Co-op warning after £2.5bn losses
The boss of the Co-op issued a stark warning about the mutual's future today after revealing annual losses of £2.5 billion, the worst in its 150-year history.
Interim chief executive Richard Pennycook said the disastrous results were a "wake-up call" to the serious challenges faced by the group - weeks ahead of a key vote on a planned shake-up of the Co-op's structure.
He said the food-to-funerals mutual needed to change course after it had tried too hard to be "all things to all men".
Mr Pennycook painted a picture of staggering mismanagement and chaotic governance at the group which meant even its own board was unaware of its £1 billion-plus debt mountain or that it was paying for 650 properties it did not need.
He announced a £100 million cost-cutting drive and the disposal of the majority of sites picked up in the ill-fated takeover of Somerfield.
The group's calamitous performance for 2013 was dominated by the failure of its banking arm, which nearly collapsed after a £1.5 billion hole was discovered in its balance sheet.
Its holding in the bank has shrunk to 30% as part of a rescue deal but the group will have to go to its lenders if it wants to put in a further £120 million that will be needed to preserve the size of the stake.
However, debts at the end of last year stood at £1.4 billion and the Co-op's backers are already keeping a close eye on the progress of bitterly-contested reform plans which the group's leadership insists are vital for its survival.
If the stake in the bank falls below 20%, a guarantee that it must uphold its ethical cooperative values will no longer stand though the business can choose to retain it.
Mr Pennycook said: "2013 was a disastrous year for the Co-operative Group, the worst in our 150-year history.
"Today's results demonstrate that but they also highlight fundamental failings in management and governance at the group over many years.
"These results should serve as a wake-up call to anyone who doubts just how serious the challenges we face are."
The group's performance has been hobbled by the ill-fated acquisitions of the Somerfield supermarket chain as well as the banking arm's takeover of Britannia, both in 2009, and a more recent abortive attempt to buy 600 Lloyds branches.
Mr Pennycook indicated that a continuation of the catastrophic running of the business would spell a bleak future. He said while 2013 was disastrous, the group had been under-performing for the past few years.
"If we had the next five years like the last five years, this is not going to be a healthy organisation," he said.
He said it "will be a very sad day" if a business such as the Co-op, with a commitment to campaigns and to returning profits to communities, were no longer to exist.
The Co-op's £2.49 billion loss included £1.44 billion from the performance of its bank, plus a £625 million hit from the reduction in its 100% stake to 30%, as bondholders took control of the rest of the business.
There were also group operating losses of £148 million plus a £226 million write-down of the value of its Somerfield acquisition.
The Co-op offered signs of improvement in its grocery arm - with like-for-like sales for the year slipping but an increase in the second half, bolstered by the improved performance of its expanding convenience store network.
It plans 100 more of these smaller outlets but some of the larger Somerfield stores it bought do not fit in with the strategy, and 60% of the sites acquired under the deal will eventually have been ditched.
The grocery arm also aims to be more "price competitive" in the face of the threat from discounters Aldi and Lidl.
Mr Pennycook said a £100 million cost-cutting plan for this year across the group would see a freeze on new hirings in the hope that job cuts could be avoided.
Operating profits at Co-op's pharmacy, funerals and general insurance businesses all rose but Mr Pennycook said the insurance division's earnings were still "well below" where they ought to be.
He added that there had been more than 100 expressions of interest after the announcement that the group's farms and pharmacies were up for sale.
"It is vital that we don't try to continue to be all things to all men - too thinly spread and therefore under-investing."
Mr Pennycook is standing in as chief executive after Euan Sutherland abruptly quit last month, claiming the group was ungovernable. He pledged to stay on and see the reform process through.
"I have said to the board that I am here through all that, keeping a steady course at this difficult time for the organisation."
The group has already committed £333 million to the rescue of its banking arm, £263 million of which is still owing. But it must find an additional £120 million if it is to take part in a new £400 million rights issue and preserve the size of its stake.
Mr Pennycook said the board had not yet received the formal proposal and the board had yet to discuss it.
He added: "We would need the consent of our banks in order to put money across."
The Co-op boss, who joined as finance director last year, also revealed that the scale of the debts faced by the group had been a "revelation to the board", as had details of its 650 surplus properties - the size of a national retail network.
Mr Pennycook said a third of these were empty while many of the rest were leased out at rates that did not cover its own rental payments.
The Co-op announced that findings of an independent review led by Sir Christopher Kelly into the events leading to the £1.5 billion black hole at its banking arm would be published in around two weeks.
Meanwhile, the group set out details of a resolution based on measures drawn up by former City minister Lord Myners that will be put to its annual general meeting on May 17. A wider strategic review will also be published.