Huckfield attended the Coops Way Forward 2 Conference in Manchester on Friday 16 May. On Saturday 17 May a Cooperative Group Special General Meeting supported the direction of Paul Myners’ very detailed and well researched The Cooperative Group : Report of the Independent Governance Review (1), published on Wednesday 07 May 2014.
At times the Friday Conference sounded like a ‘Requiem for the Coop’s Great Imperial Past’. One speaker, Phil Frampton from FC United, a community owned football club, said that it was like “rearranging the deckchairs on the Bismark“. Phil’s analogy was to the battleship’s often proclaimed invincibility. The Bismarck lasted five years before it was sunk. The Coop Group may not have that long!
Some contributors in Manchester sounded as though the Coop Group still retained its 1950s’ retail share, clinging to an era described by Myners on page 41 his Report (1):
“It seemed to be holding its own against the multiple retailers, who held a roughly similar share of food retailing (23 to 25%), which had not changed much in 20 years. Superficially, the Movement looked in good health. It had annual sales of nearly £1bn, equivalent, adjusted for inflation, to sales of £20bn (in £2014). It had a membership of 12mn; it owned over 30,000 shops, 250 factories, and the largest wholesaling organisation in the country.
(page 44) “…ie. roughly twice the current combined value of Sainsbury’s and Morrison’s, and broadly comparable with Tesco’s, market capitalisation. Even on a far more conservative price/sales valuation of, say £5bn to £7bn, this is nevertheless a measure, however uncomfortable, of the (Coop) Movement’s colossal failure of capital management and financial discipline over the subsequent decades”.
Retail Problems for the Coop
For Easter 2014, leading market researcher Kantar UK Insights (2) compared the 12 weeks to Sunday 30 March 2014 with the 12 weeks to Sunday 31 March 2013 in UK Grocery Share:
- Tesco had slipped from 29.7 to 28.6%
- Asda had slipped from 17.6 to 17.4%
- Sainsbury had slipped from 16.9 to 16.5%
- Morrison had slipped from 11.6 to 11.1%
- The Coop (as a whole) had slipped from 6.2 to 6.1%
Meanwhile, for the same periods:
- Aldi had risen from 3.4 to 4.6%
- Lidl had risen from 2.9 to 3.4%
Further detailed evidence of the Coop’s difficulties in retail were echoed in Nick Fletcher’s authoritative ‘Market Forces Live Blog’ in the Guardian of Wednesday 02 April 2014 Tesco and Morrisons Slip after Gloomy HSBC Note on Supermarket Sector (3), based on information from HSBC Investor Relations (3):
“The UK food retail industry is undergoing the biggest structural change in decades, the enormity of which should not be under-estimated. The quoted sector is losing market share and profits are declining at an accelerating rate, with no end in sight. Tesco, Asda and Morrisons are all pledging major price investments and the space race continues with around 4% capacity additions per annum. (BHS is the latest entrant).
“How bad can the industry get? 30 plus years ago, the Co-op was the market leader, with a peak share of over 25%. It was bigger than Tesco and Sainsbury combined. Around 20 years ago, Kwik Save was a FTSE 100 company with around 10% market share. K-Mart used to be around 100 times the size of Wal-Mart.
“We believe that from the current change, a new structure will emerge and that the industry will look very different in 5-10 years. Not all are likely to survive. Tesco have the resources to influence this change to its own benefit but it requires significant and decisive action”.
House of Commons Treasury Committee and Kelly Report on Coop Bank
The combined effect of the Reverend Paul Flowers’ appearance before the House of Commons Treasury Select Committee on Wednesday 06 November 2013 (4) and Sir Christopher Kelly’s Report on Failings in Management and Governance at the Cooperative Bank on Wednesday 30 April 2014 (5) presents an unyielding litany of incompetence and incapacity.
House of Commons Treasury Select Committee
While Huckfield may agree with many Coop colleagues who reckon that Paul Flowers’ drug taking was a distraction from the troubled affairs of the Coop Bank and Coop Group, his appearance before the House of Commons’ Treasury Select Committee on Project Verde (4) on Wednesday 06 November 2013 was not. This transcript of the hearing shows the irreparable damage done by this one Committee appearance:
Q684 Andrew Tyrie MP, Chair: … Give me, and everybody listening to this, an idea of the size of the Co-operative Bank. Roughly, what is your total asset value?
Reverend Flowers: Valued at just over £3bn.
Q689 Andrew Tyrie MP, Chair: Your total assets in June 2013 are listed at about £47bn, just to give you an idea. You were offering me £3bn, and I am telling you that your annual accounts show it at £47bn.
Reverend Flowers: Indeed they did, forgive me.
Q690 Andrew Tyrie MP, Chair: Your loan book is about £32bn. These are very basic numbers for a chairman of a bank. What expertise did you have in banking before you became chairman?
Q691 Andrew Tyrie MP, Chair: You just used a phrase, “the needs of contemporary banking”. Was there anything in your background that prepared you or would have prepared you to chair a sizeable bank with assets on the balance sheet of £47bn?
‘Failings in Management and Governance: Report of the Independent Review into the Events Leading to the Cooperative Bank’s Capital Shortfall’
Sections of the Failings in Management and Governance (5) Report of the Independent Review into the Events Leading to the Co-operative Bank’s Capital Shortfall by Sir Christopher Kelly on Wednesday 30 April 2014, such as those on pages 12 to 14 are worrying to existing customers and potential lenders. They show the Coop Bank trying to takeover the Britannia Building Society more than twice its size, when it was knee deep in its own problems:
“At the time of the merger the Co-operative Bank was a small, full-service bank with a high cost/income ratio, leading to modest profits. It had a balance sheet of about £15bn. It operated through 90 branches and served 500,000 retail customers”
“Britannia before the merger was the second largest building society in the UK. It had assets of about £35bn, 254 branches and 2.8mn customers. On most dimensions it was, therefore, substantially bigger than the Co-operative Bank”.
Kelly reports that alongside difficulties with the Bank’s Risk Governance and Control Framework, Accounting Judgements, Capital Requirements and Group and Bank Governance, coinciding with Britannia, the Bank was involved in:
- IT Replatforming – causing a “near £300mn addition to the Bank’s capital shortfall” and “the full cost of the programme up to the point of cancellation (£349mn)” (pages 63 and 64)
- Misselling Payment Protection Insurance (PPI) – for which the Bank made initial provision in 2010 of £4mn, which was raised to £347mn by 2013. (page 40) The Coop Bank’s share of PPI misselling was assessed by the Prudential Regulation Authority as £1.5bn (page 103)
- Project Unity – integration of staff and systems – with total benefits claimed of £125mn against projected cost and revenue benefits of £190mn to £415mn by 2015 (page 72)
- Project Verde – trying to take over 632 Lloyds Bank branches, with reported transaction costs of £73mn in 2012 and 2013 (page 80)
- Deteriorating relationship with the Prudential Regulation Authority and Financial Conduct Authority – resulting from which there are now further inquiries by the Financial Conduct Authority and Chancellor of the Exchequer (page 82 onwards and elsewhere)
The Kelly Report (5) on pages 22 and 23 casts doubts on those involved in the Britannia takeover:
“KPMG’s Phase 1 due diligence report was broadly neutral, though it did warn about Britannia’s high risk profile and large exposure to sub-prime and specialist lending and arrears in its asset backed securities. Its high-level analysis of Britannia’s commercial loan portfolio identified no substantial arrears or impairment. At the time, Britannia executives described the commercial loan portfolio to KPMG as high quality”.
“The Co-operative Bank’s own Corporate Credit Risk team did have some access to Britannia’s commercial book before the signing of the merger agreement. The Review has faced considerable difficulty in establishing how extensive this was in practice.
“As far as it has been possible to ascertain, three members of a Co-operative Bank team including the Head of Banking Risk, Kevin Blake, reviewed about 30 of the largest commercial loans over a two-day period in early January 2009 (about two weeks before signing the sale and purchase agreement).26 In the time available it cannot have looked at them in any great detail.
“The Bank Board minutes record JP Morgan Cazenove as telling the Board that the due diligence undertaken by KPMG “exceeded that normally undertaken for listed companies”.
The Kelly Report (5) on page 103 describes the Coop Bank’s misselling of Payment Protection Insurance:
“Financial Policy Committee Capital Assessment
“The results, published in June 2013, suggested an aggregate capital deficiency on this basis of £27.1bn for the 8 firms combined. The Co-operative Bank’s share was assessed by the PRA (Prudential Regulation Authority) as £1.5bn. This figure amounted to approximately 88% of the Bank’s capital resources at 31 December 2012, significantly larger than the equivalent figure for any of the other seven. Following the Bank’s £709mn reported loss before tax in its interim 2013 accounts, this proportion increased further. For comparison, on the same basis the deficit faced by RBS, proportionally the second largest, amounted to 37% of its capital resources”.
Paul Myners’ Warnings
Seven days later, on Wednesday 07 May 2014, Paul Myners’ Report published an equally stern warning that time was running out fast.
In his Concluding Reflections on page 97 (1) Lord Myners stressed that by November 01 2014, the new Day 1 Group Board, National Membership Committee and Steering Group should be installed. The Nominations Committee should “begin process to identify and propose Group Board for Members’ Election at the 2015 AGM”:
“A further point that I feel obliged to make to members is this: because of the losses exposed last year and their severe impact on the Group’s balance sheet, the high level of debt now carried by the Group has made it inevitable that the bank syndicates providing this funding will, for quite obvious reasons, continue to take the closest interest in the Group making rapid progress to strengthen its governance.
“Among the top ten grocers, for example, there is likely to be no organisation more challenged by the price war now developing in food retailing unless the Group can swiftly put a strong, well-informed Board in place.
“Without decisive commitment to rapid reform, the banks may well have their own view on the appropriate timetable for transition to a new governance structure.In those circumstances, my concern is that that the Board’s and Executive’s discretion may become increasingly more constrained, with portfolio decisions progressively forced on the Group by its creditors.
“Nevertheless, it is only right that I offer a brief comment on the situation that would arise if, looking ahead, elected members do not show the appetite or discipline to govern the businesses that they own far more responsibly than at present.
“If the Group cannot govern its businesses to the same standard as those with whom it competes, it would make more sense to put these businesses into the ownership of others who could more effectively create value than it is able itself to achieve”
“All we need is a bit more time”
Despite all these stern warnings above, some senior figures around the Coop movement still seem to be saying that the Group only needs a bit longer to sort things out!
Sir Graham Melmoth presented a masterly historical tour de force to the Manchester Conference on Friday 16 May 2014. He finished his stint as Chief Executive of the Coop Group in January 2002. At that time, the Coop had 1100 retail outlets and 50,000 employees. The Cooperative Wholesale Society had merged with Cooperative Retail Services as a single entity. So his descriptive historical tour of events leading to the present Coop Crisis (6) was both significant and an accurate portrayal of past events.
Despite his overwhelming expertise and longstanding experience he still thought there was time after Lord Myners’ fundamental criticisms for another round of meetings:
“I have argued the case with Lord Myners for a small group of Cooperative Group members to be commissioned by the Board to review these reform proposals, reflect upon them, receive submissions, hold 3 or 4 public meetings around the UK and produce a blueprint for final approval by Board and Membership in the shortest possible time. Paul Myners has suggested that the time constraints impost by the stringent financial straitjacket we are in would simply preclude giving members such a chance to reflect some more on what has been put before them and to propose sensible change to what is on offer”
But two documents below, circulated in time for the Way Forward Conference on Friday 16 May and the Special General Meeting on Saturday 17 May, show the difficulties which will be encountered if an extended “Myners Road Show” goes on tour:
- Myners Plus.
On Wednesday 07 May 2014, in Cooperatives UK’s New Insight 14 “Myners Plus” (7) Helen Barber, Johnston Birchall and Ed Mayo, as distinguished individual members of Coops UK, responded to Myners:
“The solution to this is simple and it is one that is found in long established and succcessful large cooperatives overseas. This is that the Nominations Committee is a subcommittee not of the Board but of the National Membership Council – naturally with members from the Board on it and a close liaison in its work as otherwise set out in its review”
- Myners Minus.
In at anonymous reply to “Myners Plus” circulated at the Conference ““Not Myners Plus but Myners Minus”“(8), this was criticised since
“.. it would seriously impair the chances of putting in place the Board and the Group so very urgently needs. It would at a single stroke undercut the attraction of the Group Board to potential highly talented and qualified individuals”
Huckfield is a fan of down to earth Brummie, Jonathan Guthrie of the Financial Times Lombard column. Writing immediately after the Special General Meeting, he wrote Cooperative by Name, Cooperative by Nature (9) in the FT’s Retail and Consumer section on Saturday 17 May 2014:
“The alternative would be for the lossmaking Co-op to fall into the hands of the City investors, robbing proprietary capitalism of useful mutual competition. That fate has only receded a little today. The heavy lifting of turning round a retailer regarded as a joke by big supermarkets has yet to come”.
Huckfield also believes that the problems of the Coop Bank and Coop Group are of such severity that they cannot be remedied or eased by slight changes to and by more discussion on Lord Myners’ Report’s recommendations. This “heavy lifting” needs to start immediately.
A Fire Sale to Chinese Buyers?
The required “heavy lifting” will not be easy. All big supermarkets now face declining shares. The combined effect of Paul Myners’ (1) and Christopher Kelly’s (5) Reports shows that there will be resistance and reluctance to lend money to the Coop Group.
A fire sale of funeral services, pharmacies and farms – all sectors where the principles of local accountability, cooperation and mutuality ought to confer a natural advantage upon the Coop Group – will barely scratch the surface of the Coop Group’s £2.5bn debt. In Coop’s £140mn Farms Sale Aimed at Chinese Buyers (10), in the Observer of Sunday 03 May 2014, Tracey McVeigh wrote:
“The beleaguered Co-operative Group has insisted that it wants a single major corporate buyer for its portfolio of British farms, and will not consider community buyouts. …. It means swathes of British farmland will probably be snapped up by a Chinese investor or hedge fund speculator. .. Critics of the sale say it will end more than 100 years of ethical farming by the Co-op in its farms and at three packhouses across England and Scotland that process cereals, fruit, vegetables and honey”.
“The Farmers’ Weekly newspaper estimated that the sale of the land alone, without any added value from equipment or buildings, could bring in around £140mn. This, critics say, will make barely a dent in the Co-op Group’s £2.5bn losses in the year to April 2014”.
An enforced fire sale would leave the Coop Group with an aging collection of retail assets with which to compete against Tesco’s, Asda, Sainsbury’s, Morrison’s and the rest – most of which have big budget revamping and upgrading programmes for their estates.
And if anyone thinks that Aldi and Lidl are just for low income customers in socially excluded areas, next time just look at the Mercedes and BMWs in the carpark!
So any proposed fire sale will barely scratch the surface of the Coop Group’s financial difficulties. More alternatives will be examined in future postings.
For Huckfield – from close familiarity with MidCounties’ West Midlands area coverage – one of the more meaningful and heartfelt contributions at the Way Forward 2 Conference in Manchester on Friday 16 May 2014 came from Patrick Gray, President of MidCounties (11). He concluded:
“And if it is felt that the new Group will still be too large to be entrusted to a Board that includes a few carefully chosen lay members, then perhaps Group should consider allowing some of its regions to hive off and become independent societies, within a federal framework – with their own members’ capital, and taking their share of the remaining debt with them. Better three or four genuinely democratic co-operatives, than one behemoth with only a fig leaf of member control”.
Patrick Gray’s emphasis on a Cooperative Society well rooted in its local communities may point a way forward for the future. His Society broadens the scope of its donations beyond the Cooperative Group. Other organisations in the MidCounties area may make applications to its Community Grants Fund. The next round of Midcounties’ Community Grants (12) will open shortly, funding projects for:
- Supporting Communities
- Defending the Environment
- Developing Young People
- Developing Coops
Time to Move On from Retail
Patrick Gray’s suggestion of more regionally based coops, well integrated into their local communities, may form a way forward in some areas. But beyond this, it is time for the Coop Group to move into new areas.
“A Resilient Brand – Public Trust in Co-operatives Slips But Still Positive Overall
“The overall level of trust in co-operatives amongst UK adults has taken a knock, falling from a relatively high level in last year’s opinion poll, taken by YouGov on behalf of Co-operatives UK. In late 2013, 46% of those who expressed a view associated co-operative businesses with the word ’trusted’. This has now fallen to 40%.”
“While overall, co-operatives have very positive associations; being seen as local (42%), ethical (46%) and democratic (36%); there is now an increase in the minority of people who see downsides, including old-fashioned (31%, up from 26% in 2013), inefficient (9%, up from 6%) and unprofessional (5%, up from 3%).”
And these survey results appeared before the more recent and wide open bigger Coop ‘Have Your Say’ Survey now being concluded by YouGov.
In one of the sessions of the Way Forward 2 Conference, following David Boyle, Huckfield suggested that it was time for the principles of cooperation and mutuality to move from retail to community energy, asset transfer and land ownership. Scotland is already leading the way. Highlands and Islands Enterprise (14) shows a collection of Community Projects on its site. With pressure for more community land ownership and asset transfer, Development Trusts Association Scotland (15) now has 206 members and 42 associate members.
The Report on Friday 23 May 2014 by the Land Reform Group in Scotland The Land of Scotland and the Common Good (16) shows the way forward.
Though much more slowly, things are moving in England too. The Department of Energy and Climate Change has a Community Energy Strategy (17), published in January 2014, supported by a £10mn Community Energy Fund.
Not all of these emerging structures in community energy, land ownership and asset transfer are Industrial and Provident Societies but many embody principles of local community ownership allied to cooperation and mutuality.
So time is short – both for the Coop Group and to preserve and expand the principles of cooperation and mutuality. As shown above, the Coop’s grocery share slippage needs to be tackled urgently. Its projected asset sale may not leave the Coop Group in a good position to compete.
Huckfield’s recent posting “It’s not Paul Myners who’s killing the Coop Idea” included details about Coops UK’s taking Cabinet Office funding for promoting Public Service Mutuals – which trade unions fear are destroying jobs and worsening pay and conditions. It’s time for the Coop Group and Coops UK to move on before time runs out. It’s also time for others outside the “Coop Group family” to ensure that the principles fashioned by the Rochdale Society of Equitable Pioneers 170 years ago maintain and expand their relevance and meaning.
(1) 2014. Myners,Paul. The Cooperative Group: Report of the Independent Governance Review. May 07 2014. London.
(2) 2014 Easter. Kantar UK Insights. http://uk.kantar.com/consumer/ Accessed May 23 2014. Kantar UK. London
(3) 2014. Fletcher,Nick. Guardian Market Forces Live Blog Wednesday 02 April 2014, from HSBC Investor Relations http://www.hsbc.com/investor-relations. Accessed May 23 2014. Guardian News and Media. London.
(4) 2013. House of Commons Treasury Select Committee. Uncorrected Transcript of Oral Evidence taken before Treasury Committee on Project Verde. Wednesday 06 November. Questions 672-978. Parliament, London
(5) 2014. Kelly,Christopher. Failings in Management and Governance: Report of the Independent Review into the Events Leading to the Cooperative Bank’s Capital Shortfall. April 30 2014. London.
(6) 2014. Melmoth,Graham. Speech at Way Forward 2 Conference, Manchester May 16 2014 Cooperative Business Consultants, Manchester.
(7) 2014. Barber,Helen;Johnston,Birchall;May,Ed. Myners Plus. How to Make a Success of Governance Proposals developed by the Myners Review for the The Cooperative Group. Cooperatives UK: New Insight 14. Manchester.
(8) 2014. Anonymous. Myners Minus. May 15 for Way Forward 2 Conference, Manchester May 16 2014
(9) 2014. Guthrie,Jonathan. Cooperative by Name, Cooperative by Nature. FT.Retail and Consumer. Saturday 17 May 2014. The Financial Times Ltd 2014. London
(10) 2014. McVeigh,Tracey. Coop’s £140mn Farms Sale Aimed at Chinese Buyers. Observer Saturday 03 May 2014. http://www.theguardian.com/business/2014/may/03/co-op-farms-sale-chinese-buyers. Accessed May 23 2014. Guardian News and Media. London.
(11) 2014. Gray,Patrick. Speech at Way Forward 2 Conference, Manchester May 16 2014. Cooperative Business Consultants, Manchester.
(12) 2014. The Midcounties Cooperative Community Fund. Grant Guidelines. https://www.midcounties.coop/PageFiles/242/mccf-criteria-form.pdf Accessed May 23 2014 Midcounties Cooperative. Warwick.
(13) 2014. Cooperatives UK. A Resilient Brand – Public Trust in Cooperatives Slips but Still Positive Overall. http://www.uk.coop/blog/mcken/2014-05-02/resilient-brand-%E2%80%93-public-trust-co-operatives-slips-still-positive-overall Accessed May 23 2014 Cooperatives UK. Manchester.
(14) 2014. Highlands and Islands Enterprise. Community Support. Ambitious for Growth. http://www.hie.co.uk/community-support/community-projects/default.htmlAccessed May 23 2014 Highlands and Islands Enterprise. Inverness.
(15) 2014. Development Trusts Association Scotland. About DTA Scotland. DTA Scotland. http://www.dtascot.org.uk/content/about-dta-scotland. Accessed May 23 2014. Edinburgh.
(16) 2014. Scottish Government Land Reform Group. The Land of Scotland and the Common Good. Scottish Government http://www.scotland.gov.uk/Resource/0045/00451087.pdf. Accessed May 23 2014. Edinburgh.
(17) 2014. Department of Energy and Climate Change. Community Energy Strategy: DECC. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/275169/20140126Community_Energy_Strategy.pdf Accessed May 23 2014. London.