Report from Group Chief Executive Officer – Richard Pennycook

Richard Pennycook

Richard Pennycook

In 2013 the Group nearly failed and, had it done so, it would have been a cruel end to a 150-year proud history. In 2014 we took the necessary first steps to repair the damage and we are now set firmly on a journey of recovery. We have repaired our balance sheet, met our commitments to the Co-operative Bank and begun the implementation of fundamental governance reforms. There will be no quick fixes though, and it will take at least three years to rebuild the Co-operative, to a position where we can promise sustainable ongoing growth. Embedding our new constitution will run alongside this. The reassurance we can give to our Members is that we are now fully engaged in the work of rebuilding an iconic and much loved organisation.

This work is far more than just another commercial turnaround.

We are one of the world’s largest consumer co-operatives, the largest mutual in Britain, and we must operate in a way that makes us distinct in the community. Our Rebuild plans are about ensuring we deliver this promise.

Perhaps our most important work last year was to develop and announce our new Purpose, taking the Co-operative back to what it should stand for. Announced at the AGM in May, it is ‘championing a better way of doing business for you and your communities’. No other group of national scale could have this Purpose and the UK needs such an organisation in the 21st century as it did in the 19th.

As we worked last year to address our governance issues, we also had to deal with the financial consequences of long-term poor decision-making and inadequate business oversight that has inhibited the performance of all of our businesses. As a result of our crisis we eroded a huge proportion of the assets built up by our Members over a period of 150 years.

Our mergers and acquisitions of the past, having failed to give us the promised commercial benefits, had led to an unsustainable level of debt causing our lenders considerable concern. Reducing our debt has allowed us to take greater control of our investment decisions. Repairing our balance sheet meant selling three of our businesses, Farms, Pharmacy and Sunwin Services. We succeeded in finding good buyers and achieved excellent prices for all three businesses, yielding £0.9bn in total.

Having addressed governance and debt issues we have been able to focus on the details of our Rebuild agenda and give greater attention to a smaller portfolio of five businesses, all of which require investment.

We have developed a convincing plan to advance the commercial performance of Food, our largest business, which concentrates on improving and growing our core convenience offer where we have a track record of success and a strong nationwide presence. We have developed a detailed turnaround plan for our General Insurance business with new investment in digital technology. We want to grow our market-leading Funeralcare business and clearly define the future of our Legal Services offering.

We have already made the Group more efficient, delivering a new target operating model aligned to our Rebuild strategy and we are pushing further with efficiencies, making sure we have the appropriate running costs that allow us to invest where our customers will see the difference. Savings of over £100m were delivered in the year.

The figures in this report already show some early success in stabilising the Group. Whilst comparisons are difficult because of the extraordinary events of 2013, we have moved from a £2.3bn loss reported in 2013 to a £216m profit. Our debt is back at a more manageable level, having reached £1.5bn before our disposals. It is forecast to remain below £900m during the three years of our Rebuild strategy.

Our core Food convenience store estate is growing with 82 new convenience stores opened during 2014 and over 700 stores refurbished. Convenience store sales were up 3.2%, versus the market performance of 2.0%. We must use the profits we are now generating to address long-term underinvestment in our businesses. This means we will not be paying a Member dividend throughout the Rebuild phase of our turnaround.

Key to a successful Rebuild phase will be renewed engagement with our Members, who own the Society. Today our activities are not meaningful enough to resonate with the vast majority of Members. Out of over 8 million Members, 2.9 million Members have traded sufficiently with us to qualify to vote and we have the aspiration to increase voter turnout following our governance reforms. We need more Members engaging with us at all levels, whether through trade, community activities or the democratic process. Otherwise, we cease to be relevant. Further into the Rebuild phase, when we are ready, we will relaunch our membership proposition. It will contain compelling and clear benefits that only a co-operative can provide. Through every encounter and transaction we will demonstrate that we are making a co-operative difference. We will be testing the best of these ideas later this year.

Returning to being a campaigning business, showing leadership on social issues that matter to our Members, is also back on the agenda. However, it is important that our ambitions are realistic at this stage of our recovery and we must get ourselves back in shape commercially to ensure we can make an impact with our work. Our social campaigning must be proportionate to our strength, it must resonate with our Members and it must champion a better way to do business.

Let me take this opportunity to pay tribute to our former Chair, Ursula Lidbetter, the Chief Executive of Lincolnshire Co-operative, who stepped into the role at short notice in the midst of our crisis in November 2013. Ursula showed tremendous dedication, professionalism and commitment as she steered us through a difficult period of change for our elected Members and a traumatic time for the Group as a whole. She is a credit to the co-operative movement.

We have come through difficult times but we are now clear about the journey ahead. There can be no more worthwhile job in business than rebuilding the Co-operative.

Richard Pennycook
Group Chief Executive Officer