City Link to diversify, as Rentokil says sell-off is not priority

UK parcel carrier City Link is intending to branch out more into postal business and the delivery of packets, as it looks to move into profitability next year. But, the company’s parent Rentokil Initial said the sale of its loss-making parcel delivery division was not its focus at present, although an attractive offer would be considered.

Rentokil, which sees its core business in pest control and hygiene industry services, issued a trading update on Friday in which it said City Link had improved its profitability in the third quarter, despite an “extremely poor” August with loss of certain customers, and with the Olympics hitting volumes.

City Link has been working through a recovery plan to turn around its losses over the past 12 months, and this year looks set for revenue growth for the first time in five years.

In the year to date, revenues are up 3.2% to GBP 225m, with parcel volumes up 15% and losses down by 4% to GBP 24m. However, operational costs are also up 2.6%, with revenue per consignment down 10%.

Executives said the company was still “on track” to achieve profitability in 2013.

Along with a continuation of the recovery plan, particularly in the area of customer service, and a likely price increase in 2013, City Link managing director David Smith said one of the key strategies for next year would be to diversify the company’s revenue sources.

The company currently generates more than 80% of its revenues from domestic parcels.

Pushing for new business in the postal sector – particularly the delivery of franked mail from existing business customers – as well as more ecommerce packets and an expansion of international parcel exports, with partner DHL, would make for a more successful business model, he said.

In particular, City Link will aim to build on its existing parcel delivery customers as a platform to grow its postal and international parcel services, said its MD.

“This is the first year in the last five that City Link has achieved year-on-year revenue growth. That will continue to the end of the year at a modest level, but nevertheless that is turning a corner,” said Smith. “The challenge now is: the mix of customers is not where we need it to be. We need to improve the share of the wider wallet of value-added services that we get from our extensive range of customers.”

City Link Sale?

“Clearly if an opportunity came up… obviously we would look at that…”

Press speculation over the weekend has suggested City Link could be sold by Rentokil. The company is interested in focusing more on its pest control divisions, recently extending itself through acquisition in that direction.

But Rentokil CEO Alan Brown discounted any thought of closing down City Link, while the suggestion of a sale appeared merely hypothetical at this stage.

He said: “I have always said with the entirety of our [Rentokil] portfolio, clearly if an opportunity came up where we could streamline the portfolio to focus more on the pest and hygiene care side of the business, obviously we would look at that. But that is not what we are focussing on.”

City Link executives briefed investors to the fact that the UK parcel market is still ripe for consolidation, even assuming a UP-TNT merger happens, with around 15 players involved at present – a generally higher number than in equivalent European countries.

But the warning was added that of the two major UK parcel carriers currently struggling with their profitability – implicating Yodel as well as City Link – a big reason for their struggles has been the difficulty of integrating networks following key mergers. Yodel, which recently lost its top executives, is still coping with bringing together its old Home Delivery Network infrastructure with the DHL Express UK network acquired in 2010.

Brown said capacity within the UK parcel market would be at a premium over the next 12 months, which provided a “good reason for consolidation now”.

“I don’t think there is any issue about the strategic sense of consolidating – the challenge is, can you do it without making the operations go south,” said the Rentokil Initial CEO.

Smith suggested two of the biggest e-tailers of them all, eBay and Amazon, were looking at changing their delivery arrangements in response to the current capacity constraints in the UK market. He suggested eBay could decide to set up its own parcel aggregator system akin to Parcel2Go, while Amazon is thought to be looking at the idea of buying or establishing their own carrier.

“I can see it very clearly, and you probably will see it early next year,” he suggested of the Amazon possibility.

Diversification

City Link currently has 60% of its business from business-to-business parcels, 40% from business-to-consumer deliveries, with the shift moving towards the less profitable B2C.

Smith said going forward his company would target more packets from rivals Royal Mail and Yodel, as well as parcels from retailers, including a key opportunity of Click and Collect deliveries – consumers ordering products for collection at their local brick-and-mortar retail store.

But there were also two other key areas City Link was now targeting for expansion: franked mail delivery, taking market share from Royal Mail, and international parcel exports, an area driven by online shoppers from overseas.

Continued on page 2 »

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