Expectations ahead of The Co-op’s half-year results were not high. The convenience sector is a challenging market to be in right now, and the society’s performance in the monthly Kantar grocery market share data, while not at Asda levels of worry, has been underwhelming. So what did we learn from the retailer’s latest numbers?

Trading

Trading was stronger than expected. Group revenues in the first half of 2024 increased 1.5% to £5.6bn, with food sales up 3.2% to £3.7bn. The Co-op says it experienced strong sales across its food stores, and highlighted significant growth of quick commerce sales at 62% to £214m. As a result it was able to boast of becoming the largest grocery retailer on Deliveroo, Just Eat and Uber Eats.

So are delivered sales masking an underperformance at store level? Not so, says Co-op Food MD Matt Hood, who argues that Kantar data does not provide the best read for the convenience sector.

Hood prefers Circana, which values the UK convenience grocery market at around £19bn, versus Kantar which has it at £6bn, he says.

“Kantar excludes 30% of our sales because it’s a take-home measure,” Hood explains. “So a panel of customers have to take that product home, which in essence of course isn’t the main driver of convenience. So for that reason it has low pick-up on really key growth areas for us like food to go, soft drinks, confectionery, cigarettes and vapes.”

The latest Circana data is certainly much more favourable than Kantar, which had Co-op sales down 0.7% for the 12 weeks to 1 September. Circana reports Co-op sales up 2.8% for the first half of 2024, while the rest of the convenience market fell by 4.2%. Hood also points out that Co-op has been the leading player in convenience with a market share of 14.1% for the first half compared to 13.2% in the same period last year.

“So our food business is in a good place, and I’m pleased that we continue to perform increasingly strongly, making convenience more convenient and focusing on being the best small store operator,” he says.

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“We are the UK’s most shopped shop with 2.5 million customers visiting every day and around 800 million shopping visits per year. So in reality, we have a market outperformance of the half year of 7% on value and volume, a number that is continuing to grow and is particularly impressive when you consider that we are in a slightly contracting market.”

Grocery analyst Nick Bubb commends the Co-op. “It’s surprising that they’re increasing convenience market share so much given the Kantar/Nielsen numbers. The move to instant member discounts at the till has clearly been pretty successful in driving more customer loyalty.”

Wholesale struggling

The contraction in the convenience sector as a whole is hurting Co-op elsewhere, however. The numbers for its Nisa wholesale arm were less positive.

Wholesale division revenues fell 2.9% to £700m, resulting in a loss of £8m as it invested in lowering prices across hundreds of products to support its partners in “an increasingly challenging market”. This was compared to a £3m profit for the same period in 2023.

Co-op CEO Shirine Khoury-Haq says the business is backing Nisa to return to profit soon.

“We are absolutely committed to the wholesale market,” she adds. “We started 180 years ago as a wholesaler. This is part of our DNA. So that’s why we have invested so heavily in ensuring that our independent partners are able to ride out this period.

“We have no fears of anything in wholesale, and honestly, it’s the benefit of being a portfolio business that we have areas that are growing so strongly and producing as much profit as, for example, our life services and food retail business that enables us to make those investments in the shorter term across other parts of the business.”

Perhaps unsurprisingly, Nisa retailers are split on whether they feel the Co-op wholesale strategy is working.

“When I look at the wholesale propositions now, everything seems to be much tighter and you don’t see that discrepancy between Nisa and other wholesalers,” says Nisa retailer Amit Puntambekar. “Nisa has become more competitive. And when you consider that the convenience market sales are down, Co-op’s wholesale results are reflective of that.”

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Another retailer adds: “I need the Nisa P&L to look as tight possible because it means retailers are getting the lowest possible deal. I think the prices are as close to where we’d want them to be, and fair because the products are being delivered to me, and in return, we are pushing more volumes through Nisa.

“The economic environment means sales are generally low across the industry. I think other wholesalers and retailers will have the same problems and show similar results.”

However another retailer takes a very different view. “This £8m loss being blamed on so-called investment is complete nonsense,” he says.

“The investment often went towards the wrong categories and products. Mismanagement and a lack of wholesale knowledge led to inaccurate product forecasts, meaning Nisa had to reduce prices and make losses on over-ordered stock. The only winners here were secondary wholesalers.”

Debt levels keep falling

When Khoury-Haq took over as CEO in 2022, her first task was to get the business’s rampant debt under control. This was achieved via stringent cost-cutting including 400 head office roles and the cancelling of much of the planned capital expenditure.

Her laser focus on improving the balance sheet seems to have paid off, and the latest half-year figures paint a very different picture to the Co-op of 2022. Profit before tax improved to £58m versus a £33m loss. Perhaps most significantly, the society was able to reduce net debt by a further £55m to £42m. This is 95% lower than at the end of its 2021 financial year.

Khoury-Haq says this was enabled by strong cash generation of £207m, which more than covered its capex of £107m. This was the first time Co-op has spent over £100m of capital in the first half for three years.

It also invested £130m in colleague pay (£48m), colleague discounts (£18m), lower food prices and member offers (£55m) and supporting communities (£9m).

“Although the external environment remains challenging, it is testament to the underlying strength of our Co-op that we have outperformed in all our markets while significantly increasing our investments in our colleagues, pricing and in the growth of our businesses,” she adds.