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The Guardian - UK
The Guardian - UK
Alex Lawson

Dead letter office? Royal Mail wrestles with a difficult future

A small single seater electric vehicle inf ront of an array of larger electric vans, all in Royal Mail's red and yellow livery
Electric delivery vehicles at a Glasgow depot: the 500-year-old service has made efforts to modernise, but is also hoping to be allowed to cut back on certain obligations. Photograph: Royal Mail/PA

If Martin Seidenberg has had any honeymoon period as the new boss of Royal Mail’s parent company, it will end this week. He must respond by Tuesday to a series of testy questions from Liam Byrne MP, the chair of the parliamentary business and trade committee, on Royal Mail’s staff turn­over, poor service and disputed parcels policy.

This is the latest tussle in the troubled history of the 507-year-old company – seen by some as a venerable institution and by others as a corporate conundrum – which faces a huge challenge to reinvent itself amid stiff competition.

More than a dozen current and former employees and directors who have spoken to the Observer describe an organisation in flux, wrestling with questions over unions and regulators, workplace culture, changing consumer habits and a decline in letter volumes.

Change at the top

A tumultuous few years for the group have been reflected in the pace of arrivals and departures in the boardroom.

Passport-style photo of Martin Seidenberg
Martin Seidenberg has taken charge fo Royal Mail while another permanent chief executive is sought. Photograph: Valery Kloubert/GLS Newsroom

Royal Mail is the largest but most problematic part of International Distributions Services (IDS), the recently rebranded group which also contains General Logistics Systems (GLS) and Parcelforce. GLS is the profitable international arm, delivering parcels in 40 countries, mainly in Europe and North America.

Seidenberg, who runs IDS, will be keen to draw a line under a rocky period which has included a flurry of chief executives, damaging strike action over pay and conditions, a corporate rebrand, threats of administration, a £67m ransom demand after a cyber-attack, and a £5.6m fine from the regulator for failing to hit delivery targets. He even tried to address the latter by offering bonuses of up to £500 for postal workers to hit Christmas targets, as he hired 16,000 seasonal temps. (This target was split, with £250 of it linked to national targets which were missed.)

The departure of former Ocado executive Simon Thompson last year left Royal Mail hunting for its fourth boss in four years. Chided as “clueless” by MPs, mocked by the children of his workers and chanted about by thousands of angry postal staff in Westminster, Thompson was the latest chief to leave what may be the most impossible job on the FTSE, after two years at the helm.

He announced his resignation in May but officially remained with the company until October. He is due a payoff of up to £700,000. Despite the lingering goodbye, Seidenberg – formerly head of Amsterdam-based GLS – said he did not meet Thompson after taking charge in August.

Thompson’s predecessor, Rico Back, later said Thompson’s lack of experience in running either a big company or a logistics business had been a “toxic mixture”. Back himself abruptly resigned after less than two years, following a tussle with the Communication Workers Union. He was nicknamed the “flying postman” for running the business from his £2.3m family home overlooking Lake Zurich.

Seidenberg said he was taking “full ownership of Royal Mail on an interim basis as we just can’t wait [around]”. It is understood headhunters at Russell Reynolds have been tasked with finding a permanent chief executive, while pressure is mounting on the chair, Keith Williams, to ensure the next boss is the right one. “Keith hired Rico and that went badly; Simon too. His judgment has to be questioned,” says one former director.

A postal worker standing beside a red Royal Mail van on a coast watches as a drone carrying a parcel takes off
A Royal Mail drone departs to make an island delivery in Scotland. Photograph: Maggie Mullan/c/o Royal Mail

Growing losses

The scale of Seidenberg’s task was laid bare in his City debut. Group revenues were flat, at £5.8bn, in the first half of its financial year, while profits in GLS were more than offset by a 46% increase in losses at Royal Mail, to £319m, according to results published in November.

Group operating losses widened to £169m, from a £57m loss in the same period a year earlier, and Seidenberg vowed to get a “grip” on quality of service, to set “the foundation for growth”.

Competition to land lucrative parcel contracts remains stiff even as a pandemic-fuelled boom subsides. This was underlined in November, when the Post Office signed deals with rivals Evri and DPD to allow them to deliver some parcels sent from its branches, amid concerns over reliability of the service. Royal Mail was legally separated from the Post Office – the state-owned private company that operates 11,500 branches, and which has been embroiled in the Horizon IT scandal – in 2012, before the former’s flotation. The November contract ended Royal Mail’s 360-year-old monopoly on the service.

Meanwhile, e-commerce parcel volumes fell across the sector in 2023, the drop blamed partly on fashion retailers clamping down on returns and partly on rising delivery charges. At Royal Mail, volumes were down in the first half of the year, before recovering some ground.

Delivery difficulties

Royal Mail’s long-term future will be significantly shaped by the postal and communications regulator, Ofcom. In September, it began examining options to alter the universal service obligation (USO) – the stipulation that Royal Mail has to deliver to every address in Great Britain six days a week, at a fixed price.

Royal Mail has blamed the USO for rising stamp prices and last summer the government denied its request to stop delivering post on Saturdays – a move which would have needed approval by MPs. Ofcom has previously said the move could save £125m to £225m a year.

The shape of any reforms to the USO have been debated for years. Before the pandemic, consultants at McKinsey were enlisted by Royal Mail to aid this work, coming up with no fewer than 23 models. Their research found dropping Saturdays would require minimal change within the organisation, an insider says.

The biggest indicator of the long-term strategy may come from Royal Mail’s recent moves with its bulk mail customers. These companies, which include UKMail, Whistl and Citipost, specialise in sorting and processing mail for big businesses – typically marketing letters or household bills to consumers. These bulk letters, which are taken on the “final mile” by Royal Mail, make up the majority of all letters sent, though volumes here are also in decline as companies favour email or social media to reach customers.

Under most bulk mail contracts, Royal Mail is required to deliver the next day and, as with consumer mail, the quality of service has fallen behind targets. However, since 2020, bulk customers have been also able to select a slower, three-day delivery option. Sources believe this cutting back on business mail could offer a blueprint for reducing consumer deliveries.

Ofcom has conducted analysis on how cutting back on delivery days would affect households, with particular emphasis on the implications for vulnerable mail users.

Sources familiar with Ofcom’s work say analysis presented in the autumn had found that 97% of residential customers and small to medium-sized businesses would suffer “minimal” impact from a switch to a Monday-to-Friday schedule, with publishers of magazines likely to be the most affected among bulk customers.

The research also showed that about 80% of residential users and between 60% and 80% of small businesses would be served adequately by a three-day-a-week service, or alternate-day deliveries.

“People think this is about going from six days to five but it’s more about going from five days to three,” says a former employee who has examined the options. “Saturday is a red herring: they need something more radical.”

However, cutting the frequency of bulk deliveries may not significantly reduce costs. Although this work is not regulated under the USO, it is reliant on the same network of postal workers, making the two services hard to disentangle.

The source adds that to cut costs significantly using the alternate-days plan, thousands of jobs would need to be cut, with posties then tasked with walking two different routes on alternate days. “The main issue may be that its small parcels business is entirely reliant on its letters network, so if you cut back on deliveries, you have to put small packages in vans, which is less efficient,” the source says.

Three workers, two of tyhem hoplding parcels, in a post office; each wearing company flleces - one from DPD, one from Royal Mail and one from Evri
The company gave up its centuries-old monopoly on parcel deliveries by doing a deal with DPD and Evri. Photograph: Michael Leckie/PA

Ofcom was expected to give an update on its work on the shape of the future of the postal service in December, but has delayed this to later in January.

“The need for reform is urgent. The UK is getting left behind – most comparable countries have already reformed their universal service,” says a Royal Mail spokesperson.

In a separate move, it is understood that B2B International, a market research company, recently carried out a work on behalf of Royal Mail’s direct mail arm, MarketReach. The study asked large business customers for their views on delivery frequency, including reducing schedules.

Meanwhile, some posties will start their working day up to 90 minutes later from April as part of a cost-cutting drive.

Cultural problems

Royal Mail’s historical strategy of offering lucrative overtime to get deliveries done appears to be encountering problems – the number of rounds (or walks) done by posties on overtime has fallen sharply since the pandemic.

“Older workers don’t want to do the walks, but the business model assumes a certain amount of overtime,” says a source. “The problem is the workforce is skewed older and they don’t necessarily want to take the overtime. If posties are delivering fewer letters over greater distances, it may not appeal physically.”

Another longstanding problem appears to be workplace culture. Several sources claim managers show favouritism, giving certain colleagues the best rounds, and allege that problems with bullying remain. The issue of bullying has also been raised in the past by several bosses, including Thompson.

Informal photo of Christopher Davies in his garden
Christopher Davies, a former postman, says there is a ‘disgusting culture of bullying’ at the company. Photograph: Sent by him

Christopher Davies, who lives in Essex, resigned in 2022 after 32 years with the business, following seven months signed off with stress related to bullying. He claims Royal Mail had a “disgusting culture of bullying which runs through the organisation”.

Davies accuses his managers of bullying him when he returned to work after the death of his infant grandson in 2019. “It’s shocking how I was treated, and bullying happens right across Royal Mail,” the former postman says. “Managers bullied the staff and gave the best shifts and the overtime to their mates.”

Royal Mail says it has a “zero-tolerance approach to bullying, harassment, or discrimination of any kind”.

Also, long-running tensions have resurfaced over whether there has been a push to prioritise delivering more lucrative parcels over letters. Last year, MPs received photographs and recordings of local managers giving instructions to prioritise parcels, but Ofcom later said it “did not identify any suggestion that Royal Mail’s senior management had directed the prioritisation of parcels over letters”.

A union source says: “That was a red rag to a bull for the workforce – they know it’s the case.”

Royal Mail says it may be “logistically necessary to clear parcels first” to make space in delivery offices, but that Ofcom had not found “any suggestion” that senior management were instructing packages be prioritised “outside of recognised contingency plans”.

Activist investors

Royal Mail’s attempts to change under private ownership are comparable to struggles at BT and British Gas, both privatised under Margaret Thatcher in the 1980s. At each company, successive bosses have demanded rapid change of their huge workforces in evolving markets, while grappling with ageing infrastructure. But while Thatcher eschewed privatising Royal Mail – even the Iron Lady was “not prepared to have the Queen’s head privatised”, she said – it was listed in 2013 amid a cloud of controversy.

Fleet-footed and less hamstrung rivals have spurred its modernisation efforts, such as introducing barcoded stamps to aid tracking, using drones to deliver to islands, offering Sunday parcel deliveries, installing Amazon-style collection lockers and opening “super hubs” for parcel processing in Cheshire and Northamptonshire. The company says it is making “good progress” in implementing changes to working hours and attendance policies that were agreed to end the strikes.

A notable uncertainty in the background is the intentions of Daniel Křetínský, the billionaire who first invested in 2020 and is now IDS’s largest shareholder. The tycoon, nicknamed the Czech Sphinx for his poker-faced approach to investment, faced a national security investigation last year when his firm, Vesa, raised its stake. No action was taken.

Křetínský’s investment initially did well, bringing in a share of a £400m dividend in 2021 as the pandemic boosted deliveries. But the shares have since more than halved in value, to 270p. Shareholders have, however, been promised a “modest dividend”, paid from GLS profits, this year.

It was initially suggested that Křetínský would push for a breakup of the group – an idea later mooted by the company itself in a threat to the union – but Křetínský has since said this is not his intention. He declined to comment for this article.

Royal Mail could also be caught in political turbulence this year, if Labour wins a general election.

“I would like as much parliamentary scrutiny as possible for the new management,” says Kate Osborne, the Labour MP for Jarrow, who worked at Royal Mail for 25 years before entering Parliament. She campaigned against privatisation and would like to see Royal Mail renationalised. However, she says Labour’s frontbench has not stated its desire to see this happen.

“There is still an ‘us and them’ culture at Royal Mail between the workers or middle management and the leaders,” Osborne says. “They still get their big bonuses when Royal Mail fall foul of their targets but those lower down do not get their bonuses. The shareholders keep getting their dividends.”

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