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

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Smith said the franked mail market was “under served” at the moment. “There is an opportunity for us to expand into this area through using our own collection capabilities for customers we are visiting anyway,” he said.

Bulk mail collection and sorting was too low-margin for City Link’s interest, but Smith said the company could under cut the 30-45p per item price of processing franked mail, charing perhaps 20-25p before passing on processed mail to Royal Mail for final delivery, paying Royal Mail 17-20p per item.

“In order to do that we have to have a better sortation capacity ourselves so that when mail comes to us, we are able to present it properly to Royal Mail to get these cheap rates of delivery,” said the City Link managing director, adding that investors could expect this to happen during 2013.

City Link said international exports – parcels sent overseas and cross-border ecommerce fulfilment – was a market “growing very quickly” at present, by as much as 60% a year.

Executives said working with partner DHL the company would aim to carve out more of this market.

Finance director Rob Peto said City Link was “too reliant” on domestic parcels, which were “profitable but lower margin” compared to international exports.

Peto said: “International is below 5% of our product mix, the more profitable carriers would have in the region of 20-25% mix in this particular area. It’s a huge opportunity for City Link going forward.”

Price increases

Meanwhile, City Link will be continuing to develop its domestic parcels services, with an eye to successes enjoyed by rivals such as DPD, and its industry-leading estimated time of arrival tool, Predict.

But with UK parcel processing capacity currently constrained, it said further price increases are on the way.

Despite the recent announcements of investment in new parcel capacity by rivals including Royal Mail, Parcelforce Worldwide, Hermes and DPD UK, along with some investment in new capacity at City Link itself, Smith warned that planned growth in new UK capacity as a whole is not enough to match expected growth in parcel volumes in the UK.

That means next year should see further increases in parcel shipping prices, beyond those seen this year, which have included a 30% hike in Royal Mail rates, double-digit increases at Yodel, a 3-4% increase in City Link rates, and increases of 5-7% at other carriers.

Smith said: “Certainly for 2013 with many members of the industry still not making money and with capacity challenges out there, we will see a continued hardening of prices.”

Larger UK parcel shippers – whose large volumes have traditionally meant lower prices-per-consignment, and therefore lower margin for carriers – will face some particularly steep price rises, the City Link MD suggested.

“For some of the bigger tier one customers and some of the e-tailers facing additional costs, we would see their prices hardening fairly significantly,” said Smith.