Goodbye Royal Mail plc...
Consignia part II + 40C and 9.4% inflation + Jake Wightman
Thanks for reading Off to Lunch. If this newsletter was shared with you, please sign-up below to become a member and get all our content in your inbox as soon as it is published…
First it was Royal Mail, then it was Consignia, then it was back to Royal Mail and now it is International Distributions Services. Yes, Royal Mail has announced this morning it is proposing to change the name of its holding company. Instead of Royal Mail plc being listed on the stock exchange, the company whose origins go back to Henry VIII and 1516 will be known as International Distributions Services.
This move will spark plenty of reminiscing about Consignia, a poster-child for awful rebrandings since it was launched and then swiftly scrapped in the early 2000s. But at the heart of this story is something more significant - the consequences of inflation, technological change and where that leaves British institutions.
Royal Mail is changing its name to emphasise the fact it is not just a UK postal service. It also owns GLS, the Amsterdam-based international parcel service that has performed much better financially than Royal Mail in the UK in recent years. The UK business and service will retain the Royal Mail name, so International Distributions Services isn’t going to be appearing on post boxes or postal vans anytime soon…
The reason Royal Mail wants to emphasise this is that it is involved in a battle with unions over pay and conditions for its 115,000 UK workers (that is 1 in 175 of all employed people in the UK, by the way). Royal Mail workers voted to go on strike yesterday. The Communication Workers Union say they have been offered a 2 per cent annual pay rise by management and they want something in-line with inflation, which hit 9.4 per cent in June according to figures published this morning. The strike announcement prompted a wave of social media posts from union leaders and supporters (including Labour MPs) all with the same message…
Royal Mail has a different message, however, one it is seeking to promote further with its announcement. It is that the UK business is struggling, is in desperate need of structural change, and has been propped up by the performance of GLS.
Royal Mail revenue in the UK fell 11.5 per cent year-on-year in the second quarter of 2022 (April, May and June) according to the company’s statement today. A temporary boost from sending out Covid-19 test kits has dissipated, people are sending fewer letters and Royal Mail has also been hit by the cost-of-living squeeze, with fewer online deliveries to be made because cash-strapped consumers are ordering less. The number of parcels Royal Mail delivered fell 15 per cent compared to 2021 (although rose 1 per cent on pre-Covid 2019) while letters fell 6 per cent (and fell 23 per cent on 2019), the latest stage of the long-term decline of letters due to email and social media.
The UK business posted an adjusted operating loss of £92 million for the last three months - which means Royal Mail is losing £1 million a day in the UK. The company also said that £100 million of the £350 million boost from its “pathway to change” modernisation programme is now at risk this year due to the row with trade unions. This programme includes the introduction of new automated technology, Sunday deliveries and changes to working practices.
In contrast to the performance in the UK, the company says that GLS grew revenues by 7.8 per cent in the quarter and posted an operating profit of £94 million.
This paragraph in the statement from Royal Mail summarises the company’s position:
"The board has always maintained that there should be no cross-subsidy in the group and recognises the need to address improvements in Royal Mail's performance quickly. In the event that significant change within Royal Mail is not achieved, the board will consider all options to protect the value and prospects of the group, including separation of the two companies.”
Simon Thompson, Royal Mail’s chief executive, said:
“We have made progress building the infrastructure we need for Royal Mail to compete, especially given the growing demand for more larger parcels, delivering the next day - including Sundays - and in a more environmentally friendly way. But building the infrastructure is not enough. We have to transform the way we work too. We need to change - and change now. This is how we can give our team the job security that they deserve for tomorrow and not just for today. I am ready to talk about pay and change at any time. But it has to be both.”
It is Royal Mail’s annual meeting today so the debate between the unions and the company is going to heat up fast….
This battle is unlikely to be resolved soon. The relationship between all sides was tense before inflation surged to the highest level in 40 years. How do you invest in technological change and keeping up with the competition while also supporting staff? Royal Mail employees think their company has got the balance wrong. The company thinks employees need to understand how precarious the state of their business is. This is a situation that will be replayed in other organisations and sectors across the UK in the next few months…
A new normal?
Headlines of 40C temperatures and 9.4 per cent inflation are next to each other this morning. Not so long ago either of these events would have been unthinkable in Britain. However, seeing them sit alongside each other got me thinking about whether we need to quickly re-consider what the new normal is…
We are constantly being told by economists that this spike in inflation is transitory and driven by one-off factors. But what if isn’t? Or what if the one-off factors are just replaced by different factors immediately after?
Andrew Bailey, governor of the Bank of England, said in his Mansion House speech last night that Russia’s invasion of Ukraine is now the key driver of rising prices:
“The Russian shock is now the largest contributor to UK inflation by some way. There is an economic cost to the war, and we all have to recognise that, but at the Bank it will not deflect us from setting monetary policy to bring inflation back to the 2 per cent target.”
Bailey also made clear that a 0.5 percentage point increase in interest rates is under consideration at the Bank’s next meeting:
“In simple terms this means that a 50 basis point increase will be among the choices on the table when we next meet. 50 basis points is not locked in, and anyone who predicts that is doing so based on their own view.”
Russia’s invasion of Ukraine is likely to reshape global trade for some time. It has narrowed globalisation and forced countries to re-consider how self-sufficient they are, particularly with energy. This, coupled with a smaller pool of oil and gas suppliers if Russia is excluded from the market, will put upward pressure on inflation. This is a one-off factor that isn’t going away…
40C temperatures are also relevant to inflation. One aspect of tackling climate change and cutting emissions that is rarely discussed right is that it is likely to push up prices. Warren East, the chief executive of Rolls-Royce, is quoted in the Daily Mail today saying precisely this - the price of plane tickets will go up to cover the cost of airlines switching to sustainable fuels. That story is here. This FT piece from Peggy Hollinger says prices could also go up due to the need to cover the pay of extra ground and baggage staff at airports. There are other examples where the push for net zero by 2050 will push up prices. What about the rents on buildings that the landlord needs to modernise to meet new green standards?
If this is the new normal then moves like the Bank of England scrapping mortgage affordability tests make more sense. Patrick Jenkins said in his FT column that it is “hard to imagine a more bizarre time” to do this. This test forced mortgage lenders to check if the potential borrower could still afford their monthly repayments if interest rates went up by three percentage points. With interest rates now going up and the average house still costing nine times annual earnings, this test seems more relevant than ever. But if inflation and higher rates are going to stick around, then a loosening of the rules like this could be necessary to ensure there is any mortgage lending at all...
A chart that helps you understand the world…
I have already mentioned it, but here is what the 9.4 per cent inflation for the UK in June looks like in the context of recent history. Thanks to Refinitiv for the chart…
You should also read this
Some names to watch who could soon be chief executives of big tech companies are Russell Grandinetti, Amazon’s head of international stores, Will Gaybrick, Stripe’s chief product officer, and Emilie Choi, the chief operating officer at Coinbase. That’s according to this look at the next generation of bosses… (The Information, paywall)
A look at what makes Rishi Sunak tick, including how life at Stanford and California changed him, what he reads and being a parent (Jimmy’s Jobs of the Future)
Bring back the Argos catalogue! Paper catalogues are making a comeback amid soaring digital advertising costs (Harvard Business Review)
Sony has developed an AI racing driver that beat professional gamers. The key to its success? Etiquette (MIT Technology Review)
Recent losses have not put off young traders who made money from crypto or meme stocks. Because they have struggled to make enough money to buy a house through their job, they are playing by different rules in financial markets - they don’t have anything to lose... (FT, paywall)
….one way amateur traders are they are doing this is by playing in currency markets (Bloomberg)
And finally…
What a victory for Jake Wightman - gold medal in the 1,500m at the World Athletics Championship. The 1,500m is often spoken about as an event where Great Britain has a rich heritage thanks to Sebastian Coe, Steve Ovett and Steve Cram, but this is the first time the country has won the gold medal in this race at the world championships since Cram in 1983. Wightman was an outsider but beat the Olympic champion Jakob Ingebrigtsen with a personal best and the fastest time this year of anyone - 3.29.23. A fast 800m runner, Wightman spent last winter running cross-country to try to improve his stamina for the 1,500m.
You can re-watch the race below (worth it for Cram’s commentary). However, there is another remarkable part to this story. Jake’s dad Geoff Wightman does the in-stadium announcements for global athletics events and was actually working on this race in Eugene in the US. “I have got to tell you why the camera is on me,” he told fans as the race finished. “That’s my son… I coach him….and he’s the world champion.” You can see how Geoff Wightman commentated on the end of the race underneath the BBC clip…
Thanks for reading. Off to Lunch will be back on Friday. If you want to read Friday’s newsletter in full, attend our events and contribute to the work of Off to Lunch, then please sign up to become a paid member. Alternatively, if you enjoy Off to Lunch please share it and spread the word…
Graham
Great read. I don't normally read the business pages but all this is fascinating stuff. Feel better informed as a result!
The link for the HBR's "Bring back the Argos catalogue!" goes to the 13D website. Thought it would go to the HBR article...?