From food to funerals: a review of the Co-operative Group’s business performance in 2013

Despite posting an overall loss of £2.5bn, the Co-operative Group has identified a core set of businesses that are trading well in the current climate. The Group’s core...

Despite posting an overall loss of £2.5bn, the Co-operative Group has identified a core set of businesses that are trading well in the current climate.

The Group’s core business is food, while funerals, general insurance and legal services will form part of a new consumer services division. Read the full breakdown and trading performance of the Group’s trading estate.

Food

8164

  • Revenue £7.24bn (down from £7.44bn)
  • Underlying operating profit £247m (down from £269m)
  • Operating loss (after goodwill impairment charge and other one-off costs): £35m (down £218m)
  • Employees 69,482
  • Stores 2,779

“The food business is in a period of transition,” says the Group, which is reflected in 2013 results. Sales fell from £7.44bn to £7.24bn as a result of store disposals, a shorter accounting period and price reductions, and underlying operating profit was down from £269m to £247m.

The Food operating loss is after an impairment charge of £226m relating to goodwill which arose on the investment in Somerfield, reflecting the fact that the business’s future focus will increasingly be on convenience stores within the estate.

Its new strategy is called True North and is the start of an “exciting, five-year journey to transform” the food business, according to the Group. It is also part of a commitment to provide fair value, streamline promotions, develop its own label range to a high standard and refresh its estate of stores, including new store formats.

Some of this has already been seen in the last year, with the launch of the ‘Loved by Us’ range in September and the reduction of 1,000 prices. In the last quarter of the year, members spending between £5 and £100 were given a coupon for 10% of their transaction. The coupons could be used against future purchases and saw a redemption rate of 72%, far ahead of industry standards.

“Improving the look and feel of our stores is a key priority,” says the annual report. New store formats were rolled out in November, and by the end of 2014, 75% of stores will have been refreshed since 2012. In 2013, the society opened 32 stores and a further 32 contracts were exchanged for stores that will open in 2014. A large number of these are situated in and around London.

This year, the Group also announced that its farms division was no longer part of its strategy, and it is currently exploring options for the sale of this part of the business.

 

General Insurance8378

  • Revenue £476m (2012: £580m)
  • Underlying operating profit £36m (2012: £13m)
  • Employees 1,291
  • Sites 5

Last year, the Group said it would sell the general insurance division to concentrate on the Co-operative Bank and to help shore-up the Bank’s £1.5bn capital shortfall. However, it later announced that a further review found that it will keep the profitable business.

In 2013, general insurance achieved an improvement in underlying operating profit to £36m (2012: £13m) on revenue of £476m sales (2012: £580m) due mainly to better claims experience compared to the prior year. The result is driven by a positive performance of the home portfolio, supported by improved profitability in motor policies.

The Group said it will continue to grow this business, which has “considerable future potential”, around the proposition of fairness and can build on its current success.

Funerals8166

  • Revenue £370m (£358m)
  • Underlying operating profit £62m (£60m)
  • Employees 4,230
  • Branches 926

Co-operative Funeralcare increased both its revenue and profit in 2013, which was attributed to the expansion of its estate, as well as the introduction of new products and services.

Sales for 2013 were £370m – 3.4% up on 2012. Underlying operating profit increased 3.3% to £62.1m. In 2013, it opened 16 new funeral homes, invested £3.1 million in crematoria development and £9.5 million in its fleet of vehicles. In December, a new website was launched to allow customers to purchase, as well as manage, a pre-paid funeral plan online.

After establishing a National Vocational Qualification in Funeral Operations and Services, 2013 saw 415 employees join Funeralcare as apprentices. It also introduced a new management development programme, MySteps, to support all leaders across the business.

Pharmacy8173

  • Revenue £760m (£764m)
  • Underlying operating profit £33m (£28m)
  • Employees 6,980
  • Branches 782 branches

The pharmacy business continued to suffer from the impact of government funding on medicine pricing, according to the Group. Sales were down £4m, or 0.5% on 2012, while underlying operating profit was up £5m on the prior year – a 17.9% increase on 2012.

Prescription like-for-like sales were up 2.2% and Over the Counter (OTC) like-for-likes were up 1.7%.

Pharmacy achieved these results as a result of an increased focus on customer care.

Following a pilot in 2012, the Group rolled out its branch transformation programme which provides an enhanced customers experience, including training with a focus on customer service.

In total, 80 branches have been remodelled, while 11 branches have been relocated to meet customer demand, with a further 20 identified for 2014.

As part of the wider strategic review of all its businesses, the Group has decided that pharmacy will not be part of its future strategy. The business is currently being considered partially or in its entirety, for sale.

Co-operative Legal Services

8168

  • Revenue £33m (£33m)
  • Underlying operating loss £9.1m (nil)
  • Employees 560
  • Operating loss after goodwill impairment £22m
  • Sites 3

The Legal Services business remains in the early stages of its development, and this is reflected in the performance for 2013. Sales were broadly flat with losses arising from regulatory change, uncertainty about the future of the General Insurance business, and decisions to invest in future growth.

It is now looking to consolidate and optimise the portfolio, with further restructuring planned, to work more closely with funerals on probate and will and general insurance on family law, as part of a newly-formed consumer services division.

A goodwill impairment of £13m followed a reassessment of its business plan, which has assumed a slower growth rate than previously applied. This means that the overall operating loss of this business stands at £22m for 2013 (2012: £2m loss).

During 2013 it continued to invest in the Family Law business developing a transparent fixed fee pricing proposition for customers. The business achieved £1.2m revenue in its first full year of trading; however, it remains focused on ensuring it has an efficient operating model to take the business forward.

Electrical8158

  • Revenue £88m (£83m)
  • Underlying operating profit £1m (£1m)
  • Employees 118
  • Sites 3

Co-operative Electricals saw a strong sales increase in 2013. The second half of the year saw like-for-like increases in 25 of the 26 weeks. Sales and traffic peaked on ‘Cyber Monday’ (the first Monday in December) and Christmas Day, with a 56% increase in web traffic in December (22% increase overall in 2013). It said the profits remain flat because it has a commitment to offering customers value in this competitive market.

It said the UK is expected to see a recovery in the housing market which will lead to an increase in kitchen appliance sales. And demand will increase this summer for large screen TVs because of the World Cup.

Estates8160

  • Revenue £28m (£36m)
  • Underlying operating profit £11m (£19m)

The Co-operative Estates generated an income for the Group of £28m at year-end (2012: £36m), with an underlying operating profit of £11m (2012: £19m).

The commercial property market saw signs of improvement in 2013, particularly in the second half of the year, although this varied considerably by geographical region and property sector.

One of the key strategies for Estates in 2013 was to increase non-core property disposals, freeing up funding capital for use in the trading businesses. Examples of this include the exit of 40 properties generating £103m as part of a non-core disposal project. This had an impact on 2013 income and profits, which were therefore lower than in 2012.

Estates also continued to deliver large parts of the Group’s sustainability agenda, with further progress on renewable power and pioneering work on energy-saving fridge doors in the food business. Estates has achieved its 2007 target of reducing the Group’s energy usage by 40%, delivering a cost saving of over £100m.

A new office base has also been established near St Paul’s in London, allowing for consolidation of Group activities currently based in the capital.

During 2013 a number of longer term collaborative partnerships were developed with core suppliers, with a strategic lifecycle approach to key assets across our stores, branches and office buildings.

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