Amazon's move to scrap free delivery on orders below £10 has hit profits at Royal Mail, which warned that the performance of its crucial parcels business has been weaker than expected .
In a trading update that comes two days ahead of Royal Mail'sshareholder meeting, the first since the 500-year old postal service was privatised last year, chief executive Moya Greene said the business is facing intensifying competition, with parcels revenue down 1% over the three months to the end of June, pushing down shares by 3%, to 450p.
The price remains well above the Royal Mail's controversial flotation price of 330p but below the peak of 615p that shares hit in January.
Richard Hunter, head of Equities at Hargreaves Lansdown stockbrokers, said the honeymoon period for Royal Mail was over. "The weakness in the parcels performance is a concern, and may prompt questions as to whether this is transient, or whether the change is structural. The fact that this decline has been offset by an improvement in the letters business, which is not a long-term area of growth, and cost-cutting measures, may help in the shorter term, but these are both temporary reliefs."
Overall revenues were up 2% over the three months to the end of June.
Royal Mail blamed the slip in its parcels business on Amazon's decision to introduce a £10 minimum spend for free delivery and also to expand its own delivery network. The online retail giant scrapped free "super-saver" delivery on items worth less than £10, introducing a minimum spend in January.
The decline was offset by a better-than-expected performance in the letters business. Revenue from letters increased 3%, as a result of local election mailouts that boosted mail volumes and an increase in the cost of stamps. The price of a first-class stamp rose by 2p to 62p at the end of March, while a second-class stamp rose 3p to 53p. In the UK, letters remain the biggest earner for Royal Mail, bringing in 59% of its income compared to 41% from parcels. However, letters are expected to decline by around 4% to 6% each year, while parcel delivery is seen as a growth business as consumers embrace online shopping.
Royal Mail is not changing its forecast for full-year profits, although last week warned it could face a hefty fine from French authorities, who are investigating alleged anti-competitive practices at Royal Mail's French parcel delivery business. Rivals TNT Express and FedEx have also confirmed they are being investigated and face possible fines. The European parcel delivery business, GLS, which operates in 37 countries, turned in a robust performance, with revenues up 6%.
Green said that trading had been characterised by a good performance in the letters business, but "a weaker than expected performance in UK parcels, largely driven by the intensifying competitive environment".
Greene will face shareholders in Birmingham on Thursday, where she is expected to face questions over her £1.35m salary and pay package, as well as threats to Royal Mail's universal service obligation - the pledge to deliver letters at the same price to all parts of the country six-days a week.