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Amazon’s recent delivery expansion is bad news for Royal Mail, says UBS

The Swiss bank has highlighted the recent growth of Amazon’s delivery business in the UK as a key factor in why Royal Mail is struggling to charge more for delivering parcels

amazon parcels
Amazon has more than doubled its share of the UK delivery market since 2013

UBS has slashed its price target for Royal Mail PLC (LON:RMG) as competition from e-commerce giant Amazon.com Inc (NASDAQ:AMZN) keeps a lid on parcel prices.

Amazon’s share of the UK delivery market has more than doubled over the past five years to 7% last year, up from 3% in 2013.

Last year it delivered 20mln more parcels than it did in 2017 and now has a similar UK coverage to other, more established delivery firms.

READ: Deutsche Bank cuts Royal Mail price target

“We believe part of the reason why UK parcel prices are not rising…is partly down to the number of competitors in the market,” said a note from analysts on Monday.

The Swiss bank had expected parcel prices to at least stay the same over the next few years, although it now reckons they will fall 1% a year from 2020.

Separately, UBS also notes that Amazon’s delivery service is much cheaper than Royal Mail for parcels over 2kg in weight.

“We believe that in order to become competitive with [Amazon] (and its peers) at heavier parcel weights RMG will need to find ways of reducing its cost of parcel fulfilment.

“How to do this is likely to be a key part of the strategy review underway and should be addressed in the Capital Markets Day to be held after its results in May.”

Price target slashed

Despite this, the analysts highlight that Royal Mail still has the best reach of any UK delivery company: 99.9% of the population is within 30 minutes’ drive of a Royal Mail delivery facility.

“For a truly universal service RMG remains a key operator and we would see Amazon remaining a key customer for the foreseeable future,” UBS added.

Still, that wasn’t enough for the analysts to maintain their previous price target, which they have chopped from a bullish 354p right down to 282p. They did repeat their ‘neutral’ stance, however.

Royal Mail shares were up 0.4% to 272.4p on Monday morning.

Quick facts: Royal Mail PLC

Price: 236.7 GBX

Market: LSE
Market Cap: £2.37 billion

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