British parcels carrier City Link may slump into the red this year after an “unacceptable” 2007performance marred by poor management, weak integration and low organic growth, parent group
Rentokil Initial warned today. The group’s share price slumped as much as 24% on its profitwarning.Rentokil said it last week sacked City Link boss Michael Cooke, has halted the depotintegration programme designed to merge locations with those of Target Express, which was acquiredin late 2006, set up a new sales team and has undertaken measures to improve customer service.
City Link, which is one of Britain’s largest express parcel companies, increased revenues by95.5% in 2007 to GBP 417.1 million (EUR 547.5 million) due to consolidation of Target Express andformer franchisees. But organic network turnover rose only 1.9%, mostly due to poor Q4 volumes. Itsoperating profit dropped 44.3% to GBP 19.4 million, including a Q4 loss of GBP 13.4 million.
Doug Flynn, Rentokil Initial CEO, described the performance from City Link as “unacceptable”.“Actions are in hand to improve the situation but this is a trend business and improvements willtake time to come through. This means that 2008 adjusted profit before income tax for the group isexpected to be significantly lower than 2007 and will be heavily dependent on the performance fromCity Link,” he warned.
City Link’s trading in the first weeks of the year remained poor and the trends seen in thefourth quarter appeared to be continuing. In January, City Link was loss making and its adjustedoperating profit was £4 million lower than in January 2007. “As a result, it is possible that thebusiness may not trade better than breakeven levels in 2008,” Rentokil Initial said.
Commenting in detail on City Link’s business performance during 2007, Rentokil Initial saidthe integration of Target Express “tried to do too much too quickly without establishing a soundbase. This had the effect of impacting service. In addition, some of the actions we undertook, mostnotably with the former City Link franchises, were in the wrong direction. The move away from localto centralised customer account management, for example, had a detrimental impact on customerrelationships resulting in lower volumes going through the business and a modest increase incustomer attrition.”
The underlying problems were hidden by higher business from existing customers but when theirvolumes dropped in Q4, this impacted immediately on revenues and profits, Rentokil said in its 2007annual report. “The poor fourth quarter trading was due more to poor management of the businessthan to City Link’s markets.” But revenue per consignment (RPC) also dropped and the expectedpre-Christmas peak did not materialise.
In response to these problems, Peter Cvetkovic, the former CEO of Target Express, replacedMichael Cooke as Managing Director of City Link on 18 February 2008 with a clear focus on restoringthe profitability of the business, Rentokil said. Other measures include freezing the depotrationalisation programme until systems, processes and account management had been improved, a newsales team and a new account management structure to build direct relationships between customersand their local depots. The mid-year service issues had been resolved and the continuing rollout ofhand-held, real-time proof of delivery equipment was generating faster and better serviceinformation.
“Although we have made tangible progress in addressing the problems that have been discoveredsince the trading downturn at the end of last year, it is clear that there is much to do to restorethe enlarged City Link business back to its former profitability,” Rentokil said.
