Where has reporting season left the retail co-operatives?

Paul Gosling’s analysis of the annual reports which have so far been released

There is marked inconsistency in the health of retail co-operatives across the UK. While some are performing well, others are in difficulty.

The Co-op Group is going through another stage in its recovery. Revenues rose 7% from £10.2bn in 2018 to £10.9bn in the 2019 year, while pre-tax profits rose by an impressive 50% to £50m even after the distribution of £76m to members and good causes.  

Food sales at the Group rose from £7.3bn to £7.5bn, with revenue increases for both insurance and legal services. Net debt was cut, from £764m to £695m. It would seem that the acquisition of Nisa in May 2018 is serving
the Co-op Group well, and is supporting a strong performance in wholesale.

The Group made £439m in capital investment, to position itself for future growth. Promising activity areas included the opening of 79 new stores, the extension of another 10 and the refit of 152 shops. It trialled home deliveries – a service that is now primed for expansion into a growing market segment. 

The disappointing performance – and this is largely true across the retail co-op sector – was in funerals, where revenues fell from £317m in 2018 to £307m last year. Funeral provision has become a more competitive market, with price competition and a demographic trend – prior to the Covid-19 pandemic – of greater longevity. The Group says it has now embarked upon a turnaround strategy for the funerals division, but there is uncertainty over the future given the ongoing competition and markets investigation.

Central England increased total revenues by 2.7% from £870m in 2019 to £893m in 2020. Trading profits declined from £18.1m to £17.5m, while reported operating profit increased from £11.9m to £15.5m. The travel division increased revenues from £40.2m to £49.2m, while funeral sales fell from £41.8m to £39.9m. Rental income of £8.7m was flat. The society opened 10 additional food stores and two funeral premises in the year, while also investing in upgrades of stores.

Midcounties also had a good 2019/20 year, with food retail sales increasing from £594m to £612m. However, while sales increased at its convenience stores, they declined in the larger supermarket shops. The society runs Post Office branches, which have returned a profit for the first time in four years. Childcare also performed well, with a revenues increase of 5.3% to £36m. This, though, is a sector that will have been badly damaged by the impact of the pandemic.

Related: Click here for more on the sector’s annual results

Interestingly, Midcounties’ travel division – branded as Co-operative Travel – performed very well in a trading period that pre-dated the pandemic. Midcounties retained its own travel business, despite the Co-op Group and what was then the Midlands Co-op (now Central England Co-op) entering into a joint venture with Thomas Cook, before merging them into the Cook brand. The collapse of Thomas Cook last year caused initial anxiety for Midcounties, but a subsequent surge of business for the society. Sales of travel products at Midcounties jumped from £397m to £554m, an increase of 40%.

Midcounties’ Co-op Energy business has had serious challenges in recent years and in September last year it was restructured, involving a strategic partnership with Octopus Energy and the sale of some of its customers’ accounts. The division is to be integrated with the Phone Co-op, which itself reported a significant jump in revenues from £7m in 2018/19 to £11m in 2019/20. The healthcare division had standstill revenues of £29m, but in a difficult trading environment the society is disposing of 22 pharmacies. The funeral division also has challenges, with turnover falling from £34m
to £33m.

Scotmid increased its turnover by 1.6% from £378m to £384m, but pre-tax profits fell from £6.3m to £5.7m. This was despite an accounting gain of £3m in added profits through a property revaluation. The operations of the society extend beyond Scotland, through its ownership of the Semichem chain, which performed well in Scotland but had difficulty in its other main trading area of Northern Ireland. Scotmid’s net debt was cut by £3.3m to £29.4m. The society’s accounts are not reported in a way that allows
direct comparison with other societies.

East of England Co-op had a difficult trading year, with turnover down 1.4%, £5m, to £349m, while trading profit fell by 19.2% to £4.5m. The society’s explanation for the poor financial performance was the impact of the rise in the National Living Wage – which does not seem to have been as significant an issue for other societies. Food turnover increased by £6m at continuing operations, but total turnover was hit by exiting the pharmacy and optician sectors. However, the society retains a strong balance sheet of £213m. 

Turnover at the Channel Islands Co-op rose 2.2% in the year from £181m to £185m, with trading profit rising from £8.8m to £9m. The society reported a loss for the year in excess of £4m because of an accounting provision in relation to a lease. The society reported that trading conditions in the year were difficult, with operating costs rising. Sales by its travel department fell significantly, by 11.5% to £3m, while funeral turnover fell by £45,000 (2.44%).

Chelmsford Star slightly increased revenue in the year, which rose by 0.4% from £113.5m to £114m. It reported a trading profit of £755,000, down from £901,000. After payment of share interest it recorded a loss for the year of half a million pounds, compared with a pre tax profit of £140,000 the previous year. In another worrying sign, capital expenditure which had been more than £2m in 2017 and 2018 was down to a mere £140,000. However, both the cash flow and long term liabilities positions improved significantly in the year.

Challenges during the year for Chelmsford Star included pressure on margins, reduced revenues from its department stores and a 7% fall in revenues in the funeral division. The travel operations did well, with sales increasing 5.4%.

Some societies report outside the main reporting season. Heart of England and some of the smaller societies have different reporting periods. 

Lincolnshire has just reported its most recent half year performance rather than a full year. It reported sales in the half year ending March of £165m, a fall from last year as a result of substantial provisioning on travel operations because of the onset of the pandemic. But food revenues rose 6.3%, while pharmacy rose 3.2% and funerals 5.2%. 

It is important to note that societies do no report their finances in identical ways, meaning that comparisons can be misleading. This includes the treatment of pension liabilities, which can make significant differences to overall financial positions. It is also important to recognise that societies have very different trading activities, while some societies generate large incomes from property portfolios. 

Larger societies tend to be provide much clearer presentations of their financial reports. The Co-op Group, Midcounties and East of England are particularly good in this respect, while Scotmid, Chelmsford Star and Channel Islands could do better in terms of presentation and transparency.

  • This post was amended on 4 July to correct the figure for the change in turnover for the Channel Islands Co-op’s funerals business.