Co-op says recovery plan will hit annual earnings

Efforts to rebuild the Co-operative Group will dent its annual profits, despite a robust performance at its food and funerals divisions driving a return to the black in the first half.

The Co-op hailed 'robust' sales at its food stores

The mutual firm, which was dragged to a loss of £2.3 billion in 2013 following the near-collapse of its banking arm, spent £144 million during the 26 weeks to 4 July – 48 per cent more than a year ago – opening 35 convenience stores and ten funeral homes. It also took on an extra 1,000 staff to improve customer service during peak times.

Like-for-like sales at its core network of convenience outlets rose 3.3 per cent, helping underlying profits at its food division jump 21 per cent to £120.4m.

Its Funeralcare business, which now has 970 homes, enjoyed the busiest start to a year since 2008, mainly due to an increase in the death rate, with profits rising to £51.8m, up from £34.6m a year ago.

Combined with an improved performance at its general insurance arm, the “robust” trading saw the Co-op deliver an underlying pre-tax profit of £64m for the first half, compared with a £1m loss last time, although overall revenues dipped 2 per cent to £4.6 billion.

Chief executive Richard Pennycook said: “We’ve made a good start on the three-year journey to rebuild the Co-operative Group.

“These early days are about fixing the basics – putting in place new leadership teams and providing the investment to deliver the strategies for our businesses. Our customers and members are beginning to see the difference.”

However, the Co-op added: “We expect full-year profitability to reduce year on year, given the planned and increased levels of investment we are making in the second half of the year to support our rebuild strategy.”

Interim results showed the group’s net debt pile had been trimmed to £600m, from £1.4bn a year earlier. Although the figure is expected to swell towards the end of the year as its investment programme accelerates, Pennycook said it was still forecast to remain below its £900m target during its three-year recovery plan.

The Co-op also said that an 8.5 per cent pay rise for 47,000 store colleagues, announced earlier this year, would mean the “vast majority” of staff would be earning more than the national living wage ahead of schedule. In July, Chancellor George Osborne said the replacement for the minimum wage would kick in at a level of £7.20 an hour in April, rising to £9 by 2020.

Trading during the first eight weeks of the second half has been in line with the retailer’s forecasts, and it forecast further like-for-like sales growth as it prepares to open 60 more convenience stores and revamp a further 150 outlets.

The group is selling off larger food sites to the likes of Aldi, Asda, Lidl and Waitrose to focus on its 2,800-strong network of smaller convenience stores. Last year it sold its farms business to the Wellcome Trust for £249m, while Bestway, the family-owned firm behind the Best-one convenience store chain, bought its pharmacy stores for £620m.