Royal Mail is turning a profit - but can it halt decline in DM?

Ian Darby, ian.darby@haynet.com, Campaign 21-Apr-06

If you think ITV has issues, spare a thought for another of the UK's large media owners, Royal Mail. What with a pensions deficit approaching £5bn, declining direct mail volumes and the end of its monopoly in January, you could argue that Royal Mail executives face more problems than the recently nabbed Mafia don "Bernie the Tractor".

For the six months to 30 September 2005, Royal Mail Group posted hefty
profits of £159 million, a rise of 20 per cent. Yet on the letters
side of the business, falling volumes led to a 3 per cent slide in

profits.

Royal Mail's chief executive, Adam Crozier, and chairman, Allan
Leighton, are arguably doing a sterling job in tough conditions, but
it's hard to see things getting easier for them.

The problem for Royal Mail is making its medium seem more attractive to
advertisers. And this month's increase in the price of a first- and
second-class stamp, and the subsequent knock-on increases in Royal
Mail's Mailsort business mail tariffs, is hardly an incentive to
advertisers to pump money into a medium they're already investing less
in (despite a fourth-quarter recovery, there was a 3.9 per cent decline
in direct mail expenditure during 2005, with mail volumes down by 5.3
per cent).

Though Royal Mail has behaved admirably in some ways in recent years,
positioning itself as a responsible media owner with investment in
solutions for advertisers, its Pricing in Proportion proposals (due to
be introduced in August) have upset some advertisers and agencies, who
argue that it will work against the medium and potentially increase
costs for advertisers.

Royal Mail is arguably not to blame for this month's price hikes - some
at the company were said to favour even higher pricing for consumers
rather than hitting businesses in the pocket, but it is pretty much
hamstrung by the decisions made by the regulator Postcomm, which has put
a cap on stamp price increases ahead of 2010.

The big concern for advertisers surrounds the possibility that if the
pension deficit worsens and/or direct mail volumes continue to fall,
there is flexibility for Royal Mail to continue to increase prices. And,
at a time when there will be focus on the impact of Pricing of
Proportion on mail response rates, advertisers could do with more
stability.

Some of this is out of Royal Mail management's hands, but once again the
company faces a struggle to convince advertisers that have a widening
array of options via digital of the strength and relevance of its
medium. Much will depend on a series of new product ideas that are
currently being "hot housed" by the brains at Royal Mail. Don't hold
your breath, though - these aren't likely to see the light of day for
some time yet.