Company in the news: Royal Mail
Phil Oakley explains what the dramatic collapse of competitor City Link means for Royal Mail.
The collapse of delivery company City Link over Christmas has starkly shown the woes facing Britain's parcel businesses. Royal Mail (LSE: RMG), UK Mail and TNT have all said in recent months how hard life has become for them. Royal Mail's revenue from parcels in 2014 will probably have stagnated, or even fallen.
Despite the boom in internet shopping, many parcel companies seem to be making less rather than more money. That's because there are too many delivery vans out there chasing the business.
Some retailers offering free delivery seem content to have several couriers fighting each other and cutting prices to take their parcels. City Link had been loss-making for years, and was unable to adapt and survive in this cut-throat marketplace.
So what does the collapse of City Link mean for Royal Mail? Less competition is usually good news it begs the question as to how long other couriers can survive.
Parts of the parcel delivery market have been commoditised, and are based on owner-drivers working long hours at rock-bottom rates. They don't tend to offer timed delivery slots, tracing or returns as Royal Mail does.
As I said back in October, Royal Mail shares do not look overly expensive given the improvements it is making to services and cost efficiency. Yes, it faces challenges but it is better placed than many of its peers to be a long-term winner in the parcels market.
Verdict: still a buy