October 2, 2018 / 9:54 AM / in 2 months

Breakingviews - Royal Mail’s strategy gets lost in the post

A pigeon flies past a Royal Mail post box outside Charing Cross station in central London, October 8, 2013. REUTERS/Andrew Winning

LONDON (Reuters Breakingviews) - Royal Mail is having a ropey old year. Two weeks after Chairman Peter Long resigned in the wake of investor ire over a golden hello for Chief Executive Rico Back, the delivery service unveiled a profit warning that sent its share price down almost a fifth. The problem for workers and investors alike is that its strategy looks as questionable as its approach to remuneration. 

Royal Mail is paying the price for a decline in the art of letter writing.  The rise of e-communication and new European data regulations have reduced the volume of marketing mail which had previously topped up its earnings. The upshot is the 3.6 billion pound company has had to cuts its full-year operating profit forecast by 20 to 28 percent. More worryingly, its inability to cut costs as quickly as it expected means it will only be able to strip out 100 million pounds compared to its previous 230 million pound target for 2018-2019.

The company’s problems are likely to intensify.  Back is failing to adequately prepare for a future where the cost of his 159,000 workforce can be supplanted by machines and artificial intelligence. This can only be achieved if he ploughs money into capital expenditure. That seems unlikely given he attempted to ease investor nerves on Monday with a promise to stand by a generous dividend policy while putting capital expenditure under review. The company is expected to increase its dividend by nearly 7 percent next year, according to forecasts from Refinitiv I/B/E/S. Meanwhile, it has already cuts its capex investment from 650 million pounds a year to a target of 500 million pounds this year.

The strategic question mark reinforces the bad vibes on pay. Long presided over one of the biggest pay revolts in UK corporate history – almost three-quarters of Royal Mail’s shareholders refused to support a 5.8 million pound pay deal for Back and a million pound going away payout for former chief executive Moya Greene – not surprising, given Back already worked for a subsection of the company. UK opposition leader Jeremy Corbyn has made hints about nationalising the company. Royal Mail has a job to do to prove this is a bad idea.

Breakingviews

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