How Amazon stole Christmas from bankrupt Royal Mail

Every morning at 11am, red Royal Mail drones take off from a village in Orkney and zip over the water to deliver mail to nearby Scottish islands.

Spider-shaped devices with six rotor arms can carry weights of up to six kilograms, providing a much cheaper and more convenient way to move mail than an airplane or boat.

“Drone delivery is one of the ways we aim to provide fast and convenient services to our remote customers,” says Nick Landon, Commercial Director at Royal Mail.

This is an example of how modern technology is changing the way delivering our mail: The company has carried out similar trials on other islands and parts of Cornwall.

Landon, who has worked for Royal Mail for three decades, is confident the postal service can keep up with the times. “I don’t want to sound cliché, but Royal Mail has been around for 500 years,” he says. «We're really used to reinventing ourselves.»

Yet throughout its recent history, the company has just as often been accused of dragging its feet on modernization, leaving room for a host of more nimble competitors. eat your lunch.

Now, with Christmas just a few weeks away, that nightmare is becoming a reality as the threat comes from one competitor: Amazon.

Although Royal Mail remains the UK's largest parcel carrier, the US giant is closing in on it. grew to become the second largest player in just over four years after launching its own operations.

The threat comes at a catastrophic time for Royal Mail, which since privatization has been struggling with the slow death of the letter and the explosive growth of online shopping.

However, the company has repeatedly struggled to adapt, with efforts to introduce package tracking, next-day delivery or machine sorting repeatedly thwarted by clashes with its unionized employees.

These issues came to a head last year when the bitter dispute escalated into the first nationwide Royal Mail postal strike in 10 years, which took place over Christmas.

Since then, the postal service has seemed to be in a constant state of crisis. Not only has the company faced fines from Ofcom for consistently failing to meet punctuality targets, but some households have complained about only receiving mail once every two weeks, and the company collapsed this month with a half-year loss of £319 million.

In another recent blow, Royal Mail lost its 360-year monopoly on parcel delivery for the Post Office, which now also works with rivals Evri and DPD due to performance complaints.

Meanwhile, Amazon continues to quietly build its empire, creating a delivery network independent of Royal Mail and offering services to other retailers.

“We are actually at a moment of crisis,” says Dave Ward, general secretary of the Communications Workers Union, which represents 140,000 Royal Mail lettermen and women.

“Real change is needed.”

Unable to achieve results

Examples of dissatisfied Royal Mail customers are not hard to find. Residents in Rayleigh, Essex, are so frustrated at having to wait «weeks» for deliveries that some are offering help at their local sorting office — perhaps only half-jokingly.

“I subscribe to the Radio Times to get the magazine half price, but since it hasn't arrived it's a waste of time,” John Smith, 73, told the Southend Echo.

People in parts of Kent are also saying they haven't received mail for weeks, with hospital patients missing appointments, birthdays not being celebrated and important letters going AWOL. One Gillingham fan told Kent Online his season ticket arrived three months into the season.

Similar stories can be found across the country, raising fears that this year's Christmas mail will not arrive on time.

It was revealed this week that Royal Mail paid out more than £26 million in compensation last year amid a 50 per cent rise in complaints.

The figures follow a record £5.6 million fine from industry regulator Ofcom for late delivery of more than a quarter of first-class messages.

All these problems arose after the controversial privatization of Royal Mail in 2013.

The company was delivering 14 billion emails a year at the time, down from a peak of 21 billion in 2007. Today this figure is only 7 billion per year.

At the same time, online shopping has caused an explosion in the number of parcel deliveries.

Acutely aware of this disruption, Royal Mail executives have tried to move in this direction . parcels for years.

They pointed to two seemingly insurmountable obstacles to modernization: union bosses determined to protect working conditions; and the Universal Service Commitment, which obliges the company to deliver goods six days a week to all 30 million UK addresses at the same price.

Royal Mail has one of the most heavily unionized workers in the country . The Communications Workers Union speaks on behalf of 140,000 employees. He has repeatedly clashed with bosses over radical changes.

These long-standing tensions finally escalated into open warfare last year when CWU members went on strike over changes to working conditions.

Some of the issues at the heart of the dispute were things that most consumers take for granted. in a modern delivery service: next day delivery and tracking. But to achieve this, the company had to overhaul some of the most outdated practices in corporate Britain and confront the CWU, which responded by saying it was «ready for battle».

Attempts to force postmen to work on Sundays and later shifts so that Royal Mail can expand its weekend services and better compete with Amazon, DPD and others in a parcel market where delivery is heavily skewed towards weekends have been met with fierce resistance.

Dave Ward, general secretary of the CWU, described the changes as «the biggest attack on their [postal workers'] jobs, conditions and regulations in Royal Mail's history.» The relationship reached new levels of toxicity under Simon Thompson, the former head of Royal Mail in Britain who resigned in October and was accused of stoking employee discontent and making brutal changes without warning.

But this was an organization in which the practice of keeping track of arrivals and departures on paper persisted for a long time because the CWU was so vehemently opposed to electronic swipe cards on the grounds that they could be used to spy on workers.

A A salary agreement was finally reached in May, although it ultimately cost Thompson his job.

With the devastating strikes behind them, management's attention has since turned to USO reform as Royal Mail slides deeper into the red. Last month, the postal division of parent group International Distribution Services said it posted a half-year loss of £319 million.

Chiefs have admitted the company is failing to meet its legal obligations to deliver letters on Saturdays, but argue that the £250 million that could be saved by eliminating Saturday deliveries could be better spent on a parcel delivery service.

They are lobbying for legislation to ease USO requirements, as in other parts of the world. Just last week, Denmark's PostNord announced that its universal postal service would be closed entirely in response to a «90% decline in mail volumes» since 2000. Many other European countries have taken similar actions.

But Business Minister Kevin Hollinrake rejected the prospect of any changes. “We have no plans at this time to change the minimum requirements for universal postal service,” he told the business select committee in June.

Ministers are concerned about the economic impact of such a move and believe the bar for making such changes must be high.

Meanwhile, Royal Mail's competitors operate with lower operating costs and use technology more efficiently , are undermining its business — about 10% of its sales have reportedly been transferred to competitors. Chief among them is Amazon, which has been quietly developing its own competing delivery network.

The Arrival of Amazon

Over the past five years, the sight of Amazon delivery vans speeding down our roads or parked on sidewalks has become increasingly common.

The US e-commerce giant has been handling many of its own deliveries since 2018 and has increased its share by The UK parcel market is up to almost a fifth, although mainly through its own business.

However, this huge expansion is not quite what it seems at first glance, at least according to Amazon itself.

Even though they drive Amazon-branded vans and wear Amazon-branded uniforms, none of the drivers are technical employees of the company.

Instead, they are all part of the Delivery Partner (DSP) program.

With this scheme, Amazon effectively helps people start their own delivery business for as little as £10,000 inc. equipment, vehicles and training and then directs the delivery work to them.

Amazon has proven to be a nimble competitor to Royal Mail by focusing on market control over profits. Photo: Chris Ratcliffe/Bloomberg According to the company's brochure, delivery partners with a fleet of 20 to 40 vans can expect annual revenues of up to £1.8 million and profits of up to £150,000. And larger operators, of which there are several, can count on even greater profits.

“Your success story begins here,” the brochure tells potential recruits.

The DSP program is now thought to carry the bulk of Amazon's parcel delivery load in the UK, although the company refuses to reveal exactly what percentage, and taps into the company's vast logistics network of more than 20 distribution centres.

At the same time, Amazon continues to rely on Royal Mail and other couriers to make undisclosed deliveries a year, particularly to hard-to-reach areas such as Orkney where it has no presence.

Overall, around 5.1 billion parcels were delivered in the UK in 2022, or around 14 million per day, according to the Pitney Bowes Parcel Delivery Index.

Royal Mail remained the largest player, with 1.3 billion parcels per year or 25% of the market.

But Amazon, despite launching its delivery business just five years ago, already delivers 900 million parcels, a 17% share.

Some of this is clearly at the expense of Royal Mail. Since 2020 alone, Royal Mail's market share has fallen from 34%, while Amazon's has risen from 15%.

And Amazon is hungry for much more. Three years ago, the company began offering use of its delivery network to all UK businesses through Amazon Shipping, including those that do not sell goods through its online marketplace.

History shows that Royal Mail management would be foolish to ignore this threat, as Frederick Smith, founder and chief executive of US courier service FedEx, can confidently attest.

When asked about a potential challenge from Amazon five years ago, Smith responded that the online retail giant was a «wonderful» company and a good customer, but not an equal.

«I think the prospect of this company being 'disrupted' … is just fantastic,» he said . told reporters.

Now he eats his words. Amazon surpassed the number of packages delivered by FedEx to U.S. homes in 2020 and also outpaced rival UPS last year, the Wall Street Journal reported this month.

Meanwhile in the UK, Amazon is one of only two retailers to deliver parcels themselves (the other being Argos). It delivers both to your doorstep and to Amazon-branded lockers spread across the country and now also offers same-day delivery.

But Gerald Hu, an analyst at city brokerage Liberum, said Royal Mail bosses initially didn't understand why Amazon was launching domestic delivery and scoffed at the idea it could match them on costs.

“The problem was that Amazon didn't care about short-term profitability,” Hu explains.

“They were much more interested in managing the process.”

Preparing for battle

A giant metal shed next to the M1 in Nottingham seems an unlikely scene for one of the most bitter commercial battles of the 21st century. However, this is where Royal Mail plans to take on Amazon as it prepares for the influx of Christmas deliveries.

Royal Mail is preparing for Christmas with a large number of employees and machines in its parcel super hub. Photo: Peter Byrne/PA Wire

The company's new «supercentre» in Daventry, Northamptonshire, opened in June and spans 53 acres and boasts machines. which can process 850,000 parcels per day, making it the largest automated parcel delivery facility in the country.

To ensure a smooth festive period, the company has also hired 16,000 temporary workers to help 110,000 post offices sort and deliver parcels as it tries to avoid a repeat of last year's strike, which cost £200m in lost turnover. An additional 6,800 cars and 1,000 large vans have also been deployed, with customers lured by Amazon-like promises of guaranteed next day delivery on Saturday orders, same-price Sunday delivery and better rates on heavier tracked parcels.

Posties are also promising a £500 Christmas bonus for “meeting local and national quality targets”, possibly to soften the introduction of new working hours in April, when many will be asked to start work 90 minutes later. Royal Mail said the move would allow it to halve the number of charter mail flights per day to 18, cutting costs and carbon emissions.

And while Royal Mail is focused on trying to win back scores of customers who have switched to competitors, Ofcom's USO review is likely to prove decisive.

The regulator will begin collecting evidence in January to determine how services “may need to evolve to better reflect the changing needs of postal users.” It was previously revealed that consumers were «largely indifferent» to the idea of ​​ending Saturday deliveries.

Consultant Alastair McPherson says there are many ways to change the USO. “The number of births per week is one measurement. You can even have different service levels for different regions. So it may still be reasonable to deliver seven days a week to certain areas of London, but only four days a week to more rural areas.»

Landon, Royal Mail's commercial director, is adamant that the company is asking for «no service cuts». «It's a reflection of what our postal customers and clients want, and that's a rebalancing of our network between parcels and letters,» he says.

Trouble in Paradise

At times, Amazon's rise seemed as inevitable as Royal's demise Mail.

The US company, which has annual sales of around $243bn (£194bn), has expanded in recent years from e-commerce to cloud computing, video streaming, advertising, bricks-and-mortar retail and even prescription drugs.

However, today there are signs that the pace of development of the technology giant is slowing down.

The company posted a loss of $2.7 billion in 2022 due to overexpansion during the pandemic, forcing it to lay off thousands of excess employees. The company has also paused work on high-profile initiatives such as checkout-less Amazon Go stores, and has even begun cutting jobs in the division responsible for Alexa, the voice assistant long said to be a favorite of company founder Jeff Bezos.

Under CEO Andy Jassy, ​​who succeeded Bezos in 2021, Amazon also faces a new regulatory threat in the US, where the Federal Trade Commission accuses the company of anti-competitive practices.

And leaders have reason to worry about Britain.

While the delivery partner model has allowed Amazon to increase the number of packages it delivers, it has also embroiled the company in a legal battle over the rights of drivers wearing its logo.

Should these people actually get the same rights as employees? It is this issue that lies at the heart of a claim brought on behalf of more than 1,000 drivers by lawyers Leigh Day, which says they could each be owed up to £10,000 in back wages, holiday pay and other benefits.

Kate Robinson, a senior lawyer at Leigh Day, argues that Amazon drivers who work for delivery partner companies cannot be treated as contractors only because they do not enjoy any of the freedoms that role comes with.

They cannot negotiate wages, are paid the same fees regardless of workload, and are constantly monitored by company systems for their performance. They also can't let someone else do their tasks.

“Amazon classifies these drivers as self-employed, but we say that they are actually employees and therefore entitled to various benefits. associated with employee status,” Robinson. adds.

Amazon rejects suggestions that drivers are actually its employees.

“We are committed to ensuring that these drivers receive fair compensation from and to the delivery companies they work with.” were treated with respect and this is reflected in the positive feedback we hear from drivers every day,” says the spokesperson.

And despite these problems at its rival, Royal Mail can hardly celebrate itself.

Royal Mail& Its neighborly appeal goes some way to setting it apart from its competitors. Photo: Kirsty O'Connor/PA Wire

Even though the company has put the strikes behind it, pressing questions remain about the future of its services.

On the one hand, executives like Landon say Royal Mail's greatest strengths are its vast network, the relationships between post offices and customers, and its strong environmental standards (most deliveries are made on foot and many vans are now electric).

“What I hear incredibly regularly from our major clients is that if they use Royal Mail, the number of complaints they receive is vanishingly small compared to our competitors,” says Landon. «That's probably the biggest difference we have.»

Dave Ward, general secretary of the CWU, agrees that this link with communities is an advantage and should be expanded to include other services, such as by delivering more prescription drugs. or helping the NHS in other ways.

“The threat from Amazon is very serious, we don’t deny that,” he admits.

However, not everyone agrees that Royal Mail's extensive network is such an important advantage.

“The network is still focused on delivering letters and footcarts,” says Liberum's Hu, pointing to postal services. so much can be carried on foot.

«It's not a case of, 'We'll still send the mail down this street so we can just put the packages in a cart for them to deliver,'» he adds.

“Once you have to replicate what every other parcel delivery company has to do, namely the guy in the van, Royal Mail will have no competitive advantage.”

On top of that, the postal service is getting good. Customer relations are only different up to a point: they are tied with Amazon at the top of the customer service leaderboard, according to Citizens Advice.

Trial and error

Royal Mail's Orkney trial of drones has been extended into next year as the company continues to assess how useful the service could be in rural areas of the UK.

Even this is not as innovative as it sounds. Amazon has also been conducting its own trials of drone delivery since 2016 and says it plans to begin offering the service to UK customers from next year.

Royal Mail's Landon insists for now that Amazon remains «a really big customer for us and we really value the traffic they give us.»

“Our job every day is to go to each retailer and say we are the best person to deliver to them,” he adds. «Clearly the market will decide.»

Given FedEx's experience, this could bode bad news for Royal Mail.