Is the Co-Op staging a comeback?

The Co-operative Group (Co-op) has always been in the background of my shopping life, and I somehow feel that it belongs in a former era. It certainly seems so when I teach the concept of co-operatives to students. They only start with a very vague idea of the business model - which is odd, given that it’s the fifth biggest business in my region of East Anglia. But the Co-op’s recent takeover of Somerfield has boosted their grocery market share to the point where we should be taking notice.

The £1.57bn deal which saw the Co-op buy 750 Somerfield outlets increased its store portfolio to 3,000 and in the process took its share of the UK supermarket sector from 4.5% to 8%, putting it into fifth place behind Tesco, Asda, Sainsbury’s and Morrisons. At one time the Co-op movement had a 30% share of the UK food retail sector. Could it get back there?

A key concept here seems to be capturing economies of scale. Formerly, the Co-op was fragmented into hundreds of separate parts. But since 2007 the Co-op has effectively been one single business headquartered in Manchester. This centralisation has given the opportunity to grow the business.

At the same time, the Co-op is anxious to avoid diseconomies of scale. They want to avoid the huge problems that Morrisons suffered in their 2004 takeover of Safeway.

The BBC quote retail analyst Jon Wright, of Euromonitor, who says the Co-op must have planned the integration of Somerfield “very, very well”.

“The example of Morrisons has obviously loomed large, but the Co-op seems to be doing all the right things in bedding Somerfield into the business. This is especially the case when you consider that Somerfield has had difficulties of its own in recent years. And the Co-op can now enjoy the extra buying power that its new-found size gives it to better complete with the likes of Tesco.”

The Co-op also owns a number of other businesses - it is the UK’s third-largest pharmacy group, biggest funeral services provider, and even the country’s largest farmer.

And what’s so different about the Co-Op? Instead of having shareholders and a share price to worry about, the Co-op is owned by all its individual members. Instead of shareholders being paid a dividend according to how much of a share of the company they own, the Co-op’s members are all paid a dividend according to how much money they spend across its businesses. For 2008 its 4.5 million members all received 2.6 pence worth of benefits - such as vouchers - for each £1 they spent.

The BBC again, quoting the director of the Co-op:

“The beauty of the mutual model is that we aren’t driven by chasing short-term profits or share rises. And look where that took some of the UK’s largest banks. Instead we can take a much longer view based on our strict ethical approach.”

“We used to be described as a sleeping giant. We aren’t asleep anymore.”