Interim results for The Co-operative Group for the 26 weeks ended 2 July 2011
25 August 2011
Results in line with expectations: The Co-operative Group continues to invest and modernise
- Financial performance
- Financial and operational highlights
- Peter Marks, Group Chief Executive
- Contact details
- Financial overview
|Financial performance||H1 2011
|Group sales (incl. VAT)||6,891.7||6,950.9|
|Underlying Group operating profit*||275.1||308.1|
|Underlying profit before payments to and on behalf of
members (equivalent to the pre-tax profit of a plc)**
Financial and operational highlights
- Group delivers solid results in line with expectations in the context of the continuing economic downturn
- Results show benefits of Group’s position and strength of the portfolio of different businesses
- Financial Services produced a strong performance turning in an underlying operating profit of £131.3m (2010: £109.3m); Bank maintains a strong capital position, with a core tier one ratio of 9.6%
- Food’s performance reflected an increasingly tough market with an aggressive promotional environment producing an underlying operating profit of £135.4m (2010: £171.6m)
- The Group’s other businesses performed well despite tough market conditions with underlying operating profit of £70.0m (2010:£71.0m). This result was achieved in spite of a £9.0m impact on profits due to a reduction in government funding of prescriptions and a change in policy on revenue recognition on the sale of funeral bonds which impacted profits by £2.7m (both against the same period last year)
- Further improvements in working capital and a reduction of £39.1m in net borrowings since the start of the current financial year
- Continued moves to ensure we maximise the potential of The Co-operative brand by integrating our financial services and retailing businesses, for example, pilots to introduce banking and electrical services to our food stores and legal services into our bank branches
- Continued investment in business: Group remains committed to £2bn three-year programme with £280m invested in the period
- Financial Services: replacing the core banking platforms with the most modern systems in the industry to further improve the customer experience through improved functionality; full servicing of current accounts available from next month in the 248 Britannia-branded branches, effectively giving customers a near four-fold increase in outlets to conduct their banking; existing credit card platform to be replaced before the year end with a leading-edge system that will enable the delivery of market-leading products and services tailored to customer needs
- Food: two new distribution centres opened during the period and two more in the pipeline with a total investment of £110m; availability and service improving on the back of investment in new end-to-end supply chain systems; increased investment in new product development with re-launch of the premium Truly Irresistible range boosting sales by 32%; 244 stores refitted and eight new stores opened with 259 refits and 30 new stores planned for H2
- Other businesses: Legal Services and Life Planning merged to capitalise on the imminent opening up of the legal services market; E-Store launched a market-leading free 90-minute time-slot delivery service for major appliances or large screen TVs purchased online; Pharmacy extends its customer service with the launch of E-Pharmacy; continued investment in new Funeralcare branches and crematoria
- Launch of new ethical plan reaffirms The Co-operative Group as the UK’s most responsible business
- Allows us to offer value to customers while staying true to our values
- Testament to our ethical commitments and our core values as we set ourselves ambitious targets for sustainability, investment in the community and the promotion of co-operation
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Peter Marks, Group Chief Executive, The Co-operative Group, said:
“Looking ahead, we do not see signs of any real improvement in the economy and we are planning accordingly to help our customers, as much as possible, through this difficult period. Given the outlook and our determination to continue to invest through the cycle, we will find it difficult to match the record profits we made in 2010; but I remain optimistic. Our ownership model means that we can take a long-term view and we are as driven, determined and ambitious as ever to modernise our business. Following the overhaul of the Group in recent years the business is in excellent shape and when the economic upturn finally begins we will be better placed than ever before to take advantage of new opportunities.”
The Co-operative Group:
- Martin Henderson: 07770 925 959
- Russ Brady: 07880 784 442
- Susanna Voyle/Lucy Legh: 0207 353 4200
The Co-operative Group is one of the UK’s leading businesses and the world’s largest consumer-owned co-operative. The Group is the fifth biggest food retailer and the leading convenience store operator and its financial services business runs the largest “super mutual”. Other interests include the third largest retail pharmacy chain, the number one funeral services business, Britain’s biggest farmer and a leading travel agency. The Co-operative Group has around 6 million members. As well as delivering on its financial and operational goals, The Co-operative Group aims to deliver on its social goals, playing an active part supporting local communities and the wider world.
*Underlying operating profit measures the normal underlying business performance and removes from operating profit the following volatile or one-off items: property disposal profits, investment property valuation fluctuations, Financial Services Compensation Scheme (FSCS), significant items, fair value amortisation and short term investment fluctuations.
** Underlying profit before payments to and on behalf of members is underlying Group operating profit less underlying interest (interest excluding fair value movement and other net financial income) plus the Group’s share of the operating result of associates and joint ventures, as shown in the table on the attached financial information.
The first half of 2011 has been a period in which The Co-operative Group, along with many other businesses, has faced significant challenges. The UK and the world economy remain in a highly fragile state. As the cost of living continues to rise and job insecurity increases, our customers are feeling the squeeze and, inevitably, we are seeing an impact on our sales. The economic environment is particularly challenging for those businesses within the Group that rely on ever-tightening discretionary spend. However, the diversity of our portfolio of businesses is a strength and, unlike a great many of our competitors, we are able to take a long-term view because we do not have to chase short-term profitability.
We have continued to invest in our businesses, in spite of the tough economic backdrop. One of our main focuses is reassessing the ways in which our businesses operate to try and drive more compelling reasons for members and customers to trade across more than one business. In the future, all our businesses will have the same customer-facing strategy and this will enable us to leverage the benefits of the rejuvenated brand and increase synergies and cross-selling opportunities between businesses, as well as generate improvements through organic growth.
The picture we present with these results is mixed. Overall Group sales are down slightly at £6.89bn (£6.95bn), reflecting the tough trading period we have been through. Within that, however, Co-operative Financial Services saw gross revenue rise 6.4% to £1.33bn. Our Food business produced sales of £3.7bn, down 4.6% reflecting the tough trading environment. Our other businesses produced sales of £1.43bn in line with last year.
Underlying operating profit was £275.1m (2010:£308.1m). Falling sales was the main factor behind the falling profitability. Financial Services underlying profitability improved from to £131.3m (2010:£109.3m); while in Food, profits were down at £135.4m (2010:£171.6m). Underlying operating profits in other businesses were £70.0m (2010:£71.0m) after absorbing the impact of reduced government funding for prescriptions in Pharmacy (£9.0m in the period) and a reduction in the income recognition policy on sales of funeral bonds (£2.7m in the period). Underlying profit before payment to members (the equivalent to the pre-tax profits of a plc) fell to £230.8m (2010:£262.3m). Allowing for the non like-for-like impacts noted above, underlying profit before payment to members would have been £242.5m.
The Food business recorded sales of £3.7bn in the half year, down 4.6% on this time last year. On a like-for-like basis sales were down 3.6%. Operating profit before significant items was £135.4m (2010:£171.6m). Intense competition from all major retailers, greatly diminished customer confidence and the start of the Government’s austerity cuts have all had a part to play. The Food business has recently come to the end of the largest integration programme in UK food retail history, following the acquisition of Somerfield, and is now moving into a concerted development phase, not least with the modernisation of end-to-end supply chain systems and processes. This brings with it a level of disruption to store activity, that adds further challenge to the post-integration recovery phase and the on-going adverse economic environment. The Co-operative Group
Despite the short-term downturn in our results, there is much to be excited about. For example, work is currently underway to enhance the range, segment the customer offer and overhaul the ways in which products and produce are replenished in-store. Further to the efficiencies driven by our newly-opened Andover and Newhouse distribution centres, we have secured agreement for new RDCs in both Avonmouth and Castlewood. In 2009 and 2010, our new product development (NPD) work was put on hold while much of the integration took place. NPD is now firmly back on the agenda with the recent relaunch and extension of our Truly Irresistible range.
Early indications show that the relaunch has turned into a record-breaking campaign with sales in the first 3 weeks up over 30% year-on-year. We also introduced our ‘Eat-In’ range, as well as a new own-brand Free From range, and a new Wholefoods range containing over 57 products with more launching later in 2011.
higher-welfare Elmwood standard across our Turkey, Chicken and Pork ranges at the Compassion in World Farming Awards. The launch of our own dedicated dairy supply chain in partnership with Wiseman Dairies helped us win a Good Dairy Award. The contracted British farmers will supply into Wiseman Dairies the equivalent volume of fresh milk required to supply all Co-operative brand fresh milk in the UK. We were also named Green Retailer of the Year at the prestigious Grocer Gold Awards for the second year running.
Our Farms business is now more closely integrated with Food and performed well in the half year partly due to increased cereal prices increasing and extensive efficiencies at the pack houses supported by good buying. Going forward, we aim to significantly increase the presence in stores of our ‘co-operative farmers’ and our own-grown British produce. We have taken on a new farm tenancy, including a pack house, in Kent and a further tenancy at Tillington, Herefordshire, as part of our strategy to increase the volume of our own-grown key produce, such as apples, in stores.
The Co-operative Financial Services (CFS) is increasingly seen as the compelling co-operative alternative to the plc banks. Underlining our position as a viable alternative, CFS has been named as Europe’s most sustainable bank for the second successive year.
The operating result of £131.3m was 20.1% higher than 2010, a strong performance, given the challenging economic conditions. Income was 16.7% higher, reflecting growth across most areas of the business, particularly in our insurance business. Costs remain well controlled, despite the impact of strong inflationary pressures (from the VAT increase, increased pension contributions and other factors).
We recorded a significant one-off charge of £90m to cover claims for potential mis-selling of Payment Protection Insurance (PPI). Although an industry-wide issue, as a member-owned organisation, we are committed to doing the right thing for our customers and we will deal with complaints in a fair, personal, easy and responsible manner.
Total customer deposits have grown significantly from December, demonstrating our customers’ trust in the business. Gross total advances of £1.4bn were extended to our customers during the first half of 2011.
Our capital remains strong, with a core tier one ratio for The Co-operative Bank of 9.6%. Moreover, our liquidity position, already robust, has improved significantly, with a customer funding ratio in the Bank of 113%, compared to 107% at December.
We have now concluded our review of the Life and Savings business. We propose to undertake an enhanced Bancassurance relationship with AXA, close our field sales force, and are in exclusive talks regarding the sale of our life and asset management businesses. These proposals ensure that Co-operative customers have continuing access to expert financial advice via our extensive branch network.
The Reclaim Fund Ltd, a wholly-owned subsidiary, has been established by CFS with the approval of the Government to collect dormant customer account funds from UK financial institutions, retaining sufficient funds for future reclaims by customers and distributing surplus funds to good causes via the Big Lottery Fund. As such this represents a good fit with our co-operative values, and demonstrates considerable trust in the business by the Government. Under accounting rules, we are obliged to consolidate the accounts of the Reclaim Fund, generating a surplus which is shown in significant items, but held separately from the Group’s funds.
We continue to attract high levels of customer advocacy, where we remain 7.1 percentage points ahead of our competition, and colleague engagement remains strong at 79%, despite the considerable pace of change within the business.
We have now integrated the merged operations, and are making excellent progress in transforming the business and realising the benefits. Within months of the merger, customers could open current accounts in the Britannia branded branches. By next month full servicing of current accounts will be available in the 248 Britannia-branded branches, effectively giving customers a near four-fold increase in outlets to conduct their banking and enabling us to rebrand our Britannia branches as part of The Co-operative Bank. In year synergies for 2011 are anticipated to be substantially ahead of target.
Full transformation will be complete when our programme has replaced our legacy banking systems and infrastructure with modern, flexible solutions, making us a customer-centric organisation, able to grow organically and exploit new markets.
The challenges faced by the financial services industry remain considerable. We agree with the widespread recognition that the industry needs to change, as supported by the Independent Commission on Banking (ICB), and believe that we are excellently placed to address the genuine concerns of customers. We welcome any outcome of the ICB that promotes easier account switching and greater competition.
The considerable investment in our new banking systems and the opportunities arising as part of the Unity programme will help us further establish the compelling co-operative alternative and meet our customers’ changing needs via increased online and mobile technology. Our strong 2011 performance will ensure that CFS continues to be well placed to deliver on its customer promises and move us closer to achieving our vision of becoming the UK’s most admired financial services business.
At the end of July, Neville Richardson, Deputy Chief Executive of the Group and Chief Executive of its financial services business, advised the Group that he had decided to step down. Barry Tootell, Chief Financial Officer at CFS, became Acting Chief Executive with immediate effect. Barry joined The Co-operative Group in 2008, from Lloyds Banking Group.
Pharmacy delivered an operating profit of £12.7m, down £5.3m year-on-year. This represents a creditable achievement given a reduction in government funding for prescriptions that impacted half-year profits by £9m versus the same period last year. On a like-for-like basis, Pharmacy’s profits would have increased by approximately 20% due to improved buying efficiencies and cost control within the business.
As the UK healthcare landscape reacts to changes in government policy, it is The Co-operative Pharmacy’s intention to ensure that we are ready for the future. We are investing in new Pharmacy branches in communities where we feel we can provide a service which is currently lacking. This both extends our reach into these communities, and grows our market share through these opportunities. We have also tendered for several hospital trust outpatient dispensing contracts in a further effort to extend the reach of our pharmaceutical services. Our online e-Pharmacy store opened during the first half of the year, offering healthcare goods and services over the internet for the first time including doctor and medicine advisory services. This not only strengthens our offer, but allows us to reach the significant number of customers who currently do not have access to a Co-operative Pharmacy.
Our partnership with Unicef continues, enabling us to provide clean sanitation facilities to areas of the world which are currently underdeveloped. With this aim, we anticipate donating £100,000 during this year to funding a sanitation project in Togo.
Funeralcare also launched its Ethical Strategy at the start of the year. The strategy outlines how key social and environmental issues will be managed in the day-to-day running of the business. Highlights include: 93% of the coffins manufactured by Funeralcare are made from FSC-certified wood; Funeralcare is the first UK-wide carbon neutral Funeral Director, and Funeralcare is committed to providing choice in funeral arrangements.
The half year marks the fifth anniversary of the formation of The Co-operative Legal Services. Originally established with a view to creating 150 jobs, the business has surpassed all growth expectations and now has in excess of 400 employees, and is still growing. During the half year, the business performed well with revenues up by 22.0% and profit up by 3.0%, compared with last year. The business is actively preparing for the forthcoming de-regulated legal market place and will be submitting an application to the Solicitors Regulation Authority to become one of the first Alternative Business Structures to be licensed. This will allow the business to provide a full suite of consumer legal services with the aim of becoming the consumer’s lawyer of choice.
Life Planning delivered an operating profit of £3.0m, slightly down on last year. This was in part due to a reduction in our internal revenue recognition policy on funeral plan sales, adjusting for which our like-for-like profit would have been up £2.2m (36.6%) on the same period. Sales volumes are up 4.9% to 42,326, with funeral homes and third party insurance legal charge partners making a significant contribution. As part of the continued evolution of both of these newer businesses we merged our Life Planning and Legal Services businesses during the half year and we expect that this will provide an opportunity to enhance our combined partner propositions, optimise our third party B2B relationships and enable us to cross-sell our products and services more effectively. We will be launching new distribution channels in the second half of the year and expect to continue our strong performance.
Sunwin Services Group
Sunwin Services Group (SSG), which comprises Cash in Transit (CIT) Services, ATM Support, IT Services, Sunwin Security and Sunwin Managed Security, has enjoyed a good first half year despite seeing some delays in the commencement of new contracts. In difficult trading conditions where our customers, primarily in retail and banking, are looking at ways to reduce costs, total sales in the six months were down 3.7% to £14.3m. However, with increased control over our expenses, operating profit showed an increase to £2.6m. A number of new opportunities, both inside and outside of the Group, exist for SSG to continue its growth throughout this year and beyond. During the half year, the business also completed the rebrand of its 400 strong fleet of vehicles to help reposition the business in the market.
Our car dealerships performed well, given the difficult nature of the market currently, with the slowdown in the economy and increasing consumer nervousness, with sales of £143.6m, 6.3% up on this time last year. The successful initiative to rebrand the business was recognised when we won the award for ‘Best Marketing Initiative’ at the 2011 Automotive Management Awards. Our Motors business has also been shortlisted for Dealer Group of the Year and Green Dealer Group of the Year at the 2011 Motor Trader Awards.
In spite of difficult trading conditions in the UK within the electrical sector, E-Store continues to perform well against last year with sales up 1.1%, and operating profit up by 29.2%. Electrical within Food stores is also starting to grow, with new concepts being trialed in different store sizes. Initial results are very encouraging. In the second half of the year we will be focusing on developing our range, launching our new website, and growing our electrical products within Food stores. We will continue to look at ways of improving our delivery offer to our customers, with even quicker lead times and shorter delivery windows.
The industry faces severe economic challenges combined with inflationary wool and cotton prices. Despite these challenges, we have majored on increasing gross margin through cost base and overhead control resulting in an improved net profit. Sales in the half year have increased by over 30% to £3.1m and profit in the half year has doubled to £0.5m. Our sales emphasis continues towards niche markets including B2B again enhancing gross margin. Significant new ranges are under development for January 2012 launch.
As the custodian of the Group’s substantial property portfolio extending to over 10,000 properties, Co-operative Estates made a significant contribution to the Group in the first half of 2011. Despite a challenging market, with active property management and tight cost control, the Estates business achieved an operating profit of £9.2m, slightly up on the first half of 2010. There was also a small uplift of £0.7m in the value of the investment property portfolio which totalled £340m at the half year. Estates plays a key role in providing the property support services to the retail trading businesses to enable them to achieve their strategic aims, for example through the opening of 9 new Food stores, 11 Funeralcare branches and relocation of five Pharmacy branches.
In addition, over 200 store refurbishments were completed. Estates has been shortlisted for three BIFM awards, which recognises the quality of our facilities management, both in our Food stores and major occupancy sites, and continues to lead on energy efficiency programme with the Group making major progress by hitting its 35% carbon reduction commitment. In April 2010, The Co-operative’s NOMA development was officially launched to the wider property industry and local Manchester community. Commercially focused, innovative and highly sustainable, the 20-acre regeneration scheme in Manchester city centre is a visible demonstration of co-operative values and the Group’s confidence in its business. Building work on phase one of NOMA includes the new Co-operative Head Office, which is well under way, creating both a modern and agile space for employees and the most environmentally friendly large office building in the UK.
The Competition Commission recently announced outright unconditional approval of the joint venture between The Co-operative Travel, Thomas Cook and Midlands Co-operative. These findings help clear the way for the creation of the most exciting and dynamic travel business in the UK.