Lessons to learn from City Link
As the prospect of creditors getting any money back dwindles, Sara Yirrell examines what went wrong and what other companies should bear in mind
City Link was around for more than 45 years, and the courier firm’s green and yellow livery was instantly recognisable on the streets and roads of the UK.
So when the company went into administration on Christmas Eve last year, the industry was left asking many questions, and the firm’s 2,700-plus employees were left in the dark over their fate.
More questions were raised when it was revealed that the joint administrators, Ernst & Young (EY), had failed to find a buyer for the business, despite an offer appearing from an unnamed consortium, which the administrators rejected because the interested buyer offered no money upfront and undervalued the assets to be acquired.
By New Year’s Eve, 2,356 people out of 2,727 had been laid off as the company was wound down and customers were reunited with their parcels. Or not, in the case of many people. So what went wrong? How did a company that had recently received a cash injection of £40m from Better Capital, after it bought the company for the princely sum of £1 from previous owner Rentokil in April 2013, go so spectacularly wrong?
Admittedly, the firm had been suffering financial losses for the past two years, recording a £14m loss for the year ending December 2013, and a £27m loss the previous year, but having secured such a bulky investment by Better Capital, its future was looking brighter.
However, in the words of Hunter Kelly, joint administrator to City Link: “[The company] had incurred substantial losses over several years. These losses reflect a combination of intense competition in the sector, changing customer and parcel recipient preferences, and difficulties for the company in reducing its cost base.”
He added: “The strain of these losses became too great and all but used up Better Capital’s £40m investment, which was made in 2013 and intended to help to turn around the company. Despite the best efforts to save City Link Limited, including marketing the company for sale, it could not continue to operate as a going concern and administrators were appointed.”
As EY began the unenviable task of racking up the hours picking through the City Link carcass, it emerged last month in an interim EY report that there was “no prospect of any funds becoming available to unsecured creditors of the company”.
More than 100 firms were left out of pocket to the tune of a combined £30m, including IT channel players such as Sungard Availability Services (£333,000), Vodafone (£323,000), Virgin Media (£224,000), Spicers (£62,000), Kelway (£48,000), Bytes Document Solutions (£36,000) and Secon (£31,000). Unfortunately, none of the creditors were keen to talk to CRN about their situation.
The report also revealed that HM Revenue & Customs was owed more than £5m, and the total amount owed to former employees amounted to £1.28m – taking into account unpaid wages, holiday pay and unpaid pension contributions.
So crucially, where did the company go wrong?
The logistics market is becoming increasingly crowded and cut-throat, with many firms forced to carry the cost burden due to customers not wanting to pay increased delivery costs.
CRN spoke to several industry experts to get their take on the situation and see whether there was anything the company could have done to avoid its demise and, crucially, what lessons others can learn from City Link.
Siamac Rezaieazadeh, head of strategic accounts at vendor OpenMarket, said: “In a situation where competition is driving prices to unsustainable levels, companies are faced with two options: raise prices, or reduce operating expenses to increase efficiency. In the logistics sector, each last mile of a missed delivery costs the company an average of £6.50. This expense can be avoided through implementation of timely communications with customers to create a more agile delivery force.”
Similarly, Matthew Napleton, marketing director at data analytics vendor Zizo, said knowledge of your cost base is vital.
“The act of delivering a parcel is a complex business, with many different working parts that need to be in sync to ensure that the customer receives their parcel on time and undamaged. Understanding where there are issues in the pipeline can be difficult, as can understanding where there is slack,” he said.
“Cutting costs by cutting corners leads to delays in delivery and reduced customer satisfaction, which results in fewer customers, eventually leading to lower prices and so on. This downward spiral can be quick – as evidenced by City Link. Gaining an understanding of your cost base is crucial so every organisation has the answers at their fingertips.
“Becoming a data-driven business takes time, however. Even with the experience of Dave Smith and Rob Peto at the helm, City Link was unable to turn itself around – but did they have enough time? We will never know,” he added.
Ian Tomlinson, CEO of cloud specialist Cybertill, said supply chain partners are faced with challenges from both sides. “Logistics businesses are being asked to respond and react with greater efficiency, which means they in turn need to introduce efficiency savings into their business models.
“There is a false expectation set by some retailers that customers can get free next-day delivery. Ultimately, this is a premium service, and by offering it for free, it is devalued and also erodes margins for the retailer who has to cover these costs, leading to sharper negotiation with logistics partners.
“However, I don’t see this marketing tactic changing; if anything I can see more retailers offering it as a promotional tool. This means that supply chain partners need to be as lean as possible, with real-time systems in place, so they can respond to the demands put upon them by retailers and most importantly, the consumer.”
Stuart Miller, CEO of ByBox, said the demise of City Link has a deeper message for all those involved in the logistics industry.
“Growth in online retailing should have been a wonderful opportunity for carriers. All delivery businesses need scale to make money. So the dramatic rise in deliveries driven by e-commerce should have increased carrier margins. But it has not worked out like that for two key reasons. The way consumer deliveries are made has not changed since the days of catalogues and black and white TV. There is no guarantee that a customer will be in when a carrier calls and returning a faulty or unwanted item is frustrating for all involved. Carriers could just about cope when volumes were low, but at today’s scale these inefficiencies are destroying their profitability.”
He added: “Click-and-collect services were introduced to address these problems. Customers must travel a short distance but in return they know their goods will be there and they can return unwanted items quickly and easily. Click-and-collect should be a much more efficient delivery method for carriers due to the high levels of consolidation (delivering lots of parcels in one go to a shop or a locker); but it also reduces the volume of home deliveries. Unlike Hermes and Yodel, City Link did not invest in any form of click-and-collect. Net result? All the inefficiency of reduced volumes of home delivery without the efficiency of click-and-collect. And in a commoditised market where delivery prices were only going one way.”
So it appears the City Link lesson is one that could apply to a lot of businesses – modernise your way of doing business and invest in more up-to-date systems and processes, or risk going the same way as the unfortunately doomed courier firm.