Judging by this millennial, whose infrequent letters are now sent solely to a fast-diminishing crowd of geriatric relatives on their birthdays, the future of snail mail is dim indeed across the UK. For Royal Mail Group (LSE: RMG) the inexorable decline in letter volumes, down 3% year-on-year over the past nine months, has required a traumatic and expensive transition to focusing on package deliveries. While switching from sorting letters to sorting boxes of clothes and electronics may seem a quick fix, it has entailed costly infrastructure investments and cutting jobs.
These restructuring costs, new sorting facilities, and intense competition has led to margins falling from 6.7% to 5.6% on the year. Even worse is that although the volume of parcels sent increased 4% over the past reporting period, the overall parcel market grew by an estimated 6%, suggesting rivals are gaining market share. And at the end of the day, sending letters still accounts for roughly 50% of revenue, which means if Royal Mail continues to lose ground to rivals in parcel delivery, the shares may be in for a rough ride.
Survival tactics
The rise of e-books and shift away from textbooks and standardised testing in classrooms across the developed world have hit publisher Pearson (LSE: PSON) hard. Over the past five years the company’s operating cash flow has fallen an average of 16% annually due to precipitous drops in print media sales. Like Royal Mail, Pearson is attempting to pivot away from its historical business lines to focus on future growth markets; in this case digital classroom software. These digital services now account for 65% of overall revenue after selling off non-core assets such as The Financial Times and a stake in The Economist.
The disposal of these two newspapers allowed Pearson to bring net debt down to £800m last year. Restructuring efforts in the core business lines are also beginning to pay off as operating margins rose from 13.8% in 2013 to 15% last year. Although these are still below the 17.1% level of 2011, continued cost-cutting measures and a shift to emerging markets and digital textbooks means that while Pearson may not thrive in this new environment, it will at least survive.
Bright future
While the loss of print books and physical letters will evoke nostalgia, few would decry the downfall of cigarette smoking. Unfortunately for public health across the globe, the latest results from British American Tobacco (LSE: BATS) show that this isn’t the case at all. Volumes rose 3.6% over the past quarter for BATS as every region except the Americas sold more cigarettes.
Judging by past restrictions on tobacco adverts, the introduction of plain packaging rules in the UK and Australia will likely have little effect on the BATS bottom line as it offers a wide range of high and low-end brands. And with global reach, the company can continue to take advantage of growing populations and wealth in emerging markets. This is one reason revenue over the past quarter grew 6.1%, which coupled with astounding operating margins of 38.1%, makes BATS a strong choice to continue performing well for years to come.