In a statement about its reorganisation released this morning (25 January), the group said that as part of its transformation programme, it is today entering into formal consultation on a reorganisation to streamline operational management to improve focus on performance at a local level and devolve more accountability and flexibility to frontline operational managers.
It is engaging with its unions on the proposals, which it expects “will lead to a reduction of around 700 managers” and deliver an annualised benefit of around £40m, with around £30m in FY 2022-23.
To deliver this programme, the group said it expects to incur a restructuring charge of around £70m in Q4 2021-22, subject to consultation. The proposed changes in management structure are subject to statutory consultation with Unite/CMA, and Royal Mail said it will work with the Communication Workers Union (CWU) to ensure that the impact of any proposals remains in line with its existing agreements.
The company also reported that its absence due to Omicron peaked at around 15,000 in early January, which is around double pre-Covid levels.
While the situation is now said to be improving, it led to an impact in both service levels in some areas of the country and the delivery of Royal Mail’s Pathway to Change efficiencies, which had delivered £35m of benefits to the end of December.
It expects to achieve targeted exit run rate to deliver at least £90m in the 2022-23 financial year, with expected benefits of £55m to £80m in the 2021-22 financial year, depending on the speed of recovery from Omicron.
The group’s reorganisation announcement also included a trading update for its third quarter, from October to December 2021, and for the nine months ended December 2021.
Its Royal Mail division performance for Q3 was in line with its expectations.
It handled 439 million parcels, with its Q3 domestic parcel revenue growing by 43.9% vs Q3 2019-20 but declining by 4.9% year-on-year. Its domestic parcel volumes in the period, meanwhile, grew by 33% compared to Q3 2019-20 but declined by 7% year-on-year; although the company said it had maintained its market share. The company experienced stronger growth in December, driven by a pick-up in B2C volume in the run up to Christmas.
Royal Mail said the pandemic has resulted in a structural shift, with a permanent step up in the level of domestic parcel volumes compared to pre-pandemic levels.
Covid-19 test kits accounted for around a mid-single digit percentage of total parcel volume in the first nine months of the year.
Royal Mail’s total parcel revenues grew by 29.7% compared to Q3 2019-20. Its year-on-year revenues decreased by 9.4%, primarily due to lower volumes but partially offset by positive product/channel mix.
Addressed letter volumes, excluding elections, in Q3 were down by 17% compared to Q3 2019-20, which the group said was broadly in line with the trend seen in the first half and reflecting the ongoing structural decline in letters.
Year-on-year volumes decreased by 3% and total letter revenue was broadly flat, driven largely by pricing initiatives.
Overseas parcels wing GLS reported Q3 revenue growth of 37.7% in Euros and 35.2% in Sterling compared to Q3 2019-20, and 10.7% growth in Euros and 4.5% growth in Sterling year-on-year.
Overall, Royal Mail revenue decreased by 5.8% year-on-year in Q3 to £2.42bn, but grew by 9.8% over a two-year period. Group revenue for the period, including GLS, was £3.55bn, which was down 2.4% year-on-year but up by 17.1% over a two-year period.
The group said its trading was in line with previous guidance of around £500m adjusted operating profit for the financial year 2021-22. Including the restructuring charge, its guidance is now around £430m adjusted operating profit.
Chair Keith Williams said the company had delivered “a solid performance over the Christmas period in particularly challenging circumstances operationally”.
He added: "We expected some decline in parcel volumes given most retail stores were open during the period, unlike last year. However, the trend towards customers wanting more parcels remains, and responding to that change efficiently is key. Our domestic parcels business in the UK has seen demand increase by around a third over two years, as has our GLS business across its markets.
"The past few months have demonstrated that the challenge for Royal Mail is to improve both quality and efficiency. Looking forwards, the delivery of our transformation and modernisation plans remain incredibly important in light of the fast-paced change we are seeing and ongoing inflationary pressures.
“Whilst GLS will also face inflationary pressures, our focus will be on continuing to leverage its distinctive and proven business model to exploit growth opportunities in a profitable way, whilst building on the progress made this year in previously underperforming markets.”
Looking ahead, Royal Mail said there was still some uncertainty over the evolution of the pandemic and the Omicron wave, consumer behaviour, and economic factors such as GDP growth and inflation.
It therefore continues to expect month-on-month fluctuations in parcel volumes, including Covid test kits, given periodic changes to government guidance on testing.
For the financial year 2022-23, the company said it will continue to build its commercial plan to target growth opportunities and market share. As a result, it said it is focused on progressing its transformation and efficiency plans to mitigate expected cost pressures and sustain profitability, with around £220m of savings now identified.
