Where is Your Business Heading?

If your proposition is too reliant on price you will fail.

In April this year Rentokil Initial sold its City Link parcel business for £1 to Better Capital, a venture capital firm controlled by Jon Moulton, that also owns both glazing company Everest and Readers Digest. A year before that this blog encouraged Rentokil to get rid of City Link as it didn’t look like it would ever make money under its management.  City Link has been a big distraction to Rentokil since it acquired it in 2007; it is estimated to have cost the company some £300m during that time.

Although Rentokil has just reported a £39M one-off charge as a result of the City Link disposal, in its otherwise solid results for the first six months of 2013, there is a sense of relief in some of the comments from the outgoing CEO, that at last it has got rid of this millstone hanging around its corporate neck. Although Europe is a bit sluggish at the moment Rentokil is now performing strongly and without the City Link distraction my feeling is this will continue. It reported revenues up in the half-year by 5%, to £1.16Bn, although there was a year-on-year decline in profit of 18%, to £51.9M, because of the impact of the disposal.

So, what exactly does Moulton see in City Link? Well, for one thing, it is a very well known brand and its 1300 or so vans can be seen on most high streets. Also, in spite of its financial performance, it appears to have good management and be making steady progress. The UK parcels market is said to be worth £12bn and it is expected to grow by 7% by 2016 so demand is likely to grow too. That being said margins are tight due to tough competition from the likes of DHL and Royal Mail who have greater scale, scope, and balance sheet strength to weather any price-competitive storm.

There is no doubt that being free from Rentokil’s corporate complexity must be a good thing for City Link; it now has a chance to be a swan rather than the corporate ugly ducking, but will independence, focus and a little capital actually be enough to make a big enough difference? It is certainly always good to be in a “fast flowing stream” where demand is increasing strongly and online retailing will continue to drive demand growth for some time yet, perhaps by as much as 25% in the next few years (it has already grown by 70% since 2008). But why should City Link get the business and how will they be able to compete with bigger and stronger competitors?

City Link doesn’t seem to be competing on much but price and that hasn’t helped much. Last year it seems to have been running just to stand still: volumes were up by 17%, costs per delivery down 13%, but revenues per consignment went done by 10%. It isn’t just the big established competitors it has to worry about. Demand growth attracts others, particularly with such relatively unsophisticated propositions and low barriers to entry. All sorts of alternative delivery channels have developed to address the growth in online shopping. You can now get goods delivered to your local shop and if you go to your local self-storage depot early in the morning you will see small local distribution businesses using people’s private cars, delivering some big brand products too. So, overall, I personally am not so convinced that there is a place for a stand-along general parcel delivery business of this scale and I don’t think it is very likely that City Link will survive on its own. It seems to me that City Link needs a new niche business model: I wonder if it could metamorphose into an online shopping delivery franchise?

How does your business stack-up when compared to City Link? Are you too reliant on price?  Just where is your business heading and what are you going to do about it?

Mark

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