City Link failing to deliver for parent Rentokil after £31m loss

COVENTRY-based logistics firm City Link is failing to deliver the goods for owner Rentokil Initial after the group’s full year results showed the parcels firm made a £31m loss last year due to declining revenues and poor productivity.

As a group, Rentokil has seen full year revenue rise 1.9% to £2.54bn (2010: £4.96bn) at actual exchange rates. Although adjusted operating profit declined 6.1% to £224.7m (2010: £239.3m).

However, it was the performance of City Link that really disappointed, with lower revenue per consignment and poor productivity resulting in increased losses. This came despite the business being earmarked for turnaround during 2011.

Despite operational improvements during 2011 the business made an operating loss of £31.3m, with revenue down 8.5% to £306.9m. This reflected a 3.5% volume decline and 5% decline in Revenue Per Consignment (RPC). Losses were also impacted by slow progress on cost saving initiatives and productivity.
 
RPC decline was driven by a loss of smaller and medium sized customers in Q1 2011 predominantly due to poor service quality in December 2010, a very competitive market and a lack of investment in account management.

Given the poor performance of the business in 2011 Rentokil has agreed to write off its intangible assets at the end of 2011. The total write down amounted to £146m, of which £108m related to goodwill and £38m related to customer lists.  

Alan Brown, chief executive of Rentokil Initial, said: “City Link continues to disappoint.  While Q4 volumes grew 8% and revenue by 0.5%, losses were £3.1m greater than Q4 2010 due to low productivity, driven in part by conservative resource planning for the Christmas period.  

“The financial performance of the business will remain poor in H1 2012, however, we remain committed to resolving the key revenue and cost control issues facing this business. I am encouraged by the immediate impact of the new City Link MD and FD and by the quality of the improvement plan currently being implemented.”    

The new management team, recruited for its knowledge of the UK Parcels industry, is beginning to implement a series of changes to the business. The recovery plan is expected to show material results by the third quarter of 2012.  

The plan targets productivity savings in excess of £20m primarily through driver productivity, supported by route and round optimisation and a move to variable pay for subcontractors.   There are also initiatives to reduce trunking, warehouse operations and back office costs.

Rentokil said it had invested in both account management and customer service for City Link during the year and as a result it was now gaining momentum in winning new business. It exited the year with an additional £25m in annualised contract sales and the new business pipeline remains in excess of £50m.

However, the firm said there was now a need to increase prices after years of serial decline in the industry as a whole.