A few weeks ago I was asked to provide a short analysis on the Co-operative Group’s results for 2021. This has now been published in Coop News. I repost it below. If nothing else it shows the impact of the pandemic on retailing and the reverberations in performance vthat will still continue to be felt for some time.
“The period since early March 2020 has been a turbulent and traumatic one for everyone. Normal life has been disrupted through the onset and course of the pandemic and various legally enforced restrictions on movement and ways of behaving. Illness and death has affected so many families and communities. For organisations and businesses, and especially those dealing directly with the public, it has been a massive shock and disruption to normal activities and to pre-existing strategies.
Organisations have tried to keep going and have sought to adapt to the new and changing realities. In some cases, the trends and restrictions enhanced business models; in others trade completely disappeared. Even now, we are living in the aftershocks of the pandemic, with a high Covid-19 incidence in the population and consequent impacts on demand and supply and business operations, including distribution. “Living with Covid” is not as straightforward as some would make out.
The publication of the 2021 financial results for the Co-operative Group are thus of more than normal interest. Trading in turbulent times is not to be taken for granted. The pandemic affects the assessment of performance. What is the underlying operational and business performance and what are pandemic impacts, shocks or responses? Given the apparent endemic Covid-19 status, is our comparator the pre-pandemic “normal”, or do we accept that the world has been transformed and operations remain essentially short-term and reactive, so comparisons are less consistent?
To example the issues, the 2021 sales figure for the Co-operative Group is £11.2bn. This is a decline from 2020 when the figure was £11.5bn. On the surface this is a disappointing level of trading. But 2020 was a very strong year for all locally focused and convenience stores as lockdowns, forced business closure in hospitality and other restrictions favoured the local store model. The last pre-pandemic year (2019) saw sales at £10.9bn which was itself up from £10.2bn in 2018 (due in part to the NISA acquisition). What is the appropriate benchmark year given all the implications of a continuing global pandemic? More critically perhaps what should our expectations be in this changed world? Should we be disappointed in not holding on to the sales gains of 2020 or should we accept it was never likely to be sustained as consumer behaviours in the UK returned “closer to normal”?
Table 1 (provided at end of the post) provides the numbers for the (self-identified) Key Performance Indicators (KPIs) for the Group. In this table the data is taken back to 2018 to allow for a short pre-pandemic trajectory as well as two years (differentially) impacted by Covid-19.
At the general level the data in the table, and especially the purely financial ones, show two issues.
First, on every measure the results show that 2020 was an exceptional year for the Group. Sales and profits boomed, and debt levels were reduced. The controversy over the decision not to return business rates relief needs to be seen in this light (in 2021 business rates relief was not taken and furlough relief was returned, showing how comparisons are difficult). What caution there is for 2020 comes in the non-financial figures, where active membership numbers fell, as did rewards spending (though the base rate reduced in October 2020).
Secondly though, there is the question of considering 2021 against this 2020 performance and/or the years before. Here the story is not as positive, with figures generally returning to at, or below, the 2019 and 2018 levels. Whilst as noted earlier, sales are greater in 2021, all profit measures are lower, and debt is now much higher. A 10% increase in Group sales over three years has not really resulted in any overall financial improvement. Non-financial measures continued to decline, as for example in active membership, rewards and colleague engagement.
Almost 69% of the Group’s sales are in the food sector, with a further c15% each in the wholesale and the federated components. Food remains the driver of the Group’s performance, though the dependence has fallen from almost 80% in 2017. The store estate is being remodelled (50 new stores in 2021, plus 87 stores renewed, 25 relocations and 15 extensions), but overall store numbers fell (by 29) and sales floorspace is at its lowest level in at least five years. There have been investments in branding and pricing, supply chain (a new depot) and colleague remuneration (Real Living Wage), whilst Covid-19 costs continued (c£30m) in 2021. The supply chain though has struggled to deliver, especially in the latter half of 2021, possibly due to new systems (issues with that described as “inevitable”), but also to wider global pandemic related issues and the consequences of dealing with fluctuating production and demand. The amount of stock in the Group had been reducing (from 16.4 stock days in 2018 to 14.6 in 2020), but it increased in 2021 (to 16 stock days). The e-commerce food business saw tremendous growth (reaching £200m sales in 2021 from £4m in 2019) but from an exceptionally low base. Roll-out of store focused e-commerce, micro distribution hubs and the links with Deliveroo, Starship and (more controversially) Amazon and Amazon Prime, would seem to be sensible given the pandemic surge in the local and online channels. The strategy seems clear.
In presenting the 2021 results, the Chairman accepts that this has been a challenging year but claims the “continued planned strategic investments mean… (we) are well placed to ride out the storm and prosper beyond”. The incoming Chief Executive pointed to the long-term strategy, investment in the business and the values of the Co-operative Group as being the building blocks for the future.
However is the Co-operative Group with its focus on the local community and convenience market as well placed as it might be, or thinks it is? This was clearly working in 2020 as circumstances swung in the model’s favour. The beginnings of a return to previous patterns, as well as continuing disruptions, would have been expected to have had an impact, but it might have been hoped that a stronger 2021 operational performance should have been generated. The figures and comments point to some internal operating issues in addition to the impact of wider macro sector effects. Uncertainty hit cashflow and stockholding, adding to debt and losing sales.
The competition is not going to lessen in the sector, so it is critical that elements under the Group’s control are made as effective as possible. If 2021 was, in the words of the outgoing Chief Executive “an important and defining year”, then it is hard not to see 2022 as being even more so. Yet, of all the years, 2022 is not likely to be a stable one. The pandemic has not gone away nationally or globally. The full implications on supply chains of Brexit remain to be felt, though they are becoming increasingly apparent. The war in Ukraine has impacted peoples’ lives there, and caused a range of human and business impacts there and elsewhere, the full dimensions of which remain unclear. Together these are producing massive concerns over high energy prices, disrupted supply and cost pressures leading to increased inflation, exacerbated by UK government induced lowering of disposable incomes for many consumers. Individuals, communities and businesses are being pressured through the impact of rising costs and altered demand. The business need to be agile, resilient and flexible in the eye of these various challenges is heightened, but in an environment the like of which most have not experienced either as individuals or business managers.
It is not clear how people will react to these pressures, problems and difficult times. One would hope that values and strengths of communities and locales would come further to the fore, as they did in the initial stages of the pandemic. In this regard the Co-operative Group is more than a food retailer of course, and such values and behaviours help people and the planet. The financial performance is obviously important to allow this investment in operations and activities within this wider context (Co-operating for a Fairer World). More than ever the balance between these aspects of the Co-operative Group, as exemplified in the Chief Executive’s reflections on 2021, needs to be borne in mind. In the final analysis though, if business operations do not produce enhanced results, then difficult times and decisions lie ahead.”
Table 1: Key Performance Indicators for the Co-operative Group
|Underlying Pre-tax Profit (£m)||£-32m||£100m||£35m||£33m|
|Underlying Operating Profit (£m)||£100m||£235m||£173m||£97m|
|Debt (incl leases) (£bn)||£2.4bn||£1.97bn||£2.16bn||£0.8bn|
|Debt (excl leases) (£m)||£920m||£550m||£695m||£764m|
|Operating Profit (£m)||£64m||£207m||£173m||£90m|
|Profit before Tax (£m)||£57m||£127m||£24m||£83m|
|Active Members (mn)||4.2m||4.3m||4.6m||4.6m|
|Community Reward (£m)||£19m||£13m||£11m||£12m|
|Members Sales in Food (%age of total)||29%||30%||33%||33%|
|Colleague Engagement (%age)||72%||76%||76%||76%|