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Royal Mail warns on competition threat from rivals Royal Mail warns on competition threat from rivals
(35 minutes later)
Royal Mail has warned that competition from rivals could hurt its future revenues as it reported a rise in annual operating profits to £671m. Shares in Royal Mail have fallen after it warned that competition from rivals could hurt its future revenues as it reported a rise in annual operating profits to £671m.
It said moves by rivals to compete with its direct delivery service meant its Ofcom-set profit margin may "never sustainably be achieved".It said moves by rivals to compete with its direct delivery service meant its Ofcom-set profit margin may "never sustainably be achieved".
Royal Mail called on regulator Ofcom to carry out a review of direct delivery services across the UK. It fears rivals will be able to "cherry pick" which areas to provide services.
Shares in Royal Mail fell by 37.5p, or 6.5%, to 537.5p. Royal Mail called on the Ofcom to review UK delivery services.
Royal Mail's results showed that its overall sales rose to £9.46bn in the year to 30 March, up from £9.15bn a year earlier. However, the communications regulator rejected Royal Mail's call for a review saying it did not believe there was presently a threat to the financial sustainability of the universal postal service.
Under Royal Mail's universal service obligation it is required to deliver letters to all parts of the UK six days a week, however its competitors are not currently bound by the same obligation.
Royal Mail fears competitors will be able to provide delivery services to towns and cities, which are considered to be more profitable, and ignore rural areas which cost more to deliver to.
It said the impact of rival TNT Post UK's plans to launch its own letter delivery service could reduce its revenue by more than £200m by 2017-18.
Royal Mail said if action was not taken there was a reasonable prospect its profit margin target of between 5% and 10%, which is set by Ofcom, "may never sustainably be achieved".
Profit margin measures how much a company keeps from sales after its costs are stripped out.
The warning came as Royal Mail release its first set of financial results since it was privatised in October. They showed overall sales rose to £9.46bn in the year to 30 March, up from £9.15bn a year earlier.
Universal serviceUniversal service
The group's chief executive Moya Greene said the company's performance was in line with expectations but she admitted it faces a "couple of headwinds".The group's chief executive Moya Greene said the company's performance was in line with expectations but she admitted it faces a "couple of headwinds".
She said: "The competitive environment on the parcels side is more intense. We are taking steps to remain the leader in this growing market.She said: "The competitive environment on the parcels side is more intense. We are taking steps to remain the leader in this growing market.
"On the letters side, the headwind is direct delivery and we have strategies in place to counter its adverse financial impact.""On the letters side, the headwind is direct delivery and we have strategies in place to counter its adverse financial impact."
Under Royal Mail's universal service obligation it is required to deliver post to all parts of the UK six days a week, however its competitors are not currently bound by the same obligation.
It is also required to provide access to competitors such as TNT for final mile deliveries.
Ofcom is already investigating a complaint from TNT over Royal Mail's decision to change conditions and increase the prices it charges to deliver post collected and pre-sorted by its competitors.Ofcom is already investigating a complaint from TNT over Royal Mail's decision to change conditions and increase the prices it charges to deliver post collected and pre-sorted by its competitors.
Royal Mail believes an investigation into this complaint will lead to a long period of uncertainty around the prices it charges other postal operators.Royal Mail believes an investigation into this complaint will lead to a long period of uncertainty around the prices it charges other postal operators.
Ms Greene said: "TNT Post UK can cherry-pick easy-to-serve urban areas, delivering easy-to-handle post to homes less frequently than Royal Mail and to no defined quality standard.Ms Greene said: "TNT Post UK can cherry-pick easy-to-serve urban areas, delivering easy-to-handle post to homes less frequently than Royal Mail and to no defined quality standard.
"Royal Mail is required to deliver six days a week, overnight, throughout the whole country, to stringent quality standards and at a uniform, affordable tariff."Royal Mail is required to deliver six days a week, overnight, throughout the whole country, to stringent quality standards and at a uniform, affordable tariff.
"Moreover, we are also required to deliver any items TNT Post UK does not consider economic to deliver itself. If TNT Post UK is successful in delivering its stated objectives, this could threaten the fundamental economics of the universal service.""Moreover, we are also required to deliver any items TNT Post UK does not consider economic to deliver itself. If TNT Post UK is successful in delivering its stated objectives, this could threaten the fundamental economics of the universal service."
Royal Mail said the impact of rival TNT Post UK's plans to launch its own direct delivery service could reduce its revenue by more than £200m by 2017-18. An Ofcom spokesman said: "Ofcom keeps the market under constant close review, examining the future business plans of major operators. We have a duty to secure the universal service, and if we identify any future threat we have powers to step in to protect it.
It said if action was not taken there was a reasonable prospect its profit margin - which measures how much a company keeps from sales after its costs are stripped out - target of between 5% and 10%, which is set by Ofcom, "may never sustainably be achieved".
However, Ofcom rejected Royal Mail's call for a review.
A spokesman said: "We do not believe that there is presently a threat to the financial sustainability of the universal postal service.
"Ofcom keeps the market under constant close review, examining the future business plans of major operators. We have a duty to secure the universal service, and if we identify any future threat we have powers to step in to protect it.
"We would expect Royal Mail to take appropriate steps to respond to the challenge posed by competition, including improving efficiency.""We would expect Royal Mail to take appropriate steps to respond to the challenge posed by competition, including improving efficiency."
In a statement, TNT Post said: Where we do not deliver the mail ourselves, Royal Mail currently charge us a commercial fee which is reflected in Royal Mail's growing profits.In a statement, TNT Post said: Where we do not deliver the mail ourselves, Royal Mail currently charge us a commercial fee which is reflected in Royal Mail's growing profits.
"Competition has created choice and driven innovation and Royal Mail, like its competitors, has no specific quality regulation on its key business mail services.""Competition has created choice and driven innovation and Royal Mail, like its competitors, has no specific quality regulation on its key business mail services."
FlotationFlotation
Royal Mail's parcel delivery service overtook its letters business to become the biggest contributor to revenue for the first time.Royal Mail's parcel delivery service overtook its letters business to become the biggest contributor to revenue for the first time.
Sales in its parcel delivery business rose 7%, although parcel delivery volumes were flat. Letter delivery volumes fell by 4%.Sales in its parcel delivery business rose 7%, although parcel delivery volumes were flat. Letter delivery volumes fell by 4%.
Royal Mail has faced intense competition in its parcel delivery service over the past year as the market has boomed on the back of online shopping.Royal Mail has faced intense competition in its parcel delivery service over the past year as the market has boomed on the back of online shopping.
The results are the first full-year figures since the controversial flotation of Royal Mail shares last October. Its flotation on the London Stock Exchange last Autumn was criticised for selling shares in the company too cheaply, as Royal Mail's shares rocketed as much as 87% above the initial share price of 330p in the first few days after it was listed on the stock market.
The flotation was criticised for selling shares in the company too cheaply, as Royal Mail's shares rocketed as much as 87% above the initial share price of 330p in the first few days after it was listed on the stock market.
Sunday serviceSunday service
On Wednesday, Royal Mail announced plans to trial a Sunday parcel delivery service in response to increasing demand for goods ordered online.On Wednesday, Royal Mail announced plans to trial a Sunday parcel delivery service in response to increasing demand for goods ordered online.
Later this summer it will open about 100 offices on Sunday afternoons for customers to pick up their parcels.Later this summer it will open about 100 offices on Sunday afternoons for customers to pick up their parcels.
Delivery offices with the highest parcel volumes across the UK will take part in the scheme.Delivery offices with the highest parcel volumes across the UK will take part in the scheme.
The company will also try out parcel deliveries to addresses within the M25 motorway on Sundays.The company will also try out parcel deliveries to addresses within the M25 motorway on Sundays.