Royal Mail is turning a profit - but can it halt decline in DM?

If you think ITV has issues, spare a thought for another of the UK's large media owners, Royal Mail. What with a pensions deficit approaching £5bn, declining direct mail volumes and the end of its monopoly in January, you could argue that Royal Mail executives face more problems than the recently nabbed Mafia don "Bernie the Tractor".

For the six months to 30 September 2005, Royal Mail Group posted hefty profits of £159 million, a rise of 20 per cent. Yet on the letters side of the business, falling volumes led to a 3 per cent slide in profits.

Royal Mail's chief executive, Adam Crozier, and chairman, Allan Leighton, are arguably doing a sterling job in tough conditions, but it's hard to see things getting easier for them.

The problem for Royal Mail is making its medium seem more attractive to advertisers. And this month's increase in the price of a first- and second-class stamp, and the subsequent knock-on increases in Royal Mail's Mailsort business mail tariffs, is hardly an incentive to advertisers to pump money into a medium they're already investing less in (despite a fourth-quarter recovery, there was a 3.9 per cent decline in direct mail expenditure during 2005, with mail volumes down by 5.3 per cent).

Though Royal Mail has behaved admirably in some ways in recent years, positioning itself as a responsible media owner with investment in solutions for advertisers, its Pricing in Proportion proposals (due to be introduced in August) have upset some advertisers and agencies, who argue that it will work against the medium and potentially increase costs for advertisers.

Royal Mail is arguably not to blame for this month's price hikes - some at the company were said to favour even higher pricing for consumers rather than hitting businesses in the pocket, but it is pretty much hamstrung by the decisions made by the regulator Postcomm, which has put a cap on stamp price increases ahead of 2010.

The big concern for advertisers surrounds the possibility that if the pension deficit worsens and/or direct mail volumes continue to fall, there is flexibility for Royal Mail to continue to increase prices. And, at a time when there will be focus on the impact of Pricing of Proportion on mail response rates, advertisers could do with more stability.

Some of this is out of Royal Mail management's hands, but once again the company faces a struggle to convince advertisers that have a widening array of options via digital of the strength and relevance of its medium. Much will depend on a series of new product ideas that are currently being "hot housed" by the brains at Royal Mail. Don't hold your breath, though - these aren't likely to see the light of day for some time yet.