Message to colleagues from Keith Williams

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Good morning,

I am writing to you now because I wanted you to be the first to know about the steps we are announcing today to help ensure the survival of Royal Mail in the UK, and the proposed consequences for pay and jobs.

Stuart and I will be holding a conference call later today to talk you through all of this. Of course, you will have lots of questions, and while we try to deal with as many as possible, we can’t answer them all today. I promise we will keep you updated on a regular basis.

Thank you

Before that, however, Stuart and I would like to pay tribute to every one of you who has risen to the challenge posed to Royal Mail by Covid-19. The impact the pandemic has had on ourselves, our friends, families and communities, is like nothing we have ever known. Royal Mail’s people have worked together to keep communities connected, whilst doing everything we could to keep each other safe. Our thanks - and the whole country’s thanks - are due to all of you for fulfilling your role as key workers so well.

We took tough decisions at the beginning of the crisis - such as cancelling bonuses for the most senior levels of management and not paying a final dividend to our shareholders.

However, we have faced increasing costs and reduced revenues since the crisis began. Our UK business is making losses of around a million pounds a day. And we cannot expect all of these pressures to reverse when “normality” returns.

The need for change in our business

We need to be crystal clear with you about where our UK business stands. The headline Group figure you will hear today is a profit before tax of £180 million and operating profit of £325 million in 2019-20. But this is a tale of two businesses. Our international parcels division GLS made the lion’s share of that profit - around two thirds. In contrast, Royal Mail - with two thirds of our revenue - made around one third of the profit.

UK profits were down around 40 per cent last year. And this despite the fact that the numbers were bolstered by one-offs: over £80 million of revenue came from last year’s UK and European elections. Without these, we would have made barely any profit before tax in the UK. And for the year we have just started, City forecasters were already expecting, pre Covid-19, we might make an operating loss of up to £350 million.So even before we were hit by Covid-19, we knew we needed to change. Letter volumes have fallen by more than 50 per cent since 2004. We can all see it, and we know it in our hearts. The postmen and women I meet all tell me a simple truth: the job is not the same as even a few short years ago. In 2013, our delivery postmen and women delivered c.900 letters a day per route. By the end of 2019-20, that number had fallen to c.700. And in the last two months, that number has fallen again to c.400.

Our customers want more parcels delivered. That was clear even before Covid-19 accelerated demand. But although our parcels business is growing, in the UK parcel volumes are still only a tenth of letter volumes. And whilst revenue per parcel is higher, so are the costs of sorting and delivery. We need to grow parcels quickly – AND improve our efficiency - so we can compete against and beat other companies and retain the jobs that would otherwise need to go as letters decline.

Covid-19 and the future

The unprecedented nature of the pandemic means that the outlook is challenging and volatile. This has meant that, unusually, we are not giving the market future guidance on things like letter volume declines. We have already seen a 33 per cent decline in letters in the last two months. If we end up seeing letter volumes decline by more than 20 per cent this year, that’s over £600 million of revenue lost. Although parcels growth will offset some of that, we had to be clear in our market announcement today that the net reduction in year on year revenue could be anything from £200 million to £600 million. This is an additional challenge on top of the fact that we were expecting losses anyway.

Some businesses may expect to see their markets bounce back unchanged once the current crisis is over. Others, like Royal Mail, must face up to the fact their business has changed. Our customers will want more parcels, but it would be foolish to expect they will go back to sending as many letters as before.

So what do we need to do?

As a Board, we have had to make some hard decisions. We are today announcing changes to help ensure the survival of Royal Mail. There are three parts to this package:

what we need to do immediately;

what we need to discuss with our trade unions and frontline colleagues; and

what we need the regulator and government to think about to ensure we can deliver what our customers want at a price they can afford and the business can cost-effectively supply.

And we want to give you, where we can, some idea as to how these changes may affect each of you.

What we need to do immediately

We need - urgently - to save cash and reduce our costs. We have announced today that we will reduce our planned spend on assets by over £250 million over the next two years.

We have also announced that we will seek to reduce the day to day costs of goods and services we buy by £200 million a year, by increasing our efficiency and tightening up on our use of contractors.

But these changes, hard to make as they are, will not be enough. So, regrettably, we are announcing our intention to slim down management. We are looking for around 2,000 management redundancies, primarily focussed more on the most senior and non-operational managers. At senior levels, that means losing nearly half of our managers. We also intend to reduce other managerial staffing by around 20 per cent in office functions, and 10 per cent frontline operational management, to save about £130 million in total. We will take a phased approach to the redundancies, with the whole process complete by the end of the financial year. All of this is subject to consultation with Unite CMA, which will be commencing imminently.

Change of this nature is never easy. But, we have a good track record of managing these programmes carefully and sensitively. Wherever possible, we will try to make changes by way of voluntary redundancy. Over the coming year we will continue to offer our existing redundancy payments. These are also very generous terms, so again we will have to look at affordability in the future unless we can substantially reduce costs. For those that do leave Royal Mail we will also be offering help by way of outplacement and other transition support services as we know that these changes will be hard.

We have also been looking at the bonus arrangements for this coming year with a view to minimising the scale of management job losses in those areas of the business where bonuses are traditionally paid. We should let you know now, so that you can plan accordingly, that given the losses we expect to make this year, any bonus payments we make will reflect this difficult financial position and are therefore unlikely to be significant - if they arise at all. We have also told shareholders today that there will be no dividend for 2020-21.

Going forward, in keeping with the new group structure, we are proposing that any bonuses in the UK will be paid on the basis of the performance of Royal Mail in the UK. They will be paid as soon as financial and operational performance measures demonstrate that the business has returned to sufficient financial health. When that will be depends on how quickly we can make the changes needed to deliver the necessary results.

Discussions with frontline colleagues and trade unions

The cost savings listed above will still not, by themselves, enable the UK business to return to full financial health. Unless we adapt quickly to how customers use the internet today - sending fewer letters but wanting more parcels delivered - we will not be a sustainable business. The need for change has been recognised in our union agreements for a number of years, but - to be blunt about it - progress has been too slow.

We want to engage with the CWU to make change happen. As we have always said, this will mean more technology, fewer jobs and changes to the way we work. But we can give you the reassurance that we believe this is achievable over the next two to three years within the spirit of our existing agreements with the union.

We understand of course that we have a live dispute with the CWU and we obviously take the issues in that dispute seriously. We agree we need to improve our culture. We need to resolve all the issues in the dispute but we also need to talk about the issues we now face.

We have already given commitments to frontline colleagues over the last few months - we stick by those commitments today: such as no gig economy, no zero hours contracts for employees, and job opportunities for all of our frontline operational colleagues who can and want to work for Royal Mail. We can only deliver these commitments by delivering change, at pace. In short, we need to change to become much more efficient but believe we can do this the way we have approached change within the workplace in the past, working with our colleagues and with the CWU.

Over the coming year we will continue to offer our existing redundancy payments. These are also very generous terms, so again we will have to look at affordability in the future unless we can substantially reduce costs.

We want to continue to work with the union on pay, as we always do. The sooner we can make the operational changes to make the business financially stable, the sooner we can deliver on this for frontline colleagues.

The Universal Service Obligation (USO)

Whilst all of the above changes will help to bring us back towards profitability, the drop we have seen in letter volumes, and the change in the way our customers use letters, make it impossible to achieve sustainability without looking at our current Universal Service Obligation. We have made significant investment in this service, even while our finances are under challenge. In addition, we have been addressing the very specific challenges presented by Covid-19. We do not believe, however, that successful delivery of our transformation and Covid-19 mitigation plans will be enough to achieve break-even in 2020-21 under our current USO.

That is why we want to work with the Regulator, Government, our unions and other stakeholders on the forthcoming review of the USO. We must ensure it is future-proofed, reflecting changing consumer and SME needs and preferences, and deliverable within a sustainable business.

Next steps

None of this is easy, but it is essential if we are to secure Royal Mail for the benefit of the country, and for as many of our employees as possible. I would be grateful for your help and understanding as we try to work this through together, both to rescue the business and to give support to those colleagues who will be leaving it.

As we all know, Royal Mail has seen many opportunities and challenges since it was formed over 500 years ago. Now we need to rise to the challenge of ensuring Royal Mail survives in a state fit for the 21st Century.