Analysis: Co-op’s battle continues as new era dawns

The Co-operative Group will have a new head office, a new food boss and a fresh face in the post of chief executive by the time next summer is upon us. But for all this internal change, it’s unlikely the scale of the retailer’s challenges, battling the big four in the most competitive of retail sectors, will have eased by then.

From its foundation in Rochdale in 1844, The Co-op went on to become the UK’s largest grocer in the 1960s. But four decades on and its crown has slipped as it suffers declines in both like-for-likes and market share in a bitterly tough trading environment.

Last week, after 45 years at the Co-operative Group, its chief executive, Peter Marks, signalled his intention to stand down next year. The group has changed immeasurably during his time at the organisation, driven by events including the acquisition of Somerfield, the unification of the group’s disparate businesses across banking, funeralcare, pharmacy and food and the loss of market share.

Marks claims poor market conditions have hit the grocer hard. “Retailing is very tough at the moment in food,” he says. “Volumes are going down and people are spending less on food for the first time I’ve witnessed. We will come out at the other end, but I don’t know when. We are going to be in better shape come that point.”

He adds: “Market share is important, but it is not the be all and end all. That does not worry us too much. Competition is strong, the market is vicious.”

But with the convenience market set to be worth £44bn by 2017, according to IGD forecasts, the Co-op should be gaining from customers shopping with small baskets more frequently.

So why are the grocer’s sales falling? Analysts claim that its problems run deeper than the tough market, and caution that its competition should be watched closely. Sainsbury’s, Waitrose and Asda are all witnessing steady growth and stronger footholds in the Co-op’s core convenience market. Meanwhile, the broad customer appeal of Tesco’s Express format continues to fuel growth, and the UK’s largest retailer’s £1bn strategy to “build a ­better Tesco” will worry all its rivals. Marks & Spencer’s high street food business is also performing well. 

Complete convenience

Bryan Roberts, retail insights director at Kantar Retail, says: “The Co-op needs to understand the difference between being a genuine convenience store and a cramped smaller supermarket.” He believes that creating a compelling food-to-go offer should be high on the company’s agenda and that the Co-op’s trial of Amazon lockers to collect online orders in store is a good move to drive footfall.

Danielle Pinnington, managing director of Shoppercentric, believes price is a key factor in the Co-op’s struggle to wrestle market share from competitors. “There is a perception that the Co-op is too expensive because it has been seen as a convenience store and c-stores often cost more,” she says. “It has an image of being more expensive than large grocers that have moved into convenience. Shoppers are often surprised by the Co-op’s quality and promotions.”

According to some, it was the £1.57bn acquisition of Somerfield in 2008 that exacerbated the problems the Co-op was already facing in a difficult market. Arguably, Marks’s tenure will be defined by it. Originally heralded as the Co-op’s true arrival in an extended ‘big five’ of grocery, the integration quickly hit problems, particularly with regards to amalgamating operations and staff.

Yet Marks remains bullish about the move. “Yes, it’s been tough,” he says. “We bought the business in 2008 and we had the worst financial crisis that this country has ever seen the same year. Five years on and we’re in a depression. Integrating a business has not been easy in these horrendous conditions. Was the Somerfield acquisition tough? Yes, it was. Am I pleased with it? Absolutely. In these businesses you need scale to improve buying terms and costs. We needed to take the business to the next level.”

Planet Retail UK grocery analyst David Gray says: “Somerfield has been very, very challenging. In context, Somerfield was an enormous business and integration problems were likely, as we saw with Morrisons and Safeway before that.”

Reports that former Somerfield stores are not performing well make grim reading, suggesting Somerfield shoppers have not moved over to the Co-op. An internal memo leaked in February said complaints at the 650-plus ex-Somerfield stores were rapidly increasing and customers had been overcharged due to pricing errors.

However, one source close to the Co-op said: “In truth, many of the operators who have taken on the former Somerfield stores have struggled with them. Their customers were used to high/low pricing and an offer that some of the convenience operators cannot reproduce.”

That said, while the Somerfield acquisition has undoubtedly given the Co-op further scale, question marks remain as to whether it truly has a ‘big five’ mentality or the capacity to compete on price with the likes of Tesco.

Steve Murrells, the Co-op’s new chief executive for food, will be hoping he can lead the charge to better take on the larger grocers. He joined the retailer last month from Danish meat company Tulip and will have his sights set on turning around a slide in market share. The former Tesco and Sainsbury’s executive will look to quickly form a strong management partnership with chief operating officer Sean Toal, who had been acting chief executive for food since January.

The grocer is trialling a handful of new format stores. Marks has been cagey over the details of changes to these stores but their navigation has been improved. Marks said he is “delighted” by like-for-likes at the revamped stores and that a roll-out is planned.

The Co-op is also well placed to take advantage of a return in momentum for consumer sentiment towards ethical sourcing, which waned at the peak of the financial crisis in 2008. Sainsbury’s has benefited from what its chief executive, Justin King, describes as “value and values”. And public support for dairy farmers in the dispute over milk prices last month further illustrated this trend. The Co-op’s clear core values and ethical model leave it well placed to benefit from this and commentators believe it should rethink its marketing.

Roberts says: “The ‘Good with Food’ strapline could definitely be changed. The Co-op’s marketing and communications definitely need to be reviewed. In this environment, you need to be distinctive.” The Co-op has trademarked ‘The Co-operative Here For You For Life’ and ‘You And Us The Co-operative’ which could replace its existing tag line.

An acquisition agenda

Despite the problems experienced with Somerfield, the Co-op has made it clear further acquisitions remain on the agenda. The acquisition of the 28-store David Sands chain in Scotland in January was a signal of intent. The buy forms part of the Co-op’s ambitious plans to expand its food store network by 300 sites over the next three years, taking on some 7,000 extra staff.

The Co-operative Group last month agreed a £950m refinancing deal with a group of banks led by Barclays. Most of the capital will be invested in the group’s legal services division, but some is likely to be given over to small-scale food retail acquisitions, analysts believe.

Gray says: “In recent years, we have seen the Co-op gobble up smaller property operators and there’s definitely potential for more. The deal puts them in good shape for that. The David Sands acquisition gave the Co-op more reach in Scotland but they still have room for growth there. They are also expanding in the South and East.”

Shore Capital analyst Clive Black believes acquisitions should not be the priority. “It will also need to invest in stores and organic growth and fully digest the Somerfield business,” he says. “Problems in its estate around parking, leases and access make it difficult to compete.”

Leading a transformation

Marks has been modest about his legacy after a six-year stint as chief executive of the mutual, which has included the arduous and lengthy acquisitions of Somerfield, Britannia and 632 Lloyds Banking Group branches.

Marks believes integration has been the defining key word of his period in charge. “It was a fragmented ragbag of individual organisations almost competing with each other,” he says. “It is for other people to say what I have done but a few years ago we were managing decline and we have moved the brand significantly. We were losing market share, influence and brand identity. I feel very positive about it now. Not everybody agrees with the model but we now have 90% of the co-operatives in the UK and have the scale to invest.”

Gray says: “His key legacy is unification. Creating one brand from so many businesses trading under different names was a good decision.”

Roberts says: “It was the right time for him to leave. He has led them through a lot of big deals. It’s important to remember he is the group leader, and food retail is just one part of it.”

Murrells will hope next month’s move into the group’s new £100m Angel Square head office in Manchester will herald a new dawn.

Ultimately, the Co-op will thrive by focusing on offering a rounded convenience offer and ensuring it capitalises on the shift in the consumer mindset towards smaller households shopping locally and more frequently.

Marks says that Murrells is “confident” about the task in hand and adds he is philosophical about his own 45 years in the trade. He says: “The food business has changed materially. There was no big four when I started, technology has changed vastly and when I started there weren’t even self-service stores. But, at the end of the day, it’s still selling cornflakes and tins of beans.”