The collapse of UK parcel delivery firm City Link was due to its failure to successfully find aniche in the market and adapt to changing customer expectations rather a correction of market
overcapacity, industry experts have told CEP-Research, although customers in some sectors may besignificantly affected by its departure from the market.Commenting on the reasons for City Link’s failure, Patrick Wall, CEO of multicarrier parceldelivery platform MetaPack, told CEP-Research: “To survive and prosper, companies must be best inclass around any chosen service proposition. To achieve this in a competitive market requires alevel of specialisation. City Link’s proposition got lost in the middle – not really premium, andnot price competitive. It was insufficiently differentiated.”
He did not believe that Amazon’s expansion into UK parcel delivery was a contributing factorto the demise of City Link. “Plenty of other UK carriers are thriving,” he observed. Neither was ita result of general market overcapacity, he argued, adding that “demand was just moving to carrierswho were better suited to purpose”.
Wall also said there was unlikely to be further major casualties in the UK parcel deliverymarket. “It is a highly innovative and competitive market, with great carrier services. This wasnot a correction, it was competitive tension,” he said.
A senior executive at one UK parcel delivery firm estimated that the UK parcels market had asurplus of capacity for 70 per cent of the time, with capacity in balance around 20 per cent of thetime and an acute shortage of capacity for around 10 per cent of the year.
But postal and e-commerce consultant Richard Wishart, managing director of DeliveryManagement, agreed with Wall that capacity issues were not the cause of City Link’s failure. “Ithink it will be an object lesson to the industry which highlights the need for innovation,restructuring, and agility,” he told CEP-Research.
“The City Link business strategy was based on a fairly extreme internal franchising model.The built-in inertia of this model made it very difficult for the company to innovate successfullyin the first wave of omni-channel e-commerce that we saw this year.” He added that with a long-termloss-making business, there was also no money for investment, “and it is really difficult to takemajor costs out of a franchise model”.
Wishart described the UK parcel delivery market as “highly commoditised, with a very low andhighly competitive average parcel price”. He said there was plenty of business to be had in thisyear’s peak period, “but if you lose money on every parcel – as City Link appeared to do – you arestill going out of business.”
But he stressed the need for innovation and investment in order to adapt to the rapidlyevolving e-retail delivery market. “It is very difficult for a long-term loss-making company toinvest adequately in the network redesign and tracking technologies that are required foromni-channel e-commerce,” he said.
“Very few traditional parcel CEOs even understand the enterprise architectures that will beneeded. At Post Expo this year, I predicted that companies would need to ‘Innovate or Die’ and Ithink that City Link has been the first to die in what will be a major restructuring of the parceldelivery industry in the UK.”
While Amazon’s moves into delivery in the UK may not have been a defining factor in terms ofcapacity, Wishart believes that Amazon is making the right moves with regard to omni-channele-commerce, with local warehousing and scale. “I think we only saw the opening moves on theomni-channel ‘chess board’ this year – things will change dramatically next year,” he predicted. “Amazon will be a significant player, but not the only one.”
He also said collaboration would be a major factor and believes Royal Mail’s CEO made a majorpolitical blunder this autumn when she labelled her biggest customer Amazon as her competitor. “Theold extreme competitive model no longer works and success will go to the companies that are bestable to collaborate,” Wishart said.
Elmar Toime, director of E Toime Consulting, said City Link’s market share was insufficientto have a major impact on market capacity and pricing, something that was also a factor in itsdemise. “It goes without saying that the UK parcels market is highly competitive. Service – whichmeans a whole range of things – and price competitiveness are the demand side factors,” he said.
“At City Link’s small market share, they would have to be price and service followers. So,unless cost structures were low, it would be hard to make money or to dig yourself out of theoriginal company problems.”
He agreed with Wall that finding a place in the market was vital: “I don’t think failure ofany parcel company is inevitable, given the growth and opportunity in the parcels market,” saidToime. “However it is a fragmented market and so if you are a small player you need at least aniche advantage: specialist sector, best in class cost model, large-sending customer loyalty.”
Toime also doubted whether new competition from Amazon was a major factor, although he saidit was telling that Amazon had chosen to start its own delivery business from scratch rather thanbuying City Link at near-zero cost. “Obviously they had a view they could do better – price,control, employee versus contractor, unit labour cost,” he observed.
“Clearly the company has been in trouble for a while, so I would guess it’s not anAmazon-volume problem. And in any event, that City Link even folded in the face of the seasonalpeak suggests bigger issues.”
Toime did not think City Link’s departure was necessarily significant to the rest of market.“The volume share is small and volumes will be happily picked up by others,” he said. “Perhaps anynew investment that was being planned by existing or new players might be held back while thefallout if any works its way through the market.”
He continued: “I think competition remains strong, so I can’t see why prices would firm. Thegood players try to adjust capacity dynamically, so I don’t even think capacity will be influencedmuch.”
Toime doubted whether other delivery companies will have seen any significant market changesyet “unless there are large City Link customers that will now have to tender out for new carriers”.However, Wall said there had been some observable migration to other carriers within the MetaPacksystem.
City Link delivered around 60 million parcels a year – predominantly in the B2B market,despite recent efforts to move into B2C. Parcel industry sources estimate that the UK B2B marketequates to about 1 billion parcels per year, including click and collect, with the B2C market inthe UK amounting to a further 750 million parcels – plus approximately 160 million cross-borderitems.
However, a source at one leading parcel firm told CEP-Research he believed the collapse ofCity Link would help parcel delivery prices in the UK to strengthen in 2015, particularly in someniche sectors. He observed that City Link had a particular strength in delivering larger, bulkyitems – such as flat-pack furniture, estimating that it was responsible for around one third ofthat market.
While the network of other carriers could be reconfigured to take this traffic, he said thiswould lead to significant increases in costs. “While City Link may have delivered these kinds ofparcels for perhaps £4.50, other general parcels companies might require more like £15 to make thesame delivery profitable within their system,” he observed.
City Link’s use of delivery ‘cages’ also meant they were favoured by customers with multipleshipments within one consignment, for example desktop computer systems. While other carriers suchas UK Mail also had this capability, it was unclear whether they had sufficient capacity to take onadditional customers, he observed. UK Mail declined to respond to questions regarding theimplications of City Link’s demise.
Toime said he did not believe that the City Link experience was indicative of wider marketproblems. “In 2015, last-mile delivery will continue to grow with e-commerce, but we will seegrowing parcel locker, parcel shop, and click and collect initiatives temper last mile deliveryvolume growth,” he observed.
