Lancashire Times
A Voice of the North
4:15 AM 24th July 2021

Market Analysis: Royal Mail - Cost Reductions Driving Improved Margins & Premier Foods - A Business With Momentum

Royal Mail - cost reductions driving improved margins; parcel automation is mid-term challenge. Ben Nuttall, Senior Analyst at Third Bridge comments on Royal Mail's trading update.

“Ofcom, which regulates the Royal Mail, considers 5-10% EBIT margins reasonable, and Royal Mail continues to come in on the low end of this scale.”

“Changes Royal Mail have put in place to bring down their costs are translating, and should continue to drive, better margin. In the medium-term one of the key challenges for Royal Mail is its low level of parcel automation.”

“Plans for parcel hubs in Warrington and the Midlands, which combined should be able to process 1.6m parcels a day, could take a chunk out Royal Mail's cost base and help bring it in line with other parcel competitors.”

“Royal Mail’s international arm GLS, the smaller but more profitable part of the group, has supported the business through tough times.”

“GLS has carved itself a significant niche in day-definite international delivery. Day-definite is taking share from time-definite where players such as UPS, DHL and FedEx are very strong.”

“As the UK begins to open up parcel volumes have declined compared to last year down 13%, but there are early signs that some of the behaviour of buying online is sticking as domestic parcels remain 19% above 2019 levels.”

“International parcel volumes were down more, as we still see impacts of passenger flights reducing air freight capacity and increased conveyance costs as well as Brexit impacts while the country transitions into a new trade deal.”

“Overall structural letter decline continues compared to 2019, but there is a nice jump from last year as businesses reopen compared to the same period last year.”

“Any decline in volumes in parcels has been more than offset by pricing increases, showing lasting benefits for Royal Mail of delivering last year under tough conditions when we all wanted home delivery.”

"Premier Foods is a business with momentum on growth where they need it," says Third Bridge Senior Analyst Alex Smith:

"Our experts say CEO Alex Whitehouse has done a good job with the turnaround. They see a focus and increased investment on core categories such as cooking sauces, accompaniments, and ambient cakes, and to a smaller extent quick meals, flavourings and seasonings. Lesser brands, like Marvel, Lyons, and Smash have been de-prioritised."

"A change in ownership at ASDA as well as private equity interest in Morrisons and Sainsbury’s could well trigger fresh cost negotiations between the big supermarkets and suppliers like Premier Foods. The prospect of increased competition will spur those that can eke out a cost advantage to do so now."

"Investors will be looking for any signals that the so-called 'pingdemic' might hamper Premier Foods production plans."

"Premier Foods is encountering higher prices for raw materials and ingredients. Some of this cost pressure is linked to the global economy, but Brexit, complex logistics, and elevated tin prices are all playing a role."

Third Bridge is a global primary research firm that interviews more than 6,000 internationally recognised industry experts and business leaders a year to compile 360-degree market intelligence for institutional investors.