Post offices boost WH Smith profits

As the government continues with its planned closure of crown post offices across the UK, WH Smiths' trials to launch the post office franchise in existing stores have proved successful according to Luke Newman, manager of F&C Special Situations Fund.

Newman who recently met with WH Smiths' chief executive Kate Swann, said under her direction the stationer's move away from entertainment back towards stationary and books and most recently post offices, has seen the share price rise from 370p in December last year to a high of 470p in May 2007.

"When Kate Swann took over at WH Smith, the entertainment business accounted for 25% of sales but given the increasing pressure from online competition, the company took the decision to reduce its exposure to this space – such that it now accounts for 16% of turnover with a target reduction of approximately 5% of sales that should be achieved over the next three years. WH Smith has refocused its proposition to capitalise on its legacy retail expertise, primarily in books and stationary and has launched trial post offices at 6 branches," said Newman.

Newman said the trials were successful and WH Smith had announced plans to launch a further 70 post offices across existing stores.

"The post office franchise makes excellent business sense. WH Smith can use the space previously occupied by entertainment, typically 15-20% of its store space, to house the post office counters without the need to spend money on expansion. As well as generating profit from each book of stamps or tax disk they sell through the post office, there will also be cross-selling opportunities. So, for existing WH Smith customers there are additional services on offer and for post office customers, there is a chance that after completing their tax disk for example, they will stop to buy a newspaper or an item of stationary. The cross-selling potential creates a win-win situation" .

"In the trial period before Christmas, the reduction in entertainment sales was more than offset by the increase in business from cross-selling. In the quieter period, post Christmas the increased footfall has continued - driven we believe by word of mouth," he added.

WH Smith has also increased its exposure at travel sites, with new branches at airports and more recently motorway service stations.

"These offer a very cost effective business model, allowing growth without much capital investment. WH Smith has proven that its change of strategy is working well, and this is a recovery story which we continue to hold a meaningful investment in." concluded Newman.