I couldn't resist jumping on the bandwagon of the country's much beloved postage group. Since the company has more to talk about than I would want to discuss in a single post - even more than usual - and with the dynamics of it being an IPO and not actively trading, I'd rather just ask the questions and ruminate on the issues having read their annual report and the surrounding information.
The economics
Off the cuff, we can see that Royal Mail hold quite an unusual position. For historical reasons, they're a dominant market provider - and a monopoly holder in one of the essential phases, the final delivery-to-door bit. They hold 99% of the letter market and around 53% of the parcel market by volume. This should suggest a level of pricing power which becomes more evident when the company is free from direct Government control, particularly in the services they provide to other companies (when they deliver parcels/letters which have come through other providers, for instance).
For the same historical reasons, though, the company is - for better or worse - seen by the wider public as something of an institution. Monopoly holders are already subject to a good deal of regulatory scrutiny, and it seems unlikely Royal Mail would really have the capacity to be a price setter in normal monopoly-esque sense of the word. There's no guarantee that future governments will be committed to the same hands-off approach that the Conservatives have championed in something of a pointed sell-off. Interestingly, in one of their RNSs they note that 'Ofcom has stated that such an indicative benchmark EBIT margin range of five to 10 per cent. on the universal postal services activities would be appropriate'. Two obvious questions there; firstly, how do you split up the 'universal postal services activities' from the rest of their activities and, secondly, why EBIT margin? That seems bizarre. Return on capital seems a far more important metric to be addressing for competitive reasons. Still, my gut feeling is that the regulators, at the moment, verge on the side of caution when it comes to interfering with private business operations, even ones that are politically sensitive. I think it'd make sense to do some research on that. What sort of returns do the energy companies earn, for instance? These are probably the best go-to model.
Royal Mail commissioned a PWC report on…
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