Online retail giant Amazon’s own delivery service will more than halve the growth potential for Royal Mail’s parcels business, the former state-owned British company said, sending its shares lower.

Parcels make up half of Royal Mail’s turnover and the development of online shopping has made them central to the company’s prospects when letter volumes are in decline.

However, competition from the likes of TNT, Yodel, and a new delivery service from Amazon, which was Royal Mail's biggest customer accounting for 6 per cent of sales, has hampered progress and hit revenues.

Royal Mail warned that Amazon's plans to deliver more of its own packages would cut growth in the British parcels market for it and rivals from an annual rate of 4-5 per cent to 1-2 per cent for at least two years.

The squeeze showed in a 21 per cent decline in Royal Mail operating profit for the six months to September 28th, although the figure of £279 million was not as bad as many analysts had feared.

Shares in the firm, sold off by the British government in October 2013, fell more than 8 per cent to 430.8p in morning trade.

The privatisation prompted criticism that taxpayers were shortchanged after shares were floated at 330p but soon soared by as much as 87 per cent.

Moya Greene, Royal Mail’s chief executive, said Amazon’s arrival and increased capacity from rivals were having a dramatic effect on its market.

"When an online retailer of the size and scale of Amazon decides to build out its own delivery network, that changes the market for everybody," Ms Greene said, adding that Royal Mail was sticking to its full-year forecasts.

Jefferies analyst David Kerstens said the parcel outlook added to the investment risks for the firm, which include falling letter volumes and regulatory disputes.

“The outlook for the parcel market is worse than expected... which implies parcel revenues would remain stable at best,” said Mr Kerstens who rates the stock as “underperform”.

Royal Mail, which remains Britain’s dominant postal company said the amount of UK parcels delivered grew by 2 per cent in the six months but that pricing pressure pushed revenue down 1 per cent. Its letters business saw revenues rise 1 per cent, with volumes down 3 per cent, more resilient than expected.

Reuters