SPECIAL REPORT: Despite all efforts, City Link fails to deliver the goods

THEBUSINESSDESK.COM marks the fifth anniversary of the launch of its West Midlands operation in February 2015 and throughout its life the award-winning business news website has reported a catalogue of woes surrounding the City Link parcel delivery group.

Formally owned by facilities management and pest control business Rentokil Initial, the parent company would make regular announcements to the London Stock Exchange detailing the latest crisis surrounding its logistics business.

In March 2012 we reported Rentokil’s full year results had shown that the parcels firm made a £31m loss in the previous year due to declining revenues and poor productivity.

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

It revealed City Link had seen 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.

Alan Brown, chief executive of Rentokil said in that year’s results statement: “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.”

A new management team was expected to turn the business around but unfortunately it failed to arrest the decline.

The following March, Rentokil said that while there had been a slight turnaround in the ailing logistics business, the operation had still seen an operating loss of £26.4m. The only positive thing it found to say was that this was a 15.7% improvement on 2011.

The results statement showed that City Link had seen a 17% volume growth during 2012 and a 16% reduction in operating losses.

However, this was offset due by a fall in revenue per consignment of 10% following a focus on large Tier 1 Business to Consumer customers. Rentokil said its immediate priority for 2013 was to focus attention on retaining more profitable smaller customers.

On a brighter note, during Q4 of 2012 City Link revenue grew 9.1% from £88m in 2011 to £96m, while for the year as a whole the figure was £322m (2011: £307m), an increase of 4.8%. The revenue increase was attributed to the growth in online shopping.

However, Rentokil said that while new business was in line with expectations, declines in the smaller, higher margin Tier 2 B2B business had been disappointing.

“A focus on further improvements in account management and customer service is underway to better meet customer requirements and drive retention,” it said.

A month later the news broke that Rentokil had agreed to sell City Link to venture capitalist Better Capital, led by Jon Moulton (left).

Better Capital specialises in acquiring and turning around the fortunes of UK and Irish businesses, typically with a turnover of up to £500m. It does not focus on specific industry sectors instead it looks for businesses where its expertise can help. It works with a number of well known UK businesses including Jaeger, Spicers and Everest.

The deal saw Rentokil sell its entire share capital in City Link Ltd to Better Capital’s BECAP12 Fund for £1. It said there were no outstanding conditions required, so completion was effective immediately.

As part of the deal, Better Capital agreed to invest £40m in the business to complete its turnaround plan.

At the time, Alan Brown said: “I believe City Link has now turned the corner after five years of substantial losses. The business has made strong financial progress over the last two quarters, it now has a strong management team and we have found a very committed investor in Better Capital.”

The change in ownership ushered a more positive attitude amongst the senior management.

In May 2013 they promised customers would quickly see changes to the business.

Dave Smith, who headed up the management team at Coventry, had remained in post and said he had received a clear mandate to transform the customer experience across the firm’s range of services.

“This is great news for our customers and our colleagues. We will all benefit from the expertise of Better in business turnaround and from the certainty of funding the deal provides,” he said.

“My message to our customers would be that while in the short term it is business as usual, very quickly we will start to see the access to new capital, and the expertise Better bring to bear, accelerating the investment and improvements we are making in our customer experience.”

By June 2013, City Link had launched a recruitment drive for 80 new young apprentices to join the business the following September.

The firm began recruiting from across the country and said it was looking for enthusiastic and motivated people seeking a career within the industry to work in both its depots and customer contact centres.

Successful applicants were offered a salary above the minimum wage and the promise they would embark on a year-long training programme in which they would earn while they learn.

The expansion continued and in October 2013 City Link said it was set to create more than 700 seasonal jobs as it geared up for a busy final quarter.

The parcel carrier’s Peak Planning team based the employment requirements on volume forecasts as the business geared up for Christmas.

The strategy was likely to see 200 additional warehouse staff recruited, along with an additional 450 drivers and 65 operations staff, it said.

To ensure the logistics business continued to operate successfully, the company shipped in more than 200 tonnes of rock salt, booked an additional 300 fleet collection and delivery vehicles, 130 more trailers, 32 additional forklift trucks and 1,000 extra hand-held scanners.

Such was the scale of the operation that the company said it intended to open an extra site in London to relieve pressure on its existing three sites in the capital. To ease the burden further, the firm said it would also be moving postcodes in three other depots into neighbouring sites to utilise spare capacity.

Additional resources were allocated to the firm’s control centre in Coventry, which was upgraded when the firm consolidated operations there following its decision to quit its distribution hub in Wednesbury (left), to ensure all eventualities over the Christmas period could be dealt with successfully.

In a statement which now seems somewhat incongruous, Louise Whitehouse, Head of Network Support & Service, City Link said: “Christmas is a busy and stressful time so City Link is doing everything in its power behind the scenes – including contingency planning – to ensure that both consumer and business deliveries arrive safely and on time.”

It now transpires that by September this year, Better Capital had realised the City Link operation was in serious trouble.

The venture capitalist said the parcels firm had continued to demonstrate a lack of profitability and various options to maximise the value of the investment were being considered.

At the time, Better Capital took the decision to write down by 50% from £40m to £20m the value of the business – the value being determined on an estimated liquidation valuation basis.

It said in a statement to the LSE: “Following a very detailed review of City Link’s strategy and prospects, including unsuccessful discussions with a number of counterparties to effect a sale on a going concern basis, the GP concluded that it was inappropriate to commit further capital from the 2012 Fund. Accordingly, in light of continued substantial losses, City Link could not continue as a going concern, which resulted in the appointment of (administrators) on December 24, 2014.”

So, even the best efforts of one of the leading turnaround specialists were not enough to secure the operation’s future and 12 months on from those exciting expansion plans, the company’s head office and transport hub in Coventry; its three other transport hubs in West Drayton (Heathrow), Peterborough and Warrington, and its 53 depots throughout the UK now face imminent closure and majority of the firm’s 2,727 workers have made redundant.