C-store specialist the Co-op has spoken recently of the need to make its business more efficient and cost-effective in the short term in light of spiralling costs.
At its full-year results in April, the first signs of strain emerged. Pre-tax profits were down £70m to just £53m, while group revenues edged down to £11.2bn.
The group also warned of further headwinds, citing “the final implementation of the business transformation in food, current inflationary pressures and the economic uncertainty facing customers, members and colleagues”.
Given those results, the Co-op’s disclosure late last week that it would cut 400 jobs in its head-office support team did not particularly set off alarm bells. The Co-op certainly is not the first – and will not be the last – retailer to seek to rebalance costs at a time of historically high inflation.
However, the job cuts are just the tip of an iceberg of issues that have emerged at the Co-op since the turn of the year and which, viewed in the round, seem to indicate a business that is struggling.
All change at the top
Retail Week understands that Murrells was being considered for the vacant chief executive role at Asda, which would have provided an explanation for his sudden departure. However, no such move has yet materialised.
There is speculation that Jo Whitfield may also not return to the Co-op once her four-month career break has concluded.
Retail Week understands that, before going on the break, Whitfield was questioning what opportunity was left for her to progress further in the business.
While she has since told Retail Week that the opportunity to take over from Murrells as group chief executive would not have stopped her from taking leave, that avenue now appears to be closed to her.
“The leadership triumvirate responsible for years of consistent growth at the Co-op has now all left in the space of a few months”
Chair Allan Leighton, who appointed Murrells to the top job back in 2017, is also due to stand down, meaning the leadership triumvirate responsible for years of consistent growth at the Co-op has now all left in the space of a few months.
Murrells’ replacement, Shirine Khoury-Haq, has stepped into the top role, having previously been the group’s finance and life services boss. While she is still technically an interim chief executive, it has been made clear by the Co-op that is not actively considering anyone else for the role.
While Co-op insiders insist Khoury-Haq has hit the ground running and brings a wealth of experience to the role, she has taken up the job when the group’s key profit driver, the food business, is operating under a relatively unusual co-manager structure – all at a time when food prices are surging to historic levels and the business is in danger of being left behind by its competitors.
Costs cut deep
One of Khoury-Haq’s first actions as chief executive has been to embark on a £50m cost-cutting spree.
The Co-op has sought to cut back on so-called non-essential technology projects, which has included taking back company phones from all staff members who don’t deal with external clients on a daily basis.
The retailer is also looking to scrap the publication of its magazine in a bid to trim the cost base.
Co-op insiders say these initiatives are all needed to tackle the retailer’s costs after a number of years of significant investment – not just in food but across the wider group.
“The deep and far-reaching nature of the cuts give the appearance of a business frantically trying to find cost savings any way it can”
On the food side, the retailer has invested heavily over the years to broaden its routes to market beyond c-stores into wholesale with Nisa, its own ecommerce channel and a tie-up with Deliveroo.
Still, the deep and far-reaching nature of the cuts – most notably the job losses – give the appearance of a business frantically trying to find cost savings in any way it can at a time when competitors are investing heavily in price and availability.
While the Co-op may be holding its own in trading, an analysis of Kantar market share data since the pandemic shows the c-store retailer has been overtaken in the period by Lidl – dropping to seventh place in terms of market share.
With its focus on local convenience stores, often in parts of the country that other competitors shy away from for cost reasons, the Co-op has enjoyed a boom during the pandemic.
However, as customer behaviour has begun to normalise in terms of store visits, combined with a flight to value in the face of spiralling prices, the retailer has seen a widening gap open between it and Lidl in sixth place.
The Co-op insists it has been working behind the scenes on price – reducing or holding prices on 4,000 products, including 100 of the most popular goods for members and customers alike – yet it is still demonstrably more expensive than many of its competitors.
The Co-op has never been a price leader and that will hurt it as the economic outlook for millions of customers worsens over the year.
“With gaps still on shelves and everyday prices consistently more expensive than its competitors, the Co-op is going into the largest price war since the financial crisis with damp powder and one arm tied behind its back”
Availability issues continue to plague the business, as they did last year. At its most recent financial results, the Co-op specifically blamed supply chain disruption for a plummet in underlying operating profits to £100m.
With gaps still on shelves and everyday prices consistently more expensive than its competitors, the Co-op is going into the largest price war since the financial crisis with damp powder and one arm tied behind its back.
The Co-op’s model and focus on the needs of its membership is a rare thing in the cut-throat world of businesses intent on prioritising profits and maximising shareholder returns. That said, in recent years it has been able to manage the former while also focusing on the latter.
After years of sustained growth, 2022 looks like a year of consolidation for the business.
At a time when inflationary pressures will only mount, members and customers alike will hope the current issues are simply a blip and not the beginning of a longer-term crisis for the Co-op.