Mutual model drives Co-op profit surge

The Co-operative Group benefited from a 'flight to trust' to deliver record profits in 2009. <b>James Thompson</b> finds out how

The Co-operative Group hailed its mutual model as one of the main reasons for its record profits yesterday as it confirmed a sharp hike in its much-heralded dividend to members for 2009. The Manchester-based group, whose businesses include banking, grocery, travel and funeral care, also revealed that it has been speaking to politicians from the three main parties recently about how its co-operative structure can be applied to revitalise public sector services.

Peter Marks, the chief executive of the Co-operative, which has five million members, said: "There has been huge interest in the mutual model and it is no wonder given where the traditionalist capitalist model has got us."

The Co-operative Group posted pre-tax profits – before payments to and behalf of members – up by 85 per cent to £402m for the 51 weeks to 2 January 2010. Excluding exceptional items, the group's underlying operating profit climbed by 20 per cent to £473m.

In particular, Mr Marks said that the co-operative's financial services' division, which merged with Britannia building society last year, had reaped the benefits from the groundswell of mistrust in the banks that built up during the recession.

He said: "We have significantly benefited from the flight to trust. The confidence in the banks has never been lower. People did not know where to put their money, but they do now – it's called the Co-operative." In a thinly veiled dig at the state-controlled banks Lloyds Banking Group and RBS, he added that his company "did not have to go cap in hand to the Government".

Boosted by its merger with Britannia, the Co-operative expanded its customer deposits by 178 per cent to £32.5bn over the 51-week period, up from £11.7bn a year ago. Its current account sales surged by 38 per cent over the year and the merger also drove a significant uplift in its customer loans to £34.1bn. "Our loan book is covered by our deposits to the tune of over 100 per cent," said Mr Marks.

The Co-operative hiked the dividend paid to its customers members by 16 per cent to £55m over the year.

Politicians from the Labour, Conservative and Liberal Democrat parties have stepped up their courting of the Co-operative over recent months, in an effort to find a way to improve performance in the public sector through employee-owned co-operatives.

"We have been speaking to politicians of all colours. We think there is serious interest in this and an opportunity for different business models to be considered in the future, particularly in the public sector, and we are doing a lot of work with schools," said Mr Marks. MPs have also been talking to John Lewis Partnership, the owner of the eponymous department store and the grocer Waitrose, which is known for its flat bonus structure and staff benefits.

But Mr Marks warned the mainstream political parties: "If these plans are to work, they must be underpinned by an unswerving commitment to investing in the people who can deliver the renaissance that public sector services so badly need."

The group's total sales rocketed by 31 per cent to £13.7bn over the year.

Robert Clark, a partner at the research firm Retail Knowledge Bank, said that the Co-operative's corporate social responsibility schemes were also resonating with customers. "I think consumers, both in financial services and food, are increasingly interested in this sort of thing and sophisticated in their approach to it... For the Co-op there is certainly some benefit to it."

The performance of its food division was boosted by the Co-operative Group's £1.56bn acquisition of its rival Somerfield in the spring of 2009, which created the UK's fifth biggest grocery chain with nearly 3,000 stores. Food trading profits jumped by 31 per cent to £286m, on sales up by 66 per cent to £7.5bn.

"It's a stunning performance, given it is a very tough market out there," said Mr Marks. He cited strong sales of its value, as well as premium, lines and a boost from the modernisation and rebranding of its food stores under a single brand.

Mr Marks said the increased scale of its food operation, following the Somerfield deal, was enabling it to be more aggressive on price. "We have become more competitive on price, passing on savings to customers in lower prices."

In 2009, the group rebranded and upgraded 597 Co-operative and 181 Somerfield shops, which means that 65 per cent of its estate has been modernised. Sales at the rebranded stores were up by 12 per cent.

Stamp of trust: A history of the Co-op

* In 1844, the Rochdale Pioneers Society introduced a new model for conducting business – the co-operative movement. It was based on eight "Rochdale rules", of which the most significant included distributing a share of profits, based on purchases, which came to be known as the "divi".

* By 1900, a total of 1,439 co-operative societies had been registered.

* In 1965, the group introduced dividend stamps.

* By the late 1960s, what is now the Co-operative Group was as large in grocery as Tesco is today.

* It subsequently lost its way, and has only regained its mojo in the past three years, following mergers with other UK co-ops.

* In 2009, the Co-op acquired its grocery rival Somerfield for £1.56bn to become the UK's fifth biggest grocer.