Co-op's food sales fall as Somerfield disruption bites

The Co-operative Group has suffered its first fall in underlying food sales for at least three years after it conceded the integration of Somerfield had taken its toll on performance.

But the group, which also has financial services, travel, pharmacy and funeral directors businesses, said underlying pre-tax profits rose by 17 per cent to £260m for the 26 weeks to 3 July. Due to the change in its year-end, this compared to a 28-week period last year. The Co-operative Group, which completed the £1.56bn acquisition of Somerfield last year, blamed the "unavoidable disruption" in converting the grocer's estate to its own brand for a 1 per cent fall in like-for-like sales for the half year. Its last decline in sales occurred before it acquired United Co-operatives in 2007.

Peter Marks, the chief executive of the Co-operative Group, pointed out it was converting 24 Somerfield stores a week, which led to them being closed for "a few" days to change over systems and products. The Co-operative has taken on more than 600 Somerfield shops to make it the UK's fifth-biggest grocer with 2,900 outlets.

Mr Marks said it plans to complete the integration in the first quarter of next year, adding "it is going extremely well". The Co-operative said that like-for-like sales in the 2,500 stores refitted under its brand rose by 2.5 per cent. This was despite "no food inflation" in the first half, Mr Marks said.

In a "flat and increasingly tough" market, he said that about 40 per cent of its products are on promotion. "We have not seen these kind of levels for some time and it is a good indicator that the market is flat and we are all fighting it out." Over the 26 weeks, the Co-operative's food unit posted trading profits up 12.6 per cent to £169.7m, on total sales up by 11.5 per cent to £3.9bn.

Elsewhere, the Co-operative Financial Services division, which acquired Britannia Building Society last year, registered a 34.3 per cent uplift in operating profits to £109m. This was driven by a surge in mortgage applications and general insurance policies.

Its pharmacy business also grew by 26.1 per cent to £18m.

But the group's travel division suffered a 70 per cent slump in profit to £0.4m after "arguably the most challenging year" the industry has faced.

Group pre-tax profits tumbled by 31 per cent to £169.2m, but this was distorted by last year's proceeds from selling 220 Somerfield stores, integration costs and exceptional financing adjustments. Mr Marks said he did not expect the "tough economic conditions" faced by all its businesses to improve until late 2011 at the earliest.

Retail: 'Better weather' boosts August sales, says CBI

UK retailers posted their best performance for more than three years in August, scotching fears that the recovery in consumer spending is running out of steam.

High street chains expect the sales growth to continue next month and are "upbeat" about their prospects for the next three months ahead of Christmas trading.

Some 53 per cent of retailers said that sales volumes rose during the first two weeks of August, while 18 per cent said they fell, the CBI's quarterly Distributive Trades Survey revealed. While the net balance of 35 per cent reporting a sales rise was lower than the expected 45 per cent, it was the second consecutive month of growth and the fastest since April 2007. Retailers of clothing, food, household goods, footwear and leather, and hardware and DIY products enjoyed the strongest growth.

The CBI attributed the surge in these sectors to "better weather" in early August, the summer sales and the school holidays.

But Lai Wah Co, the CBI's head of economic analysis, said: "The broader outlook for consumer spending is still uncertain, given the VAT rise to 20 per cent next year, subdued pay awards and the feed-through of public spending cuts to job losses."