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UK Coop Falls into the Red on Write-Downs

Coop UK
Photo: The Co-op Group
The recently rebranded Co-operative is focused on its 'True North' strategy, with the aim of being the UK's number one convenience retailer.

The Co-operative Group in the UK has released annual results, showing positive like-for-like momentum for its food business but an overall group loss on further write-downs for its banking arm. For the year to December 2016, food sales increased 1% to GBP7.1bn (EUR8.29bn), up 3.5% on a like-for-like basis driven by a focus on convenience, rebranding and investment in pricing.

Co-operative Group posted a pre-tax loss of GBP132mn (EUR154.13mn), as it valued its remaining 20% stake in the troubled Co-operative Bank at nil. This was its first loss since 2013 and a sharp fall from the previous year’s profit of GBP23mn (EUR26.86mn). At its food division, operating profit increased 3.5% on property disposals although underlying profit edged down 2.2% to GBP182mn (EUR212.51mn).

As it enters the final phase of its Rebuild strategy the group demonstrated an increase in the number of loyal shoppers – the group reached four million active Coop members at year-end and expects to reach its goal of adding one million new members a year earlier than planned.  Priorities for the coming year include ensuring its business is “ready for the digital age”. The group is also looking to infill with new stores in markets where space allows and “challenge existing providers”, according to Group Chief Executive Steve Murrells.


Is it Really Ready to Challenge?

The latest results for The Co-operative show a mixed state of affairs. Clearly the group is enjoying success in rebuilding its business as it revamps its stores and attracts new, loyal shoppers and members. The convenience channel is growing in the UK and 3.5% increase in like-for-like sales puts the group slightly ahead of average growth as it differentiates on fresh food, local provenance and sustainability initiatives.

However, the distraction of an ailing bank (even one in which it owns only 20% now) and associated writedowns makes life more difficult for the Coop at a crucial time – in the face of growing competition from Tesco’s planned acquisition of Booker. Tesco currently has around 2,714 minimarkets to Coop’s 3,075. Assuming competition authority approval, the acquisition would add up to 4,800 more stores in the channel for Tesco, giving it channel leadership in terms of stores and revenue as well as the opportunity to leverage scale across these businesses (Tesco Express, Premier, Londis and Budgens). The group already admitted that all of its markets remained "fiercely competitive" with a challenging economic backdrop. With Tesco and Booker, competition is potentially set to intensify significantly in the coming months.

In addition, while it is encouraging to hear that digitalisation is a priority at last, this is an area where it has been slow on the uptake. It is unclear whether by digitalisation the group is looking to simply update its membership scheme or perhaps thinking of finally tapping into another fast-growing UK channel – e-commerce, where other than a small pilot it has been notably absent. Click & collect would be an obvious first step to leverage the group’s network of stores around the UK, perhaps broadening the range it can then offer in smaller stores and driving loyalty. Whilst focusing on the right areas of its business, it is our view that The Co-operative needs to learn to go a little bit faster, in order to not get left behind in the wake of Tesco, Booker and an intensely competitive market.

Topics: The Co-operative