With retail sales dropping unexpectedly across the UK, the sector is undergoing a difficult period. Britain’s economy is likely to face deflation for the first time in half a century. As supermarkets step up the price war, co-operatives aim to work together to reduce operating costs. What can the sector do to turn itself around?
Retail analysts IGD warn that one potential consequence of deflation would be that customers might find price-only promotions less motivating when background prices are falling. James Walton, chief economist at IGD, believes that “rather than focusing relentlessly on price, now may be the time to invest in new products and services.” For retail co-ops this could be an opportunity to assert their co-operative difference.
Research conducted by IGD shows that 23% of shoppers expect food prices to fall in the coming year. They are also planning their grocery shopping, with 70% writing some form of list before going shopping. The trend for shopping around has continued to gain momentum. The average customer shops 24 times a month with 90% using a supermarket and a convenience store. According to IGD, co-operatives have seen a small increase in store numbers year on year, up by 43 (5.4%) in 2014. Sales have also increased last year by 2.3% to £4.1bn. However, over 61% of shoppers continue to view convenience stores, including co-operative retailers as more expensive.
Price deflation is driven by two factors, explains Ben Reid, chief executive of the Midcounties Co-operative. “Firstly, the falling commodity prices which is affecting products like milk. If we can negotiate better prices we can pass these onto the customer,” he says.
“The second factor, the intense competition driven by the success of the discounters, is a different proposition and poses a serious threat to the Co-operative food business.”
Retail co-operatives are in the process of moving from the Co-operative Retail Trading Group (CRTG) to Federal Retail Trading Services (FRTS), a new buying group designed to put independent societies like Midcounties on a level playing field with the Co-operative Group. The new FRTS buying groups will also have a chief executive.
“The prospect of us having to accept lower gross margins from our food businesses will, unless we can find ways of offsetting this, lead to reduced net profits and bring with it real pressure on all societies where food is the core business,” says Mr Reid. “The creation of the new FRTS organisation, the successor to CRTG, has been set up to enable societies to respond. We are exploring a wide range of potential areas where by working together we can all reduce our operating costs, which will enable us to absorb the inevitable reduction in profitability. A great example of co-operation in action.”
The past two years have seen negative PR for the whole movement due to the crisis at the Co-operative Group. However, this has not had a damaging impact on Midcounties, the UK’s largest regional retail co-operative.
“It was the Group’s crisis, not Midcounties’,” Says Mr Reid. “We are not in a crisis – the energy business did suffer for a period of time, but the agenda has moved on. We have worked hard to talk about Midcounties being local and as the year went on those people knew that we haven’t changed.”
The society had made efforts to increase awareness among people and colleagues of Midcounties’ financial soundness, he added.
Mr Reid thinks the new buying group could be one of the real benefits to emerge from the crisis at the Group, by changing the relationship between the Group and independent societies. “There are going to be tensions, but we’re all committed and have a forum to do that. The conflicts of interest, governance, and all those things, we’ve been able to leave behind and create something fit for purpose,” he says.
When other competitors choose to follow the example set by co-operatives it’s a tribute to the sector, argues Mr Reid. Midcounties was among the first businesses to get the Fair Tax Mark accreditation.
An initiative pioneered by co-ops, the Fair Tax Mark is now attracting big companies such as SSE and Lush cosmetics. The mark is awarded to organisations that display a high degree of transparency in their tax affairs.
“We started a bit like Fairtrade,” he says. “We entered it to say, ‘Come on people, look at what you’re doing and join’. Of course, co-ops should pay fair tax, if you work in the local community, businesses have to pay. It is part of the community strategy for us to pay our share. It’s quite fundamental.”
Co-operatives have been at the forefront of the Fairtrade movement, with Sainsbury’s coming on board later in the day.
“I was a bit sad with the PR that said they [Sainsbury’s] were bigger than us but that wasn’t the point, “says Mr Reid. “We did it to benefit people in Africa. The same with the Fair Tax Mark. If we can encourage people to look at what their accountants are doing and appreciate that if you are part of a community than you have to give back then I’d be really quite happy. It’s not just about headlines, but let’s be the change and co-ops should be there.
“Our diversity is our greatest strength. With the support of our board, which represents our members, we adopted a strategy to develop into new business areas when Midcounties was formed in 2005 following the merger of the Oxford, Swindon and Gloucester Co-op and West Midlands Co-op.
“This strategy has paid off. We now operate a wide portfolio of businesses that provide essential products and services to the local communities that we serve, and as the society has grown, our sustainable practices have evolved to benefit and reach an even bigger audience.”
Asked how the future looked for Midcounties, the chief executive says that the society was not looking to enter any new markets for now, but he did not rule out expanding into other business sectors in the future. “It’s an opportunity presented. If there is a co-operative solution then we would consider it. We like to think of ourselves as an entrepreneurial co-op,” he says.
Global trading is becoming more and more apparent and having a European buying group for retail co-operatives is something worth exploring, according to Mr Reid.
“I am one of those individuals that still thinks there is some mileage in exploring the European buying group option. It’s not for today, but when we get settled in the new structure, it’s hard to believe that there isn’t any advantage in it,” he says. “Co-operation is worldwide. Have we really explored this as deeply as we ought to have done?”