2009 Business review


It is no understatement to say that 2009 has been a transformational year for The Co-operative Group and an historic one for the Co-operative Movement as a whole. Over the past 12 months we have achieved the acquisition of Somerfield, the merger with Britannia, the launch of our brand advertising campaign and the ongoing transformation of our entire estate. Taken individually, each of these events would mark a significant change for any business. Taken together, they demonstrate that 2009 saw the greatest change to the business, in its entire history. These achievements, however, are merely the tip of the iceberg

The bringing together of Somerfield with our existing Food business has, for instance, involved an enormous amount of work behind the scenes to establish a combined Food business with almost 3,000 stores the length and breadth of the United Kingdom. This work has been undertaken whilst maintaining business as usual ensuring that we continue to place the utmost importance on great products and great services. It is to the credit of everyone involved that our new and existing customers now view the Group as a totally revitalised business.

2009, then, has been a year of growth – both in terms of our core businesses and in terms of how the Group is viewed by the outside world thanks to the rollout of the brand advertising campaign and the transformation of our family of businesses. The Co-operative is once again a respected brand on the high streets of the communities in which we operate. We have taken the Big 4 and created the Big 5, and we have created the UK’s first “super mutual” in financial services.

This is how we come to be reporting another year of excellent figures, with gross sales up 31% from £10.4bn to £13.7bn and Group revenue before reinsurance premiums up 33% from £9.4bn in 2008 to £12.5bn. Profit before payments to and on behalf of members – equivalent to pre-tax profits in a plc – rose by 85% from £218m to £402m. However, this included a £99m benefit from the fair value amortisation relating to the Britannia merger and significant improvements in the performance of our investment property portfolio, offset by a reduction in the one-off gains in the disposal of fixed assets.

Excluding these, underlying operating profits of £473m were 20% up on last year. Our borrowings increased from £648m to £1.6bn, largely as a result of the Somerfield acquisition and our investment in the brand rollout. This resulted in a net debt to EBITDA ratio of 2.4 compared with 1.4 in 2008. Members’ funds also rose during the year by 15.2% to £4.5bn.


Our Food business delivered an excellent result with sales including Somerfield up 66% from £4.5bn to £7.5bn and trading profit up 31% to £286m from £219m the previous year. Like-for-like sales increased by a healthy 5.5% year on year. Following a strong Christmas in 2009, we have now delivered 16 successive quarters of like-for-like growth in a fiercely competitive marketplace and a difficult economic climate. Against the backdrop of financial pressures on household budgets, rising unemployment and increases in fuel prices and extreme wintry conditions, our focus on great deals and community-based stores, helped boost sales.

The big story of 2009 for the Food business, however, has been the Somerfield acquisition and the fact that three years of planned growth has been completed in a single, decisive move. We now operate almost 3,000 local community stores. Each week, we serve 21 million customers and we have a store in every single postal area in the UK bar one. The Somerfield acquisition has also changed our Food business from being focused very much on the convenience store sector to one which combines that expertise with a strong presence in small supermarkets. The challenge now is to become the market leader in that sector, just as we are in the smaller store convenience sector. Our heritage and support for the UK was highlighted throughout our store estate with the launch of our campaign to support British food and reminding our customers we have been at the heart of the community serving Britain for 165 years. During 2009, 778 stores were rebranded and upgraded, 597 Co-operative and 181 Somerfield stores converted to The Co-operative brand which means that 65% of the total estate, including Somerfield, has now been rebranded and modernised, providing a progressive modern shopping experience for our customers. Crucially, sales from rebranded stores have increased by 12% year-on-year.

We have placed value right at the centre of our customer message this year with the Great Deal Locally campaign, which focused on the fact that our stores are located in the heart of local
communities so best placed to deliver great savings to customers, without the need to travel to big superstores. Great Deal Locally focused on price cuts, helping customers buy what they actually needed. We introduced Bulk Stacks of show-stopping deals on products that are meal or household essentials, supported with significant television, in-store and leaflet communication. Our most important diet and health initiative this year has been the Green Dot campaign, highlighting healthier choices with a simple prominent green dot on the front of our packaging. Customers of our Healthy Living and Reduced ranges and those buying fruit and vegetables were already familiar with this approach. All Green Dot messages are based on approved nutrition claims. The Green Dot campaign has been an unreserved success with these 850 healthier green dot products making up 25% of our own-brand offering, and accounting for 15% of sales. Our Simply Value range has been another great success, with an 85% increase in sales year-on-year. Other highlights included our Meal Deal campaign – which focused on providing customers with great value family meals – and our Christmas Smart Coupon campaign.

At the Scottish Retail Excellence Awards, The Co-operative won the prestigious title of Retailer of the Year. Judges said the Group demonstrated leading performance across all aspects of its
business in Scotland, including clear brand values, commitment to product and store innovation and active involvement in the communities it serves. The Co-operative also picked up the Green Retailer of the Year award for the second year running. As far as 2010 is concerned, although the marketplace remains challenging, both in terms of the economic climate and the increased competition from other retailers, we are confident our offer is distinct enough to retain customers and drive further growth in the year ahead.

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Financial Services

The Co-operative business model is increasingly being seen by consumers, commentators and politicians alike as a long-term and sustainable solution to the challenges facing the UK financial services industry.

Against the backdrop of the banking crisis and the worst economic recession in decades, few financial services businesses can claim to have strengthened their balance sheet, brand strength and future strategic capability in the past 12 months in the way The Co-operative Financial Services ( CFS ) has.

The merger of The Co-operative Financial Services with Britannia Building Society has created the UK’s most diversified, mutual financial services provider. Merging two complementary businesses driven by shared values and values, offers the UK consumer a member-owned, customer-led and ethically-guided alternative to the shareholder and state-owned banks so publicly called into question by the ‘credit crunch’. Moreover, the merger delivers increased reach, diversity and opportunity, whilst enhancing the financial capability of the business which is clearly in keeping with the long-term interests of our members and customers.

Total operating results (i.e. operating profit before tax, FSCS levy, significant items, short-term investment fluctuations and fair value amortisation) for 2009 was £177m compared with £147m in 2008 (an increase of 21%). These results reflect the business’ success in maintaining profitability despite the continuing weakness of the market. Meanwhile CFS’ underlying capital and liquidity positions continue to provide the foundations for stable growth. Our liquidity position remains very strong at 104%, and we remain very well capitalised with a capital ratio of 13.6%. We have also maintained rigorous cost control, with pro-forma 12-month operational costs down by 1%.

These figures reflect a business determined to achieve commercial success within a framework of financial prudence and strength. Our focus in 2009 was on delivering a groundbreaking merger while maintaining ‘business as usual’. It is to the credit of all colleagues that profits have improved with underlying like-for-like profits up 3% to £174.3m. Customer loans have also increased significantly to £34.1bn (2008: £10.2bn) as a result of the merger. On a like-for-like basis, customer assets have remained stable in difficult markets which re-affirms our support for UK consumers and business, while retaining our strong liquidity and capital positions.

Our liquidity has also been supported by strong growth in customer deposits as consumers continue to be attracted to the CFS mutual and ethical position and competitive pricing. Customer deposits have consequently increased significantly to £32.5bn (2008: £11.7bn) which on a like-for-like basis represents a growth of 2.6%.

Throughout the year CFS was widely recognised as a customer services’ champion in being named Best Financial Provider by Which? and by receiving the UK Customer Experience Award as ‘best large company’. The Co-operative Bank and smile, our internet bank,  took two of the top three spots at Which’s inaugural People’s Choice Awards, while the Co-operative Insurance won a platinum award for Motor Claims customer satisfaction from Consumer Intelligence.

Platform was named Best Intermediate Lender by Your Mortgage Magazine and our Corporate Banking operation was named small/mid-sized debt provider of the year. Crucially as a business that seeks to take both personal and social responsibility, The Co-operative Financial Services also became one of only seven businesses to be awarded the new ‘platinum plus’ rating from Business in the Community.

These awards have helped bring us to wider consumer attention. Current account sales have seen a 38% uplift at a time when many competitors are struggling to keep existing customers. Meanwhile life & savings new business premiums for 2009 were 30% higher than 2008 and general insurance gross written premiums increased by 8%.

To support our people in delivering our customer promise, and to lay the foundations for sustainable long-term growth, we are investing significantly in the transformation of our systems and process infrastructure. 2010 will see the first phase implementation of a major programme to transform our banking systems infrastructure with the launch of a new, more customer-centred business banking service. We will continue to focus on stability and core strength rather than opportunism; building on strong performance in 2009 to deliver further benefits for members, customers and society. Above all we will continue to offer consumers a viable alternative to traditional financial services – a model that is fair, easy, responsible and personal.

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Despite extremely tough trading conditions during the course of 2009, and continued
pressures on the market driven by further cuts to pharmacy funding from the Department of Health (DoH), our Pharmacy business has delivered a creditable performance, with sales up from £744m in 2008 to £745m. Operating profits were down 21% from £37.8m
to £29.9m. Despite this, there have been a number of significant achievements during the year ranging from the launch of a new National Distribution Centre, which will improve stock availability for customers in over 750 pharmacies and give us improved control of our procurement, to sizeable investment in our IT infrastructure, which includes the introduction of a new financial management system and the rollout of a new EPOS In Control platform to all branches.

2009 has also seen us take great strides in rebranding the business with 221 branches newly refurbished and 12 branches positioned either closer or actually within primary care trusts which enables our customers to collect their prescriptions with the minimum of fuss. Other highlights of the year include the launch of our Healthy Heart initiative within Health Centres and improvements to our membership offer, such as the rewards available for the Prescription Collection Service.

Our medicines use reviews have also gone from strength to strength, growing 48% year-on-year and now delivered in 635 branches in England and Wales. Going forward, 2010 is going to be a key year in the development of the industry, with the conclusion of negotiations between the Pharmaceutical Services Negotiating Committee (PSNC) and the DoH regarding the new pharmacy contract and corresponding funding allocation. Within the Pharmacy business itself, we will need to ensure that we are equipped to take the full benefit of the national implementation of the electronic prescription service, a step that will see further investment in our patient medication record systems in branch.

Our joint venture in China should be in production towards the end of the year and the first generic medicines should start to be distributed to pharmacies, adding to the continued strengthening of our own-label medicines and the improvement of our ‘over the counter’ offer.

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The Co-operative Funeralcare sales during the year were up from £274m to £287m. Operating profit before significant items increased by 11.5% from £39.2m to £43.7m.

In delivering these results, providing exceptional client service remains central to Funeralcare’s
strategy. Significant investment in Funeralcare’s premises, vehicles and staff has continued throughout the year.

Funeralcare continues to expand its business portfolio following the merger with Plymouth and South West Co-operative Society with a further 32 funeral homes joining The Co-operative Group. The business also acquired a new Woodland Burial site, Mayfields, located on the Wirral, Merseyside.

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In the worst recession for 60 years and the most challenging year for the travel industry, sales in our Travel business fell by 5.9% from £262m to £246m, leading to an operating loss before significant items of £2.3m, down £7.6m on last year. To mitigate the impact of lower volumes, action was taken during the year to both reduce the cost base and improve business efficiency, including consolidation of our profitable call centre businesses and changes to the business model within our Homeworking Division. This work has helped to ensure we are better placed
to benefit from the future recovery in the economy.

2009 saw the launch of our own tour operation ‘Co-operative Holidays’, in partnership with Cosmos, and the continued growth of our dynamically packaged beach holidays. Sales through our new website, www.co-operativetravel.co.uk, grew rapidly in 2009 as we further developed the site, and our Travel business was voted National Retail Travel Agent of the Year at the British Travel Awards.

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Legal Services

Our Legal Services business had an excellent year with sales up 45% from £14m to £20m and with operating profits before significant items up £2.1m from £1.7m to £3.8m. In a short period of time we have established the business as a significant provider of personal injury claims and management services to internal and external business partners. In addition, we have become one of the leading providers of wills, probate and estate administration services in the UK, supporting not only customers of Co-operative Funeralcare, but also those of other societies within the Co-operative Movement and of external partners.

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Life Planning

With sales up 73% from £18m to £31m and an operating profit before significant items up £2.6m from £1.9m to £4.5m, our Life Planning business enjoyed another record year. Success continued to be driven by broader distribution, continued product innovation and greater customer awareness. 2009 has seen the investment and planning carried out in 2008 really start to reap benefits. For instance, our legal charge product which was launched the previous year in partnership with Axa, went on to surpass all expectations.

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Sunwin Services Group

2009 has seen Sunwin Services Group continue the growth begun the previous year. Sunwin Security and eSolutions have both worked hard to expand their business and Aegis has worked tirelessly to reduce costs and provide an industry-leading service which is now being extended to Somerfield stores.

Overall, sales were up by 28.9%, from £22m to £28m and operating profit before significant items was up £3.8m, from £0.7m to £4.5m.

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The current economic climate has undoubtedly impacted upon the Motor business with turnover decreasing by 5.5% from £209m in the previous year to £198m, and profit decreasing to a loss of £1m. Whilst the Government’s scrappage scheme has stimulated sales of new cars, this has adversely affected margin with reduced interest in higher margin used cars. The business also began rebranding in 2009, from Sunwin Motors to The Co-operative Motor Group, and this will continue in 2010, thereby taking advantage of a wide range of synergies with the other businesses in the Group, as well as renewed consumer awareness of The Co-operative as a trusted brand.

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Despite continuing challenges presented by a fiercely competitive market, our Electrical business has had an excellent year in 2009, with Internet sales up 36% compared to last year.

The electrical industry in the UK was circa 10% down in 2009, and the on-line electrical sector finished the year level, measured against 2008. Considering these industry figures it is obvious Co-operative Electrical has again increased its market share during the last 12 months. Total sales including our buying group increased by a significant 54% compared to the previous year, with Co-operative Societies also performing well measured against the sector. Anglia and Channel Islands also joined the buying group during 2009, which has assisted the buying group in achieving its volume growth.

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Our Estates business performed well despite the impact of the credit crunch. Turnover was slightly down from £34m to £33m due to surplus asset disposals and tenant bad debts, and trading profit down £1.6m from £20m to £18.4m.

Despite a difficult market, the value of our underlying investment portfolio increased in value by £3.5m to end the year at £321.6m. This is expected to improve further as the property market emerges from the recession.

Through an ongoing initiative to reduce energy costs the division is saving our businesses £14m per annum, a 20% saving on a 2006 like-for-like basis. Estates is also driving forward the Group’s new Head Office and Masterplan for the development of the existing HQ site, and having completed the detailed design work has now begun on site. Our Corporate Procurement department made an important contribution to the Group helping guarantee significant savings.

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2009 has been another year of steady performance for our farming business, with an overall profit of £4.2m, a decline on the previous year driven by cereal prices, but a growth in potato packhouse profits. We have seen further expansion of our unique ‘Grown by Us’ range, with new products including carrots, sweetcorn and turkeys, but the key aspect of growth for the business has been the increased depth of distribution as products have been rolled out throughout both the Co-operative and the Somerfield estates. The business was also included in both the high-profile brand advertising campaign and Food’s Christmas advertising campaign, which helped to raise its profile.

The Co-operative Farms won Farm Business of the Year at Farm Business magazine's Food & Farming Industry Awards. At the Farmers Weekly Awards, Nick Padwick, Stoughton's Farm Manager, won the overall Farmer of the Year title, as well as Farm Manager of the Year, and Russell Armstrong, Farm Manager at Coldham, was named Green Energy Farmer of the Year. Finally, William Barnett, Farm Manager at Tillington fruit farm, won Top Fruit Grower of the Year at Horticulture Week magazine’s Grower of the Year Awards.

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