Structured investment vehicles losing millions of pounds to the sub-prime
crisis, landmark acquisitions, OFT consultations, lucrative joint ventures in
China, doubling shareholder dividends –
Group is no less corporate than anyone in the City.
But perception being nine-tenths of reality, the company’s mutual model comes
over a tad too cuddly for many in the business world; unlisted, owned and
governed by millions of ordinary people united by a common aim of doing good,
where possible, by doing well.
From the 12th floor of Manchester’s New Century House, Co-op’s chief
financial officer Martyn Wates can glance across a patch of prime city real
estate that houses the group’s central offices, its financial services HQ in the
25-storey CIS Tower over the way, clad top to bottom in solar panelling.
Against forbidding views of the Pennines, the ageing cluster of buildings
serving as the Co-op nucleus looks a little worn. But the group plans to flatten
the whole area and build a new office complex. ‘We’ll do it sympathetically,
though,’ says Wates surveying from a great height.
The Co-operative Group is nothing if not sympathetic by nature, being wed to
a core of social goals harking to its beginnings as a movement for the welfare
of the poor more than a century ago. If you know anything about Co-op, you’ll
know it for those little local supermarkets whose owner is some sort of
socialist organisation – though you’re sketchy on the details – or as the owner
of that internet bank, smile.
Co-op’s financial services business posted a slight increase in profit for
the first half of 2008, reporting ‘shareholder profit’ before tax, significant
items and short-term investment fluctuations of £73.4m, up from £35.4m at the
same time in 2007. The group reported 2007 operating profit ‘before significant
items and chan-ges in valuations of investment properties’ of almost £323m, a
35.2% year-on-year increase.
Co-op members enjoyed dividends (Co-op calls it ‘total share of profit
payment’) of £38.1m in 2007, compared to £19.6m in 2006. Where Co-op has been a
poorer performer is in pushing its brand as a group and among its business
As Wates concedes, there has long been a lack of any cohesive message, but
this has merely reflected how much change there has been as today’s group has
emerged as a mothership to countless minnow mutuals across the UK, and the
world’s largest consumer co-operative society.
‘We haven’t been able to project ourselves in the way that, say, Tesco has,’
says Wates. Indeed, Tesco doesn’t own 311 separate business subsidiaries or
societies, as Co-op does.
The strategy has been fruitful: the company’s purchase of convenience store
chains Alldays, in 2002, then Balfour in 2003 helped it quietly grow its estate
to become the UK’s number five food retailer. On top of this, the group is also
the UK’s biggest farmer with an estate of 700,000 acres of farmland across
England and Scotland, and operates a £250m car dealership. Between absorbing
smaller co-operatives and buying up portfolio-boosters like Alldays, the group
has been one of the most acquisitive in the UK’s business landscape. So clarity
has been difficult.
This has been changing since the group enlarged following the merger with
another mutual, United Co-operatives, in May last year, the owner of United
Norwest Co-operative where Wates had been CFO since 2002 (he was made
CFO-designate to succeed Co-op’s retiring CFO Brian Portman).
A year later, this May, came the pivotal £1.5bn Somerfield acquisition,
bumping Co-op’s 5% share of the UK supermarket business up to 8%.
By the time you read this, Wates will have the Office of Fair Trading’s
decree on if, and how many, of Somerfield’s 3,000 stores it must dispose of to
satisfy competition criteria; he will then add to his £1.5bn budget to revamp
Co-op’s existing network of 4,300 stores (as well as its other retail-based
businesses, such as its 90 banking sites and 374 travel agency operations) to
include those it retains.
‘We’ve been waiting for critical mass within the business before we got out
the big guns and now we’ve got it,’ says Wates. ‘In the past, people probably
viewed us as a bit quaint, old-fashioned, safe, solid and trustworthy, but not
as exciting or modern as our rivals. We’re doing a lot of work to overhaul our
offering now. Our shares would be significantly up if we were a listed business,
because I know the Somerfield purchase is a value-enhancing transaction.’
As CFO of an organisation that can never unpick its financial targets,
speaking with Wates is more akin to speaking with a CEO who can talk about why
his baked beans are the best, then switch to the forensics of discounted cash
flow. A good man to have around.
‘I’ve met a few FDs, blue-sky men, who consider themselves above the
nitty-gritty. But what makes this business great is the detail; the customer
going into our shop and buying something, leading to profit and we never forget
that. And I like to think I can argue with anyone strategically. But if you
don’t know what’s going on, you’re just throwing the dice. You’re gambling.’
Not a strategy that would sit well with an ethics-based model.
Active engagement in companies and regions where the group believes money and
positive change can be made is underpinned by Wates who backs the group
operating, for example, local supermarkets in areas its rivals shun because it
is too deprived, too dangerous, and deemed not worth the time.
Co-op, Wates says, will stick with these often loss-making operations because
they make real the group’s social policies.
The group made a £20m investment in July 2007 in a joint venture with Chinese
pharmaceutical generics manufacturer Tasly Group, to build and staff a
production plant in the country. Many will wonder how Co-op’s strict ethical pol
icies will be effected in a country also noted for its relationship with
Wates argues that engagement is better than avoidance. ‘A lot of plcs are not
venturing there yet and I suppose it does raise ethical issues: why should Co-op
trade with China? Because we will work with this company which already has high
standards, to raise standards in that country. We are commercially focused and
we can make the ethics in that deal work, having done a lot of social auditing
on employee conditions and manufacturing practices over there.’
One area in which Wates seems uncomfortable is talking about the group’s use
of structured investment vehicles, on which it lost £31.8m in 2007 as the
sub-prime crisis took hold. The group’s last Responsible Business report said
Co-op was founded on working for ordinary people who were fed up of
‘profiteering shopkeepers selling adulterated food’.
Are SIVs socially responsible? And if so, are those investing in SIVs not
party to profiteering from adulterated loans, as we now know they frequently
In his defence, Wates wasn’t yet CFO of Co-op when these investments were
made. ‘But there were so many layers to these products, weren’t there? Someone
sold a standard mortgage and then built a mortgage book and an income stream
from that, which was sold to another institution. This was then aggregated with
others and bounced on again; but by then they’re just traded assets, aren’t
they? What we were picking up was a financial asset.
‘That income stream I am paying £35m for will give me £3m a year for the next
20 years. Had that asset been traceable to arms manufacturing or something like
that, you’re right, we would not have been there. But it was divorced from
This seems no less profit-minded than any regular corporate’s attitude to
investment. Which only serve to illustrate the rather unique position that
Wates, as CFO of a company that sells products on the back of ethics, is in.
Co-operative but still corporate
Accusations that Co-op isn’t under the same economic pressure as other
companies disappoint Wates, who cites some figures – doubled dividends in 2007
and the intention to double profit in 2008/09 – and his dual responsibility to
make the business as profitable as possible while handing out millions each year
to the long list of social, ethical or charitable groups it funds.
‘We’ve looked at distribution strategies among our competitors, asked
ourselves what returns our shareholders expect and what we can afford to pay,
and we’ve benchmarked our distribution policies along with the best of them,’ he
says. ‘Instead of paying dividends to some faceless institutional shareholders,
our dividends go to our members, the people who shop with us, our employees,
various charities and the local communities we trade in.
‘Some people can use ethics as an easy excuse to hide behind [for lack of
profits or dividends]. If you’re ethical, you can’t shy away from being
efficient, challenging and driving hard. We approach investment and shareholder
return on capital the same way anyone else does. Being a one-person, one-vote
organisation we’re certainly different. But we’re a part of the corporate
The full version of this interview appeared in the October issue of
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