When Yodel realised it did not have enough drivers to cover the Christmas rush, it took an unusual step. The delivery company earlier this month told its customers – including eBay and New Look – to use rival couriers instead.
The decision underscores the challenges facing Yodel, which has frequently come under criticism for its poor quality of service. More widely, though, it highlights the unprecedented demand for parcel delivery services as people increasingly do their Christmas shopping online.
A booming and growing market has sparked cut-throat competition among couriers. With incumbent Royal Mail losing ground, a crop of new players has sprung up looking to capitalise on the e-commerce boom.
At stake are billions of pounds in revenues from lucrative Christmas contracts. Winning such deals will deliver for investors – but will it deliver for customers?
When Royal Mail was privatised in 2013, parcels were cited as a key opportunity in the new era for Britain’s postal service.
Posties would benefit from the boom in online shopping, investors were told.
“Rather than picking winners in e-commerce, you knew that as long as people were buying physical stuff it would still need to be delivered,” says Gerald Khoo, an analyst at Panmure Liberum.
But rather than thrive, the 500-year-old Royal Mail has been weighed down by the onerous universal service obligations, which require it to deliver letters on Saturdays and meet strict quality of service targets, as well as the high costs of its heavily unionised workforce.
Instead, Royal Mail has seen its dominant market share eroded. It faces tough competition from the likes of DPD and DHL, while newer players such as Yodel and Evri, formerly known as Hermes, have begun to gain ground.
“It’s a growth market, so there’s capital chasing that growth, wanting to get involved,” says Alexander Paterson at Peel Hunt.
“You have an incumbent in Royal Mail who has been probably under-invested in for the last four or five years, if not potentially longer, and therefore other groups sense they can take market share and do that through innovation and technology.”
Amazon, meanwhile, began building its in-house delivery network across the UK in a bid to drive more customers to its Prime subscription service. The US retail giant is now the second-largest courier in the country behind Royal Mail.
Its high-speed service, which offers same-day delivery for some orders, has also raised customers’ expectations.
Khoo describes this as a “double whammy”. He says: “Amazon added capacity and took volumes away from everyone else, which resulted in structural over-capacity in the market. I don’t think that situation has resolved.”
Parcel volumes were already rising before the pandemic struck but Covid-19 drove demand to record highs. Couriers invested heavily in infrastructure such as warehouses and sorting centres to meet this spike in demand, which saw 4bn parcels sent in 2020-21.
As lockdown restrictions eased, however, parcel volumes fell back. Growth finally returned in the year to March, when 3.9bn parcels were sent and overall revenues stood at £13bn, according to figures from Ofcom.
“Parcel services I wouldn’t say are in trouble, but they’re not financially as viable as they were during Covid,” says retail analyst Jonathan De Mello.
“It’s definitely not a happy ship with some of these businesses. I think they over-invested in their logistics during Covid and then spend dropped off a cliff the following year.”
Yet as demand peaks over the Black Friday and Christmas period, it is still all to play for. Rival couriers vie for lucrative contracts with the likes of John Lewis, Marks & Spencer and Asos, though major retailers often work with multiple delivery firms.
For Royal Mail, which starts preparing for Christmas immediately after Easter, the peak season is critical. The company hires hundreds of seasonal workers, opens temporary mail sorting centres and has previously offered bonuses to staff as an incentive.
This year, for example, Royal Mail is hiring an additional 16,000 people for the festive period, taking its total number of posties to over 100,000. That compares to around 28,000 delivery drivers at Evri.
Royal Mail uses this added capacity as leverage, locking some customers into year-long deals in return for access to its peak Christmas service. The postal company also specialises in smaller parcels, which tend to be most in demand for festive gifts.
Czech tycoon Daniel Kretinsky has made it clear that parcels will be the focus when he takes over the Royal Mail - Roman Vondrous/CTK
He plans to invest around £800m rolling out 20,000 parcel lockers across the country where customers can pick up deliveries, hoping to undercut rivals on price.
Even Martin Walsh, who represents more than 100,000 Royal Mail employees at the Communication Workers Union, this week acknowledged the need for change. “This industry does not survive if we don’t grow parcels,” he said.
But Royal Mail, which lost £349m last year and is still recovering from recent crippling strikes, has its own challenges. The company is campaigning for an overhaul of its universal service obligations, warning that current regulations have rendered its business model financially unsustainable.
Its rivals operate from a much lower cost base and often have deeper pockets to invest in new technology. As Khoo puts it: “Royal Mail is playing catch-up in every single aspect.”
In a highly competitive market, however, pricing power is limited. As a result, parcel delivery companies must find ways to stand out.
Savvy operators have carved out a niche in the market, for example, by providing premium high-speed deliveries or specialising in large, bulky items. They are also locked in a billion-pound battle over customer service.
“We’ve seen pressure on the parcel services to deliver a quality of service that matches what the merchants are promising,” says De Mello. “And I think there’s an increased dichotomy between merchants promising we’ll get it to you before Christmas and then the parcel services maybe not delivering that.”
Frustrated consumers will be all too aware that it is the retailer who chooses the courier, not the customer. Nevertheless, service standards still matter. Merchants who frequently miss their delivery targets risk driving customers away and suffering revenue losses.
“If they don’t deliver – especially to an M&S or a John Lewis – then they stand to lose some of that business,” De Mello adds. “That’s why there’s so much pressure on them to deliver on time.”
Despite the challenges, investors are still betting on future growth. Evri was snapped up by US private equity giant Apollo in a £2.7bn deal in July and has since outlined a plan to hire 9,000 new workers to meet rising parcel demand.
Paterson predicts a wave of consolidation as smaller regional players are bought up or shut down, particularly if regulations are tightened.
“For me, parcels are a good structural growth market,” he says. “It’s one that’s consolidating and where the returns I would expect to be very attractive over a long period of time. It’s a very good area for investors to be in.”
Festive spending is expected to hit £22.7bn this year, according to PwC. With appetite for online shopping showing no signs of abating, couriers are jostling for a share of the spoils.
Christmas still delivers the biggest payday of the year.
