With inflation still on the rise, the UK economy in freefall and customer confidence at an all-time low, the Co-op has unveiled a new strategy. Will it be enough to stop the rot at the c-store specialist?

  • The Co-op is pledging £37m of investment to “slash prices” on 120 products during the golden quarter and into 2023
  • Its “initial view” is of a 21% reduction of its 15,000 SKU-count to focus more on its own-brand proposition
  • The mutual is moving away from opening new stores of its own, instead focusing on “more than trebling” its franchise business
  • Plans to grow its online business will be achieved predominantly through the expansion of existing partnerships with Deliveroo, Uber Eats and Amazon

It’s fair to say that 2022 has been a year of transition for the Co-op. Once a perennial outperformer driven by the success of its core food business, the mutual has fallen on tougher times during the past 12 months.

Supply chain snarl-ups and patchy availability have combined with rampant inflation, head-office job cuts and the exits of group chief executive Steve Murrells and food boss Jo Whitfield to leave the Co-op shaking rather than stable.

Shirine Khoury-Haq CEO at co-op

Co-op CEO Shirine Khoury-Haq has unveiled a “new strategy” for the food business

On Thursday, it posted an 84% slump in group pre-tax profit to £7m in the six months to July 2, while underlying operating profit in its core food business dropped 39.7% to £41m.   

In a bid to draw a line under the travails of the first half, chief executive Shirine Khoury-Haq unveiled what she called a “new strategy” for the food business, aimed at establishing the Co-op as “the largest convenience retailer in the UK”.

She called the plan the “biggest shake-up in its near-180-year history”.

The three key pillars of the new strategy revolve around price and value; expanding its ecommerce and franchise businesses; and improving its loyalty scheme – the latter two, in particular, being seen as capital-light methods of expansion. 

But does this represent a bright new day for the Co-op or will it prove to be a false dawn? 

Price and range

Amid the ongoing cost-of-living crisis, price has never been more important for customers. Indeed, earlier this week Aldi chief executive Giles Hurley said price had overtaken convenience as the key customer driver for grocery shopping

With that in mind, the Co-op is pledging £37m of investment to “slash prices” on 120 products during the golden quarter and into 2023. 

Prices across these products have been lowered by as much as 36%, with savings averaging over 13%, the Co-op says. The price cuts will save customers more than £100 across a year. 

“We really wanted to put in a significant price investment into the products that really matter to our customers to be able to help them to afford what they need at Christmas”

Shirine Khoury-Haq, the Co-op

Khoury-Haq says the prices will be “locked in” until the new year and beyond to help customers with the ongoing cost-of-living crisis. 

“That is why we really wanted to put in a significant price investment into the products that really matter to our customers to be able to help them to afford what they need at Christmas,” she says.

The Co-op is also “developing improved member offers to drive loyalty and grow shopping baskets and trips”, although it gave few details on these plans.  

Co-op-food

Will a £37m investment be enough to be truly competitive on price?

But will a £37m investment be enough to be truly competitive on price? Rivals in what is now UK grocery’s big six have gone earlier, but also much harder, on price than the Co-op. 

Sainsbury’s, for example, earlier this year pledged to invest £500m in price by March 2023, while Tesco has made similar promises with its Aldi Price Match and Clubcard Prices. Discount leader Aldi also this week doubled down on price, while only three days ago Morrisons promised to plough £100m into price cuts.

It’s hard to see £37m making a significant dent in comparison, particularly when you consider that the Co-op’s prices are already far from being the lowest in the sector – Khoury-Haq had advisers “waving” at her during a media call on Thursday, encouraging her “not to give a number” when asked what the price gap was between the Co-op and its competitors.

The Co-op can, however, look forward to a £600m windfall from the sale of its petrol forecourt business to Asda – a deal that is due to complete in the fourth quarter of the year.

Yet, with a debt pile of £731m the Co-op is keen to reduce, Khoury-Haq refuses to be drawn on whether any of that cash will be used to fund further price reductions.  

On range, meanwhile, the mutual’s “initial view” is of a 21% reduction of its 15,000 SKU-count to focus more on its own-brand proposition. 

“In a convenience business, you may not need quite as many varieties of a specific product,” Khoury-Haq suggests.

“We certainly want to promote our own brands, as we have incredible own brands. We have our Honest Value range, which is absolutely critical during this cost-of-living situation.”

Currently, 79% of the 15,000 products the Co-op carries are branded goods, with the remaining 21% being made up of its own-label ranges. 

New food boss Matt Hood was absent from the media call on Thursday as he met Co-op suppliers to discuss the range rationalisation plan.

This could prove a tricky first assignment for the newly promoted Hood, given the disquiet among food producers more generally in the current financial environment. 

Franchise forward

The Co-op is also moving away from opening new stores of its own, instead focusing on “more than trebling” its franchise business.

The Co-op currently operates more than 2,500 of its own stores, while more than 40 Co-op shops are run by franchise partners. Its Nisa symbol group business also works with franchisees across its 5,000-store network. 

Co-op Union St 3

The Co-op currently operates more than 2,500 of its own stores

“We have very, very strong franchise partners at the moment and we find that we’re able to build that business effectively through a model that we’ve been able to replicate over time,” says Khoury-Haq.

“We currently have 43 franchise stores and we’re aiming to grow that to 150. It’s a great model for us, it’s capital-light for us and it’s something that we see absolute potential in.” 

While that target of 150 franchise stores represents a new one, it is only 50 more than the goal the Co-op initially set itself back in 2019 when it made its first foray into franchise partnerships.

When making that announcement, the Co-op earmarked 100 franchise stores by the end of that year alone. 

The pandemic slowed down those plans, and Khoury-Haq insists the new target represents a “radical” shift in strategy for the business. 

“There are going to be some core components to every retail business. But the radical shift for us is how we actually approach those in a very different, very focused way, and make some hard decisions along the way that we have not done previously.”

She adds that the Co-op will be taking “different views on franchise partnerships that would take us much, much more radically into that space”. 

Qcommerce conundrum

The final piece of the Co-op’s new strategic jigsaw is the growth of its online business, which will be achieved predominantly through the expansion of existing partnerships with Deliveroo, Uber Eats and Amazon. 

Online food retailing was one of the biggest winners of the Covid-19 pandemic – ecommerce accounted for an all-time high of 15% of grocery spend during the first quarter of 2021.

The major supermarkets rushed to invest hundreds of millions into the channel, while the sector was upended by the rapid birth and growth of so-called quick-commerce brands, including Getir and Gorillas.

Deliveroo-Co-op

The Co-op plans to grow its online business via its existing tie-ups with Deliveroo, UberEats and Amazon

However, as pandemic restrictions relaxed and customers have returned to bricks-and-mortar locations, Kantar data shows that online grocery shopping is retreating – in August ecommerce penetration slipped to 12.6% of grocery sales.  

Despite this, Khoury-Haq is convinced the plan will work and believes the Co-op is uniquely placed to grow in this space. 

“The fastest-growing channel in grocery remains ecommerce and the second fastest part of the market is convenience,” she insists.

“From our perspective, we have been outperforming the online growth by 20%.

“With our wonderful network of 2,500 stores, we’re so close to our customers that we can continue to outperform in that area.” 

The Co-op is being prudent in its capital-light approach – the correct decision given its focus on cutting debt and shoring up its balance sheet. But with that strategy comes a reliance on the growth of existing channels to improve sales and rebuild the bottom line. 

Time may prove this strategy to be a sound one, but with the cost-of-living crisis showing no signs of abating, the Co-op will need to weather more of the storm before a bright new day can dawn.