Jeremy Corbyn Dreams of Nationalization But What About Amazon?
(Bloomberg Gadfly) -- Royal Mail Plc’s shares soared on the first day of its IPO in 2013, sparking outrage about the British privatization short-changing the public. Four years later, the stock is a fraction higher than where it closed on its debut and the centuries old postal company has departed the FTSE 100.
Some might argue that Royal Mail is destined to struggle. It still has to deliver mail anywhere in the U.K. at a fixed price six days a week, even though email means letter volumes are in structural decline (a problem because of Royal Mail's substantial fixed costs).
Parcels are booming, thanks to e-commerce. But customers are more demanding, while Amazon and other logistics firms are cutthroat competitors. Some cherry-pick urban areas and higher-value services, not always with the same labor protections.
Royal Mail has a hefty, unionized workforce demanding wage increases -- though hopes of an impending staff deal have lifted the shares by one quarter since November. The yearly funding requirement on its pension plan will double to more than one billion pounds ($1.4 billion) unless it's overhauled. Oh, and Jeremy Corbyn, the leftwing leader of Britain’s opposition Labour Party, says he’ll nationalize Royal Mail if he wins power.
Yet while things seem bleak, there is a glimmer of hope offered by another centuries old postal service that's coping admirably with the same problems (bar Corbyn): Deutsche Post AG.
The Labour leader chastises the Royal Mail for paying hundreds of millions of pounds in dividends to shareholders, but it's also invested 1.5 billion pounds since privatization, including a sweeping IT upgrade. After years of under-investment under public ownership, it had no choice.
Deutsche Post has plowed earnings into building a European parcels network, international express delivery and supply chain management business, cutting the dependence on letters. The DHL Express unit, a competitor of United Parcels Service Inc. and FedEx Corp., usually makes an operating margin above 10 percent, higher than the parent company's average.
Sensibly, Royal Mail is investing too in its expanding European parcels business, GLS, an asset-light offshoot that's unbound by U.K. wage deals or regulatory handcuffs. It's more profitable, contributing more than a quarter of adjusted group operating profit. Even so, the U.K still accounts for about four-fifths of Royal Mail sales. There’s a way to go on diversifying.
In fairness, Royal Mail’s Canadian boss Moya Greene is doing a decent job in difficult times. Britain’s economic wobble since the Brexit vote hasn’t helped junk mail volumes, and Amazon has built its delivery operations more quickly in the U.K than in Germany.
German postal regulation is more benign as well, giving Deutsche Post the freedom to innovate. "The U.K postal market is very pro-competition, making it more difficult for the incumbent," says Daniel Roeska at Bernstein. Royal Mail investors are compensated in part with a relatively high dividend yield.
Still, Deutsche Post shows how privatization can work. There's no reason legacy postal giants can't thrive in the age of email, instant messaging and Amazon. Royal Mail needs profits to reinvest in modernizing. Corbyn and his acolytes should pay a visit to Germany.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.
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