Page last updated at 00:02 GMT, Friday, 11 December 2009

Co-op supermarket chain enjoys Somerfield boost

By Will Smale
Business reporter, BBC News, Manchester

Peter Marks, chief executive, Co-operative Group
Mr Marks says the Somerfield takeover has been 'rocket fuel' for the Co-Op

Peter Marks uses a football analogy to describe how 2009 has transformed the food retail fortunes of the Co-operative Group (Co-op).

"We've gone from the second division back into the Premiership," says the company's 60-year-old chief executive.

"Overnight we doubled our share of the UK supermarket sector."

Mr Marks is speaking in regard to the Co-op's takeover of rival Somerfield, which was completed in March.

The £1.57bn deal saw the Co-op buy 750 Somerfield outlets, which increased its store portfolio to 3,000.

In the process, this saw its share of the UK supermarket sector rise from 4.5% to 8%, putting it into fifth place behind Tesco, Asda, Sainsbury's and Morrisons.

For straight-talking Mr Marks, the deal was just the latest vital step in revitalising the Co-op on the UK High Street.

"Historically the Co-op movement had a 30% share of the UK food retail sector," he says.

The example of Morrisons has obviously loomed large, but the Co-Op seems to be doing all the right things in bedding Somerfield into the business
Jon Wright, Euromonitor

"But the movement became very fragmented over the years.

"As a result we were eaten alive by the consolidated food movement - the likes of Tesco. We needed to consolidate ourselves."

To put this into context, today's Co-op is an amalgamation of a number of former regional co-operative businesses around UK, which often did not work together as well as could be hoped.

Or as Mr Marks jokes: "The name 'co-operative movement' had become a bit of a misnomer - they didn't cooperate and rarely moved."

'Rocket fuel'

The Co-op is effectively one single business headquartered in Manchester since 2007. This centralisation has given Mr Marks and his board the opportunity to grow the business.

Exterior of the Co-Op's Westbury branch
The Co-Op is now the UK's fifth largest supermarket chain

"We needed to win back some market share, and Somerfield came on the market," says Mr Marks.

"It was rocket fuel for the business, a real transformational deal."

With the Somerfield stores now continuing to be rebranded Co-op as the two businesses are integrated, Mr Marks says they have avoided any of the very public woes that bedevilled Morrisons' 2004 takeover of Safeway.

While Morrisons' troubles in integrating the Safeway business saw it forced to issue a number of profit warnings, Mr Marks says the Co-op's past experience of amalgamating the various regional co-operative businesses has put it in good stead.

"Morrisons got it badly wrong. Sir Ken Morrison [the firm's former chairman and now life president] would admit they were naive," says Mr Marks.

"While we are not being complacent, and are working very, very carefully, we have a lot of merger experience to draw upon."

And instead of profit warnings, the Co-op announced in October that its pre-tax profits rose 17% to £229m in the six months to July, its first financial figures since the Somerfield takeover was completed.

Buying power

Retail analyst Jon Wright, of Euromonitor, says the Co-op must have planned the integration of Somerfield "very, very well".

We are not looking to become the new Tesco in 10 years' time
Peter Marks

"The example of Morrisons has obviously loomed large, but the Co-op seems to be doing all the right things in bedding Somerfield into the business, he says.

"This is especially the case when you consider that Somerfield has had difficulties of its own in recent years.

"And the Co-op can now enjoy the extra buying power that its new-found size gives it to better compete with the likes of Tesco."

However, with the final Somerfield stores not due to be rebranded as Co-op until the end of next year, fellow retail analyst, Clive Black, head of research at Shore Capital, warns that some shoppers may be be put off as a result.

"You now have many stores still branded Somerfield, but selling a mixture of Somerfield and Co-op products," he says.

"This is far from ideal, and is off-putting for customers. If I was a senior boss at the Co-op I'd want those stores rebranded as quickly as possible."

Mutual model

Looking ahead, Mr Marks says the Co-op has no plans to try to continue to grow rapidly in the medium term.

Supermarket share

"We are not looking to become the new Tesco in 10 years' time," he says.

"And for the next three years in particular it is all about consolidation, continuing to get what we are doing right, continuing to improve our offerings and revamp our stores.

"And, [due to strict competition rules governing the supermarket sector] it would be very, very difficult for us to us to expand much further anyway."

With the Co-op also owning a number of other businesses - it is the UK's third-largest pharmacy group, biggest funeral services provider, and even the country's largest farmer - Mr Marks says its mutual ownership structure continues to be a benefit rather than a hindrance.

What this means is that instead of having shareholders and a share price to worry about, the Co-op is instead owned by all its individual members.

And instead of shareholders being paid a dividend according to how much of a share of the company they own, the Co-op's members are all paid a dividend according to how much money they spend across its businesses.

For 2008 its 4.5 million members all received 2.6 pence worth of benefits - such as vouchers - for each £1 they spent.

"The beauty of the mutual model is that we aren't driven by chasing short-term profits or share rises," says Mr Marks.

"And look where that took some of the UK's largest banks. Instead we can take a much longer view based on our strict ethical approach."

'Strong position'

Analyst Don Williams, head of retail at BDO, says the Co-op's high profile focus on Fairtrade goods was likely to see it continue to attract new customers.

Somerfield branch
The last Somerfield stores will be rebranded by the end of 2010

"The Co-op has certainly taken a lead on its rivals in its very public ethical stance," he says.

"Most people won't overpay for more ethnical goods, but when they are priced broadly similar, many do prefer to buy them.

"Take this together with the Co-op now being better able to trim prices, thanks to the increased economy of scale of taking on Somerfield, I think it is a strong position going forward."

Back at the Co-op's head office, Mr Marks says the Co-op is relishing the future.

"We used to be described as a sleeping giant. We aren't asleep anymore."

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