Last week’s numbers don’t look clever. But a mammoth overhaul of its outdated logistics network is essential to The Co-op’s rejuvenation. Beth Phillips reports

The Co-operative Group’s rapid transformation into the UK’s fifth-biggest grocer in recent years has not been easy. And inevitably, attention has focused on results.

Last week the society reported a 21% drop in food operating profits to £135.4m in the 26 weeks to 2 July, on sales down 4.6% to £3.7bn. Like-for-like food sales also took a hit down 3.6%.

But a snapshot financial analysis cannot do justice to the upheaval. Between 2002 and 2009 The Co-op Group swallowed Somerfield, convenience chains Alldays, Balfour and Conveco, as well as merging with United Co-op, Plymouth & South West Co-op and Lothian Borders & Angus Co-op. It now has more than 3,000 stores, and its buying group the Co-operative Retail Trading Group (CRTG) serves nearly 4,000 sites the biggest store estate in the UK.

And while many have accepted the necessity of this consolidation, every time the society merged or acquired another, one member of the team no doubt welcomed the news through gritted teeth director of food retail supply chain Trevor Ashworth.

He was already five years into a massive overhaul of the society’s food distribution network when The Co-op Group acquired Somerfield in 2009. And not only did the society’s supply chain need to deliver to its own stores, it also needed to get goods to stores run by independent societies part of CRTG.

There was also no model network Ashworth could replicate because, in 2004, the multiples were only just developing their convenience estates and were still delivering largely to out-of-town superstores.

So Ashworth had to develop a new network from scratch. “When I came on board [in 2003], we had 30-odd distribution sites and the whole thing evolved haphazardly,” he recalls. “It was actually not a single network, it was three ambient, chilled and frozen. It was very old, in the wrong place and the wrong size and shape. It was bent and twisted and a complete mish-mash.”

Stark evidence of this “mish-mash” were the distances the society was travelling to stock its stores. Ashworth reveals that at one point it was delivering to stores in the centre of Glasgow from Newcastle. Goods to stores within the M25 were coming down from Nottingham. Products destined for stores in South Wales were starting out from Barnsley.

The original plan, he recalls, was for six multi-temperature regional “super” distribution centres and one national centre, with four cross-dock sites. Between 2004 and 2009 he closed five ambient RDCs and two chilled RDCs. He also opened an NDC in Coventry, and two multi-temperature sites, in Thurrock and Birtley.

By 2009, the society still had 29 sites, but plans were “ticking along nicely” to close the remaining sites and open new RDCs, including one in the North West. But then The Co-op Group bought Somerfield. “I was doing quite well until Somerfield came along,” he jokes. With nine new depots and 800 extra stores gained from the acquisition, Ashworth’s original plans were revised and expanded to accommodate nine RDCs rather than six, and two cross-docks instead of four, to allow the society better coverage of the UK.

Ashworth is now tantalisingly close to finishing the overhaul, nine years and an estimated £250-300m in the making when complete in late 2012. Last month the society cut the ribbon on a new £25m, state-of-the-art, 503,000 sq ft DC in Newhouse, near Glasgow, to service 618 stores in Scotland and Northern Ireland, which is 80% operational, says Ashworth.

A 467,000 sq ft RDC in Andover, Hampshire was handed over to The Co-op in June. It is currently 40% operational. Construction work is also set to start in the next two weeks on an RDC in Avonmouth, to be completed by May next year. The final super DC, in Derbyshire, is currently awaiting planning permission. Total investment in the two DCs, plus the two in the pipeline, will be £110m.

Disruption, but ‘desperately needed’
CEO Peter Marks concedes that overhauling the supply chain has led to disruption in stores. “It’s caused us some disruption and it’s come at a time when we could have done without it, but nevertheless, we want to modernise the business,” he says. And he insists availability and service is improving. “We’re going from managers pulling stock from warehouses to the system pushing stock out. We’re right in the middle of that programme at the moment and we’ll see the benefit of that in coming years.”

Since 2004, The Co-op has put “1.5 million sq ft of new DC on the ground” and closed 15 legacy sites. There are still 13 sites to close, including Chelston, Portbury, Bridgwater, Thetford, Halesowen and Peterborough, which will result in a number of redundancies, but when the supply chain transformation is completed, the society has predicted a net gain of 350 jobs.

Disruption or not, the work is desperately needed, believes group CFO Stephen Humes: “The last two years has seen us focus on the integration of Somerfield. The next two years are about taking the new enlarged business a step further. The spine of that is the supply chain.”

It’s the number one priority in the next two years. Adds Ashworth: “We’ll end up with a network fit for purpose for the first time. We’ll finish by the end of next year, but it’s the beginning, not the end.”