Expert fleet management will play a key role in plans to turn around ailing delivery firm City Link, following its sale by Rentokil Initial for £1 last month.

For years, City Link has been a highlight of its parent company’s annual reports for all the wrong reasons, with regular losses amid tough trading conditions.

Overall management was described as weak in a 2010 report before new leaders were parachuted in, but still the business has been dogged by its poor financial performance, including a full year operating loss of £26.4 million in 2012.

The change in ownership brings a clean slate for the troubled fleet, together with £40 million in new investment.

New owner and investor Better Capital is run by its founder, private equity veteran John Moulton, who is most famous for his failed bid to buy MG Rover at his previous venture capital firm Alchemy.

Other Better Capital acquisitions include glazing firm Everest and the Readers Digest.

The acquisition of City Link has created a stand-alone delivery fleet with around 1,340 vans. Rentokil Initial will still have a fleet of more than 1,500 cars and 4,000 vans in its core hygiene and pest control business.

Both fleets will hold a place in the 2013 Fleet200, the listing of the country’s 200 biggest car and van fleets in 10 key industry sectors.

For Moulton, there is clear profit potential at City Link, particularly as it has made steady progress under its current management team, who have moved with the business as part of the sale.

Moulton has told the press “we can see a way forward” and says there are signs the business could be in the black within months as the company is “improving quite rapidly”.

There is certainly potential for growth, as the UK parcels market is worth an estimated £12 billion and is set to grow by 7% by 2016.

The challenge for City Link is to focus the business in the most profitable areas, particularly as margins are incredibly tight in the battle for business with industry giants such as DHL and Royal Mail. There is also a need to balance big contracts that drive volume with smaller deals that are more profitable.

The business-to-consumer (B2C) market is set to grow 10% to 25%, while the business-to-business market is expected to grow in line with GDP over the next few years.

Growth in B2C is driven by online retailing, up 70% since 2008. Consumer confidence in direct channels is increasing, leading to higher-value, bigger and bulkier goods being carried. Get it right and the returns could be between 5% and 10% pre-tax profit margins.

While City Link saw a 13% cost-per-delivery reduction last year and 17% growth in volume, revenue per consignment fell 10% because its sales mix relied too heavily on large business to consumer customers.

Efforts to maximise retention of more profitable smaller customers is a key priority for 2013 and the performance of the fleet in delivering on time, every time, is a vital part of that strategy.

As a result, City Link has also invested in specialised equipment to maximise the speed and accuracy of its fleet delivery operations.

For example, unlike some rivals, the business transports parcels in cages from the collection depot to the delivery depot, which ensures goods arrive safely and on time.

New scanning technology will also provide accuracy of product delivery. GPS technology enables provision of estimated times of arrival to customers, with the service offered on 98% of deliveries by next year.

City Link managing director Dave Smith, who remains in post to continue the business plan put in place last year, said: “We will all benefit from the expertise of Better Capital in business turnaround and from the certainty of funding the deal provides.

“In the short term it is business as usual, but we will soon start to see the access to new capital, and the expertise Better Capital bring, accelerating the investment and improvements we are making in our customer experience.”

Alan Brown, chief executive of Rentokil Initial, added: “I believe City Link has turned the corner after five years of substantial losses. There is strong growth in the B2C parcels market, it has a great management team and we have a very committed investor in Better Capital.”

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