Source - RNS
RNS Number : 0395K
Co-operative Group Limited
06 April 2018
 

6th April 2018

 

CO-OP PROFITS RISE SHARPLY ON CONTINUED INVESTMENT IN BRAND, BUSINESS AND PEOPLE

AMBITIOUS NEW PLAN UNVEILED TO CREATE THE CO-OP OF THE FUTURE

 

Co-op difference highlights 2017: delivering for members and their communities

•         Significant Co-op member reward of £74m generated - members receive £61m in personal rewards with £13m earned for over 8,000 community projects

•         Active membership increased by 15% to 4.6 million; total joining since member relaunch to 1.2 million

•         200 Member Pioneers recruited in new role designed to strengthen communities around Co-op outlets; on track to recruit Member Pioneers for each of our 1,500 communities by 2020

•         Co-op's position as UK's largest corporate supporter of Academy schools strengthened with addition of three new academies and creation of plan for significant expansion, more than tripling number of Co-op Academy schools

•         60% increase in apprenticeships year-on-year, recruited 742 new apprentices who receive quality training and pay rates in line with fellow colleagues; target of 1,000 apprentices agreed for 2018

•         A campaigning Co-op: leading the way on Modern Slavery and tackling loneliness and one of first retailers to sign up to bottle deposit and return scheme to reduce plastic waste

•         Development of the Stronger Co-op, Stronger Communities plan, designed to make the Co‑op more competitive, relevant, sustainable and innovative. Early 2018 initiatives see further price investment in Food, ground-breaking product innovation in Funeralcare and Insurance and creation of new Ventures programme

 

Financial and operational highlights:

•         Profits in line with plan, reflecting strategy of continued investment in The Co-op and the return of value to members:

Profit before tax of £72m (2016: loss £132m), on strong business performance, with 2016 loss reflecting write down of stake in Co-operative Bank

Underlying profit before tax of £65m* (2016: £52m), up 25% on improving business performance and further reductions in the cost base      

Operating profit of £126m (2016: £148m), including £74m of value created for members and communities

•         Revenues stable at £9.5bn (2016: £9.5bn), in line with plan

Food like-for-like sales** up 3.4%, Core convenience LFL sales up by 4.3%, with four consecutive years of LFL sales growth now delivered. Reported Food sales flat at £7.1bn, reflecting impact of strategy to close larger stores

Wholesale sales to independent societies up 7% to £1.7bn, as wider co-op sector benefits from the quality and value of Co-op product range 

Funeral and Life Planning revenues up 4% to £343m, supported by growth of Simple Funeral offer; sales in will writing and probate rise 16%. Market share of funeral plan sales increased to 33.2% (2016: 28%)

Insurance gross written premiums up 3% at £496m; like-for-like net earned premiums growth of 8% but reported revenue of £331m (2016: £439m) down due to a new reinsurance contract

•         Debt significantly reduced to £775m (2016: £885m)

 

New Stronger Co-op, Stronger Communities plan:

New plan in place to create the Co-op of the future: driving growth by creating a more commercial Co-op and sharing the greater value created with members and their communities. Underpinning that plan will be:

An efficient Co-op, with a clearer focus on serving customers and members

More closely interconnected business areas operating under the strong Co-op brand

A greater focus on convenience and relevance, with market-leading products and services at competitive prices

Ventures in new markets with agile, capital-light, digital-first approach to disrupting markets

•         In support of this plan, the Co-op will maintain a distinctive voice in society, championing causes that matter to members, while also taking a stance as an employer of difference in its sectors

Under the Stronger Co-op, Stronger Communities plan, the Co-op has already taken a number of initiatives in 2018, including:

•         In Food, initiatives to lower prices and broaden offer underway, including:

£50m investment to reduce prices announced in January 2018, with further pricing reductions planned

Further expansion of convenience store estate, with 100 new stores planned for 2018

"Pay in the aisles" pilot underway to enhance the shopping experience for customers within stores

Acquisition of Nisa Retail, the wholesaler and convenience retailer, for up to £137.5m. Deal remains subject to regulatory approval

Agreement to become exclusive wholesale supplier to Costcutter Supermarkets Group (CSG) and the 2,200 Costcutter, Mace, Simply Fresh, Supershop and kwiksave convenience stores across its network from spring 2018.  Working with independent retailers to grow their businesses through the provision of Co-op own-brand products to their stores and by offering lower wholesale prices through improved buying power

•         In Funeral & Life Planning, the Co-op will continue to hold funeral prices and help tackle funeral affordability, whilst investing heavily to provide products and services to meet present and future customer needs:

Acquisition of Simplify Probate signals commitment to grow the life planning and legal area, both organically and through acquisition, with a primary focus on wills and probate

Focus on improving the funeral planning market for consumers via the launch of "The Co-op Commitment", making Co-op the only plan provider to launch additional protection for customers paying monthly

•         In Insurance, plans in place to expand product range, working with partners, with the ambition of covering customers' more detailed insurance needs within next five years:

Ground-breaking new Travel insurance product launched in early 2018, based on member input, providing unlimited medical expenses for people with pre-existing conditions

50% of all contact centre new business now comes from Co-op members

•         Ventures 

A new Co-op ventures programme has been created; currently looking at initiatives in Health and Money

Ventures to be supported and enabled by existing digital and supply chain capabilities, seeing the Co-op creating a digital member platform, with new services and products that create social and commercial value. These will create further synergies for the existing businesses and member value in new areas

Outlook

•         The Food, Funeral and Life Planning and Insurance markets all remain highly competitive against a challenging consumer and economic backdrop. The Co-op will invest further in all its businesses to drive commercial success and value for members and their communities, whilst maintaining a tight control over costs.

•         Debt will remain within guidance levels of £900m

•         Our focus is on Stronger Co-op, Stronger Communities. With this significant investment in members and our business areas,  the Co-op is not expecting any  surplus profits being available for distribution during 2018

•         Looking forwards the Co-op will continue to consider how best to provide significant and sustainable value to members and the communities in which they live  

 

Steve Murrells, Chief Executive of the Co-op, said:

"Today's results show how much progress we have made. All our businesses have performed well and we have increased profits and reduced debt, while continuing to invest for colleagues, members and customers. The success we are enjoying shows that the Co-op's difference really resonates today - a different ownership model and a different approach to business, based on returning profits to our members and their communities.

 

"We're delighted with our performance, but we're hungry for more and ready to create the Co-op of the future. Whether it's in our existing business areas or through new ventures, we want to make the Co-op ever more competitive, relevant and innovative. That is why we are launching the Stronger Co-op, Stronger Communities plan. To really succeed as a Co-op we need to be even more successful commercially and our community efforts need to be concentrated on the things that matter to people. We are going to deliver more Co-op products and services to more people throughout the country and that is what will really allow us to spread our difference.

 

"We know there are challenges ahead, but we are confident that with the support of our colleagues and our members, the strength of our brand and continued investment in our businesses we will achieve our goals."

 

 Allan Leighton, Independent Non-Executive Chair of the Co-op, said:

"With profits up 25%, debt down and membership up by more than 1.2 million since we launched our new scheme, we are stronger than ever before and ready to create a new, modern Co-op that is fit for the future. As we do that, we will remain true to our social purpose and continue to make the right decisions and campaign on the big issues where business really should have a voice.

 

"It is vital that our Co-op continues to innovate and be relevant to meet the changing needs of our stakeholders. The plans we have in place to do this are rightly challenging. We have much to do, but we are confident in our ability to deliver our ambition and create an even stronger Co-op."    

 

Media Enquiries:

The Co-op

Jon Church
Tel: 07545 210812

Russ Brady 
Tel: 07880 784442

Tulchan Communications

Susanna Voyle 
Jonathan Sibun 
Tel: 020 7353 4200

 

Notes to editors

About the Co-op 

The Co-op, one of the world's largest consumer co-operatives with interests across food, funerals, insurance, electrical and legal services, has a clear purpose of championing a better way of doing business for you and your communities. Owned by millions of UK consumers, The Co-op operates 2,500 food stores and over 1,000 funeral homes, with more than 63,000 colleagues and an annual revenue of £9.5bn.

* Underlying Profit before Tax excludes one-off items, property and business disposals, change in value of investment properties, finance income and non-cash finance costs, and share of profits and losses from associates and joint ventures. A reconciliation of Operating Profit to Underlying Profit before Tax is provided in the Consolidated Income Statement.

 ** Like-for-like sales is a measure of year-on-year sales growth for stores that have been open for more than one year.

 

 

Chair's introduction - Allan Leighton

 

Creating shared value

 

Our businesses performed well in 2017, and you can find out more about how they did on page 13. But business performance is only one measure of the value we're creating as the UK's biggest consumer-owned co-op. There were many more as you can see below:

 

·      We gave £61m to our members through the 5% member reward.

·      We put £13m, earned by our members through the 1% member reward, into the Local Community Fund to support local causes.

·      We raised the pay of Food store colleagues by 6.1% keeping us ahead of the government's living wage target.

·      We recruited 742 apprentices receiving quality training, permanent contracts and good wages in line with other colleagues.

·      We sponsored 11 successful Co-op Academy schools, many in some of the most disadvantaged communities in the country, bringing Co-op values into the classroom to improve children's long-term opportunities.

·      We recruited 200 dedicated Member Pioneers to work in their local communities and make great things happen. They'll be working across each of our 1,500 communities by 2020.

·      We reached £6.5m in our fundraising to tackle loneliness and, through our partnership with British Red Cross, a network of Community Connectors was created to help young and old return to community life.

·      We stepped up our campaigning on modern slavery following a vote by our members.

·      We renewed our commitment to Fairtrade, and all the cocoa used in our own brand products is now Fairtrade.

·      We gave £1.8m from the sale of bottled water to fund clean water projects in some of the poorest parts of the world.

·      We supported British farming with a commitment to spend £2.5bn sourcing own brand British meat, produce and dairy products between 2017 and 2019.

·      We held our prices to tackle funeral affordability.

·      We extended free children's funerals to include 16 and 17 year olds.

 

These are just some of the highlights of how we've created shared value for our members and their communities in 2017. You can find out more about our ethics and sustainability performance in our Co-op Way Report which is published alongside this report.

 

 

 

 

 

 

 

 

Why are we different to other businesses?

 

The answer is found in our Values and Principles, the way of working for all co-ops agreed by the international co-operative movement. They provide us with an ethical code that informs all we do. So we run our Co-op, not to make profit for a few shareholders, but to create value in lots of ways for our 4.6 million members who shop with us each week and collectively own the business. We sum it up as 'Championing a better way of doing business for you and your communities'.

 

That 'better way of doing business' includes giving our members a central role in how we're governed and a say in the major decisions we take. All our directors are members and actively trade with us. They are all subject to election by our members with our four Member Nominated Directors (MNDs) directly chosen through contested elections. Our Board ensures the interests and concerns of members are represented in our boardroom, with the MNDs having a particular member focus. Through our elected Members' Council, our Board is held to account. Our directors and Council have a strong focus in making sure our Values and Principles are upheld.

 

How do we create shared value?

 

We create shared value by running commercially successful businesses that meet the needs of our members in an unmistakably Co-op way.

 

We've been working in our main markets - Food, Insurance and Funerals - for more than 150 years. We've built up enormous expertise and we've always had to learn and adapt to make sure we continue to be modern and relevant. In recent years we've added more products and services like life planning and legal where we've seen an opportunity to enter new markets where we can make a Co-op difference.

 

As our Chief Executive, Steve Murrells, sets out in his introduction, now we're ready to do more. At a time when big businesses and national government have lost the confidence of many people in the UK, we believe our Co-op is uniquely placed to rebuild trust and restore confidence in the strength of communities and businesses.

 

We want to grow our businesses so we can return more to our members and their communities and continue to look at new markets which can benefit our members.

 

Our suppliers

 

We've also had the disappointing news this year that the Groceries Code Adjudicator is investigating some of our practices related to suppliers. We need to live our values in our dealings with suppliers and we know we've fallen short. We've already been taking action and have a dedicated team making sure we have great supplier relationships. This area has great focus from our Board and we'll make sure you can be proud of our practices in the future. When you're a co-op, with values at your heart, you must get these things right. And we will.

 

Our Board and Executive

 

I'd like to congratulate Steve on becoming our Co-op Chief Executive. His five years leading our Food business and his commitment to co-operative values made him a uniquely qualified candidate and an excellent appointment.

 

Steve has been building his top team since taking the role in February 2017. Pippa Wicks is now Deputy Chief Executive with executive responsibility for our non-Food businesses, Jo Whitfield has succeeded Steve at Co-op Food, Helen Webb has become our new Chief People Officer, and Helen Grantham has become our permanent Group Secretary and takes on the role of General Counsel. Matt Atkinson started to work with us in the autumn and joined us full-time as Chief Membership Officer in January 2018. For the first time, we have an Executive with more women than men although we recognise this is no reason for complacency on gender issues and we still have work to do.

 

On the Board we welcomed Gareth Thomas as our latest Member Nominated Director (MND) and said farewell to Ruth Spellman who had served as an MND for two years and chose not to seek re-election. We benefited considerably from Ruth's contributions in the boardroom, as well as the good counsel she's given to the leaders in our business and I'd like to thank her for her service. I'd also like to add my thanks to Peter Plumb who is standing down at the 2018 Annual General Meeting to concentrate on his new role as Chief Executive of Just Eat plc. His commercial insight and challenge have been invaluable to the Board.

 

 

 

Chief Executive's introduction - Steve Murrells

 

Stronger Co-op, Stronger Communities

 

We've made great progress over the last few years and now we're ready to take a big leap in our ambitions. 

 

Over the last three years we've fixed and repaired many parts of our organisation. We've returned membership to the heart of our thinking, we've undertaken a huge rebrand and we've restored pride in our Co-op for our colleagues and our members. While there is still work to do, we've reached the point where we can look confidently to the future and plan for growth.

 

To make our business plans a success we need to be a forward-looking Co-op - modern, competitive, relevant and innovative. We need to invest in the businesses we have now and open up new opportunities where our Co-op can make a real difference. Our Stronger Co-op, Stronger Communities plan includes all of this, and more.

 

 

 

Closing the Co-op circle 

 

Through our Co-op Membership rewards, the thousands of community causes we've been supporting, through our campaigning, our commitment to academy schools and apprenticeships, and the great products and services we sell, we've been creating that rich and diverse Co-op value.

 

But the idea of shared value still isn't understood. The Co-op difference isn't quite cutting through. We need to do more to close the 'gap' in the Co-op circle.

 

It's widely recognised that making communities stronger and more resilient is an urgent priority for the UK. Our member-owned business, our heritage, and community presence makes us uniquely placed to play a significant role in that work. Making this happen will be the outcome of our plans and will turn us into the nation's favourite business.

 

Our strategy for a stronger Co-op

 

Much of what we're planning is old-fashioned business logic, building on the plans already in place. Now we're better placed than ever before to give those strategies the fuel they need to succeed. And the return on that investment will be the magic of enriched community life up and down the country. 

 

In Food we've recently announced a £50m investment to cut prices across hundreds of everyday purchases. We're going to continue to grow our convenience store estate with hundreds of new openings over the next few years. We're going to continue to work through how we will use digital technology to bring our Co-op closer to our customers and members in other ways too. The Costcutter and Nisa deals (subject to regulatory approval) have the potential to expand the reach of our brand even further.

 

In Funeral and Life Planning we're already the market leader, and we're going to show market leadership too. We'll do that through innovation in our offer, outstanding facilities, and a strong focus on choice and affordability. We're holding our prices in a market that's traditionally seen annual price hikes. This business now encompasses our legal operations which are fully integrated, so we can offer a truly comprehensive offer for later and end of life planning. Our funeral plans are already award-winning, highly competitive and distinctly Co-op in their guarantees. Probate will be the major area of focus for growth and we plan to be the biggest player in this market.

 

In Insurance we have bold and exciting plans to meet more of the insurance needs of more of our members by improving our competitiveness and offering a wider range of insurance products. Our new groundbreaking travel insurance product, which is the first in the UK to offer unlimited, cashless medical expenses for all ages, is a great example of our ambitions for our Insurance business and our Co-op difference.

 

 

 

 

New opportunities 

 

The markets we're in today will remain central to us, but our ambitions are greater. We're looking at markets using digital platforms that will allow us to learn quickly and build on our existing strengths while keeping our investment modest and limiting our risks.

 

We're exploring possibilities in Healthcare and Money where we believe we can provide more convenient and accessible services. We'll start small then adapt our offer and learn. Our Members' Council has set up an advisory team which will help shape our thinking as we develop our plans.

 

Membership 

 

Our new Co-op Membership has attracted more than a million new members since its launch and returned £61m to members during 2017. Over the coming years we'll look to evolve our Membership rewards to create an even stronger offer that drives business growth and community resilience. This year we'll look closely at how to make more of our membership data and build the right technology to support our needs.

 

Colleagues 

 

Our colleagues have been central to everything we've achieved and it's important we give them the reward and recognition they deserve. Over the next few years, we'll further improve the competitiveness of our pay for our customer-facing colleagues and we'll introduce significant well-being initiatives.

 

Community

 

We're looking at how we can build on the incredible work we've done so far through our Local Community Fund. We'll continue to invest in and develop our nationwide network of Member Pioneers so they can act as an important bridge between our Co-op, our members and the communities they live in.

 

We want to find ways to connect local people and organisations with each other so they can co-operate. Bringing people together to share ideas, skills and resources and really make a difference.

 

We'll continue to act on things that matter to our members. And we also want to start using our campaigning strength to focus on the issues that really matter locally. In future, we'll be shouting even louder about our campaigns and we'll have an ever more powerful and influential voice.

 

 

 

 

 

 

One Co-op

 

To achieve all our ambitions we need to make some changes. We've been holding ourselves back through the way we organise ourselves internally and how we work together. From now on we'll be 'One Co-op' in how we think, how we act and how we talk to our customers and members. We'll end duplication within our organisation and make decision-making easier and quicker. By doing this we'll become a Co-op able to respond to fast changing markets and social trends. 

 

To support the huge investment and our growth plans we'll look closely at the cost base in every part of our business. This will form part of the investment we need, while keeping our bank borrowing at sensible levels. 

 

We'll look at three ways of doing this: through organisational changes, better deals on the things we buy to help us run our organisation, and through the creation of the new Co-op Service Centre to look after our back office functions including finance, IT, HR and our customer and member helpdesks.

 

Ambitious for the future

 

Stronger Co-op, Stronger Communities is a return to an old Co-op idea with some very up to date Co-op thinking. Our plans address modern needs in a co-operative way that no other business can attempt to match.

 

The years ahead will be exciting and not without challenges. What's important is that we've been able to create these plans with the confidence that they're achievable as well as necessary.

 

Report from the President of the Members' Council - Nick Crofts

 

I'm delighted to present my report as President of the Members' Council.

 

First I must offer my heartfelt thanks to all of the members of the Council for their hard work, their passion, knowledge and commitment to our Society and our Movement. Serving our Society as an elected member is a great honour. In July I was especially privileged to be re-elected by Council to a second term as President.

 

Business success


Our Co-op had a good 2017. The successful trading of our family of businesses is the key which unlocks our ability to maximise our impact and influence as a leading co-operative society.


 

 

We opened over 100 new Food stores to better showcase our increasingly special own brand products. We enjoyed our fourth year of market-beating like-for-like sales growth in our convenience stores. The importance of strong commercial performance cannot be overstated. Our members know the necessity of operating successful co-operative businesses to our continued sustainability - and, indeed, our continued existence.

This success has been delivered by our 64,000 colleagues that work in every corner of the country. It is their work, in every store and funeral home, in every office and distribution centre, that has been steadily putting our Co-op back on track since 2013. The Members' Council and our millions of individual members are tremendously proud of them, and very grateful for their efforts. Thank you to every single one.

Collaboration


2017 saw the departure of our previous Chief Executive, Richard Pennycook. I took the opportunity at last year's Annual General Meeting (AGM) to thank Richard for his leadership following our 2013 crisis. I must now thank Allan Leighton, the Chair of the Board, who invited me to represent Council and serve as a member of the selection panel tasked to choose Richard's successor. 

There are few things I can point to that better demonstrate the transformed relationship between Board and Council and the growing spirit of collaboration between elected members and the Board. I'm pleased to serve as a member of the Nominations Committee and delighted that Steve Murrells was its unanimous choice.

Steve's transition into his new role has been entirely seamless. His years spent transforming our Food business were the perfect preparation for the task of completing our rebuild as we begin to look at new opportunities in the future. Our plans to purchase Nisa and extend the reach of our brand through our proposed deal with Costcutter are an indication of our ambition, and demonstrates finally that our Co-op is now firmly back on its feet after its near-death experience in 2013.

Advisory teams

 

A significant step in 2017 was the commitment to involve elected members of the Council in exploring ideas and opportunities to feed into our future strategy. In February, Council held a one-day workshop identifying five key areas for further exploration. New 'advisory teams' have been set up to continue this work in 2018.

 

Strengthening the co-operative movement

 

Elected members in our Society have always known that our Co-op is part of something much larger and more important than it - a movement that began in the 19th century and now spans the world. Council was particularly pleased when, to celebrate the 150th anniversary of Co-op Insurance, Steve Murrells committed to regain our Society's leadership role in the national and international movement. 

This is welcomed, as Council is the guardian of our co-operative Values and Principles and our co-operative business model which sets us apart from our competitors. We must continue to use our Co-op difference to distinguish our Co-op in all areas - our products and services, our role in local communities and our social and ethical responsibility. We know the difference co-operation - and co-operatives - can make to a better, more equal and more just society. 

 

Campaigns and community

 

This manifests in our Co-op's campaigning work. I was very pleased that our campaign to tackle the scourge of modern slavery won overwhelming support from members at last year's AGM. Campaigning on social issues that matter to our members has always been central to the purpose of our Co-op, all the way back to the Society's pioneering beginnings. Be it modern slavery, Fairtrade, tackling loneliness or ending water poverty, there's so much that we do to make our members proud.

 

Our Co-op difference needs to thrive locally. I was particularly delighted by the Board's commitment to recruit Member Pioneers across each of our 1,500 communities. Developed by Council, the role of Member Pioneers is to forge links in the community, bringing members together with local good causes and develop opportunities to get involved in our Co-op. It's a fine example of Council and Executive working together. 

 

It's in the nature of co-operation that the work is never finished, and that is true of our Co-op. As the transformation of our businesses continues, there is work to do to revitalise and rebuild member engagement in our democracy. It's testament to the dramatically improved relationships with the Board and Executive that the Council is able to press for faster progress in areas that are important to our members.

 

We recognise that our ability to communicate the work of our elected members, including our Member Nominated Directors, remains incomplete and this is a high priority for the Council. Similarly, finding innovative and compelling ways for our members to be able to participate in the affairs of the Society which they own is critical. There have been some tremendous successes here - the member-designed Pioneer Pinot Grigio wine being my personal favourite - and Council continues to work with the business to develop more.

 

I thank Vice Presidents Dan Crowe and Bev Perkins for their support throughout 2017 and Council members for their terrific work and scrutiny in the Senate, committees and working groups of all types.

 

So we can look forward to further and faster progress in 2018. In no small part, this is due to the terrific work of Council Secretary Gill Gardner and her colleagues from the Council Secretariat. They comprise a very small team of outstanding and committed co-operators who do so much to deliver on the Council's agenda. All of our members owe them a debt of gratitude.

 

 

Our business performance - Food

 

Shared value

 

Co-op Food is our biggest business and the most significant way we reach our members and customers. With our 2,532 Co-op Food shops we have a high street presence across the country providing the communities we serve with high quality products responsibly sourced from our suppliers and partners in the UK and around the world.

 

·      We've chosen to spend £2.5bn on British farm produce (2017-19) - all our fresh meat is now British and we've extending our British seasons commitment on fruit and veg

·      We're extending our local sourcing to every county in the UK

·      We've recruited over 200 apprentices in 2017

 

The numbers

 

The investment we've made over the last three years to create award-winning food sold in modern, friendly stores has shown its value through the 16 consecutive quarters of like-for-like sales growth we've seen in our core convenience estate.

 

Like-for-like store sales remained strong at 3.4% up, ahead of the market by 1.1%. Convenience store like-for-like sales were up 4.3%.

 

Our sales for the year were £7,054m (2016: £7,064m). This is slightly lower compared to last year because we sold 298 smaller food stores to McColl's Retail Group plc and a number of petrol filling stations, offset by our strong like-for-like performance. The deal with McColl's has helped us to focus our investment in new stores in more appropriate locations for the wider range we want to offer our members and customers, opening 105 new stores in 2017.

 

Underlying operating profit (which excludes any one-off items, property and business disposals and the change in value of investment properties) was in line with last year at £182m (2016: £182m), a strong performance given that this includes paying our Membership rewards. Operating profit, which includes property and business disposals and the change in value of investment properties totalling £20m (2016: £21m), was £202m (2016: £203m).

 

The momentum we built throughout 2017 led to a strong Christmas which outperformed the market. We saw a 6.2% jump in like-for-like sales over the two weeks to 1 January, almost double the 3.5% sales growth we reported last year. Overall, our Christmas and New Year sales were up 9%, proof that the public see our Co-op as far more than just an 'emergency' or top-up shop.

 

The quality of our food was acknowledged through more than 140 major awards including a Gold award for our Les Pionniers NV Brut Co-op champagne beating more well-known global brands costing up to 23 times as much. For the third year in succession we were recognised as the Sandwich Convenience Retailer of the Year at the British Sandwich Industry Awards (known as 'the Sammies').

What's new?

 

British

 

In May we announced our decision to spend £2.5bn on British-grown farm produce between 2017 and 2019. Just as we believe it's right to champion Fairtrade with our suppliers on the other side of the world, we also want to support our own farmers and their communities here in the UK. We've done this by moving to 100% British fresh meat in all our own label range.

 

Our investment in British goes well beyond meat. We've extended our British seasons commitment for home-grown fruit and vegetables and increased the British flower varieties we sell. We're also setting up British fish farming groups. In dairy we've put in place British sourcing credentials across our core dairy products and we make sure there's a fair farm gate price for our Co-op Dairy Group supplying our liquid milk.

 

Fairtrade

 

At our Annual General Meeting (AGM) in May our members backed our continuing commitment to Fairtrade and we're now using Fairtrade cocoa in all our own brand products. Sales of Fairtrade increased by 15.1% during the year - double the market increase. In 2018 we're switching to Fairtrade tea, banana and coffee as ingredients in our own brand products.

 

Local products

 

Our members have been keen to encourage our innovation with local products. From a successful trial in Yorkshire in late 2015, our programme is now being rolled out to every county in the UK with new relationships formed with local butchers, bakers, brewers and ice-cream makers. Unlike some of our competitors, we don't demand exclusivity as we want to see local businesses grow and thrive in our communities, create jobs and benefit the local economy. During 2017 we sold £164m of locally sourced products across the UK.

 

Recycling

 

At our AGM in May our members voted to make all our food packaging 100% recyclable in the long term, and we're aiming for 80% by 2020. We're on track and making good progress to meet this target. So far we've moved from 46% 'easy to recycle' to 71%. We've got there through making our meat and fish trays from only one plastic, changing the black plastic trays on our Irresistible tomatoes to card and making all our pizza bases cardboard, all of which are easy to recycle in the majority of local council areas. We're also supporting the government's plans for a deposit and return scheme for plastic bottles to reduce plastic waste.

 

We're now focusing on alternatives to hard-to-recycle plastics, including plastic film, CPET (a type of plastic used mainly for ready meals) and deeper coloured plastic, as well as being the first to trial fully compostable tea bags for our iconic 99 tea brand, which will break down completely in food waste collections.

 

Colleagues

 

Developing our colleagues and offering them clear career paths remain top priorities. We've launched the next phase of My Co-op Career giving colleagues in our stores, from Customer Team Member to Store Manager, access to new learning experiences to help them progress their career. My Co-op Career will be rolled out to Logistics this year. 27 Food colleagues were celebrated at the graduation ceremony for our Shining Stars development programme at the end of July. Our first ever Co-op-wide group of 28 Shining Stars started their leadership development journey in September.

 

Looking ahead

 

Our aim is to get closer to our members and customers:

 

·      Closer to where they are - physically and digitally

·      Closer to what they need - good food, friendly people and easy shops

·      Closer to what they care about - ethics, values and community

 

In 2018 we'll open a further 100 new stores as part of £160m investment in new openings and refits, creating an estimated 1,600 jobs.

 

In January 2018 we announced a £50m price investment to cut the cost of everyday food. Some products have been lowered in price by more than 40% and, on average, more than 600 products now cost 14% less. Based on an average weekly food shop we estimate that our customers could save £120 a year on their food bills.

 

Wholesale

 

Critical to taking our brand to more people are our wholesale arrangements with Nisa and Costcutter announced last November. Members of Nisa Retail voted in favour of our offer to buy 100% of the business for up to £137.5m. The deal is subject to regulatory approval due in the spring of 2018.

 

We also announced an agreement to become the exclusive wholesale supplier to Costcutter Supermarkets Group and the 2,200 Costcutter, Mace, Simply Fresh, Supershop and Kwiksave convenience stores across its network from spring 2018.

 

This builds on our long standing wholesale experience and the recognition of the quality of our products. Our plans will help expand the reach of our products and increase our buying power with our suppliers.

 

Products, availability and suppliers

 

We're continuing to make our products relevant and reflecting the demand for more 'Free From', 'Vegan' and 'Health' ranges. Improved availability and great customer service remain priorities.

All of this will be supported by ongoing investment to improve our use of data, our product availability, logistics to stores, and the training we give our colleagues.

 

Following the end of the year, the Groceries Code Adjudicator (GCA) opened an investigation into some of our practices connected to suppliers relating to delisting and the introduction of benchmarking and depot quality control charges. We acknowledge that at times we've fallen short and have been discussing the two issues raised with the GCA for some months.

 

 

 

Co-op Food is part of the biggest product placement venture that Coronation Street has ever taken on. A Weatherfield Co-op Food store is part of a new area of the Coronation Street set and will appear in episodes from spring 2018. You'll see our store, our bags, and non-speaking artists walking around in Co-op uniform going about their daily business.

 

 

 

Our business performance - Funeral and Life Planning

 

Shared value

 

In 2017 we brought together our Funeralcare and Legal Services businesses to create a joined-up set of services and products to our members and customers.

 

We're now able to offer both an 'at need' (funerals arranged at the time someone dies) and 'pre need' (funerals planned and paid for in advance) funeral service along with power of attorney, will writing and probate services which means families can be supported with greater care and consideration through some of the most difficult of times.

 

·      We're leading the way on funeral affordability and it's our top priority, holding our prices for at need and pre need

·      We're bringing more choice and transparency in all we do

·      We're offering free funerals for children up to the age of 17

 

The numbers

 

Our Funeral and Life Planning business had sales totalling £343m which was £14m up on 2016. We provided 99,925 at need funerals, up 2.4% on last year, and a growing number of our clients are choosing Simple funerals (our lowest price funeral). Our at need market share was 16.2% while pre need share was 33.2% at the year end (5.2% up on 2016).

 

Operating profit, which includes property and business disposals, was £66m, down £35m on the previous year mostly due to the sale of our crematoria. Underlying operating profit was £66m (2016: £71m), slightly down on last year due to Membership rewards and the impact of the crematoria sale.

We sold 68,969 funerals plans, an increase of 9,950 on 2016. At the start of 2018 we were awarded the 'Best Funeral Plan Provider' at the Moneynet Personal Finance Awards. We've also received top marks from Fairer Finance - 5 stars for our silver and gold funeral plans.

 

The number of legal cases we handled was 16,342, up 321 on 2016.

 

We opened 63 new homes during the year, bringing the total estate to 1,079 funeral homes and a further 100 had rebrands or refits during the year. Our programme to brand our private name funeral homes as 'Co-op' should be completed by the end of 2018.

 

What's new?

 

In 2016 we became the first funeral provider to sign up to Fair Funeral's enhanced pledge to tackle funeral affordability. In 2017 we made good on that pledge keeping the price for our Simple funeral unchanged, and launching our most affordable fully guaranteed funeral plan.

 

Co-op Commitment

 

If you choose to pay in instalments over 2-25 years, your plan will include the new Co-op Commitment:

 

·      If you die after the first 12 months of your plan, but before all your instalments have been paid, we'll still deliver all the services provided in your plan, with no more for your family to pay.

·      Other funeral plan providers ask for the family to make up the shortfall if the plan hasn't been paid for in full.

 

Children's funerals

 

For the last 30 years we've helped approximately 25,000 families who've lost a child under the age of 16 by not charging for our funeral director services. We're not the only funeral providers to do this but in 2017 we decided to go a step further and we no longer charge for funerals for children aged 16 and 17. It was a decision welcomed by the government and others have now followed our lead.

 

Going digital

 

We've been investing significantly in new digital technology working with our Co-op Digital team. It's helping us to improve how we record and store information given to us by clients when arranging a funeral. The new platform, called Guardian, moves away from paper and makes the information easier for colleagues to access at each stage of the client journey from our first meeting with a family through to their wishes for the funeral and all the arrangements on the day. We tested it first with families and our colleagues in Edinburgh and Bolton, and by the end of 2017 the new platform was being used in four regions. It's already reducing administration and allowing more time for conversations with families. We'll be using Guardian across the whole business in 2018.

 

In October we set up a new online hub for colleagues running bereavement clubs around the country so that knowledge and experience could be shared more widely and more clubs could be set up.

 

Following the success of our online will writing service we've also put our Lasting Powers of Attorney process online.

 

Colleagues

 

We made the news in July when we took on our 2,000th apprentice since 2013. By the end of 2017 we had 500 apprentices working in the business and we remain the only national funeral provider to offer apprenticeships. Around a third of our apprentices are over the age of 50. In November 2017 we were awarded the Princess Royal Training Award for our apprenticeship programme.

 

Looking ahead

 

Our Funeral business is the market leader, and we want to lead the market. We're keeping a strong focus on making our services affordable and there'll be no increase in at need funeral prices in 2018. For our Co-op members we're changing the 5% Membership reward to exclusive member prices at the time of arranging a funeral or buying a funeral plan. We're investing in outstanding facilities like our new mortuary in Edinburgh and improving our funeral homes and car fleet. Our new digital systems will set a global benchmark in funeral administration and allow colleagues to spend more time caring for families.

 

Choice, affordability, regulation

 

We'll continue to offer customers and members more choice and affordability through new approaches like 'Direct to Crematorium' (funerals with no service) and we'll help families to celebrate the lives of loved ones in a way they feel appropriate and meaningful.

 

To encourage long term planning and to know better the funeral wishes of individuals we'll tackle the reluctance to speak about death within families and society as a whole.

 

We believe in the value of better national regulation of the funeral industry and will work with government to achieve this to make sure there are minimum standards of care. We're also strong supporters of a better regulatory model for pre-need plans to make sure the market works effectively and in the interests of consumers.

 

Training and business development

 

We'll invest in new skills and accreditation for our colleagues with more professional qualifications. We want our colleagues to be able to spend more time supporting bereaved families. So we'll complete the organisational changes we started in 2017, and continue the roll-out of the digital Guardian platform which is revolutionising the way we do business.

 

We'll grow the Life Planning & Legal part of the business organically and through acquisitions. We'll focus on probate and wills and form new partnerships to bring our products to the market. We'll broaden our marketing to the over 50s and provide access to them 24/7 through online, phone and face to face channels across the UK.

 

Across Life Planning & Legal we'll be growing our own in-house experts - providing a career framework for our colleagues, investing in training our own legal advisors and using online learning.

 

 

The rainbow hearse - one of only a handful in the country - is the latest addition to our growing fleet of specialist hearses, including a Land Rover, a 1933 Austin and a Buddhist-themed hearse.

 

The colourful hearse was a request from a member of the community in Brighton, but is now in demand across the country, as people want to personalise funerals for LGBT+ friends and relatives.

 

Our research shows that almost half (47%) of UK adults would like their own funeral to be conducted as a celebration and almost a quarter (23%) of Britons say they want to make their last journey in a personalised vehicle.

 

 

 

Our business performance - Insurance

 

Shared value

 

Our Insurance business puts the needs of our members first through our customer experience, member pricing and safer communities. In 2017 we celebrated our 150th anniversary and continued to innovate to support our members:

 

·      Our new groundbreaking "cashless" Travel insurance product provides cover that meets the needs of more of our members and has been designed with them

·      We're offsetting carbon emissions on our new direct Car and Home policies, as well as on our policies sold through price comparison sites

 

The numbers

 

Our Insurance revenue was £331m (2016: £439m). From January 2017 we had a new reinsurance contract in place. This supports our capital position but reduces the amount of revenue we recognise, so we expected our revenue to fall. On a like-for-like basis, excluding the impact of this reinsurance, our revenue grew by 8% compared to 2016 reflecting the investment we're making in our pricing capabilities.

 

Underlying operating profit in 2017 was in line with last year at £11m (2016: £11m). Our operating loss, which includes the one-off costs associated with our transformation plans, was £12m (2016: £18m loss).

 

At the half year we reported that our contract with IBM to upgrade our IT systems had been terminated and we were exploring alternative technology options. Since the termination of the contract we have made significant progress by investing in more specific IT improvements. In 2017 we started to see the benefits of this through innovations in pricing, an increased focus on customer service, and new product development.

 

While the insurance market as a whole in the UK remains fiercely competitive, our strategy remains to focus on meeting more of the insurance needs of more Co-op members and offering a wider choice of fairly priced insurance products.

 

What's new?

 

In September we tested the UK's first ever car insurance quote chatbot. The Co-op Insurance chatbot gives users an estimate of how much they could expect to pay for their car insurance in as little as 30 seconds. They answer four questions on Facebook Messenger to get an estimate of the cost before completing the full quote on our Insurance website.

 

Safer communities

 

We've spent several years helping to make communities safer. We're working with Neighbourhood Watch to understand how we can help vulnerable homeowners who feel anxious at the thought of unexpected callers to their front door. We're also trialling the use of smart-device connected doorbells for customers who've already been a victim of a burglary. The technology allows homeowners to see and speak to anyone at the front door from anywhere, using their smart phone, tablet or PC. We're finding ways to help cut the number of burglaries and make customers and members feel safer.

 

Safer streets and cars

 

We're continuing to encourage safer driving, partnering with the charity Brake to work in schools to educate on speed awareness. Having pioneered telematics technology to encourage safer driving habits and lower insurance premiums for young drivers, we've been looking at more ways we can help our younger customers. We've followed up our research into best used cars with a new award for best 'first' used cars. In June we announced that the 2012 Skoda Citigo as our number one car for Co-op Safe Used First Car Award 2017.

 

In July we launched Park Smart, a new digital interactive map which aims to help people make informed choices about parking their car. The tool shows the number of vehicle related crimes in the last six months using government crime data. Users can enter their postcode across England and Wales and the Park Smart tool will highlight the risk level in each area based on vehicle theft, theft from a vehicle, and vandalism. 

 

Cutting carbon emissions

 

In 2017 we became the first major UK insurer to offset as standard a proportion of customers' carbon emissions when they buy a new motor or home policy direct from us. We do this by supporting carbon offsetting projects which help to reduce carbon emissions, a cause of climate change.

 

The projects we support also have additional social and environmental benefits such as Gyapa cookstoves, which are cleaner and more efficient. We're helping to fund Gyapa stoves for 140,000 people in Ghana. The project, which has been accredited as Gold Standard, not only helps reduce carbon emissions but is also equipping people in Ghana with the skills and knowledge to manufacture, market and sell the stoves, as well as saving money on fuel for families.

 

Colleagues

 

Co-op Insurance created 25 new apprenticeships in 2017, including seven students from the Co-op Academies Trust, helping to bring in new talent and grow the next generation of insurance leaders.

 

Looking ahead

 

To create a stronger Co-op and stronger communities through our Insurance business we're planning to increase the range and cover of the products and services we offer for members.

 

Our new groundbreaking travel insurance product, launched in January 2018, is an example of how we plan to do this:

 

·      We've built the product after talking to our members to help understand what frustrates them about other products on the market.

·      We're the first UK general insurer to offer unlimited, cashless medical expenses for people of all ages. That means there's no need to pay upfront for medical help when away and then claim it back when you get home.

·      Our insurance also gives access to face-to-face video consultation with a UK doctor before and during trips.

 

Our aim is to create more new products and services in this way - talking to our members, understanding their needs, and working with other experts while still maintaining our Co-op difference.

 

  

  

 

 

Megan Frater (16) is one of our first Co-op Insurance apprentices and a former Co-op Academy pupil. She's now studying towards a qualification in customer service:

 

"I've learned loads since I joined the Co-op Insurance team and although my first time talking to customers was daunting, I've since grown in confidence and now have the skills to answer most insurance queries."

 

All of the successful candidates have the opportunity to earn qualifications up to degree level and will benefit from a competitive salary, well above the national average for apprenticeships.

 

Our finances

 

The profit before tax for the year was £72m, compared to the loss before tax in 2016 of £132m. The loss in 2016 was affected by the reduction in value of our investment in the Co-operative Bank ('the Bank') to £Nil, which led to a cost in our income statement of £185m.

 

As with any organisation in change, there are always non-trading items that affect the numbers. This means our operating profit is down by £22m to £126m (2016: £148m) but our underlying operating profit is up by 10%. The table below shows how the operating profit is adjusted to get to the underlying operating profit (adding back losses and subtracting gains) and further details of the non-trading items are given in the Profits section.

 


2017

£m


2016

£m

Operating profit

126


148

One-off items

23


21

Property and business disposals

4


(27)

Change in value of investment properties

(15)


(16)

Underlying operating profit

138


126

 

2017 is the first full year of our new Co-op Membership and members have earned £61m through the 5% reward (2016: £16m). £13m was also earned for local community causes through the 1% reward during the year (2016: £3m). The cost of the 5% and 1% rewards is included in arriving at our underlying profit.

 

Sales

 

Sales of £9.5bn were in line with last year. More information on the performance of each of our businesses can be found on page 13.

 

Profits

 

Our key profit measure is underlying profit before tax, which looks at our core trading performance less underlying interest (interest on borrowings). Underlying profit before tax of £65m was 25% up on last year, mainly as a result of cost savings in our support areas. Profits across our businesses were in line with last year, with our Membership rewards being funded from improvements in our underlying performance.

 

Costs from supporting functions of £118m were, as expected, £16m lower than last year, which was a peak year for investment in our activities to rebuild our Co-op.

 

The table shows how we get from reported profit before tax to underlying profit before tax, adding back losses and subtracting gains.

 


2017

£m


2016

£m

Profit / (loss) before tax

72


(132)

One-off items

23


21

Property and business disposals

4


(27)

Change in value of investment properties

(15)


(16)

Finance income and non-cash finance costs

(11)


35

Share of (profits) and losses from associates and joint ventures

(8)


171

Underlying profit before tax

65


52

 

The main elements are explained below.

 

One-off items

 

Where we have significant costs that aren't expected to happen every year, like major restructuring, we strip these out of normal trading profit to present a clearer picture of our ongoing trading performance. One-off items of £23m relate to restructuring costs in our Insurance business. The one-off items last year also related to restructuring costs, both for our Insurance business and our support functions.

 

Disposals

 

We made a loss on disposals of £4m, compared to a profit of £27m in 2016. The table below shows how this is made up of the profits and losses from different disposals during the year.

 


2017

£m


2016

£m

Crematoria

-


30

NOMA joint venture

12


-

Bank investment

5


-

Food store sales to McColl's

7


-

Other property and business disposals

(28)


(3)

(Loss) / profit on disposals

(4)


27

 

More information about the Bank and NOMA disposals is provided in the Investments in associates and joint ventures section.

 



Finance income and non-cash finance costs

 

The table below shows what we include in finance income and non-cash finance costs.

 


2017

£m


2016

£m

Pension finance income

42


45

Fair value movement on quoted debt

(11)


(74)

Fair value movement on interest rate swaps

(12)


8

Discount unwinds

(8)


(14)

Finance income and non-cash finance costs

11


(35)

 

 

The fair value movement on our quoted debt is also known as 'mark to market'. As the market value of our bond debt liability increases in the accounts, it creates a charge to the income statement. We also have to include the movement in the fair value of interest rate swaps we hold to protect us from changes in interest rates. Both of these items can be either income or costs depending on what happens in the finance markets.

 

We have to reduce (known as 'discounting') the value of some of our financial assets and liabilities to reflect that when we receive or pay the money in future its value will have reduced, mainly due to inflation. As we get nearer to receiving or paying the money, the difference between the current and future values gets smaller and we call the difference a 'discount unwind'.

 

Investments in associates and joint ventures

 

At the end of 2016 we had several joint venture and associate arrangements, most notably a 20% stake in the Bank and a 30% stake in a travel joint venture with Thomas Cook.

 

During 2017, the Bank went through an exercise to secure additional capital and as a result we saw our shareholding reduce from 20% to 1% in early September. We later sold our remaining shareholding for £5m.

 

We reported last year that we'd served notice to exit the travel joint venture arrangement and we received £50m (plus interest) from Thomas Cook in December 2017 in return for our shares in the joint venture. We also received £32m during the year under a minimum dividend guarantee.

 

Just before the end of the year, we sold our investment in Manchester's NOMA development to our joint venture partner. We started our NOMA joint venture by originally contributing a number of our properties with a book value of £58m. Over the life of the partnership we contributed a further £19m of cash, and we've received £123m cash in return.

 

We also completed the sale of two of our windfarm investments.

 



The table below shows our income and losses during 2017 and 2016 from associates and joint ventures.

 


2017

£m


2016

£m

Reduction in value of our investment in the Bank

-


(185)

Share of profits or losses made during the year:




·      Travel

-


12

·      NOMA

8


1

·      Other investments

-


1

Income / (losses) from associates and joint ventures

8


(171)

 

Financing and cashflow

 

Net debt was £775m at year end, down from £885m last year (details of what is included in net debt are provided in note 10).

 

We've continued to invest in our trading estate and in our systems but have also received significantly higher proceeds from our disposals than we did in 2016 - £241m compared to £65m in the previous year, driven by the disposals in our Food business as explained on page 23. We invested £441m on capital expenditure, including £95m on new Food stores, £135m on refitting existing Food stores and £51m on our Funeral and Life Planning business.

 

Underlying interest payable fell to £73m from £74m.

 

Our regulated Insurance business is separately funded from the Trading Group, which includes our other businesses, so we review our funding position separately and on an overall group basis. The Insurance business operates under the Solvency II regulatory reporting regime which sets out capital requirements for the business. Our Insurance business meets and, based on current plans will continue to meet, all these regulatory capital requirements.

 

The Trading Group is comfortably within the ratios of debt and interest agreed with our banks and our funding position is strong. Our £21m debenture stock is due to be repaid during 2018 and we're also due to pay back our £450m Eurobond notes in 2020. We're confident we'll be able to fully replace these facilities and have already started work on this.

 



Tax

 

We won't be paying corporation tax in respect of the year because we have brought forward capital allowances and tax losses in excess of the taxable profit. These allowances and losses are explained in more detail in note 5. In 2017 we paid £201m (2016: £199m) to the government in respect of VAT, business rates, Stamp Duty Land Taxes and Employers' National Insurance.

 

We retained the Fair Tax Mark accreditation in 2017 showing that we put our purpose, Values and Principles into action in the way we do business. Our tax policy can be found here: www.co-operative.coop/ethics/tax-policy/.

 

Pensions 

 

Our accounts show a surplus of £1,553m (2016: £1,727m) across all our schemes. Our largest scheme, the Pace Complete scheme, has a healthy surplus of £1,603m (2016: £1,822m) with most of the other schemes in a deficit position and so partially offsetting this.

 

These figures are on an accounting basis. Pension schemes look at funding on a statutory basis which values pension liabilities on a more prudent basis than the accounting basis. On a statutory basis, Pace Complete has a smaller surplus which was assessed as part of the funding valuation at 5 April 2016. It's this statutory funding basis which informs how much cash we'll need to pay into the pension pot in future. We agreed with the Pace trustee that contributions to Pace Complete would stop with effect from 1 December 2017 to reflect this surplus as it moves towards being self-funded. Discussions are currently taking place about the funding of two of our other schemes that had valuations during 2017.

 

As part of the arrangements which led to the sale of our investment in the Bank, we agreed principles to split the total pension liabilities of Pace and to remove the Bank's obligation to support our share of the Pace Complete pension scheme liabilities. This agreement means that in our accounts we've reduced the amount of pension surplus we show by around 21% (£374m) and our pension liabilities by £1.9bn. This is explained further in note 8.

 

Balance sheet

 

Total equity fell by £153m to £3,088m during the year. This was mainly due to the reduction in the amount of pension surplus recognised as a result of our agreement reached with the Bank as explained above, offset by our retained profit for the year.

 

Our investments in joint ventures and associates have reduced from £52m to £3m due to the sale of our investments in NOMA and two of our windfarms. The balance relates to one windfarm investment.

 



Our funeral plan investments have grown over the year to £1,076m (2016: £872m), reflecting our increased sales of funeral plans. An independent actuarial valuation is carried out each year and we're comfortable that we have enough assets to meet the costs of carrying out the funerals in future.

 

Outlook

 

In 2017 we continued the great progress we've made over the last few years. As we move into 2018, we'll continue to invest in our businesses so that we can grow our Co-op, while we explore potential new markets where we believe we can deliver a better solution for the benefit of our members. 2017 was the first full year of our new Membership, and we want to continue to develop this to drive business growth as well as strengthening communities.

 

Principal risks and uncertainties

 

The key risks most relevant to the Group are as follows:

 

Risk description

Reasons for risk

Where we are and what we're doing

Change

Transformational change is not done effectively

 

Potential consequences

Failing to realise the planned benefits in full

 

·      Number and complexity of change programmes

·      Available resources for programmes

·      Dependencies between programmes

Where we are

·      Our plans are ambitious and as a result of there being a number of complex programmes this risk profile remains high.

 

What we're doing

·      Set up a Transformation Steering Group with Executive oversight and sponsorship

·      Regular review of all our programmes and rationalisation by the Portfolio Co-ordination Board

·      Governance at an individual programme level and across all our programmes

·      Training colleagues in our approach to managing change

Misuse and/or loss of data

Personal data is inappropriately accessed, shared and/or not managed in line with our expectations

 

Potential consequences Customer and member confidence is affected, financial loss, regulatory fines, and reputational damage

·      Member, colleague and customer confidence

·      Data privacy and GDPR regulations

·      Information processed on our behalf by third parties

 

Where we are

·      Our GDPR programme is in place to help make sure our Co-op is ready for changes to data protection law that come into force in May 2018.

 

What we're doing

·      Revised data protection operating model

·      Expanded data protection team led by our Data Protection Officer

·      Revised policies and standards

·      Inventory of all personal information, its uses and how long it's held

·      Information retention framework

·      Use of IT to support GDPR compliance

·      GDPR training and awareness

·      Managing third party contracts and processes

·      Payment Card Industry (PCI) framework

Market and economic conditions

Changing market and economic conditions may threaten our objectives and business model

 

Potential consequences

Changes to our consumers' spending patterns and choices, availability of labour, increased cost of funding and disruptions to parts of our supply chain

·      Consumer behaviour

·      Pressure on margins

·      Structural impact of Brexit

·      Economic downturn

·      Competitors

·      Political landscape

·      Currency fluctuation

Where we are

·      Continuing uncertainty around Brexit and its potential impact on the economy and consumer spending means that this risk remains high.

 

What we're doing

·      Scenario analysis and planning

·      Monitoring of leading economic indicators

·      Establishing early warning triggers

·      Brand strategy

·      Market research and analysis

·      Strategic ventures to strengthen our brand

·      Currency hedging

Revenue targets

We don't meet our sales growth targets

 

Potential consequences

Not achieving our planned sales growth would affect the sustainability of our business model and mean we can't invest in communities

 

 

·      Consumer confidence

·      Changes in spending patterns

·      Price competition in all of our markets

·      Customer experience

Where we are

·      We're a market leading funerals business, have great food store locations, great products, a good reputation and loyal customers.

 

What we're doing

·      Continuous review of our products and services

·      Expanded wholesale offering through our proposed acquisition of Nisa

·      Management of our locations and online services

Fuel for growth

We don't achieve our 'fuel for growth' targets making our organisation more costly

 

Potential consequences

If we don't find ways to save money and become more efficient our profitability will be lower than planned

 

·      Market cost pressures

·      Inefficiencies in our operations

·      Complexity

Where we are

·      We have many projects looking at cutting costs and making us more efficient that are managed through the programme governance explained above.

 

What we're doing

·      Programme governance structure with Executive oversight and sponsorship

·      Continuous review of individual savings and progress to savings targets

Brand and ethical framework

Failure to create a brand and ethical framework that strengthens our Co-op Way

 

Potential consequences

We don't successfully balance profit and ethics

·      Our Co-op values

·      Members' expectations

·      A Co-op that makes our colleagues proud

Where we are

·      Our business model is Stronger Co-op, Stronger Communities

·      Ethical framework in place

·      Award-winning sustainability report

·      Leading global campaigns like modern slavery

 

What we're doing

·      More focus on our social impact supported by external assessments and benchmarking

·      Continued improvement to our sustainability reporting

·      Our Co-op Way plan

 

Managing health and safety

Weaknesses in our health and safety practices and procedures could put customers and colleagues at risk

 

Potential consequences

An unsafe environment for our colleagues and customers

·      Keeping our colleagues, members and customers safe

·      UK Health and Safety Regulation and Approved Codes of Practice

·      Avoidable accidents

·      Complexity of our business

 

Where we are

·      Our health and safety programme is creating a better controlled and safer place to work which can be seen through less events being reported and the organisation's increased awareness.

 

What we're doing

·      Making sure our colleagues understand our health and safety culture and how it links with our Ways of Being Co-op

·      Training and awareness at all levels including the Executive

·      Health and safety operating model with clear roles and responsibilities

·      Policies and control standards

·      Putting a new accident management system in place

·      Safety governance framework

Regulatory compliance

Non-compliance with laws and regulations may increase our cost of doing business

 

Potential consequences

Our Co-op is subject to various laws and regulations across its businesses. Failure to respond to changes in regulations or stay compliant could affect profitability through fines and sanctions from our regulators

·      Regulations from our primary regulators

·      Codes and regulations that apply to our Food business including the Groceries Supply Code of Practice and product safety regulations

·      Solicitors Regulation Authority regulations applicable to our Funeral and Life Planning business

·      Financial Conduct Authority and Prudential Regulation Authority applicable to our Insurance business

·      Increased enforcement activity

 

Where we are

·      In our Food business we're doing a full review of processes and ways of working to make sure we fully understand, execute and monitor our performance against regulatory compliance.

·      The Groceries Code Adjudicator has opened an investigation into some of our practices relating to suppliers.

·      Our regulated Insurance business has well established regulatory risk and compliance teams.

 

What we're doing

·      Regular engagement with primary authorities and regulatory bodies

·      Executive oversight of compliance activity

·      Horizon scanning by our in-house Legal team

·      Continued focus on product quality and safety

·      Dedicated Food policy and Code Compliance Team

·      Colleague training and awareness

 IT security and cyber threats

A cyber-attack or data security breach could lead to downtime of critical IT services and/or a loss of sensitive personal or commercial data

 

Potential consequences

Our ability to serve our customers is highly dependent on our IT systems. Any prolonged downtime or data breaches could prevent us from providing our products and services to our customers and members.

·      Data privacy and GDPR regulations

·      Colleague, member and customer confidence

·      Processing of data through third parties

·      Worldwide spread of cyber threats

·      Increasingly sophisticated and diverse threat landscape

 

Where we are

·      The continuous evolution of cyber threats means that this risk remains critical.

 

What we're doing

•      Strengthened Information Security team in place

·      Information Security governance framework in place

·      24/7 security monitoring

·      Enhanced patching, encryption, user access controls and incident detection

 

 

 

 

 

 

 

 

Consolidated income statement

for the period ended 6 January 2018






























2017


2016






Notes

£m


£m

Revenue






9,470


9,472

Operating expenses





(9,432)


(9,363)

Other income






88


39

Operating profit




1

126


148

Finance income




3

44


53

Finance costs





4

(106)


(162)

Share of profits / (losses) of associates and joint ventures


7

8


(171)

Profit / (loss) before tax




1

72


(132)

Taxation





5

(2)


(2)

Profit / (loss) for the period (all attributable to members of the Society)

70


(134)

 

 

Non-GAAP measure: underlying profit before tax **





























2017


2016 (restated*)






Notes

£m


£m

Operating profit (as above)





126


148

Add back losses / (deduct gains):







    One-off items




1

23


21

    Property and business disposals



1

4


(27)

    Change in value of investment properties




(15)


(16)

Less underlying interest payable




(73)


(74)

Underlying profit before tax




65


52










Underlying profit before tax (as above)




65


52

Add back: member rewards





61


16

Underlying profit before tax and member rewards



126


68










* For more details on the restatement, refer to the general accounting policies note on page 56.



 ** Refer to note 1 for a definition of underlying profit before tax.





  

 

 

Consolidated statement of comprehensive income

for the period ended 6 January 2018






























2017


2016  (restated*)






Notes

£m


£m

Profit / (loss) for the period




70


(134)










Other comprehensive income:







Items that will never be reclassified to the income statement:





Remeasurement gains on employee pension schemes



112


503

Derecognition of pension surplus attributable to Co-operative Bank

8

(374)


-

Related tax on items




5

44


(78)







(218)


425

Items that are or may be reclassified to the income statement:





Changes in value of available for sale assets




(7)


16

Related tax on items




5

1


(3)







(6)


13

Other comprehensive income for the period net of tax


(224)


438

Total comprehensive income for the period (all attributable to members of the Society)

(154)


304










*For more details on the restatement, refer to the general accounting policies note on page 56.




 

 

 

  

 

 

Consolidated balance sheet

 

 

as at 6 January 2018

 




 






2017


2016 (restated*)





Notes

£m


£m

Non-current assets





Property, plant and equipment


2,014


1,943

Goodwill and intangible assets


897


911

Investment properties


68


74

Investments in associates and joint ventures

7

3


52

Other investments


1,538


1,414

Reinsurance contracts


44


47

Derivatives


38


50

Pension assets

8

1,746


1,978

Trade and other receivables


58


55

Deferred tax assets


228


221

Reclaim Fund assets


234


237

Total non-current assets


6,868


6,982

Current assets





Inventories


389


439

Trade and other receivables


635


704

Cash and cash equivalents


403


283

Assets held for sale

9

6


106

Other investments


415


372

Reinsurance contracts


14


7

Reclaim Fund assets


439


332

Total current assets


2,301


2,243

Total assets


9,169


9,225

Non-current liabilities





Interest-bearing loans and borrowings

10

1,138


1,141

Trade and other payables


1,249


1,078

Provisions


222


224

Pension liabilities

8

193


251

Deferred tax liabilities


400


429

Insurance contracts


289


280

Reclaim Fund liabilities


446


495

Total non-current liabilities


3,937


3,898

Current liabilities





Overdrafts


6


6

Interest-bearing loans and borrowings

10

34


21

Income tax payable


-


1

Trade and other payables


1,400


1,506

Provisions


90


102

Liabilities held for sale

9

-


5

Insurance contracts


461


444

Reclaim Fund liabilities


153


1

Total current liabilities


2,144


2,086

Total liabilities


6,081


5,984

Equity





Members' share capital


73


72

Retained earnings


2,914


3,062

Other reserves


101


107

Total equity


3,088


3,241

Total equity and liabilities


9,169


9,225

 

*For more details on the restatement, refer to the general accounting policies note on page 56.



 

 









 

 

 

 

 

Consolidated statement of changes in equity

for the period ended 6 January 2018


























Members' share capital

Retained   earnings

Other  reserves

Total  equity




Notes

£m

£m

£m

£m

Balance at 31 December 2016


72

3,062

107

3,241

Profit for the period


-

70

-

70

Other comprehensive income:






Remeasurement gains on employee pension schemes

8

-

112

-

112

Derecognition of pension surplus attributable to Co-operative Bank

8

-

(374)

-

(374)

Gains less losses on available for sale assets


-

-

(4)

(4)

Available for sale cumulative gains transferred to the income statement


-

-

(3)

(3)

Revaluation reserve recycled to retained earnings


-

-

-

-

Tax on items taken directly to other comprehensive income

5

-

44

1

45

Total other comprehensive income


-

(218)

(6)

(224)

Contributions by and distributions to members:






Shares issued less shares withdrawn


1

-

-

1

Contributions by and distributions to members:


1

-

-

1

Balance at 6 January 2018


73

2,914

101

3,088









See note 20 in the annual report for further details of Share Capital and Reserves.

 





Members' share capital

Retained earnings (restated)

Other reserves

Total equity (restated)




Notes

£m

£m

£m

£m

Balance at 2 January 2016


72

2,770

95

2,937

Loss for the period


-

(134)

-

(134)

Other comprehensive income:






Remeasurement gains on employee pension schemes

8

-

503

-

503

Gains less losses on available for sale assets


-

-

17

17

Available for sale cumulative gains transferred to the income statement


-

-

(1)

(1)

Revaluation reserve recycled to retained earnings


-

1

(1)

-

Tax on items taken directly to other comprehensive income

5

-

(78)

(3)

(81)

Total other comprehensive income


-

426

12

438

Contributions by and distributions to members:


-

-

-

-

Balance at 31 December 2016


72

3,062

107

3,241









*For more details on the restatement, refer to the general accounting policies note on page 56.



 

 

 

Consolidated statement of cash flows

for the period ended 6 January 2018




















2017

2016




Notes

£m

£m

Net cash from operating activities


6

363

247







Cash flows from investing activities





Acquisition of property, plant and equipment



(427)

(330)

Proceeds from sale of property, plant and equipment


186

60

Purchase of intangible assets



(4)

(23)

Acquisition of businesses



(10)

(5)

Proceeds from sale of investments



55

5

Disposal of businesses, net of cash disposed



-

17

Dividends received from investments


7

33

2

Net cash used in investing activities



(167)

(274)

Cash flows from financing activities





Interest paid on borrowings



(75)

(72)

Repayment of corporate investor shares



(8)

-

Repayment of borrowings including derivatives



(1)

(22)

Finance leases entered into / (repaid)



8

(3)

Net cash used in financing activities



(76)

(97)

Net increase in cash and cash equivalents



120

(124)

Cash and cash equivalents at beginning of period



277

401

Cash and cash equivalents at end of period


397

277

Analysis of cash and cash equivalents





Overdrafts (per balance sheet)



(6)

(6)

Cash and cash equivalents (per balance sheet)



403

283





397

277

 

Group Net Debt




2017

2016





£m

£m

Interest-bearing loans and borrowings:





 - current



(34)

(21)

 - non-current



(1,138)

(1,141)

Total Debt




(1,172)

(1,162)

 - Group cash


403

283

 - Overdraft


(6)

(6)

Group Net Debt




(775)

(885)

Add back fair value adjustment



138

127

Group Net Debt (pre fair value adjustment)


(637)

(758)

See note 10 for a full reconciliation of the movement in net debt.




 

 

 

Notes to the financial statements

 

1    Operating segments

 

2017
























Revenue from external customers (f)

Underlying segment operating profit (a)

Operating profit

Additions to non-current assets (e, f)

Depreciation and amortisation (e)


£m

£m

£m

£m

£m























Food


7,054


182


202


357


(215)

Funeral and Life Planning


343


66


66


51


(22)

Insurance


331


11


(12)


61


(61)

Other businesses


59


(3)


(5)


1


-

Federal (g)


1,683


-


-


-


-

Costs from supporting functions


-


(118)


(125)


33


(26)























Total


9,470


138


126


503


(324)












 

2016 (restated - see (d) below)
























Revenue from external customers (f)

Underlying segment operating profit (a)

Operating profit

Additions to non-current assets (e, f)

Depreciation and amortisation (e)


£m


£m


£m

£m

£m























Food


7,064


182


203


286


(210)

Funeral and Life Planning


329


71


101


26


(19)

Insurance


439


11


(18)


64


(61)

Other businesses


67


(4)


3


1


-

Federal (g)


1,573


-


-


-


-

Costs from supporting functions


-


(134)


(141)


40


(22)























Total

9,472


126


148

417

(312)












 

 

a) Underlying segment operating profit is a non-GAAP measure of segment operating profit before the impact of property and business disposals (including individual store impairments), change in value of investment properties, profits / losses from associates / joint ventures and one-off costs.

 

b) Each segment derives its revenue and profits from the sale of goods and provision of services, mainly from retail and insurance activities.

 

c) The Group identifies its operating segments based on its divisions, which are organised according to the differing products and services it offers its customers. The reportable operating segments (and the captions) reported above are based on the periodic results reported into the Chief Operating Decision Maker (CODM) which is the Board and whether the respective division's results meet the IFRS 8 minimum reporting thresholds. The 'Other Businesses' category includes activities which are not reportable per IFRS 8. The significant constituent parts of 'Other businesses' are the Group's Electricals business and the deferred income recognised on the disposal of the Travel business in 2011 (see also d) below) and these results have been combined as allowed by IFRS 8. Other Financial Services entities (mainly holding, ancillary companies and the Reclaim Fund Limited) are included within costs from supporting functions.

 

d) The result of the Group's Legal services business has been reported in the segmental analysis within Funeral and Life Planning (previously reported within Other Businesses) to be consistent with a change in the way information is reported to the Group Board. Deferred income recognised on the disposal in 2011 of 70% of the Group's interest in Travel is now shown within property and business disposals whereas previously it was shown within underlying operating profit (within Other businesses). See general accounting policies section on page 56 for details of the restatements. 

 

e) Additions to non-current assets are derived on a cash flow basis. Depreciation and amortisation excludes £nil (2016: £7m) amortisation of deferred income relating to the use of the Co-operative Travel brand by the Group's associate: TCCT Holdings UK Limited. Amortisation of £61m (2016: £61m) and additions of £61m (2016: £64m) on deferred acquisition costs are included within Insurance.

 

f) The Group's external revenue and non-current assets arise primarily within the United Kingdom. The Group does not have a major customer who accounts for 10% or more of revenue. There are no material transactions between the main operating segments.

 

g) Federal relates to the activities of a joint buying group that is operated by the Group for itself and other independent co-operative societies. The Group acts as a wholesaler to the other independent co-operatives and generates sales because of this. This is run on a cost recovery basis and therefore no profit is derived from its activities.

 

h) Transactions between operating segments excluded in the analysis are £6m (2016: £6m) sales of electrical goods by Co-op Electrical to Food and £1m (2016: £2m) sales of legal cover on insurance policies by Legal Services to Insurance.

 

i) A reconciliation between underlying segment operating profit and operating profit is as follows:

















2017


Food

Funeral and Life Planning

Insurance

Other businesses

Costs from supporting functions

Total



£m

£m

£m

£m

£m

£m









Underlying segment operating profit


182

66

11

(3)

(118)

138









One-off items


-

-

(23)

-

-

(23)

Property and business disposals


5

-

-

(2)

(7)

(4)

Change in value of investment properties


15

-

-

-

-

15









Operating profit


202

66

(12)

(5)

(125)

126

 

One-off items include restructuring costs of £23m (2016: £29m) relating to expenditure incurred in relation to the transformation programme and replatforming work being undertaken within our Insurance business. The costs associated with the implementation of the transformation programme are charged to the income statement as incurred, with recognition of assets where the technical accounting criteria are met.

 









2016 (restated*)


Food

Funeral and Life Planning

Insurance

Other businesses

Costs from supporting functions

Total



£m

£m

£m

£m

£m

£m









Underlying segment operating profit


182

71

11

(4)

(134)

126









One-off items


-

-

(29)

-

8

(21)

Property and business disposals


5

30

-

7

(15)

27

Change in value of investment properties


16

-

-

-

-

16









Operating profit


203

101

(18)

3

(141)

148

 

*See general accounting policies section on page 56 for details of the restatement. 

 

 

 

j) A reconciliation between underlying segment operating profit and profit before tax is provided below:

















2017

2016 (restated*)






Notes

£m

£m

Underlying segment operating profit






138

126

Underlying interest payable





4

(73)

(74)









Underlying profit before tax






65

52

One-off items






(23)

(21)

(Loss) / profit on property and business disposals - see overleaf




(4)

27

Change in value of investment properties






15

16

Finance income





3

44

53

Non-cash finance costs





4

(33)

(88)

Share of profits / (losses) of associates and joint ventures



7

8

(171)









Profit / (loss) before tax






72

(132)

 

(Loss) / Profit from property and business disposals


2017

2016 (restated*)





£m

£m

£m

£m

Crematoria sale








 - proceeds




-


41


 - less net book value written off




-


(11)







-


30

Sale of Somerfield Stores Ltd








 - expenses




-


(13)


 - payable recognised




-


(35)


 - net onerous lease provision release and net book value written off




-


53







-


5

Sale of NOMA (50% stake in joint venture)








 - proceeds




35


-


 - less net book value written off




(23)


-







12


-

Sale of Bank (remaining 1% shareholding)








 - proceeds




5


-


 - less net book value written off




-


-







5


-

Food store sales to McColls Retail Group








 - proceeds




121


-


 - less net book value written off




(114)


-







7


-

Other Disposals








 - proceeds




80


90


 - less net book value written off




(82)


(83)


 - provisions recognised on closure




(19)


(20)







(21)


(13)

Impairment of property, plant and equipment and goodwill





(7)


(5)

CFS Management Services Ltd (CFSMS) retirement liability derecognised





-


3

Deferred income on Travel disposal





-


7

(Loss) / Profit on disposal





(4)


27

 

*See general accounting policies section on page 56 for details of the restatement. 

2   Supplier income

 

Supplier Income




2017

2016





£m

£m













Long-term agreements




149

155

Bonus income




142

157

Promotional income




337

359













Total supplier income




628

671

























Percentage of Food's Cost of Sales before deducting Supplier Income












Long-term agreements




2.1%

2.2%

Bonus income




2.1%

2.3%

Promotional income




4.8%

5.2%











9.0%

9.7%













These figures do not include income or purchases made as part of the Federal joint buying group.




 

3    Finance income























2017

2016





£m

£m













Net pension finance income




42

45

Fair value movement on interest rate swaps (see note 11)




-

8

Discount unwind from trade receivables




2

-

Net interest on funeral investments and liabilities (see below)




-

-













Total finance income




44

53



















The discount unwind from trade receivables relates to the £50m put option that was recognised in trade receivables in the prior year following the Group serving notice to Thomas Cook of its intention to exit its investment in the Travel JV. The £50m put option (plus interest) was paid by Thomas Cook in December and the Co-op Group no longer holds any receivable balances in respect of Travel.

Included in the above are interest and bonuses of £103m (2016: £23m) earned in the year on funeral plan investments. These have been offset by a £103m (2016: £23m) increase in the corresponding financial liability.

 

 

 

 

4    Finance costs











2017

2016





£m

£m







Loans repayable within five years




(27)

(27)

Loans repayable wholly or in part after five years




(46)

(47)













Underlying interest payable




(73)

(74)







Fair value movement on quoted Group debt (see note 10)




(11)

(74)

Fair value movement on interest rate swaps (see note 11)




(12)

-

Discount unwind of provisions




(10)

(14)













Other finance costs




(33)

(88)













Total finance costs




(106)

(162)













The Group's Eurobond debt is fair valued each period with the fair value movement going through the income statement (see note 10).







Fair value movements on forward currency transactions were immaterial in the current and prior period.







Total interest expense on financial liabilities that are not at fair value through profit or loss was £15m (2016: £16m).

 

5    Taxation

 

















2017

2016




Footnote

£m

£m













Current tax charge - current year



(i)

-

-

Current tax - adjustment to group relief payable owed to Co-operative Bank plc



(ii)

3

6

Current tax (charge) / credit - adjustment in respect of prior years



(iii)

(1)

12













Net current tax credit




2

18







Deferred tax charge - current year



(iv)

(8)

(24)

Deferred tax credit - adjustments in respect of prior years



(v)

4

4







Net deferred tax charge




(4)

(20)

























Total tax charge




(2)

(2)













 

 

 

The tax on the Group's net profit before tax differs from the theoretical amount that would arise using the standard applicable rate of corporation tax of 19.25% (2016: 20%) as follows:











2017

2016




Footnote

£m

£m













Profit / (loss) before tax




72

(132)







Tax (charge) / credit at 19.25% (2016: 20%)




(14)

26







Deferred tax reconciliation:






Expenses not deductible for tax (including one off costs)



(vi)

(4)

(1)

Depreciation and amortisation on non-qualifying assets



(vii)

(4)

(3)

Non-taxable profits / (losses) arising on business disposals



(viii)

2

(2)

Impairment of investment - Co-operative Bank plc



(ix)

-

(37)

Associated company profits



(x)

1

2

Capital gains arising on property disposals



(xi)

10

(21)

Adjustment in respect of previous periods



(v)

4

4

Restatement of deferred tax to blended rate (2016:17.1%)



(xii)

1

12













Subtotal of deferred tax reconciling items




10

(46)













Current tax reconciliation:






Current year tax charge



(i)

-

-

Adjustment in respect of previous periods



(iii)

(1)

12

Adjustment to group relief payable



(ii)

3

6







Current tax reconciling items




2

18













Total tax charge




(2)

(2)













The net tax charge of £2m on a profit before tax of £72m, gives an effective tax rate of 3%, which is 16.25% lower than the standard rate of 19.25%. The majority of this difference can be explained by two principal items. Firstly, there was a £4m reduction in the amount payable to the Bank in respect of group relief, representing 5% of the difference (see footnote (ii) overleaf). The remaining 11% is in respect of the sale of food stores to McColls Retail Group. Tax legislation dictates that the tax charge on this disposal is triggered in 2016, being the date in which the contract was signed. This differs to the accounting treatment, where the disposal is recognised in 2017, being the period in which the properties were transferred out of the Group.

 

Tax expense on items taken directly to consolidated statement of comprehensive income



















2017

2016 (Restated*)





£m

£m













Actuarial gains and losses on employee pension scheme




44

(78)

Available for sale assets - Insurance




1

(3)

















45

(81)



















Of the tax taken directly to the consolidated statement of comprehensive income, £45m credit (2016: £81m charge) relates to deferred taxation credit of £44m (2016: £91m charge) arising on the actuarial movement for the year, net of a credit of £nil (2016: £13m) relating to the restatement of deferred tax rates on the pensions scheme surplus. *For more details on the restatement, refer to the general accounting policies note on page 56. Furthermore, there is a £1m credit representing the movement in deferred taxation on available for sale assets in General Insurance (2016: £3m charge).

 

The Finance Act 2016 will reduce the main rate of corporation tax to 17% from 1 April 2020.  This will reduce the company's future current tax charge accordingly.  Each deferred tax balance has been measured individually based on the tax rate at which it is expected to unwind (either 17%, 18% or 19%). This results in a blended deferred tax rate of 17.1% at the balance sheet date.

Tax policy










The Group published its Tax Policy on our website https://www.co-operative.coop/ethics/tax-policy.  The Group have complied with the commitments set out in that policy.











Footnotes to taxation note 5:









i) The Group is not taxpaying in the UK in respect of 2017 due to the fact it has a number of brought forward capital allowances (£187m gross claimed in 2017) and tax losses (£29m gross utilised in 2017) that are in excess of its taxable profit for the period.  An amount of current tax of £265k (2016: £253k) is in respect of wholly owned IOM resident subsidiary, Manx Co-operative Society, an entity undertaking convenience retailing in the Isle of Man. This is the Group's only non UK resident entity for tax purposes, which employs 246 out of our total Group headcount figure. All other employees are employed in the UK. The unaudited 2017 revenue of Manx Co-operative Society is £34m, all other Revenue reflected in the consolidated income statement is generated by UK trading activities. The unaudited 2017 profit before tax of Manx Co-operative Society is £2m, all other income in the consolidated income statement is generated by UK trading activities. The net assets of Manx Co-operative Society at December 2016 were £19m, compared to net assets of the consolidated Group of £3,209m. The Manx assets represent the only overseas assets within the Group.  A full copy of the most recent accounts is available here https://www.co-operative.coop/downloads/manx-co-operative-2016-accounts.pdf.  The presence of this IOM resident subsidiary has resulted in this additional tax charge of £265k. If these activities had been carried out in the UK, any taxable profits would have been reduced to nil due to the availability of capital allowances and tax losses.  In addition the Group has one company registered in the Cayman Islands, Violet S Propco Limited. This dormant company is UK resident for tax purposes as it is managed and controlled entirely within the UK. All tax obligations in respect of this company are therefore reported in the UK. 

ii) The Group hold a creditor balance in relation to group relief claimed from the Bank.  Group relief is the surrender of tax losses made by one group company to another which made taxable profits.  In 2012 and 2013, the Bank had tax losses that it was able to surrender to a number of Group companies which had taxable profits during those two years.  This group relief payable is intrinsically linked to and held at prevailing tax rates to 17%.  As a result of the change in tax legislation regarding the utilisation of losses, the timing of the total group relief payable has extended into periods when the tax rate will be 17%  and a credit is required to be booked in the income statement in respect of this item.  In addition a contractual agreement was made to reduce payments due to the Bank by £4m in July 2017 and a credit for reduction in amounts payable has been booked.

iii) Adjustments to tax charges in earlier years arise because the tax charge in the financial statements is an estimate that is prepared before the detailed tax calculations are required to be submitted to HMRC, which is 12 months after the year end.  Furthermore, HMRC may not agree with a tax return some time after the year end and a liability for a prior period may arise as a result. Provisions for uncertain tax positions booked in previous years of £0.5m have been released in the year as a result of increased certainty gained through correspondence with HMRC during 2017.

iv) Deferred taxation is an accounting standard concept that reflects how certain income and expenses fall into the charge to tax in differing periods from the accounting period than the period the original income or expense arose. These differences are a result of tax legislation.

v) In addition to the adjustments arising between prior year estimates and submissions to HMRC, the Group ascertained on the original purchase cost information on deferred tax balances arising on land and buildings.

vi) Some expenses incurred by the Group may be entirely appropriate charges for inclusion in its financial statements but are not allowed as a deduction against taxable income when calculating the Group's tax liability. Examples of this include certain repairs, entertaining costs and legal costs.

vii) The accounting treatment of depreciation differs from the tax treatment. For accounting purposes an annual rate of depreciation is applied to capital assets. For taxation purposes the Group is entitled to claim capital allowances, a relief provided by law. Certain assets do not qualify for capital allowances and no relief is available for tax purposes on these assets. This value represents depreciation arising on such assets (primarily Land and Buildings).

viii) In 2017 the Group disposed of its shareholdings in Gilsland Spa Ltd, White Mill Windfarm Ltd, Biggleswade Windfarm Ltd, TCCT UK Holdings Ltd and Co-operative Bank Plc. No tax arose on the accounting profit due to the availability of the Substantial Shareholding Exemption. This is a legislative exemption from capital gains for corporate entities who sell more than 10% of their shares in a trading entity.

ix) In 2016, the investment held in the Co-operative Bank Plc was impaired, which attracted no tax relief. No such impairment has been made this year.

x) This represents the share of post-tax profits from associated companies that are not included in the Group's tax charge, as tax is already included in the accounts of the associate.

xi) During the year a number of assets were sold, where the tax value is in excess of the accounting profit. The most significant element of this figure relates to NOMA following the sale of the JV's interest in the CIS Tower Miller Street and disposal of the investment in this partnership.

xii) It is a requirement to measure deferred tax balances at the substantively enacted corporation tax rate at which they are expected to unwind. This figure represents the change in the tax rate identified in 2017 at which these deferred tax balances are expected to unwind.

 

 

6    Reconciliation of operating profit to net cash flow from operating activities

 









2017

2016  (restated*)









£m

£m





















Operating profit








126

148

Depreciation and amortisation charges (excluding deferred acquisition costs)



264

251

Non-current asset impairments







9

5

Profit on disposal of businesses and non-current assets





(4)

(32)

Change in value of investment properties






(15)

(16)

Retirement benefit obligations







(45)

(45)

Decrease in inventories







50

6

Increase in receivables







(137)

(160)

Increase in payables and provisions







88

78





















Net cash flow from operating activities before asset and liability movements in Financial Services

336

235











Fair value through profit and loss movement






14

(27)

Assets available for sale movement







18

21

Movement in deferred acquisition costs






1

(3)

Reinsurance assets








(5)

15

Loan receivables at amortised cost







9

(6)

Insurance and other receivables







(23)

36

Insurance and participation contract provisions






24

(24)

Insurance and other payables







(11)

-





















Asset and liability movements in Financial Services




27

12





















Net cash from operating activities






363

247





















*See general accounting policies section on page 56 for details of the restatement. 















Asset and liability movements from Financial Services activity are shown separately from the rest of the Group to help members understanding the impact of fluctuations and volatility in this area.











The increases in receivables and payables noted above for the Trading Group include increases on funeral plan assets and liabilities of £233m (2016: £109m) and £213m (2016: £109m) respectively.

 

7   Investments in associates and joint ventures

 

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A breakdown of the investments held and income received is disclosed below:






2017

2016






Income / (losses)

Investments

Income / (losses)

Investments






£m

£m

£m

£m

The Co-operative Bank plc




-

-

(185)

-

TCCT Holdings UK Limited (Travel) - share of income / (losses)

-

-

12

-

NOMA





8

-

1

39