SWOT analysis: The Co-op has ground to make up in online retail

Strengths

It’s the fifth-largest grocer – with food sales of just under £7bn in 2015, the Co-op is still the UK’s fifth-largest grocer, although market share has been under pressure of late.

Largest local store network – 75% of the Co-op’s 2,800 or so food stores are small neighbourhood shops, making the group the leading player in the currently buoyant convenience store sector.

New era – The long-overdue restructuring of the group has created a more professional board that is held to account by a national members’ council and continues to promote the traditional values on which the Co-operative movement was built.

The high-profile appointment of well-regarded senior retailers has been a clear statement of intent from the Co-op regarding its commitment to transforming its food business.

Appointment of chairman Allan Leighton – New chairman Allan Leighton personifies the new approach at the Co-op, combining extensive business leadership experience, including a successful stint at Asda, with a commitment to the Co-op’s unique heritage – his father ran three Co-op stores.

New head office – The new head office that became operational in 2013 has been a concrete expression of the Co-op’s integrated and unified future and has won a series of sustainability accolades.

“Over 75% of the network has been refurbished within the past two years, which is helping to make Co-op stores more attractive to customers”

Ethical image in tune with the times – The Co-op has been at the forefront of ethical issues that have become increasingly important in retailing. ‘Responsible’ retailing has remained at the heart of its approach.

Lack of exposure to large stores – With very large superstores having become much less relevant in the changed grocery market, the Co-op stands to benefit from the fact that only a quarter of its estate is larger supermarkets.

Moreover, the location of most of these stores at the centre of communities has protected sales to a certain extent. Underperforming stores will be closed as part of the Rebuild phase of the recovery plan, but the closure programme would appear to be more manageable than at some of its larger rivals.

Weaknesses

Failure to exploit key USPs – The Co-op has failed to maximise its strong brand and extensive local store base up to now.

It is aiming to put this right from 2016 though, and is investing some £1.3bn in a rebranding programme that is reviving its traditional blue cloverleaf logo from the 1960s.

Supply chain – Despite significant recent investment, the efficiency of the supply chain continues to be questioned, with unacceptably high levels of out-of-stock situations across the business.

Prolonged under-investment – The Co-op has suffered from long-term under-investment throughout the business and the store network had been looking tired in comparison with its rivals.

Investment in refurbishment was raised by nearly 70% to £106m in 2014 and was increased again in 2015, but this has impacted margins.

As noted earlier, it is now investing some £1.3bn in a major rebranding programme from 2016. All of its stores will be rebranded and refreshed in a transformation programme that is expected to take three to five years.

Loss of market share – Market share had declined from over 7.5% immediately following the Somerfield acquisition to just under 6% by the beginning of 2015.

It has continued to fluctuate around this broad level subsequently as the discounters continue to encroach on the mainstream grocers.

Crisis at the bank – The move to expand the financial services division through the acquisition of Britannia in 2009 was ill-judged, while the appointment of Paul Flowers to chair the bank from the following year proved even more of a misjudgement.

This resulted in the group losing control of the Bank in late 2013, while repercussions from the scandal have damaged trust in the brand as well as the ethical position of the wider business.

Historical structure – The Co-op’s ability to exploit economies of scale has been hampered by its historically weak regional structure, while in the past it has been required to subsume underperforming operations from failing societies.

Opportunities

Focus on food – The disposal of the 780-strong pharmacy business in 2014 reduced debt and means that management can now focus on turning around the core food business. Meanwhile, the sale of 300 smaller stores to McColl’s Retail Group in July 2016 means the group will be able to turn its attention to outlets that have enough space to accommodate its improved own brand offer.

Rebranding to emphasise core values – In May 2016, the Co-op announced a £1.3bn rebrand of the business through which it is reviving its traditional blue cloverleaf logo as it seeks to return to its core values and drive membership.

Fuller exploitation of the Co-op’s ethical stance and the trend towards more local shopping under new management will be key to driving growth.

With convenience stores one of only two growth areas in food retailing (the other being online), there is significant scope for the Co-op to maximise its position as the largest neighbourhood food shop operator.

“The move to expand the financial services division through the acquisition of Britannia in 2009 was ill-judged”

Investment in price – The Co-op has made a significant investment in pricing over 2015 and 2016 to reduce the price disparity that had existed between itself and its Big Four rivals, and dispel the perception that its convenience-oriented focus means it is expensive.

Extensive refurbishment – Over 75% of the network has been refurbished within the past two years, which is helping to make Co-op stores more attractive to customers.

Online electricals business – While it is a minnow in comparison with the food business, the online electricals business generates sales of around £80m, and could be useful in terms of knowledge and experience if the group decides to make the move into online grocery.

Increasing segmentation – The beefed-up commercial team is overseeing further segmentation of the offer, according to location, and this is likely to be central to the success of the Co-op in the increasingly competitive convenience sector.

Threats

Increasing competition – The Co-op has traditionally been seen as the ‘soft underbelly’ of retailing, with its market share open to widespread attack, and though it is now fighting its corner more nimbly, it is still not easy to compete with Tesco, Sainsbury’s, Asda and Morrisons, let alone the fast-growing discounters Aldi and Lidl.

All the majors are expanding into the Co-op’s convenience store domain – The industry is shifting attention from opening non-food-focused superstores to the less-well-developed area of convenience stores, bringing increased competition to the Co-op for new sites.

Lack of online offer – The Co-op will have a lot of ground to make up if it eventually decides to move online. This had been promised for a few years but shifted down the agenda in light of the more pressing problems from the end of 2013.

The group faces a number of challenges in its bid to launch a viable online food service, with its small – just £6 – average basket size key in this regard. The Co-op brand would have to prove a draw in its own right, with its traditional strength of good locations taken out of the mix.

Fallout from Bank problems – There will have to be some significant rebuilding of trust in the wake of the Bank crisis, which has called into question the movement’s ethical heritage.

• This is an excerpt from The Co-op’s profile on Retail Week Prospect, an intelligence service offering insight and analysis on the UK’s most innovative retailers.