The Co-operative Group has warned it is on course to break even at best this year, despite returning a profit in the first six months after a strong performance at its convenience stores and funeral homes.
The mutual said investment in new stores, IT and higher staff pay meant it could make a small loss for the full 12 months – down from a £124m profit last year. It has spent about £125m on price cuts, mostly on fruit and vegetables, over the summer which will affect profit margins in the second half.
Richard Pennycook, chief executive, said: “We’re making real progress in rebuilding the Co-op and getting back to what makes us different as an organisation, focused on members and the communities in which they live ... We’re fixing the basics, investing for the future and it’s working.”
Pre-tax profit rose to £36m in the six months to 4 July compared with a £9m loss in the same period a year before, even though there was a slight fall in group revenues to £4.6bn from £4.7bn. The small decline was a result of a fall in sales at the Co-op’s insurance and electrical goods businesses.
Sales at the group’s established food stores rose 0.8% in the six months to 4 July as they coped with a tough market in which all the big supermarkets have seen sales fall. The Co-op’s convenience stores increased sales by 3.3%, excluding gains from new stores. The group also conducted 12% more funerals, as a rise in death rates led to its busiest start to the year since 2008.
Growth at the convenience stores was partly helped by £300m of discount vouchers and “swipe and win” prizes for Co-op members handed out over the half year as Pennycook said it was a priority for the group to ensure that membership felt worthwhile.
Sales were boosted by a near 50% rise in capital expenditure to £144m over the six months. Pennycook said the money had been spent on improving the look of existing stores as well as on 35 new convenience stores, IT systems and 10 new funeral homes.
Pennycook said the Co-op would spend up to £350m in capital expenditure by the year end as it continued to modernise the business after years of underinvestment. He said the investment meant net debt was likely to rise again, to £900m, by the year end. Net debt more than halved to £570m in the first half, from £1.4bn a year before.
Part of that spending will be funded by the sale of unwanted larger stores – 28 were sold in the half year and the Co-op intends to sell up to 300 in the long term. Pennycook said there would be no fire sale. “We don’t have urgency and we don’t want to push stores into the market at any price,” he said. “We will spend many years working them out into the market when we can see good demand.”
Allan Leighton, the Co-op’s chairman, said the board wasworking on plans for members to nominate and elect a fourth independent member. He said a process would be in place before the next Co-op AGM but could not put a definite timetable on it. “It’s a work in progress but the most important thing is that we get it right,” he said.
Meanwhile, the Co-op hopes to improve the way it communicates with members with the help of Mike Bracken, the former head of the government’s digital services, who joins next month.
Leighton said: “We are working on making membership really meaningful and part of that has to be the development of one member, one vote. There is a laborious process for members to interact with us and that’s something we want to make a bit easier.”
