Royal Mail says Amazon delivery service will hit its UK parcels business

Royal Mail shares slumped on Wednesday after the newly privatised postal service warned that its profits would be hit by Amazon launching its own delivery service.

Shares in Royal Mail, privatised last October, dropped 8.4% to 430p after the company said losing the business from delivering many of Amazon’s 70m packages a year would cut its potential parcel growth in half.

The drop knocked more than £360m off Royal Mail’s market value and left the shares languishing below the 445p they soared to on their first day of trading after being floated at 360p. Royal Mail is one of the most commonly held stocks, with more than 700,000 people applying to buy shares in the flotation. Royal Mail had hoped growth in parcel delivery fuelled by internet shopping would make up for the decline in letters. Amazon is Royal Mail’s biggest customer, accounting for 6% of all parcels. Royal Mail said its parcel growth rate would decline from 4%-5% to 1%-2% for at least two years because of Amazon’s decision.

Moya Greene, Royal Mail’s chief executive, said: “When an online retailer of the size and scale of Amazon decides to build its own delivery network, that changes the market for everybody.”

Amazon launched its first same-day delivery service in the UK last month. The new service, called Pass my Parcel, promises to deliver parcels on the same day ordered to hundreds of newsagents across the country. Orders placed by 11.45am will be available to pick up from 4pm that day. Orders made before 7.45pm can be collected from 9am the next day. The service is free for Amazon Prime customers.

Amazon plans to expand the service, which is run using the infrastructure of newspaper delivery company Connect Group, to thousands more retailers. It also plans to deliver small items by drone.

Greene said drones were “one of those disruptive things” that Amazon “a very big company with a lot of money to invest in technology” could do. Royal Mail’s profits are already being squeezed. Operating profits before transformation costs dropped 21% to £279m in the six months to the end of September.

David Kerstens, an analyst at Jefferies, said: “The outlook for the parcels market is worse than expected … which implies parcel revenues would remain stable at best.” Greene warned that the ability of rival firms to pick and choose to compete with Royal Mail on profitable routes could wipe £200m off its sales and undermined its universal service obligation, to deliver everywhere six-days-a-week for one price.