Co-op sees no reprieve from the economic pain as profits drop

The customer-owned group, which has 4,800 shops on the high street, felt the squeeze through lower like-for-like sales at its supermarkets and a doubling of bad debt charges at its bank.

That drove group pre-tax profits down to £69m in the first six months from £155m a year earlier. Underlying operating profits were down by a third to £174m and revenues were flat at £6.6bn.

“I don’t see (economic) growth at all,” said the group’s outgoing chief executive Peter Marks. “Do I see a light at the end of the tunnel? I don’t see a tunnel at the moment. Do I see any help from the economy in 2013? No, I do not.”

The Co-op would give no guarantee on maintaining its dividend payout level but said it has no plans to increase the standard variable rate it charges on mortgages.

But the group said it continues to invest and yesterday announced a £2bn spending programme over the next three years, including overhauling shops, buying more sites and expanding its legal services arm.

The Manchester-based mutual is also buying 632 branches from Lloyds Banking Group in a deal which will catapult its Co-operative Bank into the “premier league” of banking. The deal should complete by the end of March next year.

Mr Marks, who was born in Bradford and lives in West Yorkshire, said it was a “great deal for Co-operative’s members and a great deal for financial services”. He added the customer response to the deal has been “really encouraging”, with a 60 per cent increase in customers switching accounts to the Co-op in recent months.

It is paying £350m up-front for the branches, and Lloyds could earn another £400m by 2027 depending on how the bank performs.

Mr Marks said the group’s banking arm is “ring-fenced” from the wider group, so a future banking crisis cannot drag down the whole mutual.

And he added the mutual has no plans to walk away from the Lloyds deal or renegotiate its terms.

“We’ve already got the shirt off his back and the cufflinks,” said Mr Marks. “What more do you want?”

Buying the branches will give the Co-op about 1,000 banking locations, seizing 10 per cent of the UK’s bank branch network. “We needed scale in the bank,” said Mr Marks.

The Co-operative Bank slumped to a £58.6m pre-tax loss, worse than the £9.8m loss a year earlier.

Impairment charges to cover bad debts almost doubled to £91.9m from £46.1m, mainly due to the worsening state of its corporate loan book.

The bank also revealed it has set aside another £40m to cover mis-sold payment protection insurance, taking its total provision to £130m.

“What we had expected to see was the level of claims coming down,” said finance director Steve Humes, blaming the increase on claims management companies. “We’re seeing far too high a level of bogus claims coming through.”

He added while the group was “disappointed” by the bank’s performance, it was “not surprised”.

“It’s extremely difficult to make a margin in a low interest rate environment.

“We’ve seen a lag in performance from some of our corporate business customers.”

The supermarket chain posted a 1.2 per cent sales decline at stores open for at least a year. Including the impact of disposals, net sales fell 2.2 per cent to £3.6bn. Underlying operating profits in the food arm were down 16 per cent to £119m.

“We’re in an unprecedented and sustained period of low food growth,” said Mr Humes. “The customer is more discerning. They’re looking for a bargain.

“They’re trading down and prepared to walk 50 yards further up the high street if they think they can get a better bargain.”

The Co-op is testing new format stores, where food is tailored to the local community, and said these have seen a 12.5 per cent sales spike.

It also plans to buy another 80 stores.

The Co-op’s specialist business, which includes funerals, pharmacy and car sales, grew operating profits 19 per cent to £62m on revenues up 1.5 per cent at £777m.

Mr Marks, who recently revealed he is retiring after 45 years within the co-operative movement, said it is “early days” in recruiting his replacement.

“Whoever sits in my chair will not only be a great business person but it’s also very important to buy into the group ethos and principles. This a different business.”

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