Comment: Co-op has plenty to ponder after unsurprising H1 results
Co-op faces issues on price, stock and range
Another fall in profits from The Co-operative Group's food stores has hardly surprised the UK retail sector and there is the feeling the country's fifth-largest grocer has a lot to do to revitalise its grocery business.
The Co-op said yesterday (23 August) that lower sales in a "tough" UK market had hit profits from its food arm in the first half of its financial year.
Operating profit from The Co-op's food business was GBP119m (US$188.8m) in the half year to 30 June, down from GBP142m a year earlier. The decline followed a year in which underlying operating profit from that side of The Co-op's operations tumbled 20%. Sales from its food stores were down 2.2%. Like-for-like sales dropped 1.2%.
"A year ago, we warned we were operating in the worst conditions for 40 years," CEO Peter Marks said yesterday as he discussed The Co-op's first-half numbers with reporters. "These results show the impact of that."
Marks pointed to the wet weather in the UK in recent months as a factor in the performance of The Co-op's food stores.
"The big factor affecting our business is the weather. I joke that it's the worst summer since the Ice Age," Marks said. "Our food business is disproportionately affected. A few weeks ago, we had two or three days of warm weather and we had significant like-for-like increases."
Often, however, the weather is a bit of a weak excuse. The Co-op has more pressing issues than whether a bit of rain makes some head to larger stores in their cars than walk down the road for a top-up shop.
"The issues are a lot more fundamental than the weather," Conlumino analyst Joseph Robinson says. "The main thing is the growing competition its stores are located. Not only have you got Tesco and Sainsbury's more established but new entrants like the Little Waitrose format and even Morrisons, which looks like it is going to be focusing on that area in the future."
Robinson argues the increased competition highlights to consumers how The Co-op "falls short on price" compared to its rivals.
There are signs The Co-op is looking to spend to bring down its prices. The retailer said "investment" in price was a key reason in the lower profits from its food business in the last six months.
And, broadly speaking, it is clear The Co-op is working on a number of projects it hopes will revitalise its business, including investing in NPD and implementing a new stock management system.
Robinson says The Co-op has acknowledged the work it needs to do and is investing to improve its food business. However, he suggests the retailer needs to think even more about the offer in its stores.
"Maybe it needs to go one step further and really think about the role of its stores, whether that is segmenting its stores its small ones into a bigger food-to-go offer and focusing its bigger stores into a small supermarket format," Robinson says. "It needs to consider whether it want its convenience stores to be supermarkets or should it be focusing on other aspects like food-to-go and having a more limited offer in grocery."
There is a lot to ponder, not just for Marks but also for whoever his successor as CEO will be. Price, stock management, NPD and range are four key elements of a successful retailer and, in some ways, The Co-op could be argued to be behind some of its rivals on some or all of these metrics.
"The organisation was never just about one man," Marks said yesterday. "Whoever sits in my seat will have a great team around him. We've transformed this business in five years and we're going to transform it again."
Improving The Co-op's food business will, it seems, be one of the retailer's toughest tasks.
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