|FINANCIAL PERFORMANCE SUMMARY||2012*||2011|
|Group Sales (inc. VAT)||£13.5bn||£13.3bn|
|Group Underlying Operating Profit**||£54m||£526m|
|Of which -|
|Banking Group - core||£120m||£173m|
|Banking Group – non core||(£377m)||£3m|
|Underlying Operating Profit excluding non-core||£431m||£523m|
|Group Statutory (Loss)/Profit***||(£599m)||£373m|
|Total Bank lending||£4.4bn||£3.0bn|
|Total payment to and on behalf of members||£104m||£142m|
* 2012 represents 53 weeks vs 52 weeks in 2011
** See note 2 in summary financials
*** Group Statutory figure is the (Loss)/Profit before tax and member payments, equivalent to pre-tax profits in a PLC
Peter Marks, Group Chief Executive of The Co-operative Group, said:
“2012 was a challenging year for The Co-operative Group. Our core businesses performed in line with expectations in their respective markets delivering an underlying operating profit of £431m against the backdrop of a tough economy. However the Group’s statutory profit was adversely impacted by a number of factors within the Bank.
These included a realistically cautious approach to the impairment of corporate loans within the non-core business, further PPI provisioning and the write-down of IT assets, together totaling £650m.
“In Food, there was a marked improvement in the second half of the year, most notably with our like for like sales performance returning to growth in the last quarter. Overall profitability for the year, however, was impacted by the competitive environment and our continued investment in prices, the store estate and our supply chain. Our Specialist Businesses had another good year with underlying sales and profits both up as we again demonstrated a clear point of difference within the professional services markets in which we operate.
”We have a clear view of what is strategically important to ensure that the remarkable transformation of the Group over the last five years is fully embedded and can be built upon. In our Food business we are building on the momentum of the second half under our strengthened management team with a continued focus on prices and the roll-out of new store formats. During 2013 we will further improve the shopping experience for our customers. In our Specialist Businesses we will maintain our focus on excellent customer service as we continue to build on our position as one of the leading professional services organisations for consumers in the country. We
will also continue to invest in key growth markets, such as legal services.
“In our Banking Group, we have clearly identified what is core and are taking firm action on non-core assets to improve performance and manage risk. In addition, we are today announcing the Banking Group’s intention to sell its General Insurance business. This follows the signing earlier this week of a binding agreement to sell our Life and Savings business. These moves are in line with our strategy of focusing on our relationship banking activities and will also strengthen our capital position. The Bank’s underlying financial strength remains solid, with a pro forma core tier one ratio of 9.2% and strong liquidity levels.
“The Co-operative Group is a great business. We have a fantastic brand, talented people, loyal customers and over 7 million members. We have effectively pursued a strategy of building strong positions in our chosen markets and are coming through the worst economic downturn I have seen in 40 years in business. Our ownership model means we have and can continue to take decisions for the long term. The strength of our capital position enables us to absorb short term losses. We know we are making the right strategic decisions which will enable us to make the most of the significant opportunities which lie ahead for the Group.”
Food: We will build on the momentum of the second half with the planned roll-out of new formats trialled in 2012, as well as prioritising own label product development and customer service.
Bank: Our focus is on building our relationship banking services for retail and business customers. We are managing the run down and exit from non core business lines, de-leveraging the balance sheet and building capital strength. We continue to work with Lloyds Banking Group towards the successful completion of the Verde acquisition. Cost management remains a key area of focus, and a number of initiatives continue.
Specialist: Positive start to the year, with continued good progress in Pharmacy and Funeralcare. We are continuing the planned rapid expansion of Legal Services.
Group underlying operating profit of £54m (2011: £526m)
Food business gained momentum on investment in prices, stores and supply chain
Food's performance showed a marked improvement through the second half, in spite of continued low levels of consumer confidence and the impact on sales of one of the worst summers on record.
Our investment in IT and the supply chain helped us to reap the benefits of our focus on customer value and service and consistent execution. Under a strengthened management team, led by Steve Murrells, we also began the work needed to develop a new strategy for implementation in 2013 and beyond.
We enjoyed a particularly strong end to the year, with like-for-like sales (including VAT, excluding fuel) increasing by 0.3% in the final quarter and, in the three weeks over Christmas by 2.2% overall and by 5.5% in convenience stores.
The full year flat sales performance impacted profitability as we absorbed significant inflation and managed operating and overhead costs to invest in service, price and value for customers in an intensely competitive market.
We opened 83 new stores across the UK in 2012, including the acquisition of Scottish convenience chain David Sands, increasing our overall presence in Scotland by 28 stores; plus 10 former Costcutter stores in London. All stores were trading as Co-operative Food before Christmas.
Our focus has been on improving the shopping experience by tailoring stores to our customers and locations. Our investment thinking for 2013 has been shaped by the successful delivery of 60 format trial stores, which have received great customer feedback and encouraging sales figures. Additionally we have standardised trading hours to provide a more consistent service.
Support for our store estate has been improved through investment in our distribution network, with the long-term transformation programme almost complete. In November, we opened our new £22m distribution centre at Avonmouth and have made excellent progress on our new Castlewood (East Midlands) depot, with practical completion ahead of target and outbound deliveries scheduled from March 2013.
Our award-winning Store Merchandising and Replenishment Transformation programme (SMART) is now complete. SMART delivers an end-to-end supply chain solution from supplier to store, transforming the way stock is replenished in our food stores. It has radically increased product availability to more than 97.5% and has won two prestigious awards; the coveted Grocer Gold award for Best Business Initiative and the BT Retail Week Programme Implementation of the Year award. Additionally, we received the Environmental Sustainability Award at the IGD Food Industry Awards. Structural changes at board level have included the appointment of our new Chief Executive Officer, Steve Murrells, as well as new roles focussing on customers, IT and service delivery. These changes will enable us to centre more closely on our customers and increase efficiency, as we move through
the next phase of our development.
Banking Group significantly impacted by impairment of non-core loans
Since 2011, the Bank has been managed through distinct classifications: “core” and “non core”. ‘Core’ represents those assets and activities consistent with the current strategy and risk appetite and includes the Retail, selected Corporate and Business Banking and Treasury businesses.
‘Non core’ includes those assets and activities not congruent with the current strategy which are being managed for value and targeted for run down or exit. These non-core lines contain the majority of the impairment risk for the Bank, most of which originated in the Britannia non-member business acquired in 2009.
Consistent with the persistent weakness and prolonged uncertain outlook for the economy, further significant impairment provisions were made in the non core business. These non-core activities, particularly the commercial real estate assets and non-prime residential mortgages, were predominantly originated by the non-member Britannia business acquired in 2009, and contain the majority of the impairment risk for the Bank. Additionally, we re-appraised the carrying value of the substantial investment made to date in our transformation plan. This gave rise to an exceptional write down of £150m. In common with the rest of the industry in 2012, we saw an increase in the volume of PPI complaints, giving rise to a further provision increase of £150m, bringing the total estimated cost of redress to £244m.
Despite absorbing the non core impairment charge and the other exceptional items, the Bank’s underlying financial strength remains solid, in terms of both capital and liquidity. Subsequent to the year end we executed a transaction to reduce risk weighted exposures increasing the Bank’s core tier 1 ratio to 9.2% on a pro forma basis (from 8.8% at year end), while liquidity remains strong with a loan-to-deposit ratio of 92%.
However, we are not complacent about our financial strength and our strategic focus is on implementing a range of measures targeted at increasing the health of our capital ratios. These include strengthening the management team and the appointment of advisers to support implementation of a range of capital strengthening and cost reduction options.
Specialist Businesses achieved another strong result
During 2012 a programme of change was undertaken in the Specialist Businesses. This programme has helped deliver even greater focus on service, value for money and innovation so that we build on our market-leading positions in Funerals, probate and other consumer professional services.
Our intention is to create compelling co-operative alternatives for customers needing professional services in each of the areas in which we operate, while retaining relentless focus on great customer service, value for money and innovation to ensure we deliver our services as efficiently as possible.
Consequently we divested Clothing, Sunwin Fire and Security and a number of our motor dealerships. Excluding these disposals, year-on-year revenues rose in each of the continuing businesses, despite the tough economic climate. In total, revenues from continuing businesses rose by £36.2m to £1.2bn, with operating profits higher by £7m at £97m, which was a strong performance given tough trading conditions and competitive pressures.
There was a particularly strong performance in Funeralcare, where profits rose to £60m (2011: £55m) on revenues up 6.4%. Funeralcare maintained its position as the UK’s leading Funeral Director, renowned for its market leading customer service and client care with customer feedback scores at record, industry-leading levels. We continued to expand with 27 new funeral homes opening during the year to ensure our funeral home network remains local and accessible to clients, while investment in crematoria continued.
In Legal Services we continue to deliver our ambitious growth plan. Year-on-year investment in people, infrastructure, processes and marketing grew significantly and helped to drive revenue growth of nearly 13% to £33m. Even more encouragingly, our probate volumes were up 55%, while our new Family Law practice has gained market share quickly with caseloads up significantly. Overall, Legal Services made a small profit following continued significant investment for future growth, changes to both the pricing of services and the nature and duration of cases. We are working to become the number one legal service provider in the UK and are creating thousands of new jobs in the process.
Our Pharmacy business, the third largest in the UK, enjoyed record levels of customer experience and satisfaction. And like for like prescription growth of over 3%. However, the industry continues to come under pressure from Government funding of the healthcare sector. We piloted our Branch Transformation Programme (BTP) in 21 branches. BTP is delivering completely remodeled branches and processes to provide customers with an excellent service and experience. Additionally we refitted a further 38 branches, relocated 8 others, opened three new branches and continue to diversify into new areas, opening five new Outpatient Dispensaries within hospitals. In order to drive efficiency, manage inflationary pressures and ultimately improve customer experience, the pharmacy business changed its supply chain partner during the year and continued its focus on end to end processes throughout the operation to improve margin and reduce wastage.
Last year, we reduced our environmental impact further still. Carbon dioxide emissions and the total waste produced by the business fell further, which means that since 2006 these are down by 43% and 29% respectively. This has produced in excess of £65m in projected annual savings. The Cooperative Bank had committed in excess of £800m to green energy finance by the year end.
We also sustained £18.3m of giving to communities in the UK, which enabled a record 2,709 small grants to be disbursed across the country and our Enterprise Hub to support its 1,000th co-operative.
Our commitment to tackling global poverty remains undiminished: in addition to our leadership on Fairtrade availability, we now have 16 beyond-Fairtrade projects benefitting more than 250,000 people globally.
Our responsible approach to business was widely recognized, with more than 25 awards and commendations for our Ethical Plan, environmental management, community programmes and sustainability reporting, together with our sustainable approach to Banking and Food retail.
The Co-operative Goup
Russ Brady 07880 784 442
Martin Henderson 07770 975 959
Patrick Tooher 07831 314 671
Susanna Voyle/Lucy Legh 020 7353 4200
Notes to Editors:
The Co-operative Group is the UK’s largest mutual business, owned not by private shareholders but by over seven million consumers. It is the UK’s fifth biggest food retailer and a major financial services provider, operating The Co-operative Bank and The Co-operative Insurance. Among its other businesses are the number one funeral services provider, the third largest pharmacy chain and one of Britain’s largest farming operations. As well as having clear financial and operational objectives, the Group has also set out its social and sustainability goals in its groundbreaking Ethical Plan, which specifies over 50 commitments in these areas.
The Group operates 4,800 retail trading outlets, employs more than 100,000 people and has an annual turnover of more than £13bn. Further information is available at www.co-operative.coop.