Investment drives sales growth as customers return to the Co-op

23 September 2016

Interim results for Co-operative Group Limited for the 26 weeks ended 2 July 2016

  • Planned reduction in profit following continued Rebuild investment, colleague pay increases and price cuts; debt held steady at £0.7bn
  • Food business continues to deliver with success of own brand-led convenience strategy
  • Strong growth in pre-paid funeral plans offsets lower death rate in Funeralcare
  • General Insurance sales rise sharply following member-pricing initiatives

Group highlights:

  • Revenue increased by 2.2% to £4.7bn (2015: £4.6bn) as customer transactions grew by 3.3%
    • Food like-for-like sales rose by 3.1% 
      • Core convenience business grew ahead of market after investment in price and products, with like-for-like sales up 4.3%
    • Funeralcare revenues held, with significant growth in pre-paid funeral plan sales offsetting lower death rate
    • General Insurance (GI) delivered strong sales and profits performance, with more than 100,000 new policies sold in first half after launch of member-focused pricing initiatives
  • Planned reduction in profit, driven principally by Rebuild investment, pay increases for frontline colleagues and price reductions in Food
    • Underlying profit before tax* of £31m (2015: £63m)
    • Profit before tax of £17m (2015: £36m)
  • Half way through three-year Rebuild phase, with further investment made in improving our brand and membership offer   
    • Capex of £149m (2015: £144m) as further improvements made to food stores and funeral home estate
    • Costs from supporting functions increased from £37m to £52m to support required investment in brand and membership relaunch, and creation of new Digital division
    • Major investment in Co-op colleagues as 5,400 managers attend “Being a Co-op Leader” events and all 70,000 colleagues embark on “Back to Being Co-op” sessions 
  • More than 5 million members set to receive new Co-op cards to mark the launch of our compelling new membership offer, placing customers and communities firmly at the heart of the Co-op again
  • Successful disposal of non-core food properties which do not align with food strategy focused on delivering a compelling and convenient shopping experience for members
  • Debt at £0.7bn (2015: £0.6bn), in line with stated aim to keep debt around £0.9bn during Rebuild

Richard Pennycook, Group Chief Executive of the Co-op, said:

“These are exciting times for the Co-op as we continue to make this a better business that is more relevant for members, customers, communities and colleagues. These results, along with today’s relaunch of our compelling new membership offer, show the real value of “being Co-op” and our difference as a business. Revenues across the Group have grown and, in line with our strategy, profitability has fallen due to our major Rebuild investment, pay increases for our people and price cuts for our customers. We are able to invest for the long-term, strengthening the appeal of our products and services, because our business model allows us to pursue our unique approach, championing a better way of doing business for customers and communities.

“This long-term approach is evidenced by the continued reshaping of our Food store portfolio to support our own-brand, convenience-led strategy. This means we can, as necessary, forgo sales growth in order to ensure we have the right stores in the right places for our customers.

“We are only half way through the Rebuild and much remains to be done, whether it is investing in our digital capability or campaigning on key issues. We remain firmly on track with our plans and are encouraged that the work we are doing is attracting more and more people back to the Co-op.”

Allan Leighton, Independent Non-Executive Chair of the Co-op, said:

“We are delighted that our members, our customers and our people have so enthusiastically backed our plans to create a new Co-op economy, based on a better way of doing business. These results show that we are moving in the right direction – be that in going back to our roots with a return to an iconic brand, the launch of our new member offer or our partnership with the British Red Cross which has already raised £3m. It is the support of our members, under a strengthened governance structure enhanced by committed colleague engagement, that means we can continue to pursue our strategy with confidence.”

Summary of business performance  

Food

  • Clear momentum in strategy to deliver a compelling and convenient shopping experience to millions of customers and members every day within their local communities
  • Like-for-like sales grew 3.1%
    • Core convenience business grew 4.3%
  • Food business has had six consecutive quarters of positive life-for-like sales
  • Underlying profit fell to £63m (2015: £88m), driven by significant investment in customer offer in terms of price investment, fresh food range and increased colleague pay  
  • Remain the most frequently visited retailer in the country, according to Kantar, as customers shop little and often and at lower prices through core convenience offer
  • 30 new Food stores opened as part of the 100 planned in 2016, with a refit of an additional 80 stores nationally
  • Continued refocus of store estate:
    • Purchase of 15 Budgens stores and 8 stores from MyLocal, supporting focus on convenience store retailing
    • Sale of the remaining assets within Somerfield Stores Limited, recognising a profit on disposal
  • Sale of 298 smaller Food stores, which fell outside of our core strategy, to McColls for £117m. The sale proceeds, once received, will be re-invested to further deliver the Food strategy. Whilst the sale in the short-term will reduce the number of outlets by around 10%, the revenue impact will be circa 3%, given the average size of the stores being sold

Funeralcare

  • Market-leading position further strengthened in a period when the death rate fell year on year by 11,000 to 303,000 
  • Underlying profit reduced to £42m (2015: £47m) on sales of £164m (2015: £162m)
  • Funeral plan sales increase significantly through a strong focus on member pricing and website improvements, with 60% of new plan sales coming from members, up from 30% previously.  Co-op Funeralcare’s market share for funeral plan sales now top 25%   
  • 12 further funeral homes opened, including our 1000th. Continue to be the only UK funeral director to offer an apprenticeship in Funeral Operations and Services
  • Agreed the sale of crematoria operations to Dignity for £43m, to invest more into core funeral homes business
  • Re-launched Simple Funeral, cutting the price of lowest price funeral by 7%, making products more affordable without compromising on quality
  • Improvement of website to include an online comparison tool to make funeral planning more accessible and transparent
  • First business to sign Fair Funerals’ new enhanced pledge to tackle funeral poverty

General Insurance

  • Sales performance strong, with Gross Written Premiums** increasing 29% to £242m (2015: £187m) and Net Earned Premiums*** increasing to £208m (2015: £159m)
  • Underlying operating profit improved to £11m (2015: £2m) 
  • Increased premium levels reflect motor price rises across the industry, but also initial benefits from the investment made into our pricing capabilities      
  • Total in force policy count increased from 1.28m to 1.48m
  • More than 100,000 more new policies sold, compared with same period in 2015
  • In line with Group’s strategic community focus, GI launches new partnership with Neighbourhood Watch and Brake as part of the “making communities safer campaign”

 

Legal Services

  • Sales rose to £11m (2015: £10m)
  • Underlying operating profit of £1m (2015: £Nil)
  • Acquisition of Collective Legal Solutions at the end of 2015 enables our legal services business to expand its Wills, Trust and Probate services across England and Wales  

Electrical

  • Sales declined to £33m (2015: £36m)
  • Underlying operating loss of £1m (2015: £1m loss)
  • Electrical business moved into the Co-op’s new Digital division to provide it with greater focus and digital capability to enhance the customer offer and experience  

Membership, democracy and governance

  • Successful AGM in May; announced we were going back to ‘Being Co-op’ by placing membership and community firmly at the heart of our business again
  • Unveiled a return to iconic blue clover-leaf logo with around half the estate rebranded before the end of 2017 and plan for launch of new compelling membership offer, which is detailed in a separate announcement today
  • Group Board further enhanced with the appointments of Lord Victor Adebowale as a Non-Executive Director, Margaret Casely-Hayford as a Member-Nominated Director and Ian Ellis as an Executive Director

Colleagues

  • Full annual impact of the 8.5% pay award for food colleagues, announced last year, which took them ahead of the National Living Wage threshold 
  • Colleagues actively involved in shaping the Co-op under strengthened governance structure, with 17 colleagues on the 100 strong members’ council
  • Co-op Executive takes strong leadership position, post the EU referendum, on the call to allow existing colleagues from EU to remain in the UK
  • Over 440 new Co-op apprentices appointed in the first six months
  • Co-op colleagues participate in the new membership offer trial, with a sharp increase in colleague sales witnessed
  • 70,000 Co-op colleagues embarked on a unique “Back to Being Co-op” journey which reconnects them with Co-op heritage and values 
  • Significant investment made in building the leadership skills of our colleagues with over 5,400 attending “Being A Co-op Leader” programme, with phase 2 now underway
  • Co-op colleagues played a major role in us reaching £3 million fundraising mark to help tackle isolation and loneliness

Outlook

Whilst we are mindful of some political and economic uncertainty, our focus remains on delivering the next-stage transformation initiatives which will complete our three-year Rebuild during 2017. Central to this will be the roll-out of our new brand and membership offer, which will reward our members and their local communities on the back of Co-op trade. The development of this new “Co-op economy” will stimulate new product development and service innovation, especially from our new Digital team, as well as influencing heavily our future campaigning and community-based strategies. We are now in a position where we can again place our members’ interests firmly at the heart of the Co-op and the next 6-12 months will see far more member-engagement occur so we know we are providing the right mix of goods and services to meet their requirements

In keeping with previous guidance, the Board anticipates dividend payments resuming after the three-year Rebuild programme has completed

Download full RNS (PDF, 41 pages 700KB)

Download Interim Report 2016 (PDF, 34 pages 1MB)

Media Enquiries:

The Co-operative Group

Jon Church: 07545 210812
Russ Brady:  07880 784442

Tulchan Communications

Susanna Voyle/Jonathan Sibun:  020 7353 4200

*     Underlying profit before tax is statutory profit before tax, but stripping out the effects of property and business disposals (including individual store impairment), change in value of investment properties, profits / losses from associates / joint ventures, one-off costs, pension finance income and non-recurring finance costs. A full reconciliation to statutory profit before tax can be found on page 16
**    Gross written premium (GWP) is the total expected value of all new and renewing policies in the period
***   Net earned premium (NEP) is the amount of premium that has been recognised in the period after reinsurance costs have been deducted.