The Royal Mail (LSE:RMG) share price has been on fire lately. Multiple lockdowns in 2020 led to a surge in online spending. And with it came a rapid rise in parcel deliveries.
The FTSE 100 stock benefited from this trend. Its parcel delivery volumes grew by 33% compared to 2019, pushing overall revenue up by 37%. So it’s not surprising that the Royal Mail share price has surged by 150% in the last 12 months. But would I still buy the shares today?
Royal Mail is growing, and so is its share price
The recent boost in business is unlikely to last forever. After all, non-essential stores should reopen in April and could lead to a reduction in online shopping. Yet even after the pandemic is finally over, I believe that a good chunk of increased online spending will remain. And the management team at Royal Mail seems to agree.
The business has just begun the construction of its largest parcels hub in the UK. The new facility will be able to process over one million parcels every day. And the firm has also hired Beumer Group to build a fully automated parcel sorting (APS) system that will drastically improve this new facility’s efficiency.
Another encouraging sight is that an agreement has finally been reached between management and the Communications Workers Union. There has long been tension between the two parties that has, in my opinion, impeded Royal Mail’s full potential. To see the matter resolved with both parties happy is a huge step in the right direction. At least that’s what I think.
Royal Mail is not the only fish in the pond
The parcels delivery market is growing fast. And Covid-19 has undoubtedly helped accelerate this trend. However, Royal Mail hasn’t been the only beneficiary. There are many courier services available. This means the business has a serious number of competitors that it needs to fend off while having virtually no pricing power.
Its established delivery network, and infrastructure does give it an upper hand. But, as fulfilment centres and courier warehouses become more common, this advantage may no longer be sufficient to remain ahead. Therefore, I believe the key to success comes down to operational efficiency.
Covid-19 has made boosting door delivery efficiency quite a challenge due to social distancing measures to ensure everyone’s safety. But Royal Mail has been focusing on increasing warehouse efficiency with its new APS system that may give it the edge it needs to stay ahead of the competition.
Yet this system is expensive and won’t be usable until the new parcels hub is finished in 2023. Delays in construction or sudden declines in parcel delivery demand could drastically impact the business and, with it, the Royal Mail share price.
The bottom line – a good stock to buy?
Overall, the business looks like it’s in good form and over the long term, parcels delivery should stay buoyant.
However, it’s not a stock I’m personally interested in investing in. The parcels delivery sector is incredibly competitive, and subsequently, the business’s economic moat is just too narrow for my tastes. Perhaps when the new facility is completed, I may change my tune. But for now, Royal Mail is on my watch list but not on my buy list.
