Buoyed by six consecutive years of like-for-like growth, the Co-op could have justly looked forward to another bumper year in 2020. But the coronavirus has forced it to fundamentally rethink a strategy that was reaping rewards.

  • Co-op bosses say rapidly shifting customer demand has been one of the most challenging aspects of coronavirus crisis
  • Acceleration in the shift towards customers paying with cards rather than cash
  • Value to become more important “as the true depth of the recession we’re already facing becomes better known”

In its results statement covering the 52 weeks to January 4, Co-op chief executive Steve Murrells said that the coronavirus crisis prompted the mutual to “review the strategy we had embedded across our businesses”.

The results point out that the Co-op has incurred £200m worth of additional costs associated to the coronavirus outbreak. The pandemic has also seen the convenience store retailer bring forward some capex spend to meet related strategic issues.

While some of these costs will be met by increased food sales and expected business rates reliefs, it has still forced the Co-op into strategic changes that, in normal circumstances, it would not have needed to consider.

Retail Week spoke to Murrells and the Co-op’s food boss Jo Whitfield about some of the key strategic areas that have required a rethink due to the ongoing coronavirus crisis, and what that will mean for the future of the business.

Co Op staff

Customer behaviours

Both Murrells and Whitfield point out that keeping up with rapidly shifting customer demand has proven to be one of the most challenging aspects of the coronavirus crisis.

Nielsen figures for the month of March showed that demand for groceries surged 20.6% as the virus first began to spread across the UK and the government implemented lockdown measures to safeguard the population.

Whitfield says the Co-op, like many grocers, struggled at first to deal with the spike in demand for certain items, such as toilet roll, hand sanitisers and ambient foods like pasta and rice.

Although she says the situation has stabilised somewhat, customer demand in certain categories remains “very volatile” and subject to rapid change.

“I think the stock in our stores is as good as anybody’s, but not necessarily where we want it to… we have to accept there’s only so much the supply base can do”

Steve Murrells, The Co-op

“As social distancing continues, and out-of-home businesses remain closed, there’s a degree of volatility that will remain for the foreseeable future,” Whitfield says. “As restaurants and businesses remain closed, we’re all seeing a demand switch towards calories being consumed in the home.”

Whitfield says growing numbers of customers “cooking with families, baking and cooking from scratch” have driven the Co-op to work more closely with suppliers to meet these demands and shift focus away from previous strengths in food-to-go and pre-prepared meal offerings.

Murrells highlights another shift in shopper behaviour – an acceleration in the previously steady shift towards customers paying with cards rather than cash.

“We’d normally see a 1% movement [towards card payments] every 12 weeks. However, in the first three or four weeks in March it’s shifted a full 10%,” he says. “We’re at about 65% of transactions on card now, which is a phenomenal shift we’ve never seen the likes of before”.

Supply chain challenges

Whitfield admits the initial surge in consumer stockpiling in the early weeks of March proved a “significant challenge”, both for the Co-op and its suppliers.

However, she says that as the month wore on, the retailer was able to get a grip on availability issues by placing initial customer limits on certain categories and also by working closely with suppliers. 

Steve Murrells Co-op

Steve Murrells

”We’ve been working collaboratively with them around range profiles, ensuring that we can make their operations as simple and efficient as possible to make sure they can get us the products we need and we’ve focused on how we can give our suppliers greater forecast flexibility to react to changes in demand.” 

As a result, purchasing restrictions on products have now been almost entirely lifted in its stores.

“We’ve only got restrictions on eggs in place at our stores at the minute, and that’s down to a wider issue around egg production globally,” Whitfield explains. “So, we’re in pretty good shape and improving all the time.”

She admits, however, that the Co-op remains acutely aware of the “challenges our suppliers are facing” – particularly as the need to implement social distancing measures on farms and production lines slows output rates.

For Murrells, the Co-op’s 2017 decision to shift the food business’ supply base to more UK produce has “certainly helped” create a supply chain that has proved robust during the ongoing crisis. But he concedes there is still work to be done to further improve availability.

“I think the stock in our stores is as good as anybody’s, but not necessarily where we want it to be,” he says. “It’s going to be important that we get back to where we’d want to be as quickly as we can, but we have to accept there’s only so much the supply base can do.”

He says the government’s coronavirus testing programme that was extended to key workers including those in the grocery and food supply chain today will play an important role in relieving some of the stresses on suppliers, by allowing more people work at farms, productions facilities and packaging sites.

Surge in online

With many customers self-isolating or shielding themselves at home, the Co-op has seen a growth in demand for both its own online offer and for food deliveries through Deliveroo.

The Co-op was slow to move into the ecommerce market compared to its other mainstream grocery rivals, instead focusing on its pivot away from larger stores to focus solely on convenience.

But Whitfield says the mutual is now ramping up investment into its digital proposition at a time when other ecommerce players like Ocado are struggling to meet the demand for online groceries, which surged 13% during March.

“Value was already important to the UK consumer, and it’s only going to become more important as the true depth of the recession we’re facing becomes better known”

Steve Murrells, The Co-op

At the start of the year, the Co-op set itself a target to expand its ecommerce offering to 100 towns and cities, fulfilling orders from 650 of its stores, by the end of 2020. Whitfield says it has already expanded to 470 additional stores across the UK, outstripping its 100 catchments target before the end of April.

Whitfield says that while such rapid expansion has been a costly strategy – although she did not specify exactly how much had been spent in this area – “it’s been vital for us to be able to offer this service”. She says the uptick in demand for its online proposition has been profound – and is likely here to stay.

“It’s the right channel to have both for the moment, but also for the future,” she explains. “Our sense is that this is likely to be another sticky behaviour that customers continue with after the virus and we’re going to look to invest more and grow our online capabilities further.”

Value focus

Although the coronavirus crisis has further boosted the Co-op’s food sales in the short term, both Murrells and Whitfield are keenly aware that the pandemic is decimating the economy and leaving the majority of its customers worse off.

Unemployment has spiked to historic levels and only yesterday the Bank of England warned that the UK could be facing the worst recession “seen in the past century, or possibly several centuries”.

JO WHITFIELD

Jo Whitfield

Whitfield says the Co-op has already been trying to boost employment rates in the communities it serves, having hired an additional 7,000 temporary workers – many from the embattled hospitality sector.

During the last recession in 2008, Aldi and Lidl benefited from their value propositions, positioning themselves as the two grocers offering quality products at the lowest prices. Murrells says the Co-op is already focusing on how it can improve its pricing for consumers who will become increasingly money-conscious in the wake of the health emergency. 

“Value was already important to the UK consumer, and it’s only going to become more important as the true depth of the recession we’re already facing becomes better known,” he says. “Our thinking is all about how we provide answers for those problems going forward.”

No matter what challenges it might face in the coming months and years, Murrells insists the Co-op’s fundamental DNA as a local cooperative stands it in good stead. It recently ploughed £600,000 into local food banks across the UK and has donated £1.5m worth of food to charity FareShare.

“It’s a combination of doing the right things for community life and being able to help families cope with the likely recession,” Murrells concludes. “That’s where our thinking is going.”

Analysis: How coronavirus forced the Co-op to fix what wasn’t broken