UPDATE 2-Royal Mail parcel revenues hit as competition bites

Tue Jul 22, 2014 5:45am EDT

* Q1 group revenue up 2 pct

* Letters revenue up 3 pct, parcels down 1 pct

* Parcel arm hit by price battles, rising competition

* Shares fall as much as 4.5 percent (Adds analyst comments, shares, detail, background)

By Neil Maidment

LONDON, July 22 (Reuters) - Britain's Royal Mail said growing competition had cut its revenue expectations from parcel deliveries, leaving it reliant on tight cost control and its traditional letters business to hit full-year profit forecasts.

Shares in the group, sold off to much controversy last October in Britain's biggest privatisation in decades, fell as much as 4.5 percent in early Tuesday trading.

Parcel deliveries account for about half of Royal Mail's turnover and its growth in an industry buoyed by online shopping is a key investment focus for shareholders in light of declining letter volumes.

But the group faces stiff competition in its main UK parcels market from the likes of UPS, TNT and Yodel, and it was dealt a blow in the past year when online retailer Amazon - its single biggest customer worth six percent of sales - moved to launch its own delivery service.

"The key challenge remains weakness in parcel pricing in the UK. In our view, the company faces a considerable volume and pricing challenge in parcels in the next 18 months," Cantor Fitzgerald analyst Robin Byde said, keeping a "sell" rating on Royal Mail shares.

The group, which is also facing regulatory probes in Britain and abroad, said higher stamp prices lifted group revenue 2 percent in the three months to June 29, the first quarter of its financial year, meeting analyst forecasts.

But parcel sales were hit by the changes at Amazon, rivals cutting their prices and by the stronger pound, which affected export volumes.

"Given the increasing challenges we are facing in the UK parcels market, our parcels revenue for the year is likely to be lower than we had anticipated," Royal Mail chief executive Moya Greene said in a statement.

"However, through cost control measures and with continued good letters performance we expect to be able to offset the impact on profit such that our overall performance would remain in line with our expectations for the full year."

At 0900 GMT, Royal Mail shares had pared their losses to trade down 0.9 percent at 461.88 pence, within a UK benchmark equities index up 0.8 percent.

The shares were floated at 330 pence last year, and then soared as much as 87 percent, prompting criticism from unions and the main opposition Labour party that taxpayers had been short changed in the privatisation.

FIGHTING ON MANY FRONTS

Royal Mail said UK letter volumes declined 3 percent in its first quarter - better than its expected range of a 4-6 percent fall per year - as consumers increasingly use email, but revenue rose by the same amount thanks to price increases and an uplift from mail related to European and local elections.

That helped offset a 1 percent fall in UK parcels revenue, with volumes up just 1 percent.

Revenue in its European parcels arm GLS rose 6 percent.

Greene said full-year parcels revenue would be dependent on its second-half performance and no further weakening in its addressable UK parcels market. The firm has opened its network for longer on weekends to receive goods from e-tailers and launched Sunday delivery services to help boost its business.

Royal Mail is grappling with several other challenges too.

In its letters arm, the firm has warned a rival TNT Post UK delivery service that targets the most profitable areas of Britain only could hit its revenue by over 200 million pounds by 2017/18 and jeopardise its own six-day-a-week, anywhere service.

The group's move to mitigate the impact of the rollout - by proposing a price hike for rivals using its network - was suspended by regulator Ofcom in April and now faces a probe, while its call for a regulatory postal industry review to be started early has yet to be met.

In addition, earlier this month the firm said French competition authorities were investigating the French arm of GLS over a breach of competition laws, which could result in a fine.

Royal Mail, whose shares are down 24 percent on six months ago, is on average expected to post a full-year pretax profit of 464 million pounds ($792 million) according to a Reuters poll of 15 analysts.

($1 = 0.5859 British Pounds) (Editing by Kate Holton, Louise Heavens and Mark Potter)