Co-op Weathers the Retail Storm

The economic crisis that is being made worse by George Osborne is causing tremendous turbulence in the retail sector. Consumer spending which was the driving force of the economy before the banking crash is under massive pressure and this is exaggerating other cultural shifts in the way we shop.

The disappearance of many familiar names from the high street is a symptom of deep underlying structural changes in the sector. Osborne’s, “Honey I shrunk the economy” is ensuring that we have too much retail capacity. It is also hard to understand why David Cameron moans about people not paying their taxes when Osborne allows firms, like Amazon who sold £3.3billion worth of goods in the UK last year, to pay next to no corporation tax and exploit VAT loopholes.

Other factors include high fuel costs squeezing disposable incomes and reducing consumers’ appetite to travel plus the massive social impact of the internet both for shopping and for price comparison.

For the Co-operative retailers the ongoing migration into convenience stores has been accelerated by these forces. Concentrating food retail forces in this area made sense as the margins where better and it was a good fit with the existing co-operative retail estate.

This may have been a pragmatic response to the huge shopping “sheds” of the big four food retailers but no one realised how quickly these huge assets could become liabilities. Deloittes are predicting a 40% “downsizing” of retail space in the next five years. We will see retailers having fewer stores and the beginning of the end of the huge out of town shopping “hangers”.

Many people loved these huge stores, a whole retail village under one roof always dry and warm (a real boon given our climate) that buzz has however long gone. Now we can do our browsing online and often get stuff delivered to our homes cheaper than they can sell it in the shops.

Stores complain of shoppers coming in to take a look at goods then buying on the internet, a practice known in the trade as “show-rooming”.  Not a service you can offer for very long.

If the Co-op move to convenience made sense it has not gone unnoticed by the competition with all the major retailers developing small store formats. For the Co-op having a store in every UK postcode means that the business rises and falls with those communities and outside the South East they are being seriously squeezed.

The long retreat from non-food retailing continued this month when Midlands Society announced the closure of its nine Fashion and Home department stores after producing significant losses. This will be the end of an era in places like Derby, Chesterfield and Ilkeston where these stores have long been part of the fabric.

It maybe ironic but some of the competition has come from the fast growing Co-operative Electrical, the Co-op Group’s online business. Over Christmas it enjoyed a 15 per cent increase in sales compared with the previous year. Best sellers included, tablet PCs, printers and laptops, products that did not exist when those department stores first opened.

The co-op food retail sector had a good Christmas with many independent co-op retailers especially the East of England, Midcounties, Southern and Lincoln doing particularly well and the Co-operative Group had respectable results.

The real winners given the state of the economy where the discounters Aldi, Lidl and Iceland as well as at the other end of the spectrum Waitrose - showing that austerity is only for the poor. For the big retailers at best it was a stand still position with big discounts and high food inflation damaging margins.

This tough environment is the challenge for the new CEO of the Co-operative Group, Euan Sutherland. He will replace Peter Marks who most of us expected to be Sir Peter in the New Year’s honours list however he had to settle for a CBE.

I found this a bit insulting given his record. Maybe I’m an old cynic but this just adds to my scepticism about the whole honours system and those dreadful imperial labels.

Euan comes from Kingfisher where he was Chief Operating Officer, so for those of us in retail at least he is a shop keeper and not the banker that we thought the FSA might foist upon us.

Keeping the Co-operative retail sector competitive with smaller shops and lower volumes than our rivals is a tough ask. Back in 1993, the movement finally - not before time - got its buying act together. The formation of the Co-operative Retail Trade Group brought together all the buying for the movement into one body.

Many co-operators are now saying it is time to form or join a European version, joining with colleagues in Spain, Italy, Scandinavia, and elsewhere so we can really compete with the giant retailers.

Then there is the internet and the question of what should be the Co-ops online offer?  The new CEO is going to find that as well as the integration of a huge banking acquisition there is no let up in the retail competition and that is without going into funerals, pharmacy or farming!