says it could do more.
‘Royal Mail still has room to improve,’ says Jonathan Oxley, Ofcom’s competition director. ‘We’ll keep a very close eye on all aspects of the company’s performance, and step in if we need to protect consumers from high prices.’
ONLINE SHOPPING BOOM
Interestingly, Ofcom implies Royal Mail may soon be exempt for performance targets for Black Friday and Cyber Monday, two events in November each year that see retailers offer significant discounts to drum up business before the Christmas rush.
Royal Mail is already exempt from performance targets in December to reflect the higher volume of pre-Christmas deliveries.
The delivery group says it will respond to Ofcom’s statement ‘in due course’.
