The lowdown on why City Link went bust
We hear from the venture capitalist, the company MD and the administrator that wound up City Link, as they explain why the courier failed.
City Link went into administration on Christmas Eve and after a failed bid to transfer ownership of the company, announced more than 2,300 redundancies on New Year’s Eve.
Private equity firm Better Capital had bought City Link from Rentokil for £1 less than two years before.
The RMT union which represented some City Link employees expressed its outrage at the time, saying the move was a ‘cynical betrayal that will wreck the lives of our members, many of whom are owed thousands of pounds’.
In the last month, Parliament called key personnel linked to City Link to discuss the controversial demise of the company in a Commons Select Committee.
Here are some quotes from those discussions.
Jon Moulton, Better Capital
[asked why the company failed]
At the end of the day, it was too small a company in too difficult an industry.
It was a very challenging deal [at the beginning]. [City Link] had lost somewhere in excess of £300 million for its prior owners, so it was clearly a very frightening sort of company. We had to believe there was a way forward to cut costs and improve systems and processes to get it to be a profitable company and an investment worth having for our shareholders. I do not think you need to be particularly good at hindsight to recognise that it was a mistake.
This company was losing 2 million quid a month, or a similar number, so why wouldn’t we want it brought to an end? We are not gaining anything from running out the creditors; we are losing money.
[Asked if he knew where big clients Amazon, John Lewis and Mothercare went]
No, I do not, but bear in mind that some of them, for example, Amazon have their own distribution systems as well. They make a relatively unattractive customer because they only use you for overflow and marginal business.
[Asked ‘If a small company is entirely dependent on a contract with City Link, because it was stipulated by City Link that they could only work for them, how are they supposed to pay that money [to their staff]?
I know this sounds terribly hard, but I think they should have found themselves a better customer.
David Smith, ex-chief executive, City Link
[asked why the company failed]
City Link was a business that was put together back in 2007 by Rentokil buying two companies, essentially, City Link and Target. From that date onwards, the consolidation of the two businesses did not go well, and, in fact, the business never made a profit in its entire time from 2007. I joined the business at the end of 2011. In that December, my first month, it lost £7.5 million. In fact at that year end it lost £66 million or £67 million. It was always a business in distress. I was brought in to try to turn that around.
Essentially, we had three big problems. The first was that the IT of the business was two separate businesses put together and not properly invested in over a long period of time. The second was the operational processes of the business. Those processes had not kept pace with all the competitors in that time period. The third was the commercial contractual arrangements that the business had struck in the period between 2010 and 2011, fundamentally. We made great progress on all three of those, but ultimately we were not able to fix them all in time with the amount of cash that we had to turn the business around.
The business is fundamentally an IT business. You may think of the trucks and the vehicles, but to move any volume of parcels and know where they are, you need good IT behind it, because you need to be able to read the barcodes. When I joined the business it was not able to measure collections. It was not able to measure movement through the network. It was only able to measure the delivery. It was not able to measure individual parcels, only bundles of parcels together. It was not able to work out at all the profitability of each individual item as it moved through the network.
[asked why there was such a big loss in the run-up to Christmas, the busiest time for a parcel business]
It was the busiest time in terms of volume, but the pricing positions that I had inherited in 2011 had a number of contracts that were set for a long period of time—two, three or four years. The largest of those contracts—I cannot tell you which company, because obviously that would be confidential—was very loss-making; in rough terms, for every parcel we were delivering we were losing about £1. If I tell you that that company was about 28% of all my volume for the month of December, you can start to appreciate the difficulties. In addition, we had more physical premises than we needed for the volume that we were carrying. We had a significant proportion of fixed costs that were not being covered by the volume that the business was carrying, hence the reason why we were looking at restructuring in the 2015 period.
Hunter Kelly, City Link administrator, Ernst & Young
[asked why the company failed]
My involvement with City Link is relatively short; therefore, I cannot answer with a great deal of certainty on some of the things. A couple of things surprised me about how competitive the marketplace is. At certain points in the year the demand for parcel delivery services exceeds supply, yet there seems to be an almost cut-throat approach to winning contracts. A number of the contracts that City Link was carrying out were loss-making at direct cost level. In addition, City Link had certain fixed costs. There were a number of property costs, and their IT infrastructure had a number of duplicate systems, which led to inefficiencies. It was a combination of those.
