Royal Mail faces challenging trading

It said the number of letters delivered fell 5% and sales dropped 4% in the quarter to June 28 in a tough environment that continues to see email eat in to the traditional letter market. This figure excludes the impact of election mailings.

But its parcels unit saw sales by volume lift 3% and revenues rise 2% in the period, as recent cost cutting and other new initiatives took effect.

The update comes after shares in Royal Mail fell sharply on Friday after regulator Ofcom confirmed the scope of a “fundamental review” in to the firm’s operations that could see it impose a cap on prices.

The group said the outlook for its letters and parcels businesses for the full-year remained unchanged, as it continues to clamp down on costs.

It added the group’s annual performance will be heavily dependent on the important Christmas season, as usual.

The business added that its international parcels business GLS enjoyed a better-than-expected performance in the first quarter with volumes up 9% and sales lifting 8%, due to good trading in Italy and Germany.

Royal Mail chief executive Moya Greene said: “We have benefited from the parcel initiatives that took effect in the second half of last year and a good performance from GLS.

“Our trading environment remains challenging and we are stepping up the pace of change to drive efficiency, growth and innovation, while maintaining a tight focus on costs.”

Brokers at Bank of America Merrill Lynch said trading was broadly in line with expectations with “mail performing slightly below expectations and with the GLS and parcels’ divisions performing slightly ahead of expectations”.

Ofcom said last Friday its inquiry will look at whether current regulation secures “the efficient and financially sustainable provision” of the country’s universal postal service.

The universal service is the Royal Mail’s commitment to make deliveries to all parts of the UK at a flat rate, six days a week.

The watchdog, which first said it would look at this area last month, has become concerned at the weakening of competition in parts of the letters and parcels markets.

The letter delivery arm of Whistl and parcel firm City Link have both folded within the last seven months. The collapse of the letter service run by Whistl - formerly known as TNT - left the Royal Mail with no national competitor in this market.

Ofcom added it will also look at the firm’s position in the parcels market “and assess the company’s potential ability to set wholesale prices in a way that might harm competition”.

The regulator says it may roll back some of the commercial flexibility it granted Royal Mail in 2012, including the ability to put up its prices, as the business has strengthened over the last three years.

The Royal Mail said last week it would continue to participate fully in Ofcom’s review.

Ofcom’s review is expected to be completed and revised regulations put in place in 2016.