Royal Mail's (OTCPK:ROYMY) basic problem is that it is that legacy mail delivery system in the UK. As with the USPS, this means having to maintain every address delivery. It also means having a large and highly unionised workforce.
Sure, there's a benefit to having that national network that reaches everywhere, along with quite the largest retail network in the country. However, those are also costs that have to be carried and that doesn't bode well when overall trade, let alone sector revenue, is falling.
It has been true, though, that the same thing which threatens the basic model - email and the internet - has been the saviour - delivery of internet-ordered packages.
The current union problems are just an irruption of what is always going to be a problem and which can be managed. In the longer term, Amazon (AMZN) might be about to deal a significant blow to the business though.
The Communication Workers Union (CWU) has called for a strike, won a strike ballot, and is threatening action in the busiest time of the year - that period between Black Friday and Christmas:
About 110,000 members of the CWU took part in a ballot this month, representing a 76 per cent turnout, and more than 97 per cent voted to strike in a dispute over pay, security and working conditions.
Royal Mail said that it would hold talks without preconditions and would extend the life of the ballot result if the union made a binding commitment to remove the threat of strike action until after the key Black Friday and Christmas sales periods.
At the very least, it's not a good look, is it?
No one believes in the company at present
It should be obvious that no one really believes in Royal Mail as a business at present:
(Royal Mail share price from London Stock Exchange)
It's worth pointing out that, for example, the LSE has the yield at 8.8%, but that's on the price last March. Account for that price drop and it's now 15.5%. That's not going to last - the entire market is not just insisting but screaming loudly that that dividend is going to get cut.
But here's the problem
So, legacy business. There are problems as other companies come in and take the profitable parts of business delivery, town centre and so on, leaving Royal Mail to service that universal provision unprofitably. But the whole sector has been doing very well out of the way in which internet delivery has been using that delivery network.
Amazon is looking for Delivery Partners who are at least 18 years old with a valid UK driving licence and a vehicle. You will need to be entitled to work in the UK and pass a background and criminal record check which includes, but is not limited to, a review of driving licence records. Current Amazon employees are not eligible to be Delivery Partners.
What will I be delivering?
Delivery Partners mostly handle Amazon parcels, ranging from small letterbox-sized envelopes to boxes. In some locations, Delivery Partners can choose to deliver other items from, for example, supermarkets.
Amazon's coming for Royal Mail's business
Amazon has decided that the UK is small enough, tight enough and concentrated enough that having its own delivery network makes sense. That's going to pull the rug out from underneath Royal Mail:
Amazon is recruiting a small army of delivery drivers in a direct challenge to Royal Mail.
The internet shopping giant is urging entrepreneurs across the UK to set up businesses for as little as £10,000 as part of a major scheme to bring more of its operations in-house.
There's also a neat example of how difficult it's going to be for any response:
However, the Communication Workers Union, which represents postal workers, said: ‘The attempt by Amazon to replace well-paid, unionised Royal Mail jobs with the insecure employment model they promote is yet another example of why the dispute between the CWU and Royal Mail is so important.’
Well, yes, the CWU has a great deal of power within Royal Mail and none within Amazon. Therefore, we might have an inkling about how that strike is going to go.
But here's the problem
Royal Mail is saddled with that universal provision insistence. And legacy and unionised workforce. There's nothing wrong with unions per se, indeed there's much to recommend them. But certain of the British unions do make scaling back the size of the workforce, changing working practices and so on expensive. And yet, this is exactly what Royal Mail is going to have to do at just the same time that the union is being assertive. This does not bode well.
Plus, one of its major customers, Amazon, is gearing up to compete directly with it. And Amazon's already at the scale where it can support its own delivery network, and we know how the company is willing to invest in expanding the business.
I can't really see a way out of this for Royal Mail. I'm not about to say that it's going to go bust, as politically that's just never going to happen. But a vibrant future for the firm is hard to imagine. It has an archaic cost structure, plus it's about to lose a major prop of its current revenue model.
The investor view
That 15.5% yield sure looks attractive, but it's near impossible for it to last. Without the dividend, there's little reason recommend the stock. Avoid at best.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.