Connect Group saw its pre-tax profit and turnover fall in the first half of its current financial year, as its previously strong Tuffnells division crossed the line from profitability to loss.

Pre-empted by a profit warning in January, the group saw a 30.3% drop in pre-tax profit for the six months ended 28 February 2018 to £15.1m (compared to a £21.7m pre-tax profit in the first half of 2017), which it attributed to the reduced performance from Tuffnells and an unprofitable business model in its Pass my Parcel division.

Group turnover also dropped 3.4% to £766.5m (£793.3m in H1 2017). The departure of group chief financial officer David Bauernfeind, a two-year veteran, was announced on the same day as the interim results, but a spokesman for Connect Group told MT the two were unconnected.

Tuffnells struggles

Tuffnells made an operating loss of £200,000 in the first half of 2018, compared to an operating profit of £4.3m in the same period in 2017. Turnover increase 1% to £87.3m compared to £86.6m in the prior period.

The filing to investors stated that a number of factors contributed to what the business described as a challenging period. These include the effects of the driver shortage and the cost of staff recruitment and retention and high turnover of depot managers. This loss of experience, Tuffnells said, diminished the business’s ability to managing its changing landscape “with sufficient speed and agility”.

It said it had entered an agreement with recruitment agency ADR Network last month to "improve driver recruitment and retention".

A spokesman for Tuffnells told MT that the IWD carrier would also be analysing the competitiveness of its pricings on an individual customer basis.

The spokesman said that with peak ongoing, the results for Q3 and full year would reflect a stronger performance from the division.

Pass my Parcel

The reduced financial performance at Tuffnells has also been blamed in part on its involvement with Connect Group’s Pass my Parcel operation.

While the click and collect operation is more closely aligned with the group’s Smiths News, Tuffnells has been moving parcel volumes in areas not reached by its sister company. This, it conceded, is not well-suited to its core operation.

A Connect Group spokesman told MT it would be evaluating the Pass my Parcel operating model in the coming months – not just to assess the viability of Tuffnells’ involvement but, he said, to find a way of making the model profitable for the group in the long-term.

At present, while the click and collect offering has seen volume growth of 389% year-on-year, with turnover of £3.4m in the first six months of 2018, unprofitable customer returns for Amazon are over-represented in the network.

The results state: “It is clear that the growth of parcel returns alone cannot provide a substantial platform in the absence of significant new customers and material improvement in the margin mix.”

Looking back

Tuffnells was acquired by Connect Group in November 2014, but it wasn’t until 1 September last year that the business was fully integrated into Connect Group, pre-empted by the departure of former MD Chris Ward at the beginning of August.

Until the profit warning in January highlighted a difficult period for the irregular parcel freight carrier, it had been fueling growth within its parent group, always underpinned by a steady performance from Smiths News.

Commenting on the interim group results, Connect CEO Mark Cashmore said: “In a period of challenging trading, our profit was impacted by a combination of cost and margin pressures compounded by the extent of change across the group.

“The priorities for second half are clear with action underway to improve the performance of Tuffnells and re-engineer our click and collect proposition.”