Royal Mail’s revenue from parcels has overtaken its revenue from letters for the first time as online shopping surged during Covid-19 restrictions.
Parcel deliveries accounted for 60% of the company’s revenue in the first half of its financial year, up from 47% before the pandemic.
The postal service’s revenue grew by 5% year on year in the six months to 27 September while revenue at the wider group increased by 10%, to £5.7bn, helping the company to achieve its first growth since privatisation in 2013.
Despite the revenue growth, Royal Mail made a £20m operating loss in the first half, compared with a £61m profit in the same period the previous year, blaming increased costs. At the pre-tax level, the company made a profit of £18m, down almost 90% on the previous year’s £146m.
The shift towards handling fewer letters and more parcels pushed up the company’s costs by £95m, as parcels require more manual sorting by workers. The company also faced an extra £85m in costs related to business during the pandemic, including the purchase of protective equipment, social distancing requirements and more worker absences.
Royal Mail said it spent £147m on voluntary redundancy charges after its announcement in June that it was cutting 2,000 jobs – a fifth of its management roles – in a cost-cutting plan accelerated by the coronavirus crisis.
The increase in parcel deliveries has helped Royal Mail hit its revenue targets four years ahead of schedule. The firm also received a boost from the demand for personal protective equipment – it said it had delivered 100m items of PPE to care homes and doctors’ surgeries. It added that it had handled about 90% of coronavirus tests issued in the UK.
Royal Mail expects demand for parcel deliveries to remain high until the end of the year, and is gearing up for its biggest ever Christmas.
The company is planning to hire a record 33,000 temporary workers for the festive period, two-thirds more than usual, to deal with the boom in parcel deliveries.
It said 100,000 people had applied for the temporary roles, and it would take on more staff if demand for parcel delivery exceeds its expectations.
The postal service has long struggled with the shift from letters to parcels as businesses rely on email for more routine communications, and consumers increasingly turn to online shopping.
Keith Williams, the company’s interim executive chair, said: “We have been pushing forward with our transformation in Royal Mail and delivering more new innovations, products and services for our customers.
“The level of revenue growth in the first half shows we have the right strategy and that Royal Mail can be cash-generative and a sustainable, profitable business in the future. But we need to speed up the pace of change in order to create a profitable business in the UK.”
The company has previously signalled it may ask the regulator Ofcom if it can end Saturday letter deliveries.
Williams thanked Royal Mail staff for their “dedication and commitment”. His thanks followed concern from trade unions about postal workers’ safety during the pandemic.
The increase in parcels revenue was a “milestone” for the business, said John Moore, senior investment manager at the wealth manager Brewin Dolphin, adding that it underlined the need for restructuring.
“Royal Mail is making some important decisions and changes at a challenging time – it is perhaps more important than ever to create a more flexible business while keeping staff onside against an uncertain economic backdrop,” Moore said.
The firm said last month that its postal workers would collect parcels from the doorstep for the first time.
Susannah Streeter, senior analyst at the stockbroker Hargreaves Lansdown, said: “Adapting to the e-commerce boom is proving a painful shift for the company. Collecting parcels straight from the door should help put more volumes through the network.”
She added: “With demand for letters plummeting, there is a risk that the red postbox could go the same way as the iconic telephone box, revered for its history and not its usefulness.”
