Co-op posts mixed results and corroborates Yellowhammer food shortage warning

Co-op posts mixed results and corroborates Yellowhammer food shortage warning

Diverse British consumer co-operative retail business Co-operative Group reported improved sales alongside a drop in profits, due to challenging conditions experienced by its funeral business. The Co-op Chief Executive then came out to substantiate some of the concerns laid out in the recently published Operation Yellowhammer documents.

The Company celebrated a 12% rise in first half sales on a year-on-year basis, up to £5.4 billion. This period also represented a 22nd consecutive quarter of like-for-like sale growth in its Co-op Food branch, which saw total sales increase by 3% during the period. As a result of the performance, the Group said they were able to return £29 million to its members and £6 million to 4,000 local causes.

However, this good news was somewhat offset by a drastic contraction of profits led by its funeral branch. The Co-op said that first half profits dropped from £44 million to £25 million, which it said was led by a 10% drop in death rates.

The Group added that it expected Co-op Health to be rolled out nationally by early 2020, and that it had extended its online food delivery trials using zero emission electric cargo bikes and in partnership with Deliveroo.

It continued by saying it had re-entered the life insurance market with the launch of Co-op Life Cover, and that it was awarded Grocer of the Year at the Grocer Gold Awards and Consumer Business of The Year at The London Evening Standard Awards.

Co-op comments on their performance

Steve Murrells, Chief Executive, stated,

“We’ve enjoyed another good six months where the strength of our business has led to a further £35 million of value being generated for our members and their communities. Our food business continues to perform strongly in a highly competitive market and has now recorded 22 consecutive quarters of like-for-like sales growth. As our largest business, it is providing the fuel for our growth in terms of member value and community impact.”

“In funerals we are actively re-positioning the business to meet the changing needs of our members. We are the market leader but we will also lead the market in providing better choices and options for our customers in the years ahead. Likewise, the development in our insurance, legal and health businesses will enable us to significantly broaden the range of Co-op services, in areas where our members know the Co-op difference can be clearly seen.” 

Allan Leighton, Chairman, said,

“We have made further progress during the first six months of this year and the strength of our business can be seen by our underlying financial position and through the increasing impact we’re having in local communities.”    

“The Co-op is now 175 years young, and we have worked hard to ensure that we remain relevant to all generations and in particular younger co-operators. Whether this is using our presence at eight music festivals to introduce people to our values and ways of doing things, or by developing motor insurance products specifically with the needs of young drivers in mind. The Co-op is thriving and we are committed to growing our Co-op difference and impact for generations to come.” 

Warnings on food shortages

In addition to a mixed but largely positive set of results and outlook, the Co-op corroborated the food shortage warnings laid out in the recently released Operation Yellowhammer paper.

Clause seven of the ‘Key Planning Assumptions’ reads as follows,

“Certain types of fresh food supply will decrease. Critical dependencies for the food supply chain (such as key input ingredients, chemical and packaging) may be in shorter supply. In combination, these two factors will not cause an overall shortage of food in the UK but will reduce availability and choice of products and will increase price, which could impact vulnerable groups. The UK growing season will have come to an end and the Agri-food supply chain will be under increased pressure at this time of year, due to preparations for Christmas, which is the busiest time of year for food retailers. Government will not be able to fully anticipate all potential impacts to the agri-food supply chain. There is a risk that panic buying will cause or exacerbate food supply disruption.”

While we have been told these are a ‘reasonable worst-case scenario’ set of preparatory assumptions, Co-op Chief Executive Steve Murrells seems to confirm that some of these ideas aren’t impossible. While the Company are making efforts to expand their warehouse space to stockpile water and canned goods, he says that the challenge will come primarily from fresh foods.

“We think there will be shortages in some fresh food areas. Where that is the case, we would endeavour to bring it in to give our customers a choice,” said Mr Murrells, speaking to The Guardian.

He added that it would be easier to “knit fog” than attempt to predict the fallout from a crash-out Brexit.

“The question for us is how much of the price increases can we absorb? […] How much can we spread that impact over a period of time?” said Murrells.

He said that there would be contingency for their meat supplies given that all of the Co-op’s meat comes form the UK. He noted that to avoid empty shelves, the supermarket would resort to air freighting fresh fruit and other supplies.

Regarding panic buying, Murrells said there were “very early signs” that British people were stockpiling. He went on to say that he expected this kind of behaviour to intensify as the UK neared a No-Deal outcome, with consumers most likely heading to larger outlets rather than local convenience stores such as the Co-op.

Murrells said that Leaving the EU with a Deal would be the best outcome, “because it was the only way to avoid the inevitable impact on our customers”.

Investor notes

The Company’s shares have dipped 0.10% or 13p to 12,800p per share 12/09/19 15:00 BST. The Group has a running yield of 8.748%.

Elsewhere in food and beverage news, there have been updates from; Bakkavor Group Plc (LON: BAKK), Avangardco Investments Public Limited (LON: AVGR), Loungers PLC (LON: LGRS), The Coca-Cola Co (NYSE: KO), Devro plc (LON: DVO), Greencore Group plc, (LON: GNC) and NWF Group plc (LON: NWF).