Co-op Group reports £2.5bn loss after 'disastrous' year

Chief executive Richard Pennycook: "The results today reflect a disaster for the Co-op in 2013"

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The Co-operative Group has announced losses of £2.5bn for 2013, marking the worst results in the group's 150-year history.

The group said most of the losses stemmed from the Co-operative Bank, which amounted to £2.1bn.

That included a trading loss of £1.44bn for the year to December, when the group lost control of Co-op Bank to US hedge funds.

Chief executive Richard Pennycook said 2013 had been a "disastrous" year.

He added: "These results should serve as a wake-up call to anyone who doubts just how serious the challenges we face are.

Analysis

The Co-op Group chief executive has laid it on the line - this business needs to reform or it will face dire consequences. His words about "management failings" and these results being "disastrous" and the "worst in our 150-year history" are a clear message to anyone who thought that the business could carry on in the same way.

What is also of concern is that group sales and underlying profit are both down. That signals that while past mistakes might make up the vast bulk of the losses, the present business (supermarkets, funerals, pharmacies and insurance) still has its own problems.

Glimmers of hope? Net debt is down, convenience store like-for-likes are up and the sale of the pharmacies and farms business could bring in some much needed cash, probably numbered in the hundreds of millions. But the group has an awfully long way to go.

"The scale of this disaster will rightly shock our members, our customers and our colleagues,"

He also criticised the lack of transparency within the bank, which he said he believed had failed to communicate effectively with the group board.

"As a former public company finance director, I would not have been comfortable running with debt levels the bank was running with. So I do think there has been a lack of transparency," he said.

The Co-op Group chief executive told the BBC's business editor, Kamal Ahmed: "What we have found is a period of poor performance from management. The last five years in our proud 150-year history have been very difficult. It was not just an accident at the bank."

He said in those five years the group had become bloated in terms of its costs and strategy, and was now in need of wholesale reform if "inexorable decline" was to be avoided.

Mr Pennycook added that had the Co-op Bank not been rescued by its bondholders in December, the taxpayer would have been left with a bill for £5bn.

He also said he believed it would take 10 years for the Co-op Group to fully recover from the events of 2013.

The group has already announced £100m of cost cuts this year but Mr Pennycook said he expected cost cuts would eventually amount to £300m.

He also said he could not guarantee there would not be job cuts within the group.

Somerfield writedown

The Co-op Group's results show that it wrote down the value of the Somerfield store chain by £226m.

Mr Pennycook said the group would be refocusing its strategy in its food division to concentrate on smaller convenience stores in towns and villages, which he said had worked "very well for us".

Shoppers outside a Co-operative Group supermarket  The Co-op says it will focus on smaller convenience stores in towns and villages

As part of that strategy, the Co-op plans to open 100 new convenience stores this year.

But he added the acquisition of the Somerfield supermarket chain in 2008 had left the Co-op Group with a large number of very large stores, which were not working.

As a result, he said the Co-op would "exit 60% of Somerfield acquisitions".

Mr Pennycook said the Group owned about 650 properties, a third of which were empty stores.

"That's property we don't need and don't use," he said. "It's the size of a national retail chain," he added.

Highlighting the lack of transparency, Mr Pennycook said the board was "surprised" when he told them of the size of the group's property portfolio.

Bank losses

Unite's Adrian Jones calls for "reform at the highest level"

Last week, the Co-op Bank reported pre-tax losses of £1.3bn for 2013 and said it did not expect to make a profit in 2014 or 2015.

The discovery of a £1.5bn black hole in the balance sheet of the bank last year scuppered the planned takeover of 632 Lloyds Bank branches and caused the near-collapse of the Co-op Bank.

The parlous state of the bank's balance sheet led to the takeover of the bank by its bondholders in December, leaving the Co-op Group with a 30% stake in the business.

That stake could be diluted further after the discovery of another £400m hole in the bank's balance sheet in March.

The Co-op Bank is considering issuing new shares to raise the money it needs to fill the £400m gap.

As a result, Co-op Group would need to find another £120m to maintain its 30% shareholding.

Mr Pennycook said he did not yet know whether the group would be investing additional money in the bank.

He added: "We have not yet had a formal proposal from the bank that we can look at, evaluate and take to our board."

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