Royal Mail: Analysts and businesses warn delivery cuts no panacea to firm’s woes

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Royal Mail has been the talk of the City over the last few weeks after the Czech Sphinx's bid.
Royal Mail has been the talk of the City over the last few weeks after the Czech Sphinx's bid.

Daily Royal Mail deliveries are vital to the UK economy and losing them could risk “real disruption” to the nation’s finances, MPs and business lobbyists have warned.

Watchdog Ofcom has called for the modernising of Royal Mail, with proposals including a slower first-class service and reducing the number of delivery days from six to three.

The communications regulator said reducing letter delivery days from six to five would save the Royal Mail £100-200m, whilst reducing it to three days a week could save £400-650m.

But politicians and business groups hit back at the moves to alter the universal service obligation (USO) of a six-day a week delivery guarantee, leading analysts to predict change could still be some way off.

Federation of Small Businesses (FSB) policy chairwoman Tina McKenzie warned it could be a “slippery slope” and damage the trust of small and medium-sized enterprises (SMEs).

“Considering that 25 per cent of them rely on the postal service, these proposals could cause real disruption to our economy,” she said.

Conservative MP Sally-Ann Hart told Morning Wire that Royal Mail was “essential for our local businesses” and added a “dependable postal service is also key to the UK’s economy”.

Julian Sturdy, Rural Services All-Party Parliamentary Group (APPG) chairman, said: “Reliable six-day postal services are essential to thousands of businesses across the UK.

“I do not believe switching to a five or even three day letter postal service is the way to do it.”

While Lib Dem Treasury spokeswoman Sarah Olney said the proposal “feels like a slap in the face” and Labour MP Kate Osbourne posted on X, formerly Twitter, that “deliberate mismanagement at Royal Mail is putting vital services and the whole company at risk”.

Liam Byrne, Business and Trade Committee chairman, urged government and Royal Mail to “get round the table” to agree on the USO and said he had “demanded” a report this year.

No10 said the government was committed to a six-day a week service. The Prime Minister’s official spokesman told reporters ministers would “engage with” Ofcom’s report and service levels consultation – but rebuffed suggestions Royal Mail could collapse without key reforms.

For parent company International Distributions Services (IDS), axing one to three days a week would be a considerable windfall, given infrastructure built for 20bn letters is now delivering less than half that amount. 

But Peel Hunt analyst Alexander Paterson, warned it could require redundancies and see gains cancelled out by “further investment in parcels, building a national seven-day service to become more competitive with alternative suppliers such as DPD and Evri”.

MPs and trade groups have cast shadows of doubt over Ofcom’s report, with many jumping to protect the full six day per week operation. This makes any hope of change for Royal Mail unlikely, according to analysts.

Equity research analyst at Hargreaves Lansdown, Matt Britzman, said with Westminster jumping to protest the USO, while debate is “healthy”, in reality, any changes are distant. 

“That leaves Royal Mail in a sticky spot, having to rely on things within its control to turn fortunes around,” he added. While Victoria Scholar, head of investment at interactive investor suggested the tide could be turning, but stressed “considerable opposition” remains. 

Royal Mail is targeting breakeven for the second half of its 2024 financial year. IDS saw its share price rise by more than three per cent after the open, following the Ofcom warning.