Co-operative boss Richard Pennycook believes the group has “turned the corner” after returning to profit in 2014 following a torrid year.

Co-op chief executive Richard Pennycook and chairman Allan Leighton are confident in prospects

The retailer made a net profit of £216m in the year ending January 3, 2015 after posting a £2.3bn loss the previous year.

“Robust” performance in food led the recovery as underlying profits increased 1.5% to £251m during the 52-week period. Overall like-for-likes were up 0.4% and up 3.2% in its ‘core convenience’ stores.

As Co-op bosses enter the next phase of their three-year strategy to restore the business to its “rightful place at the heart of communities up and down the UK”, Retail Week takes a look at six key areas for the business.

Property

The Co-op has a large estate in terms of property numbers, but not in terms of square footage of its stores. The majority of its locations are between 3,000 sq ft and 20,000 sq ft in size, far smaller than some of the huge sheds its big four grocery rivals are struggling to offload. That should play into the Co-op’s hands when trying to secure deals.

Bosses sold 37 larger stores last year and want to dispose of 50-75 more per year “if the market is right,” by offering “small packages to the market two or three times a year.”

Chief executive Richard Pennycook said the majority of its larger shops “work really well” due to their locations at the centre of communities and would not dispose of all 717 of the larger properties it still owns.

Colliers International head of retail Mark Phillipson said the Co-op’s target of selling up to 75 larger stores per year was achievable in the current market. He said: “The demand for good quality retail investments is still strong.

“If they are in attractive locations, with attractive commercial lease terms and they are priced correctly, I’m sure there would be demand for these sort of properties and they will be able to sell that sort of volume, if they wanted to.”

Investment in price

Although it refused to divulge exactly how much it invested in price last year, it’s fair to say the Co-op placed that at the heart of its food business strategy.

In what Pennycook called a “highly competitive market,” Co-op Food delivered “robust” performance as profits and overall like-for-likes both increased.  

It’s positive results were delivered off the back of price drops in 40 different categories, while investment was also made in its own-brand range, which won 170 awards for quality during 2014. 

Pennycook believes that has set Co-op Food up “really well” to be “more competitive against the market this year than we were in the last.”

Planet Retail analyst David Gray said it was “essential” the Co-op invested in price and believed it would be a sustainable element of its strategy.

He said: “There has been quite a big disparity on price between the Co-op and the big four supermarkets. They had to address that because they were losing customers.

“There are a lot of ways they can afford it. The Co-op has been renowned for having quite an inefficient supply chain, so there is quite a bit of room for improvement to strip out cost.

“So do I think they can sustain it? Probably, but they may have to accept lower margins.”

Store revamps

The Co-op opened 82 new convenience stores last year to take its tally across the UK to 2,079. Not content with that figure, bosses plan to open another 100 c-stores this year in a bid to meet changing shopping habits and achieve its overarching aim of restoring the business to its “rightful place at the heart of communities.”

But just as important as the Co-op’s investment in new stores has been the cash it’s ploughed in to refurbishing its existing estate. More than 700 stores were refurbished last year with another 255 refits planned by the end of 2015 as part of the group’s True North strategy, focused on the convenience market.  

Bosses said that 336 of the refits, which saw stores converted into the Co-op’s new Gen2 format, had triggered “high single-digit uplifts in sales.”

Planet Retail analyst Gray was “not surprised” by those figures and said it was “critical” that the Co-op rejuvenated its “tired, drab” estate to regain shoppers.

He added: “When you are getting new Tesco Express stores and Sainsbury’s Local’s opening nearby, it’s absolutely crucial. They should have done it years ago.

“The Co-op has a lot of convenience stores. They have obviously refreshed a lot of those and that’s bearing fruit for them.”

Other businesses

Food accounts for the lion’s share of the Co-op’s sales – just over £7bn of total turnover of £9.4bn

However the group’s operations include other divisions such as online electricals retail and funerals.

The electricals business is a tiddler in comparison with food. Last year its profits fell from £700,000 to £600,000 on sales down from £88m to £84m.

However Pennycook maintained it is worth hanging on to and not up for disposal. He said it was “not dissimilar in profitability” to quoted electricals etailer AO.com.

The Co-op’s electricals business was hit in the first half of last year as a result of the bad publicity surrounding the group as it was engulfed in scandal and leadership turbulence, but recovered afterwards. “We love that business,” said Pennycook.

Sales at the Co-op’s funeralcare arm fell from £370m to £363m last year because of the “relatively low number of deaths in the UK.

However underlying profit advanced from £62m to £66m, mainly as a result of cost initiatives.

Governance and structure

After the Co-operative faced an existential crisis in 2013 and the early part of last year, brought low by a banking scandal and internecine warfare, the mutual launched a restructuring to adapt to commercial realities without losing its heritage.

The Co-op is to create a more professional, plc-style board which will be held to account by a national members’ council which will also promote cooperative values.

The changes will be voted on at the AGM next month under a new one member, one vote system– a “historic” moment according to chairman Allan Leighton.

He perhaps typifies the new Co-op approach, combining extensive business leadership experience including a famously successful stint at Asda, with a commitment to the Co-op’s unique heritage – his father ran three Co-op stores.

Leighton said the challenge at the Co-op is different to that faced by Asda, which he turned around alongside Archie Norman in the 1990s.

He said: “I’ve understood how the Co-operative can play a unique role n the fabric of British society. No other business is held in such affection by the communities it serves.

“Our job is to hold on to everything that has served us well in the past and at the same time demonstrate relevance to the future.”

There is still debate within the organization about its fundamental reason for existence and a motion being put forward at the AGM for a new “purpose statement. The board is encouraging members to vote against that motion.

The outlook for the Co-op?

Pennycook said that the last financial year was “one in which we turned the corner” as it left turmoil behind it.

The new year has got off to an encouraging start. Group trading in the first 12 weeks was in line with or ahead of expectations in all parts of the business.

The retailer expects food trading conditions to remain “volatile” amid fierce price competition but is confident in its strategy designed to make it “the best community convenience retailer in the UK”.

Consultancy Retail Remedy partner Phil Dorrell says the Co-op’s store numbers and locations  give it a great opportunity to carve out a powerful position for itself in convenience retail but is still off the pace compared to competitors.

He says: “It’s a viable business. What they’ve got to do is work hard on tailoring the customer offer, to localise it and to make sure they’re not out of step on price.

“And they’re going to have to inject more of the core Co-op – the heritage, the provenance, the links to communities. Do you really see that in stores?”

“They’ve got everything they need to do it, but there’s a lot of work to do.”