The Rise and Fall of Royal Mail – Sorry, International Distributions Services Now

Royal Mail (LON: RMG) changed its name recently, to International Distributions Services (LON: IDS). Within that name change is the base problem that Royal Mail – sorry, IDS – faces and the one that could well bankrupt the group. Or, of course, provide the impetus for the change that will allow it to thrive.

This is what makes IDS such a difficult investment to think about. It depends not upon base economics, nor even that mysterious aura of macroeconomics, but how bloody minded the two sides, labour and management, are going to be in re-organising it. British labour unions have been known to continue to hold onto privileges until the entire industry goes under after all – dockers were not known for their transigence nor the continued existence of British docks. And British management has oft lacked a certain something.

But it’s worth having a look back to see what the problem is. Royal Mail, as we know, started out as a state monopoly, inventing the Penny Black and the universal postal service a century and a half back and all that. Cool, then it was privatised 9 years back. Maybe cool, maybe not, it depends upon your political views on that. OK, but it’s those roots which are creating the problem which exists now.

Royal Mail’s history and rise

That Royal Mail was a nationalised company meant that union power within it became very strong. This isn’t to say that’s a good nor bad thing, it’s just an observation. After all, one of the socialist points about nationalised companies is that the labour force will have more power.

However, as the recent Royal Mail accounts show, this is now causing a problem. For part of that privatisation process put two specifics into law. One is that Royal Mail – or IDS – must still support that universal postal service. Any and every address in the country must be delivered to for the same price as any other. The economics of post – letters and such – are that urban centres are profitable, the countryside isn’t. Further, the marginal costs of an additional piece are near nothing, while the overhead costs of the network – and delivery requirement – as a whole are vast.

So, profitability depends hugely upon the volume of mail going through it. And that’s the first problem – the law insists that the network be maintained even as email, texts, mobile phones and all the rest are gutting the volume of mail being sent. The old levels of service simply are not economic to support any more. 

RMG to IDS

The second problem is that certain of those union powers were not just maintained, they were put into the privatisation law. Which is a problem.

For, as the name change itself shows us, Royal Mail has to change to be able to stay viable. The mail itself, well, it’s still got to do that. But the growth now is delivering parcels from online shopping. Where there’s significant competition of course – Amazon and others are building out their own delivery networks, DHL exists, so do many others. RMG – sorry, IDS – should have a head start on all of these, already having that entire parcel delivery network. But the problem is that it’s also got one of Britain’s more intransigent unions built into its structure.

In theory – in concept – we can see that IDS has that head start and should be able to clean up in this new parcel and online shopping delivery area. Having that head start does mean this should in fact work. Except we’ve got that union power. For example, postal strikes around Black Friday.

Royal Mail – the actual letter part is still called that – is trying to cut postal deliveries back to five days a week. That makes sense. Royal Mail is also a mess. The real reason being that it just doesn’t have the flexibility to reallocate the workforce across from letters to parcels. That sounds more than a little absurd but it’s actually still the local union officials who decide upon shift patterns and allocations.

Distribution should work – but will it?

What we end up with here is an actual make or break problem. Royal Mail as was needs to reduce that letters business – it’s disappearing – and reallocate assets like depots and staff and vans and so on across to the international distributions side. There’s that near immovable object of the union in the middle preventing that.

IDS finances are not wholly robust. But IDS does need to be able to break that union power or it’ll not be able to make that transition. Simply because flexibility is the very thing required, the very thing which working to union rules and restrictions doesn’t allow.

It is actually possible that IDS goes bust. We’ve any number of British union stories that lead to that, docks, motorcycles, cars, ship building and so on. Well, will it?

Royal Mail will survive of course – but will IDS the company?

That’s the bet, either way. Will management beat the union into being able to actually manage the transition? Even if it can, will it win? Or will the union power being flexed mean that the transition just never does happen and therefore the system as a whole goes down?

This all sounds rather bloodthirsty, possibly even Thatcherite. But it is the actual situation here. As investors or traders the game for us is to try to decide upon that. If management is to win then what’s the low point at which we buy in? And if it isn’t to win then what’s the point at which we go short?

Don’t forget, even if we insist that no government will ever allow Royal Mail itself to disappear – a reasonable bet that – there’s no insistence that any government will save the corporate wrapper around it, International Distributions Services.  

Tim Worstall

Editor

Tim Worstall is a freelance journalist who also used to be the world's leading scandium wholesalers (one of the rare earths). His Wikipedia entry gives a flavour.

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