When I announced The Co-operative Group’s annual results in March 2011, I noted that the retail business – and indeed the UK economy – was going through the toughest time I had seen in more than 40 years. So it is with some pride that I am able to reflect on a year of solid performance and respectable profitability. Even though the scale of our success does not quite match that of 2010, the five-year trend is still firmly upward.
Investing in the future
It is in times such as these that a business shows its true colours; we have revealed ours by building for the future, with nearly £600m in capital investments across the Trading Group and Banking Group. We set ourselves on this course in 2007 when we recognised the importance of scale, centralisation and a revitalised brand for our long term future. We will not allow the current economic downturn to knock us off the course we have set. We have the resources, the resolve and above all, the ability and belief to make our vision a reality.
Of course, pursuing our long term vision does not mean ignoring the immediate impact of the downturn, particularly on families and communities across the UK. We have invested significantly in discounts and special offers; although these may have impacted on our short term profits, our first duty in times of income and job insecurity is to help our customers make it through. In the long term, success is built on relationships and the loyalty of customers who remember that we ourselves remained loyal to them when times were tough.
Solid and creditable performance
Within this context of short term pressures and long term investment, the Co-operative family of businesses has delivered solid and creditable results.
Our Food business has weathered some of the worst market conditions in recent years while completing the largest integration programme in UK food retail history. Underlying profits are £309.4m, 20% down on 2010 but once again the five-year trend remains firmly upward. We have invested significantly in both product innovation and supply chain infrastructure; while the increased scale afforded by the acquisitions of recent years allow us to reduce prices for members and improve our competitiveness. We are in a strong position to both maintain the progress of recent years and build future success.
Our Banking Group has delivered a solid performance for the year, with an operating result (excluding discontinued operations) of £200.9m, in line with last year. The retail sector in particular posted a 78% improvement in operating results over 2010. Corporate and business banking continues to reflect the challenges of the corporate lending market with impairments significantly higher than 2010, but corporate asset growth and improved arrears management offer significant opportunities for the coming year. Capital and liquidity remain strong, backed by a healthy and improving loans to deposits ratio.
Our Specialist Businesses, delivering a diverse range of services from pharmacy to funerals, has delivered very positive results, with profits increasing over 10% to £99.4m.
Our Pharmacy business was significantly impacted at the start of the year by reductions in Government funding, but has recovered to post a healthy operating profit of £29.7m. A new e-pharmacy channel has been launched, as well as a ground-breaking outpatient dispensing contract with Doncaster and Bassetlaw NHS Trust.
Our Funeralcare business posted profits of £53.6m, thanks in part to the successful sales of Funeral Plans through funeral homes. Funeralcare has invested in infrastructure improvements and expansion of our crematorium estate, while pioneering a more ecological alternative with resomation, on which we hold the worldwide patent.
Meanwhile, our Life Planning and Legal Services businesses have come together to lay the groundwork for significant growth. The Group is awaiting the outcome of its application to become one of the first Alternative Business Structure (ABS) organisations to be appointed by the Solicitors Regulation Authority, and we aim to establish ourselves as the consumer lawyer of choice. We have also piloted the provision of legal services through the Co-operative Bank branch network, an excellent example of the kind of cross-sales potential within the Group, and a precursor to the kind of integrated service proposition that the Unity programme is designed to foster.
Our Motors business has increased sales to £277m as well as being recognised by Land Rover as UK dealer of the year. Our E-store and Clothing businesses have both performed well in difficult market conditions; the E-store business outperformed the sector leaders for internet sales, while Clothing increased its profits by 113%. Our business-to-business provider Sunwin Services Group also increased its profits by 12%, even as companies cut back on security and office services.
A strategy for long term growth
Measured growth has been a keynote of our strategy since 2007; the Somerfield acquisition in particular was a step-change for our Food business, increasing its scale and reach to allow the business to compete effectively with the market leaders. As I write we are completing the acquisition of David Sands Ltd, with 28 stores, a depot and back office support in Fife, Kinross and Perthshire. This strengthens our position as the fourth biggest food retailer in Scotland, and is a key step in our plan to open 300 new food stores across the UK in the next three years.
We are now looking to bring about a similar step-change for the Banking Group. We are currently in exclusive negotiations with Lloyds Banking Group to possibly take over more than 630 Lloyds TSB branches. This acquisition, if it comes off, would grow our banking business to nearly 1,000 branches, transforming the bank into the sixth largest in the UK.
With or without the Lloyds branches however (and any agreement will depend first and foremost on safeguarding the interests of our members and customers), we are determined to grow our banking business. Already recognised as the most ethical and responsible provider on the UK high street, the ‘compelling co-operative alternative’ is beginning to prove increasingly attractive to customers and investors alike. The Group is investing significantly in building the systems we need to deliver a superlative customer service and enable us to offer a competitive alternative to the ‘Big Five’. This is a ground-breaking initiative, the first of its kind in the UK; in terms of size and complexity it presents an unprecedented challenge but successful delivery will facilitate future growth, whether organic or by acquisition.
A unified business model
The Group’s most far-reaching strategic initiative of 2011 however, is the Unity programme. Our diversified business mix is a source of strength in times such as these, offering not only significant cost synergies but the opportunity to develop cross-business relationships with our customers. However, to realise our true potential as a consumer co-operative we need to evolve. Bringing our retail and financial services divisions together will not only deliver a range of strategic and tactical benefits, but will enable us to offer members and customers a truly unified and consistent service proposition.
Unity will also ‘go public’ in the coming months with a unified marketing approach, supporting the next phase of our ongoing brand rejuvenation.
The most concrete expression of our integrated future is the new Group head office, which will be ready for occupation later this year. Built to complement the environment and the local community, our new headquarters is more than just a building; it is a demonstration of our faith in the future and our deep-rooted commitment to a sustainable future.
2012 will be a historical year for the UK, as we look forward to the Queen’s Diamond Jubilee and the London Olympics. It is to be hoped that events like these and Euro 2012 will lift the national mood and provide a spur to consumer confidence. All we need is a good summer!
This is also the International Year of Co-operatives, an opportunity to showcase the key contribution the Co-operative Movement has made to building a better future. It is a matter of pride to me to be a part of that story, and I believe that despite the ongoing challenges of a fragile economy it is within our power to deliver a better future for our members, our customers and our communities. It was out of adversity that the Rochdale Pioneers emerged to change the face of business; and it is my belief that we too, can drive real change.
While the challenges of today’s market need to be addressed, at The Co‑operative Group we are focused primarily on building for the future. The hardships of the last couple of years have made it clear that UK customers want, and deserve, better. They deserve better service, better choice, a better life for their communities. At The Co-operative Group, that is the future we were created to deliver.
Peter Marks, Group Chief Executive