Co-op set to take on the grocery big guns

Sep 25 2008 by Iain Laing, The Journal

THE Co-operative Group said it is ready to trade blows with its bigger grocery rivals after its burgeoning food business boosted first-half profits.

The UK’s largest mutual retailer has embarked on a three-year brand and store overhaul and will consolidate its position as the country’s fifth-biggest grocer if its £1.6bn Somerfield takeover is approved.

The Co-op’s food business boosted trading profits by 68% to £126m in the 28 weeks to July 26, helping the mutual lift overall profits by 36% to £191.2m.

Like-for-like food sales were 5% higher – ahead of the market – with overall sales leaping 43% to £2.4bn as customers flocked to revamped stores.

The Co-op has seen 11 successive quarters of like-for-like growth and the Somerfield deal would give the Co-op an 8% share of the grocery market.

Chief executive Peter Marks expects to get “back into the premiership” with the move and said the Co-op’s overhaul would not be derailed by tougher trading conditions over the next year.

He said: “The credit crunch, the ongoing slowdown in the housing market, food price inflation and energy cost rises will weigh on all businesses – and our sector will continue to be as competitive as ever.

“In spite of this, we are confident that our business model is robust and we will continue to maximise opportunities as and where they present themselves.” The mutual, which overhauled 349 of its stores in the first half of the year, said it had tried “as far as possible” to shield its members and customers from higher prices.

But in May the Co-op took £100m in food sales in a week – a first for the group outside of the Christmas trading period – as the higher prices accounted for the bulk of its like-for-like sales growth.

The Co-op, which has 85,000 staff overall, is also the UK’s third largest pharmacy chain, as well as the biggest provider of funeral care and independent travel services.

The healthcare business struggled in the first half due to Government moves reducing the amount reimbursed to pharmacies from prescriptions, with operating profits down £3.8m to £13.6m. But the travel business posted profits of £7.9m after a break-even performance a year earlier.

The Co-op warned the second half of the year could be “very tough” for its travel operation as would-be holidaymakers shelve plans in the gloomy economic climate.