Co-op Group says high UK inflation will continue to hit profits

Top buyers of the Co-op Group have said high inflation will continue to weigh on the mutual company’s profits in the coming months.

The group posted an underlying operating profit of £100m for 2022, the same figure as the previous year, after absorbing £100m in additional energy and ‘salary inflation’ costs.

Allan Leighton, Chairman of the Co-op Group, said: ‘We are, of course, not immune to the stark realities facing all consumer-led businesses, with skyrocketing energy costs and other inflation-related costs continuing to weigh heavily on short-term costs and corporate profits. ‘

Leighton added that the group had made “difficult but necessary decisions to cut costs significantly” in an effort to reduce “unprecedented” levels of inflation.

The Co-op Group recorded a ‘significant’ one-off charge of £26 million during the period, as a result of severance costs incurred.

The group sold its entire service station to Asda at the end of October for net cash proceeds of £408 million, making an accounting profit of £319 million.

Total group revenue for the year was £11.5 billion, up from £11.2 billion in 2021.

“We saw higher inflation, but also smaller baskets and more conservative spending,” the group said.

Group profit before tax was £247m, an increase of £190m compared to 2021.

Full-year underlying profit for the food division fell slightly due to gas station sales, but the decline was offset by improvements in funeral services, legal services and arms wholesale.

Responsible: The chief executive of the Co-op group, Shirine Khoury-Haq

Food revenues rose by £134 million to £7.81 billion, while wholesale sales rose by £53 million to £1.44 billion.

The number of transactions per week increased by 5 per cent to 16.4 million, while online sales increased by 24 per cent to £222 million over the period.

Across the funeral business, the group saw revenue increase by £7 million to £271 million. The growth in market share offset a lower death rate, with 93,867 funerals the group performed during the period.

The group said funeral plan sales fell to 16,774, down from 44,751 in 2021. The group said this drop “driven by lower consumer confidence in the overall market ahead of regulation, as well as the exit of some third-party distribution agreements due to regulatory changes.”

The group added: “Direct cremation and direct burial burial options continue to grow in popularity, accounting for 11.7 percent of our funerals (2021: 7.9 percent), as people continued to opt for unattended, lower-cost services.”

In the legal arm of the group, sales increased by 19 per cent to £46.3m. Probate saw “significant growth,” taking on 24 percent more cases than in 2021, increasing revenue by 28 percent year-over-year.

In the insurance arm of the group, revenues fell from £34m in 2021 to £24m. The Co-op group said this reflected “the shrinking auto insurance market following a decline in new car sales and the advent of new product and price regulation.”

Net debt stood at £333 million at the end of the period, up from £920 million for 2021.

The number of active Co-op memberships has risen to 4.41 million for the first time in five years.

Looking ahead, the group said: “We expect the volatile external environment and turbulent economic headwinds, including inflationary pressures, to continue.

“However, the early action taken last year to strengthen the Coop’s financial position puts our Co-op in a good position to face such headwinds, but is not immune.

‘The resulting costs are expected to depress profitability in the short term. Despite this short-term impact, we look forward with confidence to strong performance in our business areas and our cooperative in the longer term.”

Co-op chief executive, Shirine Khoury-Haq added: “It is clear that our early action to significantly reduce our debt, improve our cash position and tighten cost control has made a significant difference to the financial strength of our Co-op -op and has enabled us to look forward with confidence, despite the continuing market uncertainty.’

In September 2022, the group revealed that profits had fallen by 84 per cent to £7 million in the six months to July 2. The group was hit by rising utility bills and the need to pay higher wages, driving costs up £50m compared to the same period last year.