Interim results for The Co-operative Group for the 26 weeks ended 30 June 2012
23 August 2012
The Co-operative Group posts results in line with forecasts
- Financial performance
- Financial and operational highlights
- Peter Marks comments
- Business review
- Group maintains strategic progress and trading momentum across its family of strong businesses against tough trading backdrop
- Short-term profitability impacted by a number of factors, most notably Bank impairments for lending to corporate customers and competitive environment in Food
- Despite challenging conditions, Group plans £2bn investment programme over next three years
|Financial performance||H1 2012
|Group gross sales (incl. VAT)||6,559||6,546|
|Underlying Group operating profit||174||264|
- Group has delivered results in line with expectations in the context of the continuing economic downturn
- Significant strategic and operational progress made in the first half; work undertaken to secure agreement with Lloyds Banking Group was the most important achievement
- Maintenance of stable capital position. Balance sheet remains strong. Net borrowings slightly up since the start of the financial year, reflecting continued investment
- Results show the benefits of the Group’s structure and the strength of the portfolio of different businesses:
Food’s performance reflected the on-going tough market, the sale of non-core assets and the impact of unseasonable weather which disproportionately hits convenience operators. Sales were down 2.2% overall and by 1.2% like-for-like. Sales in the core convenience chain were up by 1.4% LFL with very encouraging sales in new trial stores, with LFLs up by over 12%. Operating profit fell to £119m (2011: £142m) with continued investment in price for customers, the store estate, supply chain and distribution network and extended opening hours.
Banking Group’s performance reflected the on-going uncertainty in the Eurozone, the prolonged low-interest-rate environment and increased impairments in the non-core corporate loan book. Revenue rose by 3.9% to £1.0bn but taking into account the year on year impact of PPI provisions fell by 1.1%, and underlying operating profit fell 67.9% to £36.9m. The Bank maintains a stable capital position, with a core tier one ratio of 9.6%, unchanged from 2011. Liquidity has been carefully managed and remains at robust levels, with a loan to deposit ratio of 101%.
The Group’s Specialist Businesses continued to perform well, most notably within pharmacy and funerals, despite challenging market conditions. Revenue was up 1.5% at £777.1m (2011: £765.7m) and underlying operating profit jumped 19.3% to £62.0m.
- Post the end of the period reported, the Group successfully agreed a £950m refinancing deal
- Continuing work on Project Unity to realise the full potential of our vast and diverse customer base and our strong family of businesses, in the interests of our customers and members
Start of roll out of Banking and electrical services in our food stores after successful pilots
Roll out of legal services through Bank branches
Investing for the future
Our continued investment and strategic development through the period demonstrates the strength of the Group’s ownership model. Looking ahead, we are planning to invest £2bn over the next three years across our family of businesses - in our people, processes and systems – in the interests of all our customers and members who remain at the very heart of all our diverse businesses:
Food: Under our new management team, 2012 will mark the latest stage in the most ambitious change program that the Co-operative has ever completed. Our growth plans are on track to deliver 80 new stores this year and our award winning SMART stock management system that has increased product availability in store to over 97.5% is being rolled out more widely. We are also investing heavily in new product development. In addition, we are continuing the work to overhaul our workforce management system to ensure great local service, and increasing our trading hours by 15,000 hours a week, all of which is being recognised with vastly improved customer satisfaction scores. Behind the scenes we are continuing to focus on efficiency, completing work on overhauling our supply chain network to underpin the retail proposition. The purpose-built network will have one National DC, nine Regional DCs, and two stockless cross-docks, and will have capacity to handle 32,000 deliveries a week giving us an industry-leading distribution network.
Banking Group: We are working to complete on Project Verde which will create a real challenger bank. The transaction will accelerate delivery of our strategy, creating a compelling co-operative alternative with a combined banking network of almost 1,000 branches across the UK, representing nearly 10% of today’s UK bank network and 11m customers. In addition, we are actively managing corporate non-core assets to improve long-term profitability and capital efficiency. We are also making new technology available to our customers and increasing our capabilities; for example the launch of mobile banking and contactless payments.
Specialist Businesses: Using our family of businesses and our unparalleled high street presence, we are improving access to our diverse but complementary range of services for our customers and members. We will continue to offer our clients the highest levels of choice, service standards and care in the funerals industry. We are at the forefront of the significant change in the provision of quality legal services in the UK by widening access for all, improving transparency and delivering value for money for the consumer. We recently announced exciting plans to create 3,000 new legal services jobs in the next few years underpinned by a clear ambition to be the UK’s leading provider of consumer legal services. We are broadening the services provided to customers both in branch and online across our pharmacy business and exploring strategic opportunities for further growth. We are building a compelling co-operative online retailing presence, which builds on our strengths of great customer service, value for money and trust within our existing electrical and pharmacy online businesses.
Ethical highlights and social goals
- The Co-operative Group’s latest ethical plan, the most radical sustainability programme in UK corporate history, was launched in February
- The Co-operative Banking Group’s sustainable approach received international recognition at the Financial Times’ Sustainable Banking and Finance Awards for the third year running
- Some 5,000 schools have now signed up to join The Co-operative Group’s sustainability education programme - the Green Schools Revolution
- The Co-operative Enterprise Hub service, which continues to offer free advice and guidance to co-operative ventures has now supported the creation and growth of almost 1,000 member-owned enterprises since its launch in 2009
“This has been an important first half for The Co-operative Group, marking as it did the progress we made that led to agreement with Lloyds Banking Group on our planned acquisition of the Project Verde assets. This was the highlight of the ongoing strategic progress across our strong family of businesses.
“It is in times like these when our ownership model as a mutual really comes into its own. We have been able to continue to invest for the long-term development of all our businesses and to protect our customers even though we, like all businesses, have felt the impact of the tough headwinds of the unrelenting consumer downturn.
“A year ago I warned that we were operating in the worst conditions that I have seen in more than 40 years in business. The results we are announcing today show the full impact of that with the profitability of our two biggest businesses affected. The impact has been felt most keenly in our Bank which has been hit by increased impairments on lending to corporate customers and the on-going low-interest-rate environment. On a positive note however, our specialist businesses division continues to perform well and saw a strong increase in profitability in the first half.
“None of this was unexpected and we had planned for this outcome, so were well prepared. And the current environment only highlights again the strength of our ownership model that lets us plan for the longer term by continuing to invest to ensure our businesses maintain momentum and our customers are always offered value with values. We are supported in this by our healthy financial position, with a robust balance sheet and strong cash position.
“Looking ahead, we remain confident and we expect an improvement in sales and profit in the second half.. The environment is tough and we see no let-up in that. But we believe that the work we have done over the past five years to scale up in our core businesses means we are better placed than ever before to thrive when the economic upturn does come.”
The Co-operative Group:
Russ Brady 07880 784 442
Patrick Tooher 0161 903 4187
Tulchan Communications: 020 7353 4200
Notes to Editors:
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 has a strong reputation and presence in its sector. Other interests include the third largest retail pharmacy chain, the number one funeral services business, Britain’s biggest farmer and a growing legal services business. The Co-operative Group has over 7 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 Group 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 Levy (FSCS), significant items and fair value amortisation.
The double-dip recession in the UK that is creating the longest economic downturn for many decades inevitably had an impact on our sales and performance during the first half. Underlying operating profits for the Group as a whole were down by just over a third to £174m, and profit before tax and member payments (equivalent to the pre-tax profit of a plc) was down at £69m (£155m) with overall sales up 0.2% at £6.6bn.
Across our family of businesses, individual business performance was mixed. In our Food business, overall sales were 2.2% lower at £3.6bn while underlying profit was £119.0m (£142.3m)
In the Banking Group, revenues rose 3.9% to £1.0bn, delivering a profit of £36.9m (£115.0m).
Our Specialist Businesses continued to perform well, most notably within pharmacy and funerals, with revenue rising 1.5% to £777m while underlying profit was 19.3% higher at £62m.
The Food business recorded sales, excluding VAT, of £3.6bn in the half year. On a LFL basis, stripping out the planned sale of some stores, our sales were down 1.2%. Operating profit for the food business was £119.0m, down 16.4% on last year. As these figures suggest, competition within the industry remains fierce, particularly in the convenience sector where competition is growing almost daily.
Against the backdrop of this tough market, our focus has been to take every opportunity to develop our business and resist the competition. We are investing considerably in our infrastructure - our supply chain, distribution network and store estate – in order to continually develop our business.
We have ambitious growth plans too and are on track to deliver 80 new stores this year. In April, we acquired Scottish convenience retailer, David Sands, including its 28 food stores, distribution depot and head office. We have already launched three pilot stores under The Co-operative fascia, and our learnings will be built into the rest of the refit programme. The David Sands stores will be a valuable addition to our portfolio, as we forge ahead with our programme to grow the business by seeking new opportunities right across the UK.
In November, we will open the Avonmouth Composite Distribution Centre (DC), part of our supply chain transformation programme, known as LIDIA, which will be completed in 2013. The completed distribution network, of one National DC, nine Regional DCs, and two stockless facilities, will have the capacity to handle 32,000 deliveries a week and will give us an industry-leading distribution network that’s fit for purpose across our whole store estate.
Our ground-breaking SMART software has just scooped top awards at the Grocer Gold and BT Retail Week Awards. It has radically increased product availability in store to more than 97.5% and is set to streamline the whole store replenishment process with product ranges and orders for more than 2,800 stores nationwide now centrally controlled.
Our Commercial team is undertaking a huge project to develop our customer offer by segmenting our stores into five formats. This is enabling us to identify the best fit for each of our stores and tailor deals and ranges to customer demographics – giving our customers what they want, when they want it. In addition, our new Post Office counter service has been trialled in several stores, offering extra services to our customers and driving footfall.
We have now fully integrated our farming operation into the Food business. With a new senior leadership team in place, we will maximise the benefits of having end-to-end visibility of the supply chain which, in turn, should deliver sustainable profits. By aligning our businesses more closely, we will be able to mitigate any seasonal challenges, focusing firmly on delivering an improved British produce proposition.
Our products are continuing to lead the way, with several of our premium Truly Irresistible range picking up gold awards at the Grocer Own Label Food and Drink Awards. Our new customer magazine, available in our larger stores, contains all the latest product news, recipes and coupons to inspire our customers and really promote the ‘good with food’ message.
2012 is proving challenging, with the first double dip recession in the UK since the 1970s. Continued uncertainty in the Eurozone, prolonged low interest rates and the resulting impact on profits, together with higher unemployment continue to inhibit customer confidence and place pressure on the financial services industry.
Our operating result of £36.9m for 2012 (2011: £115.0m) reflected these challenging conditions. While the underlying performance was satisfactory, net income was down due to the continued low Bank of England base rate environment and increasingly higher cost of funding. Income also benefited from gains on the sale of Treasury assets of £10.7m (2011: £24.2m). Our bad debt charge rose to £91.9m from £46.1m, reflecting the strains in the corporate sector. The results however reflect a favourable result for the General Insurance business, which delivered an increase in operating profits of £23.5m during the period.
In line with many of our competitors, we have seen acceleration in the rate of PPI claims during 2012, driven largely by the activity of claims management companies, and the additional charge in 2012 of £40.0m (2011: £90.0m) reflects this. Other significant items of £45.0m (2011: £34.7m) were incurred during the year, primarily associated with the investment in our transformation and integration programme, and with our bid for the 632 Lloyds Bank branches. We remain committed to investing in our banking business and looking forward to growth and development.
Our core tier 1 ratio remains steady, at 9.6% (December 2011: 9.6%). Liquidity has been carefully managed and remains at robust levels, with a loan-deposit ratio of 101% at the half year (December 2011: 94%) reflecting our policy of keeping the ratio broadly in balance. During these difficult times, we have continued to support our customers, with £1.0bn lent to Retail Bank mortgage customers in the first half of 2012 (2011: £0.5bn) and a further £0.5bn (2011: £0.3bn) via Platform, our intermediary mortgage business.
Our customer advocacy levels testify to the high degree of trust placed in us by our customers, and our great customer service. As at June 2012, advocacy for The Co-operative Banking Group was 9.3% above the average of our top five competitors. Similarly, the number of customers who consider us their main bank, key to our continued overall growth, has increased further, with the number of primary current accounts increasing by 3.3% during the first half of 2012.
Our commitment to sustainability has again been recognised by the Financial Times, naming us as Europe’s most sustainable bank for the third year running.
Having been granted preferred bidder status by Lloyds Banking Group (LBG) in 2011 for the sale of its 632 branches, we announced in July 2012 that an agreement had been reached to proceed on the basis of non-binding heads of terms. The Banking Group is now working with LBG towards agreeing definitive, binding documentation, subject to the satisfactory completion of further due diligence and Board approvals. In the event of proceeding to the sale and purchase agreement, we will revisit the value ascribed to the investments made in our transformation plan to date. Completion of the transaction is expected before the end of November 2013 and will be conditional upon, among other things, regulatory approvals from the FSA, HMT and the European Commission.
The outlook for our industry looks unlikely to improve in the medium term and the risks remain considerable. However, the exciting prospects from the potential acquisition of the 632 Lloyds branches should be of considerable benefit to both our financial strength and the quality of customer service and product range. Our focus is to continue our transformation journey to become the compelling co-operative alternative, while delivering an acceptable level of financial performance in this very challenging economic environment.
Pharmacy delivered an operating profit of £16.1m, which represents an impressive 27.2% increase year-on-year, with revenue at £378.1m (up 0.9%). Prescription like-for-like (LFL) growth is up 3.1% on 2011. Over The Counter (OTC) LFL growth is up 3.5% on 2011. Both represent a creditable performance, given the wider economic environment and intense competition. Our continued focus on in store processes and reducing complexity helped to reduce wastage by 43% year on year. We continue to diversify and grow our pharmacy business. By the end of the half year, we had won three hospital trust contracts equating to five out patient pharmacies, of which three have opened. Working in partnership with the NHS enables us to bring our Co-operative values and excellent service to outpatients in hospitals.
Funeralcare performed well, with operating profit up 6.6% to £36.0m compared to the first half of 2011. Sales performance was also positive at £180.9m, which was up 6.0% on the previous year. To deliver the very best service to clients, Funeralcare continues to invest heavily in its employees, achieving Investors in People reaccreditation, paying industry leading salaries and launching a business wide apprenticeship scheme. Significant investment has also been made in products and services, with £6m invested in the vehicle fleet and over £8m invested in the estate so far this year, including 16 new funeral homes across the UK.
Legal Services recorded sales of £17.1m (up 18.9%) with profits at £0.7m (down 63.1%); the decrease in profits is in line with expectation and reflects investment for future growth. This half year marks the sixth anniversary of the formation of our Legal Services business, and in April this year we were the first major consumer brand to be awarded an Alternative Business Structure (ABS) licence by the Solicitors Regulation Authority (SRA). This licence enables CLS to offer a full range of consumer legal services. In time, this will lead to the creation of 3,000 new roles at CLS, helping to transform the business into the leading consumer legal services provider in the UK.
Life Planning delivered a half-year operating profit of £0.2m, up £1.4m (117.6% against last year) and recorded sales of £5.6m, an increase of 5.7%, with volumes up 7.0% to 45,400. Sales through our funeral homes and third party insurance partners continue to make a significant contribution.
Sunwin Services Group enjoyed a good first half year albeit seeing some delays in the commencement of new contracts. Despite tough trading conditions resulting in our customers, primarily in retail and banking, looking at ways to reduce costs, total like for like sales in the six months were up 23.0% to £17.5m. With this additional revenue and continued control over our overheads, like for like operating profit showed a healthy increase of 17.3% to £2.5m.
In Motors, our Land Rover dealerships continued to perform well, retaining the ‘Dealer of the Year’ title for our Bradford operation. Overall, Motor sales were down 5.3% to £135.9m, with profits also down 8.5% to £1.5m. On a more positive note, our Land Rover dealership sales were up 22.6% and profits up 13.1%.
E-Store sales were down slightly by 2.3% compared to last year. Putting this into context the wider UK Electrical sector is reportedly down around 10 to 12%. Our recorded profit was £0.5m (down 45.5%). The new Electrical in Food formats continue to perform well with a sales increase of above 60% in the trial stores, with excellent prices on well known brands proving to be popular with our customers.
Clothing sales were £3.0m (down 4.5%). The business was recently been awarded significant contracts and has a healthy pipeline. Gross margins strengthened due to cost base initiatives, with an operating profit of £0.5m (down marginally by1.1%).
Estates made a trading profit of £9.7m (up £0.1m), on revenue of £18.3m (up 2.2%). Our investment property portfolio valuation fell £1.4m, but the fall was less than the Investment Property Databank (IPD) benchmark. The construction of the Group’s flagship new building in Manchester, 1 Angel Square, continues on schedule and on budget, with migration into the building, continuing into 2013.
Although the UK economy is currently in a double dip recession, and the impact across all our businesses continues to be felt, we expect to see some improvement in the remaining 6 months of 2012. Our customers are looking to us to provide value and choice. We remain committed to this aim in addition to adhering to our Values and Principles.
The agreement of Heads of Terms for the Verde business, which includes 632 branches, 4.8m customers and 754 ATMs, will take a significant amount of our resources, as we look to integrate these into our existing Co-operative Banking Group over the next few years. Longer term, an enlarged bank will create cross-selling opportunities for the whole of the Group.
In July, the Group successfully refinanced £950m of senior debt facilities. This 5 year deal provides the Group with adequate funding to further develop our non-banking operations.
By continuing to listen to our members and customers, we remain in a strong position to grow our business, as we look towards the remainder of the year.