The long-awaited full-year results were a hefty 59 pages long, but there are still unanswered questions ahead of the agm…
What’s the outcome of all those investigations?
The Co-operative Group is the subject of seven investigations examining everything from its corporate governance to the alleged activities of The Co-operative Bank’s former chairman Paul Flowers.
The first we can expect an outcome from is Sir Christopher Kelly’s review into the £1.5bn capital shortfall unearthed at the Bank in May last year. Kelly’s review was launched by the Group in July 2013 and his findings are expected next week. A draft copy leaked to the BBC this week suggests Kelly will point to the society’s takeover of Britannia Building Society in 2009 and poor governance.
The findings of Lord Paul Myners’ governance review, launched in December 2013, will be reported “following the publication of the Kelly report,” according to The Co-op. Myners’ progress report issued in March, in the wake of the departure of group CEO Euan Sutherland, didn’t go down well, but a carefully worded four-point resolution developed by chairman Ursula Lidbetter based on his review will be put to members at its 17 May agm in a bid to keep everyone on board.
“The Co-op, like any mutual, is not very good at acquiring firms”
Michael Mol
No timelines have been set for the remaining five investigations. In June 2013, the Treasury Select Committee launched an inquiry into the collapse of the society’s bid for 632 Lloyds Bank branches - known as Project Verde. Having called people to give evidence over the past few months, it has concluded its oral evidence and its report is “in preparation”.
In January this year, both the Financial Conduct Authority and the Prudential Regulation Authority revealed they would launch investigations into “events at The Co-op Bank” and “the role of former senior managers”. HM Treasury announced in November 2013 it would launch an independent investigation into events at the Bank and the circumstances surrounding them” but would not start until the FCA and PRA probes were over.
The final investigation, by the police, has been looking into the allegations surrounding Flowers. Flowers was charged with possession of class A and class C drugs on 16 April and is due to appear at Leeds Magistrates Court on 7 May.
Being under such close scrutiny, and the associated potentially negative media coverage, the drip-feed of investigations could generate means restoring The Co-op’s brand reputation to its former glory won’t be straightforward, warns branding expert Jonathan Gabay. “Whatever the outcome of ongoing investigations, what the brand does as opposed to promises will be the deciding factor in whether it remains true to its foremost principles or is perceived as, first and foremost, being loyal to business principles.”
At least the society’s food business has continued to perform strongly, says one senior industry source: “The retail brand has been less impacted by turmoil than many would expect - the last Kantar Worldpanel market share figures were not bad. Steve [Murrells, head of retail] has done a good job in uncertain times.”
What will The Co-op’s new strategy be?
Including plans to reduce its £1.4bn debt, the strategy will be unveiled at its agm. Despite a number of high-profile leaks in recent weeks, The society has so far managed to keep this strategy close to its chest. In its results, it gives few hints as to the detail of “a wide-ranging review”. “One very clear lesson is that The Co-op, like any mutual, is not very good at acquiring and integrating other firms so it should refrain from large-scale acquisitions,” says Michael Mol, professor of strategic management at Warwick Business School. “The Co-op needs to get its house in order in terms of how it is governed. Then it may need to either negotiate an exit from banking or sell off other businesses to fund the banking business.”
What will Have Your Say reveal?
The society will also announce the results of its member poll at the AGM. At its launch in February, Have Your Say was described as the biggest piece of research and engagement in The Co-op’s 150-year history - the group claims more than 180,000 people took part - asking members, staff and customers to share their views on its future through an online survey.
But there were claims the questions were loaded and many decisions had already been made, including the sale of Pharmacy and Farms. It is currently analysing the results, and interim group CEO Richard Pennycook claims they show “we still enjoy the goodwill of the nation, and they are urging us to succeed”.
Who will buy Pharmacy and Farms?
The potential sale of these businesses was leaked to the media in March, and further details were expected in the results. But it only said the units “will not be part of its future strategy”.
Pharmacy reported a 17.9% rise in operating profit to £33m on sales down 0.5% to £760m in the year to 4 January 2014. No figures were cited for Farms.
The Co-op is “currently exploring opportunities” for Farms, and Pharmacy was “currently being considered partially or in its entirety for sale”. Pennycook added that there had been a “huge amount” of interest for the businesses with “more than 100” expressions of interest for each.
Potential buyers for Farms include investment funds, other retailers, large-scale private buyers or corporate structures, predicts Tom Raynham, head of agricultural investment at Knight Frank. “There is certainly demand for agricultural land in the market and land values have improved dramatically in the last 10 years,” he adds. “The sale of the Co-op land is unique in the market, though, given the size of the portfolio for sale and the fact t The Co-op wants to sell it as a whole rather than split it up into individual farms. This is primarily to protect the employees on these farms and maintain the legacy of what they have built up, but it will limit the amount of buyers as the price tag will be considerable.”
Will it commit a further £400m to The Co-op Bank?
Earlier this month, The Co-op Bank revealed it needed to raise an additional £400m to cover costs that among others included separating Bank from Group following last year’s recapitalisation plan.
The Co-op Group, which has a 30% stake in The Co-op Bank, already has that £1.4bn debt, so raising £400m could prove a problem. In its results, the society said it had already committed £333m to the recapitalisation. It had provided £70m to date, with a further £100m due on 30 June and £163m by 31 December. Of the £400m, it said it would “decide upon participation in this exercise” when the Bank had finalised the structure of the capital raising.
Who will be the new CEO?
Sutherland stepped down last month, leaving the society without a group CEO. Pennycook stepped up from FD to interim CEO on the departure of Sutherland, but does not want the job permanently. He will take on the role of chief operating officer when a new CEO is found. Myners’ progress report recommended The Co-op Group should not appoint a CEO until the governance issues are resolved. This is something the society is sticking to. “We will commence the search for a new permanent chief executive once the governance reforms have been completed,” said The Co-op in its report.
However, the senior industry source believes Pennycook should take on the role permanently. The best CEO by a hundred miles would be Richard Pennycook,” he says. “He understands the gravity of the situation and has done a great job so far.”
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