City Link reduces losses but acknowledges concerns about small-customer attrition

UK parcel delivery firm City Link reduced its losses in the second quarter to 30 June and claimsits restructuring plan is on track to deliver profits in the fourth quarter, although it remains

Parcel volumes for City Link grew by 14% in the second quarter, although changes in customer mixtempered the benefits of this, with Q2 revenues up by just 5.3% on the prior year. Losses in thesecond quarter were reduced by 18.3% to £5.8 million.

For the first half of the year, City Link losses increased to £18.5m, on revenues up £5m or3.5%, driven by increased volumes of 14%.

Speaking at today’s interim results conference for parent company Rentokil Initial, CFO JeremyTownsend said the 14% increase in volumes for City Link was offset by a decrease in revenues perconsignment of 9%, due to an increase in the number of larger B2C customers. But on theproductivity side, he said a good start had been made with the implementation of the company’s newvolume-based driver contracts, “supporting a significant reduction on direct delivery costs”.

Savings had also been made in trunking and property costs.

He said City Link was well prepared for the Olympics, and there had been minimal disruption todate due to congestion. “However, the initial indications are that sales volumes have beenadversely affected by the tournament,” he observed.

He said assuming the current slowdown was a temporary phenomenon, the company expected a furtherimprovement in its financial performance in the third quarter, and a small profit in Q4.

Rentokil CEO Alan Brown said City Link’s turnaround involved around 20 initiatives, of which 70%were planned to be in place by the end of the first half of the year, and most of this had beenachieved. For example, the new management team was in place, and the company had been able to putthrough some price increases at the beginning of the second quarter, which “have been executedwell”, he said.

“But the big contributor to the turnaround this year has been the move to paying owner-driverson the basis of parcels delivered rather than days worked,” he continued. “That has now beenlargely implemented. We had a few bumps on the road in Q2 as we were doing it, but is now goingpretty well and we are now pretty close to the target cost rates we set ourselves for thefinal-mile delivery, which is the biggest part of our cost base.”

Brown said that improvements in the company’s line-haul efficiency related to the cost of CityLink’s central warehousing and its trunking fleet. “We are a bit behind in that, but that is asmaller contributor to the overall turnaround in productivity this year than the owner-driverinitiative and we hope to catch that up by the time we get to October,” he added.

He said customer-care initiatives had been taking place since last November and were nowconducted on a regional basis rather than having them in every depot, which is also bringingsavings. “That is on target,” Brown said.

“Overall the underlying initiatives are going well,” he continued. “If we look at the risksgoing forward in the business in the next three to six months, we believe that the productivityagenda is on track and we are reasonably confident that we will meet productivity targets that weset ourselves.”

For example, company had met its target for signing up new business. “That looks very robust,”said Brown. “The area that I think is a little bit uncertain is the general economic outlook andthe rate of volume attrition. We have certainly seen volumes down in the last 10 days by about5-10%, but we do anticipate that this is a very specific issue related to the general attention ofthe British people being on the Olympics. We hope things will come back once we are through thenext 10 days or so.”

Brown said it was possible to pinpoint the day when volumes went down, and it coincided with theannouncement of the opening of the Olympic Route Network in London, on the Wednesday before theopening ceremony. “But we are reasonably confident that this will pick up again once we get throughthis period,” he said.

Brown said City Link had achieved an improvement of 4% in its customer care rating, theso-called ‘net-promoter score’, but acknowledged that service levels were still not good enough incertain areas, and this has been leading to attrition of some smaller customers.

“I am not saying that the ‘customer voice counts’ score is satisfactory, but it is going in theright direction,” he said. “We have been giving very good service to our large customers and wehave won a lot of business, with customers like John Lewis, and Marks & Spencer, and ourbusiness with these customers is growing. But our account management and service consistency withsmaller customers is not good enough. We know that and we need to sort that out. We have had tofocus on the essentials we are working from the top down. We have got some really good accountmanagement to the top customers and we need to roll that down the organisation, although it willtake time.”

But he insisted that this issue was “absolutely number 1” on City Link MD David Smith’s agendaat the moment.