Annual Report (ESEF) • Apr 18, 2023
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Download Source FileOur 2022 Co-operate Report includes detail on the progressive actions we’re taking to fulfil our Vision of Co-operating for a Fairer World. To read the report, visit: www.co-operative.coop/ethics/sustainability-reporting
* PBT in 2022 includes £319m of profit on the sale of our petrol forecourts in October 2022.
We’re a consumer owned co-operative running an ethically responsible business. Our Vision is ‘Co-operating for a Fairer World.’ Every day we champion a better way of doing business for you and your community by offering a range of products and services which create value for our Co-op members and their communities. When you spend at Co-op it does good for you, your local community and communities across the country and around the world. It’s what we do.
Our Co-op is the UK’s largest consumer co-operative, with more than four million active members and a presence in every postal area in the country. We’re a major food retailer and wholesaler; we’re the largest funerals services provider in the UK; a major provider of regulated consumer legal services, particularly probate and wills, and a major provider of life planning and insurance products. Our businesses are all UK-based and our main support centre is in Manchester. Since 1844, the co-operative movement has promoted organisations with a clear social purpose and our Co-op continues that tradition. A stronger Co-op means stronger communities; we’re here to create value for our members and the communities in which we trade and we can only do this by running a successful co-operative business.
How we run our business is important to us. We set ourselves high standards for responsible retailing and service. And, we have a responsibility to be a campaigning business, speaking out on the issues that matter to our members. By offering great products and services we grow our customer base, our membership and the positive Co-op impact and value we can bring to wider society. For more information on our responsible business performance in 2022, please see our Co-operate Report on www.co-operative.coop
Our Co-op continues to stand apart from other operators in its markets, demonstrating the power of co-operation and firmly placing democracy and those issues that matter most to members at the heart of our business. During 2022, our Co-op led the way:
“For us to maintain a lasting Co-op impact we need to be clear in terms of our Vision, be commercially successful and have the underlying financial strength to face into whatever short to longer-term headwinds confront us.”
Against a rather bleak external backdrop, we are pleased to say that our Co-op enters 2023 in a much stronger financial position than it was in a year ago, and has continued to deliver for our members, customers and communities throughout a challenging 2022. That’s something we’re very proud of, when we consider the events of the last 12 months and what we’re continuing to face into this year. I wish, in writing this introduction, that we could be living in a world more certain of its future, more confident in its outlook and with its nations more peaceful and respectful in their approach to one another – alas, we know that isn’t the case. The tragic war in Ukraine continues to devastate that nation, with its impact reverberating around the world politically and economically. Our thoughts remain with those affected by the ongoing conflict, and we join them in hoping for peace to return as soon as possible to Ukraine.
Closer to home, it was a highly turbulent, unsettling and volatile year for those living in the UK. The death of Her Majesty The Queen in September marked the passing of our longest serving monarch. The outpouring of grief, respect and remembrance for a lifetime of service and devotion to both country and Commonwealth was both deeply moving and richly deserved. Her Majesty’s death occurred, as we know, during a period of intense political and economic upheaval, with three Prime Ministers and four Chancellors coming and going over a matter of weeks. Soaring inflation and rising interest rates dominated the news agenda and the UK entered a cost of living crisis not witnessed in decades, from which the country will take many years to recover.
On behalf of the Board, we would like to thank our CEO Shirine Khoury-Haq, the Operating Board and wider leadership team and our 57,000 Co-op colleagues for all that has been achieved, during a highly challenging but ultimately successful year for our group in 2022.# Shirine was appointed as interim CEO in March, taking on the CEO role permanently in August - she has led through significant changes in our leadership structure and in our business strategies, ensuring our Co-op remains resilient in the face of a challenging environment across all of our businesses. Much has been made of the need for ‘businesses with purpose’ to play more active roles in helping our country address some of the environmental and societal issues it faces. Our Co- op has origins that date back to 1844, when the Rochdale Pioneers came together with an enduring Purpose of championing a better way of doing business, going on to later establish the original business of purpose, anchored upon our ethical Values and Principles. There are notable parallels between the world we live in today and the world which prompted the Rochdale Pioneers to act. Both periods witnessed, and are witnessing, social and economic inequality as well as gaps in access to nutritious food, education, skills and opportunity. These are issues which our Co-op has always faced into and will continue to do so on behalf of our members and their communities. For us to maintain a lasting Co-op impact, we need to be clear in terms of our Vision, be commercially successful and have the underlying financial strength to face into whatever short or longer-term headwinds confront us. Over the past year, Shirine and her team have brought this clarity to fruition and this report will detail how we have become financially stronger and commercially sustainable, whilst continuing to deliver on our Vision Co-operative Group Limited Annual Report and Accounts 2022 6 commitments. For the number of active members to increase for the first time in five years, from 4.27 million to 4.41 million, is a testimony to the increased confidence we hope our members have in our Co-op, and the improvements we’re making to the way our businesses are run, but also the products and services they offer. In the face of unprecedented levels of inflation, we have taken the tough but necessary decisions to significantly cut costs to mitigate these headwinds. We’ve prioritised our capital expenditure and investments. We’ve streamlined our business processes while at the same time introducing clear strategies for our Food, Funeralcare, Insurance and Legal Services businesses. We also successfully sold our petrol forecourts business, allowing us to focus on our core convenience business. The net result is a Co-op Group which has generated more cash, with net debt greatly reduced and with the foundations in place for us to grow more sustainably in the years ahead. We are of course not immune to the stark realities facing all consumer-led businesses, with soaring energy and other inflation related costs continuing to weigh heavily on short-term expenses and operating profits. The actions we have taken already have provided us with the ability to weather this over the short term and to capitalise more fully over the longer term. The Board accepts and understands that ongoing inflation in energy and salary levels will mean our profits are likely to reduce in 2023, as we face into another year of economic uncertainty and higher prices, while committing to invest in our colleagues and communities. The underlying strength of our Co-op provides reasons for optimism and long-term success when things stabilise. The next 18 months will see change in our Board as Sir Christopher Kelly, Simon Burke, Stevie Spring, Paul Chandler and I all reach the maximum nine years of tenure and will step down at different points during 2023 and early 2024. Our Board remains whole-heartedly committed to supporting our businesses, colleagues and members as we transition through this change. We have been carefully planning ahead to ensure orderly succession, but also the continued momentum of everything we’re proud to see our Co -op achieving. Allan Leighton Chair, The Co-op Group Co-operative Group Limited Annual Report and Accounts 2022 7
2022 has truly been a year of challenge and change, both for our National Members’ Council and our Co-op. I’m proud of how our different way of doing business has supported members, colleagues and communities through the cost of living crisis, with Council members using the first year of delivering our Three-Year Plan to align our priorities to key issues and topics whilst keeping members’ views and our values at the core of decisions and discussion s. As part of my role as Council President, I co-ordinate how our National Members Council considers how we deliver our Vision of ‘Co - operating for a Fairer World’ during challenging times and how our Co-op best supports our members, customers, communities and colleagues as the cost of living crisis continues. Ahead of the winter months, we hosted our annual Join In Live events and met with nearly 400 members online and in-person for the first time since 2019. These focused on the launch of our new partnership with Your Local Pantry and asking members to shape how we work together in communities to provide people with access to food. We got lots of great ideas and I was honoured to host our London event in Westminster, where I was able to meet so many local members and hear their ideas about what community and membership means to them. In my last report, I mentioned that I was keen to see us develop a thriving, active co- operative movement and I think that these last 12 months have made this even more important. We need to work together and find co-operative solutions to the issues that people from all walks of life are experiencing. Throughout the year, myself and other Council members attended and spoke at high-profile events, including Co-op Congress and the Co- operative Retail Conference. In particular, I’ve been considering with fellow co -operators how we make membership meaningful. As I entered my second year as President, I felt empowered by the progress we’d made in bringing members closer to our Co-op through opportunities on Join i n around how they can play their full part in the business they own. It’s clear that when we talk about our Co-op Difference, people connect with it and want to get more involved, so I was delighted to hear that Shirine and our Operating Board have been looking at how we unleash the power of co-operation and take who we are and what we do to the next level. Shirine will speak more to the Operating Board in her overview. To support our Co-op with deepening member engagement, our Community & Member Participation Joint Working Group has been helping to develop our Member Participation Strategy, so we can create a journey for members from the minute they join Co-op and create advocates out of our colleagues too. The joint working group has also inputted into proposals for our new charity partnership with Barnardo’s, which is helping to provide young people with a better future. Supporting young people to succeed in life despite the constant adversity their generation is facing is something I’m really passionate about. I was thrilled to join our Public Affairs & Campaigns team at the 2022 Labour Party Conference, where we heard from young activists working with Mind as they led thought-provoking panels on mental health and wellbeing. Young people are the future in every sense and their passion for making the world a fairer place is inspiring - we invited some of our young Council members to share their views during a panel to kick off our February Council meeting, to help us better understand how we can work with them on the things they care about and appeal to new audiences. As we get stuck into 2023, I want to say a massive ‘thank you’ to all of our amazing Council members and our supportive, innovative (and patient!) Council Secretariat team, led by the Co-operative Group Limited Annual Report and Accounts 2022 8 brilliant Kate Brown . You’ve pushed us into a progressive space in 2022 so that we can be a modern Council in a modern co- op. I’m looking forward to seeing where 2023 takes us as the business adapts to new challenges and Council begins a review of its own effectiveness, to make sure we’re fulfilling our roles meaningfully and supporting each other and the business in ‘ Co-operating for a Fairer World ’ . It’s been seven years since Council was set up in its current form, and I’m proud that we’re taking the time to look at how we work and be honest with ourselves about where we are and where we need to be, so that we can be at our best as representatives of our member-owners. After all, our members owning our Co-op is where our difference starts, but its power and impact lies in us all working together and using our platform and voice to make amazing things happen. Please read Council’s 2022 Annual Statement on page 131 to find out more about all the ways you can participate and how we’ve worked for our members over the last 12 months. Denise Scott-McDonald President, National Members’ Council Co-operative Group Limited Annual Report and Accounts 2022 9
I am very glad that we were able to quickly foresee the impact of the economic upheaval and international events that were to affect our businesses. The pre-emptive actions we took at pace to address them have stabilised both our short and long-term future, giving our Co-op a solid platform for growth when market conditions allow. This is my first annual report as Group Chief Executive for our Co-op and I am honoured to have been given the opportunity to lead our amazing organisation through a year which has been fast-paced, challenging, tough and, at times, heart-breaking. Our Co-op has origins that date back to 1844 and a mission to provide fair, affordable and ethical access to food and other goods and services, with profits being shared amongst our members for their benefit and the benefit of their communities.We were, and remain, the original business with purpose and, in today’s modern world, co-operation and those ethical Principles will continue to remain at the heart of our decision making. We’re proud to be a trusted household name and a respected brand - we touch the lives and enter the homes of millions of people every day. When our members and customers buy Co-op products and services, they create value for themselves, for others and for their local communities. It’s this value that we use to deliver our Vision of ‘Co-operating for a Fairer World’ - supporting our members, colleagues, communities and the planet sustainably. That’s what makes our Co-op unique now and throughout our rich history. 2022 was a truly incredible year across the globe, and one in which our organisation also saw many changes. These included leadership changes and the introduction of our Operating Board, a necessary change to drive our priorities as one Co-op. It brings together our most senior leaders and decision makers, working together collaboratively on the decisions and actions we need to take to run our business effectively - and at pace. They ensure that our members, colleagues and Vision are at the heart of our organisation. Structural changes to our teams meant we said goodbye to some colleagues, welcomed new colleagues and, through careful succession planning, provided career progression for others. In this report, we welcome Matt Hood and Gill Stewart, our new Managing Directors of our Food and Funeralcare businesses, and also Peter Batt, new Managing Director of Nisa, to report on how their businesses performed last year. While we entered 2022 hoping for a time of calm, after a couple of years of significant upheaval as a result of Covid, we quickly saw that volatility and significant change instead were on the cards. As with practically all businesses across the UK, we saw substantial challenges across our markets as increased disruption and unpredictability continued to generate pressure. Consumer habits continued to shift as unprecedented levels of inflation and the cost of living crisis impacted household budgets. I am very glad that we were able to foresee the impacts that economic upheaval and international events would have on our businesses. We have the advantage of being a member owned organisation and, as such, we were not only able to speak publicly about these challenges very early on, but we were also able to start addressing them at pace and engaging our members.
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In March 2022, we set some short-term strategic priorities that would allow us to focus on what matters most to our members, colleagues, customers and communities, while protecting our Co-op from external headwinds. Our focus has been rigorously and unapologetically aligned to these and this is beginning to show clearly in our performance. This in turn will stabilise the long term future for our Co-op and all who rely on it, particularly as 2023 is predicted to be another year of increasing inflation, interest rates and energy costs, as well as possible recession. These focus areas were:
Despite the many challenges, our businesses have all traded well, led in their respective markets, made considerable progress with their individual strategies and yielded many highlights of 2022.
Our Food business
As we reported at the half year, profitability was partly affected by the rollout of our new SAP supply chain systems, as we continued to feel the effects of a global pandemic and supply chain crisis in H1 2022. Our Technology and Food teams worked incredibly hard together to combat this. By the end of the year, availability had improved in our Food business – 94% of products were available in all our stores on average each day (against our target of 95% for the financial year) despite continued supply chain challenges. In Q1, we opened our Biggleswade distribution centre. It's the largest, greenest depot in our network, with up to 1,000 colleagues, delivering up to two million cases a week to stores up and down the country. I also took the decision to review our Food strategy. We needed to identify, focus and invest only in the areas that played to and capitalised up on the strength of being the UK’s number one convenience retailer. And, as in all of our businesses, we needed to find ways to remove unnecessary costs and increase efficiency. Our Pure Convenience strategy launched in Q3 with a renewed focus on convenience and value. Lower pricing on key products, more focused ranging and better targeting what our customers and members want from our Co-op, combined with our decades of experience in the convenience market, will enable us to continue to grow our business through four key routes to market: Retail, Wholesale, Franchise and Online. Recognising the challenging retail environment and the cost headwinds we have faced, our overall retail trading performance was strong, and we have managed to mitigate the pressures that these would have otherwise placed on our business. Revenue grew (sales for the full year were £7.8bn (2021: £7.7bn), basket size declined as customer behaviours shifted and profitability was also affected. Despite this, we continued to broadly maintain market share (2022: 6.1%, 2021: 6.2%).
Our Wholesale business
Nisa saw strong growth in sales of Co-op own brand products, an increase in profitability and strong partner growth with the addition of over 475 new stores during 2022.
Funeralcare achieved an important milestone in 2022 , with the creation and FCA approval of Co-op Funeral Plans Ltd, our regulated business supporting members and customers through the sales and redemption of funeral plans. Despite many changes and disruption in the marketplace, due to regulation and competitor activity, we had a positive
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performance and saw an increase in revenue for the year (2022: £271m, 2021: £264m) and market share (end of 2022: 14.67%, end of 2021: 13.92%). Contributing factors to this strong performance include marketing investment and activity; a new all-colleague code, designed by colleagues to improve their experience of working for our Co-op; and first to market initiatives such as distribution of ashes via drone. We also said a sad goodbye to our Managing Director Sam Tyrer in October after a long- planned exit, to pursue a career in a different industry. Former Chief Operating Officer, Gill Stewart, took up the role to lead our Funeralcare business and teams with a comprehensive hand over from Sam. Our colleagues continued to work tirelessly to ensure the best possible experience during such a difficult time for the families that trust us to care for their loved ones. In 2022, we supported over 3,000 more families following the loss of a loved one, with an increase in popularity of lower cost Direct Cremation and Burial funeral options, and a slight decrease on tailored services, resulting in slight increases in both revenue and operating profitability.
Our Legal Services business outperformed the market and produced outstanding year-on-year growth with revenue up by 19%, to £46.3m (2021: £39.0m). Our strategy to enable digital access to our products and enhancing our services led 50% of all clients to access Legal Services digitally during the year, with client satisfaction across all channels staying strong at 85%. We made significant progress in strengthening the growth of our business through major partnerships, with renewed contracts during 2022 including Newcastle and Saffron Building Societies and Cancer Research UK, and new partnerships with The Co-operative Bank PLC and Amazon UK.
Our Insurance business continued to develop during 2022 and build on the foundations created during 2021. Having products which are easily accessible to our members and customers is key, and we sought innovative ways to bring them to more places where our members and customers shop. We were one of the first insurers to bring our home insurance policies to Amazon UK. Due to the external pressures affecting the insurance market specifically including car sales at an all-time low, cost of parts and labour increasing with inflation, regulatory changes impacting policy pricing and a decrease in consumers switching policies at renewal, performance was mixed. However, challenges in Motor and Home products were offset by positive performances in Travel and Pet policies, with our new Pet partnership with Markerstudy doubling the number of customers holding pet policies with us. And, of course, our Funeralcare, Legal Services and Insurance businesses continued to excel as a combined ‘Life Services’ portfolio, helping members and clients navigate life changing moments. In 2022, our Moving Home Hub continued to develop and support with buying, selling or moving home by bringing together products, services and information from our Legal Services and Insurance businesses. Also, our market leading funeral and legal expertise continued to offer joined up guidance and support bereaved families through their emotional moments and practical needs. More detail on each of our businesses can be found on pages 20 - 30 where our Managing Directors share their updates and reflections on 2022.
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We entered 2022 with a plan which included increasing our operational efficiency. We knew our costs to operate and serve our members, customers and communities were too high, and we needed to reduce our capital expenditure and debt. Everyone in our Co-op has pulled together and worked co-operatively to make this happen. Our results show that hard work beginning to pay off.# Mike Hazell, our Interim Chief Financial Officer will explain our year end results in more detail in his financial overview.
At times, this has involved taking some very difficult decisions, especially with the restructuring of many of our teams. This has meant, though, that we were able to mitigate new headwinds in 2022, while maintaining our margin and delivering an underlying profit in line with what we achieved in 2021 despite significant increases in operating costs that were driven by external factors. Also, as you’ll see in Mike’s update, we began 2022 with £920m of net debt, reducing to £731m at the end of H1 2022, and further to £333m at the end of 2022. This is thanks to trading well, managing our cost base, driving cashflow disciplines, the successful appeal of the IBM legal claim and the sale of our petrol forecourts. Sheer determination across our Co-op to reach our cost saving targets of £101m for the year mitigated significant increases in energy costs and salary inflation, driven by the external environment, which would otherwise have materially impacted Group profits this year. It’s a robust performance in what has been a difficult and disruptive trading year for many businesses. I’m very proud that, thanks to the efforts of everyone in our Co-op, we ended 2022 with a much improved and substantially more stable balance sheet to take us into 2023.
Making things Fairer for our Members and Communities, Fairer for our Colleagues and Fairer for our Planet is always at the heart of everything our Co-op does. There is much we can be proud of when we look back at 2022. Through our community programmes and in true co-operation with colleagues, members and partner organisations, our focus on providing fair access to food, fair access to mental wellbeing support and fair access to opportunities for young people continued to be relevant and needed. We simply couldn’t do this without the support of our members, who, by trading with us and buying Co-op products and services, generate the value we re-invest in our businesses and re-distribute to communities and local causes. In 2022, we celebrated our members generating over £117m for local communities since 2016, when the Local Community Fund launched, followed by the Communities Partnership Fund in 2020 - £24.6m was raised through the Local Community Fund, Community Partnerships Fund and Carrier Bag Levy in 2022 alone and, during the year, the Local Community Fund supported over 4,000 individual community projects. Our charity partnership with Mind, SAMH and Inspire, after three years of fundraising, hit our target of £8m (£8.33m) bringing communities together to support mental wellbeing across the UK. This was a staggering £2.3m more than our original £6m target.
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And we found new routes to support those who found they needed it in 2022. More than £1.2m was raised for the Ukraine and Pakistan appeals driven by the Disaster Emergency Committee, which brings together 15 leading UK aid charities. Our network of Co-op academies grew to 29, providing fairer access to education for young people with the addition of two new academies in Manchester and Stoke-on-Trent. The Co-op Academies Trust was also successful in bidding to build a new free school in East Leeds - Co-op Academy Brierley will open in September 2023. And in November, our charity, the Co-op Foundation, launched its new five-year strategy, ‘Building communities of the future together’, to deliver unrestricted grants in 2023 of up to £30,000 a year for five years to help organisations develop diverse young leaders of the future. We cannot achieve our Vision alone, nor should we aim to. In 2022, our Co-op, our charitable Foundation and Co-op Academies Trust formed new partnerships which helped see young people in our schools get access to a healthier breakfast, see families in our communities gain greater access to affordable food and see the fair distribution of surplus food through our new platform Caboodle. There’s more detail on all of our community support and partnerships in our Vision update.
Despite the challenges and headwinds faced during 2022, we remained true to our Purpose of championing a better way of doing business. We were honoured that our efforts to operate our businesses sustainably and for the longevity of our planet were acknowledged with the Queen’s Award for Sustainability in April 2022, followed by the Relex Responsible Retailer Award in July at the 2022 Retail Week Awards. Our Co-op being involved in and influencing conversations that can drive external decision making - benefitting our members, customers, colleagues and communities - is a responsibility we take seriously and that sits within our core principles of co-operation. During 2020, for the first time in my role as Chief Executive, I had the honour of being invited by the World Resources Institute to speak at COP27 about our pioneering water security partnerships with Water Unite and The One Foundation. Together we have raised over £20m since 2007, funding critical WASH (water, sanitation and hygiene) and water security programmes, positively impacting the lives of over 2.9 million people. I joined the World Wildlife Foundation at their Commitment to Nature Steering Group, and the British Retail Consortium Climate Action Roadmap Steering Group, as their Chair. Energy dominated the headlines during 2022 and as the war in Ukraine continued to push up prices and threaten supplies, with no visible end to the volatility, we joined forces with other leading retailers to request Government open discussions about the sourcing, security and investment in renewable energy sources.
Our commitment to our colleagues is to create a truly co-operative, diverse and inclusive workplace and culture, and to support their wellbeing. 2022 saw our first ever ethnicity pay gap report, the establishment of a new colleague fertility policy and refreshed menopause policy, offering greater support for colleagues. You can find more details on pages 37 and 38, and within our Co-operate Report. We were also proud to maintain our first place Silktide ranking against 11 other UK retailers for our website accessibility. Our colleagues were not immune to the increased cost of living. Rising costs were top of the agenda in every conversation during 2022. In April, we again re-aligned our minimum hourly Co-operative Group Limited Annual Report and Accounts 2022 14 rates to the Real Living Wage for all colleagues including younger colleagues and apprentices. We also invested £12m in payments onto colleague membership cards, and we extended colleague discount to 30% on Co-op own brand products from 20 October until April 2023.
2022 was another year of challenges for our Co-op, which our organisation met together and resiliently. Because of this, it was a year of incredible progress. None of this would be possible without our members, colleagues and my leadership team. Our Co-op is owned by our members. As Allan references in his introduction, I am delighted to have seen an increase in the number of active members choosing to be part of our Co-op. Every single member makes our organisation special, however I’m particularly pleased that, as Allan said, we’ve seen new growth in our active members, for the first time in five years. I’m grateful to our National Members’ Council - a passionate group of members, including colleagues and other co-operative societies, totalling 100 people from a variety of backgrounds. The Council continued to champion the interests of our members across everything our Co-op does in 2022, inputting into areas including our Pure Convenience strategy in Food and our Diversity and Inclusion strategy. Their advice on our cost of living support to members, colleagues and communities proved invaluable. I thank them for their warm welcome when I took on my role and I look forward to their continued support and involvement in 2023, as we work together to ensure co-operation and membership sit firmly alongside delivering our Vision.
My heartfelt thanks and gratitude also go to each and every member, customer and client who has placed their trust in us over these 12 months by trading with our businesses and advocating our products and services. My thanks also go to our amazing 57,000 colleagues, without whom our Co-op wouldn’t be where it is today. Words cannot express how grateful I am to them for showing up and giving their very best each day as we faced the challenges and headwinds of 2022. I am so proud of them for their hard work, passion and commitment to our organisation, members, customers and communities, and the care that they show for each other. I am also so grateful to them for speaking up and telling me both when we have gotten things right, and also when they think we could do better. Each and every colleague plays their part in making our Co-op the special place it is and working alongside them is a real honour. I’m also thankful to my leadership team who have stepped up this year in the face of adversity, supporting and embracing the change, challenge and, at times, very difficult decisions that were necessary for us to affect the future course of our Co-op. I thank them all for their bravery and commitment, and for their ability to take on new roles and responsibilities with incredible professionalism while maintaining a sense of perspective and humour. One often hears that the CEO job is a lonely one. I can genuinely say that, with my leadership team, this is absolutely not the case. They are a strong, focused and supportive group of people that - along with our colleagues, our Board and our Council - make (almost!) every day working at our Co-op a joy. All of us, together, truly co-operated for a fairer world during an incredible year.# Co-operative Group Limited Annual Report and Accounts 2022
Together with this report’s Vision update on page 31, our 2022 Co-operate Report includes more detail on the progressive actions we’re taking to fulfil our Vision of Co-operating for a Fairer World. To read the report, visit: www.co-operative.coop/ethics/sustainability-reporting
2022 was a year of significant macro-economic and geopolitical turbulence, translating into very difficult trading conditions for most businesses including our Co-op. Our full year financial performance sits against a backdrop of a deep and lasting cost of living crisis, double digit food inflation, soaring energy costs and continued disruption to global supply chains from the impact of the war in Ukraine. Despite this challenging backdrop, our Co-op has had a successful year, delivering a strong set of results, with a very solid profit performance, strong cashflows and a growing top line. We have grown our sales, successfully maintained margin and managed our cost base to mitigate the significant cost inflation on ourselves, our members and our customers. This was also supported by some difficult decisions, including the restructuring of the team at our support centre. There is no avoiding the impact that inflation is having on the profits of most businesses – for our Co-op, energy costs increased by £48m in 2022 compared to 2021, and salary inflation drove a further £55m of additional cost.
Faced with such inflationary pressures, the renewed cost disciplines we have instilled in 2022 have served us well and we successfully delivered our targeted cost savings of £101m during the financial year, to mitigate these pressures. Recognising the difficult time many of our customers and members were experiencing, we sought wherever possible to protect our customers and absorb inflation. Throughout the year, we continued to focus on delivering the propositions and value that our customers need at this difficult time, including £38m of direct reward for our members and their communities. Importantly, we also sought to support our colleagues through the winter cost of living crisis with additional one-off support of £12m and by increasing our colleague discount to 30% on Co-op own brand products from 20 October until April 2023.
This solid financial performance, combined with a focus on balance sheet and cash, delivered a very strong cashflow position and a step-change reduction in our net debt. Part of this action included the sale of our petrol forecourts in October (roughly 5% of our Food store estate) which generated a significant one-off profit and cash proceeds. Furthermore, through continued focus on cost control, management of working capital and our measured approach to capital investment, we strengthened our balance sheet significantly. This means we are well set to ride out the economic storm whilst still being able to invest in our longer-term future through capital light and commercial opportunities.
| Metric | 2022 | 2021 |
|---|---|---|
| Group revenue | £11.5bn | £11.2bn |
| Underlying EBITDA | £490m | £505m |
| Profit before tax (PBT) | £247m | £57m |
| Net Debt | £333m | £920m |
Revenues: Group revenue of £11.5bn is 3% higher than last year. We saw increased inflation but also smaller baskets and more conservative spending, according to our data. This represents a strong result across our portfolio of businesses in light of the challenging economic trading conditions. Sales in our main Food business are £134m higher than 2021 even though the comparative period included two more months (or around £150m) of sales from our petrol forecourts which we sold in October 2022. Like-for-like sales in our core convenience stores were up 3.2% with downward pressure on consumer spending from the cost of living crisis being offset by significant food inflation. Sales in our Wholesale, Funeralcare, Legal Services and Federal businesses are all also up in 2022, on the prior year.
Profitability: Despite the significant inflationary cost pressures we have faced (particularly on energy and salaries), our robust sales performance and tight cost control means we have maintained our 2022 profit levels, broadly in line with 2021 levels at £100m (2021: £100m) and underlying EBITDA (earnings before interest, taxes, depreciation and amortisation) of £490m (2021: £505m). This is commendable given the challenging economic backdrop and demonstrates how hard all of our Co-op colleagues worked in 2022, driving efficiency throughout our business and helping shield our members and customers from the worst of the cost increases. Delivering in this way, despite the unprecedented headwinds, is all the more impressive when considering that 2021 included two more months of profit (around £10m) in our Food business from the petrol forecourts we subsequently sold in October 2022.
Full year underlying profit within our Food business fell slightly following the forecourt disposal, but this has been offset by improvements in our Wholesale, Funeralcare and Legal Services businesses.
At £5m, our operating profit in 2022 is £59m lower than 2021. Although our underlying operating profit is comparable to last year, we’ve incurred £59m more of non-underlying charges in 2022 compared to 2021. These changes primarily relate to the impairments we have recorded against some of the assets that we hold to reflect the continued difficult trading conditions we anticipate going forward as well as other non-recurring items.
At £247m, profit before tax (PBT) is significantly higher than last year (2021: £57m). Although our operating profit is lower this year (as noted above) we have recorded a gain on the disposal of our petrol forecourts of £319m which increases our PBT number. This relative increase is partially offset by the one-off gain of £99m that we recognised in 2021 following the settlement of a long-term liability.
Net Debt: Our net debt reduced by £587m to £333m (2021: £920m). This significant reduction was generated by the £408m net proceeds from the sale of our petrol forecourts (excluding lease disposals of £171m), £72m payment following the judgement on the IBM legal case but also a strong underlying cash performance in the Group, which generated positive cashflows from continuing operations of £383m.
Further detail on our trading performance and that of our individual businesses can be found within ‘Our Financial Performance’ section on page 47 with business unit updates over pages 20 - 30.
The cost of living crisis left our vulnerable members in even more need of the value we create across our Co-op, but also our support of local causes, safeguarding access to food and basic amenities across our communities. As economic challenges look set to continue into 2023, our Co-op took the decision to re-assess our membership offering and what more could be done for those 4.41 million members who were active over 2022. This is the first time we have seen this number grow in five years.
As always, we worked closely with our passionate National Members’ Council in 2022, collaborating on how we best engage our members, who own our Co-op, and demonstrate how our Co-op Difference can offer meaningful support, especially during the cost of living crisis. Council continued to help develop key initiatives that matter to our members, including the Warm Spaces funding boost for local community organisations, helping others to navigate energy costs during winter. It also remains an important touchstone for our Co-op’s culture, championing work around diversity and inclusion.
592,000 new members joined us in 2022, more than 2021 (517,000) and we ended the year having achieved our target for active members, having also reactivated over 219,000 of our lapsed members. And we’re delighted to be attracting younger members – more than 45.3% of our new members are aged 35 and under. This is above the 40.4% target we set ourselves.
In 2022, we shared a bonus digital offer of £3 off a £10 shop with just under 190,000 new members to welcome them to our Co-op and encourage them to engage with our app. Specifically, from May, we lowered the price of our lunchtime meal deal to £3.50 for all members, saving them 50p. More exclusive member deals were made available in 2022 than any other year, including a saving of £5 when members buy three Irresistible wines, Irresistible crisps at 90p and £1 off pizza. Seven digital offers were sent to all members to mark the World Cup. Across November and December, members received a price reduction on Walkers Sensations and Ben and Jerry’s ice cream. As a thank you for helping us raise £117m for local communities since 2016 (the year our Local Community Fund launched), members received an offer of 25% off a Co-op Irresistible product.
Our members play a unique role in helping to power our Vision of ‘Co-operating for a Fairer World’. They’ve been able to learn more about their Co-op and the big issues affecting their communities, and have helped choose how our funding is used while making sure we focus on the things that matter most. They continued to help shape how we deliver our community missions nationally and locally, as well as the products and services we provide for members. They also added their voices to many campaigns and actions that helped us make a difference together.
In 2022, members contributed to our Vision through 1.9 million participations and by volunteering over 116,000 hours of their time to our community, campaigning and co-operative participation activities.# Co-operative Group Limited Annual Report and Accounts 2022
To ensure our members’ voice continues to be heard and their insight drives what we do, members help design new products and services, shape strategies and policies and support us with campaigning. Over four dates in October, Co- op’s Join In Live events were back online again and also in- person for the first time since 2019. Hosted by our National Members’ Council, the events shared performance updates from our businesses and an overview of our Co- op’s new community partnership with Your Local Pantry – for more information, see page 33. They also offered opportunities to put questions to Board members, leaders from our Operating Board and generate conversations around what more could be done to support members, customers and colleagues through the cost of living crisis, with some members offering to support Local Pantries. The events build upon those monthly opportunities to develop products, share thoughts and ideas and shape plans that go live on our members’ online Join In platform.
Our Member Pioneer team also take our Join In Live events to a local level throughout the year, theming them on important topics and initiativ es and inviting members and customers to come along to stores and community spaces. More than 300 ‘Live Local’ events - led by Member Pioneer Co-ordinators and attended by thousands of members, customers and local causes - were focused on Fairtrade, membership and sustainability. And those successful collaborations with our members shone through in 2022, as further testimony to the role they play in shaping our business.
To read more about how our Co-op rewards members, including 2p back for every £1 spent on selected Co-op branded products and services, as well as personalised and exclusive offers, please see page 60 of our Co-operate Report.
As with all retail organisations, throughout 2022, we've continued to operate in a challenging and demanding economic climate. The impact of the pandemic, Brexit and the ongoing war in Ukraine caused workforce shortages, supply chain constraints and drove a cost of living crisis, which affected our members, customers, communities and our business, resulting in changing consumer shopping habits and much more.
As we reported for H1 2022, profitability was partly affected by the rollout of our new SAP supply chain systems, as we continued to feel the effects of a global pandemic and supply chain crisis. However, performance in FY2022 overall was strong for our Food business, considering the significant headwinds in play across our market, including rising energy costs and inflation. We also stood by our commitment to invest in colleague pay during the year. Mitigating actions that we’d already taken ensured tight cost control with available funds to navigate cost challenges:
Nevertheless, profitability for the full year ended 11% lower than in 2021 (2022: £139m, 2021: £156m), albeit that £10m of this reduction is due to the sale of petrol forecourts in October. Sales for the full year were £7.8bn; representing a slight increase on the previous year (2021: £7.7bn).
Based on our own data (comparing the 2022 average selling price to that of 2021), our food sales (excluding fuel) were heavily impacted by increased cost prices driven by market wide inflationary pressures, with full year inflation of 5.9%, peaking at 8.9% in December 2022. In response, to support members, customers and colleagues, £37m was invested in our prices, across a series of popular products. Inflationary increases offset lower volumes in the year, with unit volumes down 5.5% on 2021 (2022: 3.7 billion, 2021: 3.9 billion). Corroborated by our own data, customer behaviour incited ‘smaller’ baskets across the market, with fewer products per transaction on average during the year, although frequency of shop did increase.
Product availability in our Food stores improved in 2022 – by the end of the year, availability continued to improve from Q4 2021 and 94% of products were available in all our stores on average each day (against our target of 95% for the 2022 financial year).
In October, we completed the sale of our 129-site petrol forecourt business to Asda for an enterprise value of £611m. This represented 5% of our retail estate of 2,564 stores. Fuel performance was strong in 2022 with sales £69m higher year-on-year (2022: £571m, 2021: £502m) despite only operating for 10 months of the year. Trading profit for our petrol station stores overall was £47m, which was £2m lower than 2021 (2021: £49m).
Despite a turbulent year, we ended 2022 with a market share of 6.1% by the end of 2022 (2021: 6.2%) according to data from Kantar Worldpanel. Margin held up well overall for the year, with new customer behaviour driving significant change in three key areas:
In our Wholesale business, Nisa has had a successful 2022, despite these same economic challenges impacting all retailers. Please see the update from Nisa’s Managing Director, Peter Batt, for more detail, on page 23.
Over the last few years, we’ve continued to invest in our estate, infrastructure and people. Our focus on convenience has, in turn, powered up our proposition, extending our reach through our four routes to market – Retail, Wholesale, Franchise and Online – to get closer to where people are. In September 2022, we unveiled our new-look Food strategy with a renewed focus on convenience and commitment to offer greater value, led by a £37m investment to slash the price of over one hundred products. Our refreshed strategy aims to capitalise on the experience we’ve gained in the market over the last decade. We’ve grown our business to operate more than 2,400 Co-op stores, supported by online platforms, built a nationwide franchise business and served almost 5,000 independent convenience stores through our wholesale arm.
In response to the cost of living crisis, we lowered prices on more than 120 Co-op own brand products from pizza, pasta and burgers to fruit and vegetables, by as much as 36% in 2022, and ‘locked’ these prices into the new year to support our members, customers and communities who face rising household bills. Our target shoppers come to us looking for treats, food on the go, inspiration in meals for the night and to top up their bigger shops. In the first half of 2022, we began repositioning our fresh, chilled and frozen meals, bringing them together consistently across all our stores so customers could quickly shop our meal offers and easily identify our new ones. These changes set the foundations to ensure we fully complied with the Government’s new High in Fat, Sugar and Salt (HFSS) regulation, which came into force for England-based stores of over 2,000 sqft in October.
We know that creating member and customer value is our key to success, balanced with a sustainable cost to serve. This requires continued focus on range, investment in value and price and rewarding our members and customers for their loyalty. To enable this, in 2022, we began an 18-month range review programme to revamp every category in our shops to ensure real customer value through our four levers of price, promotions, range and quality. Through this work, we began looking to balance branded versus own brand products, improve the distribution of our Honest Value range, improve packaging and our use of plastics and introduce member-only deals.
Whilst doing this, we also looked to reduce the number of products in our range, removing those we know don’t matter as much to our members and customers. As well as helping us to improve overall value perception, work like this allows us to manage our overall cost to serve our members and customers.# Online
We continued to focus on growing our online presence in 2022, supporting efforts to make shopping quick, easy and convenient for our members and customers. Our aim remains to be the most convenient home delivery service in the UK, as we continue to innovate to meet the needs of consumers. Our online business (including the expansion of our own site offering and our offering through partners) could reach 81% of the UK population before the end of the year and revenue grew to be 24% more than we achieved in FY 2021 (2022: £222m, 2021: £179m). Our online delivery services were available in more than 1,800 individual Food stores across 859 locations in 2022, with stores acting as micro-distribution hubs in communities. By the end of H2, Deliveroo was available in 1,296 stores (1,235 if we exclude our petrol forecourt sites), and Uber Eats in 1,001 stores. Of all the orders placed through our online shop (coop.co.uk) in 2022 overall, 64% of transactions came from Co-op members. A key part of our online strategy in 2022 continued to be the development of our ecommerce offer, using the competitive advantage of our store footprint to provide fast home deliveries, click & collect and added services. Growing market share remains our priority, targeting 30% of the quick convenience market share (rapid delivery from store to door) within four years. We started to develop plans in 2022 to simplify the online delivery operation for our colleagues, working with our partners to move all their platforms to our hand-held terminals, meaning everything will be in one place for our store teams.
In January, we opened our new Biggleswade depot – our largest regional distribution centre (660,000 sqft). The depot became fully operational in H1 as the most sustainable and environmentally friendly depot in our network, handling over two million cases of frozen, ambient and fresh products a week. This depot brought thousands of products closer to communities across the South and South East. In April, we also began to extend and enhance our Newhouse distribution centre, as we continued to strengthen our existing logistics network, ensuring we have suitable distribution facilities to deliver improved services and access to food conveniently for our communities into the future.
We’re committed to supporting British farmers – 100% of our fresh and frozen meat is British, and we only use British meat as an ingredient in our products. I’m proud that all our hard work has enabled us to continue to back British farmers when others pulled back in 2022, with our pledge to back British egg producers through a multi-million-pound support package for producers, on top of the £19m we also pledged to support pig farmers during the year. By supporting British farming, we believe we can boost the economies of communities across the UK and ensure the highest animal welfare standards. In the context of the climate crisis, we recognise that global producers and farmers in our supply chains are some of the most vulnerable to the shocks of extreme weather and disease outbreaks, but are without the resources to protect themselves and their livelihoods.
Co-operative Group Limited Annual Report and Accounts 2022 23
Our ambition continues to be the achievement of net zero greenhouse gas emissions by 2040, 10 years ahead of international agreements. From products and packaging to power and pension fund investments, our Climate Plan details how Co-op will reduce the impact of operations. For more information about our Climate Plan and how we’re supporting international communities, see our Co-operate Report. For more information about our new partnership with Your Local Pantry and how we worked together on a live stream at Christmas time, see our Vision update.
As with the wider Co-op Group, Nisa must remain commercially strong now and in the future, to continue supporting our customers’ (or partners’) stores, communities and shoppers. To ensure that, we took some difficult decisions in the financial year including the restructure of some of our teams, streamlining operations and making cost efficiencies to get Nisa into a position where we can reinvest in lower prices for our customers and their shoppers. Our 2022 trading profit was £22m (2021: £9m), representing 1.5% of sales. This figure was enhanced in 2022 by £4.4m of one-off gains. Sales in our Wholesale business were 3.8% higher than the prior year at £1,439m (2021: £1,386m). This represents a solid performance in light of significant inflationary pressures and tough economic headwinds, impacting consumers and retailers alike. Of that total, sales in our Nisa business were £1,385m and although retail like-for-like performance was down 2.5%, new member recruitment remained strong. The performance and improving profitability of Wholesale demonstrates the underlying strength of the synergies between Co-op and Nisa. Ensuring the profitability of the business is important, so that we can continue to invest in Nisa in 2023 and beyond, and pass on associated benefits to our customers. Nisa’s sales of Co-op branded products grew by 12.5% in 2022 to £199m (2021: £176.6m) and now represents 20% of total sales, excluding tobacco. In Q4 2022, we made a significant investment in the pricing of Co-op branded products, to improve the margins our Nisa partners make but also ensuring retail selling prices remained competitive. Our data for financial year end 2022 shows just over 91% of Nisa customers were buying Co-op branded product. Recruitment throughout 2022 remained strong, with 475 new stores added, with in-year sales of £66m (£113m annualised). Co-op disposal stores remain key for recruitment – we recruited 33 more year-on-year (2022: 88, 2021: 55) with total sales at £42m by financial year end. Our Co-op is the major shareholder in Federal Retail and Trading Services Limited (FRTS), which is a joint buying group collectively owned by us and Independent Society Members (ISMs), which are all retail co-operatives. The group operates for itself, but also acts as a wholesale to other independent co-operatives. Revenue for the year was £1,895m (2021: £1,756m). FRTS continues to be run on a cost recovery basis, meaning the group doesn’t make or record any profits from these sales. We continue to explore ways to maximise our impact as independent co-operative societies, in the increasingly competitive markets in which we operate.
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2022 proved to be a very important year for our business. We achieved consistently high client satisfaction scores throughout, set up a new business – Co-op Funeral Plans Ltd – and then achieved Financial Conduct Authority (FCA) approval for that business to sell, service and redeem funeral plans. We said goodbye to Sam Tyrer who, almost a year prior, had taken the decision to move on to her next challenge. I was then honoured to take on the Managing Director role, having previously been Chief Operating Officer, to continue the delivery of our business strategy. We also made great progress with the important work we began in 2021, to transform the culture within Funeralcare and make it a great place to work for everyone.
A significant amount of work went into getting ready for funeral plan regulation and we were very proud to be granted authorisation when the UK’s funeral plan market became regulated by the FCA on 29 July. We saw a reduction in funeral plan sales in the lead up to this date, as customers’ confidence in the market overall was impacted pre-regulation and there were changes to our distribution channels due to regulation. Our plan sales for the year were 16,774, down from 44,751 in 2021, not least due to exiting some third party distribution arrangements not permitted under the new legislation. In preparation, Co-op Funeral Plans Ltd (CFPL) was set up as a new legal entity and we started to sell funeral plans under the Co-op Funeralcare brand from this entity on 1 May 2022. Our regulatory compliance advisory function was introduced and over 700 colleagues became certified to sell, service and redeem funeral plans on 29 July 2022, the day that CFPL became regulated. We also launched a new digital Halo Plans system, which is a key part of our core system transformation programme, ensuring our systems and ways of working are regulatory compliant and future proof. We continue to be recognised as providing one of the best funeral plans in the market. We’ve been recognised for the fifth year running as Moneynet’s best funeral plan provider and awarded Highly Commended in the Best Funeral Plan Provider category by readers of the Money Pages. There has been significant change in the wider funeral plan market, with 26 out of 70 players becoming authorised to sell funeral plans (these 26 players cover 87% of the market). This is expected to bring greater confidence in the market, now that it is under FCA regulation. However, in the short term, it has led to some of our competitors ceasing to sell plans or even falling into insolvency. We have been in active discussions with the FCA throughout 2022 to provide assistance where customers have been affected by this. We were one of the providers who offered support to those who held plans with providers that are no longer operating, through the availability of a heavily discounted funeral plan as well as discounted funerals for some families at their time of need. The death rate was low in the first few months of 2022, but increased in Q2 and remained at higher than historical average levels through the rest of the year, with a slight reduction overall year-on-year, as confirmed by data from the Office of National Statistics.# Co-operative Group Limited Annual Report and Accounts 2022
We saw growth in our share of the market throughout the year, which more than offset the lower death rate and resulted in higher funeral numbers of 93,867 for 2022 compared to 90,731 in 2021. Clients continued to mention colleague interactions as the primary driver of high satisfaction scores for their experience. Throughout 2022, our Direct Cremation and Direct Burial funeral options grew in popularity with members and clients, making up 11.7% of our funerals (an increase from 7.9% the previous year), as people continued to choose our unattended, lower cost services, as Co-operative Group Limited Annual Report and Accounts 2022 25 anticipated during the cost of living crisis. Our simpler Essential funeral option stayed at 11% of our funerals year-on-year. As a result, we saw clients move away from our higher cost, bespoke Tailored service, which made up 49.3% of our funerals in 2022, down from 51.7% the previous year. These factors resulted in revenue of £271m for 2022, which is a marginal increase on the previous year’s £264m in 2021. We increased our investment in marketing activity in 2022, which had positive results. By focusing more on brand-led messaging in our advertising and the re-introduction of TV into our media mix, we saw a stronger response and improved return on investment compared to previous years. We continued to evolve our digital strategy by making our content more personal and relevant to the recipient’s local community, as well as driving the conversation around grief and bereavement on a national level through our partnership activity with publisher Reach and podcast company Acast, developing podcasts which featured guests including Rev. Richard Coles and Coleen Nolan. The higher revenue performance was partially offset by this increased marketing spend, and some inflationary headwinds with the business delivering improved operating profit in 2022 of £16m (vs £12m in 2021). We’re passionate about giving our clients truly unique and personal ways to remember their loved ones, so in November we led the market by becoming the first funeral provider to offer a service where ashes can be scattered by drone. Families now have the option to scatter their loved one’s ashes by drone in memorable locations over land or sea. More than a third (35%) of those who have cremated a loved one in the past five years opted to scatter ashes in a location of significance.
To enable us to support the growing demand in Direct Cremation services, we welcomed a new partnership with crematoria provider Westerleigh on 1 August. They’re the leading developer and operator of crematoria and cemeteries across the UK, as well as having state-of-the-art systems and processes to give our members and customers an improved service. In January, we launched a partnership with Cruse Bereavement Services with the aim of helping people to talk about death and grief more openly, and empower people in their local communities to provide everyday bereavement support to those who have experienced loss. Related YouGov research we carried out showed 54% of UK adults had lost a loved one in the last five years. Of those who were bereaved, 31% said it impacted their mental health and 15% were left isolated. This work continued throughout 2022 and, in October, we re-launched our Co-operate platform, which helps connect people with events, groups and activities happening in their local communities. We also updated our online hub to include more useful tips and information about grief and bereavement. In November, we joined with Cruse and local MPs to host an event in Parliament highlighting our ‘Connecting Communities’ partnership and welcoming the findings of the UK Bereavement Commission. We also launched a new podcast in partnership with Cruse called ‘Let’s Talk About Grief’, with the aim of opening up the conversation about grief and bereavement. In November, we welcomed a new partnership with EverWith, the UK’s largest memorial jewellery company, as we expand the services and support we provide to families beyond the day of the funeral.
Co-operative Group Limited Annual Report and Accounts 2022 26 As part of our focus on bereavement support within the community, colleagues in our funeral homes across the country encouraged people to come together and take part in Marie Curie’s National Day of Reflection on 18 March, as the nation reflected on the second anniversary of the pandemic. We also continued to innovate in the way we co-operate for a fairer planet. We invested further in environmentally friendly and sustainable alternatives, including the use of an electric fleet, trialling both electric hearses and ambulances. We also began trialling more eco-friendly funeral options.
Throughout 2022, we continued the work we began last year of looking into our culture. Our Funeralcare colleagues pioneered the launch of an All Colleague Code, with the purpose of creating a workplace where everyone feels they belong and has a safe space to work together. Both the Code and the launch approach have been positively received and we’re seeing the difference it’s making in how colleagues feel about working in Funeralcare. There was significant improvement in our annual colleague survey results across engagement, enjoyment with working for Co-op, empowerment and a decline in those colleagues who have witnessed or experienced bullying, harassment or discrimination at work since 2021. We recognise how important our caring and professional colleagues are to our business and our clients’ experience. They play a unique and valuable part in their local communities, where the support they provide goes beyond the day of the funeral. It’s vital that our colleagues feel a sense of belonging at work and that they receive the care and support they need. We will continue building on the progress we’ve made over this past year, to ensure Funeralcare is an inclusive, diverse and safe place for everyone.
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2022 saw further development of our insurance business with new partners, products and distribution channels added. We successfully transferred to new partners for Pet and Travel insurance and made our Co-op products available in more places where our members and customers shop. Like Home and Motor insurance, Pet insurance is now available across all main price comparison sites and Co-op Home insurance is now available through Amazon UK. In addition to extending our reach, we are also expanding our insurer partnerships to strengthen pricing and coverage to meet more of our member needs. We achieved revenue of £24m (2021: £34m) and profit of £8m, after an adjustment of £4m relating to the accounting treatment of deferred income following the sale of the underwriting business in 2020 (2021: £15m). This is as expected - our new distribution model continued to establish itself and – since the sale of our underwriting business and as part of the agreement – we continued to process those policies that were owned by our underwriting business before its sale to Markerstudy, and see, and have seen policies to their end.
As with the whole insurance market this year, our performance has been mixed and subject to external pressures and changes caused by the pandemic, claims cost inflation and regulatory changes. According to price comparison website commentators, overall customer demand for Motor insurance policies reduced by around 7%. This has happened for several reasons. According to the Association of British Insurers’ (ABI) Motor Insurance Premium Tracker, published in December, car insurance claims inflation went up by 16%, making them just over £3,000 each on average in the year to Q2 2022. The ABI reference a number of complex supply chain issues as responsible, as well as the increasing sophistication of vehicles (leading to more expensive repairs) and rises in the costs of raw materials and labour. Despite this, the ABI Tracker shows that the average price paid for motor insurance rose by a marginal two percent over the year to September 2022. We also saw new pricing regulations come into effect for Home and Motor insurance from 1 January 2022, which treated loyal customers as favourably as new customers. During 2022, 50% of consumers were seeing either a decrease or no change at renewal, the largest proportion since mid-2015. Shopping and switching rates were at their lowest point since 2009 (when market data collection began) as a result of lower renewal pricing, based on data from ConsumerIntelligence.com. Despite these factors, we were still able to deliver 103,388 new Home and Motor Policy sales. Although we’ve experienced challenging market conditions, we’ve continued to focus on improving our customer experience. In 2022, we introduced a new online claims portal which is already used by just under half of our Motor insurance customers going through a claim. Throughout 2022, we improved our online Motor insurance journey meaning 9% more users who start a quote with us are completing their quote compared to 2021, and we’ve also improved our quote follow up communications which drove a 60% increase in users visiting our ‘retrieve quote’ page, year-on-year. These improvements, plus others, make it easier than ever for members and customers to engage with Co-op Insurance. These improvements in customer experience were recognised by The Institute of Customer Service in their UK Customer Satisfaction Index survey. In the insurance sector report, Co-op Insurance rose to number four across the industry. In addition to this, Co-op Insurance Co-operative Group Limited Annual Report and Accounts 2022 28 was the most improved brand in the year not only within the insurance sector but across all UK sectors.# Travel, Pet and Life insurance products
These challenges in Motor insurance have been offset by a strong performance from some of our other products. Travel, Pet and Life insurance have all performed very well in 2022, with 61,232 new policy sales. By the end of 2022, we’d refreshed all our insurance products with an aim to provide better cover, more choice and better prices. We added new features to help our products meet the needs of our customers and members. This included a discount on policies for rescue pets and providing cover for older pets who traditionally find it harder and more expensive to get protection through insurance. Having focused on our product offering and customer experience for a number of years, in the second half of 2022 we moved our focus to extending our distribution and maximising the market leading products we have. We’re now getting our products to more people, making insurance easier to buy and offering it in more places. We also put a renewed focus on our members and communities, and responded to the cost of living crisis with help for our members and the community causes we support.
Our new Pet insurance partnership with Markerstudy has gone from strength to strength since the new proposition was launched at the start of the year. Customer feedback has been positive, and this has been reflected in the sales of the products, with customers holding a Co-op Pet insurance product doubling in the space of 12 months. Our new partnership with AllClear for Travel insurance has been very well received by customers. Their ability to support our ‘any age, any condition’ proposition, and also enhance this with the Doctor Anywhere online support, has led to industry recognition and consumer champion Which? nominating Co-op Travel insurance as one of their recommended providers. At the end of the year, we announced that Co-op Home insurance was to be one of only three home insurance products offered through the new Amazon UK insurance store. This will ensure our Co-op Home insurance products are in front of millions more potential members and customers, in a way that suits them. The increasing use of online platforms to distribute products will be a future development of our strategy to make it easy for members and customers to access our Co-op products.
In July, we launched our Motor insurance campaign, offering both new and renewing members £50 to spend on their Co-op membership card when they took out a policy directly with us. We ensured this applied to new members so more people could take advantage, while supporting the further growth of Co- op’s membership base. Given the economic climate and cost of living crisis in the UK, we wanted to make sure our communities also benefited, so for each policy sold we also gave £5 to local causes. By the time the offer came to an end in December 2022, we had shared £1.3m with individual members and raised over £130,000 for Co- op’s Local Community Fund. To read more about the performance of our Local Community Fund, please see our Vision update on page 31.
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2022 has been a strong year for our Legal Services business - in the context of challenges and economic uncertainty, we’ve continued to grow our business. Revenue increased by 19% year-on-year to £46.3m (2021: £39.0m), and our underlying profit increased 60% to £8m (2021: £5m). The majority of our growth came from the largest part of our business: probate. Our market leading business experienced huge growth, taking on 24% more cases than in 2021, leading to revenues increasing by 28% year-on-year. Our Estate Planning business had a very strong second half to the year, resulting in a 9% increase in revenue in 2022. Our strategy of increased digitalisation and accessibility, growing and maintaining strong partnerships and our unique customer journeys has supported our growth this year and led to continued high performance for our clients. Our colleagues have been key in supporting this growth and our work in the charity sector is demonstrating our difference as a legal business.
No matter if clients come to us digitally, through a partner or a more traditional route, we want to give a great customer experience. We’re delighted that our customer service scores stayed strong, and our customer satisfaction score for 2022 is 85% (2021 : 86%). We’re also really proud of our Trustpilot scores, which improved to 4.8 stars in 2022 (2021: 4.7 stars).
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Co-operative Group Limited Annual Report and Accounts 2022
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2022 proved to be an incredibly challenging year for our business, but also those depending upon our Co-op, who remain at the very heart of our ‘ Co-operating for a Fairer World ’ Vision. When the V ision was introduced a few years ago, we couldn’t have anticipated how it would be tested in years to come - we’ve seen it become increasingly relevant to our members and communities, our colleagues and our planet, all of which endured so much over the 12 months. This has included the fallout from the war in Ukraine, which has affected energy security and the UK economy, through inflation and the availability of key goods. By the end of the year, the UK was facing the biggest fall in living standards since the 1920s, with members and colleagues anticipating headwinds for the short and long term, including increases in the price of food and fuel, but also fewer affordable mortgages and pension funds stretched to their limits. ‘ Co-operating for a Fairer World ’ allowed our Co-op to take important strides in tackling hardships and injustices, while also taking up new opportunities to improve the wellbeing and prospects of others. This year, our focus remained steadfastly upon making things Fairer for our Members and Communities, Fairer for our Colleagues and Fairer for our Planet.
Our community plan has three interconnecting missions to support programmes developed to bring about meaningful change in local communities. These are:
* Fair access to food.
* Fair access to mental wellbeing support.
* Fair access to opportunities for young people.
At a time where the finances of our members and their communities had been so sorely tested, in 2022 our Co-op celebrated raising £117m for local communities, since 2016.# Co-operative Group Limited Annual Report and Accounts 2022
This amount has been generated when members buy selected Co-op branded products and services, with 2p in every pound spent split between supporting:
Our Local Community Fund is at the heart of our Co- op’s support for the communities that we serve, bringing to life the co-operative principle of concern for community at a genuinely local level. Co-op colleagues who live and work in communities across the UK, led by our Member Pioneers, play a key role in determining which projects will best meet the needs of their communities, while members chose to support a cause that matters to them more than one million times during 2022. Our Local Community Fund supported over 4,000 community projects in 2022, offering a share of £12.4m, providing critical support during a challenging year.
We also secured a new partnership; o ur relationship with Crowdfunder’s funding website allows those same local causes the chance to benefit from match funding and unlock additional support.
July saw the culmination of three years of fundraising across our Co-op on behalf of our charity partners Mind, SAMH (Scottish Association for Mental Health) and Inspire – three organisations well known for their work supporting mental wellbeing across the UK. After setting an initial fundraising target of £6m, our members, colleagues and customers raised £8.3m for these three causes in total. The money raised helped to launch more than 50 new mental wellbeing services in local communities across the UK, supporting over 22,000 people in 2022. 82% of service users said that they felt their mental wellbeing had improved as a result, and that they were better able to cope with the challenges they faced.
And as well as continuing to meet long-standing fundraising targets like these, our Co-op also found new and pragmatic routes to responding to the cost of living and its effects upon communities over 2022.
And in December 2022, Nisa's Making a Difference Locally charity, which enables retailers to support good causes in their local community, reached £15m. The milestone amount has been raised for communities across the UK since the registered charity's formation in 2008, with more than £1.1m raised through the sale of Co-op brand products during its last financial year (July 2021 - June 2022).
Over the course of this year, we continued to focus upon our three Community Missions, ensuring long-term ambitions while making an immediate difference where needed, as communities still felt the effects of the pandemic and faced into a cost of living crisis. In 2022, we were able to put in place major new partnerships which greatly enhanced our efforts and impact in these three key areas.
We continued to deliver on our commitment with Hubbub to help its community fridge network expand to 500 locations by the summer of 2023, meaning it could distribute millions more meals than the original 100 locations when our partnership first began. Community fridges continue to offer more than just food - they were developed to bring people together to build skills, improve their mental wellbeing and increase their resilience. By the end of 2022, we’d i dentified 350 fridge locations.
And in September, we announced our significant new partnership with Your Local Pantry, intended to help improve household finances, while bringing people together around food. The partnership will see Your Local Pantry network triple within three years from 75 to 225 pantries across the UK, with the addition of 150 new pantries, expected to see almost 650,000 visits by July 2025. The partnership will focus on communities where additional food solutions will make a significant difference to the cost of living. The first 20 Your Local Pantry locations had been identified, as part of the partnership, by the end of 2022. Each location is run by uniformed staff and volunteers who manage the pantries. Pantries are open to all and work like any other grocery store, in that Your Local Pantry members - who pay a nominal subscription each week - choose the food from the shelves. Members save, on average, £15 per shop and around £1,000 or more a year on shopping bills. Overall, the new locations are forecast to help Your Local Pantry members up and down the UK save an estimated £5m a year when fully operational.
Instead of a traditional Christmas TV commercial, with the potential to cost millions of pounds, our Co-op chose instead to spotlight Your Local Pantry, partnering with TV chef and rapper Big Zuu on a livestream across the country, from one of its locations in Peckham. The event included demonstrations around simple and nutritious recipes for only a few pounds, as well as an opportunity to meet Your Local Pantry volunteers and its members, who are working to help their community grow and thrive.
As part of our access to food mission, at our May Annual General Meeting, we announced Caboodle: a new digital platform built to help reduce food waste between founding partners Co-op and Microsoft, with technology consultancy BJSS and TeamITG. The not-for-profit initiative enables supermarkets, cafés and restaurants to connect with community groups and volunteers and redistribute surplus food. Its ambition is the creation of a single place where food retailers and businesses across the hospitality sector can connect with volunteers and community groups in every city, town and village in the UK, helping to share food when and where it is needed. Initially trialled in Co-op Food stores in Northern Ireland, Milton Keynes and London, the platform went live across 2,500 Co-op Food stores in July and supported a total 14% increase in the amount of surplus food redistributed to local community groups by our stores, year-on-year. More than 6,500 tonnes was shared in 2022, compared to under 5,800 tonnes in 2021. News of Caboodle was publicly supported by WRAP – a climate action non-governmental organisation - which acknowledged its potential to curb food waste and redistribute to those who needed it. It has also been utilised by Co- op’s partner Hubbub.
As well as our ongoing support for Mind, SAMH and Inspire, teams across our Co-op invested time throughout 2022 and actively participated in key mental wellbeing initiatives intended to make a real difference in communities.
On Time to Talk Day, we partnered with Mind, SAMH, Inspire and Rethink Mental Illness on the nation’s biggest conversation around mental health, encouraging nearly two million conversations to take place, both inside and outside of our Co-op. Senior leaders from our Manchester support centre spent time with Paul Farmer, the CEO of Mind, and local organisations to encourage conversations around greater support and open dialogues on mental health between families, friends, others within our communities and our colleagues. Alongside this, more than 1.5 million people have been signposted to information, activity and support for mental wellbeing since 2020. This includes through our online community centre Co-operate (developed to bring people together to make good things happen in communities - coop.co.uk/co-operate) , our Member Pioneers and Funeralcare business.
To further encourage openness and support, we began the year with a new partnership with Cruse Bereavement Support, brought about to help people discuss grief more openly. The initiative sought to empower mutual support across communities, to best help those who might have experienced a bereavement.# Bite-size resources were developed to help signs of grief be identified, understood and normalised, and further signposts to support were made available. Over 13,000 people accessed new bereavement resources on Co-operate in 2022. In addition, our agriculture and fisheries team worked with the Farm Safety Foundations to undertake important training to better understand mental health, in particular the challenges felt in rural communities, and garner new ideas on how they could best support these groups.
• Fair access to opportunities for young people
The impact of the pandemic and the cost of living crisis upon young people will be felt for years to come. Working with external partners has been key, enabling our Co-op to provide sustainable solutions to support those young people whose communities and prospects have been so badly affected. The Peer Action Collective (PAC), which we launched alongside the Youth Endowment Fund and #iwill Fund, is rooted in our Vision of ‘ Co-operating for a Fairer World ’ and co-operative Values. The PAC provides 10-25 year-olds with a voice and the opportunity to make their own communities safer and fairer places. The £5.2m youth-led programme – £1.6m of which is funded by our members through their contribution to the Community Partnerships Fund – supported more than 6,000 young people across England and Wales in 2022, including 4,588 young people being heard as research participants, 1,310 young people taking social action as change makers and 169 people in paid employment as peer researchers. In July, a new partnership between Co-op and UK Youth was developed in support of young people in Scotland and Northern Ireland making a difference through social action in local communities as part of the #iwill movement. The #iwill movement is a collaboration of over 1,000 organisations and 700 young #iwill ambassadors & champions from across the UK, supported by charities UK Youth and Volunteering Matters. The £250,000 investment from Co-op (again, funded by Co-op members through the Co-op Community Partnerships Fund ) has been used to recruit, train and support new #iwill ambassadors across the nations. The 10-25 year-olds will work together to make a difference in their communities through social action.
Our focus on young people continues with our growing network of 29 academies across the North, supporting our ambition to provide fair access to education. In 2022, Co-op Co-operative Group Limited Annual Report and Accounts 2022 35 Academies Trust added two new schools; it welcomed Co-op Academy New Islington in Manchester and Co-op Academy Glebe in Stoke-on-Trent, both Ofsted rated Outstanding primary schools. The Trust was also awarded a new free school by Leeds City Council, and will be officially opening Co-op Academy Brierley in September 2023. T his will be the Trust’s third special school for children with additional needs and its first through school, supporting children from the ages of 4-18. Our network of schools remain an important part of our Co-op and to all within our group, who share our ‘ Co-operating for a Fairer World ’ Vision. In 2022, the Trust worked to ensure that every student (more than 18,500 of them) had access to a healthy nutritious breakfast before school. A newly-established and ongoing partnership between Co-op Food and Kel logg’s s ees cereal sales contribute towards the Trust’s breakfast clubs. All Co -op Academies began to offer a breakfast club, and a free breakfast to ‘Pupil Premium Students’ who are students from low income households or have considerable disadvantages to their peers. In May, our LGBTQ+ Respect colleague network hosted a conference for Academy libraries, in support of greater representation of diversity across books in our schools and, over the summer, all colleagues were invited to donate their favourite non-fiction, fiction books and magazines to be enjoyed by our students. Following its success in 2021, our Co-op relaunched its virtual work experience programme for its Year 9 Academy students, engaging over 2,500 young people, helping them to reduce barriers to the best possible work experience opportunities, while they developed key employability skills through interactive sessions.
Also supporting young people and communities in 2022 was our charity, the Co-op Foundation, which marked the year by launching its new five-year strategy: ‘ Building communities of the future together ’. This strategy was co -created with Foundation colleagues, funded partners and our Co-op. It is led by a vision of future, fair co-operative communities shaped by almost 100 diverse young people, including Co-op colleagues, members and Academy students. See www.coopfoundation.org.uk for more information. The first round of funding from this new strategy is the £1.5m Future Communities Fund. This was launched in November, to deliver unrestricted grants of up to £30,000 a year for five years to help organisations develop diverse young leaders of the future. Grants will be awarded in 2023, led by a ‘Future Communities Collective’ of 10 diverse young people working alongside the Foundation. In addition to developing its new strategy, the Foundation also built partnerships and awarded grants all over the UK in 2022. In June, the Foundation announced a new match-funding partnership with the UK-based Astra Foundation to continue its work tackling youth loneliness. Funding included a £450,000 grant to UK Youth and Youth Focus: North East to help upskill youth workers to better identify and tackle loneliness. This is an example of how the Co-op Foundation can leverage money from other funders to increase its impact and make Co-op member donations go further. Over the summer of 2022, the Foundation also awarded £1.4m of grants from its Carbon Innovation Fund partnership with Co-op Food to help reduce carbon emissions in food and farming; a £250k two-year grant to Refugee Action; and £1.2m of follow-on funding for 37 current #iwill Fund partners to build on their social action projects with young people. Co-operative Group Limited Annual Report and Accounts 2022 36 Co-op Foundation finished the year by putting young people in charge again. It launched year four of its annual Lonely Not Alone campaign to tackle the stigma of youth loneliness and signed the Power of Youth charter, committing to give young people a chance to shape their future.
During the first half of 2022, our Co-op worked closely with the Purpose Coalition throughout H1, to evaluate the impact of our work. This independent body, led by the Right Honourable Justine Greening, prepared a ‘This is Purpose’ report , focused on our Co-op, which was published and presented to the House of Commons in July. The report considered our Co- op, its missions and what more we can do for our communities, as well as the partnerships we can create that will make a difference. Along with many other ideas in many other areas, it also provided brilliant ideas to build on our flourishing programme of activity for greater social mobility, and for the greater education and employment of young people. We continued to work with Justine and her team through 2022, developing our plans to act on her recommendations. In 2022, Cooplevyshare.co.uk – built for employers to come together, create opportunities and support apprenticeships for individuals from under-represented socio-economic groups – exceeded the initial three-year target of £15m we set when it launched in 2021. Since its inception and before the end of the financial year, the service reached 54 donating employers and 138 receiving organisations, detailing potential apprenticeships. 1,397 matched apprentice opportunities have been confirmed over this time, to a value of £14m. And towards the end of the year, we were named one of the UK’s leading employers in the Social Mobility Index, which recognises employer-led social mobility and is developed by the Social Mobility Foundation. In 2022, we were one of just 12 businesses asked to join the Social Mobility Commission ’s Employer Advisory Group, put in place to drive social mobility in the workplace in the UK.
• Beyond the cheque
Underpinning all of our exceptional community achievements continues to be our Member Pioneers – we simply couldn’t have achieved what we have without their hard work in our communities across the UK, connecting members, colleagues and local causes; helping them during a difficult 2022. Our 1,000 Member Pioneers and Member Pioneer Co-ordinators invested over 116,000 hours in our UK communities over the year and engaged with an average of 51,000 people a month, reaching more than seven million through their social media channels. They played a critical role in activating campaigns, initiatives and national partnerships. During 2022, they delivered more than 300 Live Local events, reaching those in our communities and colleagues alike with important messages, ideas and opportunities to participate. Themes ranged from Fairtrade to sustainability, and highlighted activity such as the launch of our soft plastic recycling. For more information, or to get involved, visit www.communityspirit.co.uk or, to find your nearest Member Pioneer Co-ordinator, visit www.coop.co.uk
Our 2022 Co- operate Report includes detail on the progressive actions we’re taking to fulfil our Vision of Co-operating for a Fairer World, including our support of Fairtrade and international communities. To read the report, visit: www.co- operative.coop/ethics/sustainability-reporting
Colleague policies Co-operative Group Limited Annual Report and Accounts 2022 37
Our colleagues have endured those same hardships as our members and communities, and we took the opportunity during 2022 to review and reassess key colleague policies, and their suitability for those dependent upon on them.# Our leaders worked to shift perceptions at Co-op, and fundamentally change our culture when it came to menopause, challenging the stigma that it is a ‘women’s issue’ when it should be considered a workplace issue, requiring the support of affected colleagues’ whole teams. After being one of the first retailers to launch a menopause policy back in 2019, we took the opportunity to refresh the policy in April, which included the introduction of a menopause support guide for all 4,500 managers across Food stores, funeral homes and our Legal Services and Insurance businesses. A related guide was also made available to other employers for free, as part of an attempt to break the taboo of menopause in UK workplaces more widely. Developed in partnership with USDAW and Unite, as well as Co-op colleague networks, the guide is designed to help achieve a greater understanding of the menopause’s impact and the supportive role our managers can play. Our Aspire colleague network - a network of Co-op volunteers that advocate and co-operate for a fairer world for all colleagues who identify as women - also continued to hold regular menopause coffee mornings throughout 2022. The sessions remain a safe space for colleagues to share their experiences and hear from related experts.
Work to address behaviours began in Logistics during 2022, and is expected to extend into Food stores in 2023. Building on the success of our ongoing Safer Colleagues, Safer Communities campaign, Paul Gerrard, who oversees our campaigns and public affairs, was a keynote speaker in Westminster, as part of the USDAW Freedom from Fear Summit in November. Paul made clear our continued support for USDAW’s campaign , reiterating that that there was no excuse for our frontline colleagues to feel anything other than safe and respected.
We also continued to monitor very closely the implementation of the new legal protections enacted by Holyrood and Westminster to ensure the criminal justice system takes every opportunity to ensure those who would abuse or attack shopworkers face the proper sanction for doing so.
In April, we were honoured to receive the Queen’s Award for Enterprise for Sustainable Development, in recognition of our excellence in sustainability. The award, which involves a rigorous application process, recognises the reach and depth of our work reducing the impact of operations, its focus on the UN sustainable development goals and its commitment to continually drive initiatives, which affect its environmental impacts and see real change. Initiatives such as introducing Europe’s most extensive soft plastic in -store recycling scheme, to make all Co- op’s own brand food and drink packaging easily recyclable , were considered.
Our Co-op was also awarded the Relex Responsible Retailer Award as part of the 2022 Retail Week Awards for our commitment to greater sustainability. Again, our soft plastic recycling scheme was acknowledged – data shared in July, to mark the scheme’s first anniversary, showed that around 75% of polled members regularly used the bin in their local store, with 41% saying they used it once a week, 30% a few times a month and 29% more than once a week. Fruit and vegetable bags, bread bags and crisp packets were the items most recycled by members.
And our Food stores continued to find other ways of empowering members and customers to think and act more sustainably:
Our Funeralcare business continued to invest in environmentally friendly initiatives, such as an electric fleet, including trials for both electric hearses and ambulances.
Our Co-op also continued to play a role in key conversations, using its influence to engage and inspire oth ers to be ‘Fairer for our Planet.’ Leaders encouraged all colleagues to participate in Great Big Green Week, as the UK’s biggest celebration of community action to tackle climate change and protect nature. Starting in September, resources were provided to support colleagues in organising related events, such as a plastic-free picnic or a nature trail; writing to their MP or finding local events or groups they could support, including a series of Sustainability Live events hosted by our Member Pioneer network.
And beyond our colleagues, we continued to campaign for UK Government to bring about change and participate in important conversations:
For more information on our energy strategy, see the Co-operate Report 2022. Also, in 2022, total Scope 1 and 2 greenhouse gas emissions continued to decrease by 9.58% in 2022 (location-based emissions in 2021: 320 ktCO ₂ e, 2022: 288 ktCO ₂ e). This is due to using less energy, less fuel, a decrease in emissions from fugitive refrigerant gases and the UK grid electricity mix generating lower carbon emissions. For more data and detailed updates on our Climate Plan, as well as work to reduce our carbon emissions, see our Co-operate Report.
As a large organisation, our Co-op is committed to complying with the UK Government’s mandate to disclose Task Force on Climate-Related Financial Disclosures (TCFD) aligned financial information – we signalled an intention to do just that in our 2021 Annual Report and Accounts and we will do by 2023. During 2022, we evolved our plans and worked to identify the physical and transitional risks and opportunities to our business and supply chains from the changing climate, along with the potential impact of policy, technology and market changes as we move to a lower carbon future. We made progress here but recognise that there is more to do in the next year.
As an ethically responsible business, we are committed to playing our part in addressing the climate emergency. In 2021, we set out our blueprint – a Climate Plan, which sets out our pathway to achieving net zero by 2040, 10 years ahead of international agreements. It details how Co-op will reduce the impact of operations and products across our Food, Funeralcare, Legal Services and Insurance businesses. The Plan sets out targets, endorsed by the Science-Based Targets initiative (SBTi), in line with the carbon reduction that is required to cap global temperature increases and meet the goals of the Paris Agreement.
You can read more about our Climate Plan and related activities in our 2022 Co-operate Report, including:
All environmental and sustainability matters including climate change risks are currently managed within our Co- op’s overall risk management framework and reported through the Risk & Audit Committee to the Board. In 2023, the Board will review this governance structure in the light of TCFD requirements.
Our Co-op has carried out an initial, high level risk and opportunity identification with the assistance of DNV – providers of risk management services across multiple industry sectors. Our technical and sustainability teams continue to have a good understanding of the climate- related risks we face in different parts of our business. However, in the second quarter of 2022, we went through a structured process to test and challenge our thinking as we prepared for our first disclosure. Supported by experts from DNV, we worked with colleagues across the business to map our risks and opportunities and explore possible responses.## Information gathered through an online survey and key stakeholder interviews was analysed and used as the basis for a facilitated workshop, during which participants integrated and built upon initial findings, moving on to identify practical responses to the material issues raised. Risks fall in to two broad categories: Physical and Transitional.
During 2023, we will validate and finalise this initial analysis then carry out a detailed impact assessment to determine the timescale, likelihood and financial effect of each risk, as well as available mitigations. We will carry out scenario analysis, both qualitative and quantitative, to determine our resilience to the effects of varying climate change scenarios.
Climate change is recognised as a principal risk to our Co-op, which is further disclosed on page 65. The way we identify, assess, manage and monitor risk is explained on pages 58 - 60.
Our plan sets out targets, endorsed by the Science-Based Targets initiative (SBTi) across all scopes. Our current targets reach to 2025 – however, recognising the need to decarbonise further and faster, we are now resetting these across all scopes, in the near and long term. This will ensure that they are in line with keeping the global temperature increase to no more than 1.5 degrees Celsius above pre-industrial temperatures. We are expecting these updated targets to be released and validated by the SBTi in late 2023.
Our long-term goal is to reach net zero greenhouse gas emissions from both operations and products by 2040 at the latest. We have also set a target that suppliers that collectively contribute to 50% of our emissions will have set science-based net zero targets aligned to 1.5ºC by 2025.
In 2021, we reported that we had met our target to reduce our operational (Scope 1 and 2) emissions by 50% compared to 2016 reduction, three years early. You can read about how we have reduced our Scope 1 and 2 emissions during 2022 on page 124.
We measure and report our indirect greenhouse gas emissions (Scope 3) every two years. The most recent report was in 2021 (for emissions over the period 2020/21), where we quantified an 8% reduction in Scope 3 emissions since 2016. In the 2023 Co-operate Report, we will publish an updated Scope 3 inventory, covering the period 2021/22.
We align to the Greenhouse Gas Protocol Corporate Standard and the Science Based Targets Initiative Criteria. Our Basis of Reporting is published online here: www.co-operative.coop/sustainability-reporting- our-reporting
In addition, Co-op is taking action on other climate related metrics including water, food waste reduction, healthy and sustainable diets and responsible sourcing. For more information, see our Co-operate Report.
Co-operative Group Limited Annual Report and Accounts 2022 44
We look ahead to 2023 with confidence and optimism for a co-operative and stable trading year resulting in delivery of our Vision, ‘ Co-operating for a Fairer World ’. We will continue to strengthen and evolve our organisation, placing our members, colleagues, co-operation and our Co-op Difference at the heart of everything we do, whilst at the same time carefully investing and continuing our ambition to create a more modern and agile Co-op that is strategically positioned to grow sustainably when the economy and market conditions allow.
Our organisation is now in a much stronger place due to the focused actions we took in 2022 to significantly strengthen our balance sheet, reduce our net debt position, strengthen our cash position, decrease our operating costs and prioritise improvements to inefficient processes and systems. We’ll be mindful of the world around us, and we will continue to support members, colleagues and customers through the cost of living crisis. We have the capability to adapt our businesses at pace, as economic and consumer behaviour demands.
We, along with many others, fully expect the challenging external conditions to continue throughout 2023. High levels of inflation are predicted to continue until at least mid-year, before beginning to fall and a recession, both here in the UK and globally, remains a significant possibility. We are committed to doing all we can to shield members, colleagues and customers from this, and other rising costs, as much as we possibly can. We, along with other organisations, and indeed many households, are facing energy costs that will be as much as double what they have been in previous years. Energy was a core focus point for us in 2022. While the future of energy still looks uncertain, we’ve been working hard to reduce our energy consumption through capital light quick wins, simplifying processes and implementing energy efficiency changes across our businesses, sharing the details with partners across our Nisa business. You can read more information on our energy efficiency and other activities in our Co-operate Report. Despite this we have every reason to expect great things from our Co-op, during 2023 and into the future. We have confidence in all of our businesses. They are market leaders with strong strategies to take them forward, as well as the leadership and plans in place to deliver them. Our 2022 strategic priorities have evolved for 2023 and we will continue to focus tightly on a smaller number of priorities that support the growth of our Co-op and protect our ability to deliver our Vision:
We will continue to build on the progress made during 2022 in enhancing our financial controls and processes, adding rigour and governance to ensure that our financial targets are met, that our Co-op is operating as efficiently as it possibly can and that we’re generating the value we need to invest in our growth plans for our businesses, and re-distribute through delivery of our Vision.
We’ll seek to grow our Co-op cautiously, and in a way that supports the creation of a more modern Co-op for a modern world.
Co-operative Group Limited Annual Report and Accounts 2022 45
Where we choose to invest, we will do it in a capital light and cash generative way, leveraging partnerships and modern routes to market, making the most of the assets and strengths that we have.
Our Food business will remain true to convenience. We’ll maximise the four established routes to market that we have (Retail, Wholesale, Franchise and Online) and also re-open our new store and refits programme in 2023. This will all be while cautiously remaining within the financial and capital parameters we’ve set for ourselves.
Our Funeralcare business will continue to focus on a personal service, further building our propositions and continuing its digital transformation to allow clients access to us in the most convenient way for them.
Legal Services will continue its incredible journey with digital products and services in partnership with some of the UK’s largest financial services providers. And in Insurance, we’ll continue to innovate and make the new products and services we introduced in 2022 work hard, alongside making our products easier to buy through partnerships, such the one we have with Amazon UK.
We’ll do all of this with membership, co-operation and our Co-op Difference firmly in our sights. We’ll be reviewing our membership strategy to attract, reward and retain our members, alongside how we better engage them in our modern Co-op, not only in what we do, but also how they can support and influence what we do. And the time is now right for us to review our Co-op Group strategy and our Vision, to ensure that we’re truly a successful, co-operative business. A business that is adding the most value possible where our members, colleagues and customers need us the most.# Supporting members, colleagues and customers through the cost of living crisis
We are committed to doing all we can to shield members, colleagues and customers from this, and rising costs, as much as we possibly can. We will continue, as in previous years, to align frontline colleague pay to the real living wage. We’ll do all we can to not pass increased prices due to inflation onto our members and customers.
We will continue to operate our business as effectively and efficiently as possible, ensuring cost is ever present in our decision making processes, embedding a culture of cost consciousness that will empower everyone in our Co-op to be more efficient and effective. We will deliver 2023 savings already identified during our work over the last 12 months, stopping any activity that isn’t included in our growth plans, or that doesn’t support our strategic priorities.
Our focus on energy efficiency will continue with investments into technology and equipment to help us reduce our energy consumption in our Food business. And we’ll explore even more energy saving opportunities across Logistics and Funeralcare. And by listening to our colleagues we’ll identify those areas in our businesses that not only cause us, and them, issues operationally, but that also cause us to be less efficient.
During 2023, we’ll be investing £11 m, one of the largest amounts invested in our store technology for over 11 years, to address some of the legacy and obsolete systems, and technology platforms that our colleagues tell us stop them serving our members and customers effectively. This includes printers, wi-fi, payment and bakery terminals, back office PC’s and, in 50% of our stores, replacing self-service checkouts.
2023 will also begin an investment phase for our Funeralcare business as we start the journey to remediate our legacy property estate and refresh our fleet of vehicles over the coming years. And, of course, we’ll achieve all of these aims co-operatively, with a future focused, cost-conscious growth mindset, in the way that only we can.
2023 will be another challenging year for our Co-op. However, the actions taken during 2022 see us well placed to weather the ongoing headwinds of inflation, rising energy and payroll costs and forecasted recession. Nevertheless, it is for these reasons that we realistically plan a lower level of profit this year. However, the underlying strength of our business, passion and determination of our members and colleagues and the compelling nature of our Vision gives us every confidence and optimism for the future. Our Co-op was created to address social and economic unfairness and we are still ideally placed to make things fairer for our members, communities, colleagues and the planet in the future. Together, we’ll win as a modern, decisive Co-op, and deliver our Vision of ‘Co-operating for a Fairer World.’
As noted in our CFO’s Financial Overview on page 16, 2022 has proven to be a particularly challenging year for most businesses, but our Co-op has successfully navigated the turbulent markets and ended the year in a significantly stronger financial position.
Our members and customers have been facing into a sharp and prolonged cost of living crisis, with soaring inflation and spiralling household bills squeezing family budgets to near breaking point. Throughout 2022, there has been downward pressure on consumer spending compounded by significant cost inflation for businesses. This has hit profits, stifled growth and ultimately seen the UK economy bordering on recession.
Despite the challenging backdrop, our Co-op has delivered a creditable set of results with a solid profit performance, strong cashflows and a growing top line. We have grown our sales, successfully maintained margin and managed our cost base to mitigate the significant cost inflation on ourselves, our members and our customers. This was supported by some difficult decisions, including the restructuring of the team at our support centre.
There is, however, no avoiding the impact that inflation is having on the profits of most businesses – for our Co-op, energy costs increased by £48m in 2022, compared to 2021, and salary inflation drove a further £55m of additional cost. Faced with such inflationary pressures, the renewed cost disciplines we have instilled in 2022 have served us well and we successfully delivered our targeted cost savings of £101m during the financial year.
Recognising the difficult time many of our customers and members were experiencing, we sought wherever possible to protect our customers and absorb inflation. Throughout the year, we continued to focus on delivering the proposition and value that our customers need, including £38m of direct reward for our members and their communities. Importantly, we sought to support our colleagues through the winter cost of living crisis with additional one-off support of £12m, and by increasing our colleague discount to 30% on Co-op own brand products from 20 October until April 2023.
This solid financial performance, combined with a focus on balance sheet and cash, delivered a very strong cashflow position and a step-change reduction in our net debt. Part of this action included the sale of our petrol forecourts in October (roughly 5% of our Food store estate) which generated a significant one-off profit and cash proceeds. Furthermore, through continued focus on cost control, management of working capital and our measured approach to capital investment, we strengthened our balance sheet significantly. This means we are well set to ride out the economic storm whilst still being able to invest in our longer-term future through capital light and commercial opportunities.
Underlying operating profit: our main measure of trading performance at £100m (2021: £100m) is in line with the prior year. This is a strong result despite the impact of material inflationary cost increases – rising energy costs and salary inflation, for example, added an additional £103m of costs compared to 2021, which we had to absorb in 2022. Despite the inflationary pressures, underlying profit within our Food business only fell slightly and includes the impact of the disposal of our forecourt estate at the end of October – thereby reducing our 2022 profits by two months of fuel profits, or around £10m, in comparison to 2021. The slight fall in profits in Food has largely been offset by improvements in our Wholesale, Funeralcare and Legal Services businesses and overall we have traded well, held our trading margins and managed our cost base across our portfolio of businesses.
Revenue: total Group sales of £11.5bn are 3% higher than last year. This represents a strong result across our portfolio of businesses in light of the challenging economic trading conditions. Sales in our food business are £134m higher than last year even though the comparative period includes two more months (or around £150m) of sales from our petrol forecourts which we sold in October 2022. Like-for-like sales in our core convenience stores were up 3.2%. Sales in our Wholesale, Funeralcare, Legal Services and Federal businesses are all also up on the prior year.
Operating profit: At £5m, our operating profit in 2022 is £59m lower than 2021. Although our underlying operating profit is comparable to last year, we’ve incurred £59m more of non-underlying charges in 2022 compared to 2021. These charges primarily relate to the impairments we have recorded against some of the assets that we hold to reflect the continued difficult trading conditions we anticipate going forward as well as other non-recurring items.
PBT: At £247m, profit before tax (PBT) is significantly higher than last year (2021: £57m). Although our Operating profit is lower this year (as noted above) we have recorded a gain on the disposal of our petrol forecourts of £319m, which increases our PBT number. This relative increase is partially offset by the one-off gain of £99m that we recognised following the settlement of a long-term liability and the corresponding release of provision.
| £m | ||
|---|---|---|
| 2022 | 2021 | |
| Revenue | 11,480 | 11,151 |
| Operating profit | 5 | 64 |
| Profit before tax (PBT) | 247 | 57 |
| Underlying operating profit | 100 | 100 |
| Underlying PBT | (31) | (32) |
| Underlying EBITDA | 490 | 505 |
| Net debt | (333) | (920) |
| Member reward | 38 | 40 |
Underlying PBT: at a loss of £31m, underlying PBT is comparable to last year and consistent with our underlying operating profit performance. Underlying PBT includes underlying interest charges on our bank borrowings and leases, which has remained consistent year-on-year at £131m (2021: £132m).
Underlying EBITDA: again, this is broadly in-line with the prior year at £490m (2021:£505m) and consistent with our comparable underlying trading performance. Underlying EBITDA excludes interest, depreciation and amortisation charges.
Net debt: our net debt improved significantly to £333m (2021: £920m) - a decrease of £587m (2021: net debt increased by £370m). Net debt saw significant reduction in H1, and was anticipated to do the same in H2, before net proceeds of £408m from the sale of our petrol forecourt estate and an additional £72m following the judgement on the IBM legal case. We also generated cash from continuing operations of £383m (2021: £165m) driven by a solid trading performance and careful working capital management. Furthermore, we also transferred lease liabilities of £171m as part of the forecourt disposal.# Co-operative Group Limited Annual Report and Accounts 2022
• Member reward: our profits are reported after deducting the amount our members have earned through the 2% community and member rewards, which totalled £38m in the year (2021: £40m). Co-op colleague members also received £12m of one-off winter cost of living support, as well as seeing colleague discount on own brand products increased to 30% between 20 October and April.
We took the strategic decision to sell our entire petrol forecourt estate to Asda at the end of October, so our results for 2022 don’t include the results from those 129 sites (around 5% of our estate) for the last two months of the year. The deal completed on 30 October 2022 and the sale is therefore not impacted by the ongoing CMA review.
Total Food sales of £7,805m are 1.7% higher than the prior year (2021: £7,671m) representing an increase of £134m. This is a solid performance in light of the challenging trading environment and the loss of two months of sales from the forecourt sites (around £150m sales impact). The comparative period also includes the impact of the third national lockdown at the start of 2021, which buoyed our sales.
Throughout 2022, the squeeze on household budgets impacted customer choices, dampening volumes and transaction frequency, although this was offset by food price inflation. Like-for-like sales in our core convenience estate were up 3.2% and we maintained our market share. This demonstrates the resilience of our core convenience business and how our customer offer continues to resonate with our members.
At £139m (2021: £156m), underlying profit is down slightly on the prior year, driven by the higher energy and salary costs the business had to absorb. The comparator also includes two months of extra profit from the forecourt sites (around £15m profit impact). Excluding the impacts of the forecourt sale and resulting two month profit reduction versus the prior year, our underlying profitability is broadly flat in 2022 compared to 2021, which is a commendable performance given the difficult trading environment and the level of cost inflation we have had to absorb.
In line with many businesses, we have seen sharp rises in the costs we incur to serve our customers - with energy costs and salary inflation adding an additional £103m of cost which we had to absorb in 2022, in comparison to 2021. Where possible, we’ve tried to shield our customers from the impact of this cost inflation, and we’ve also worked hard to manage our own cost base. This has allowed us to maintain our trading margin and return a credible top-line sales and underlying profit result.
| Sales (£m) | 2022 | 2021 |
|---|---|---|
| Food | 7,805 | 7,671 |
| Wholesale | 1,439 | 1,386 |
| Funeralcare | 271 | 264 |
| Insurance | 24 | 34 |
| Legal Services | 46 | 39 |
| Other | - | 1 |
| Federal | 1,895 | 1,756 |
| Total Group | 11,480 | 11,151 |
| Underlying profit (£m) | 2022 | 2021 |
|---|---|---|
| Food | 139 | 156 |
| Wholesale | 22 | 7 |
| Funeralcare | 16 | 12 |
| Insurance | 8 | 15 |
| Legal Services | 8 | 5 |
| Other | - | (1) |
| Federal | (92) | (94) |
| Total Group | 100 | 100 |
Sales in our Wholesale business are 3.8% higher than last year at £1,439m (2021: £1,386m) with growth both through our Nisa partners and our franchise stores. This represents a solid performance in light of significant inflationary pressures and the tough economic headwinds impacting consumers and retailers alike. Although our retail like-for-like performance in Nisa was down 2.5%, new member recruitment remained strong.
Profitability has continued its year-on-year improvement with our Nisa business registering an increase of £14m to £22m (2021: £8m) as we continued to see the benefits and efficiencies of the collaboration between Co-op and Nisa, as well as the savings from an overhead cost review and restructure carried out during the year. Our results also reflect £4m of benefit from non-recurring items. This was part of the work in 2022 to support Nisa being in a position where it can reinvest in lower prices for our customers and their shoppers.
Funeral volumes were up 3.5% to around 94,000 with volumes increasing in the second half in-line with the wider death rate, after a dip in death rate in the first quarter of 2022. This - together with a growth in our market share (end of 2022: 14.67%, end of 2021: 13.92%) offset by a continuation of clients choosing our simpler and unattended funeral options, which affects our average sales price - contributed to an increase in sales of 2.7% to £271m. Profitability is up year-on-year due to the revenue increase as well as greater efficiency in our operations, offset by inflationary pressures as well as additional costs as a result of the regulation.
Volumes of funeral plans sold were lower than prior years at just below 17,000 (representing a fall of 63%) as a result of our decision to exit some third-party distribution channels (due to regulation) and client uncertainty in the run-up to industry regulation with the FCA.
Our Insurance business recorded sales of £24m (2021: £34m) and profit of £8m (2021: £15m). This reduction is in-line with our expectations as we establish our new distribution model and work through the continued run-off of the historic backbook of policies, following the sale of our insurance business and Home and Motor insurance distribution agreement that we entered into with Markerstudy. All the insurance markets in which we operate remained highly competitive with inflationary cost rises for claims squeezing our margins. Customer behaviour was also impacted by the regulatory pricing changes implemented at the start of 2022, with fewer customers shopping around and switching suppliers. We continue to see good traction outside of our core policies of Home and Motor (such as Pet and Life insurance) and we’ll continue to develop our product and customer offering and extend our reach as illustrated by our newly launched partnership with Amazon UK.
The strong growth we have seen in recent years has continued with sales up £7m to £46m (2021: £39m) and profits up to £8m (2021: £5m). This further validates our strategy of developing our digital services offering and blending it with expert advice - driving consumer access in what remains a fragmented market where we can lead.
Costs from our central support functions are broadly in-line with last year at £92m (2021: £94m) as we’ve worked really hard to manage inflationary cost pressures through disciplined cost control management. We’ll continue to strive to drive down our cost base and improve the efficiency of our support functions and operations while reaping the benefit of the re- organisational changes we’ve implemented to our structures and ways of working.
Every year we review our portfolio of trading sites for potential impairment of assets (where the value of the asset is no longer supported by future forecasts of cashflows and profitability, and so we reduce the value of the assets we hold through a charge to our profits). The impairment charge of £105m (2021: £30m) comprises £60m against right-of-use assets (leases), £30m of fixtures and fittings and £15m of intangibles, where forecasts of future cashflows do not support the value of those assets. The charge is predominantly in our Food business and often relates to loss-making sites. It is larger in 2022 due to the prudent approach we have taken when assessing future profitability, in light of the challenging cost environment we expect to see in the near term.
As noted at the half-year, we have also partially impaired the value of the leased asset for our central support centre by £20m reflecting the change in utilisation we’ve seen as we transition to a more flexible and hybrid working model. Furthermore, we have reduced the carrying value of certain ancillary elements of the intangible asset we hold against our logistics and supply chain infrastructure by £15m following some minor changes to the way that we intend to use the assets going forward.
Other disposals and closures – the £64m reflects the net gain we have made on other individual and non-core properties that we have sold during the year.
| £m | ||
|---|---|---|
| 2022 | 2021 | |
| Impairments of assets | (105) | (30) |
| Other disposals and closures | 64 | - |
| Investment properties | (15) | 9 |
| Total | (56) | (21) |
We revalue these properties each year to reflect their latest fair value. The loss in 2022 of £15m (2021: £9m gain) reflects a downward market valuation on the properties we hold (or on those which we sold during the year).
We’ve recorded a significant one-off charge of £26m, reflecting redundancy costs we’ve incurred. These follow some changes we have made to colleague structures in our support centre, to ensure that we are set up in the best way to efficiently support our customer facing colleagues.
Due to the unprecedented pressures our colleagues are facing from the cost of living crisis, we have also directly helped those member colleagues who need it the most with one-off support totalling £12m added to their membership cards.
One-off items included a £17m charge reflecting the costs of organisational changes we made to colleague structures in our Food stores as part of the Fit for Future programme.
We sold our entire petrol forecourt estate to Asda at the end of October for net cash proceeds of £408m (and transferred £171m of lease liabilities) which generated an accounting profit of £319m. Further details of the sale are given in Note 35 to the financial statements (see page 210).# Co-operative Group Limited Annual Report and Accounts 2022
| £m | 2022 | 2021 |
|---|---|---|
| Organisational changes / redundancies (central) | (26) | - |
| Colleague support | (12) | - |
| Other one-off items (net) | (1) | 2 |
| Fit for future (Food) | - | (17) |
| Total | (39) | (15) |
| £m | 2022 | 2021 | |
|---|---|---|---|
| Net underlying bank/loan interest | (55) | (56) | |
| Net underlying lease interest | (76) | (76) | |
| Total net underlying interest | (131) | (132) | |
| Net pension finance income | 43 | 30 | |
| Net finance cost (funerals) | (25) | (4) | |
| Movement on FX contacts | 20 | 5 | |
| Movement on quoted debt/swaps | 17 | - | |
| Non-underlying finance interest | (1) | (5) | |
| Group Relief Creditor gain | - | 99 | |
| Total net non-underlying interest | 54 | 125 |
| £m | 2022 | 2021 | |
|---|---|---|---|
| Bank debt | (780) | (976) | |
| Lease debt | (1,306) | (1,516) | |
| Total debt | (2,086) | (2,492) | |
| Group cash (net) | 447 | 56 | |
| Net debt (excluding leases) | (333) | (920) | |
| Net debt (including leases) | (1,639) | (2,436) |
Excluding lease liabilities, net debt reduced by £587m from the start of the FY 2022 to £333m at year end (2021: £920m). This is a significant achievement and is a consequence of the positive action we had taken to reduce our indebtedness and to strengthen our balance sheet. Our cash position improved year-on-year with net cash from continuing operations of £383m in 2022 (2021: £165m), generated by our robust trading performance, careful working capital management and disciplined cost control as we strived to mitigate the impact of cost inflation. Our measured approach to capital investment, for example, saw us invest less than in 2021 at £147m (2021: £325m) and tighter management of stock balances improved stock levels by £55m. Our cash and net debt position was further improved following the sale of our petrol forecourt estate to Asda at the end of October, which generated cash proceeds of £408m and by the receipt of £72m in the first half of 2022, following the appeal judgement on the IBM claim. Our strengthened balance sheet position will allow us to continue to invest in our business in line with our strategic priorities and to capitalise on commercial growth opportunities as they arise.
As has been the case in recent years, we won’t be paying corporation tax in respect of 2022 because we have brought forward tax losses and capital allowances which can be used to offset any liability. In 2022, we paid £206m (2021: £170m) to the Government in respect of VAT, business rates, stamp duty land taxes and employers’ national insurance. The year-on-year increase mainly reflecting reduced business rates in the prior year as the Government sought to support businesses through the later stages of the pandemic. The total tax charge reported in the income statement for continuing operations of £4m is made up of a £13m current tax charge and a £17m deferred tax credit. The current year deferred tax credit mainly relates to movements on our pension assets. There is also a £44m deferred tax credit impact to reserves arising from the change in tax rate at 19% to 25%. See Notes 8 and 15 for more detail on Tax. We retained the Fair Tax Mark accreditation in 2022 showing that we put our Purpose, Co-operative Values and Principles into action in the way we do business. Our tax policy can be found here: www.co-operative.coop/ethics/tax-policy
The overall net assets of the Group have decreased by £0.2bn from the start of 2022. The main movements include a decrease in the net pension surplus of £0.7bn offset by an improvement in our cash position of £0.4bn. Our lease liabilities have reduced by £0.3bn following the sale of our petrol forecourts and our right-of-use assets and property plant and equipment reduced by a combined £0.5bn following the disposal. Furthermore, as outlined above, our net deferred tax liability has also decreased significantly, falling by £158m from £314m (2021) to £156m primarily due to the decrease in our pension net surplus and the change to the tax rate. The actuarial surplus on our largest pensions scheme, PACE, decreased by £0.6bn with asset values falling by £3.5bn whilst liabilities decreased by £2.9bn. Against a backdrop of market uncertainty, rising inflation and interest rates - investment returns and asset values fell significantly in 2022. However, scheme liabilities also reduced markedly following a significant increase in the discount rate, which is used to calculate the present value of the scheme obligations. This is due to rising AA corporate bond yields, as the market reflected ongoing economic uncertainty, and demonstrates that the pension schemes are well hedged and able to withstand material changes in market conditions. Despite the surplus reducing, the accounting funding level has increased, from 125% to 129%. The fall in asset values in absolute terms is higher than the fall in liabilities as PACE started the year with a net asset surplus of £2.1bn which has reduced to £1.5bn at the end of the year (the relative percentage fall in both assets and liabilities is comparable). Property, plant and equipment has decreased by £281m, which mainly reflects the net impact of £104m of additions, net disposals of £111m, depreciation of £244m and impairment of £30m. The value of the funeral plan investments that the Group held in 2022 is consistent with the prior year at £1,369m (2021: £1,372m). This reflects net movements from an increase of £76m for new plans, a reduction of £108m from redeemed or cancelled plans and favourable market returns in relation to the value of those investments held of £29m. Contract liabilities relating to funeral plans have decreased by £55m in the year, with amounts recognised as revenue during the year (which reduces the liability) outweighing new plans and the deferred revenue (which increases the liability) from the interest we accrue on plan liabilities.
The tough trading environment we are facing is unlikely to change in the short term. The squeeze on household budgets and ongoing high levels of inflation will continue to influence customer behaviour and maintain pressure on sales, margins and profitability. Indeed the cost pressures in 2023 are likely to be greater than those felt in 2022, as the full year impact of 2022 events take effect. As we have done this year, we will have to continue to work hard to mitigate those inflationary cost rises wherever possible and navigate our businesses through another year of challenging trading conditions. We have proven in 2022 that by taking early and decisive action, we can deliver a strong performance in difficult markets. This approach, together with the significantly stronger financial position we ended 2022 in, puts us in a strong position to deliver a successful 2023 for our customers and members. As noted above, our net debt reduced considerably in 2022 and we significantly deleveraged our balance sheet. Subsequently, in early 2023, we have taken steps to reduce the level of principal debt that we hold and the Group has bought back £100m of the £300m Sustainability Bond from bond holders. Furthermore, the Group has also amended and extended its existing rolling credit facility until March 2026, to further secure our medium-term funding position and available facilities. Further details are given in the financial statements – see Note 34 (Events after the reporting period).
Being a profitable business with financial stability is essential in helping our Co-op meet its strategic objectives. It’s important to get the right balance between the returns to members and reinvesting in our Co-op for future growth. Further detail on why we think these metrics are useful and how they relate to the statutory measures in our financial statements is noted in the Jargon Buster (see page 243). More information on our financial performance can be found on page 47.# KPI
| KPI | 2022 | 2021 |
|---|---|---|
| Underlying (loss) / profit before tax | ||
| Underlying operating (loss) / profit | (£31m) | (£32m) |
| Underlying operating profit | £100m | £100m |
| Underlying EBITDA | £490m | £505m |
| Net debt | £1,649m | £2,436m |
| Net debt (excluding leases) | £343m | £920m |
| Total revenue | £11.5bn | £11.2bn |
| Operating profit | £5m | £64m |
| Profit before tax (PBT)* | £247m | £57m |
Our colleagues all share responsibility for identifying and responding to risk and making decisions that fit with our Co-operative Values and Principles. Managing our risks well means we continue to create value for our members and the communities that we serve. Our risk management framework gives colleagues a clear way to identify and manage risks while keeping us within our risk appetite.
We use a four-step approach to help our leaders and colleagues recognise and manage risk within our risk appetite. This is supported by our risk management processes and tools.
Read more about Our principal risks and uncertainties on pages 61 – 65.
Our Board reviews our position against risk appetite, the principal risks to our business and monitors management’s action plans. In 2022, the Risk and Audit Committee (RAC), our Operating Board and the Business Risk and Assurance Committee (BRAC) met regularly to look at the risks affecting our Co-op and have scrutinised the principal risks and the activity undertaken by management to mitigate these. The BRAC considers both our principal risks and any emerging risks that may affect the achievement of our strategy. As part of our annual planning exercise, we reflect any changes to our strategy in our risk profile. This includes:
Members of the senior management team are individually responsible for managing the principal risks and mitigating those risks with the support of the appropriate senior leaders. Nominated leaders from the Operating Board and senior leaders drawn from each business unit and key support function form the Business Risk and Assurance Committee (BRAC). This committee has responsibility for monitoring the delivery of plans, assessing emerging risks and, when required, challenging action taken to keep us within risk appetite.
Read more about Our principal risks and uncertainties on pages 61 - 65.
In setting our strategy and medium-term business goals, we consider the degree of risk we are willing to accept to achieve those goals. We refer to this as our ‘risk appetite’. The level of risk we’re willing to accept will vary depending on the type of risk. Our risk appetite is set by the Board and reviewed periodically or when there are significant changes affecting our business. Our risk appetite statements are used as the basis for reporting on both qualitative and quantitative criteria, which help us assess our position against our risk appetite. The Operating Board and senior leaders put into practice monitoring processes to make business decisions, ensuring that we operate within our risk appetite, taking corrective action where needed. We regularly report to the Business Risk and Assurance and Risk and Audit Committees on our position compared to our agreed risk appetite. We make assessments against the following categories of risk:
Our principal risks are approved by our Board and detail the risk exposures that pose the greatest potential threat to our Co-op. Our principal risks are set out in the table below. In addition to our principal risks, there may be risks that are not known to us or some we may consider not to pose a material threat to our Co-op.
Over the course of 2022 and into 2023, changes in the macro-economic environment that we operate in has created uncertainty and has worsened due to the war in Ukraine. The impacts of this span several of our principal risks. The principal risks most impacted are:
The various businesses within our Co-op are each affected in different ways by changes in regulation. We continuously monitor planned changes to regulation and adapt to meet new requirements. The Department for Business, Energy and Industrial Strategy (BEIS) has published the Government's response to the white paper: ‘Restoring trust in audit and corporate governance’. The proposals will affect how we assess our controls and the basis for that assessment. We have a programme of work in place to prepare for the expected changes and their subsequent implementation, which will ensure we comply with the requirements that are set out.
In our accounting and reporting, we’ve adopted IFRS17 – Insurance Contracts from January 2023, which will apply to all pre-paid funeral plans. In our Food business we are continuing our work to respond to changing regulations such as the deposit return scheme in Scotland, which will come into force from August 2023.
Co-op Funeral Plans Limited was approved to sell pre-paid funeral plans by the Financial Conduct Authority on 29 July 2022. Prior to this, we reviewed our structures, processes and culture to comply with the newly introduced regulatory requirements for the industry. Looking ahead, the Financial Conduct Authority intends to set out new rules on consumer duty, which will also apply to the financial products and services we sell through our business, and come into effect from the end of July 2023. They are anticipated to have the greatest impact on the areas of consumer understanding and consumer support.
Risk Category: Strategic and Business
2022 Risk Trend: Stable
Risk description: We will make changes to the way we operate through our Three-Year Plan. If our plans are not delivered in an effective way, we will not be able to see the benefits of our change programmes.
| Reason for the risk | How we manage it # Co-operative Group Limited Annual Report and Accounts 2022
Risk Category: Operational
2022 Risk Trend: Stable
Risk description: We hold data on our members, colleagues, customers and partners. We are reliant on technology to deliver our business operations so theft of data or a cyber attack could significantly disrupt our operations.
| Reason for the risk | What we do | What has changed | What we plan to do |
|---|---|---|---|
| - Custody of valuable data - Reliance on technology - Sophisticated and diverse cyber threat landscape - Data privacy and data protection regulations - Colleague, member and customer confidence - Processing data through third parties | - Protect information owned or managed by our Co-op - Protection of services that our Co-op delivers to our members and customers - Provide 24/7 security operations capability with embedded information security controls - 24-hour threat and security event monitoring and response capability - Patch management and penetration testing - Supplier security due diligence and assurance, and regular testing for security weaknesses - Share best practice and foster a strong information security culture | - Improved remote working experience with Windows 10 and Office 365 - Improved system security controls through Microsoft security toolsets - Improved protection from external cyber threats - Enhanced end user computer protection capabilities - Matured our Security Scorecard technology to monitor third party security posture - Increased boundary controls to reduce external threats - Increased our Public Key Infrastructure (PKI) capability - Further matured our Identity solutions - External maturity assessment performed to quantity our risk appetite position | - Extend cloud security further with additional controls over cloud application security - Improve our data loss prevention controls through a better Information Protection & Governance programme of work - Continue to mature our Identity & Access Management controls - Refresh our intruder prevention capability - Improve our boundary through enhanced firewall strategy |
Risk Category: Operational
2022 Risk Trend: Increased
Risk description: Our ability to attract and retain colleagues with relevant skills and experience while fostering a diverse and fairer workplace is important to achieving a strong, competitive Co-op. If we do not continue to recruit talent and invest in our colleagues, then it may impact our operations and our ability to deliver on our strategic plans.
| Reason for the risk | What we do | What has changed | What we plan to do |
|---|---|---|---|
| - Ineffective selection and assessment processes - Talent attraction - Need for greater diversity - Increased demand for talent and reduced supply | - Pre-employment screening, culture fit assessment and induction for new hires - Ongoing training for all leaders and managers, including diversity and inclusion leadership behavioural training - Colleague performance review, engagement and recognition - Talent management review - Pay and reward packages are reviewed regularly to ensure they remain competitive and fair - Operate a hybrid working policy which gives more choice over how, when and where our colleagues work best to balance the bus iness’ and colleagues’ needs - Launch of a wellbeing hub with access to tools and resources to support and encourage a healthy and happy work life balance | - Advancing Diverse Talent Programme - Revised salary management and benchmarking - External context remains challenging with labour shortages compounded by high inflation and a cost of living crisis | - Embed our leadership and capabilities framework - Review our future talent strategy and invest in our frontline colleagues - Maintain an inclusive culture and continue to develop robust indicators to measure inclusion, as we increase awareness and insight among leaders - Inclusive hiring training for all hiring managers - Focus on improvements to colleague experience to reduce colleague turnover |
Risk Category: Operational
2022 Risk Trend: Stable
Risk description: We hold personal information of our members, colleagues and customers. We need to make sure we protect and manage this responsibly.
| Reason for the risk | What we do | What has changed | What we plan to do |
|---|---|---|---|
| - Member, colleague and customer confidence - Data privacy and data protection regulations - Information processed on our behalf by third parties | - Dedicated data protection, data management and information security teams provide challenge, guidance and oversight - Role specific training and awareness to manage data protection risks and promote ethical data usage - Data protection impact assessments for new/changes to existing systems, processes or business activities - Strategic relationship with Government bodies and third parties | - Increased accountability through enriched records of data processing activity - Further improvements to our data governance, reporting, monitoring and oversight - Co-op-wide repeatable assurance plan in place - Embedded third party supplier data protection risk management - Responded to Government consultation on proposed UK data reforms | - Further embed assurance activity over key data protection controls - Evaluate materiality and practical implications to our Co-op of key proposed changes to data protection related regulation and standards - Enhance suite of reporting to include trend analysis, risk metrics and emerging risks - Drive increased ownership and accountability for personal data to ensure an appropriate level of data protection risk and compliance |
Risk Category: Operational
2022 Risk Trend: Stable
Risk description: Faced with a rise in violent and abusive crime and busy retail environments, we need processes in place to protect our colleagues, members, customers and visitors to our premises.
| Reason for the risk | What we do | What has changed | What we plan to do |
|---|---|---|---|
| - Keeping colleagues, members, customers and visitors to our sites safe - UK health & safety legislation - Complexity of our business | - Co-op Health and Safety Governance Framework and Financial Crime & Security Frameworks in place - Co-op Minimum Safety Standards - Oversight by second line safety and security teams - Assurance of safety and security data and compliance with standards across Co-op - Embedded Co-op Minimum Safety Standards and Pan Co-op Assurance Activity on key areas including Covid-19 controls | - Wider focus on occupational health and wellbeing - System and relationship enhancements to provide better intelligence sharing with police forces and other stakeholders - Working with partners to enhance security of our premises and people - Established ways of working with communities to better identify prolific offenders and respond | - Ongoing review to ensure we meet our safety standards - Further safety and crime data enhancements to develop current system intelligence - Work with colleagues on wellbeing initiatives across Co-op - Build on external crime and safety partnerships - Continue the ‘Safer Colleagues, Safer Communities’ campaign - Ensure that security initiatives are in place across our Co-op |
Risk Category: Operational
2022 Risk Trend: Increased
Risk description: If we are unable to prevent, adapt or respond to a major failure or external event to a key part of our business or supply chain, it could significantly affect the availability and quality of products and services delivered to our members, colleagues, customers and partners.
| Reason for the risk | What we do | What has changed | What we plan to do |
|---|---|---|---|
| - Unpredictable external events like severe weather, pandemics and significant geo-political events - Efficiency of logistics network process, infrastructure and resource capacity - Post-exit from the single market and customs union, structural changes to the economy, trade deals and national infrastructure - Supplier capacity and preparedness for cross border processes - Variability in customer and network demand leading to supply pressures and service instability | - Established business disruption planning and testing, including incident management processes - Regular disaster recovery testing and review of IT service levels to ensure resilience to external sources of disruption - Regular review of pay rates for our driver and warehouse colleagues - Engagement with industry working groups, Government and information exchanges to support joint responses with key stakeholders - Maintain post-exit from the single market and customs union governance and oversight during the standstill of the Northern Ireland protocol, ready to respond to changes | - We expanded our network capacity to support our Food business with a new depot in Biggleswade - Worked closely with our suppliers and partners following the Russian invasion of Ukraine, mitigating impacts with shortages of certain raw materials and disrupted energy supplies - Building on successful delivery of our multi-year Retail | # Business Transformation programme, with rollout of SAP to our franchise operations - ‘Best Ways’ programme has delivered consistent standards across our Funeralcare business - Delivery of next waves of Funeralcare’s core system transformation programme to support greater resilience Ongoing strategic review of our network to meet future demands - Focus on retention and attraction in our supply chain and logistics operations |
Risk Category: Regulatory Compliance
2022 Risk Trend: Stable
Risk description: Our Co-op is subject to laws and regulations across its businesses. Failure to respond to changes in regulations or stay compliant could affect profitability, our reputation (through fines and sanctions from our regulators) and our licence to operate.
| Reason for the risk | What we do | What has changed | What we plan to do |
|---|---|---|---|
| - New and updated laws and regulations - Our businesses provide financial and legal products and services regulated by the Financial Conduct Authority and the Solicitors Regulation Authority - Codes and regulations that apply to our Food business including the Groceries Supply Code of Practice (GSCOP), product safety regulations etc. | - Continued horizon scanning for emerging changes on the regulatory landscape, feeding into consultations where applicable - Colleagues with expertise in financial services (including FCA approved senior managers) - Regulatory compliant controls and procedures for financial and legal product and services businesses - Processes and charter in place to engage with suppliers and remain compliant with GSCOP - Established risk and compliance teams in our regulated businesses - Mandatory regulatory/legislative training for relevant colleagues - Regular compliance monitoring and review undertaken at senior governance committees - Implemented operational processes and controls to deliver against new High Fat Sugar & Salt regulations for England across applicable Food stores | - Competition and Markets Authority introduced new legal obligations for funeral directors following its market investigation into the sector - FCA regulation of funeral plans commenced on 29 July 2022 - Imports from the EU and exports to Northern Ireland, remain subject to current standstill arrangements | - Enhance cross functional review and monitoring of the regulatory landscape to track compliance to these and delivery plans - Ensure readiness for the Scottish deposit return scheme legislation and preparedness for other key regulatory changes - Strengthen compliance framework in response to increasing regulatory requirements for our businesses - Maintain compliance with the new funeral plan regulatory regime - Comply with the new rules planned by the Financial Conduct Authority on consumer duty |
Risk Category: Finance and Treasury
2022 Risk Trend: Stable
Risk description: The measurement of our pre-paid funeral plan obligations is sensitive to changes in several factors. Adverse movements could result in lower than expected funds being available and the business receiving a lower amount for each funeral, or result in individual contracts becoming onerous.
| Reason for the risk | What we do | What has changed | What we plan to do |
|---|---|---|---|
| - Changes in the cost of providing a funeral or expected inflation on funeral costs - Underperformance of assets held to meet funeral requirements - Changes in long-term interest rates | - Most funds are invested in whole of life insurance policies with guaranteed minimum returns - Regular stress testing, actuarial modelling and monitoring of risk positions versus risk appetite - Annual assessment of key assumptions and annual actuarial valuation by external actuaries - Monitoring and oversight by a senior committee of specialists, business leaders and advisers - Monitoring of Financial Conduct Authority (FCA) reporting requirements (Core Capital, Liquidity and General Solvency/Capital Adequacy) | - Over the short term, inflationary pressures may cause the future cost of fulfilling a funeral to grow at a rate that is higher than the assets we hold. Covering this cost will weaken our actuarial funding position. We do not expect high levels of inflation to last beyond the short term and we anticipate the funding position to improve thereafter - Throughout 2022, the return expected on Government bonds and therefore our wider asset portfolio increased as a result of political and market changes, which results in higher asset return expectations in the future vs our 2021 view - Our funeral plans business was authorised by the Financial Conduct Authority in July 2022 - The introduction of a new accounting standard (IFRS17) will affect the Core Capital metric and will be monitored closely | - Regular review and improvement of the methodology and assumptions used in our actuarial models - Ongoing monitoring of the required levels of funding and FCA metrics |
Risk Category: Strategic and Business
2022 Risk Trend: Increased
Risk description: The way we choose to run our business operations and the products and services we provide has both social and environmental impacts, affecting the future of our planet. Running our business in a sustainable manner is essential to Co-op’s commercial success, to being climate resilient and to transition to a greener and fairer economy.
| Reason for the risk | What we do | What has changed | What we plan to do |
|---|---|---|---|
| - Changing regulations and UK Government targets / policies - UK commitment to the 2015 Paris Agreement and to be net zero by 2050 - Increasingly competitive environment on sustainability as organisations move from aspiration to implementation to meet agreed targets - Climate change and sustainability impacts on food sources; materials we use in our business; livelihoods and economic growth - Government plans for a transition to a greener and fairer economy - Living up to Co-operative Values and Principles - Increased awareness and changing attitudes of members, customers, suppliers and partners | - Signatory to: - The WWF Retailer Commitment to Nature (the Basket) to halve the environmental impact of UK shopping baskets by 2030 - Courtauld Commitment 2030 to reduce food waste and cut carbon - British Retail Consortium Climate Roadmap - Science-based targets to reduce direct and indirect greenhouse gas (GHG) emissions - Meet our commitments and targets across a broad range of material issues: plastics and packaging; biodiversity and responsible sourcing; human rights; Fairtrade and ethical trade - Produce our annual Co-operate report - Have a clear plan to reach net zero by 2040, ahead of the Government’s target, supported by sustainability strategies for our core businesses | - Changes in the broader economic and geo-political environment, along with increasing environmental regulation and associated costs, mean that the resources and investment required to meet our commitment to being net zero by 2040 (ahead of the Government’s target of 2050) are more challenging than originally anticipated - Launched our Water Security for People and Planet report - Alongside other members of the WWF Retailer Commitment for Nature, we asked suppliers to take action to set ambitious science based GHG reduction targets and report on progress - As members of the IGD workstream working on the development of a harmonised environment label, we supported a virtual reality trial of the label over the summer - We also see increased public scrutiny by NGOs of business action on sustainability and calls to support joint advocacy asks of Government | - Continue to strengthen our pan-Co-op governance and future reporting to drive our sustainability plan, while leveraging synergies across businesses and ensuring we have sufficient resource within our Co-op to deliver on our public commitments - Continue implementing carbon reduction strategies to deliver GHG reductions and set new science-based GHG reduction targets aligned to 1.5 degrees to 2030, in line with industry best practice - Establish a new supplier engagement programme to set clear direction on the actions needed to support our sustainability objectives; progress against these and challenges that we need to work on. Embed resulting actions in joint business plans with key suppliers - Changing policy and legislative landscapes will be factored into our sustainability strategy and plans |
Chair
Appointed as Independent Chair in February 2015.
Committee membership
• Nominations Committee (Chair).
Skills and experience
Allan has held many high-profile roles, including Chief Executive of Asda from 1996 to 2000, Non-Executive Chairman of Royal Mail from 2002 to 2009 and Chair of Canal and River Trust from 2014 to 2022. Allan is currently the Chairman of Northern Bloc Ice Cream, C&A AG, Simba Sleep Limited, Em TopCo Limited, The AllBright Group Limited, PizzaExpress and BrewDog PLC. Allan is also a Non-Executive Director of Going Plural Limited and BrewDog Employee Benefit Trust Limited.
Chief Executive Officer
Appointed as CEO in August 2022 (Interim CEO from March 2022).
Skills and experience
Shirine joined the Co-op Executive and Board in August 2019, originally as our Chief Financial Officer and Chief Executive Officer of Life Services. Shirine is a Non-Executive Director of Persimmon Public Limited Company. Before joining us, Shirine was Chief Operating Officer for the Lloyd’s insurance market, which comprised of more than 50 leading insurance companies operating with over 200 Lloyd’s brokers. Her remit included global operations, business transformation, data, information technology and corporate real estate. She also led the modernisation programme for the wider London insurance industry.# Co-operative Group Limited Annual Report and Accounts 2022
Member Nominated Director
Elected as a Member Nominated Director in May 2016. Last re-elected in 2022.
Committee membership
* Remuneration Committee.
* Nominations Committee.
Skills and experience
Shirine has extensive experience at Board level, holding a variety of senior executive and non- executive leadership roles in the commercial sector, across a wide variety of companies, cultures and countries. Shirine is currently the Chair of Court for the University of the West of Scotland and Anpario PLC. She also sits on the Board of Eurocell PLC, Ballater (RD) Limited, Thrive Ballater Limited and of the Universities and Colleges Employers’ Association (UCEA). Prior to Shirine’s election to our Co-op, she was Chief Executive of Cedo Limited and First Milk Limited.
In addition to holding senior positions at IBM, McDonald’s and insurer Catlin Group, Shirine has worked in a number of regulated sectors in the UK and overseas including retail, IT, pharmaceuticals and consumer goods. She was also a Non-Executive Director of the Post Office. Shirine holds an MBA from Ohio State University and is a US Certified Public Accountant.
Member Nominated Director
Elected as a Member Nominated Director in May 2021.
Committee membership
* Nominations Committee.
* Remuneration Committee (appointed 18 January 2023).
Skills and experience
Kate has extensive experience at Board level, holding a variety of senior executive and non- executive leadership roles in the commercial sector, across a wide variety of companies, cultures and countries. Kate is currently the Chair of Court for the University of the West of Scotland and Anpario PLC. She also sits on the Board of Eurocell PLC, Ballater (RD) Limited, Thrive Ballater Limited and of the Universities and Colleges Employers’ Association (UCEA). Prior to Kate’s election to our Co-op, she was Chief Executive of Cedo Limited and First Milk Limited.
Independent Non-Executive Director
Appointed as an Independent Non-Executive Director in April 2016.
Committee membership
* Risk and Audit Committee.
* Nominations Committee (appointed 28 March 2023).
Skills and experience
Victor has been involved in a number of independent commissions advising governments on mental health; learning disabilities; the role of the voluntary sector; youth crime prevention; policing and stop & search; policing and mental health; housing policy; the future of public services and employment/skills and race and equalities; social finance/investment. He is currently Founding Chair of Collaborate CIC; Director Leadership in Mind Ltd; Chair of the NHS Confederation; Chair of Social Enterprise UK; Co-founder and Chair of Visionable.com; a visiting professor of social policy at University of Lincoln and Patron of the Art House, Wakefield.
Victor has a Masters in Advanced Organisational Consulting from City University and The Tavistock Institute.
Independent Non-Executive Director
Appointed as an Independent Non-Executive Director in November 2014.
Committee membership
* Risk and Audit Committee (Chair).
* Nominations Committee.
Skills and experience
Simon was previously an Independent Non- Executive Director for the Group’s subsidiary, Co-operative Food Holdings Limited. He was appointed Chair of the Group Risk and Audit Committee on 25 June 2015. Simon is a Chartered Accountant and is currently Chair of Bakkavor Group PLC, The Light Cinemas (Holdings) Limited and Blue Diamond Limited. He is also a Trustee of the Charlotte Fraser Foundation. Simon was previously Chair of Majestic Wine, BathStore and Hobbycraft, and CEO for Virgin Retail, Virgin Cinemas and Virgin Entertainment Group. Simon will step down from the Board on 30 April 2023.
Member Nominated Director
Elected as a Member Nominated Director in May 2016. Last re-elected in 2020.
Committee membership
* Remuneration Committee.
* Nominations Committee.
Skills and experience
Margaret is a qualified lawyer of over 30 years standing, was the Director of Legal Services for the John Lewis Partnership for nine years and on the Board of the British Retail Consortium for four years to 2014. During her term on the Board of NHS England, she was one of the directors who promoted and championed ’NHS Citizen’ : a new listening structure for the NHS that enabled proper consultation and collaboration.
Margaret is currently Chancellor of the University of Coventry; a member of the Institute of Directors’ Governance Advisory Board; Chair of Shakespeare’s Globe Theatre; an adviser to a number of social enterprises including the Better Business Initiative and is a champion of diversity, equity and inclusion.
Member Nominated Director
Elected as a Member Nominated Director in May 2015. Last re-elected in 2022.
Committee membership
* Risk and Audit Committee.
Skills and experience
Paul was the Chief Executive of Traidcraft from 2001 to 2013, President of the European Fair Trade Association from 2005 to 2012, and a director of Shared Interest from 2013 to 2022. Drawing on his Fairtrade experience and early career at Barclays Bank, he is now focusing on promoting responsible practices in business, alongside a portfolio of charity and community focused roles. Paul is a director of CBF Funds Trustee Limited, Chair of the Durham Cathedral Council and a Director of North East Ambulance Service. He is also the Vice Chair, Treasurer and a Fellow of St Chad’s College in Durham University, a Trustee of the Bible Society and a director of the Fairtrade Advocacy Office in Brussels.
Senior Independent Non-Executive Director
Appointed as a Senior Independent Non-Executive Director in November 2014.
Committee membership
* Remuneration Committee.
* Nominations Committee.
Skills and experience
Chris chaired our Co-op’s independent review which considered the events leading up to the re-capitalisation plan for The Co-operative Bank PLC in 2013. He is currently Chair of the Oversight Board of the Office for Budget Responsibility and Chair of Co-op Insurance Services Limited. Previous roles include chairing the King’s Fund (the health and social care think tank), the Committee on Standards in Public Life, the Financial Ombudsman Service, the Responsible Gambling Strategy Board and the NSPCC. For many years, he was a senior public servant, mostly in HM Treasury, but latterly as Permanent Secretary of the Department of Health.
Member Nominated Director
Elected as a Member Nominated Director in May 2019. Last re-elected in 2022.
Committee membership
* Risk and Audit Committee.
Skills and experience
As a committed co-operator for over 25 years, Sarah has previously served as a local Councillor and as a Labour and Co-operative MP, representing Portsmouth North. As a Government Minister in HM Treasury, Sarah was responsible for personal savings policy and financial inclusion including Credit Unions. As Schools Minister, she led the development of apprenticeships policy and partnerships with Business and Schools. She is a former Finance Director at GKN Aerospace, a global engineering company and a former Chair of the Employment and Skills Board for the Solent Local Enterprise Partnership. Sarah is a Trustee and Treasurer of the Parliamentary Outreach Trust.
Independent Non-Executive Director
Appointed as Independent Non-Executive Director in July 2018.
Committee membership
* Remuneration Committee.
Skills and experience
Rahul is the founder and Chief Executive of Redsift, an organisation that provides an open platform delivering products that prevent cyber attacks. Prior to Redsift, he founded Apsmart, which was acquired by Thomson Reuters Corporation in 2012. At Thomson Reuters, he served as the Head of Advanced Products & Innovation. In a previous life, he was part of the founding team and principal technical architect of Shazam. Before the launch of the iTunes AppStore, he envisioned and created the first Shazam iPhone App.
Independent Non-Executive Director
Appointed as an Independent Non-Executive Director in June 2015.
Committee membership
* Chairman of the Remuneration Committee.
Skills and experience
Stevie has broad executive and non-executive experience across the private, public and not-for-profit sector. She was previously CEO of Clear Channel, the world’s largest out of home company; and of Future PLC, an international media company, where she led its digital transformation. She has chaired organisations as diverse as Children in Need for the BBC and The British Council for the Government. Stevie’s portfolio currently includes chairing Mind, the mental health charity; advising tech scale ups Kino-mo and ITG; and serving on the EDI Board of Pladis. Stevie was named in the Sunday Telegraph/Debrett’s list of Britain’s 500 most influential people.
Chief Executive Officer
See Board biographies
Interim Chief Financial Officer
Mike was appointed Interim CFO in June 2022.
Mike is a chartered accountant and an established CFO with over 25 years’ experience across a number of industries including retail and consumer services. Mike held a number of leadership roles at Debenhams over a period of 12 years, starting as Group Treasurer, moving on to CFO and then, ultimately, CEO of the business. He trained at Pfizer before spending time in the global dairy sector with Fonterra and media telco sector with Sky. Mike is due to depart in June 2023 and will be replaced by Rachel Izzard, Chief Financial Officer. Rachel has held a number of senior leadership and CFO positions, including IFA Cargo, Aer Lingus, and most recently CFO at Manchester based retailer N Brown.
Group Secretary and General Counsel
Dominic became Group Secretary and General Counsel in May 2022. He originally joined our Co-op in 2017 as General Counsel of our insurance business. Over time, he took on a wider role supporting our Life Services businesses and becoming Deputy Group Secretary. Dominic qualified as a solicitor in 2006. Prior to joining our Co-op, Dominic spent 12 years at the international law firm Linklaters, working for a wide variety of organisations on corporate advice and transactions.# Co-operative Group Limited Annual Report and Accounts 2022 73
As I note in my Chair’s introduction, the events of the last year have been testing for us all. As the UK’s largest consumer co-op, we have and will continue to support our members, colleagues, customers and communities through this challenging period. We recognise the opportunity our Co-op has to make a meaningful difference.
Our governance structure is carefully constructed and unique. Membership is core to who we are and central to our better way of doing business. Our members remain at the heart of our thinking and decision making, and our Board continues to actively engage with our members to gain their valuable thoughts and ideas. Our National Members’ Council, which is 100-strong, acts as our members’ representatives, holding our Board to account for how the business performs and our commitment to Co-operative Values and Principles. Under Denise Scott-McDonald’s leadership as President, we have continued to have a healthy balance of support and challenge from our Council, who always show their passion for our Co-op, our members and our colleagues. We value the engagement and contributions made and thank the National Members’ Council for its ongoing support and challenge.
It was great to see many of our members at our 2022 AGM. We were pleased to welcome those of our members who joined us in person and also those that took the opportunity to join us online. Plans for our 2023 AGM are already well underway and we will keep members updated via our website at www.co-operative.co.uk/agm. The AGM notice, which includes more detail, will also be displayed on the website. If you are an eligible member, keep an eye out for an email or letter with more information.
Let me firstly take this opportunity to thank Simon Burke who will be stepping down from our Board at the end of April 2023. Simon has made an outstanding contribution and commitment to our Co-op during the past nine years, in his roles as a valued member of the Board, Chair of our Risk and Audit Committee and previously in his role as a Director of our principal subsidiary, Co-operative Food Holdings Limited. As successor to Simon, we are delighted that Adrian Marsh will be joining our Board as our new Risk and Audit Committee Chair. Adrian brings a wealth of knowledge and experience, most recently from his role as Group Finance Director at DS Smith. Adrian is also a Non-Executive Director and Chair of the Audit Committee of John Wood Group and previously held senior finance positions at Tesco and AstraZeneca. We look forward to the experience, contributions and value Adrian will bring to our Board.
We were also very pleased that both Paul Chandler and Sarah McCarthy-Fry were re-elected as Member Nominated Directors (MNDs). During the year, our Board was pleased to appoint Shirine as permanent CEO. Shirine’s proven leadership qualities, transformation experience and deep understanding of, and passion for, our Co-op values will be key in steering us towards a commercially successful and sustainable Co-op that continues to drive value for our members.
Under the leadership of Shirine, we have seen a reset of our internal governance framework to better support the successful delivery of our strategy, protect our Co-op and ensure we
remain resilient even through challenging times. This has included setting up of an Operating Board made up of our most senior leaders. The Operating Board includes the members of our Executive and is responsible for the day-to-day running of the organisation, the realisation of our Vision and the implementation of our strategy.
Sustainability is a critical part of our future and is critical to our commitment to be ‘Fairer to the Planet’ – one of the three pillars of our Vision of ‘Co-operating for a Fairer World’. We have helped shape the debate and activities on environment, sustainability and climate change for many years. This will remain an overarching theme for us in 2023. We will continue to strengthen our existing governance structures and processes, and are committed to identifying and reporting on our climate related risks in line with the guidance published by The Department for Business, Energy & Industrial Strategy. We will report on the recommendations of the Task Force on Climate-Related Financial Disclosures in our Annual Report next year when we look forward to further evidencing our long-standing commitments in this area.
As we continue to navigate through the challenges we face, including energy costs, supply chain cost inflation and the cost of living crisis, our Board will continue to focus on key issues, challenge the Executive and collectively seek to make good decisions in line with our Values and Principles and with the best interests of our members, colleagues, customers and communities at the forefront.
Allan Leighton
Chair, The Co-op Group
Our Purpose is championing a better way of doing business for you and your communities. Co-operative Values and Principles are the cornerstone of everything we do. These Co-operative Values and Principles are shared by many co-operatives around the world and are included in the International Co-operative Alliance’s Statement on Co-operative Identity.
Our governance structure is carefully constructed and is unique, based on ownership by our members. It is defined in our Rules, which set out a number of formal ways in which our Board, its committees and individual directors keep in touch with our Members’ Council, its committees and members.
Our Board leads our Co-op and takes decisions at the highest level, so our Co-op is successful in the long term. The decisions we take are what we believe to be in the best interests of our members. Our Board is supported by three committees. They have specific tasks which they carry out on behalf of the Board, set out in their written terms of reference:
Our National Members’ Council - a democratically elected body of 100 of our members - acts as our members’ representative, holding our Board to account for how the business performs. It also acts as a guardian of our Purpose and Co-operative Values and Principles. Council highlights from 2022 can be found in your Council’s Annual Statement on pages 131 - 136.
Our Directors, alongside Council members, also participate in a number of informal working groups, such as the Stakeholder Working Group. Such forums, whilst not part of our formal Board governance, allow for open discussion between our Board and Council. They help make sure members’ views and needs are considered when making decisions. Further detail can be found in our section on Stakeholder Engagement on page 139.
At the date of this report, there are 11 directors on our Board. We have three categories of directors: Executive Directors, INEDs and MNDs.
Director biographies can be found on pages 66 - 71. Members are able to see copies of the Directors’ appointment letters by contacting the Group Secretary.
The Chair’s role is defined by the articles of association, a schedule of duties and delegated authorities from the Board and the terms of the appointment letter. The Chair is responsible for leading the Board and ensuring its effectiveness and for ensuring that the business of the Board is conducted efficiently and in accordance with the Group’s Rules and values. Key responsibilities include:
The roles and responsibilities of the Chair and Chief Executive are clearly set out in their role profiles, which are approved by the Board and are available on our website.
INED appointments are made by our Board following recommendation from the Nominations Committee. When a need to recruit an INED is identified, the Nominations Committee will lead the process, including:
Following INED and MND appointments, the Council Scrutiny Committee considers a report from the Nominations Committee and checks the right process has been followed for appointing an INED (or the Chair). The report of the Scrutiny Committee can be found on pages 137 - 138.
INEDs have to be elected by members at the first AGM following their appointment and are subject to re-election by our members at our AGM every three years thereafter. In 2022, no new INEDs were appointed to the Board. Adrian Marsh will join our Board as an INED in May 2023. More details on the recruitment process can be found in the Nominations Committee Report on pages 116 - 120.
The UK Corporate Governance Code sets out that all Directors should be subject to annual re-election. We choose not to comply with this in our Rules to avoid a situation where all the Directors leave the Board at the same time. It ensures we maintain continuity and allows for staggering and succession planning.
The Nominations Committee is responsible for making recommendations to our Board in respect of Executive Director appointments. Executive Directors are subject to election/re-election by our members. Shirine Khoury-Haq is due to stand for re-election at the 2023 AGM. In 2022, there were no new Executive Director appointments recommended to the Board. Rachel Izzard will become an Executive Director when she joins our Co-op in June 2023 as Chief Financial Officer.
MNDs are voted for and elected directly by our members. The MND Joint Selection and Approvals Committee (MNDJC), a joint Board and Council Committee, works with an independent search firm to oversee the selection process and assess the eligibility, skills and experience of MND candidates who are put forward to a member ballot. Members then vote for who they would like to see on our Board. Following MND appointments, the Council Scrutiny Committee checks that the right processes have been followed. The MND election process takes place before the AGM and the results are announced at the meeting:
Margaret Casely-Hayford is due to stand for re-election as an MND in 2023.
Our INEDs and MNDs have a maximum term of office of nine years. Our Executive Directors are employed directly by our Co- op and don’t have a maximum term of office.
Our Nominations Committee reviews the skills and expertise we have on our Board to make sure it continues to be well balanced, diverse, effective and suitable to deliver our Vision. Our Board Composition Charter (BCC) sets out certain requirements for our Board’s composition as a whole, levels of knowledge and expertise expected for individual directors and additional requirements for key roles such as Chair and Senior Independent Director.
Our Rules and the BCC contain strict membership and eligibility criteria which all of our Board Directors need to meet. This includes high standards of professional expertise needed to run a business of the size and complexity of our Co-op as well as a strong commitment to Co-operative Values and Principles.
The Board considers that each Director brings relevant and complementary skills, experience and background to the Board. The Director biographies on pages 66 - 71 summarise their key skills and experience.
The Board maintains a Board Succession Plan which was reviewed during the year. More detail can be found in the Nominations Committee’s report on page 116. The Board is satisfied that the Board Succession Plan remains sufficiently robust.
Executive succession is a matter for the Chief Executive (with the support of our Chief People and Inclusion Officer) in consultation with the Board. This has been delegated to the Remuneration Committee to review in the first instance.
It is good governance that the Board regularly reviews its own performance. It is also a requirement set out in our Rules. The Nominations Committee oversees a Board effectiveness review every year. Our Rules say this review should be done by an external firm every second year unless the Nominations Committee and the Chair agree a good reason why that shouldn’t happen. The last externally facilitated review was undertaken by Clare Chalmers in 2020. The Nominations Committee and Board Chair decided that there would be no significant merit in holding an external review in 2022 and that external reviews should be undertaken every three years, in line with corporate governance best practice and on consideration of the cost involved. Therefore, an internal review process was undertaken in 2022, facilitated by our SID. Further details of the 2022 review can be found in the Nominations Committee report on page 116. An external evaluation is scheduled for 2023, which will be undertaken again by Claire Chalmers.
The Board and each of its committees have a scheduled forward plan of meetings to make sure sufficient time is allocated to each key area and to make best use of the Board’s time. The Board had eight scheduled meetings during the year held through a combination of in-person and hybrid formats. During the year, our Board:
Members of the Operating Board and various colleagues regularly attend Board meetings and give presentations and updates to the Board. The INEDs and MNDs take time at each Board meeting to have discussions both with and without Executive Directors. The agendas for Board meetings are prepared by the Group Secretary in consultation with the Chair with reference to the forward planner. There is flexibility within the planner to ensure arising business matters can be addressed. Report writers use a standard paper template and need to meet deadlines for submission. Papers are reviewed by the Group Secretary prior to circulation and made accessible to Directors on a tablet using a secure system. Board Committee minutes are made available to all Directors (unless there’s a conflict of interest) and the Chairs of the Board Committees update the Board on any committee activity at Board meetings. Board Committee papers are available to Directors on request.
Our Board also regularly provides reports on their meetings to the Council, and receives reports from the Council on its activities.
Directors’ attendance at scheduled Board and committee meetings is set out in the table below. This does not include any unscheduled meetings which were held during the year and which were needed on relatively short notice or any cancelled meetings. The numbers in brackets show how many meetings each Director could have attended. When we’re setting the Board meeting schedule, we always take Directors’ availability into account but with a larger Board we cannot always find dates all can attend.
| Director | Board Meetings Attended (of possible) | Committee Meetings Attended (of possible) |
|---|---|---|
| Allan (Chair) | 8 (8) | 2 (2) |
| Debbie (NED) | 8 (8) | 1 (1) |
| Fiona (NED) | 7 (8) | 4 (4) |
| Greg (NED) | 8 (8) | 4 (4) |
| Jeanette (NED) | 8 (8) | 1 (1) |
| Liz (NED) | 8 (8) | 1 (1) |
| Maggie (NED) | 8 (8) | 3 (3) |
| Margaret (NED) | 8 (8) | 1 (1) |
| Paul (MND) | 8 (8) | 4 (4) |
| Rachel (NED) | 8 (8) | 1 (1) |
| Richard (NED) | 8 (8) | 4 (4) |
| Sarah (MND) | 8 (8) | 3 (3) |
| Shirine (Exec Director) | 8 (8) | 0 (0) |
| Stephanie (NED) | 8 (8) | 2 (2) |
| Steve (NED) | 8 (8) | 2 (2) |
| William (NED) | 8 (8) | 2 (2) |
| Dominic Kendal-Ward (Group Secretary) | 8 (8) | 1 (1) |
| Board | Risk and Audit Committee | Nominations Committee | Remuneration Committee | |
|---|---|---|---|---|
| Allan Leighton (Chair) | 8(8) | 3(3) | ||
| Sir Christopher Kelly | 8(8) | 3(3) | 5(5) | |
| Kate Allum | 7(8) | 3(3) | ||
| Margaret Casely-Hayford | 8(8) | 3(3) | 5(5) | |
| Paul Chandler | 8(8) | 6(6) | ||
| Rahul Power | 8(8) | 5(5) | ||
| Sarah McCarthy-Fry | 8(8) | 6(6) | ||
| Shirine Khoury- Haq | 8(8) | |||
| Simon Burke | 7(8) | 6(6) | 2(3) | |
| Stevie Spring | 8(8) | 5(5) | ||
| Lord Victor Adebowale | 8(8) | 3(6) | ||
| Denise Scott- McDonald* | 3(3) |
*not a Director but is a member of the Nominations Committee by virtue of role as Council President
Conflicts of interest are situations in which Directors have, may have, or at least give the impression that they may have, divided loyalties on any issue. All Directors have a duty to avoid conflicts of interests. Prior to appointment, Directors are asked to disclose any other appointments they have and any potential conflicts of interest and we also carry out a number of other background checks. In addition, Directors are required to confirm they will have sufficient time to be able to do the role. This obligation continues whilst Directors remain on the Board, and is kept under review. A year end disclosures exercise is carried out annually and, as part of this, Directors disclose any changes or updates to their interests. There are specific provisions in our Rules which cover any real or potential Director conflicts of interest. There’s also a Board Conflicts Toolkit which gives guidance on what to do in potential conflict of interest situations. The Board remains satisfied that each Director is able to allocate sufficient time to perform their responsibilities effectively.
It is important that we have Directors on our Board that have objective and independent thinking. The UK Corporate Governance Code (UK Code) requires at least half the Board, excluding the Chair, to be Non-Executive Directors (NEDs), whom the Board consider to be independent. As a Co-op we have two different ways of looking at and assessing the independence of our Directors, as defined within the UK Code and as defined within our Rules and BCC.
Co-operative Group Limited Annual Report and Accounts 2022 81
The Board considers all our INEDs (excluding the Chair) and MNDs to be independent in character and judgement as per the criteria set out in the UK Code. Our Chair was determined to be independent on appointment in line with the UK Code and our BCC. Our BCC expects the Chair to become fully engaged in the activities of our Co-op and therefore does not expect the Chair to maintain their independence for their full term.
As a co-op, the guiding values of self-help, self-responsibility, democracy, equality, equity and solidarity translate through to the balance and diversity we seek for our Board. We’re very clear that our Co-op is anti-racist and the commitments we have made to racial equality and inclusion underpin this. Our Director, Lord Victor Adebowale, sat on our Equality and Inclusion Think Tank throughout 2022, along with six other leading experts. Its purpose was to provide expert advice, challenge and insight by sharing examples of best practice and identifying opportunities to progress as we seek to meet our commitments. They supported the refinement of our approach and the development of our diversity and inclusion strategy, which elevates our ambitions to deliver a broader set of diversity and inclusion ambitions. Our Board is mindful that diversity of thought brings a richness of debate that is vital to its effectiveness. Those values are within our Board Diversity and Inclusion Policy, which can be found on our website. The policy was reviewed during the year by the Nominations Committee. See page 119. Our Board is currently made up of five women (45%) and six men (55%). Four of our Directors are from ethnic minorities (36%). It is pleasing that our Board diversity exceeds the findings of the 2019 Hampton-Alexander Review, which indicated 32.4% of FTSE 100 board positions were held by women, and the target set in the 2017 Parker Review (and the subsequent 2020 update) for FTSE 100 boards to have at least one ethnic minority director on the board by 2021.
Our Board takes decisions at the highest level to ensure the long term success of our Co-op. It focuses on the future goals for our Co-op and how those goals should be achieved in a way which is in the best interests of our members as a whole and in line with our Purpose, and Co-operative Values and Principles. How those decisions are put into action is a matter for the Chief Executive Officer, the Executive and the Operating Board - the Board then monitors progress and holds leadership to account. We do not have the same structure as limited companies, which often have large, institutional investors. We are a co-op and we have been very clear that we want to do business in a better way for the benefit of our members and communities. We call this ‘our Co-op Difference’. When considering future plans, our Board looks at short, medium and longer-term views to try and make sure our Co-op, and the way it does business, is built on a solid platform for generations to come. To achieve this, our Board takes decisions at the highest level, consistent with our Purpose and Co-operative Values and Principles, that are commercially sensible and meet the needs of our members. Our Board looks at the interests, views and needs of our wider stakeholders when making decisions of substance and our contact with them (as detailed on pages 74, 75 and 139 – 146) helps our Board understand these views.
Co-operative Group Limited Annual Report and Accounts 2022 82
Members’ views are at the heart of our Board’s decision making process through the use of an Ethical Decision Making Tool. This helps our Directors focus on what members are likely to think, whether the decision will create value and what the potential impact of the decision will be on our members and our wider communities. Recommendations on material decisions put forward to our Board must include a view on each of these elements.
Our Board oversees our risk management framework through the Risk and Audit Committee. It regularly reviews and agrees risk mitigation plans and responses. Our Board ensures that policies and practices are consistent with our Purpose and Co-operative Values and Principles. For more information on Risk Management at Co-op and our Principal Risks and Uncertainties, please see pages 58 - 65. Our commitments to the environment and tackling climate change are long-standing. We are committed to identifying and reporting on our climate-related risks in line with the guidance published by The Department for Business, Energy & Industrial Strategy (BEIS) and we will continue to strengthen our governance processes in line with Taskforce on Climate-Related Financial Disclosures (TCFD) climate disclose requirements. More detail is provided on pages 41 - 43.
Our Board has the power to delegate certain decisions. This may, for example, be to individual Directors or Board Committees. We have a Delegated Authorities Framework which is reviewed regularly by the Risk and Audit Committee and approved by our Board. This sets out defined levels of authority for colleagues. In line with good governance, the Board has reserved a level of decision making to itself, which covers areas including Strategy and Management, Group Structure, Capital and Borrowing and Financial Reporting and Controls. These are recorded formally in a ‘Matters Reserved for the Board’ document, approved by the Board.
For information on how our Board acted with regard to our key stakeholder groups, please see full details within our Section 172 Statement at pages 139 - 146.
Whistleblowing
Our Board remains comfortable that there are sufficient processes in place which enable colleagues to raise any issues which they feel uncomfortable about, or which are not in line with Co-operative Values and Principles. See page 95 for further detail.
Board Code of conduct
Our Board Code of Conduct sets out the standards of behaviour expected from our Directors. All Directors are required to abide by the code during their term in office.
Directors’ and Officers’ liability insurance
Co-operative Group Limited Annual Report and Accounts 2022 83
We have Directors’ and Officers’ liability insurance in place which covers Directors against any legal action taken against them for doing Co-op business. They also receive an indemnity from our Co-op for specified liabilities which could possibly arise from them performing their role.
Independent professional advice and Board support
Our Board can seek the advice or assistance of the Group Secretary, Secretariat and the Executive Team. We also have procedures in place so that if any of the Directors feel they need independent professional advice to enable them to perform their duties properly, they can ask for that advice and, subject to certain limits, our Co-op will pay for that advice.
Our subsidiaries
Our subsidiaries are run as independent businesses, although they operate within the strategy and direction set by our Board. There are a number of rules, policies and procedures (particularly relating to governance and authority levels) which apply across the whole of our Co-op. There are three subsidiaries which are treated slightly differently - Co-operative Insurance Services Limited (CISL), Co-op Funeral Plans Limited (CFPL) and Co-operative Legal Services Limited (CLSL). Each are regulated (CISL and CFPL by the Financial Conduct Authority (FCA), and CLSL by the Solicitors Regulation Authority (SRA)).# Co-operative Group Limited Annual Report and Accounts 2022
The latest version of the UK Corporate Governance Code (UK Code) was published in July 2018 and applies to large companies with traded shares. As a Co-op, we are not required to comply with the UK Code. However, we remain of the view that the general principles of governance set out in the UK Code are key to running a good business. We’ve therefore taken the view that it’s the right thing for our Co-op to continue to voluntarily comply with the UK Code where it can be applied directly to our democratic model and it makes sense for us to do so. In the following section, we have signposted you to various sections within the Annual Report to help demonstrate our compliance, either directly or in the spirit of the UK Code.
A successful business is led by an effective and entrepreneurial Board who should promote long-term sustainable success, general value for members and contribute to the wider society. See pages 75 - 79.
The Board should establish purpose, values and strategy and make sure these align with culture. See page 81.
The Board should make sure sufficient resource is available to meet and measure performance against its goals and that risks can be properly assessed and managed through effective controls. See pages 58 - 59.
The Board should ensure effective engagement with all stakeholders. See pages 139 - 146.
The Board should make sure policies and practices across the business are consistent with our values and support long-term sustainable success. Colleagues should be able to raise any concerns. See page 82.
The Chair should lead the Board, demonstrate objective judgement, set the tone for the culture, encourage constructive Director debate and ensure Directors receive accurate, timely and clear information. See pages 73 - 76.
There should be an appropriate mix of Executive Directors and Independent Non-Executive Directors (INEDs) and a clear division between the roles of the Executive team and Board. See pages 75 and 76.
INEDs should give sufficient time to their role and hold the Executive team to account. See pages 73 - 76 and 79 – 80.
The Board should have sufficient policies, processes, information, time and resource to function effectively and efficiently. See pages 78 - 80.
Appointments to the Board should be subject to a formal, rigorous and transparent procedure and an effective succession plan should be maintained for the Board and Executive. Appointments and succession plans should be based on merit and objective criteria, and promote diversity of general, social and ethnic backgrounds, as well as cognitive and personal strengths. See pages 116 - 120.
The Board and its committees should have a combination of skills, experience and knowledge. Consideration should be given to the length of services of the Board as a whole and membership regularly refreshed. See pages 77, 78, 80 and 116 – 120.
An annual evaluation of the Board should consider composition, diversity and how effectively members work together. Individual evaluation should demonstrate whether each Director continues to contribute effectively. See pages 78 and 118.
The Board needs to put in place formal and transparent policies and procedures to make sure that external auditors and our internal audit function are independent and effective, with the result that our published accounts give a fair reflection of our Co-op’s financial position. See pages 86 - 96.
The Board needs to satisfy itself that our Co-op’s position and prospects are presented in a fair, balanced and understandable way. See pages 87 – 88 and 129 – 130.
The Board needs to identify an acceptable level of risk and make sure that financial controls across the business are appropriate, so that financial decisions are taken in line with that identified level of risk. See pages 86 – 96.
Our pay policies should link to and support our stated purpose and promote long-term sustainable success. See pages 103 - 104.
No Director should be involved in setting their own pay, and procedures for developing the policy relating to Executive Director pay should be transparent. See page 115.
Directors should apply independent judgement by looking at our Co-op’s business performance, Directors’ performance and any other relevant circumstances when authorising Executive pay. See page 101.
We have reviewed our compliance with the Co-operative Governance Code, originally published in 2019 by Co-operatives UK, and are comfortable that our practices remain consistent with it, are appropriate and offer the necessary protection to our members.
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It has been a busy year for the Risk and Audit Committee (‘RAC’), with a wide variety of topics needing our attention. As in many recent years, IT-related issues dominated our agenda. Last year, I indicated that the Retail Business Transformation (RBT), our SAP programme in Retail, was moving from project status to business as usual. This did not proceed smoothly, however, and issues with both the design and implementation of the system caused operational problems for the business, especially in the early months of the year. The Committee received regular briefings on remediation of the system and was pleased that, by the end of 2022, many of the most significant issues had been cured. It was most reassuring to see the SAP for Franchise project completed on budget in 2022 and without major disruption. Our Co-op needs to carry out several other major IT upgrades in the coming years, and we would all hope to see them implemented with this kind of outcome and financial profile, thus using learnings from RBT profitably.
A priority system upgrade for the Society is in Funeralcare, where legacy IT is a key factor holding back the improvement of the controls framework. This is the most urgent of several controls improvements and upgrades that the RAC is keen to see across the organisation in the next two years. Apart from the desire, set out in last year’s RAC review, to enable our annual audit to be based primarily on our IT controls, we are also mindful of the Government’s proposals for strengthened controls reporting and assurance from Boards (often referred to as the BEIS proposals). Compliance with them will require much progress from where we are today, and this will be an important area of focus for the RAC and the Board in the next two years.
Funeralcare has also been in focus for the RAC - in 2022, we had to establish a separate entity, regulated by the FCA, to handle the sale of our funeral plans. This business, called Co-op Funeral Plans Limited (CFPL), now has its own independent board (and Audit Committee), and we have established a good initial working relationship with our counterparts there. IFRS 15, which brought a radical change in the presentation of the results of our Funeralcare business, is to be superseded after just three years by IFRS 17, heralding yet another approach to accounting for our funeral plans. We will continue to work to achieve the best possible level of understandability for the results.
Our Co-op carried out a significant restructuring of its core support functions in 2022 and, as part of this, the Internal Audit & Risk functions were merged. The RAC is supportive of this initiative and we have every confidence that Saleem Chowdhery, the Director of Risk & Internal Audit, will deliver a well-integrated strategy and team for the management of these functions. In this context, I am delighted to report that, at the end of 2022, after a long period of steady improvement, we had no overdue actions arising from internal audit reports. For me, this statistic is a reflection of the quality of the audit work, the regard in which it is held by the business, and the respect overall for the importance of developing and maintaining a robust framework of good controls and management practice. I congratulate the teams involved and thank our Co-op’s senior management for their steadfast support on this subject.
These were some of our headlines for the year. As always, we also gave time and attention to key topics such as cyber security, climate accounting, sustainability (led very capably as always by Paul Chandler and Sarah McCarthy-Fry), data governance and the oversight of accounting policies. We also continued our constructive and open working relationship with the Groceries Code Adjudicator and have had positive feedback on our reporting and practices. Our rating in the annual survey dipped a bit in 2022, mainly because of the SAP issues I have referred to, but we are working to regain our leading reputation amongst the large grocers.
This is my last report to you as Chair of the RAC, as I will be stepping down from the Board in April after more than nine years with Co-op. My time here has, on occasion, been most challenging, but it has also been immensely satisfying and rewarding.
Co-operative Group Limited Annual Report and Accounts 2022 87# I hope (and believe) that I am leaving the Co-op with a more robust financial structure and practices than we had in 2014, but this is not to say that there is not still much for my successor to do! One more time, I would like to acknowledge the immense support I have received from my RAC colleagues - currently Lord Victor Adebowale, Paul Chandler and Sarah McCarthy-Fry - but also those who served with me in the past. A constant throughout has been Saleem Chowdhery, our Director of Risk & Internal Audit, who has been my key executive support and has guided us all so well over the years. Thank you to one and all, and I wish the Co-op every success in the coming years. Simon Burke Chair, the Risk and Audit Committee
Our Board has a Risk and Audit Committee (‘Committee’) which watches over Co-op’s financial reporting and how well it’s managing risk. The UK Corporate Governance Code (‘the UK Code’) recommends that there are at least three independent directors on the Risk and Audit Committee, and we met this recommendation during 2022. All Committee members are considered by our Board to be independent under the UK Code, providing objectivity and independent scrutiny. Paul Chandler and Sarah McCarthy-Fry are Member Nominated Directors, and our two Independent Non-Executive Directors are Lord Victor Adebowale and Simon Burke. Our Board is satisfied that Simon Burke’s relevant and recent financial experience means he is qualified to be Chair of the Committee. Details of attendance by Committee members at meetings held during 2022 are on pages 79 and 80.
During 2022, several colleagues regularly attended meetings including the Chief Executive Officer, Interim Chief Financial Officer, Group Secretary and General Counsel, Assistant Secretary, Director of Risk & Internal Audit and the Head of Financial Control. Other colleagues also attended when asked to do so by the Committee, and the external auditors attended each session. The Committee also met the Director of Risk & Internal Audit and the external auditors privately, so they could talk without management being there.
The main areas the Committee looks after include the following:
The Committee’s terms of reference give more detail on what it does and can be found on our website: www.co-operative.coop/investors/rules. During the year we undertook a review of these terms of reference to ensure they remain in line with best practice and the UK Code.
In 2022, the Committee’s main activities included reviewing:
When the Committee looked at the 2022 financial statements, it considered all the key areas of judgement. In all cases, it discussed them with management and the external auditor. There was specific focus in year on the following:
| Areas of focus | What was done |
|---|---|
| Going concern | Management continue to monitor our borrowings, facilities and banking covenants to ensure that we have enough financial headroom to continue to run our business as a going concern. Our committee reviewed management’s assumptions in financial projections and considered the current trading conditions. It was agreed that going concern disclosures in the year end statement would be extended to 31 December 2024. Our committee agreed that our Co-op is a going concern. |
| Goodwill and fixed asset impairment | Our Co-op’s balance sheet includes significant goodwill, intangible assets and property, plant and equipment balances. The most significant of these are in the Food business, the Funeralcare business and at a group corporate level. Accounting standards require us to perform an impairment review of our non-current assets at least annually or more frequently if there is an impairment trigger. We have impaired £15m of intangible assets (mainly SAP licences) that we no longer intend to use. The Committee reviewed the outcome of management’s impairment review, satisfied itself that the assumptions used were appropriate, and reviewed the impact of this on our financial statements. |
| Property and other provisions | Our Co-op makes provisions for likely future liabilities. Management must apply judgement to determine whether, and how much, we should account for a provision, notably in relation to onerous contracts associated with leases which require significant judgement. This year we have impaired the right-of-use asset associated with the rental tenancy that we have on One Angel Square by £20m. The Committee reviewed the increase or decrease in provisions and management’s judgement on onerous contracts, self-insurance and litigation, satisfying itself that assumptions used, including around future cashflows and discount rates, were appropriate. |
| IFRS 17 & other amendments | IFRS 17 is a comprehensive new accounting standard covering recognition, measurement, presentation and disclosure of insurance contracts and replaces IFRS 4 Insurance Contracts. # Co-operative Group Limited Annual Report and Accounts 2022 |
The standard is effective from 1 January 2023 and will fundamentally change how the Group accounts for funeral plans and waiver insurance policies. We continue to assess the likely impact of the new standard on our financial statements, which is expected to be material. The Committee was updated on how the standard may impact our financial statements and monitored progress against this assessment, including review of the proposed disclosures within the financial statements.
During the year, management performed a review of the initial accounting that was undertaken on transition to IFRS 15 for funeral plans as part of the work required following the transfer of plans from Funeral Services Limited to Co-op Funeral Plans Limited for regulatory purposes. As a result of this work, a net £23m adjustment was identified to decrease plan liabilities. Furthermore, and as part of this work the line-item categorisation of the movements in plan liabilities as disclosed in Note 23 (Contract Liabilities) of the 2021 Annual Report have also been reviewed and certain items have been represented to more appropriately reflect their nature. The Committee was updated on the reasons for the adjustment and reclassifications and how management had determined and agreed this with our external auditors. The Committee agreed with the approach taken and reviewed the proposed disclosures within the financial statements.
The sale of our insurance underwriting business (CISGIL) completed in December 2020 and consequently the assets and liabilities of that business are no longer shown on our balance sheet. However, we’ve recorded a one-off gain of £78m within discontinued operations following the judgement on the legal claim with IBM. The Committee was updated on this approach to reporting and reviewed the proposed disclosures within the financial statements.
We disposed of our entire petrol forecourt estate in October 2022 which generated a material profit on disposal and cash proceeds. The results of those sites up to the point of disposal have been included in our income statement within ‘Continuing Operations’ (rather than as Discontinued Operations) as it is our judgement that the sites sold do not constitute a major separate line of business. We have also assessed at what point we lost control of the forecourt estate with reference to IFRS 10 and whether we continue to act as principle or now agent in regard to sales post completion, with reference to IFRS 15. The Committee was updated on the disposal and agreed that management’s approach to reporting was in line with our Co-op’s accounting policy.
We have recognised two material one-off charges in our 2022 results which are excluding from our underlying profit metrics. These are £26m of redundancy costs in relation to the recent restructure of our central support teams and £12m of member reward provided to colleagues to support them through the winter cost of living crisis. The Committee agreed with management’s interpretation of the accounting standard and the treatment of these items and reviewed the proposed disclosure within the financial statements.
Our Co-op has a number of defined benefit pension schemes, of which the PACE scheme is the largest. Management must make assumptions (about things like the future growth rate of investments and the death rate of members of the scheme), which can materially affect the valuation of the pension schemes. The Committee assessed the key assumptions that underpinned the pension calculations to satisfy themselves that they were appropriate.
The Committee has undertaken a self-assessment of its effectiveness. A different approach to this was adopted in 2022 with a verbal discussion taking place to cover the main areas such as the composition, management and operation of the Committee.
The UK Code says that audit committees should have primary responsibility for the tender process and make recommendations to the Board about the appointment, reappointment and removal of the external auditor. It should also approve the remuneration and terms of engagement of the external auditor and assess how well the external audit process is working. The members have the opportunity to vote on the appointment of the auditor at the AGM in line with the UK Code. EY are our Co-op’s auditors. They also provide the Committee with relevant reports, reviews, information and advice throughout the year. All these activities are set out in the engagement letter.
Our external auditor must be judged to be independent for the audit to be objective. So we have an External Auditor Independence Policy. We also have a policy about appointing people who used to work for the external auditors and an approach to be taken when using the external auditors for non-audit work. The Committee must pre-approve all non-audit spend with EY. This spend is capped at 70% of the average audit fee over the previous three years. In line with our External Auditor Independence Policy, the external auditors are not allowed to do a number of tasks including (but not limited to) the following:
The Committee approved the nature and cost of all non-audit work done by EY for our Co-op and is satisfied that EY’s non-audit work didn’t affect objectivity in doing the audit. Details of the amounts paid to the external auditors during the year for audit and other services are set out in Note 3 to the financial statements.
The Committee reviewed the effectiveness of EY throughout the year to ensure that the external auditors continued to provide a professional, independent and objective service.
Internal Audit is an independent function authorised by our Board through our committee. Its main role is to provide professional, objective assurance while providing insight to improve the way our Co-op is managed and controlled. In 2022, the Director of Internal Audit and the Chief Risk Officer roles were replaced by a new Director of Risk & Internal Audit role. The Committee approved this new role and the plans to ensure the role could maintain the necessary independence.
Internal audit continued to adopt a flexible, dynamic approach to planning in 2022 and regularly re-assessed Co-op’s assurance priorities. The Committee reviewed these priorities at each session and had the opportunity to input and shape the upcoming assurance reviews. At each meeting, the Committee received a report from the Director of Risk and Internal Audit on:
During the year, the Committee reviewed Internal Audit reports covering key processes, systems and controls, and projects and programmes. The reports have covered a range of different areas and businesses at our Co-op including supplier payments; responsible sourcing; HFSS regulation; energy procurement by Co-op Power; technology disaster recovery, and Funeralcare’s response to new regulation (both CMA and FCA). We also received assurance on the SAP implementation programme and on the commercial transformation programme. During the year, the Committee reviewed the Internal Audit charter, which reaffirmed the purpose of Internal Audit, and outputs from Internal Audit’s internal quality review.
Our Board has overall responsibility to make sure controls are in place to enable our Co-op to work effectively. The effectiveness of our controls are assessed using the globally recognised COSO model. The Committee is responsible for reviewing how effective the internal controls are. The controls are designed to manage rather than remove the risk of not being able to achieve our objectives. It can only provide some (but not complete) assurance that things won’t go wrong.
Each Operating Board member was asked to review how well the controls were working for their area of responsibility and to self-certify the results of their review. This included consideration of the key elements of internal control in operation and the key improvement initiatives. The review of the Operating Board members’ self-assessments forms an important part of the annual review of the systems of risk and control. The Committee also received regular management reports on financial control across our Co-op, including progress against the Funeralcare remediation plan. Some of the main parts of the internal control framework are set out below:
Our control environment is designed to create a culture where colleagues take acceptable business risks but within clearly defined limits. The control environment includes:
Planning
Our Board and senior leaders are responsible for identifying and evaluating our Co-op’s main business risks. We aim to have systems that manage the risk in an efficient and effective manner. We look at what could go wrong and how we can stop this happening, to protect our members’ interests and our reputation, and to make sure we comply with regulatory standards and achieve our business objectives. This is achieved through:
Doing
Our Co-op’s control procedures are designed to ensure that risks are appropriately managed. This includes risks around the completeness and accuracy of accounting for financial transactions, as well as for reducing the potential cost from loss of assets or fraud. Risks and controls are regularly reviewed. Management receives relevant information on our Co-op’s accounting and other policies, procedures, our colleagues and the Code of Business Conduct.
Informing
We engage with our stakeholders in several ways. Colleagues receive and provide information on strategy and objectives through their reporting lines and a formal performance measurement process. Colleagues also receive regular business updates from our Co-op leaders through various channels including email, conference/Microsoft Teams calls and face-to-face/online briefings. We also have an external facing colleague website: www.coop.co.uk/colleagues
Reviewing
We adopt the ‘three lines’ approach to trying to make sure our Co-op does what it says it will do. The first line is the system of internal control, which is the responsibility of line management. The second line comes from various functions, including Risk, which monitor and check compliance. Internal Audit provides independent assurance, as the third line.
Whistleblowing procedure
To ensure our Co-op follows best practice and Co-operative Values and Principles, a whistleblowing procedure has again been in place during the year to allow colleagues to pass on information about suspected wrongdoing. We use an external independent party to manage our ‘Speak Up’ service, which allows colleagues to raise concerns confidentially should they not wish to talk to someone within our Co-op. This procedure also allows suppliers to report on any suspected wrongdoing. In addition to Speak Up, reports can be made direct to colleagues at our Co-op. We have a procedure for recording and investigating whistleblowing reports and the Committee reviewed a summary of whistleblowing cases reported throughout the year. The Committee considers the whistleblowing procedures to be appropriate for our size and scale. The whistleblowing policy is included in the Code of Business Conduct and is available on the colleague intranet and our website.
BEIS proposals
The Department for Business, Energy and Industrial Strategy (BEIS) has published the Government's response to the white paper: ‘Restoring trust in audit and corporate governance’. The response sets out proposals which impact company directors, auditors and professional bodies. The reforms will be delivered by a variety of mechanisms over a period of time. The reforms will impact our Co-op. It is proposed that the UK Code will be strengthened to provide for an explicit directors’ statement about the effectiveness of the company’s internal controls and the basis for that assessment. Our Co-op Operating Board has been assessing
how best to prepare for the expected changes with a view to developing a programme of work to ensure future compliance. This will be a continued area of interest to the Committee.
Other activities
Audit actions
The Committee reviews Internal Audit reports and supports the business to ensure that any issues raised are addressed by management promptly and appropriately.
Groceries Supply Code of Practice (GSCOP)
During 2022, our Co-op engaged and worked collaboratively with Mark White, the Groceries Code Adjudicator (GCA), and we continue to demonstrate our compliance with the Code. The GCA Annual Survey 2022 showed a dip in suppliers’ rating of our overall compliance, but they continued to rank our Co-op in the top three retailers for conducting relationships fairly and in good faith, without duress. We value the supplier feedback given in the survey and use the outputs to shape our Supplier Engagement action plan. The Committee has kept compliance under review through regular updates from the Code Compliance Officer and senior leaders in our Food business. The Committee approved the Annual Compliance Report for submission to the Competition and Markets Authority, as required by the Groceries (Supply Chain Practices) Market Investigation Order 2009. A summary of progress in the year is on pages 126 - 128.
Co-operate Report and climate change
The Committee has responsibility for reviewing our Co-op’s approach to sustainability reporting and social impact accounting. We review and recommend the approval of the Co-operate Report to our Board, giving the Co-operate Report the same importance and focus as the Annual Report and Financial Statements. The Co-operate Report is independently assured. The Committee received updates this year on our Co-op’s progress against our Climate Plan and updates on identifying climate-related financial risks and opportunities in accordance with TCFD.
GDPR and Information & Cyber Security
The Committee receives regular updates to ensure that our Co-op continues to meet its obligations to be trusted with data in line with the General Data Protection Regulation (GDPR) and to use it as a valuable asset to deliver benefits to our members and customers. Through management updates and Internal Audit reports, the Committee has also considered information and cyber security and the risks associated with legacy systems.
Introduction from the Committee Chairman
This is my eighth remuneration report as Chairman of the Remuneration Committee (‘the Committee’). It covers another exceptionally challenging year for our Co-op. So again, we've tried to balance an outcome that rewards our colleagues fairly for the contribution they make every day while recognising the general market backdrop that we are all facing, not least double digit inflation, directly fuelled by the devastating and tragic war in Ukraine; and a cost of living crisis affecting all our members and customers, as well as our colleagues. Our members have given the Committee the role of deciding what we pay, but we always listen to their views and regularly engage with representatives from Co-op’s National Members’ Council and listen closely to the wider membership, not least at our AGMs. The consistent message we get is that we should continue to reward leaders competitively and appropriately, while we do our very best to increase rewards for our lower paid colleagues. The report contains a lot of information, but we’ve tried to simplify it within the guidelines of best practice reporting. My introduction has all the key highlights and there are two further sections which detail:
i. Part I – Executive Pay Policy. We’ve included a summary of the pay policy which 83% of members approved at our 2022 AGM.
ii. Part II – Annual Report on Remuneration. Then we've shown how the policy has been applied in 2022. We’ve also included a ‘Pay at a glance’ section on page 101, so you can see all the key information on our Executive team in a simple format.
Our approach
We always believe in being open with our members. So, we go beyond public company best practice and look at wider pay and reward principles for our entire colleague cohort, Operating Board and Executive.
Our performance
Against a challenging and bleak external backdrop, we are pleased that our Co-op enters 2023 in a much stronger financial footing than a year ago, especially when we consider the events of the past 12 months, which continue this year. In the face of levels of inflation many of us have never seen, we have taken the tough but necessary decisions to significantly cut operating costs in mitigation. And we’ve re-prioritised our capital expenditure and investments. We’ve streamlined our business processes, and clarified strategies for each our Food, Funeralcare, Insurance and Legal Services businesses. We also successfully sold our petrol forecourts business, which would require unaffordable investment, strengthening our balance sheet and allowing us to focus on our core convenience business. The net result is a Co-op Group which has generated more cash, with net debt greatly reduced and with the foundations in place for us to return to sustainable growth in the years ahead.## Our colleagues
Once again, significant additional investment was made in frontline colleague pay, to recognise the vital role they play. In April 2022, we aligned our minimum hourly rates to the Real Living Wage as set by the Living Wage Foundation (www.livingwage.org.uk) and we will again from April 2023. For Customer Team Members (CTMs) in our Food stores, this resulted in a 4.2% pay rise. We also increased the pay rate differential between CTM and Team Leader roles. Unlike many organisations, our hourly pay rates apply to all colleagues, including younger colleagues and apprentices. We also wanted to help colleagues as much as we could through what we knew would be a challenging winter (with rises in energy prices), so we put in place two winter support packages for our frontline colleagues at a total cost of £12m. Their wellbeing – indeed the wellbeing of all colleagues - continues to be a key priority and we’ve made progress again on how we support both their health and financial wellbeing. We’ve continued our regular communication with colleagues talking to them about the wellbeing issues that matter most to them, focusing heavily on cost of living. In the year we have:
* Increased colleague discount on own brand food and household goods to 30% from 20 October to April 2023, helping to keep the cost of living low.
* Offered all colleagues not eligible for our bonus schemes three winter support payments of £50.
* Provided all colleagues for whom pay is collectively bargained with a £75 winter support payment. The majority of colleagues will have received both the £75 and the three £50 payments.
* Ensured colleague needs remain at the heart of our wellbeing support by surveying colleagues financial wellbeing.
* By the end of 2022, more than 14,000 colleagues signed up to our Wagestream app and just under 4,000 have chosen to build a rainy-day fund with Wagestream.
* 15,000 colleagues have downloaded the YuLife app and the average number of daily steps recorded by participating Co-op colleagues far exceeds the YuLife average.
* Over 36,000 colleagues accessed mental health training.
* We also sent all of our frontline colleagues a booklet to show all of the benefits and support available to them, and how to access them.
At the end of 2022, more than 40,000 colleagues were members of our pension scheme. Our pension offer compares favourably to competitors schemes and is available to all. We also take the social responsibility and sustainability footprint of our pension investments seriously. See our Co-operate Report for more information on the real progress we’ve made by focusing here.
Good financial stewardship - particularly managing our debt level - is the underpin performance measure within our annual Bonus Plan (BP). The Plan rules have a ‘gateway’ that requires our net debt/EBITDA ratio to be within 10% of our budget throughout the year in order for any bonuses to be paid. In 2022, that net debt / EBITDA gateway was met. Our Co-op performed with resilience in 2022, against an extremely challenging market backdrop, and whilst some progress was made across our 2022 success indicators, the targets proved challenging to achieve in such uncharted times.
In determining the final outturn, the Committee reviewed each of the measures as set very robustly, but tried to balance the ambition to recognise an exemplary job in an another extremely challenging year. Based solely on performance against the balanced scorecard measures covering profit, colleagues, community and membership, the bonus outturn was just below ‘threshold’. The Committee did not retrospectively change those targets, even though the market had changed so dramatically since they were set. But the Committee did decide to use discretion against the proportion of bonus allocated to individual performance ratings to increase the outturn on the personal element of the scorecard. This went some way to recognise the significant extra effort of our colleagues to improve our position, particularly in the second half of our year. As a result, awards under the 2022 BP for our Executive were between 36.2% and 41.20% of their maximum opportunity, with 50% of this award to the Executive (and senior leaders) paid now, with the remainder deferred for a further two years. More information on the balanced scorecard measures can be found on pages 107 and 108.
The second half of the 2020 BP award is now due to colleagues still employed by our Co-op and not under notice at the time of payment. It will be paid in May 2023 to senior leaders in line with the scheme rules. Further details of the amounts paid and deferred can be found from page 106.
There were significant changes to our Executive team in 2022. Our Group CEO Steve Murrells stepped down at the 2022 AGM after 10 years of service. Helen Webb stepped down in June 2022, Helen Grantham retired in July 2022 and, following her career break, Jo Whitfield stepped down in September 2022. There were some contractual termination payments made to leavers. Further details can be found on page 111. We are truly grateful for the contribution that these colleagues have made to our Co-op and thank them for their service. As a result of these changes, we reshaped our Executive. It currently consists only of our Group CEO - Shirine Khoury-Haq, Co-op Secretary & General Counsel - Dominic Kendal-Ward and our (Interim) Chief Financial Officer - Mike Hazell. But that Exec team are part of a wider senior ‘Operating Board’ which has been established to focus on our cross-Co-op strategic priorities. That Operating Board brings together up to 20 of our most senior leaders and decision makers, working together collaboratively on the decisions and actions we need to take to run our business effectively - and at pace. We haven’t reported on this enlarged group as part of this Annual Report. Members have been specifically selected to focus on short and mid-term outcomes and, as a result, membership will vary in line with priorities, but this will be kept under review.
We continue to promote and recruit to narrow our gender role gap - increasing the number of senior female colleagues – but, because over 80% of colleagues are on fixed hourly pay rates regardless of gender, our gender pay gap moves only marginally. The full report can be found here: www.co-operative.coop/ethics/gender-pay-gap-report
The Committee has worked hard this year. We’ve had to have a lot of extra meetings and discussions beyond the formal calendar, and every member has made a valuable contribution. My heartfelt thanks to all of them, and also to the members of the Council Remuneration Working Group under Lesley Reznicek’s leadership. Their insight and challenge throughout the year made sure our members’ voice was always in the room.
It remains important to us that our members make their views heard, so we would ask that you vote prior to the 2023 AGM, including upon the motion to approve the Annual Report on Remuneration. Please watch out for your voting email or letter. I say every year that getting the balance right is never easy and this year we have had to make some particularly difficult choices. I hope you will be able to understand endorse the choices and decisions, and I’d like to offer my thanks in advance for your vote to approve my report and vote in favour of the motions.
Stevie Spring
Chairman, the Remuneration Committee
This section provides an overview of our Executive Pay Policy and summarises the framework that will apply for our executives in 2023. Further details are set out on pages 103 and 104.
The key elements of pay for our Executive are:
The table below sets out the annual base salary and maximum amount each Executive member can receive under the Bonus Plan.
| Executive member | 2022 £ ’000 | 2023 £ ’000 | Maximum BP opportunity as a % of bonusable pay |
|---|---|---|---|
| Shirine Khoury-Haq | 650 | 750 | 250% |
| Dominic Kendal- Ward | 275 | 310 | 150% |
| Mike Hazell | - | 575 | 90% |
Notes to table
1. On appointment as our Interim Chief Executive, Shirine Khoury- Haq’s salary was increased to £750k, and her maximum bonus opportunity increased to 250%.
2. On appointment as our Co-op Secretary & General Counsel, Dominic Kendal- Ward’s salary increased to £275k, and his maximum bonus opportunity increased to 150%. After a six-month review period his salary was increased to £310k.
3. Due to Mike Hazell joining us on a fixed term contract basis, a separate bonus arrangement has been put in place linked to specific deliverables during his contract.
Our bonus elements are linked to doing what matters most for our Co-op.# Co-operative Group Limited Annual Report and Accounts 2022
We are committed to a clear link between how we pay our Executive and how our Co-op performs, while keeping a strong connection with our colleagues and supporting our Co-op Values and Purpose.
It’s important we make profit to reinvest and support our future strategy and Purpose.
Maintaining responsible debt levels is an important part of that financial strategy.
We exist to create value for our members and the communities in which we trade.
Supporting local communities where our members live, and where we trade, creates much of the shared value that makes our Co-op a better way of doing business.
Colleagues play a significant role in ensuring we continue to deliver to our members, communities and customers.
The chart below shows the pay which our executives received in 2022 and full details can be found in the Annual Report on Remuneration which starts on page 97.
| Salary | Benefits | Bonuses | |
|---|---|---|---|
| Shirine Khoury-Haq | £727 | £112 | £1,571 |
| Mike Hazell | £330 | £660 | £366 |
| Dominic Kendal- Ward | £158 | £107 | £291 |
| Steve Murrells | £301 | £1,001 | £1,001 |
| Helen Grantham | £208 | £343 | £343 |
| Jo Whitfield | £248 | £278 | £278 |
| Helen Webb | £233 | £260 | £260 |
2022 total pay £000's
| £000s | £000s | £000s | |
|---|---|---|---|
| Shirine Khoury-Haq | 727 | 112 | 1,571 |
| Mike Hazell | 330 | 660 | 366 |
| Dominic Kendal- Ward | 158 | 107 | 291 |
| Steve Murrells | 301 | 1,001 | 1,001 |
| Helen Grantham | 208 | 343 | 343 |
| Jo Whitfield | 248 | 278 | 278 |
| Helen Webb | 233 | 260 | 260 |
We are committed to the following approach to pay:
Purpose and link to strategy
To set a level of pay for performing the core role that allows us to attract and retain talented leaders.
Summary and operation
We want to pay our Executive at a level that reflects the job they do, but do not want to overpay. We look at what other similar organisations pay and take this into account when setting our Executive’s pay.
Maximum opportunity
There is no maximum salary. Typically, salaries are reviewed annually. When reviewing salaries, the Committee will take account of:
* Experience
* Personal and business performance
* What other similar businesses pay their Executive
* Increases being granted to other colleagues throughout the business
Purpose and link to strategy
To offer a benefits proposition to attract and retain talented leaders.
Summary and operation
The benefits provided to our Executive will be in line with normal market practice and could include a car or car allowance, fuel in certain cases, relocation assistance, healthcare cover and life cover. Executives are also able to take advantage of benefits offered to all colleagues, for example: the cycle to work scheme, discounts on certain products and services, the Employee Assistance Programme.
Maximum Opportunity
There is no formal cap on the level of benefits that can be provided. However, this will represent a small proportion of the total pay.
Purpose and link to strategy
To provide the same percentage level of pension benefits to all colleagues across our Co-op, that provides an income in retirement.
Summary and operation
Our Executive are able to join our Co-op Defined Contribution pension plan or receive a cash allowance in lieu of pension provision.
Maximum opportunity
The following options are available:
* Defined Contribution employer pension contributions of up to 10% of salary
* Cash alternative of up to 10% of salary if the lifetime limit has been exceeded
Purpose and link to strategy
To motivate and reward achievement of key business performance measures which support the delivery of our Purpose and Values.
Summary and operation
Our Executive will be eligible for a payment under a Bonus Plan (BP) agreed by the Committee. The performance measures and targets for each annual BP cycle will be set at the start of each year. Payments will be based on a combination of business and individual performance. 50% of any award is subject to a two-year deferral period - not all of the award will be paid in one go – 50% will be paid two years later. Payments made under the BP are subject to malus and clawback provisions.
Maximum opportunity
The maximum possible bonus opportunity under the BP is 250% of salary for the Chief Executive and between 150% and 180% for the remaining members of our Executive. The maximum amount payable under the BP varies by Executive member and is set at an appropriate level in accordance with our reward philosophy. Target performance bonus is 50% of maximum.
Clawback provisions apply to the BP and enable the Committee to claim back part or all of a payment under these arrangements if our Co-op’s results were materially misstated, should have been assessed materially differently or where an individual ceases to be employed by our Co-op as a result of misconduct. Malus provisions allow, under specific circumstances, that the Committee can decide that an award which has not yet paid out should lapse.
To ensure payments are affordable, the BP has a financial underpin which must be achieved for any payments to be made. The Committee will look at performance at the end of the period and assess the BP outcomes. It can provide a BP payment between nil and the maximum opportunity for each executive depending on performance. The Committee has discretion to adjust targets, performance results or payments (up to the maximum or down to zero) for exceptional events, which they were not aware of at the time of granting the award.
The pay package for any new executive will be set using the same policies that apply to current executives, benchmarked externally by role. This means that the Committee would set a total pay package that is aligned to what other similar businesses pay for similar roles, while ensuring that it pays no more than is necessary to secure the individual.
The following additional items of pay may be considered when recruiting an executive:
* Relocation. The Committee will consider contributing towards relocation costs for an executive who needs to move home to be closer to their place of work or stay close to their place of work during the working week. When applicable, this is provided under a relocation policy that seeks to provide appropriate financial assistance based on the nature of the move and individual circumstances, without encouraging people to spend long periods away from family.
* Giving up of outstanding incentive awards. Under absolutely exceptional circumstances, the Committee may consider compensating a new executive for incentive awards lost as a direct result of leaving their previous employer to join Co-op. The exact type and amount of compensation will vary depending on the incentive plans operated by the previous employer. Any payments agreed under this policy will be no more generous than the arrangements lost, will mirror the original terms as far as possible and will typically be subject to relevant performance criteria.
In the event of termination, the Committee will review and approve all payments due to an executive with the aim of minimising the costs to our Co-op. Payments will be based on contractual and statutory obligations, including legal fees. Where negotiated, a contribution towards career support may be made.
The notice period in newly recruited executives’ service contracts will not exceed six months. Current executives’ contracts can be terminated by a maximum of six months’ notice. Where it is better for our Co-op for an individual to remain under a contract of employment but not to work their notice, they are placed on garden leave and only contractual payments are made. Where an individual is not required to work their notice and receives a payment in lieu, our Co-op is only obliged to pay base salary. The payment in lieu would not include any benefits or bonuses. The Committee can agree that the salary in lieu of the whole or part of the notice period can be paid in instalments. The Committee has the right to reduce the payments of salary in lieu of notice by the amount of income from a new role. The Committee has discretion to determine whether, and to what extent, any part of the deferred BP payment should be made in respect of the period they have been employed.# Annual Report on Remuneration
In exercising its discretion, the Committee will take account of the reasons for leaving, performance and contractual commitments. Comparison For base salary, benefits and pension, the same market aligned principles are applied to all colleagues. Fees for Non-Executive Directors Fees for non-executive Board directors are determined by the Non-Executive Fees Committee of Council. Fees are described in the section Annual Report on Remuneration on page 113.
Co-operative Group Limited Annual Report and Accounts 2022
106
The table below shows the pay received by our executives during the 2022 financial year.
Table 1a – 2022 pay for our executives in post at 1 January 2023
| Shirine Khoury-Haq | Dominic Kendal-Ward | Mike Hazell | |
|---|---|---|---|
| £ ’ 000 | £ ’ 000 | £ ’ 000 | |
| 2022 | 2021 | 2022 | |
| Fixed Pay | |||
| Basic Salary | 727 | 650 | 158 |
| Taxable Benefits (1) | 5 | 4 | 8 |
| Pension Benefits (2) | 73 | 65 | 13 |
| Performance- related pay | |||
| Bonus Plan (3) | 372 | 0 | 65 |
| Deferred Bonus Plan (4) | 394 | 117 | 47 |
| Other | |||
| Other (5) | 0 | 0 | 0 |
| Total | £1,571 | £836 | £291 |
Notes to Table 1a
Co-operative Group Limited Annual Report and Accounts 2022
107
Table 1b – 2022 pay for executives who left our Executive during the 2022 financial year
| Steve Murrells (6) | Jo Whitfield (6) | Helen Webb (6) | Helen Grantham (6) | |
|---|---|---|---|---|
| £ ’ 000 | £ ’ 000 | £ ’ 000 | £ ’ 000 | |
| 2022 | 2021 | 2022 | 2021 | |
| Fixed Pay | ||||
| Basic Salary (1) | 301 | 750 | 248 | 650 |
| Taxable Benefits (2) | 11 | 29 | 5 | 14 |
| Pension Benefits (3) | 29 | 75 | 25 | 65 |
| Performance- related pay | ||||
| Bonus Plan (4) | 0 | 0 | 0 | 0 |
| Deferred Bonus Plan (5) | 660 | 615 | 0 | 283 |
| Other | ||||
| Other (6) | 0 | 0 | 0 | 0 |
| Total | £1,001 | £1,469 | £278 | £1,012 |
Notes to Table 1b
The following table shows our performance for each section of the 2022 balanced scorecard.
2022 Balanced scorecard measures
| Weighting | Performance Measures | % of maximum weighting | Outturn | Summary | |
|---|---|---|---|---|---|
| Win as Co-op | 50% | Co-op Operating Profit | Miss | • Our Co-op performed with resilience in 2022, against an extremely challenging market backdrop • Achieving operating profit growth was a challenging target given the market headwinds, including significant underbudgeted in-year energy and salary inflation Based on performance against the 2022 budget the result for the financial element of the Co-operative |
|
| Fairer for our Members and Communities | 20% | Member – measures focused on creating and sharing value; driving member engagement, creating value with our members and sharing it with their communities | Target + | • During 2022, we delivered incremental activity across a number of key areas • Member participation continued to grow and reflects our growing understanding of what motivates members to participate, especially in our community • We also saw strong growth in members redeeming digital personalised offers with over one million members redeeming a digital offer Based on performance against the 2022 targets, an outturn of Target + was achieved |
|
| Fairer for our Colleagues | 10% | Colleague – measures focused on building and maintaining colleague engagement | Miss | • We went ahead with our annual Talkback survey during original timescales despite the timing coinciding with significant restructuring. We chose to do this in order to give colleagues a voice during a difficult time despite knowing that the activity we were undertaking would have a significant impact on our colleague engagement • There are some key strengths in our experience metrics. Colleagues are also increasingly positive about our inclusivity, with 81% feeling Co- op is a place where people from diverse backgrounds can succeed • Our drop in our engagement score in 2022 meant performance against this measure is below threshold |
|
| Personal performance | 20% | Assessment of how each member of the Executive performs across the year | • Determined in reference to individual performance. Measures include specific objectives such as overall financial performance, cultural achievements such as inclusion and leadership, transformation programme delivery and sustainability targets |
Co-operative Group Limited Annual Report and Accounts 2022
108
In determining the final outturn, the Committee reviewed each of the measures as set very robustly but tried to balance the ambition to recognise an exemplary job in an another extremely challenging year. Based solely on performance against the balanced scorecard measures covering profit, colleagues, community and membership, the bonus outturn was just below ‘threshold’. The Committee did not retrospectively change those targets, even though the market had changed so dramatically since they were set. But the Committee did decide to use discretion against the proportion of bonus allocated to individual performance ratings to increase the outturn on the personal element of the scorecard. This went some way to recognise the significant extra effort of our colleagues to improve our position, particularly in the second half of our year. This upward discretion meant that outturn of the 2022 BP was around threshold.
Awards are made annually under the BP and any payments due are made in cash, with 50% of all awards paid in two years’ time. The table below shows the value of the deferred award held by executives in post at 1 January 2023.
Table 2a – deferred BP awards held by our executives in post at 1 January 2023
| Name of executive | Bonus Plan award year | Value of Bonus Plan award deferred | Bonus Plan deferred award due in year (Note 1) |
|---|---|---|---|
| £ ’ 000 | £ ’ 000 | ||
| Shirine Khoury-Haq | 2022 | 372 | - |
| 2021 | 0 | - | |
| 2020 | 394 | - | |
| Dominic Kendal-Ward | 2022 | 65 | - |
| 2021 | 10 | - | |
| 2020 | - | 47 | |
| Mike Hazell | 2022 | - | - |
| 2021 | - | - | |
| 2020 | - | - |
Notes to Table 2a
Co-operative Group Limited Annual Report and Accounts 2022
110
Table 2b – deferred BP awards for executives who have left our Executive
| Name of executive | Bonus Plan award year | Value of Bonus Plan award deferred (Note 1) |
|---|---|---|
| £ ’ 000 | ||
| Steve Murrells | 1 2021 | 0 |
| 2020 | 660 | |
| Jo Whitfield | 2 2021 | 0 |
| 2020 | 343 | |
| Helen Webb | 2 2021 | 0 |
| 2020 | 238 | |
| Helen Grantham | 3 2021 | 0 |
| 2020 | 107 |
Notes to Table 2b
The table below shows the pension entitlements for our Executive. The figures shown reflect the period that the individuals were appointed to our Executive.
Table 3a – Pension entitlements for executives in post at 1 January 2023
| Name of executive | Date appointed to Executive | Years of group service | Period | Employer contributions to Defined Contribution pension scheme | Payment in lieu of pension benefit | Total pensions benefit |
|---|---|---|---|---|---|---|
| £ ’ 000 | £ ’ 000 | £ ’ 000 | ||||
| Shirine Khoury-Haq | 5 Aug 2019 | 3 | 2022 | 2 | 71 | 73 |
| 2021 | 2 | 63 | 65 | |||
| Dominic Kendal-Ward | 13 Jun 2022 | 5 | 2022 | 13 | 0 | 13 |
| 2021 | - | - | - | |||
| Mike Hazell | 9 Jun 2022 | 0 | 2022 | 1 | 28 | 29 |
| 2021 | - | - | - |
Notes to Table 3a
Table 3b – Pension entitlements for executives who left our Executive during the 2022 financial year
| Name of executive | Date stepped down from Executive | Years of group service | Period Employer contributions to Defined Contribution pension scheme | Payment in lieu of pension benefit | Total pensions benefit |
|---|---|---|---|---|---|
| 2022 | £ ’ 000 | 2022 | |||
| Steve Murrells | 21 May 2022 | 9 | - | ||
| 2021 | - | ||||
| Helen Grantham | 31 Jul 2022 | 6 | - | ||
| 2021 | - | ||||
| Jo Whitfield | 30 Sept 2022 | 6 | 2 | ||
| 2021 | 3 | ||||
| Helen Webb | 30 June 2022 | 8 | - | ||
| 2021 | - |
What arrangements have been agreed for former executives?
Jo Whitfield stepped down from our Executive on 30 September 2022. Her earnings whilst she was a member of our Executive team up to 30 September 2022 are shown in Table 1b. The terms of her settlement agreement included an amount of £364,000 for contractual pay in lieu of notice and termination payments totalling £344,000.
Helen Webb stepped down from our Executive on 30 June 2022. Her earnings whilst she was a member of our Executive team up to 30 June 2022 are shown in Table 1b. The terms of her settlement agreement included an amount of £225,000 for contractual pay in lieu of notice and a termination payment of £253,000.
Steve Murrells stepped down from our Executive on 22 May 2022. His earnings whilst he was an Executive up to 22 May 2022 are shown in Table 1b. The terms of his settlement agreement included an amount of £375,000 for contractual pay in lieu of notice. His deferred 2019 bonus payment was paid in full in May 2022 and he will be treated as a qualifying leaver for the 2020 deferred bonus payment due in May 2023.
Helen Grantham retired from our Executive on 31 July 2022. Her earnings whilst she was a member of our Executive team up to 31 July 2022 are shown in Table 1b. In line with the bonus plan rules, Helen will be treated as a qualifying leaver for the 2020 deferred bonus payment due in May 2023 and will receive a prorated award.
Large public companies are required to report the ratio of pay between a firm’s chief executive compared to the 25th, median and 75th percentiles of full-time employees. To calculate each percentile, we’ve sorted all our colleagues in order of their total pay from high to low. We then split them into four equal groups to work out the percentiles i.e. if there are 101 colleagues, the 25th highest paid colleague is used for the 75th percentile, the 51st highest paid colleague for the median and the 75th highest paid colleague for the 25th percentile.
The pay ratios, calculated in line with the Corporate Governance Code guidance, are set out below.
| Year | Method | 25th percentile ratio | Median pay ratio | 75th percentile ratio |
|---|---|---|---|---|
| 2022 | Option C | 91:1 | 76:1 | 62:1 |
| 2021 | Option C | 76:1 | 71:1 | 64:1 |
| 2020 | Option C | 122:1 | 117:1 | 102:1 |
| 2019 | Option C | 83:1 | 76:1 | 62:1 |
Under the options provided in the guidance to calculate the pay ratio, we’ve opted to use option C. This allows us to select comparator colleagues for the 25th, 50th and 75th percentiles. All three options would give us a very similar result, and option C is the most practical and appropriate for Co-op given the size and complexity of our payroll systems. A large proportion of our colleagues work in frontline roles in our stores, and both the 25th percentile and the median comparators are CTMs in our Food stores.
The Government pay ratio calculation is based on actual pay received. It therefore can change a lot, as bonus payments are likely to vary each year given that they are linked to both business and personal performance. In addition, for the last six years, we’ve shared our pay ratio based on target earnings rather than actual, as this approach makes sense to us and we believe it will make it easier for members to compare progress over time. We’ll continue to provide the ratio on this basis, and the ratio between our highest paid executive and lowest paid colleague for 2018 to 2023 on base pay and for base pay plus target bonuses is set out below.
| Year | Base pay only | Base pay plus on target bonuses |
|---|---|---|
| 1 April 2023 | 35:1 | 79:1 |
| 1 April 2022 | 39:1 | 87:1 |
| 1 April 2021 | 40:1 | 91:1 |
| 1 April 2020 | 43:1 | 96:1 |
| 1 April 2019 | 44:1 | 99:1 |
| 1 April 2018 | 48:1 | 96:1 |
On appointment as our Chief Executive, Shirine Khoury-Haq’s salary increased to £750k, and her maximum bonus opportunity increased to 250%, which is the same remuneration package as our previous CEO Steve Murrells. The reason for the reduction in the pay ratio is that our CEO pay and on-target earnings has remained static whereas we ’ve increased the pay of the comparator role, which is a Customer Team Member (CTM) in our Food Stores, by 10.1% from 1 April 2023.
This section of the report includes details of the payments made to the Non-Executive Directors (NEDs) in office during 2022.
What are the fees for the NEDs for 2023?
| NED Role | Fees |
|---|---|
| Chair | • The basic fee for the Chair role is £250,000 per annum. There has been no change in annual fee between 2015 and 2022. No additional fees are paid |
| Independent Non- Executive Directors (INEDs) | • The basic fee for an INED is £60,000 per annum • The following additional fees apply: • Senior Independent Director £15,000 • Chair of Risk and Audit Committee £15,000 • Chair of Remuneration Committee £15,000 • There is no additional fee for the Chair of Nominations Committee or for being a member of any committee |
| Member Nominated Directors (MNDs) | • The basic fee for an MND is £60,000 per annum • The same additional fees for the INEDs apply to MNDs who are Chairs of a committee. There is no additional fee for being a member of any committee |
Since his appointment date, the Chair has waived his fee of £250,000 per annum. Instead this is paid direct by our Co-op to charity. In 2022, it was paid to The Co-operative Community Investment Foundation. No other benefits will be provided for the Chair or any other NED member of our Board. All NEDs are entitled to reimbursement of all reasonable and properly documented travel, hotel and other expenses incurred in performing their duties, in accordance with the terms of our Co- op’s expenses policy. None of the NEDs, by virtue of their Board position, participated in any of our Co- op’s incentive plans or pension schemes, nor did they receive performance-related payments during the period. The NEDs’ letters of ap pointment are available for inspection on request.
How long are directors appointed to our Board for?
Appointments to our Board are for the following periods:
What did the NEDs earn during the year?
The table below shows the fees paid to our NEDs during the 2022 financial year.
Table 4a – Non-executive members of our Board at 1 January 2023
| Notes | Co-op Board | Risk and Audit Committee Chair | Remuneration Committee Chair | Senior Independent Director | 2022 total | 2021 total |
|---|---|---|---|---|---|---|
| £ ’ 000 | £ ’ 000 | |||||
| £ ’ 000 | £ ’ 000 | |||||
| £ ’ 000 | £ ’ 000 | |||||
| Allan Leighton (Chair) | 1 | See note 1 | See note 1 | See note 1 | ||
| Sir Christopher Kelly | 2,3 | 60 | 15 | 75 | 75 | |
| Stevie Spring | 2 | 60 | 15 | 75 | 75 | |
| Simon Burke | 2 | 60 | 15 | 75 | 75 | |
| Lord Victor Adebowale | 60 | 60 | 60 | |||
| Kate Allum | 60 | 60 | 39 | |||
| Margaret Casely- Hayford | 60 | 60 | 60 | |||
| Paul Chandler | 60 | 60 | 60 | |||
| Sarah McCarthy- Fry | 60 | 60 | 60 | |||
| Rahul Powar | 60 | 60 | 60 |
Notes to Table 4a
Table 4b – Former Non-Executive members of our Board who left during the 2022 financial year
During the year, there were no changes to our Non-Executive members of the Board. For details of fees paid to Independent Non-Executive Directors on the boards of subsidiary businesses, please see the relevant accounts, which are available on request from the Secretary.
The Committee is responsible for determining and overseeing the Executive Pay Policy for our Co-op to ensure a consistent approach across our Co-op and its subsidiaries.
The terms of reference of the Committee are available on our website: www.co- operative.coop/investors/rules
Members of the Committee
Details of the Committee members and their attendance at meetings during 2022 are provided on page 79.# The report of the Nominations Committee
I am pleased to present the report from the Nominations Committee for what marks my eighth year as Co-op Chair and Chair of the Nominations Committee. The Committee has continued to play a key role in supporting the Board and has continued to assess the composition, succession plan and skills and experience of the Board and its committees to ensure it is operating effectively. Key areas of activity for the Committee have included:
The Committee also continued to deal with all of its routine matters, which included assessing whether Directors have met the required eligibility and membership criteria, recommending the re-appointment of Independent Non-Executive Directors and reviewing the Committee Terms of Reference.
As noted in my introduction to the Governance Review, we are delighted that Adrian Marsh will be joining us as our new INED and Risk and Audit Committee Chair following a robust recruitment process led by the Committee. Sir Christopher Kelly, Stevie Spring, Paul Chandler and I will all achieve nine years of Board tenure during 2023/24 and, in accordance with our Rules, we will be required step down from the Board. The Committee and our Board as a whole have been particularly mindful of the various changes taking place to our composition in a relatively short period, and have been carefully planning ahead to ensure orderly succession. Leading on the recruitment activity and ensuring the Board maintains an appropriate balance of skills, experience and diversity will remain a key priority for us during 2023.
Allan Leighton
Chair, the Nominations Committee
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Our Nominations Committee:
The Member Nominated Directors Joint Selection and Approval Committee (MNDJC) oversees the election process for MNDs and therefore who is put forward for direct election by members. The Committee’s Terms of Reference were reviewed during the year. They are available on our website: www.co-operative.coop/investors/rules
The membership of the Committee comprises a combination of INEDS, MNDs and the Council President. Where appropriate, the CEO is invited to attend meetings. Biographical details of the Committee members can be found on pages 66 - 71. The Committee met formally three times during the year with meeting attendance available on page 80.
During the year, the Committee, under the leadership of the Chair and Senior Independent Director (SID), led a formal, rigorous and transparent process to select Adrian Marsh as our new INED as successor to Simon Burke, Chair of the Risk and Audit Committee. The Committee engaged external executive search consultants Odgers Berndtson to conduct the search. Odgers’ only connection with our Co-op is as recruitment consultants and there are no relevant connections with individual Directors. The Committee agreed the scope and candidate profile for the role with a diverse longlist being a key requirement. As well as the necessary skillset, experience and qualification for the role, including those set out in our Rules and Regulations, candidates also needed to be able to demonstrate a strong personal commitment to Co-operative Values and Principles. A shortlist of candidates was agreed and interviewed by various members of the Nominations Committee and Board. Following these meetings, the Committee was unanimous in recommending to the Board the appointment of Adrian Marsh. Adrian will be joining us in May 2023, following which he will undertake a comprehensive induction programme. Also, Rachel Izzard will join our Co-op in June 2023 as Chief Financial Officer and Executive Director, replacing our Interim CFO Mike Hazell. The Committee has supported our CEO and Chief People and Inclusion Officer who led the CFO recruitment process. This included Committee members meeting with potential candidates and considering factors including skills and experience and commitment to our Values and Principles. Rachel’s appointment as an Executive Director has been approved by our Board, following a recommendation from the Committee. As Adrian and Rachel will both join our Board after the date of convening the AGM, in accordance with our Rules, both Adrian and Rachel will be due to stand for election for the first time at our 2024 AGM.
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Our Board evaluation provides the Board with an opportunity to reflect on effectiveness and performance. 2022 saw an internal Board effectiveness review process, facilitated by Sir Christopher Kelly. Whilst our Rules indicate that an external review should be undertaken at least every two years (unless there is good reason for not doing so), the Committee and Board Chair decided that there would be no significant merit in holding an external review in 2022. The Committee further agreed that the external review should be undertaken every three years, in line with the recommendations of the UK Corporate Governance Code and on consideration of the cost involved. An external evaluation is scheduled for 2023. For the 2022 review, Board members completed an online questionnaire, rating their degree of satisfaction with different aspects of Board performance. Areas of focus included Board meetings, boardroom culture and focus, decision making, Board papers and presentations, the relationship with the Council and Board committees. The results were discussed by the Directors, in the absence of the Chair and Chief Executive and separately with the Chair and Chief Executive. The Council President and the Group Secretary were also consulted and Sir Christopher shared the outputs with the Council’s Governance Committee. Based on the results of the review, an action plan has been developed and agreed with the Board. Areas of focus include:
During the year, the Committee reviewed the Board Skills Matrix (used to help assess the current skills, knowledge and experience of the Board and any potential gaps that could be addressed in future appointments). This continues to be maintained and has been used to inform discussions on the skills and experience we are looking for in our new Board members. Our Non-Executive Directors comprise both INEDs and MNDs. While we can actively recruit for skills and skills gaps for INEDs, our MNDs are elected directly by our members once they have been shown to meet the membership and eligibility criteria under our Rules.# Co-operative Group Limited Annual Report and Accounts 2022 119
Directors are subject to re-election every three years. Lord Victor Adebowale, Shirine Khoury-Haq and Stevie Spring will be offering themselves for re-election by members at the 2023 AGM. Also, one of current MNDs, Margaret Casely-Hayford is due to stand for re-election in 2023. In accordance with our Rules, Shirine Khoury-Haq as Chief Executive Officer (with the support of our Chief People and Inclusion Officer) leads on succession planning for the leadership, in consultation with the Board. This has been delegated to the Remuneration Committee to review in the first instance.
During the year, the Committee considered and recommended to the Board the re- appointments of Allan Leighton (Group Chair), Stevie Spring (INED) and Simon Burke (INED). Following the completion of their latest terms, Allan Leighton and Stevie Spring will reach the end of their nine-year terms and will be required to step down from the Board in 2024. The Member Nominated Director Joint Selection and Approvals Committee (MNDJC) was responsible for the MND election process, which saw Paul Chandler and Sarah McCarthy- Fry being re-elected for additional terms during 2022.
A diverse and inclusive workplace representative of our membership remains a priority for the Board and Nominations Committee and underpins discussion at every level. Whilst we believe diversity goes beyond gender and ethnicity, we know this has rightly been a key area of focus over recent years. We are proud that our Board is currently comprised of:
* Men: (6) (55%).
* Women: (5) (45%).
* Ethnic Minority: (4) (35%).
During the year, the Committee reviewed the Board Diversity and Inclusion Policy and remained satisfied that it was aligned to Our Commitments to Racial Equality and Inclusion manifesto, adopted in 2020. The Board Diversity and Inclusion Policy can be found at: www.co-operative.coop/investors/rules
For more information on Our Commitments to Racial Equality and Inclusion, and how we measured against these targets during 2022, please see our Co-operate Report.
The Committee reviewed the composition and balance of skills on our Board Committees. As part of this review, the Committee considered the membership of each committee, the tenure of each Director, the Board Skills Matrix, diversity and input from the Committee Chairs. In January 2023, the Committee recommended that Kate Allum be appointed to the Remuneration Committee. This would help affect orderly succession and continuity in light of the pending changes to the Board.
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Having reviewed the qualifying and commercial experience for INEDs and Executive Directors throughout the year (including the Membership Criteria and Eligibility Criteria) the Committee can confirm that the INEDs and our Executive Directors have all met the relevant requirements and shown continued commitment to Co-operative Values and Principles.
For 2023, the focus areas for the Committee will include:
* Leading and concluding processes to appoint a new Board Chair and SID.
* Commencing and leading the process to appoint an INED as successor to Stevie Spring, the Chair of our Remuneration Committee.
* Progressing actions arising from the 2022 Internal Board evaluation.
* Overseeing an externally facilitated Board evaluation.
Co-operative Group Limited Annual Report and Accounts 2022 121
The Directors present their report, together with the audited financial statements for the period ended 2 January 2023.
The profit before taxation (from continuing operations) was £247m (2021: £57m). No interim dividend has been paid for 2022 and the members are not being asked to approve any distribution of profits for the year.
The financial statements are prepared on a going concern basis as the directors have a reasonable expectation that the Group has sufficient liquidity to continue in business for the foreseeable future. Our Co-op operates with net current liabilities as our working capital cycle means cash receipts from revenues arise in advance of the payments to suppliers for the cost of goods sold. We also borrow money from banks and others, and as part of this process we have checked that we can comply with the terms of those agreements - for example, banking covenants and facility levels.
Accounting standards require that the foreseeable future covers a period of at least 12 months from the date of approval of the financial statements. The assessment of going concern relies heavily on the ability to forecast future cashflows over the going concern assessment period, to 31 December 2024. Although our Co-op has a robust planning process, the current economic uncertainty (driven by factors including ongoing inflation and rising energy costs) means that additional sensitivities and analysis have been applied to test the going concern basis under a range of downside scenarios.
The following steps have been undertaken to allow the directors to conclude on the appropriateness of the going concern assumption:
1. Understand what could cause our Co-op not to be a going concern in relation to facility headroom and covenant compliance.
2. Review and challenge of the base case forecast produced by management, including key investment choices.
3. Consider downside sensitivities across the base case forecast as part of going concern.
4. Examine what controllable mitigating actions would be taken in the event of these scenarios.
5. Perform a reverse stress test to assess under what circumstances liquidity and covenant headroom would become a risk, assess the likelihood of whether they could occur and any further mitigating actions.
6. Conclude upon the going concern assumption.
In making their assessment, the directors have considered a wide range of information relating to present and future conditions, including future forecasts of profitability; cashflow and covenant compliance; and available capital resources. The potential scenarios which could lead to our Co-op not being a going concern are:
a. Not having enough cash to meet our debt liabilities as they fall due; and/or
b. A breach of the financial covenants implicit in our bank facility agreement.
We note at the year-end date, of the total £1,079m of facilities available to us, we were £780m drawn-down. Note 28 to the Financial Statements sets out more information on the
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Group’s objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities, and its exposures to credit and liquidity risk.
We have conducted a detailed forward planning exercise as part of our strategic plan. The Co- op’s base case forecast includes prudence following the uncertainty in the market due to geo-political factors, inflation and rising energy costs. The Board has reviewed and approved these plans. The key assumptions in the plan are:
a) Sales growth continues to be supported by market wide inflation, primarily due to the impact of cost headwinds (energy and wage inflation) increasing the cost of goods. This growth is tempered with volume reduction from cost of living pressures.
b) Cost headwinds continue due to energy and wage inflation.
c) Capital investment remains tightly controlled, supported by a capital light store growth programme.
d) The bond due for maturity in 2024, and those maturing thereafter, are repaid in full out of existing cash balances.
In undertaking our going concern assessment, we have included assumptions related to the uncertain economic environment, and modelled further severe but plausible downside sensitivities of internal and external factors on the financial projections including (but not limited to):
* A reduction in the sales in our Food retail business, with a 2% reduction to sales volume in FY23 and 1% thereafter.
* A reduction in the demand of our Funeralcare business, with a 1% reduction in volume of funerals delivered, a reduction in average sales price and a move to customer preferences towards lower cost funerals.
* An increase in energy costs across each year of the plan of £20m in each year, reflecting a reversion to the peak energy costs of 2022.
* Assuming a slower salary inflation reversion to normal levels in FY25, representing £40m cost each year (the base plan assumes that salary inflation normalises over the life of the plan).
The sensitivities identified above do not risk the validity of our Co-op as a going concern even before applying the mitigating actions set out below. Also, we have considered a plausible combination of the sensitivities happening concurrently where the validity remains protected. Even in the implausible scenario of all the sensitivities happening simultaneously we still have liquidity and covenant headroom.
Whilst out of line with our strategic ambition, there are several options within the business' control we could exercise, if the above risks materialised. Options include:
* Our Co- op’s ability to control the level and timing of its capital expenditure programme, saving a minimum of 10% of the total capital outlay.# Co-operative Group Limited Annual Report and Accounts 2022
Whilst our initial going concern approach assesses likely risks to our base case forecasts through severe but plausible downside scenarios and options to mitigate them, the reverse stress test represents a worst-case scenario at which point the model breaks. Whilst unlikely, to demonstrate the above, we have modelled that a negative cash impacting event of £569m could occur before we would be at risk of breaching our covenant and/or liquidity headroom. We note that whilst all remain undesirable strategically, we could mitigate the reverse stress test scenario through a further reduction or delay in capital expenditure and a change in the timing of our investment into operational improvements. There is also the option to apply further cost control measures and flexibility to pass a higher level of energy and cost inflation onto the end customer.
For the purposes of going concern, we assume that no new facilities are required or needed. We do not anticipate any change in this assumption, but this will be kept under review. Based on all of the above considerations, the Directors have not identified any material uncertainties and have a reasonable expectation that the Society and the Group have access to adequate resources to enable them to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the Group’s financial statements. Further information relevant to the directors’ assessment i s provided within the General Accounting Policies section of the financial statements (page 221).
The directors have assessed whether we will have enough money to continue in business and whether covenants are expected to be complied with over the longer term. In making that assessment, the directors have considered our Co- op’s current position and the potential impact of our principal risks as set out on pages 61 - 65. We believe that a three- year period to 31 December 2025 is an appropriate period over which to provide this longer- term viability statement. Retail is our largest business and the directors have therefore determined the three-year assessment period given the dynamic nature of the retail sector. This is consistent with other major food retailers and forms part of the detailed forecasts reviewed by the Group board as part of the strategic planning process.
We have assumed that our borrowing facilities maturing in 2024 and 2025 are repaid as they fall due, and that the 2026 Eurobond is refinanced on maturity. Post year end, we have extended our Rolling Credit Facility (RCF) maturity date from September 2024 to March 2026. The RCF will increase in size to £442.5m until September 2024, then fall to £360m if one of the Bank’s choose not to extend (as assumed in this model). Our RCF will then be a committed £360m for the period October 2024 to March 2026. We have the option of inviting new banks to participate, although we have sufficient headroom irrespective of this.
As part of the strategy planning process, the directors make a number of assumptions and judgements about business performance. We then flex the main financial assumptions to check that we still comply with the terms of our facilities, even if some of our principal risks happen. The viability statement is a continuation of the going concern assessment into future years and is part of the strategic plan that the Co-op Board has challenged and approved. The nature of the key assumptions are consistent with those in FY23 but have been flexed to reflect our expectations of trends beyond the going concern period of assessment. The scenarios we have selected are severe but plausible and include considering risks in combination. We have ensured that the sensitivities modelled are representative of our principal risks as set out in the below table:
| Principal risk | Sensitivity applied |
|---|---|
| Competitiveness and External Environment | Food sales reduce by 2% in FY23 and 1% thereafter |
| Funeralcare volumes reduced by 1% | |
| Funeralcare average sales price reduced to reflect lower average price and sales mix | |
| Wage and other cost inflation | |
| Electricity, gas and fuel price increases |
When applying these viability sensitivities, there is no breach to our Co- op’s financial covenants and there remains sufficient liquidity through to the end of 2025. Following their review, the directors have therefore concluded that they have a reasonable expectation that the Group will have enough money and covenant headroom to continue in business over the period to 31 December 2025.
Bond liability management exercise – on 1 March 2023, the Group repurchased £100m of the £300m 5.125% Sustainability Bond (due May 2024) from bond holders following an over- subscribed tender exercise. This was announced to the market on 27 February 2023. The bonds were bought back at 99% of par value.
Rolling Credit Facility (RCF) refinancing – on 20 March 2023, we concluded an amendment and extension exercise for our Revolving Credit Facility. As a result our £400m sustainable RCF will increase in size to £442.5m until September 2024 when it will fall to £360m. The £360m facility will mature in March 2026. New sustainability metrics will be added into the facility during 2023, firmly linking Co- op’s commitment to sustainability with its financial facilities.
Since 2016, our total Scope 1 and 2 greenhouse gas (GHG) emissions have reduced by 55.68%. In 2021, we reported that we reached our science-based target for Scope 1 and 2 greenhouse gas emissions three years early. Total Scope 1 and 2 GHG emissions have continued to decrease by 9.58% in 2022. This is due to using less energy, less fuel, a decrease in emissions from fugitive refrigerant gases and the UK grid electricity mix generating lower carbon emissions.
In line with GHG Protocol guidance, we present our Scope 1 and 2 GHG emissions figures in two ways, showing GHG emissions if our electricity was counted at UK grid average (known as location-based reporting), and also accounting for our purchase and generation of renewable electricity (known as market-based reporting). Our GHG emissions reduction target is in line with the reductions needed to keep global warming to 1.5°C above pre- industrial temperatures: a threshold for the most dangerous impacts of climate change. Our targets have been reviewed and approved by the Science-Based Targets initiative (SBTi), a coalition of leading environmental NGOs. In 2023, we will be resetting our climate targets across all scopes, for the near and long term, to ensure that they are in line with keeping global temperature rise to no more than 1.5ºC above pre-industrial temperatures. We are expecting these updated targets to be released and validated by the SBTi later in 2023.
Scope 1 and 2 GHG emissions since 2016 – location-based
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|---|---|
| ktCO₂e | 653 | 542 | 436 | 397 | 349 | 320 | 288 |
Scope 1 and 2 GHG emissions since 2016 – market-based
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|---|---|
| ktCO₂e | 342 | 297 | 247 | 232 | 206 | 198 | 181 |
Scope 1 and 2 GHG emissions by source – location-based
| 2022 ktCO₂e | |
|---|---|
| Scope 1 - Refrigeration | 66 |
| Scope 1 - Fuel | 95 |
| Scope 1 - Gas | 19 |
| Scope 2 - Electricity | 107 |
| Scope 1 and 2 – Total (location- based) | 288 |
Numbers in ktCO₂e have been rounded to the nearest whole number
Scope 1 and 2 GHG emissions by source – market-based
| 2022 ktCO₂e | |
|---|---|
| Scope 1 - Refrigeration | 66 |
| Scope 1 - Transport | 95 |
| Scope 1 - Heating / Generation | 19 |
| Scope 2 - Electricity | 1 |
| Scope 1 and 2 – Total (market- based) | 181 |
Numbers in ktCO₂e have been rounded to the nearest whole number
| 2022 GWh | |
|---|---|
| Electricity (location based) | 555 |
| Gas | 105 |
| Fuel | 370 |
Energy efficiency Reducing our operational greenhouse gas emissions to meet our science-based target has centred around energy efficiency improvements, refrigeration technology and UK electricity grid decarbonisation. We’ve improved our property maintenance plans, standards and specifications, targeted investments in energy use and refrigeration, and enhanced asset monitoring/management controls. We’ve al so achieved a reduction in greenhouse gas emissions from our logistics operations by improvements in transport planning and focusing on refrigeration plug-in compliance at depots, meaning vehicles are using less diesel to run their fridges.
Like many other businesses of a comparable size, our Co-op engages with a wide range of political opinion formers and decision makers, designed to protect, promote and enhance our corporate reputation and to deliver our campaigning ambitions. On issues of relevance to our business, we are also an active participant in the work of business trade associations. Separate to this corporate activity, our Co-op is a subscribing member of The Co-operative Party, which was founded by the co-operative movement in 1917 to promote its Values and Principles. The Co-operative Party works to raise awareness of the benefits of co-operative and mutual models. We made donations totalling £598,000 (2021: £598,000) to The Co-operative Party, which is our financial subscription to the Party for 2022 , in line with our members’ approval at the Annual General Meeting in 2021.# The Co-operative Party reports donations to the Electoral Commission in accordance with its reporting obligations as a registered political party under the Political Parties, Elections and Referendums Act 2000. No political donations are made through the Local Community Fund (‘the Fund’) and its terms and conditions are explicit that the Fund cannot be used for party political purposes. A motion was passed by our members at the 2022 Annual General Meeting regarding our political expenditure, including donations and/or subscriptions to political parties, not exceeding £750,000 in total for the year commencing 1 January 2023.
During 2022, our Co-op engaged and worked collaboratively with Mark White, the Groceries Code Adjudicator (GCA), and we continue to demonstrate our compliance with the Code. The GCA Annual Survey 2022 showed a dip in suppliers’ rating of our overall compliance, but they continued to rank our Co-op in the top three retailers for conducting relationships fairly and in good faith, without duress. We value the supplier feedback given in the survey and use the outputs to shape our supplier engagement action plan.
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|---|---|
| Tonnes CO₂-equivalent (location-based) GHG emissions per £m revenue | 63.5 | 52.8 | 42.7 | 36.4 | 30.5 | 28.6 | 25.3 |
Co-operative Group Limited Annual Report and Accounts 2022 127
The Committee has kept compliance under review through regular updates from the Code Compliance Officer and senior leaders in our Food business. The Committee approved the Annual Compliance Report for submission to the Competition and Markets Authority as required by the Groceries (Supply Chain Practices) Market Investigation Order 2009.
We have maintained our whole business approach to monitoring compliance with the Code, with regular reporting at various governance forums. The Code Compliance Officer (CCO) and Commercial leaders report regularly to the Risk and Audit Committee on how compliance is achieved. The Committee also approved the Annual Compliance Report for submission to the Competition and Markets Authority, as required by the Groceries (Supply Chain Practices) Market Investigation Order 2009.
The impact of the cost of living crisis and the increase in energy costs and other costs is felt by our customers and our suppliers. Balancing our desire to keep prices low for customers and the need of suppliers to pass on higher cost prices has the potential to increase the risk of non-compliance with the Code, in how we deal with suppliers. We have increased the level of support for buying teams throughout 2022 to ensure our buyers are clear on their responsibilities when assessing a supplier cost price increase request. This has helped us maintain our levels of compliance throughout these turbulent times.
We provide GSCOP training to all colleagues who deal with suppliers, not just the Buying teams. As per our duties with the Order, all relevant colleagues receive a copy of the Code. In 2022, we trained 1,033 colleagues. For our suppliers, we also provided new, quick ‘how to’ guides to help them keep their data accurate and minimise errors.
During 2022, we had no formal disputes under the Code. We recorded 129 potential supplier issues - of these, 53 were raised directly with the CCO and 76 were raised internally by Co-op colleagues. The increase in the number of supplier issues is largely linked to the challenges faced by suppliers and colleagues on the implementation of the new SAP Retail Business Transformation. By the end of 2022, many of the most significant issues had been fixed, but further improvements will be necessary in 2023. Only three issues remained unresolved at the end of the reporting period.
Throughout 2022, we have continued to engage with Mark White, the Groceries Code Adjudicator, and we value his collaborative approach. Our CCO has committed to treat any discussion held with a supplier in the strictest of confidence and that it will be for the supplier, and the supplier alone, to determine whether the CCO may disclose any details about the subject matter of their Code-related discussion within their designated retailer. This encourages suppliers to share their experiences of dealing with our Co-op openly and to report any Code-related concerns in the strictest of confidence with him at [email protected].
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The Directors are responsible for preparing the Annual Report in accordance with applicable law and regulations. The Group accounts have been prepared in accordance with UK adopted international accounting standards for the 52 week period ended 31 December 2022 and in conformity with the requirements of the Co-operative and Community Benefit Societies Act 2014. The Group financial statements are required by law to give a true and fair view of the state of affairs of the Group and the profit or loss of the Group for that period.
In preparing the Group financial statements, the Directors are required to:
* Select suitable accounting policies and then apply them consistently.
* Make judgements and estimates that are reasonable and prudent.
* State whether UK adopted international accounting standards, in conformity with the requirements of the Co-operative and Community Benefit Societies Act 2014, have been followed.
* Prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Group will continue in business.
The Directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that its financial statements comply with the Co-operative and Community Benefit Societies Act 2014. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Directors consider that the Annual Report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for members to assess the Group’s position and performance, business model and strategy.
Each of the Directors listed on pages 66 - 71 confirm that, to the best of their knowledge:
* The Group financial statements, which have been prepared in accordance with international accounting standards - UK adopted international accounting standards, in conformity with the requirements of the Co-operative and Community Benefit Societies Act 2014 – give a true and fair view of the assets, liabilities, financial position and profit of the Group.
* The Strategic Report and Governance Report contained in the Annual Report and financial statements include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
In this context, ‘the Group’ means Co-operative Group Limited, and all the companies and societies it owns.
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So far as the Directors are aware, there is no relevant information that has not been disclosed to our auditor. The Directors believe that all steps that ought to have been taken have been taken, to make them aware of any relevant audit information and to establish that our auditor has been made aware of that information.
A resolution to re-appoint EY LLP as auditors of the Group and to determine their remuneration for the forthcoming year was proposed at the 2022 Annual General Meeting and approved.
By Order of the Board
Dominic Kendal-Ward
Group Secretary and General Counsel
4 April 2023
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Our Co-op is owned by its members. Your National Members’ Council is elected to represent and champion members’ interests and to ensure our Co-op delivers its Vision of ‘Co-operating for a Fairer World.’ We make your voice heard, influence plans and strategies and ensure Co-operative Values & Principles are at the forefront of how Co-op does business. Being a co-op makes us different and sets us apart from other retailers, adding a unique layer to the decisions we make and the work we do. That means we have to clearly explain what it means to be a co-op and what our difference is as, together, we strive to ‘Co-operate for a Fairer World.’
In 2022 we have:
* Influenced how our Co-op is supporting members, customers, communities and colleagues through the cost of living crisis, harnessing our ethical and sustainable commitments. Key recommendations from Council members included investing in our prices and availability in store, and suggestions made by Council members included how we could support communities through our Warm Spaces funding boost.
* Emphasised the importance of clearly explaining how our Co-op is different so that everyone knows that we are owned by you - not investors, our members - and that we exist to create value for our members, our communities and our planet.
* Supported work to review how we reward our members for trading with us, and how we attract and involve members in what we do and how we do it.# Co-operative Group Limited Annual Report and Accounts 2022
And to evidence our efforts:
Council is made up of 100 Co-op members from all walks of life, including colleagues and people from other co-op societies. We meet regularly with - and provide support and constructive challenge to - our Board, Shirine’s Operating Board and our leadership team, to put your needs at the heart of the decisions we make and ensure our Co-op is successful. We also meet in committees and joint working groups throughout the year, where we hear from colleagues on plans and performance in more detail and help develop business activities by working collaboratively. We use a framework called our Co-op Compass, which helps us monitor areas of our Co-op Difference and how we are performing.
Your Council has been focusing on the issues that are important to you, our members, and will continue to prioritise them in 2023:
Big issues in 2022:
The cost of living crisis and how we support our members, customers, communities and colleagues has been at the forefront of our work for the last few months. As co-operators, we believe that by working together, we can create a world which is fairer for our members and communities, fairer for our colleagues and fairer for our planet. This year has been challenging for our Co-op and many other retailers, but we’re really proud of how Co-op has helped people during the cost of living crisis through its different way of doing business. We wouldn’t be where we are today without the communities we serve and the colleagues who serve them, so it’s been a priority for Council to make sure that we do what we can to alleviate some of the pressures they’re facing. In autumn, Council members suggested to the Board, Shirine and our Operating Board that funding for eligible local causes would be vital, so that they could open longer and support people with energy costs. This idea was developed by our Communities team, and we are proud that our Co-op was the first retailer to launch a £1m Warm Spaces funding boost, with Crowdfunder.
We are proud of our ethical standards and commitment to sustainability and our Ethical and Sustainable Leadership (ESL) Committee helps to oversee, develop and monitor our business practices, policies and performance. It works with the Board and the business to demonstrate leadership in ethical and sustainable areas.
Diversity and inclusion is at the core of making the world a fairer place. Backed by our members’ votes at our 2022 AGM, we called on Co-op to publish progress on its ethnicity pay gap, which led to one of the first standalone reports of its kind. In September, we met with Zahoor Ahmed, Co-op's Head of Social Mobility, Inclusion and Belonging for the first time, to hear more about our diversity & inclusion strategy and ambition to create a socially just Co-op. Our Council Diversity & Inclusion Working Group will be helping to shape the strategy as work evolves, as well as championing ways for Council to improve its own diversity as we strive to be more representative of our communities.
Working with the co-operative movement is crucial if we want to succeed, thrive and secure a future for co-operation, making it a priority for Council as we support Co-op with delivering its Vision. This year, we were pleased to:
We’re incredibly grateful to colleagues throughout our businesses and on the frontline for everything they’ve done to help people through the challenges we’ve all faced over these 12 months. We’d like to say a big thank you to our members for your continued support - you’re helping us shape the future of our Co-op. We’d also like to recognise our Board, senior leadership and Council Secretariat for working with us as we look to achieve our shared belief that co-operation is a better way of doing business.
Big issues in 2022:
Our Co-op exists for you, our members, and providing value for you is especially important during challenging times, so the cost of living crisis brought this into even sharper focus in 2022.
Membership is at the heart of our success as a co-operative business and we’ve been part of shaping thinking about how we can invest in how we reward our members for trading with us, connecting our co-operative Vision and demonstrating our difference in the way members access their offers. We are looking forward to seeing how this is brought to life in 2023/24.
Council is proud of our fantastic Co-op own brand range and the service we provide in our stores. In July, we met with the Board and Co-op leaders about our new Food strategy. This included how we will give our members, customers and colleagues choice and focus on value. These discussions led to us replacing some of the multi-buy deals and lowering the cost of individual products, as well as providing colleagues with additional discounts. We know our members value access to our fantastic Food and Life Services products in a way that is convenient to them. Our commercial partnerships and quick commerce offer provide this route and, as your representatives, we want to continue to work with our Board to ensure our members can accrue membership benefits through as many channels as possible. We also welcome the Board’s commitments and assurance that our Ethical Decision Making Tool will continue to guide our decisions and ensure that we maintain and promote high standards through all of our partnerships, including with quick commerce and our suppliers.
In October, Council held an online briefing session with Co-op’s Interim Chief Financial Officer, Food’s Managing Director and Chief Commercial Officer for Funeralcare to discuss Co-op’s 2022 interim results. On behalf of members, we reviewed and scrutinised our performance and asked questions about our future strategy and performance, as well as how we are going to protect our assets and members’ financial interests.Our Member Value & Business Performance Committee reviews our Co-op’s financial performance and holds the Board to account all year round about how we create, sustain and develop member value in everything we do, so that our members are rewarded for choosing our Co-op and can see the difference in the way we do things. At committee meetings, we sought to understand the business rationale for the sale of Co-op's petrol forecourts and what this would mean for those members, customers and colleagues affected, as well as how we will invest the proceeds generated to stabilise our Co-op and put us in a stronger position. As part of this, we discussed future plans for store refits and openings, emphasising the need to do this with a focus on our existing estate and a capital light approach. We are also continuing to review and support how our National Members’ Council works most effectively and efficiently to represent your interests in 2023 and beyond, as we continue to look ahead to the future. In 2022, we’ve improved our relationships with Board members through stronger reporting from Board to Council and back again on activity and focus, helping us to hold to account and understand members’ needs. As our Co-op continues to change, we will ensure that we adapt how we oversee and monitor our performance and the value our Co-op delivers for you, including the information and reports we receive, so that we can provide assurance and hold the Board to account on your behalf.
Being a member of our Co-op is unique and special - as a member-owner, you have the right to take part in and find out more about your Co-op, and influence what we do. In 2022, we focused on how we can offer opportunities for you to participate in and influence our decisions, from how we work with our network of 1,000 Co-op Member Pioneers on the ground to how we support our members to vote in our AGM and Elections. Our Member Voice Committee and Governance Committee were disappointed to see that there was a reduction in the number of members voting in our AGM and elections. These provide members with opportunities to participate in our democracy and influence how we do business, which are core parts of our Co-op Difference and ownership model. We have made recommendations for improving how we engage members in our democracy to the Board, and we hope that, through wider promotion of the AGM opportunity across all Co-op channels and a renewed focus on digital engagement, participation levels will begin to increase again. To embed our democracy and member-ownership into other areas of Co-op, our Community & Member Participation Joint Working Group has been meeting with Communities and Membership colleagues to input into our Member Participation Strategy and proposals for our Community Partnerships Fund.
In October, we led a series of online and in-person Join In Live events, welcoming hundreds of members and colleagues from around the UK. The events focused on an update from our businesses on their half-year performance and gave members the chance to put their questions on all things Co-op to Board members. This prompted some important discussions on topics like our commitments to racial equality & inclusion and how we connect with members, to communicate our Purpose and what we do as a co-op. We also spotlighted our new partnership with Your Local Pantry, which creates spaces for communities to come together around food, and we asked attendees to help shape how we can support people through the cost of living crisis.
To stay connected to our members throughout the year, we worked with our Member Pioneer and Communities teams to take our Join In Live events to a local level. In 2022, hundreds of events were delivered in stores and community spaces, focusing on themes like Fairtrade Fortnight, sustainability and the meaning of Co-op membership. Council members are buddied up with Member Pioneer Co-ordinators and attend as many events as possible, which has played a vital role in raising awareness of Council and how we gain members’ views. Council has championed the role of Member Pioneers and were instrumental in developing the way our Member Pioneers work today. As part of our Co-operative Member Education, Training & Information Opportunities on Join In, we helped members understand how Member Pioneers work in their communities and why we have them.
We will continue to champion the issues most important to you in 2023, including:
In 2023, we’ll be looking for even more ways for our members to shape your Co-op. We represent you and we want to hear from you and work with you, so we’re really looking forward to identifying further opportunities in local areas to enable Council members, Member Pioneers and Co-op members to connect on a regular basis.
If you prefer to get involved online, sign up to ‘Join In’ (https://joinin.coop.co.uk/opportunities) and see where Co-op membership can take you as we focus on what makes us different, ask you to shape what we do as a Council and showcase all the ways you’ve helped us create a fairer world. You can also get in touch with a local Council Member anytime, using: www.co-operative.coop/members-council-your-representatives.
We revamped our Council newsletter in 2022 so that it captures how Co-op is making a difference in one place, as well as update you on what Council has been up to. Keep an eye on our website (https://www.co-operative.coop/get-involved/members-council-news) for the latest editions.
After our Directors are appointed or elected, our Co-op has an extra level of checking so members can be sure we’ve done everything fairly and openly in line with our Values and Principles. This checking is done by the Scrutiny Committee of the National Members’ Council and we’re pleased to present our report to members for 2022.
It was confirmed that all Directors met our Co-op’s trading requirement of 1,000 membership points. Also, we’ve received assurances from Board Secretariat that all Independent Non-Executive Directors and Member Nominated Directors are ‘independent’ for the purposes of our Rules.
All our Directors need to show their commitment to Co-op Values and Principles. There are two types of directors who don’t work day-to-day as executives for our Co-op: Independent Non-Executive Directors (INEDs) and Member Nominated Directors (MNDs).
INEDs are those chosen specifically for their skills and experience, and to add diversity and balance to the Board. At the 2022 AGM, Allan Leighton, Sir Christopher Kelly and Rahul Powar were re-elected by members. The Committee is aware there are several INEDs whose term of office expires over the next two years and the Board has begun the process to recruit their replacements. We look forward to reviewing this process when it is completed.
Our Co-op also has Directors elected by members. As well as being able to show very clearly their commitment to bringing the voice of members to the boardroom, before being put to a ballot of eligible members, these individuals also need to evidence that they have the necessary skills and experience of a substantial organisation, and an awareness of the strategic and operational challenges of a business of the size and complexity of our Co-op.
The Scrutiny Committee checks:
The Member Nominated Director Joint Selection and Approval Committee has the primary responsibility for the selection process of MND candidates and is made up of both members of the Members’ Council and Board.# Co-operative Group Limited Annual Report and Accounts 2022 137
As well as receiving a detailed report from our Co-op's search partner on the search and selection process, we interviewed the Chair of this committee and posed questions on themes, including the search methodology across the co-operative sector and how the Committee had satisfied itself that candidates would have the time commitment required to interact fully with Council and members. As a result, the Committee can confirm that the selection process leading to the shortlisting of Paul Chandler, Sarah McCarthy-Fry, Christine Tacon and Tim Nolan to a ballot of members was fair, transparent and objective and that all proper background checks were made. We hope in future to see a greater number of candidates from the co-operative sector with the relevant skills and experience applying for, and being shortlisted, for this role. Whilst we are satisfied that there was a contested election of Member Nominated Directors, we do hope that a greater number of candidates with 1,000 or more membership points, and with the required skills and experience can be sourced in future years. The Committee also welcomed the appointment of Warren Partners as our Co-op's new search partner following Committee feedback that a new search partner would offer a refreshed approach and access to a broader pool of potential applicants. The Committee was pleased to see that the first stage of an MND development programme (designed to enable potential candidates to understand how their current skills and experience fits with the role of an MND) has now been piloted, and it has suggested that the programme be rolled out further to enable more potential candidates to receive further support and feedback.
Following elections to this committee in August 2022, the Committee is now comprised of the following Council members:
* Marlene Corbey (Chair).
* Rebecca Hamilton.
* David Paterson.
* Ewen MacLeod.
Our Co-op prepares its Annual Report and Accounts substantially as though it were a company registered under the Companies Act 2006 (‘the Act’). Whilst it is not a requirement for our Strategic Report to contain a Section 172(1) Statement, we are including one in line with best practice. The Board has, in good faith, acted in a way that it considers would be most likely to promote the success of our Co-op for the benefit of members as a whole, and, in doing so, has recognised the importance of considering all stakeholders and other matters (as set out in Section 172(1) (a) to (f) of the Act) when making decisions. The following pages comprise our Section 172(1) Statement, setting out how our Directors have, in performing their duties over the course of the year, had regard to the matters set out in Section 172(1) (a) to (f) of the Act.
Corporate governance best practice underpins how we conduct ourselves as a Board; our culture, values, behaviours and how we do business. We are conscious of the impacts that our business and decisions have on our direct stakeholders as well as our wider societal impact. We also understand the importance of developing strong and meaningful relationships. We know that we can’t fix everything by ourselves, and that working with others is key. To help us develop the strategies and capabilities to achieve our Vision of ‘Co- operating for a Fairer World’, we know we need to continue to build and nurture strong, reciprocal relationships with our stakeholders. For any key and principal decisions approved by the Board, a discussion takes place around the impact on our key stakeholders, including our members, our colleagues and our customers. The relevance of each stakeholder group may vary by reference to the issue in question, so the Board seeks to understand the needs of each stakeholder group and any potential conflicts as part of its decision making. We have provided below examples of our key stakeholder interests, their concerns and the ways in which the Board acted with regard to these groups when taking its key strategic decisions during the year.
As a co-op, we are a different kind of business. We are the UK’s largest consumer co-operative owned by more than four million active members (individual members and other co-ops, not big investors), and our members get a chance to have a say in how we’re run. Our members are at the heart of everything we do, which is why our Board uses an Ethical Decision Making Tool which considers the impact on, and impact of, members (and communities) in relation to the material decisions it makes. This was used, for example, when considering the sale of our petrol forecourt business to Asda. As part of the decision making process, our Board considered what our members would think, whether and how it created commercial and social value for our members, the potential impact on communities and whether our members would understand to reason for the decision. Our members elect representatives to the National Members’ Council which
has a voice at the highest level of our Co-op (see more in the below section). Whenever it makes sense to do so, we ask members to connect with us on projects and activity where their input can make a real difference. During 2022, members participated in our Join In online activity and our Join In Live events more than 300,000 times. More than 10,000 members have also been engaged by our team of local Member Pioneers through over 300 Live Local events, held in communities across the UK. These have enabled our members to put questions to our Council and Directors and help shape our approach and decision making on our products, services, community activity and campaigning. Since their launch in September 2018, members have participated over two million times. Our Member Pioneers make great things happen with our members in our communities. They are the boots on the ground, working together with other Co-op members, colleagues and local causes to make a difference with their networks. We have 1,000 Member Pioneers and Member Pioneer Co-ordinators, based in communities across the UK. As well as encouraging member activity and engagement, they bring our Co-op Vision to life. They connect key contacts in their communities and bring people together to increase co-operation through Local Forums. During 2022, Member Pioneer Co-ordinators delivered more than 300 Live Local events across the UK with members, colleagues, customers and causes. Themes included Fairtrade, Member Participation and Sustainability to complement our Vision of 'Co-operating for a Fairer World'. Member Pioneer Co-ordinators also buddy with our National Members’ Council as part of our wider activity to encourage greater member participation. We encourage our members to get involved in our AGM and elections, by voting on motions and on who gets to sit on our Board, and by attending the AGM in person or joining digitally. Our AGM is the forum through which our eligible members can hear more about our performance, ask questions to our Board and vote on AGM motions, which have been put forward by our members, our Members’ Council and our Board. Our 2022 AGM was our first in-person event following the lift in Covid restrictions and members were encouraged to attend. Following the great feedback we had received on our previous year’s online event, members were also able to join the meeting online, where they could listen to the meeting and put their questions to the Board in real time. We also offered an online workshop on climate and sustainability, which members could attend prior to the event. All motions are voted for on a ‘one member, one vote’ basis, except for Independent Society Members, which have their voting entitlement calculated based on the amount of trade they do with our Co-op. We will keep members updated on our plans for our 2023 AGM via our website at www.co- operative.coop/agm Each year we publish a ‘You Said, We Did’ report that outlines the actions our Board and leadership have taken in response to motions passed at our AGM. This is also available on our website. We continue to interact with members through social media channels, including Facebook and Twitter.
Our National Members’ Council (NMC) is made up of 100 Co-op members from around the UK, including colleagues. They met regularly during 2022, providing the opportunity for our NMC to ask questions and provide input on decisions, to make sure things were being done in a way that benefited our members and communities.
In addition to formal routes, there are many informal ways our Board, Chair and individual Directors interact with NMC, its committees, working groups and members. During 2022 this included:
* Attendance at NMC sessions to update on developments in the Group.
* Directors’ Forums, where Board members answer questions from the Members’ Council.
* The use of working and advisory groups with the NMC, particularly when our Board, leadership or colleagues feel input would be useful and add value.
* Regular discussions between the Group Secretary and Council Secretary to make sure there is a good flow of information between the Board and the NMC.
* Board and NMC report to each other on meetings and activity.
We also have a non-governance stakeholder working group, which is made up of four Co-op Board members and four NMC members (the Council President, two Vice Presidents and one other). This meets as required to discuss issues that may arise so our Board and Members’ Council can have an open debate and better understand the views of the other.# Co-operative Group Limited Annual Report and Accounts 2022
Whilst we are committed to ensuring our Co-op is run for the benefit of our members, who form a significant proportion of our customer base, our relationship with both member and non-member customers is extremely important and is a priority of the Board. All of our businesses proactively monitor and manage customer opinion and have a customer focused culture to ensure positive outcomes for all. Through understanding our customers’ needs, we are able to offer products and services to fit their circumstances and, by providing a positive customer experience, we aim to build relationships so they will continue to do business with us in the future. In 2022, our Insight and Research teams have conducted numerous projects to help us better understand our customers and members. These included:
Our Board recognises the importance of engaging our colleagues. Our Directors are of the view that they are all individually and collectively responsible for hearing what our colleagues have to say and making sure these views are considered when making decisions. There are lots of formal and informal ways that this happens, including through communicating with our colleague members. As a result, we have not adopted any of the methods set out in the UK Corporate Governance Code to do this (a colleague appointed director, a workforce advisory panel or a designated non-executive director). We intend that at least two of our Directors will attend each of our Colleague Voice listening sessions through 2023, as well as ensuring our Directors continue to visit stores, funeral homes, depots and sites relevant to our community missions. Having engaged colleagues, who are connected to our Co-op and feel valued for their contribution, has never been more important. It is fundamental to our Co-op’s ongoing success. Our colleague engagement activities during the year have included:
A strong, trusted and transparent supply chain is integral to our success. Our Co-operative Values and Principles underpin all of our supplier relationships as we continue to balance commerciality with shared value and communities. Our Co-op has a range of suppliers, who provide goods and services to support our businesses and operations. The terms of those suppliers and the day-to-day relationships are negotiated and managed by our Procurement team. The Board ensures we work with our suppliers so that everyone involved in producing our products is treated fairly. It monitors our relationship with our suppliers in a number of ways, including via the Risk and Audit Committee on areas such as our compliance with the Groceries Supply Code of Practice and our approach to sustainability issues. As we faced into the supply chain challenges experienced across the retail industry during 2022, we worked closely with our suppliers to support their recovery and agreed action plans with our most crucial suppliers. We have continued to focus on providing support for our suppliers, working collaboratively to protect those that are most vulnerable, protect workers and continue to champion resilient livelihoods for everyone in our supply chain. You can read more about our approach to responsible sourcing within our Co-operate Report. The way we approach modern slavery is detailed in our Modern Slavery Statement. Both reports are available on our website: www.co-operative.coop
Our commitment to Fairtrade spans over 30 years from when we first stocked CaféDirect in 1992, predating the launch of the Fairtrade mark by two years. In 1998, we became the first supermarket in the UK to start selling Fairtrade products in all our Co-op stores. Since then, our relationship with Fairtrade has continued to grow and in 2015 we became the largest seller of Fairtrade wine in the world. Since 2017, all the cocoa used as an ingredient in Co-op products is Fairtrade and 100% of our tea, coffee, chocolate, bananas, African roses and bagged sugar is Fairtrade. In 2022, Co-op made an industry-first commitment to source 100% South African wine as Fairtrade, including both own label and branded. We are committed to growing our contribution to Fairtrade producers and workers around the world.# Community
At our Co-op, our Purpose is to champion a better way of doing business for you and your community. The Board recognises the role of our Co-op in working with and supporting our communities, and this has never been more relevant than during the last few years. Through our membership proposition, we aim to build stronger and more resilient communities by offering:
• Fair access to food.
• Fair access to mental wellbeing support.
• Fair access to opportunities for young people.
The funds raised by our members are split two ways:
• We continue to support thousands of grassroots community causes through our Local Community Fund, where members can select which local cause in their community to support.
• Through our Community Partnerships Fund, we’re creating partnersh ips and resources to support local communities across the UK.
Our community plan is a critical part of delivering our Vision of ‘Co-operating for a Fairer World’ and our work to make things fairer for our members, our communities, our colleagues and our planet. We continue to focus on tackling the effects of the pandemic and responding to issues arising from the cost of living crisis in our communities. Our Community Wellbeing Index was refreshed during the year and helped to inform our community activity. Examples of how we have engaged with our communities during the year include:
• Celebrating that, together, we’ve raised £117m for our local communities – supporting over 30,000 Local Community Fund causes - since 2016, the year that our Local Community Fund launched, followed by our Communities Partnership Fund in 2020.
• Funding over 280 fridges with Hubbub, with an additional 70 fridges supported by the end of 2022, bringing the total number to 350. In addition, launching our partnership with Your Local Pantry to expand the network of pantries to 225 in three years, providing more communities with sustainable solutions to access to food
• Exceeding our fundraising target of £8m for Mind, SAMH (Scottish Association for Mental Wellbeing) and Inspire, delivering over 50 mental wellbeing services in local communities and supporting over 22,000 people – with 81% saying their mental wellbeing had improved.
• Helping 6,000 young people make communities safer and fairer places to live through our Peer Action Collective with Youth Endowment Fund and #iwill. Our PAC researchers were busy in 2022 holding fringe events at the Labour and Conservative Party Co-operative Group Limited Annual Report and Accounts 2022 144 conferences, to showcase how Co-op and our partners are providing opportunities for young people to speak out across the UK.
• The Co-op Foundation launched its new five-year strategy - ‘Building communities of the future together’ - alongside the £1.5m Future Communities Fund.
• Our Member Pioneers held Join In Live Local events. The feedback from these sessions helped shape our approach and influence our decision making on all matters of Co-op business including community involvement.
• Our colleagues and members helped to raise over £1.2m for the Disaster Emergency Committee appeals in Ukraine and Pakistan.
We recognise the benefits of working closely with other co-operatives. We are the major shareholder in Federal Retail and Trading Services Limited (FRTS), which is collectively owned by our Co-op and Independent Society Members (ISMs), which are all retail co-operatives. Through FRTS, our Co-op collaborates with ISMs on the management and operation of its centralised buying function, while observing competition law requirements. Six formal FRTS Board meetings were held during the year. ISMs are members of our Co- op and are also represented on our Members’ Council. We are passionate about proactively growing the co-operative economy by promoting, developing and uniting co-operatives and, throughout 2022, have continued to share our thoughts, experiences and learnings with other co-operatives. In 2022, we delivered two sessions at the Co- ops UK 2022 Practitioners Forum. The first was on ‘Creating Successful email campaigns’, providing advice on creating successful email campaigns, which is one of the most important ways to connect with members and/or customers. We also jointly delivered a session on ‘Looking after employees’ financial wellbeing’ a nd how employees within our Co-op are being supported, especially in light of challenges faced with the cost of living crisis. Our CEO Shirine Khoury-Haq and our INED Lord Victor Adebowale, presented the closing keynote at Co-op Congress 2022, while our National Members’ Council President, Denise Scott-McDonald, presented a session on making membership meaningful across co-operatives. We provide funding to a number of organisations which support the co-operative movement.
Education is really important to us and we have continued to support the work of the Co-op Academies Trust (CAT). Our Co-op Academies remain a key part of our Vision of ‘Co-operating for a Fairer World’. During 2022, individual Board directors and senior leaders across all parts of our Co-op have visited Co-op Academies and supported CAT's Annual Governors Conference. In 2023, we anticipated further engagement jointly with our Members' Council. For more information on the CAT, please see page 34 and 35 in the Strategic Report.
Our approach to sustainability is critical in our current and future plans and is embedded in our wider Vision of ‘Co-operating for a Fairer World’. Driving forward our sustainability agenda and our ambitious approach to climate action will ensure that we keep focused on protecting people and the planet. We can’t deliver our commitments alone, and work with our members, communities, customers, colleagues and suppliers continued to be vital. You can read more about our Climate Plan and progress across sustainability at www.coop.co.uk and in our Co-operate Report.
Co-operative Group Limited Annual Report and Accounts 2022 146
Co-op Annual Report & Accounts for 2022: Financial Statements 147
What does this show? Our income statement shows our income for the year less our costs. The result is the profit that we've made.
| 2022 | 2021 | ||
|---|---|---|---|
| Continuing Operations | Notes | £m | £m |
| Revenue | 2 | 11,480 | 11,151 |
| Operating expenses | 3 | (11,484) | (11,097) |
| Other income | 5 | 9 | 10 |
| Operating profit | 1 | 5 | 64 |
| Profit on sale of petrol forecourts | 35 | 319 | |
| Finance income* | 6 | 125 | 196 |
| Finance costs | 7 | (202) | (203) |
| Profit before tax | 1 | 247 | 57 |
| Taxation | 8 | (4) | (25) |
| Profit from continuing operations | 243 | 32 | |
| Discontinued Operation | |||
| Profit on discontinued operation (after tax) | 9 | 67 | 13 |
| Profit for the period (all attributable to members of the Society) | 310 | 45 |
What does this show? The table below adjusts the operating profit figure shown in the consolidated income statement above by taking out items that are not generated by our day-to-day trading. This makes it easier to see how our business is performing. We also take off the underlying interest we pay (being the day-to-day interest on our bank borrowings and lease liabilities).
| Notes | 2022 | 2021 | |
|---|---|---|---|
| Continuing Operations | £m | £m | |
| Operating profit (as above) | 5 | 5 | 64 |
| Add back / (deduct): One-off items | 1 | 39 | 15 |
| Property, business disposals, closures and impairments | 1 | 41 | 30 |
| Change in value of investment properties | 26 | (9) | |
| Underlying operating profit | 1 | 100 | 100 |
| Less underlying net interest on loans and deposits | 7 | (55) | (56) |
| Less underlying net interest expense on lease liabilities | 6, 7 | (76) | (76) |
| Underlying loss before tax | (31) | (32) |
The accompanying notes on pages 152 - 210 form an integral part of these financial statements.
** Refer to Note 1 for a definition of Underlying operating profit and Underlying loss before tax. Further detail on the Group's alternative performance measures (APMs) is given in the Jargon Buster section on page 243.
Co-op Annual Report & Accounts for 2022: Financial Statements 148
What does this show? Our statement of comprehensive income includes other income and costs that are not included in the consolidated income statement on the previous page. These generally relate to revaluations of our pension schemes.
| Notes | 2022 | 2021 | |
|---|---|---|---|
| Profit for the period | 310 | 45 | |
| Items that will never be reclassified to the income statement: | |||
| Remeasurement (losses) / gains on employee pension schemes | 27 | (732) | 350 |
| Related tax on items above | 8 | 183 | (130) |
| (549) | 220 | ||
| Items that are or may be reclassified to the income statement: | |||
| Gain on revaluation of right-of-use assets prior to transfer to investment property | - | 5 | |
| 5 | 5 | ||
| Other comprehensive (losses) / profits for the period net of tax | (549) | 225 | |
| Total comprehensive (loss) / profit for the period (all attributable to members of the Society) | (239) | 270 |
The accompanying notes on pages 152 - 210 form an integral part of these financial statements.
Co-op Annual Report & Accounts for 2022: Financial Statements 149
What does this show? Our balance sheet is a snapshot of our financial position as at 31 December 2022. It shows the assets we have and the amounts we owe.# Consolidated statement of changes in equity for the period ended 31 December 2022
What does this show? Our statement of changes in equity shows how our reserves have changed during the year.
| Members' share capital | Retained earnings | Other reserves | Total equity | |
|---|---|---|---|---|
| Notes | £m | £m | £m | £m |
| Balance at 1 January 2022 | 74 | 2,859 | 6 | 2,939 |
| Profit for the period | - | 310 | - | 310 |
| Other comprehensive income / (loss): | ||||
| Remeasurement losses on employee pension schemes | - | (732) | - | (732) |
| Tax on items taken directly to other comprehensive income | - | 183 | - | 183 |
| Total other comprehensive loss | - | (549) | - | (549) |
| Items taken directly to Retained earnings: | ||||
| Shares issued less shares withdrawn | 25 | 1 | - | 1 |
| Adjustment to historic funeral plan liabilities | 23 | 23 | - | 23 |
| Tax on items taken directly to retained earnings | 8 | (6) | - | (6) |
| Total of items taken directly to retained earnings | 1 | 17 | - | 18 |
| Balance at 31 December 2022 | 75 | 2,637 | 6 | 2,718 |
| Members' share capital | Retained earnings | Other reserves | Total equity | |
|---|---|---|---|---|
| Notes | £m | £m | £m | £m |
| Balance at 2 January 2021 | 74 | 2,594 | 1 | 2,669 |
| Profit for the period | - | 45 | - | 45 |
| Other comprehensive income / (loss): | ||||
| Remeasurement gain on employee pension schemes | - | 350 | - | 350 |
| Gain on revaluation of right-of-use assets prior to transfer to investment property | - | 5 | 5 | 5 |
| Tax on items taken directly to other comprehensive income | - | (130) | - | (130) |
| Total other comprehensive profit | - | 220 | 5 | 225 |
| Balance at 1 January 2022 | 74 | 2,859 | 6 | 2,939 |
The accompanying notes on pages 152 - 210 form an integral part of these financial statements.
What does this show? Our statement of cash flow shows the cash coming in and out during the year. It splits the cash by type of activity - showing how we've generated our cash then how we've spent it.
| Notes | 2022 £m | 2021 £m | |
|---|---|---|---|
| Net cash from operating activities | 10 | 455 | 178 |
| Cash flows from investing activities | |||
| Purchase of property, plant and equipment | (132) | (297) | |
| Proceeds from sale of property, plant and equipment | 47 | 80 | |
| Purchase of intangible assets | (15) | (28) | |
| Acquisition of businesses, net of cash acquired | (4) | (30) | |
| Disposal of businesses | 10 | 22 | |
| Disposal of petrol forecourts | 35 | 408 | |
| Payments to funds for pre-paid funeral plan sales | (76) | (93) | |
| Receipts from funds for pre-paid funeral plans performed or cancelled | 108 | 105 | |
| Net cash generated / (used) in investing activities | 346 | (241) | |
| Cash flows from financing activities | |||
| Interest paid on borrowings | (59) | (57) | |
| Interest paid on lease liabilities | (78) | (79) | |
| Interest received on subleases | 2 | 3 | |
| Interest received on deposits | 2 | - | |
| Settlement of Group Relief Creditor owed to The Co-operative Bank PLC | - | (48) | |
| (Repayment) / issue of corporate investor shares | 21 | (1) | 1 |
| Repayment of borrowings (net) | 21 | (1) | (2) |
| RCF (repayment) / drawdown | 21 | (163) | 163 |
| Payment of lease liabilities | (128) | (134) | |
| Derivative settlements | 16 | 3 | - |
| Net cash used in financing activities | (410) | (150) | |
| Net increase / (decrease) in cash and cash equivalents | 391 | (213) | |
| Cash and cash equivalents at beginning of period | 56 | 269 | |
| Cash and cash equivalents at end of period | 447 | 56 |
Analysis of cash and cash equivalents
| Notes | 2022 £m | 2021 £m | |
|---|---|---|---|
| Cash and cash equivalents (per balance sheet) | 20 | 447 | 60 |
| Overdrafts (per balance sheet) | 20 | - | (4) |
| 447 | 56 |
The balances above include cashflows from Discontinued operations.
The accompanying notes on pages 152 - 210 form an integral part of these financial statements.
| Notes | 2022 £m | 2021 £m | |
|---|---|---|---|
| Interest-bearing loans and borrowings: | |||
| - current | (17) | (180) | |
| - non-current | (763) | (796) | |
| Total Interest-bearing loans and borrowings | (780) | (976) | |
| Lease liabilities: | |||
| - current | (182) | (210) | |
| - non-current | (1,124) | (1,306) | |
| Total Lease liabilities | (1,306) | (1,516) | |
| Total Debt | (2,086) | (2,492) | |
| - Group cash | 447 | 60 | |
| - Overdrafts | - | (4) | |
| Group Net Debt | 21 | (1,639) | (2,436) |
| Group Net Debt (excluding lease liabilities) | (333) | (920) |
Co-op Annual Report & Accounts for 2022: Financial Statements 152
What does this show? This note shows how our different businesses have performed. This is how we report and monitor our performance internally. These are the numbers that our Board reviews during the year.
| Other Costs | 2022 | Food | Wholesale | Funeral | Insurance | Legal | businesses | Federal (f) | supporting functions | Total (c) |
|---|---|---|---|---|---|---|---|---|---|---|
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |
| Revenue from external customers | 7,805 | 1,439 | 271 | 24 | 46 | - | 1,895 | - | 11,480 | |
| Underlying operating profit / (loss) (a) | 139 | 22 | 16 | 8 | 8 | - | - | (93) | 100 | |
| One-off items (a) (i) | (21) | (2) | (2) | - | - | - | - | (14) | (39) | |
| Property, business disposals and closures (a) (ii) | 7 | (1) | (1) | - | - | - | - | 59 | 64 | |
| Impairments (a) (ii) | (71) | - | (3) | - | - | - | - | (31) | (105) | |
| Change in value of investment properties | - | - | - | - | - | - | - | (15) | (15) | |
| Operating profit / (loss) (b) | 54 | 19 | 10 | 8 | 8 | - | - | (94) | 5 | |
| Depreciation and amortisation | 331 | 8 | 27 | - | 1 | - | - | 23 | 390 | |
| EBITDA (h) | 385 | 27 | 37 | 8 | 9 | - | - | (71) | 395 | |
| Underlying EBITDA (h) | 470 | 30 | 43 | 8 | 9 | - | - | (70) | 490 | |
| Additions to non current assets (d, e) | 115 | 4 | 14 | - | - | - | - | 18 | 151 |
| Other Costs | 2021 | Food | Wholesale | Funeral | Insurance | Legal | businesses | Federal (f) | supporting functions | Total (c) |
|---|---|---|---|---|---|---|---|---|---|---|
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |
| Revenue from external customers | 7,671 | 1,386 | 264 | 34 | 39 | 1 | 1,756 | - | 11,151 | |
| Underlying operating profit / (loss) (a) | 156 | 7 | 12 | 15 | 5 | (1) | - | (94) | 100 | |
| One-off items (a) (i) | (17) | - | - | - | - | - | - | 2 | (15) | |
| Property, business disposals and closures (a) (ii) | (14) | - | 2 | - | - | (1) | - | 13 | - | |
| Impairments (a) (ii) | (22) | - | - | - | - | - | - | (8) | (30) | |
| Change in value of investment properties | - | - | - | - | - | - | - | 9 | 9 | |
| Operating profit / (loss) (b) | 103 | 7 | 14 | 15 | 5 | (2) | - | (78) | 64 | |
| Depreciation and amortisation | 332 | 9 | 32 | - | 1 | - | - | 31 | 405 | |
| EBITDA (e) | 435 | 16 | 46 | 15 | 6 | (2) | - | (47) | 469 | |
| Underlying EBITDA (e) | 488 | 16 | 44 | 15 | 6 | (1) | - | (63) | 505 | |
| Additions to non current assets (d, e) | 288 | 5 | 28 | - | - | - | - | 34 | 355 |
Co-op Annual Report & Accounts for 2022: Financial Statements 153
a) Underlying operating profit / (loss) is a non-GAAP measure of segment operating profit before the impact of property and business disposals (including impairment of non-current assets within our businesses), the change in the value of investment properties, and one-off items. This is the non-GAAP measure of segmental profitability that is monitored by the Group Board (which is the Chief Operating Decision Maker (CODM)). Further detail on the Group's alternative performance measures (APMs) is given in the Jargon Buster section on page 243.
(i) One-off items totalling a £39m charge (2021: £15m charge) are made up of £26m of redundancy charges primarily within our Support Centre, £12m of discretionary costs (membership spend added to colleagues membership cards) helping to support them through the Winter cost-of-living crisis and net £1m other. In the prior period the £15m charged comprised £17m of redundancy charges within our food store teams (under the Fit for Future programme) net of a £2m gain in relation to a reduction in the value of deferred consideration from our acquisition of Nisa.
(ii) Gains from property and business disposals of £64m (2021: net £nil) comprise a £6m gain on food stores, £1m loss on funeral branches and a £59m gain on non-trading properties sold during the year.
(iii) Impairment charges of £105m (2021: £30m) are split: Food £71m (2021: £22m), Funerals £3m (2021: £nil) and Costs from supporting functions of £31m (2021: £8m) and relates to £30m (2021: £5m) of Property, plant and equipment, £60m (2021: £25m) of Right-of-use assets and £15m (2021: £nil) of Intangible assets.
b) Each segment earns its revenue and profits from the sale of goods and provision of services, mainly from retail activities. Transactions between operating segments excluded in the analysis are £nil (2021: £nil).# Notes to the financial statements continued
c) The Group identifies its operating segments based on its divisions, which are organised according to the different products and services it offers its customers. The operating segments (and the captions) reported above are based on the periodic results reported into the Chief Operating Decision Maker which is the Board and whether the respective division's results meet the minimum reporting thresholds set out in IFRS 8 (Operating Segments). The Other businesses segment includes activities which are not reportable per IFRS 8. In the comparative period then this mainly comprised the results of Co-op Health which was sold on 6 April 2021. Our other holding and support companies are included within costs from supporting functions.
d) Additions to non-current assets are shown on a cash flow basis.
e) The Group's external revenue and non-current assets arise primarily within the United Kingdom. The Group does not have a major customer who accounts for 10% or more of revenue. In-line with how information is presented to the Board then underlying segment operating profit includes an appropriate allocation of central support centre costs which are re-charged to the operating segments. There are no other material transactions between the main operating segments.
f) Federal relates to the activities of a joint buying group that is operated by the Group for itself and other independent co-operative societies. The Group acts as a wholesaler to the other independent co-operatives and generates sales from this. This is run on a cost recovery basis and therefore no profit is derived from its activities. In the current period revenue in the Federal segment includes £40m (2021: £nil) of sales at nil margin for goods supplied to AFS (Arthur Foodstores Limited - the entity that was sold to Asda as part of the disposal of our petrol forecourt estate during the year). See footnote (i) below for further details of the transitional service agreement covering the post disposal period.
g) Operating profit in 2021 included £20m of government assistance received through business rates relief in response to the CV-19 pandemic (£18m in Food and £2m in Funerals).
h) EBITDA (earnings before interest, tax, depreciation and amortisation) and underlying EBITDA are non-GAAP measure of performance which help us to understand the profits our business segments are generating before capital investment and interest charges. EBITDA is calculated by adding back depreciation and amortisation charges to Operating profit (which is calculated before interest charges). Underlying EBITDA is calculated in a similar way but starting from underlying operating profit. Further details on the Group's alternative performance measures (APMs) is given on page 243.
i) On 30th October we sold our petrol forecourt estate to Asda and as part of the sale process the petrol sites will transfer across on a rolling basis during a handover period of approximately 12 months which is governed by a transitional service agreement. The Group have assessed the nature of the arrangement and concluded that Co-op are acting as agent in the facilitation of the transaction for the end customer, but as a principal for supplying goods to AFS (Arthur Foodstores Limited - the entity that was sold to Asda) under the service agreement, and consequently will record the revenue and costs of supplying the goods gross, as well as recording the outsourcing fee charged to AFS in revenue.
Co-op Annual Report & Accounts for 2022: Financial Statements 154
Notes to the financial statements continued
j) A reconciliation between Underlying operating profit, Underlying loss before tax and Profit before tax (Continuing operations) is provided below:
| 2022 £m | 2021 £m | |
|---|---|---|
| Continuing Operations | ||
| Underlying operating profit | 100 | 100 |
| Underlying net interest on loans and deposits | (55) | (56) |
| Underlying net interest expense on lease liabilities | (76) | (76) |
| Underlying loss before tax | (31) | (32) |
| One-off items | (39) | (15) |
| Gain on property, business disposals and closures (see table below) | 64 | - |
| Impairment of non-current assets (see table below) | (105) | (30) |
| Profit on disposal of petrol forecourts | 319 | - |
| Change in value of investment properties | (15) | 9 |
| Finance income (net pension income) | 43 | 30 |
| Fair value movement on derivatives (net) | 9 | - |
| Fair value movement on quoted Group debt | 28 | 5 |
| Finance income (one-off gain on settlement of Group Relief Creditor owed to The Co-operative Bank Plc) | - | 99 |
| Finance income (funeral plans) | 29 | 54 |
| Finance costs (funeral plans) | (54) | (58) |
| Other non-cash finance costs | (1) | (5) |
| Profit before tax from continuing operations | 247 | 57 |
| Profit / (loss) from property, business disposals, closures and impairment of non-current assets | 2022 £m | 2021 £m | £m | £m |
|---|---|---|---|---|
| Disposals, closures and onerous contracts: | ||||
| - proceeds | 47 | 80 | ||
| - less net book value written off | (15) | (71) | ||
| - provisions released / (recognised) | 32 | (9) | 64 | |
| - Impairment of property, plant and equipment, right-of-use assets and goodwill | (105) | (30) | (41) | (30) |
| Total |
See previous page (a) (iii) for details of the impairments.
Co-op Annual Report & Accounts for 2022: Financial Statements 155
Notes to the financial statements continued
What does this show? This note shows our revenue (which excludes VAT) across our different businesses.
| 2022 £m | 2021 £m | |
|---|---|---|
| Retail sales | 7,822 | 7,689 |
| Member reward earned on sale of goods | (17) | (18) |
| Provision of services | 344 | 341 |
| Member reward earned on provision of services | (3) | (3) |
| Wholesale sales | 1,439 | 1,386 |
| Federal sales | 1,895 | 1,756 |
| Revenue (as shown in the Consolidated income statement) | 11,480 | 11,151 |
Revenue is recognised in line with IFRS 15 (Revenue from Contracts with Customers). IFRS 15 defines performance obligations as a 'promise to provide a distinct good or service or a series of distinct goods or services'. Revenue is recognised when a performance obligation has been delivered which reflects the point when control over a product or service transfers to a customer. Revenue is measured based on the consideration set out in the contract with the customer and excludes amounts collected on behalf of third parties.
The Group recognises revenue when it transfers control over a product to a customer. For the sale of goods, revenue is recognised at the point of sale. Any rebates, VAT and other sales tax or duty items are deducted from revenue.
Provision of services relates to activities in our Funerals, Legal services and Insurance businesses. Revenue is recognised when separate performance obligations are delivered to the customer. For funeral sales ('at need') and funeral plan sales ('pre need') the only separable performance obligation is the funeral itself and therefore revenue is only recognised when the funeral is performed (or the plan is redeemed and the funeral is performed). See Note 29 (Financial instruments) for further details of the accounting policies relating to prepaid funeral plans, funeral benefit options (FBO's) and low cost instalment plans (LCIP's). Revenue from Legal and Insurance services is recognised as distinct performance obligations are delivered to the customer.
Amounts received from funeral plan holders are deferred on the balance sheet within contract liabilities until the related funeral is performed (at which point the revenue is recognised). The deferred amount is subject to adjustment to reflect a significant financing component. This significant financing component is calculated based on the expected interest rate that would be reflected in a separate financing transaction between the Group and the plan holder at the inception of the contract and is charged to the income statement as a finance cost (Note 7) each period until the performance obligation is satisfied. The interest rate applied is fixed at inception of each plan and is based on an estimated incremental borrowing rate between the customer and the Group at the point the contract is entered into and reflects the security over our customers' plans through the whole of life policies we have in place. See Note 23 (Contract Liabilities) for further details. When the service prescribed by the plan is delivered, revenue is recognised equal to the deferred revenue balance related to the specific plan. Discounts offered to members on initial sale of a plan are deducted from the related contract liability.
A contract asset is recognised when our right to consideration is conditional on something other than the passage of time. For funeral plans, fulfilment costs (which are costs relating directly to the plan sale which otherwise wouldn't have been incurred) are deferred and shown in the consolidated balance sheet as a contract asset. The costs are then recognised in the consolidated income statement at the point that the funeral is performed and in line with when the revenue is recognised. See Note 18 (Contract assets) for further details.
The member rewards earned as part of our membership offer are recognised as a reduction in sales at the point they are earned with a corresponding liability being held on the balance sheet. The liability is reduced when the rewards are redeemed. Member rewards are earned at 2% of sales value. The Community reward on member's spend is recognised as an operating expense in the income statement when it is earned. Community rewards are also earned at 2% of sales value.
The Group operates a joint buying group for itself and other independent co-operative societies. The Group acts as a wholesaler to the other independent co-operatives and generates sales from this. This is run on a cost recovery basis and therefore no profit is derived from its activities.# Co-op Annual Report & Accounts for 2022: Financial Statements
What does this show? This note shows the costs we have incurred during the period. It splits costs into key categories such as trading activities and employee benefits. Operating profit is stated after (charging) / crediting the following:
| 2022 £m | 2021 £m | |
|---|---|---|
| Cost of inventories recognised as an expense | (8,056) | (7,894) |
| Employee benefits expense (see below) | (1,444) | (1,484) |
| Distribution costs | (501) | (508) |
| Gain on property, business disposals and closures (before impairments) | 64 | - |
| Impairment of plant, property and equipment and goodwill | (45) | (5) |
| Impairment of right-of-use assets | (60) | (25) |
| Impairment reversal on subleases | - | 1 |
| Net gain on other plant and equipment disposals | 2 | 2 |
| Change in value of investment properties | (15) | 9 |
| Depreciation of plant, property and equipment | (244) | (254) |
| Depreciation of right-of-use assets | (119) | (122) |
| Amortisation of intangible assets | (27) | (29) |
| Furlough repayment | - | (16) |
| Business rates relief received | - | 20 |
| Subscriptions and donations | (6) | (4) |
| Community reward earned | (18) | (19) |
Employee benefits expense
| 2022 £m | 2021 £m | |
|---|---|---|
| Wages and salaries | (1,293) | (1,332) |
| Social security costs | (90) | (86) |
| Pension costs - defined benefit schemes | (6) | (5) |
| Pension costs - defined contribution schemes | (55) | (61) |
| Total employee benefits expense | (1,444) | (1,484) |
Employee benefits expense includes executive directors. The average number of people employed by the Group in the UK (including executive directors) was:
| 2022 | 2021 | |
|---|---|---|
| Number | Number | Number |
| Full-time | 18,627 | 19,618 |
| Part-time | 40,463 | 42,919 |
| Total | 59,090 | 62,537 |
Remuneration of key management
We regard the Board and Executive as our key management personnel and details of their remuneration can be found on pages 97 - 116.
| 2022 £m | 2021 £m | |
|---|---|---|
| Auditor remuneration and expenses | ||
| Audit of these financial statements | 2.4 | 2.1 |
| Amounts receivable by the Society's auditor in respect of: | ||
| - Audit of financial statements of subsidiaries in respect of the Society | 0.4 | 0.4 |
| Services relating to: | ||
| - Audit-related assurance services | - | - |
| - All other services | 0.1 | 0.1 |
| Total | 2.9 | 2.6 |
Accounting policies
Operating expenses
Operating expenses are analysed by nature, as defined by IAS 1 (Presentation of Financial Statements). Payments to our members in their capacity as customers or colleagues (rather than as members), or membership payments to non-members such as charitable organisations, are treated as charges in the income statement.
What does this show? Our suppliers give us money back based on the amount of their products we buy and sell. This note shows the different types of income we've earned from our suppliers based on the contracts we have in place with them. This income is taken off operating expenses in the income statement.
| 2022 £m | 2021 £m | |
|---|---|---|
| Supplier income | ||
| Food - Long-term agreements | 156 | 158 |
| Food - Bonus income | 66 | 82 |
| Food - Promotional income | 281 | 341 |
| Total Food supplier income | 503 | 581 |
| Wholesale - Long-term agreements | 27 | 27 |
| Wholesale - Bonus income | 15 | 19 |
| Wholesale - Promotional income | 81 | 99 |
| Total Wholesale supplier income | 123 | 145 |
| Total supplier income | 626 | 726 |
| 2022 | 2021 | |
|---|---|---|
| Percentage of Cost of Sales before deducting Supplier income | ||
| Food - Long-term agreements | 2.6% | 2.6% |
| Food - Bonus income | 1.1% | 1.4% |
| Food - Promotional income | 4.7% | 5.7% |
| Total Food supplier income percentage | 8.4% | 9.7% |
| Wholesale - Long-term agreements | 2.0% | 2.0% |
| Wholesale - Bonus income | 1.1% | 1.4% |
| Wholesale - Promotional income | 6.1% | 7.3% |
| Total Wholesale supplier income percentage | 9.2% | 10.7% |
All figures exclude any income or purchases made as part of the Federal joint buying group.
Accounting policies
Supplier income
Supplier income is recognised as a deduction from cost of sales on an accruals basis, based on the expected entitlement that has been earned up to the balance sheet date for each relevant supplier contract. The accrued incentives, rebates and discounts receivable at year end are included within trade and other receivables (Note 17). Where amounts received are in the expectation of future business, these are recognised in the income statement in line with that future business. There are three main types of income:
1. Long-term agreements: These relate largely to volumetric rebates based on agreements with suppliers. They include overriders, advertising allowances and targeted income. The income accrued is based on the joint buying group's latest forecast volumes and the latest contract agreed with the supplier. Income is not recognised until confirmation of the agreement has been received from the supplier.
2. Bonus income: These are typically unique payments made by the supplier and are not based on volume. They include payments for marketing support, range promotion and product development. These amounts are recognised when the income is earned and confirmed by suppliers. An element of the income is deferred if it relates to a future period.
3. Promotional income: Volumetric rebates relating to promotional activity agreed with the supplier. These are retrospective rebates based on sales volumes or purchased volumes.
What does this show? This note shows what we have earned during the period from activities that are outside our normal trading activities. This is mainly from rental income we earn on properties that we own or sublet.
| 2022 £m | 2021 £m | |
|---|---|---|
| Rental income from non-investment property | 6 | 7 |
| Rental income from investment property | 3 | 3 |
| Total other income | 9 | 10 |
Accounting policies
Rental income from investment and non-investment properties
Rental income arising from operating leases on both investment and non-investment properties is accounted for on a straight-line basis over the lease term. For accounting policies relating to investment property, refer to Note 26.
What does this show? Finance income arises from the interest earned on our pension scheme and interest from finance lease receivables which have been discounted. If they are gains then we also include the movement in the fair value of some elements of our debt, our interest rate swap positions, foreign exchange contracts and commodity derivatives (which are used to manage risks from interest rate, foreign exchange and commodity price movements). If they are losses, they are included in Finance costs (see Note 7). If they are gains, we also show the fair value movement on our funeral plan investments as well as the discount unwind on funeral plan instalment debtors.
| 2022 £m | 2021 £m | |
|---|---|---|
| Net pension finance income | 43 | 30 |
| Underlying interest income from finance lease receivables | 2 | 3 |
| Interest receivable on deposits | 3 | - |
| Fair value movement on foreign exchange contracts and commodity derivatives | 20 | 5 |
| Fair value movement on quoted Group debt (Note 21) | 28 | 5 |
| One-off gain on settlement of Group Relief Creditor owed to The Co-operative Bank Plc* | - | 99 |
| Unrealised fair value movement on funeral plan investments (Note 14) | 28 | 54 |
| Discount unwind on funeral plan debtors | 1 | - |
| Total finance income | 125 | 196 |
*The one-off gain of £99m in 2021 relates to the settlement of the Group Relief Creditor owed to The Co-operative Bank Plc.
What does this show? Our main finance costs are the interest that we've paid during the year on our bank borrowings (that help fund the business) and the interest payments we incur on our lease liabilities. If they are losses then we also include the movement in the fair value of some elements of our debt and our interest rate swap positions (which are used to manage risks from interest rate and foreign exchange movements). If they are gains, they are included in Finance income (see note 6). We also include the interest that accrues on the funeral plans we hold and any impact of discounting on funeral plan instalment debtors if it is a charge.
| 2022 £m | 2021 £m | |
|---|---|---|
| Loans repayable within five years | (58) | (56) |
| Loans repayable wholly or in part after five years | - | - |
| Underlying loan interest payable | (58) | (56) |
| Underlying interest expense on lease liabilities | (78) | (79) |
| Total underlying interest expense | (136) | (135) |
| Fair value movement on interest rate swaps (Note 29) | (11) | (5) |
| Other non-underlying finance interest | (1) | (5) |
| Interest accruing on funeral plan liabilities (Note 23) | (54) | (54) |
| Discounting on funeral plan debtors | - | (4) |
| Total finance costs | (202) | (203) |
Non-underlying finance interest includes the impact of discount unwind on payables and provisions (see Note 24).
Total interest expense on financial liabilities (including lease liabilities) that are not at fair value through the income statement was £125m (2021: £127m).
What does this show? Our tax charge is made up of current and deferred tax. This note explains how those items arise. Additional explanatory footnotes are included to explain the key items. We were re-accredited with the Fair Tax Mark during 2021 and the additional disclosures we provide are in line with best practice guidance.# Notes to the financial statements continued
The net tax charge of £4m on a continuing profit before tax of £247m gives an effective tax rate of 2%, which is lower than the standard rate of 19%. The main reason for this being lower is the £319m profit arising on the disposal of Arthur Food Stores Limited (the entity that was sold to Asda as part of the disposal of our petrol forecourt estate) which is exempt from tax as the disposal qualifies under the Substantial Shareholding Exemption Budget that reduces the expected tax charge by £61m. There are other factors as detailed in the disclosure, the main one being the £10m impact of depreciation on non- qualifying assets, that in total then increase the net expected tax charge by £14m. See footnotes for more detail.
| 2022 | 2021 | Footnote | £m | £m | |
|---|---|---|---|---|---|
| Current tax credit / (charge) - current period (i) | 11 | (1) | |||
| Current tax credit - adjustment in respect of prior periods (iii) | 2 | - | |||
| Net current tax charge - in respect of continuing operations | 13 | (1) | |||
| Net current tax credit - in respect of discontinued operations | (14) | 1 | |||
| Total current tax charge | (1) | - | |||
| Deferred tax charge - current period (iv) | (11) | (5) | |||
| Deferred tax charge - adjustments in respect of prior periods (v) | (2) | (6) | |||
| Deferred tax charge - impact of rate change (see note below) | (4) | (13) | |||
| Net deferred tax charge - in respect of continuing operations | (17) | (24) | |||
| Net deferred tax charge - in respect of discontinued operations | - | - | |||
| Total deferred tax charge | (17) | (24) | |||
| Total tax charge reported in the income statement | (4) | (25) | |||
| Total tax (charge) / credit attributable to a discontinued operation | (14) | 1 | |||
| Total tax charge | (18) | (24) |
The tax on the Group’s net profit before tax differs from the theoretical amount that would arise using the standard applicable rate of corporation tax of 19% (2021:19%) as follows:
| 2022 | 2021 | Footnote | £m | £m | |
|---|---|---|---|---|---|
| Profit before tax from continuing operations | 247 | 57 | |||
| Profit before tax from discontinued operation | 81 | 12 | |||
| Total profit before tax | 328 | 69 | |||
| Tax charge at 19% (2021: 19%) | (62) | (13) | |||
| Current tax reconciliation: | |||||
| Expenses not deductible for tax (including one-off costs) (vi) | (2) | (2) | |||
| Credits not taxable on the Co-operative Bank settlement (ii) | - | 19 | |||
| Depreciation and amortisation on non-qualifying assets (vii) | (10) | (11) | |||
| Non-taxable profits arising on business disposals (viii) | 61 | 3 | |||
| Capital gains arising on property disposals (ix) | (1) | (1) | |||
| Adjustments in respect of prior periods (iii) | 2 | - | |||
| Impact on current tax for movement in temporary tax differences (see below) | 11 | 5 | |||
| Total current tax charge | (1) | - | |||
| Deferred tax reconciliation: | |||||
| (Utilisation) / increase of temporary tax differences - see Note 15 footnote (vii): | |||||
| Utilisation of capital allowances in excess of depreciation on qualifying assets | (2) | - | |||
| Utilisation of brought forward tax losses | (1) | (1) | |||
| Pension timing differences | (10) | (10) | |||
| Unwind of restatement adjustment on adoption of IFRS 16 | (3) | (3) | |||
| Impact of restatement adjustment in relation to IFRS 15 | - | - | |||
| Unrealised gains on investment properties, rolled-over gains and historic business combinations | 10 | 6 | |||
| Other timing differences | (5) | 3 | |||
| Subtotal of deferred tax reconciling items (iv) | (11) | (5) | |||
| Other deferred tax items: | |||||
| Adjustment in respect of previous periods (v) | (2) | (6) | |||
| Impact of restatement of deferred tax to enacted rate (x) | (4) | (13) | |||
| Total deferred tax charge | (17) | (24) | |||
| Total tax charge | (18) | (24) |
Co-op Annual Report & Accounts for 2022: Financial Statements 161
Notes to the financial statements continued
The net tax charge of £4m on a continuing profit before tax of £247m gives an effective tax rate of 2%, which is lower than the standard rate of 19%. The main reason for this being lower is the £319m profit arising on the disposal of Arthur Food Stores Limited (the entity that was sold to Asda as part of the disposal of our petrol forecourt estate) which is exempt from tax as the disposal qualifies under the Substantial Shareholding Exemption Budget that reduces the expected tax charge by £61m. There are other factors as detailed in the disclosure, the main one being the £10m impact of depreciation on non- qualifying assets, that in total then increase the net expected tax charge by £14m. See footnotes for more detail.
| 2022 | 2021 | |
|---|---|---|
| £m | £m | |
| Tax expense on items taken directly to consolidated statement of comprehensive income or consolidated statement of changes in equity | ||
| Actuarial gains and losses on employee pension scheme | 183 | (128) |
| Investment property revaluation through other comprehensive income | - | (2) |
| Tax on items taken directly to consolidated statement of comprehensive income | 183 | (130) |
| Adjustment to historic funeral plan liabilities (see Note 23) | (6) | - |
| Total tax on changes in equity | 177 | (130) |
Of the £183m tax taken directly to the consolidated statement of comprehensive income, £139m credit (2021: £66m charge) arises on the actuarial movement on employee pension schemes. There is also a £44m credit (2021: £62m charge) being the impact of the 25% rate on the deferred tax related to the employee pension schemes as noted below. There was no movement this year directly to the consolidated statement of comprehensive income in respect of investment property revaluations. A tax charge of £6m has been attributed to the IFRS 15 adoption adjustment in respect of funeral plan liabilities taken directly to Retained earnings in equity, of which £1m charge is rate impact.
Following the Budget on 3 March 2021, the Chancellor announced the enacted corporation tax rate of 19% would increase to 25% with effect from 1 April 2023. To the extent the above deferred tax assets and liabilities are expected to crystalise after this date they should be valued using 25% rather the current corporation tax rate of 19%. The bulk of the deferred tax assets and liabilities, as shown in Note 15, are expected to crystalise over a much longer time frame, being mainly the retirement benefit obligations, capital allowances on fixed assets and unrealised gains on investment properties, rolled-over gains and historic business combinations. An assessment of the amount of deferred tax assets and liabilities that are expected to crystalise prior to 1 April 2023 is considered to be immaterial when compare to total net deferred tax liability, being less than 1% of the total amount. Due to this assessment being based on projected forecasts and the potential uncertainties inherent in using these, utilising a flat rate of 25% is seen as a fair approximate and has been used to determine the actual net deferred tax liabilities. The impact in 2022 of recognising the net deferred tax movements at 25% rather than 19% has meant the equity credit is increased by £44m and the tax charge through the income statement is increased by £4m.
We publish our tax policy on our website (https://www.co-operative.coop/ethics/tax-policy) and have complied with the commitments set out in that policy.
i) The Group is not tax-paying in the UK in respect of 2022 due to the fact it has a number of brought forward capital allowances (£198m gross claimed in 2022) and tax losses (£5m gross utilised in 2022) that offset its taxable profits for the period. These allowances and losses are explained in more detail in Note 15. The current tax charge nets to £1m, this is partly due to profits earned by Arthur Food Stores Limited that could not be fully covered by the above allowances. The corporation tax libiilty in respect of this, of £3m, was accrued in the the companies balance sheet at disposal. Off-setting this is a credit of £2m in respect of a claim made to HMRC to convert an equivalent amount of deferred tax reliefs into a cash settlement. This is shown as adjustment in repsect of prior periods. In addition, the discontinued disclosure requirements require the tax impact of discontinued operations to be split out resulting in a £14m tax credit and £14m tax charge in continuing and discontinued respectively. Outside of the UK, our Isle of Man resident subsidiary, Manx Co-operative Society, a convenience retailing business in the Isle of Man showed a small profit in 2022, giving rise to a small current tax liability of £0.1m (2021: £0.2m). This is the Group's only non-UK resident entity for tax purposes, which employs 104 part-time and 142 full-time colleagues out of our total Group headcount figure. All other income in the consolidated income statement is generated by UK activities and all other colleagues are employed in the UK. The 2022 revenue of Manx Co-operative Society is £35m and all other revenue reflected in the consolidated income statement is generated by UK trading activities. The net assets of Manx Co-operative Society at 31 December 2022 were £11.8m, compared to net assets of the consolidated Group of £2,803m. The Manx assets represent the only overseas trading assets within the Group. A full copy of the most recent accounts is available here https://www.co- operative.coop/investors/rules. The presence of this IOM resident subsidiary has not resulted in any additional tax charge in 2022 over and above that payable to the Isle of Man authorities stated above. If these activities had been carried out in the UK, these profits would have been included within the Group's taxable profit prior to the availability of capital allowances and tax losses. In addition the Group has one dormant company registered in the Cayman Islands, Violet S Propco Limited. This is a legacy dormant company and is UK resident for tax purposes, as it is managed and controlled entirely within the UK. All tax obligations in respect of this company are therefore reported in the UK. It should be noted that we have engaged with the Cayman Counsel and are in the process of completing the relevant due diligence that will allow the commencement of the formal striking off of Violet S Propco Ltd as a Cayman Isle registered company.
ITEMS IN RED PENDING UPDATES
Co-op Annual Report & Accounts for 2022: Financial Statements 162
Notes to the financial statements continued
ii) As noted in last year's financial statements, the accounting gain in the 2021 income statement of £99m arising from the settlement of a creditor balance in relation to group relief claimed from The Co-operative Bank was not subject to corporation tax in accordance with UK tax legislation.
iii) There were minimal adjustments in respect of the current year in respect of prior years for both 2022 and 2021, other than as noted above.
iv) Deferred tax is an accounting concept that reflects how some income and expenses can affect the tax charge in different periods to when they are reflected for accounting purposes. These differences are a result of tax legislation.The £11m deferred tax charge represents the net utilisation of temporary differences throughout the current year that are offset against the Group's taxable profits, reducing the Group's current tax liabilities. The £11m primarily relates to deferred tax arising on movements on our pension assets. Note 15 gives further detail on how each deferred tax balance has moved in the year. As the Group is not tax-paying in respect of 2022, the reconciling items between the tax charge at the standard rate and the actual tax charge mostly affect the deferred tax we carry as they will result in us having more or less capital allowances or losses to offset against future profits.
v) There was a £2m tax charge adjustment in the current year relating to prior years. This mainly resulted from a claim made to HMRC to convert some of the Group's deferred tax reliefs into a cash settlement reported as a £2m tax credit to current year tax in respect of prior years (see footnote (i) above). In 2021 the £6m tax charge resulted from changes to the taxable profits reported in the individual subsidiary accounts compared to the Group's tax charge as a whole in 2020. It is common for adjustments to arise in respect of prior years, as the tax charge in the financial statements is an estimate that is prepared before the detailed tax calculations are required to be submitted to HMRC, which is 12 months after the year end. Also, HMRC may not agree with a tax return some time after the year end and a liability for a prior period may arise as a result. When HMRC may not agree this can give rise to uncertainties for which a provision is recognised. Following recent agreement with HMRC on prior year issues we no longer carry any uncertain tax positions.
vi) Some expenses incurred by the Group may be entirely appropriate charges for inclusion in its financial statements but are not allowed as a deduction against taxable income when calculating the Group's tax liability. Examples of this include some repairs, entertaining costs and certain legal costs.
vii) The accounting treatment of depreciation differs from the tax treatment. For accounting purposes an annual rate of depreciation is applied to capital assets. For tax purposes the Group is entitled to claim capital allowances, a relief provided by law. Some assets do not qualify for capital allowances and no relief is available for tax purposes on these assets. This value represents depreciation arising on such assets (primarily Land and Buildings).
viii) In 2022 the Group disposed of its shares in Arthur Food Stores Limited (the entity that was sold to Asda as part of the disposal of our petrol forecourt estate). The disposal falls within the substantial shareholder exemptions (SSE) which means any gain or losses arising on the disposal are not brought into tax. The amount shown for 2021 was in connection to the disposal of shares in Co-operative Care Limited that was also covered by SSE.
ix) During the year a number of properties were sold, where the net taxable profit was less than the accounting profit.
x) It is a requirement to measure deferred tax balances at the substantively enacted corporation tax rate at which they are expected to unwind. As noted above the impact of recognising deferred tax at 25% has been to increase the tax charge by £4m this year.
Income tax on the profit or loss for the period is made up of current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in reserves, in which case it is recognised in other comprehensive income. Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
What does this show? We classify any of our business segments as discontinued operations if they have been disposed of during the year or if they are held for sale at the balance sheet date (which means they are most likely to be sold within a year). This note shows the operating result for these segments as well as the profit or loss on disposal.
Discontinued operation - disposal of Insurance (underwriting) business
The sale of our insurance underwriting business (CISGIL) completed on 3 December 2020. The results of that business have been classified as a discontinued operation from 2018 and shown in a separate line at the bottom of the consolidated income statement under Discontinued Operations. As part of the sale agreement Co-op continued to supply CISGIL with certain agreed services in the first half of 2021 under a service agreement (TSA). The costs and recoveries associated with that agreement are included in the table below within Operating expenses and Operating income respectively and are shown within Discontinued operations in the Consolidated Income statement. Operating expenses in 2022 includes the release of any remaining provisions associated with the disposal. Other income includes £72m of income following payments received in respect of a legal claim.
Results of discontinued operation - Insurance (underwriting business)
| 2022 | 2021 | |
|---|---|---|
| £m | ||
| Operating income | - | 12 |
| Operating expenses (net) | 3 | (13) |
| Other income | 78 | 13 |
| Profit before tax | 81 | 12 |
| Tax | (14) | 1 |
| Profit for the period from discontinued operation | 67 | 13 |
| Segmental analysis - Insurance (underwriting business) | Revenue from external segment customers £m | Underlying operating profit £m | Profit before tax current assets / (loss) £m | Additions to non-current assets / operating profit £m | Depreciation / amortisation £m |
|---|---|---|---|---|---|
| 52 weeks ended 31 December 2022 | - | - | 81 | - | - |
| 52 weeks ended 1 January 2022 | 12 | (1) | 12 | - | - |
The table below shows a summary of the cash flows of discontinued operations:
Cash flows used in discontinued operations:
| 2022 | 2021 | |
|---|---|---|
| £m | ||
| Net cash from discontinued operations | 72 | 13 |
Cash flows from financing and investing activities were not significant in any period.
Accounting policies
The Group classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Costs to sell are the incremental costs directly attributable to the disposal of an asset (disposal group), excluding finance costs and income tax expense. The criteria for held for sale classification is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Actions required to complete the sale should indicate that it is unlikely that significant changes to the sale will be made or that the decision to sell will be withdrawn. Management must be committed to the plan to sell the asset and the sale expected to be completed within one year from the date of the classification. Discontinued operations are those operations that can be clearly distinguished from the rest of the Group, both operationally and for financial reporting purposes, that have either been disposed of or classified as held for sale and which represent a separate major line of business. Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held for sale. Assets and liabilities classified as held for sale are presented separately as current items in the balance sheet. Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the income statement. A disposal group qualifies as a discontinued operation if it is a component of an entity that either has been disposed of, or is classified as held for sale, and:
* Represents a separate major line of business or geographical area of operations; or
* Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations.
What does this show? This note shows how we adjust our operating profit, as reported in the income statement, to get to the net cash from operating activities which is the starting position in the cash flow statement. Non-cash items are added back to or subtracted from the operating profit figure to show how much cash is generated from our operating activities.
| 2022 | 2021 | |
|---|---|---|
| £m | ||
| Operating profit (Note 1) | 5 | 64 |
| Depreciation and amortisation charges | 390 | 405 |
| Non-current asset impairments | 105 | 30 |
| Profit on closure and disposal of businesses and non-current assets | (66) | (2) |
| Change in value of investment properties | 15 | (9) |
| Retirement benefit obligations | (12) | (24) |
| Decrease / (increase) in inventories | 36 | (28) |
| Increase in receivables | (88) | (17) |
| Decrease in contract assets (funeral plans) | 3 | 18 |
| Increase in contract liabilities (funeral plans) | (87) | (19) |
| Increase / (decrease) in payables and provisions | 80 | (253) |
| Tax received | 2 | - |
| Net cash flow from operating activities before net cash operating inflow from discontinued operations | 383 | 165 |
| Net cash flow from operating activities relating to discontinued operations | 72 | 13 |
| Net cash flow from operating activities | 455 | 178 |
Accounting policies
Refer to note 20 for details of the accounting policy for Cash and cash equivalents.# Co-op Annual Report & Accounts for 2022: Financial Statements 165
This section of the accounts (notes 11 - 20) outlines the key assets that we hold at the balance sheet date.
What does this show? Property, plant and equipment is the physical assets we use in our business such as our buildings, equipment and vehicles. This note shows how the amount we include on our balance sheet for these assets has changed over the period.
| Property Plant and | Total |
|---|---|
| For the period ended 31 December 2022 | |
| £m | £m |
| Cost or valuation: | |
| At 1 January 2022 | 1,442 |
| Additions | 8 |
| Disposal of petrol forecourts (see Note 35) | (60) |
| Disposals | (31) |
| At 31 December 2022 | 1,359 |
| Depreciation: | |
| At 1 January 2022 | 610 |
| Charge for the period | 27 |
| Impairment | 2 |
| Disposal of petrol forecourts (see Note 35) | (16) |
| Disposals | (14) |
| At 31 December 2022 | 609 |
| Net book value: | |
| At 31 December 2022 | 750 |
| At 1 January 2022 | 832 |
| Capital work in progress included above | 10 |
The impairment charge of £30m (2021: £5m) primarily relates to poor performing food stores (see also Critical accounting estimates and judgements section of this note for further detail on impairment).
| Property Plant and | Total |
|---|---|
| For the period ended 1 January 2022 | |
| £m | £m |
| Cost or valuation: | |
| At 2 January 2021 | 1,467 |
| Additions | 38 |
| Transfer to Assets held for sale (see Note 19) | (4) |
| Reclassified to Investment properties (see note 26) | (7) |
| Disposals | (52) |
| At 1 January 2022 | 1,442 |
| Depreciation: | |
| At 2 January 2021 | 607 |
| Charge for the period | 30 |
| Impairment | 1 |
| Transfer to Assets held for sale (see Note 19) | (2) |
| Reclassified as assets held for sale (see note 19) | (2) |
| Disposals | (24) |
| At 1 January 2022 | 610 |
| Net book value: | |
| At 1 January 2022 | 832 |
| At 2 January 2021 | 860 |
| Capital work in progress included above | 21 |
In the context of considering potential impairment of plant, property and equipment; the recoverable amount for Food and Funeral cash generating units (CGUs) is the greater of the fair value of the CGU (less costs to sell) and the value in use (VIU) of the CGU. The value in use for Food and Funeral CGUs has been determined using discounted cash flow calculations. The key assumptions in the value in use calculations are as follows:
| Assumption | Food Segment | Funeral Segment |
|---|---|---|
| Structure of a CGU | A CGU is deemed to be a local network of interdependent branches, known as a Funeralcare Hub. | Each individual food store is deemed to be an individual CGU. |
| Future cash flows derived from cash flow assumptions. | Board approved four-year plan cash flow projections. These forecasts are based on budget for FY23, four- year plan for FY24 and then subject to a long term growth rate of 1.9% (2021: 1.9%) reflecting the UK's long-term post war growth rate which is in- line with industry norms for the period of the lease. Where lease terms are shorter than this, the remaining lease terms have been used. | Future cash flows derived from Board approved four-year plan cash flow projections. These cash flows are extrapolated over the remaining lease term for leasehold properties or into perpetuity for freehold properties. Perpetuities included in cash flows where the Hub is expected to be operational beyond its current lease terms. |
| A growth rate of 1.9% (2021: 1.9%) is applied beyond Board approved four-year plan horizon (reflecting the UK's long-term post war growth rate which is in-line with industry norms). | A growth rate of 1.9% (2021: 1.9%) is applied beyond Board approved four-year plan horizon (reflecting the UK's long-term post war growth rate which is in-line with industry norms). | |
| Cash flow years | Cash flows include estimated store capital maintenance costs / assumptions based on the square footage of the store. | Perpetuities included in cash flows with 0% growth (2021: 0%) where stores are expected to be operated beyond their current lease term. |
The Group is currently working to identify the physical risk to our business and supply chains from the changing climate, along with the potential impact of policy, technology and market changes as we transition to a lower carbon future. This is a developing area with inherent uncertainty which is constantly evolving. The work being undertaken will help inform our overall response to the risks and opportunities that are identified. Our assessment of the impact of climate-related risk and related expenditure is reflected in the financial models and plans and will continue to be monitored in future periods.
A post tax discount rate has been calculated for impairment purposes, with the Food segment's weighted average cost of capital (WACC) deemed to be an appropriate rate, subsequently grossed up to a pre-tax rate of 10.1% (2021: 7.3%). The post tax discount rate has been calculated using the capital asset pricing model.
Certain inputs into the capital asset pricing model are not readily available for non-listed entities. As such, certain inputs have been obtained from industry benchmarks which carries a measure of estimation uncertainty. However, as discussed in the sensitivity Discount rate section below, this estimation uncertainty level is not deemed to be material.
In each of the current and comparative years, sensitivity analysis has been performed in relation to our store impairment testing, testing for a 2% increase in discount rate and a decrease in growth to minus 2%; within both these sensitivities no additional material impairment was calculated. The sensitivity analysis performed considers reasonably possible changes in the discount rate and growth rate assumptions.
Sensitivity analysis has also been performed on our goodwill impairment testing, see note 13.
The Group is currently working to identify the physical risk to our business and supply chains from the changing climate, along with the potential impact of policy, technology and market changes as we transition to a lower carbon future. This is a developing area with inherent uncertainty which is constantly evolving. The work being undertaken will help inform our overall response to the risks and opportunities that are identified. Our assessment of the impact of climate-related risk and related expenditure is reflected in the financial models and plans and will continue to be monitored in future periods.
A post tax discount rate has been calculate for impairment purposes, with the Funeralcare segment's weighted average cost of capital (WACC) deemed to be an appropriate rate, subsequently grossed up to a pre-tax rate of 10.9% (2021: 8.8%). The post tax discount rate has been calculated using the capital asset pricing model.
Certain inputs into the capital asset pricing model are not readily available for non-listed entities. As such, certain inputs have been obtained from industry benchmarks which carries a measure of estimation uncertainty. However, as discussed in the sensitivity analysis section below, this estimation uncertainty level is not deemed to be material.
In each of the current and comparative years, sensitivity analysis has been performed in relation to our Funeralcare Hub impairment testing, testing for a 1% increase in discount rate and a decrease in growth to minus 1%; within both these sensitivities no additional material impairment was calculated. The sensitivity analysis performed considers reasonably possible changes in the discount rate and growth rate assumptions.
Sensitivity analysis has also been performed on our goodwill impairment testing, see note 13.
Where parts of an item of property, plant and equipment have materially different useful economic lives, they are accounted for as separate items of property, plant and equipment. Cost includes purchase price plus any costs directly attributable to bringing the assets to the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation is provided on the cost or valuation less estimated residual value (excluding freehold land) on a straight-line basis over the anticipated working lives of the assets. The estimated useful lives are as follows and where appropriate would also include our assessment of the expected impact on asset lives of our plan to move to net zero by 2040:
We no longer include property, plant and equipment in our balance sheet when the Group loses the right to the future economic benefits associated with the asset. For property, this usually happens when we have exchanged contracts on an unconditional basis to sell it.
For the Food segment, the Group treats each store as a separate cash-generating unit for impairment testing of property, plant and equipment and right-of-use assets. The Group allocates goodwill to groups of cash-generating units. The lowest level at which goodwill is monitored by management is at a total Food segment level. For the Funerals segment, the Group treats a local network of interdependent branches, known as a Funeralcare Hub, as a separate cash-generating unit for impairment testing of property, plant and equipment, right-of-use assets and goodwill.# Notes to the financial statements continued
What does this show? This note shows the value of our leased assets and the corresponding value of our lease liabilities. The tables show how these balances have moved in the period from additions, disposals, payments, interest charges and impairments.
| Property, Plant and Equipment | Right-of-use assets £m | Total £m |
|---|---|---|
| Balance at 1st January 2022 | 1,014 | 72 |
| Depreciation charge for the year | (102) | (17) |
| Additions | 116 | 7 |
| Disposals | (16) | (1) |
| Disposal of petrol forecourts (see Note 35) | (131) | - |
| Impairment | (60) | - |
| Balance at 31st December 2022 | 821 | 61 |
| Balance at 2nd January 2021 | 952 | 79 |
| Depreciation charge for the year | (105) | (17) |
| Additions | 226 | 10 |
| Disposals | (5) | - |
| Reclassified to Investment properties (see Note 26)* | (28) | - |
| Transfer to assets held for sale (see Note 19) | (1) | - |
| Impairment | (25) | - |
| Balance at 1st January 2022 | 1,014 | 72 |
The Group leases many assets, principally it leases properties for its food retail stores and funeral branches as well as some vehicles and other equipment. The leases of retail stores are typically between 1 and 20 years in length (2021: 1 and 20 years), and leases of funeral branches are typically between 1 and 10 years in length (2021: 1 and 8 years). Vehicle and equipment leases are typically between 1 and 4 years in length (2021: 1 and 4 years) and in some cases the Group has options to purchase the assets at the end of the contract term.
In the context of potential impairment then the critical accounting estimates and judgments set out in Note 11 (Property, plant and equipment) are also applicable for right-of-use assets. Impairment of £60m (2021: £25m) comprises £33m against food stores where future cashflow forecasts do not support the carrying value of the right-of-use assets we hold and £27m in the Corporate centre which includes a £20m reduction in the value of the right-of-use asset that we hold against our central support centre at Angel Square as our utilisation has changed following the transition to hybrid working.
| Lease liabilities £m | 2022 | 2021 |
|---|---|---|
| Current | (182) | (210) |
| Non-current | (1,124) | (1,306) |
| Lease liabilities included in the Consolidated balance sheet | (1,306) | (1,516) |
| Lease liabilities £m | 2022 | 2021 |
|---|---|---|
| At the start of the period | (1,516) | (1,425) |
| Additions | (120) | (244) |
| Disposals | 31 | 17 |
| Disposal of petrol forecourts (see Note 35) | 171 | - |
| Interest expense | (78) | (79) |
| Transfer to liabilities held for sale (see note 19) | - | 2 |
| Payments | 206 | 213 |
| Total lease liabilities | (1,306) | (1,516) |
The Group recognised rent expense from short-term leases of £2m (2021: £2m).
Some leases of retail stores contain extension or termination options exercisable by the Group up to one year before the end of the non- cancellable contract period. Where practicable, the Group seeks to include extension and termination options in new leases to provide operational flexibility. The extension and termination options held are typically exercisable only by the Group and not by the lessors.
The Group assesses at lease commencement whether it is reasonably certain to exercise the extension or termination options. The Group reassesses whether it is reasonably certain to exercise the options if there is a significant event or significant change in circumstances within its control.
As at 31 December 2022, potential discounted future cash outflows of £141m (2021: £150m) have not been included in the lease liability because it is not reasonably certain that the Group will exercise the extension option. Included within the lease liability are discounted future cash outflows of £99m (2021: £107m) where the group holds termination options but it is not reasonably certain to execute those termination options.
During the year the Group completed sale and leaseback transactions on some of its freehold buildings used within food retail and our funerals business. Aggregate consideration of £6m (2021: £12m) was received, a net lease liability of £1m (2021: £6m) was recognised and net book value of £5m (2021: £3m) disposed creating a profit on disposal of £nil (2021: £3m).
Lease income from lease contracts in which the Group acts as a lessor is as below:
| 2022 £m | 2021 £m | |
|---|---|---|
| Operating lease (i) | ||
| Lease income | 9 | 10 |
| Finance lease (ii) | ||
| Finance income on the net investment in the lease | 2 | 3 |
The Group leases out its investment properties. The Group classifies these leases as operating leases, because they do not transfer substantially all of the risks and rewards incidental to the ownership of the assets.
The following table sets out a maturity analysis of lease payments, showing the undiscounted lease payments to be received after the reporting date.
| 2022 £m | 2021 £m | |
|---|---|---|
| Less than one year | 5 | 6 |
| One to two years | 4 | 5 |
| Two to three years | 4 | 4 |
| Three to four years | 3 | 4 |
| Four to five years | 3 | 3 |
| More than five years | 31 | 35 |
| Total undiscounted lease payments receivable | 50 | 57 |
The Group also subleases some of its non-occupied leased properties. The Group classifies the sublease as a finance lease, where the period of the sublease is for substantially the remaining term of the head lease.
The following table sets out a maturity analysis of lease receivables, showing the undiscounted lease payments to be received after the reporting date.
| 2022 £m | 2021 £m | |
|---|---|---|
| Less than one year | 11 | 12 |
| One to two years | 10 | 9 |
| Two to three years | 9 | 9 |
| Three to four years | 8 | 8 |
| Four to five years | 7 | 7 |
| More than five years | 24 | 23 |
| Total undiscounted lease payments receivable | 69 | 68 |
| Less: Unearned finance income | (17) | (17) |
| Present value of minimum lease payments receivable | 52 | 51 |
| Impairment loss allowance | (9) | (9) |
| Finance lease receivable (net of impairment allowance) | 43 | 42 |
| 2022 £m | 2021 £m | |
|---|---|---|
| Current | 9 | 12 |
| Non-current | 34 | 30 |
| Finance lease receivable as per Consolidated balance sheet | 43 | 42 |
The average term of finance leases entered into is 13 years (2021: 10 years).
The Group estimates the loss allowance on finance lease receivables at an amount equal to lifetime expected credit losses. The lifetime expected credit losses are estimated based upon historical defaults on subleases, the credit quality of current tenants and forward-looking factors.
The Group recognises right-of-use assets at the commencement date of the lease (i.e. the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment.
At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate.
The variable lease payments that do not depend on an index or a rate are recognised as expense in the period on which the event or condition that triggers the payment occurs.# In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.
The Group applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases that are considered of low value (i.e. below £5,000). Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term.
Co-op Annual Report & Accounts for 2022: Financial Statements 172
Notes to the financial statements continued
Intangible assets have long-term value but no physical presence, such as software or customer relationships. This note shows how the amount we include on our balance sheet for these assets has changed over the period.
| Acquired customer relationships and other intangibles | |||
|---|---|---|---|
| For period ended 31 December 2022 | £m | £m | £m |
| Cost: | |||
| At 1 January 2022 | 1,245 | 346 | 43 |
| Additions | - | 15 | - |
| Disposal of petrol forecourts (see Note 35) | (107) | - | - |
| Disposals | (7) | - | - |
| At 31 December 2022 | 1,131 | 361 | 43 |
| Accumulated amortisation and impairment: | |||
| At 1 January 2022 | 383 | 138 | 38 |
| Charge for the period | - | 27 | - |
| Impairment | 4 | 11 | - |
| At 31 December 2022 | 387 | 176 | 38 |
| Net book value: | |||
| At 31 December 2022 | 744 | 185 | 5 |
The impairment charge of £15m (2021: £nil) primarily relates to software licenses in our Food business that we no longer intend to use.
| Acquired customer relationships and other intangibles | |||
|---|---|---|---|
| For period ended 1 January 2022 | £m | £m | £m |
| Cost: | |||
| At 2 January 2021 | 1,277 | 316 | 43 |
| Additions | - | 30 | - |
| Transferred to Assets held for sale (see Note 19) | (3) | - | - |
| Disposals | (29) | - | - |
| At 1 January 2022 | 1,245 | 346 | 43 |
| Accumulated amortisation and impairment: | |||
| At 2 January 2021 | 384 | 110 | 37 |
| Charge for the period | - | 28 | 1 |
| Transferred to Assets held for sale (see Note 19) | - | - | - |
| Disposals | (1) | - | - |
| Impairment | - | - | - |
| At 1 January 2022 | 383 | 138 | 38 |
| Net book value: | |||
| At 1 January 2022 | 862 | 208 | 5 |
Co-op Annual Report & Accounts for 2022: Financial Statements 173
Notes to the financial statements continued
The components of goodwill are as follows:
| 2022 | 2021 | |
|---|---|---|
| £m | £m | |
| Food | 723 | 840 |
| Other businesses | 21 | 22 |
| 744 | 862 |
The goodwill within other businesses principally relates to the goodwill recognised in the Funeral and Legal Services businesses.
For the Food goodwill impairment review, the Food segment's future cash flow projections have been taken from the board approved four-year plan, taken into perpetuity and discounted to present value at a pre-tax rate of 10.1% (2021: 7.3%). A long-term growth rate of 1.9% has been applied beyond the four-year plan period (2021: 1.9%). In each of the current and comparative years, sensitivity analysis has been performed on this assumption, testing for a 1% increase in discount rate and a decrease in revenue growth / cashflow to minus 1%; within both these sensitivities the cash flows remain well in excess of the current carrying value. The sensitivity analysis performed considers reasonably possible changes in the discount rate and growth rate assumptions.
The Group is currently working to identify the physical risk to our business and supply chains from the changing climate, along with the potential impact of policy, technology and market changes as we transition to a lower carbon future. This is a developing area with inherent uncertainty which is constantly evolving. The work being undertaken will help inform our overall response to the risks and opportunities that are identified which will then be reflected in our financial models and plans as appropriate and in line with the Group’s integrated approach to a changing climate. See our Vision update: Co-operating for a Fairer World for further discussion.
For the Funerals goodwill impairment review, average selling price increases and wage and cost inflation have been applied in line with the assumptions in the four-year plan. Although inherently uncertain this also includes our best estimate of future death rates including the recent impact of Covid-19. Cash flows have been projected based on the four-year plan and into perpetuity from year four and discounted back to present value using a pre-tax discount rate of 10.9% (2021: 8.8%). A long term growth rate of 1.9% has been applied beyond the four-year plan period (2021: 1.9%). Sensitivity analysis has been performed with the discount rate increased by 1% and a decrease in revenue growth / cashflow to minus 1%, and under these sensitivities no further material amounts of impairment are calculated. The sensitivity analysis performed considers reasonably possible changes in the discount rate and growth rate assumptions.
We continue to allocate goodwill to CGUs, which are determined as a local network of independent branches (known as a Funeralcare Hub), however in the year the allocation of branches to networks has been reorganised to better align to how cashflows are monitored internally. An impairment test was carried out prior to this reorganisation to ensure the change did not result in a materially different impairment result under the new and previous methods.
Co-op Annual Report & Accounts for 2022: Financial Statements 174
Notes to the financial statements continued
Goodwill represents the difference between the cost of the acquisition and the fair value of the identifiable assets, liabilities and contingent liabilities acquired. Assets and liabilities accepted under a transfer of engagements are restated at fair value, including any adjustments necessary to comply with the accounting policies of the Group. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment. In respect of associates, the carrying value of goodwill is included in the carrying amount of the investment in the associate. Where impairment is required the amount is recognised in the income statement and cannot be written back. Negative goodwill arising on an acquisition is recognised directly in the income statement. Acquisition costs are expensed to the income statement when incurred.
Computer software is stated at cost less accumulated amortisation and impairment. Costs directly attributable to the development of computer software for internal use are capitalised and classified as intangible assets where they are not an integral part of the related hardware and amortised over their useful life up to a maximum of seven years. We have considered the impact of guidance issued in March 2021 by the IFRS Interpretations Committee, which clarified IAS 38 guidance around what costs should and should not be capitalised specifically in relation to Software as a Service (‘SaaS’) contracts, and concluded that our policy continues to be compliant with the standard.
Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is charged to the income statement as incurred.
Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets. Goodwill with an indefinite useful life is tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows:
* Software development costs: 3 – 7 years
* Other intangible assets: 1 - 10 years
Goodwill is reviewed for impairment at least annually by assessing the recoverable amount of each cash-generating unit, or group of cash-generating units, to which the goodwill relates.
What does this show?
Our Funerals business holds some investments in relation to funeral plans. This note provides information on these investments and how they are accounted for.
Funeral plan investments as per the balance sheet:
| 2022 | 2021 | |
|---|---|---|
| £m | £m | |
| Current | - | - |
| Non-current | 1,369 | 1,372 |
| Funeral plan investments | 1,369 | 1,372 |
Funeral plan investments held by the Group are as follows:
| 2022 | 2021 | |
|---|---|---|
| £m | £m | |
| Fair value through the income statement: | ||
| Funeral plan investments (see below) | 1,369 | 1,372 |
| Total Funeral plan investments | 1,369 | 1,372 |
Funeral plan investments:
| 2022 | 2021 | |
|---|---|---|
| £m | £m | |
| At start of period | 1,372 | 1,331 |
| Net plan investments (including ongoing instalments) | 76 | 92 |
| Plans redeemed | (91) | (96) |
| Plans cancelled | (17) | (9) |
| Unrealised fair value movement on funeral plan investments (Note 6) | 29 | 54 |
| At end of period | 1,369 | 1,372 |
See Note 29 for further detail on the accounting policy for funeral plans.
The funeral plan investments are financial assets which are recorded at fair value each period using valuations provided to Co-op by the policy provider. The plan values reflect the amount the policy provider would pay out on redemption of the policy at the valuation date with the main driver being underlying investment performance. The investment strategy is targeted to deliver appropriate returns on the plan investments over the medium term to match expected inflationary increases in the cost to deliver a funeral. Assets include UK and overseas equities, gilts, corporate bonds, property and cash.
Funeral plan actuarial position as at 30 September 2022:
The Group holds investments on the balance sheet in respect of funeral plan policies which are predominantly invested in individual whole-of-life insurance policies and, to a much smaller extent, independent trusts (<5% of total). The investments are subject to an annual actuarial valuation. This gives an assessment as to the headroom of the underlying funeral plan investments over an estimated present value (on a wholesale basis) of delivering the funerals on a portfolio basis. The most recent valuation was performed as at 30 September 2022 and the headroom achieved on a portfolio basis is shown in the table below before allowance for taxation.
| 30th September 2022 | 30th September 2021 | |
|---|---|---|
| £m | £m | |
| Funeral Plan Investments Actuarial Valuation (pre tax) | ||
| Total Assets | 1,258 | 1,397 |
| Liabilities: | ||
| Present value (wholesale basis) | 787 | 1,102 |
| Total Liabilities (pre tax) | 787 | 1,102 |
| Headroom (pre-tax) | 471 | 295 |
| Headroom as a % of liabilities (pre-tax) | 60% | 27% |
Broadly, a significant increase in expected investment returns (used to derive the discount rate) has reduced future liabilities this year. This has only partly been offset by reduced asset valuations, so increasing the surplus overall. The group continues to manage funeral plans for the medium to long term given, in the normal course of business, this is when the majority of the liability will crystallise. We estimate that the pre-tax "wholesale" cost actuarial valuation surplus (used under IAS 37) at 31 December 2022 would be approximately £517m, an increase of £46m over the 30 September 2022 position reflecting modest favourable changes in assumptions including increased asset values and decreased expected inflation.
| Key assumption | 30th September 2022 | 30th September 2021 |
|---|---|---|
| Average total wholesale costs per plan funeral | £2,704 | £2,652 |
| Average future cost inflation | 3.4% | 3.9% |
| Average discount rate (before tax and after allowance for investment management costs) | 4.7% | 2.3% |
Sensitivities
The actuarial report is a best estimate and is neither deliberately optimistic nor pessimistic. It is prepared by independent actuaries based on management assumptions such as future funeral and disbursement inflation. The headroom percentage is expressing the surplus as a percentage of total liabilities. Each 0.5% (50 basis points) increase in the inflation assumption would reduce the surplus by approximately £53m (2021: £94m). Each 0.5% (50 basis points) reduction in the discount rate would reduce the surplus by approximately £34m (2021: £70m). Both of these sensitivities include allowance for assets held that would move in line with liabilities.
Under the revised IAS 37 approach the actuarial cost to be used in the assessment of onerous liabilities should be the lower of the wholesale cost and the internal cost per redemption calculated under the standard (and on this basis the "wholesale" cost has been used). The wholesale actuarial valuation is based upon the Group's estimate of the direct cost for a third party funeral director to perform the promised services and the payment of associated disbursements (crematoria, clergy fees etc) as if the Group were not in a position to carry out these funerals. The future Group administrative costs of maintaining the current funeral plans are allowed for, but no allowance is made for any incremental overheads of the third party because it's assumed that the provider could absorb these funerals into their existing infrastructures. These costs do not represent the expected internal cost of fulfilling the funeral and allowing for these costs in the valuation may materially affect the results.
Accounting policies
See Note 29 Financial Instruments for the accounting policies relating to funeral plans.
What does this show?
Our tax charge is made up of current and deferred tax as explained in note 8. We show a net asset or net liability in the balance sheet to reflect our deferred tax. This note shows how those items are calculated and how they affect the income statement. Additional explanatory footnotes are included to explain the key items.
Deferred income taxes are calculated on all temporary differences under the liability method using an effective tax rate of 25.0% (2021: 19.0%). Temporary differences arise because sometimes accounting and tax requirements mean that transactions are treated as happening at a different time for accounting purposes than they are for tax purposes.
| 2022 | 2021 | |
|---|---|---|
| £m | £m | |
| Net deferred tax in the balance sheet comprises: | ||
| Deferred tax asset - continuing operations | 400 | 429 |
| Deferred tax liability - continuing operations | (556) | (743) |
| Net deferred tax liability | (156) | (314) |
| Comprised of: | ||
| Footnote: | ||
| Other temporary differences (i) | (6) | - |
| Retirement benefit obligations (ii) | (395) | (565) |
| Capital allowances on fixed assets (iii) | 314 | 327 |
| Unrealised gains on investment properties, rolled-over gains and historic business combinations (iv) | (138) | (155) |
| Tax losses (v) | 22 | 23 |
| IFRS 16 transition adjustment taken through Opening Reserves (vi) | 47 | 55 |
| (156) | (314) |
The movements in the net deferred tax liability during the period are set out below:
| 2022 | 2021 | |
|---|---|---|
| £m | £m | |
| At beginning of the period | (314) | (161) |
| Income statement (charge) / credit: Group (see Note 8) (vii) | (17) | (24) |
| Additions / disposals | (2) | 1 |
| Charged to equity: | ||
| Retirement benefit obligations (see Note 8) (ii) | 183 | (128) |
| Investment property revaluation movement | - | (2) |
| Items taken directly to Retained earnings: | ||
| Adjustment to historic funeral plan liabilities (See Notes 8 and 23) | (6) | - |
| At end of the period (continuing operations) | (156) | (314) |
Following the Budget on 3 March 2021, the Chancellor announced the enacted corporation tax rate of 19% would increase to 25% with effect from 1 April 2023. To the extent the above deferred tax assets and liabilities are expected to crystalise after this date they should be valued using 25% rather the current corporation tax rate of 19%. The bulk the deferred tax assets and liabilities, as shown in Note 15, are expected to crystalise over a much longer time frame, being mainly the retirement benefit obligations, capital allowances on fixed assets and unrealised gains on investment properties, rolled-over gains and historic business combinations. An assessment of the amount of deferred tax assets and liabilities that are expected to crystalise prior to 1 April 2023 is considered to be immaterial when compare to total net deferred tax liability, being less than 1% of the total amount. Due to this assessment being based on projected forecasts and the potential uncertainties inherent in using these, utilising a flat rate of 25% is seen as a fair approximate and has been used to determine the actual net deferred tax liabilities. The impact in 2022 of recognising the net deferred tax movements at 25% rather than 19% has meant the equity credit is increased by £44m, the tax charge through the income statement is increased by £4m and the tax charge in respect of amounts taken straight to Retained earnings is increased by £1m.
Footnotes:
i) This amount includes deferred tax liabilities that arose on the acquisition of Nisa Retail Limited in 2018 and the adoption of IFRS 9, also in 2018. These are partially offset by a deferred tax asset in respect of provisions. Expenses that have not yet been incurred are able to be recorded in the accounts as provisions. However, of these certain expenses don't receive tax relief until they have been paid for and so the related tax relief is delayed to a future period. During 2022 the amount of expense provisions deferred for tax puposes reduced meaning a larger net liability is shown.
ii) This amount represents the theoretical future tax cost to the Group in respect of the current pension scheme surplus. The overall decrease in 2022 was £170m. This is due to the movement in the total schemes' surpluses during the year.## iii) Deferred tax asset
A deferred tax asset arises on capital allowances where the tax value of assets is higher than the accounts value of the same fixed assets. The reason the Group has a higher tax value for these fixed assets is due to the fact the Group has not made a claim to its maximum entitlement to capital allowances since 2013 due to reduced levels of trading profits in the intervening years. However, impairment, disposals and depreciation have continued to reduce the accounts value for our assets. The Group expects to use these allowances to reduce future trading profits. The £13m decrease in the asset over the year is due mainly to the increased use of capital allowances.
This amount represents the theoretical amount of tax that would be payable by the Group on (a) the sale of all investment properties, (b) the sale of properties that have been restated at their fair value on historic mergers and transfers of engagements and (c) the sale of any property that has had an historic capital gain 'rolled into' its base cost (which is an election available by statute designed to encourage businesses to reinvest proceeds from the sale of trading properties into new trading properties and ventures). The £17m decrease in the liability over the year is mainly due to disposal of properties under classs (c) above.
The Group has incurred trading losses and interest losses that were in excess of taxable profits in the past. These losses can be used to reduce future trading profits and capital gains which are included in future tax forecasts for the Group. The restriction on the amount of losses that can be used in any one year post 1 April 2017, being £5m plus 50% of any surplus taxable profits above this amount, is not expected to limit the use of these losses other than extend the time over which they will be claimed. The decrease in asset of £1m is in respect of amounts offset against taxable profits this year.
Deferred tax that arose on the adoption of IFRS 16 in 2019 will unwind over a number of years and reduce taxable profits in those future years. The decrease in asset of £8m is mainly in respect of the unwind during the year.
This movement is made up of a net £11m current year utilisation of temporary differences, £2m prior year adjustments and £4m impact from rate change, see Note 8 for more detail.
Deferred tax is provided for, with no discounting, using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of assets or liabilities that affect neither accounting nor taxable profits, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available to use the asset against. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Co-op Annual Report & Accounts for 2022: Financial Statements 179
Notes to the financial statements continued
This note shows the stock we hold at the period end. This is mainly the goods we're planning to sell, held either at Food stores or distribution centres. We also hold stocks of store consumables (such as plastic bags) as well as work in progress relating to funeral caskets.
| Inventories include the following: | 2022 £m | 2021 £m |
|---|---|---|
| Raw materials, consumables and work in progress | 4 | 4 |
| Finished goods and goods for resale | 429 | 484 |
| Total | 433 | 488 |
The period end inventory provision is £44m (2021: £29m) and a net charge of £15m (2021: £6m) has been made within operating expenses in the income statement. Inventory held at fair value less cost to sell is not material in either period. There was no inventory pledged as security for liabilities in the current or prior period.
Inventories are stated at the lower of cost, including attributable overheads, and net realisable value.
This note shows amounts we are owed and amounts we have paid in advance for services which will be received over a period of time. It also shows a reduction to reflect amounts we think may not be repaid. They are split between current items (which will be settled within one year) and non-current items (which will be settled after more than one year).
| 2022 £m | 2021 £m | |
|---|---|---|
| Non-current | 171 | 214 |
| Current | 637 | 551 |
| Total | 808 | 765 |
| 2022 £m | 2021 £m | |
|---|---|---|
| Trade receivables | 371 | 309 |
| Prepayments | 28 | 25 |
| Accrued income | 132 | 128 |
| Other receivables | 288 | 313 |
| Total | 819 | 775 |
| Allowance for expected credit losses | (11) | (10) |
| Net | 808 | 765 |
Trade receivables are non-interest bearing and the Group's standard payment terms are between 7 and 60 days. Non-current debt includes £166m (2021: £199m) that relates to pre-paid funeral plan instalments where customers have been invoiced before the funeral has occurred. £38m (2021: £37m) of current debt also relates to pre-paid funeral plan instalments which are £204m (2021: £236m) in total. Non-current debt also includes £5m (2021: £15m) of deferred consideration receivable in respect of the agreement with Markerstudy to provide marketing and distribution services for motor and insurance products with an additional £10m (2021: £10m) included in current. These balances are all included within Other receivables. Within trade receivables is £60m (2021: £52m) of supplier income that is due from Food and Wholesale suppliers. Accrued income includes £116m (2021: £116m) in relation to supplier income that has been recognised but not yet billed. As at 5th April 2023, £45m (2021: £45m) of the trade receivables balance had been invoiced and settled and £102m (2021: £112m) of the accrued income balance has been invoiced and settled.
Co-op Annual Report & Accounts for 2022: Financial Statements 180
Notes to the financial statements continued
The table below shows the movement in the allowance for expected credit losses for trade and other receivables:
| 2022 £m | 2021 £m | |
|---|---|---|
| Opening allowance for expected credit losses | 10 | 12 |
| Charge to the income statement | 12 | 7 |
| Credit to the income statement | (11) | (9) |
| Closing allowance for expected credit losses | 11 | 10 |
The Group has applied the expected losses model as defined under IFRS 9 (Financial Instruments) which focuses on the risk that a trade receivable will default rather than whether a loss has been incurred. The Group has applied a simplified approach as allowed under IFRS 9 to use a provision matrix for calculating expected losses for trade receivables. More information on credit risk and the use of a provision matrix is provided in Note 29 which outlines our approach to financial risk management.
Refer to Note 29 Financial Instruments for the accounting policies relating to trade receivables and allowances for expected credit losses.
This note shows the costs we've incurred in setting up funeral plans (fulfilment costs). We hold these on the balance sheet as contract assets until the funerals have been performed and we're entitled to receive payment, then we transfer them to the income statement in line with when the revenue is recognised.
| 2022 £m | 2021 £m | |
|---|---|---|
| Current | 5 | 5 |
| Non-current | 40 | 43 |
| Total | 45 | 48 |
| 2022 £m | 2021 £m | |
|---|---|---|
| Opening contract assets | 48 | 66 |
| Fulfilment costs - incurred on new funeral plan sales | 2 | 12 |
| Fulfilment costs - transferred to contract liabilities in respect of membership discount* | - | (24) |
| Fulfilment costs - transferred to the income statement on funeral plan redemptions | (1) | (3) |
| Fulfilment costs - transferred to the income statement on funeral plan cancellations | (4) | (3) |
| Closing contract assets | 45 | 48 |
*In the prior year we reassessed the treatment of discounts given to members on inception of a plan and reclassified them as a reduction against the contract liability (Note 23) whereas previously they were held as contract assets in the table above. No provision for expected credit losses has been recognised against contract assets in either the current or prior year.
A contract asset is recognised when our right to consideration is conditional on something other than the passage of time. For funeral plans, fulfilment costs (which are costs relating directly to the plan sale which otherwise wouldn't have been incurred) associated with delivering the funeral are deferred and shown in the consolidated balance sheet as a contract asset until the funeral is performed (at which point the costs are recognised in the income statement in line with when the revenue is recognised).
Co-op Annual Report & Accounts for 2022: Financial Statements 181
Notes to the financial statements continued
This shows the value of any assets or liabilities that we hold for sale at the period end (these generally relate to properties or businesses that we plan to sell soon). When this is the case, our balance sheet shows those assets and liabilities separately as held for sale.# Notes to the financial statements continued
What does this show?
The tables below show a breakdown of the cash and cash equivalent balances that the Group holds at the balance sheet date and the accounting policies explains what is and what isn't classified as cash and cash equivalents.
| 2022 £m | 2021 £m | |
|---|---|---|
| Cash in hand | 63 | 59 |
| Cash at banks | 384 | 1 |
| Cash and cash equivalents | 447 | 60 |
| Cash and cash equivalents (as above) | 447 | 60 |
| Bank overdrafts | - | (4) |
| Net cash and cash equivalents | 447 | 56 |
The Group has a right of set-off as part of a pooling arrangement with its principal bank and the bank overdraft figure above reflects the net position across those accounts. The Cash at banks (prior year Bank overdrafts) figures include amounts receivable from customers or banks for debit or credit card payment transactions made by customers of £39m (2021: £38m) in the two days before year-end which don't clear the bank (and show on our bank statement) until the first working day of the new year.* Cash at banks (2021: Bank overdrafts) includes £3m (2021: £6m) of non-distributable cash held on behalf of customers in the process of purchasing funeral plans.
Accounting policies
Cash and cash equivalents in the consolidated balance sheet comprise cash in hand, cash in transit and cash at bank and short-term deposits with banks with a maturity of three months or less, which are subject to an insignificant risk of changes in value. Cash and cash equivalents includes debit and credit card payments made by customers which are receivable from banks and clear the bank within three days of the transaction date. In the statement of consolidated cash flows, cash and cash equivalents includes bank overdrafts as they are repayable on demand and deemed to form an integral part of the Group's cash management. Amounts held in trustee-administered bank accounts of the Group of £27m (2021: £25m), which can only be utilised to meet liabilities in respect of funeral plans, are classed as Funeral plan investments (see Note 14) and not Cash and cash equivalents.
Co-op Annual Report & Accounts for 2022: Financial Statements 183
Notes to the financial statements continued
This section of the accounts (notes 21 - 24) outlines the key liabilities that we have at the balance sheet date.
What does this show?
This note provides information about the terms of our interest-bearing loans. This includes information about their value, interest rate and repayment terms and timings. Details are also given about other borrowings and funding arrangements such as corporate investor shares and leases. All items are split between those that are due to be repaid within one year (current) and those which won't fall due until after more than one year (non- current).
Non-current liabilities:
| 2022 £m | 2021 £m | |
|---|---|---|
| £105m 7.5% Eurobond Notes due 2026 (fair value) | 95 | 123 |
| £245m 7.5% Eurobond Notes due 2026 (amortised cost) | 255 | 258 |
| £300m 5.125% Sustainability Bond due 2024 (amortised cost) | 299 | 299 |
| £109m 11% Final repayment subordinated notes due 2025 | 109 | 109 |
| £20m 11% Instalment repayment notes (final payment 2025) | 5 | 7 |
| Total (excluding lease liabilities) | 763 | 796 |
| Lease liabilities | 1,306 | 1,124 |
| Total Group interest-bearing loans and borrowings | 1,887 | 2,102 |
Current liabilities:
| 2022 £m | 2021 £m | |
|---|---|---|
| £245m 7.5% Eurobond Notes due 2026 (amortised cost) - interest accrued | 9 | 9 |
| £300m 5.125% Sustainability Bond due 2024 (amortised cost) - interest accrued | 2 | 2 |
| £20m 11% Instalment repayment notes (final payment 2025) | 2 | 2 |
| £400m revolving credit facility (RCF) | - | 163 |
| Other borrowings | 1 | - |
| Corporate investor shares | 3 | 4 |
| Total (excluding lease liabilities) | 17 | 180 |
| Lease liabilities | 182 | 210 |
| Total Group interest-bearing loans and borrowings | 199 | 390 |
See Note 29 for more information about the Group’s exposure to interest rate and foreign currency risk, and a breakdown of the Group's borrowings by the three-level fair value hierarchy (which reflects different valuation techniques) as defined within IFRS 13 (Fair Value Measurement).
Co-op Annual Report & Accounts for 2022: Financial Statements 184
Notes to the financial statements continued
Reconciliation of movement in net debt
Net debt is a measure that shows the amount we owe to banks and other external financial institutions less the cash that we have and any short-term deposits. Some of our Eurobond borrowings are held as financial liabilities at fair value through the income statement. The fair value movement on these liabilities is shown under non-cash movements in the tables below.
For period ended 31 December 2022
| Start of period £m | Non cash movements £m | Cash flow £m | End of period £m | New leases £m | Other period £m | |
|---|---|---|---|---|---|---|
| Interest-bearing loans and borrowings: | ||||||
| - current | (180) | - | - | (17) | - | 163 |
| - non-current | (796) | - | 31 | (763) | - | 2 |
| Lease liabilities | ||||||
| - current | (210) | (17) | (161) | (182) | 206 | - |
| - non-current | (1,306) | (103) | 285 | (1,124) | - | - |
| Total Debt | (2,492) | (120) | 155 | (2,086) | 206 | 165 |
| Group cash: | ||||||
| - cash & overdrafts | 56 | - | - | 447 | - | 391 |
| Group Net Debt | (2,436) | (120) | 155 | (1,639) | 206 | 556 |
For period ended 1 January 2022
| Start of period £m | Non cash movements £m | Cash flow £m | End of period £m | New leases £m | Other period £m | |
|---|---|---|---|---|---|---|
| Interest-bearing loans and borrowings: | ||||||
| - current | (16) | - | - | (180) | - | (164) |
| - non-current | (803) | - | 5 | (796) | - | 2 |
| Lease liabilities | ||||||
| - current | (191) | (34) | (198) | (210) | 213 | - |
| - non-current | (1,234) | (210) | 138 | (1,306) | - | - |
| Total Debt | (2,244) | (244) | (55) | (2,492) | 213 | (162) |
| Group cash: | ||||||
| - cash & overdrafts | 269 | - | - | 56 | - | (213) |
| Group Net Debt | (1,975) | (244) | (55) | (2,436) | 213 | (375) |
Details of the Group's bank facilities are shown in Note 29.
Co-op Annual Report & Accounts for 2022: Financial Statements 185
Notes to the financial statements continued
Terms and repayment schedule
The Group has two bonds in issue. A £300m Sustainability Bond issued in May 2019, and repayable in May 2024 and with an interest rate of 5.125%. The bond proceeds were fully allocated against the cost of purchasing Fairtrade products for resale by the end of 2020. On the 1st March 2023 the Group repurchased £100m of the bond (see Note 34 (Events after the reporting period)). The other bond is a £350m Bond issued in May 2011, and repayable in May 2026; it has an interest rate of 7.5%. This bond has been paying an additional 1.25% coupon since 8 July 2013 following the downgrade of the Group's credit rating to sub-investment grade. On maturity this bond will be repaid at par. The Group also has two subordinated debt instruments in issue: £109m 11% final repayments notes due December 2025 and £20m 11% instalment repayment notes, with final repayment in December 2025. As at 31 December 2022 the £109m 11% final repayments notes had an outstanding value of £109m. The £20m 11% instalment repayment notes had an outstanding value of £7m.# Notes to the financial statements continued
What does this show?
This note shows how much we owe, and includes amounts we owe to suppliers for goods and services we've bought, as well as taxes we owe and other sundry liabilities.
| 2022 | 2021 | |
|---|---|---|
| £m | £m | |
| Current | 1,403 | 1,472 |
| Non-current | 31 | 44 |
| 1,434 | 1,516 | |
| 2022 | 2021 | |
| £m | £m | |
| Trade payables | 967 | 1,013 |
| Value Added Tax, PAYE and social security | 14 | 16 |
| Accruals | 300 | 317 |
| Deferred income | 53 | 66 |
| Deferred consideration | - | 6 |
| Other payables | 100 | 98 |
| 1,434 | 1,516 |
Further details on the maturity profile of trade and other payables can be found in Note 28. Deferred income includes £39m (2021: £55m) in relation to the 13 year marketing and distribution arrangement entered into with Markerstudy following the sale of our Insurance underwriting business (CISGIL). Accruals includes capital expenditure accruals of £25m (2021: £52m), payroll accruals of £103m (2021: £110m) as well as standard cost accruals of £172m (2021: £155m). Deferred consideration includes £nil (2021: £6m) in respect of the Nisa acquisition and is contingent on the level of trade that passes through Nisa. Other payables also includes £32m (2021: £30m) of rewards earned through our membership offer that have either not been redeemed by members or have not yet been paid out to local causes. During the year a £1m charge (2021: £1m charge) of member reward earned has been charged / written back to the income statement in line with a prudent assessment of the likelihood that members won't redeem their rewards. The Group operates a supplier financing arrangement with Prime Revenue, under which suppliers can obtain accelerated settlement on invoices from the finance providers signed up to the programme. The Group settles these amounts in accordance with each supplier's agreed payment terms. The Group’s trade creditors balance includes £40m (2021: £33m) relating to payments due to Co-op suppliers under these arrangements. During the year ended 31 December 2022, the maximum facility was £110m (2021: £120m).
Accounting policies
Refer to Note 29 Financial instruments for the accounting policies relating to trade payables.
What does this show?
When a customer buys a funeral plan from us we invest the money they give us and we recognise that we have an obligation to provide a funeral in the future. We include a liability on our balance sheet for this and we recognise an effective interest charge on the monies received from a customer in each year until the plan is redeemed at which point the revenue is recognised as the total of the monies received from the customer and the interest charged. This note shows these liabilities and how they have changed during the period. Further detail on our accounting policy for funeral plans is given in Note 29.
| 2022 | 2021 | |
|---|---|---|
| £m | £m | |
| Contract liabilities - Funeral plans | 1,723 | 1,778 |
| Current | 183 | 164 |
| Non-current | 1,540 | 1,614 |
| 1,723 | 1,778 |
Contract liabilities - Funeral plans comprise £1,392m (2021: £1,366m) relating to fully paid plans, £200m (2021: £253m) on instalment plans and £131m (2021: £159m) of deferred income. Included in the balances above are Low Cost Instalment Funeral Plans (LCIP) of £328m (2021: £348m). This relates to 62,948 live plans (2021: 65,754 live plans). Refer to Note 29 for further details of the accounting policies for funeral plans, contract liabilities and LCIPs.
| Contract Liabilities: | 2022 | 2021** |
|---|---|---|
| £m | £m | |
| Opening contract liabilities | 1,778 | 1,737 |
| Adjustment to historic funeral plan liabilities* | (23) | - |
| New plan additions | 72 | 221 |
| Interest accruing on funeral plan liabilities | 54 | 61 |
| Transfered from contract assets in respect of membership discount (see Note 18) | - | (24) |
| Plans cancelled or redeemed outside of the Group | (48) | (105) |
| Recognised as revenue in the period | (110) | (112) |
| Closing contract liabilities | 1,723 | 1,778 |
*A historic adjustment of £23m has been taken directly to retained earnings to more accurately reflect the contract liability balance recognised on initial transition to IFRS 15 (see also the Consolidated Statement of Changes in Equity). The adjustment is not material for restatement in the context of the overall contract liability balance.
**The line-item categorisation has been represented in the comparative period to better reflect the movements in the prior year. There is no change to the overall liability value.
What does this show?
We recognise a provision when a liability has been incurred but there is some uncertainty about when the liability will be settled or how much it may cost us. This note provides an analysis of our provisions by type, and shows how the value of each provision has changed during the period.
| 2022 | 2021 | |
|---|---|---|
| £m | £m | |
| Non-current | 59 | 74 |
| Current | 34 | 52 |
| 93 | 126 |
Uninsured Property Restructuring & Regulatory / Total
| 2022 | £m | £m | £m | £m | £m |
| :------------------------------------ | -----: | -----: | -----: | -----: | -----: |
| At beginning of the period | 37 | 72 | 3 | 14 | 126 |
| Credit / release to income statement | (1) | (37) | (3) | (1) | (42) |
| Charge to income statement | 19 | 8 | - | 3 | 30 |
| Payments | (17) | (2) | - | (2) | (21) |
| At end of the period | 38 | 41 | - | 14 | 93 |
Uninsured Property Restructuring & Regulatory / Total
| 2021 | £m | £m | £m | £m | £m |
| :------------------------------------ | -----: | -----: | -----: | -----: | -----: |
| At beginning of the period | 40 | 67 | 7 | 17 | 131 |
| Credit to income statement | (6) | (12) | (2) | (4) | (24) |
| Charge to income statement | 24 | 27 | 19 | 3 | 73 |
| Payments | (21) | (9) | - | (2) | (53) |
| Transfer to payables | - | (1) | - | - | (1) |
| At end of the period | 37 | 72 | 3 | 14 | 126 |
Critical accounting estimates and judgements
Uninsured claims
This provision relates to potential liabilities arising from past events which are not covered by insurance. It includes a wide variety of known claims and potential claims from accidents in our depots and stores. The provision includes an assessment, based on historical experience, of claims incurred but not reported at the period end. The claims are expected to be settled substantially over the next three years.
Property provisions
Property provisions are held for onerous contractual obligations for leasehold properties that are vacant or not planned to be used for ongoing operations. The provisions represent the least net cost of exiting from the contracts. Provisions include an assessment of dilapidation and return of lease obligations, and other service costs that are explicitly excluded from the measurement of lease liabilities in accordance with IFRS 16. The Group considers that where it has entitlement to possession of a property, even if vacant, it retains a statutory obligation to pay the related business rates that have been determined to be levies as defined in IFRIC 21. Accordingly, the estimate of the least net costs of exiting from the contracts excludes future business rates which instead under IFRIC 21 are recognised when the event that triggers the payment of the levy arises (as a periodic cost). Property provisions are expected to be utilised over the remaining periods of the leases which range from 1 to 97 years. In each of the current and comparative years, sensitivity analysis has been performed in relation to the provision, testing for a 2% increase in inflation related to costs expeted to be incurred; this sensitivity does not lead to a material additional provision being calculated. The sensitivity analysis performed considers reasonably possible changes in the inflation assumption.
Restructuring and integration
The remaining provisions are expected to be utilised within one year.
Regulatory / other
This provision relates to costs from a number of past events that are expected to be incurred within the next one to three years. Typically, these cover potential legal or regulatory claims.# Accounting policies
A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a discount rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
Co-op Annual Report & Accounts for 2022: Financial Statements 189
Notes to the financial statements continued
This section (notes 25 - 34) contains additional notes to the accounts.
What does this show?
This note shows the amounts our members have paid to become owners of the business and provides information on their rights as shareholders. It also shows our reserves which, together with our share capital, form the total capital resources of the business.
| 2022 £m | 2021 £m | |
|---|---|---|
| Individual shares of £1 each | 66 | 65 |
| Corporate shares of £5 each | 9 | 9 |
| Share capital | 75 | 74 |
| Other reserves | 6 | 6 |
| Retained earnings | 2,637 | 2,859 |
| Total Retained earnings and Other reserves | 2,643 | 2,865 |
| Total Capital resources | 2,718 | 2,939 |
Members’ share capital (Issued and paid-up value)
Members’ share capital is made up of corporate and individual shares. The rights attached to shares are set out in the Society’s rules. Shares held by Independent Society Members (corporate shares) are not withdrawable and are transferable only between Independent Society Members with the consent of the Society’s Board. Shares held by individual members (individual shares) are withdrawable on such period of notice as the Society’s Board may from time to time specify.
IFRIC 2 (Members' Shares in Co-operative Entities and Similar Instruments) determines the features that allow shares to be classified as equity capital. As the Board has an unconditional right to refuse redemption of both classes of shares, both corporate and individual shares are treated as equity shares. Both classes of share maintain a fixed nominal value with corporate shares attracting a limited rate of interest.
Under the Society's current rules, voting for Independent Society Members is in proportion to trade with the Society, with Independent Society Members totalling 21.9% (2021: 21.9%) of the vote at the Annual General Meeting. Each individual member has one vote with individual members totalling 78.1% (2021: 78.1%) of the vote at the Annual General Meeting.
For individual shares, new members are required to contribute a minimum of £1 when they join the Society. Each member has 1 individual share although contributions of up to £100,000 per member are allowed. No interest is earned on member capital. Members can withdraw money from their share account upon request (to a minimum of £1) or they can withdraw their £1 when they leave the Society.
Share capital increased by £0.5m in the period being the net of new member contributions of £0.6m and withdrawals of £0.1m. There are 17.5m individual member records on the share register.
Co-op Annual Report & Accounts for 2022: Financial Statements 190
Notes to the financial statements continued
Revaluation Total Other reserves (2022)
| Reserve | £m |
|---|---|
| Balance at 1 January 2022 | 6 |
| Balance at 31 December 2022 | 6 |
Revaluation Total Other Reserves (2021)
| Reserve | £m |
|---|---|
| Balance at 2 January 2021 | 1 |
| Gain on revaluation of right-of-use assets prior to transfer to investment property* | 5 |
| Balance at 1 January 2022 | 6 |
Revaluation reserve - property, plant and equipment
This reserve relates to the surplus created following the revaluation of certain assets in previous periods. Any surplus relating to a revalued asset is transferred to retained earnings at the point the asset is disposed of.
Investments held at fair value through other comprehensive income (FVOCI)
We sold our Insurance underwriting business (CISGIL) on 3 December 2020. Prior to disposal CISGIL held certain debt securities as investments at fair value through other comprehensive income. Subsequent valuation was at fair value with differences between fair value and carrying value recognised in other comprehensive income as they arise. The balance of this reserve has been disposed of as part of the sale of CISGIL and the Group no longer holds any investments at FVOCI.
Distribution of reserves in the event of a winding-up
The Society’s rules state that any surplus in the event of a winding-up shall be transferred to one or more societies registered under the Co- operative and Communities Benefit Act 2014. Such societies must be a member of Co-operatives UK Limited and have the same or similar rule provisions in relation to surplus distribution on a dissolution or winding-up as we have. If not transferred to another society in this way, the surplus shall be paid or transferred to Co-operatives UK Limited to be used and applied in accordance with co-operative principles.
Capital management
The Group defines capital as its share capital and reserves. The Group's policy is to maintain a strong base and to be more prudent than industry 'normal' levels as it is not able to raise equity externally. The Group still recognises the need to maintain a balance between the potential higher returns that might be achieved with greater borrowing levels and the advantages and security coming from a sound capital position. The Group manages capital to make sure we have the right balance between investing in the future growth of the Group and making member and community payments.
Following the launch of the membership offer in 2016, the Group has made payments to members and communities of £38m in 2022 (2021: £40m). See Note 33 for more details. It has also invested in future growth through cash capital expenditure additions of £147m (2021: £325m) and still kept within its net debt limits. Total member funds decreased during the period by £221m (2021: increased £270m).
Co-op Annual Report & Accounts for 2022: Financial Statements 191
Notes to the financial statements continued
What does this show?
We own properties that we don't occupy or trade from and which we rent out to generate income or hold for capital growth. These properties are revalued at each period end and this note shows how that valuation has changed during the year as well as showing other changes in our investment property holdings.
| 2022 £m | 2021 £m | |
|---|---|---|
| Valuation at beginning of period | 55 | 17 |
| Disposals | - | (9) |
| Reclassification from Property, plant and equipment (Note 11) | - | 5 |
| Reclassification from Right-of-use assets (Note 12) | - | 28 |
| Revaluation (loss) / gain recognised in the Consolidated income statement | (15) | 9 |
| Revaluation gain recognised in the Consolidated statement of comprehensive income | - | 5 |
| Valuation at end of period | 40 | 55 |
Accounting policies
Properties held for long-term rental yields that are not occupied by the Group or properties held for capital growth are classified as investment property. Investment properties are freehold land and buildings and right-of-use assets. These are carried at fair value which is determined by either independent valuers or internally each year on a three-year cyclical basis in accordance with the RICS Appraisal and Valuation Manual. Fair value is based on current prices in an active market for similar properties in the same location and condition. Any gain or loss arising from a change in fair value is recognised in the income statement. If we start to occupy or trade from one of our investment properties, it is reclassified as property, plant and equipment, and its fair value at the date of reclassification becomes its cost for subsequent accounting purposes. Other disclosures required by IAS 40 (Investment Properties) are not considered to be material.
Co-op Annual Report & Accounts for 2022: Financial Statements 192
Notes to the financial statements continued
What does this show?
This note provides information about our pension schemes. It explains the types of pension scheme we have, the assets and liabilities they hold, the assumptions used in valuing the pension schemes and the key risks faced in connection with the schemes.
| 2022 £m | 2021 £m | |
|---|---|---|
| Pension schemes in surplus | 1,584 | 2,262 |
| Pension schemes in deficit | (3) | (4) |
| Closing net retirement benefit surplus | 1,581 | 2,258 |
Defined benefit (DB) plans
The Group operates three funded DB pension schemes all of which are closed to future accrual. This means that colleagues can no longer join or earn future benefits from these schemes. The assets of these schemes are held in separate trustee-administered funds to meet future benefit payments. The Group's largest pension scheme is the Co-operative Group Pension Scheme (‘Pace’) which accounts for approximately 85% of the Group's pension assets. The DB section of Pace ('Pace Complete') closed to future service accrual on 28 October 2015. Further information about Pace is set out below.
Defined contribution (DC) plans
Since the closure of the DB schemes, the Group provides all colleagues with DC pension benefits through the DC section of Pace. Colleagues are able to select the level of contributions that they wish to pay. The contribution paid by the Group varies between 1% and 10% of pensionable salary depending on the contribution tier that the scheme member has selected. Contributions are based on the scheme member’s basic pay plus any earnings in respect of overtime, commission and shift allowance.# The Pace DC section provides benefits based on the value of the individual colleague’s fund built up through contributions and investment returns. The Group has no legal or constructive obligation to pay contributions beyond those set out above. There is therefore no balance sheet items for DC pension benefits except for any accrued contributions.
The table below summarises the net surplus in the balance sheet by scheme. The main feature over the year has been a material rise in interest rates and this comes through in a reduced balance sheet surplus as both assets and liabilities have fallen (albeit a slight improvement in funding levels in percentage terms). All of the schemes use segregated liability driven investment (LDI) mandates which hold government and corporate bonds, along with derivatives. These investments increase (decrease) in value when yields on government bonds fall (rise), and are designed to have similar interest rate and inflation sensitivities to the schemes’ liabilities so that the funding position is protected against movements in interest rate and inflation expectations. The schemes’ liabilities are in aggregate broadly fully hedged against from movements in yields on government bonds. Against a backdrop of market uncertainty, investment returns and asset values fell significantly in 2022, in particular as government bond yields rose. However, scheme liabilities also reduced markedly following a significant increase in the discount rate, which is used to calculate the present value of the scheme obligations, as AA corporate bond yields rose significantly over the year. The IAS19 surplus on our largest pensions scheme, PACE, decreased by £0.6bn with asset values falling by £3.5bn whilst liabilities decreased by £2.9bn. Despite the surplus reducing, the funding level across all our schemes has increased, from 125% to 129%, as the percentage fall in assets was marginally lower than that of the liabilities.
| Net | Net | |
|---|---|---|
| 2022 | 2021 | |
| £m | £m | |
| Schemes in surplus | ||
| The Co-operative Group Pension Scheme (Pace) | 1,524 | 2,087 |
| Somerfield Pension Scheme | 32 | 108 |
| United Norwest Co-operatives Employees' Pension Fund | 28 | 67 |
| Total schemes in surplus | 1,584 | 2,262 |
| Schemes in deficit | ||
| Other unfunded obligations | (3) | (4) |
| Total schemes in deficit | (3) | (4) |
| Total schemes | 1,581 | 2,258 |
Any net pension asset disclosed represents the maximum economic benefit available to the Group in respect of its pension obligations. The Group has carried out a review of the provisions for the recovery of surplus in its pension schemes. This review concluded that the Group can recoup the benefits of the surplus via a right to refunds and this is reflected in the balance sheet position.
Co-op Annual Report & Accounts for 2022: Financial Statements
193
Notes to the financial statements continued
27 Pensions continued
As Pace represents around 85% of the Group's pension assets, further information has been included on Pace below. As all of the DB schemes will be exposed to similar risks to Pace, we have not provided additional commentary on each scheme. Benefits accrued in Pace between 6 April 2006 and 28 October 2015 are calculated based on an individual’s average career salary. Benefits accrued prior to 6 April 2006 are linked to final salary until scheme members end their pensionable service.
A valuation of the Group section of Pace DB was carried out as at 5 April 2019, in accordance with the scheme specific funding requirements of the Pensions Act 2004. The results of the valuation showed that the Group section of Pace DB had a surplus of £907m. On completion of the actuarial valuation in July 2020 the Group and the Trustee agreed that no contributions would be required. The 5 April 2022 valuation is currently being carried out, to be finalised in mid 2023.
Pace is a mutli-employer scheme but following sectionalisation of the scheme in 2018, the Group accounts only for the Co-op section of Pace. CFSMS, a subsidiary of the Group, participates in the Group's section with a material share of accrued DB obligations. There are other participating employers in the Group section which include Group subsidiaries, non-associated and associated entities, but these do not have a material share. Non-associated entities account for pension contributions in respect of the scheme on a DC basis. As a multi-employer pension scheme, Pace exposes the participating employers to the risk of funding the pension obligations associated with the current and former colleagues of other participating employers. The sectionalisation of Pace largely removes The Co-operative Bank’s (the 'Bank's') ‘last man standing’ obligation to the rest of the Pace scheme but an obligation on the Group to support the pension liabilities of the Bank section could arise in limited circumstances if the Bank were to not meet its own section's pension liabilities. The Bank element of Pace is fully funded on both an IAS 19 accounting and a statutory funding basis. At 31 December 2022, the Bank reported an overall defined benefit pension scheme surplus of £154m (2021: £833m). This included £17m (2021: £601m) in relation to the Pace scheme consisting of assets of £930m (2021: £2,129m) and liabilities of £913m (2021: £1,528m).
As required by UK legislation, the Group's three DB schemes are run by Trustee boards which operate independently from the Group. The Trustees are responsible for the development and implementation of appropriate policies for the investment of the scheme assets and for negotiating scheme funding with the Group. The Trustees consult with the Group in developing investment strategy and delegates the responsibility for implementing and monitoring the strategy to Investment Committees. Each Trustee board has at least one professional Trustee and there is also a requirement for the boards to have some member representation. The Pace Trustee Board is made up of three professional independent Trustee Directors appointed by the Group and a further professional Independent Trustee Director appointed by the Bank. Other Trustee Boards are made up of professional independent Trustee Directors, Group appointed Trustee Directors and Member Nominated Directors elected by scheme members. The Chair is appointed by the Trustee Directors.
Under the scheme specific funding regime established by the Pensions Act 2004, trustees of DB pension schemes have to undertake a full actuarial valuation at least every three years. The purpose of the valuation is to determine if the scheme has sufficient assets to pay the benefits when these fall due. The valuation targets full funding (scheme assets equal to the value of pension liabilities) against a basis that prudently reflects the scheme’s risk exposure. The basis on which DB pension liabilities are valued for funding purposes differs to the basis required under IAS19. The Group may therefore be required to pay contributions to eliminate a funding shortfall even when a surplus is reported in the IAS19 disclosure. Any shortfall in the assets directly held by the Group’s DB schemes, relative to their funding target, is financed over a period that ensures the contributions are reasonably affordable to the Group. Deficit contributions over the 2022 financial year totalled £17m (2021: £27m). Deficit contributions to Pace and Somerfield have now ceased but contributions are still required to the United scheme. All schemes target a more prudent level of funding than the target stipulated under IAS19 which is included in these financial statements. Therefore the funding levels are not comparable and it is possible to have a surplus under IAS19 and yet still be required to pay deficit contributions. We also cannot use a surplus in one scheme to offset the requirement to pay cash contributions to fund a deficit in another scheme. In 2023, deficit contributions will continue at a rate of £16.9m (2021: £16.9m) until the point at which the United scheme becomes fully funded.
Co-op Annual Report & Accounts for 2022: Financial Statements
194
Notes to the financial statements continued
27 Pensions continued
The average duration of the liabilities is approximately 21 years. The benefits expected to be paid from the schemes take the form of a cash lump sum paid at retirement followed by a stream of pension payments. The effective date of the last full valuations of the schemes are shown below:
The liability associated with the pension schemes is material to the Group, as is the cash funding required. The Group and Trustees work together to address the associated pension risk - in particular, steps have been taken to significantly reduce the investment risk in the schemes. The key risks in relation to the DB schemes are set out below, alongside a summary of the steps taken to mitigate the risk:
| Risk description | Mitigation # Notes to the financial statements continued
The funding level at future Group monitors the funding level of the schemes in order to understand the likely outcome of valuation dates is uncertain and this leads to uncertainty in valuations and the Trustee is required to obtain agreement from the Group to funding future cash requirements for the Group. assumptions and deficit recovery contributions.
Pension liabilities are measured with All of the schemes invest in liability-driven investment (LDI) products which increase (decrease) reference to yields on bonds, with lower yields increasing the in value when yields on government bonds fall (rise), providing protection against interest rate liabilities. The schemes are therefore exposed to the risk of risk. Across all schemes, approximately 95% of the liability is currently protected from falls in interest rates. movements in yields on government bonds. LDI involves investing in assets which are expected to generate cashflows that broadly mirror expected benefit payments from the scheme.
The market This risk has been mitigated by reducing the exposure of the pension schemes to those asset value of the assets held by the pension schemes, particularly classes which have the most volatile market values. In particular, the schemes have limited the assets held in return-seeking assets such as equity, can allocation to return-seeking assets such as equity. Analysis undertaken by the Pace Trustee be volatile (and, for example, may be affected by shows that the low risk investment strategy of Pace DB means the exposure of the scheme’s environmental, social or corporate governance (“ESG”) assets to climate risk is limited. In addition, the Trustees of the Co-op’s pension schemes have failures at investee companies and/or sovereign states - responsible investment policies in place, and aligned with those policies exclude specific including the physical and transition risks of climate change). investments (where appropriate and viable). Management of ESG risks is considered when This creates a risk of short-term fluctuations in funding level. appointing investment managers and in their ongoing monitoring, and the schemes’ equity assets are explicitly managed with a consideration of such risks, including climate change.
Many of the benefits paid by the schemes are All of the schemes invest in liability driven investment products which increase (decrease) in linked to inflation. Therefore, the pension liabilities reflect value when expectations of future inflation rates increase (fall), thus providing protection against expectations of future inflation with higher inflation leading to inflation risk. Across all schemes, approximately 95% of the liability is currently protected from higher liabilities. movements in inflation.
All of the schemes' funding targets incorporate a margin for prudence to reflect uncertainty in Pensions paid by the schemes are guaranteed for life, and future life expectancy. During 2020, the Group reduced its exposure to longevity risk in the Pace therefore if members are expected to live longer, the Scheme via three separate pensioner insurance buy-in contracts. liabilities increase.
Co-op Annual Report & Accounts for 2022: Financial Statements
195
For IAS 19 disclosure purposes, DB obligations are determined following actuarial advice and are calculated using the projected unit method. The assumptions used are the best estimates chosen from a range of possible actuarial assumptions which may not necessarily be borne out in practice.
| 2022 | 2021 | |
|---|---|---|
| Discount rate | 4.76% | 1.90% |
| RPI Inflation rate | 3.50% | 3.48% |
| Pension increases in payment (RPI capped at 5% p.a.) | 3.25% | 3.37% |
| Future salary increases | 3.75% | 3.73% |
The discount rate has been derived by reference to market yields on sterling-denominated high quality corporate bonds of appropriate duration consistent with the schemes at that date.
The Group has used best estimate base mortality tables which reflect the membership of each scheme. Allowance has been made for future improvements in line with the Continuous Mortality Investigation (CMI) 2021 projections and a long-term future improvement rate of 1.25% p.a. (2021: CMI 1.25% p.a.). The actuaries have made an adjustment to the scaling factors, increasing them by 2%, to reflect recent COVID experience. For illustration, the average life expectancy (in years) for mortality tables used to determine scheme liabilities for Pace is as follows. These are broadly similar to the life expectancies used for other schemes.
| Life expectancy from age 65 | 2022 | 2021 |
|---|---|---|
| Male currently aged 65 years | 21.1 | 21.0 |
| Female currently aged 65 years | 23.1 | 23.4 |
| Male currently aged 45 years | 22.2 | 22.0 |
| Female currently aged 45 years | 24.2 | 24.7 |
The measurement of the Group’s DB liability is particularly sensitive to changes in certain key assumptions, which are described below. The methods used to carry out the sensitivity analysis presented below for the material assumptions are the same as those the Group has used previously. The calculations alter the relevant assumption by the amount specified, whilst assuming that all other variables remained the same. This approach is not necessarily realistic, since some assumptions are related: for example, if the scenario is to show the effect if inflation is higher than expected, it might be reasonable to expect that nominal yields on corporate bonds will also increase. However, it enables the reader to isolate one effect from another. It should also be noted that because of the interest rate and inflation hedges, changes in the liability arising from a change in the discount rate or price inflation would be expected to be largely mitigated by a change in assets. It’s impossible to predict future discount rates or inflation with any real certainty and so the sensitivities shown are for illustration purposes only and in reality more significant movements could be experienced.
| 2022 £m | 2021 £m | |
|---|---|---|
| Change in liability from a 0.5% decrease in discount rate | 474 | 960 |
| Change in liability from a 0.5% increase in RPI inflation | 329 | 652 |
| Change in liability from a 0.25% increase in long-term rate of longevity improvements | 44 | 122 |
The sensitivities performed and shown in the table above for the discount rate and RPI assumptions have been changed in the current year to more realistically reflect the scale of fluctuations that are currently being experienced. The comparative figures have also been re-calculated on a similar basis for comparability. Previously the sensitivities shown reflected the potential changes to the liability from a 0.1% increase in discount rate and a 0.1% decrease in RPI inflation.
| Changes in the present value of the defined benefit obligation (DBO) | 2022 £m | 2021 £m |
|---|---|---|
| Opening defined benefit obligation | 9,194 | 9,854 |
| Interest expense on DBO | 171 | 157 |
| Remeasurements: | ||
| a. Effect of changes in demographic assumptions | (51) | (42) |
| b. Effect of changes in financial assumptions | (3,870) | (316) |
| c. Effect of experience adjustments | 450 | (57) |
| Settlements (trivial commutation exercises) | - | (2) |
| Benefit payments from plan | (351) | (400) |
| Closing defined benefit obligation | 5,543 | 9,194 |
Co-op Annual Report & Accounts for 2022: Financial Statements
196
| Changes in the fair value of the plan assets | 2022 £m | 2021 £m |
|---|---|---|
| Opening fair value of plan assets | 11,452 | 11,708 |
| Interest income | 214 | 187 |
| Return on plan assets (excluding interest income) | (4,203) | (65) |
| Administrative expenses paid from plan assets | (6) | (5) |
| Employer contributions | 18 | 27 |
| Benefit payments from plan | (351) | (400) |
| Closing fair value of plan assets | 7,124 | 11,452 |
The fair value of the plan assets at the period end were as follows. The assets have been split to show those which have a quoted market price in an active market and those which are unquoted.
| 2022 Quoted £m | 2022 Unquoted £m | 2022 Total £m | 2021 Quoted £m | 2021 Unquoted £m | 2021 Total £m | |
|---|---|---|---|---|---|---|
| Equity instruments | 35 | - | 35 | 197 | - | 197 |
| Liability driven investments | 2,418 | - | 2,418 | 4,304 | - | 4,304 |
| Investment grade credit | 1,735 | - | 1,735 | 2,978 | - | 2,978 |
| Illiquid / other credit | - | 944 | 944 | - | 1,300 | 1,300 |
| Alternative investments* | - | 360 | 360 | - | 351 | 351 |
| Cash and cash equivalents | 53 | 3 | 56 | 63 | 28 | 91 |
| Insurance buy-in contracts | - | 1,576 | 1,576 | - | 2,231 | 2,231 |
| Fair value of plan assets | 4,241 | 2,883 | 7,124 | 7,542 | 3,910 | 11,452 |
*Alternative investments consist of private equity, private debt and inflation-linked property.
| Amounts recognised in the balance sheet | 2022 £m | 2021 £m |
|---|---|---|
| Present value of funded obligations | (5,540) | (9,190) |
| Present value of unfunded liabilities | (3) | (4) |
| Fair value of plan assets | 7,124 | 11,452 |
| Net retirement benefit asset | 1,581 | 2,258 |
| Amounts recognised in the income statement and other comprehensive income | 2022 £m | 2021 £m |
|---|---|---|
| Interest expense on defined benefit obligations | (171) | (157) |
| Interest income on plan assets | 214 | 187 |
| Administrative expenses and taxes | (6) | (5) |
| Settlements (trivial commutation exercises) | - | (2) |
| Total recognised in the income statement | 37 | 23 |
| Remeasurement losses on employee pension schemes | (732) | 350 |
| Total recognised in other comprehensive income | (732) | 350 |
| Total | (695) | 373 |
Co-op Annual Report & Accounts for 2022: Financial Statements
197
The Group operates various defined contribution and defined benefit pension schemes for its colleagues as stated above. A defined contribution scheme is a pension plan under which the Group pays pre-specified contributions into a separate entity and has no legal or constructive obligation to pay any further contributions. A defined benefit scheme is a pension plan that defines an amount of pension benefit that a colleague will receive on retirement.# Notes to the financial statements continued
What does this show? This note explains the main financial risks we face and how we manage them. These include: credit risk, interest rate risk, foreign currency risk and liquidity risk.
The main financial risks facing the Group are set out below. Overall Group risks and the strategy used to manage these risks are discussed in the Principal Risks and Uncertainties section on pages 61 - 65.
Credit risk arises from the possibility of customers and counterparties failing to meet their obligations. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed for all customers requiring credit over a certain amount. The Group does not require security in respect of financial assets. The majority of businesses in the Group have cash-based rather than credit-based sales and so customer credit risk is relatively small. The Group will ensure that it earns an appropriate return on its invested cash, whilst ensuring that there is minimal risk over the security of that cash. Investments are only allowed with the Group's syndicate banks or counterparties that have a credit rating of Investment Grade. Transactions involving derivative financial instruments are with counterparties with whom the Group has signed an ISDA agreement (a standard contract used to govern all over-the- counter derivatives transactions). Management has no current reason to expect that any counterparty Group has invested with will fail to meet its obligations. Funeral Plan funds are invested in whole-of-life insurance policies which pay out a lump sum when the insured person dies. Any provider of these policies to the Group must be authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. There are also some funds relating to plans taken out prior to 2002 that are held in interest-bearing trustee-administered bank accounts which can only be utilised to meet liabilities in respect of funeral plans. At the balance sheet date there were no significant concentrations of credit risk. Information regarding the age profile of trade receivables is shown in Note 17. The carrying value of all balances that attract a credit risk, which represents the maximum exposure, is set out below:
| Carrying amount 2022 £m | Carrying amount 2021 £m | |
|---|---|---|
| Trade and other receivables (excluding prepayments and accrued income) | 648 | 612 |
| Interest rate swaps | (13) | (2) |
| Foreign exchange contracts and commodity swaps (net) | 5 | 1 |
| Funeral plan investments | 1,369 | 1,372 |
| Finance lease receivables | 43 | 42 |
| Cash | 447 | 60 |
Interest rate risk arises from movements in interest rates that impact the fair value of assets and liabilities and related finance flows. The Group adopts a policy of ensuring that 50-90% of its exposure to changes in interest rates on borrowings is on a fixed rate basis. The fixed proportion as at 31 December 2022 was 86% (at 1 January 2022: 69%). Interest rate swaps, denominated exclusively in Sterling, have been entered into to achieve an appropriate mix of fixed and floating rate exposure within the Group’s policy. At 31 December 2022, the Group had interest rate swaps with a notional contract amount of £105m (at 1 January 2022: £105m). The Group does not designate interest rate swaps, forward foreign exchange contracts, and commodity swaps as hedging instruments. Derivative financial instruments that are not hedging instruments are classified as held for trading by default and so fall into the category of financial assets at fair value through the income statement. Derivatives are subsequently stated at fair value, with any gains and losses being recognised in the income statement. See Note 29. The net fair value of swaps at 31 December 2022 was a net liability of £13m (2021: net liability of £2m) comprising assets of £nil (2021: £nil) and liabilities of £13m (2021: £2m). These amounts are recognised as fair value derivatives on the face of the Consolidated balance sheet.
The Group is exposed to foreign currency risk on purchases that are denominated in a currency other than sterling. The key currencies giving rise to this risk are Euros and US Dollars. The Group manages the impact of market fluctuations on its currency exposures and future cash flows by undertaking rolling foreign exchange hedges. These are executed on a monthly basis in a layered approach based on forecast requirements. At 31 December 2022, the Group had forward currency transactions in Euros and US Dollars with a notional contract amount of £88m (2021: £100m).
This is the risk that the Group will not have sufficient facilities to fund its future borrowing requirements and will require funding at short notice to meet its obligations as they fall due. The Group’s funding maturity profile is managed to ensure appropriate flexibility through a mix of short, medium and long term funding together with diversified sources of finance to meet the Group’s needs. As at 31 December 2022, the Group had available borrowing facilities totalling £1,166m (2021: £1,168m), which was made up of uncommitted facilities of £nil (2021: £nil) and committed facilities of £1,166m (2021: £1,168m). These are detailed below:
| Bank facilities as at 31 December 2022 | Expiry £m | Expiry £m |
|---|---|---|
| Revolving Credit Facility | Sept 2024 400 | Sept 2024 400 |
| £300m 5.125% Sustainability Bond due 2024 (amortised cost) | May 2024 300 | May 2024 300 |
| £109m 11% Final repayment subordinated notes due 2025 | December 2025 109 | December 2025 109 |
| £20m Instalment repayment notes (final payment 2025) | December 2025 7 | December 2025 9 |
| £350m 7.5% Eurobond notes due 2026 | July 2026 350 | July 2026 350 |
| 1,166 | 1,168 |
The following are the maturities of financial liabilities as at 31 December 2022:
| Carrying amount £m | Contractual cash flows £m | 6 months or less £m | 6 - 12 months £m | 1 - 2 years £m | 2 - 5 years £m | More than 5 years £m | |
|---|---|---|---|---|---|---|---|
| Non-derivative financial liabilities | |||||||
| £105m 7.5% Eurobond 2026 (fair value) | (95) | (105) | - | - | - | (105) | - |
| £245m 7.5% Eurobond 2026 (amortised cost) | (255) | (254) | - | (9) | - | (245) | - |
| £300m Sustainability Bond 2024 (amortised cost) | (301) | (302) | (2) | - | - | (300) | - |
| £109m 11% Final repayment subordinated notes 2025* | (109) | (109) | - | - | - | (109) | - |
| £20m Instalment repayment notes (final payment 2025) | (7) | (7) | - | (2) | (2) | (3) | - |
| Lease liabilities | (1,306) | (1,763) | (97) | (97) | (183) | (475) | (911) |
| Trade and other payables | (1,434) | (1,434) | (1,338) | (47) | (16) | (19) | (14) |
The following are the maturities of financial liabilities as at 1 January 2022:
| Carrying amount £m | Contractual cash flows £m | 6 months or less £m | 6 - 12 months £m | 1 - 2 years £m | 2 - 5 years £m | More than 5 years £m | |
|---|---|---|---|---|---|---|---|
| Non-derivative financial liabilities | |||||||
| £105m 7.5% Eurobond 2026 (fair value) | (123) | (105) | - | - | - | (105) | - |
| £245m 7.5% Eurobond 2026 (amortised cost) | (267) | (254) | - | (9) | - | (245) | - |
| £300m Sustainability Bond 2024 (amortised cost) | (301) | (302) | (2) | - | - | (300) | - |
| £109m 11% Final repayment subordinated notes 2025 | (109) | (109) | - | - | - | (109) | - |
| £20m Instalment repayment notes (final payment 2025) | (9) | (9) | - | (2) | (2) | (5) | - |
| Lease liabilities | (1,516) | (2,090) | (109) | (107) | (204) | (542) | (1,128) |
| Trade and other payables | (1,516) | (1,516) | (1,376) | (54) | (40) | (15) | (31) |
The valuations of the Group’s quoted debt and interest rate swaps have been determined by discounting expected future cash flows associated with these instruments at the market interest rate yields as at the Group’s year end.# Notes to the financial statements continued
This is then adjusted by a +1% increase to the interest rate yield curve and a 1% reduction in the interest rate yield curve to show the impact of changes in interest rates on the value of our debt and swaps. At 31 December 2022 if sterling (GBP) market interest rates had been 1% higher / lower with all other variables held constant, there would have been no material impact to post-tax profit. Profit is generally less sensitive to movements in GBP interest rates due to the level of borrowings held at fixed rates as described in the Interest rate risk and hedging section.
At 31 December 2022, if the Euro and US dollar had strengthened or weakened by 10% against sterling (GBP) with all variables held constant, the impact to post- tax profit would be a £2m loss (2021: £1m loss) and £1m gain respectively (2021: £1m gain).
In the course of conducting its operations, the Group is required to issue bank guarantees and bonds in favour of various counterparties. These facilities are provided by the Group’s banking syndicate and as at 31 December 2022 the total amount of guarantees / bonds outstanding is £17m (2021: £8m).
Co-op Annual Report & Accounts for 2022: Financial Statements 201
This note shows how our financial assets and liabilities are valued, including our interest rate swaps.
Derivatives held for non-trading purposes for which hedge accounting has not been applied are as follows:
| 2022 | 2022 | 2022 | 2021 | 2021 | 2021 | |
|---|---|---|---|---|---|---|
| Contractual/ | Fair value | Fair value | Contractual/ | Fair value | Fair value | |
| notional amount | assets | liabilities | notional amount | assets | liabilities | |
| £m | £m | £m | £m | £m | £m | |
| Interest rate swaps | 105 | - | (13) | 105 | - | (2) |
| Foreign exchange contracts | 88 | 3 | - | 100 | - | (3) |
| Commodity swaps (diesel) | 38 | 5 | (3) | 22 | 4 | - |
| Total recognised derivative assets / (liabilities) | 231 | 8 | (16) | 227 | 4 | (5) |
The interest rate swaps mature in 2026 and as such are held in non-current liabilities. The majority of the foreign exchange contracts and diesel swaps mature within 1 year so are shown in current liabilities and current assets respectively.
The following summarises the major methods and assumptions used in estimating the value of financial instruments reflected in the annual report and accounts:
a) Financial instruments at fair value through the income statement
Investments in funeral plans
Where there is no active market or the investments are unlisted, the fair values are based on commonly used valuation techniques (refer to accounting policy (section iv) of this note for further details.
Derivatives
Forward exchange contracts, such as the Group's interest rate swaps have been determined by discounting expected future cash flows associated with these instruments at the market interest rate yields as at the Group’s year end. The Group's derivatives are not formally designated as hedging instruments but under IFRS 9 (Financial Instruments) they are used to match against a proportion of the Eurobond liabilities carried at fair value through the income statement, showing as a cost of £11m in 2022 (2021: £5m cost) see Note 7.
The Group enters into forward contracts for the purchase of energy from third party suppliers for use by Group. Energy contracts for own use are not required to be accounted for as derivatives. We adopt a layered hedging procurement policy for energy contracts over a period of 3 years to a maximum of 80% of Group forecast demand. At the 2022 year end we had 78% electricity (2021: 80%) and 76% gas (2021:66%) coverage of our forecast demand for 2023.
Fixed rate sterling Eurobonds
The fixed rate sterling Eurobond values are determined in whole by using quoted market prices.
b) Interest-bearing loans and borrowings - amortised cost
These are shown at amortised cost which presently equate to fair value or are determined in whole by using quoted market prices. Fair value measurement is calculated on a discounted cash flow basis using prevailing market interest rates.
c) Receivables and payables
For receivables and payables with a remaining life of less than one year, the nominal amount is deemed to reflect the fair value, where the effect of discounting is immaterial. For further details see the Accounting Policy section at the end of this note.
Co-op Annual Report & Accounts for 2022: Financial Statements 202
The table below shows a comparison of the carrying value and fair values of financial instruments for those liabilities not carried at fair value.
| Financial liabilities | Carrying value 2022 | Fair value 2022 | Carrying value 2021 | Fair value 2021 |
|---|---|---|---|---|
| Interest-bearing loans and borrowings | 685 | 645 | 853 | 915 |
The table below analyses financial instruments by measurement basis:
| Fair value through income statement £m | Amortised cost £m | Loans and receivables £m | Total £m | |
|---|---|---|---|---|
| 2022 | ||||
| Assets | ||||
| Other investments | 1,369 | - | - | 1,369 |
| Trade and other receivables | - | - | 648 | 648 |
| Derivative financial instruments | 8 | - | - | 8 |
| Cash and cash equivalents | - | 447 | - | 447 |
| Total financial assets | 1,377 | 447 | 648 | 2,472 |
| Liabilities | ||||
| Interest-bearing loans and borrowings | 95 | 685 | - | 780 |
| Derivative financial instruments | 16 | - | - | 16 |
| Trade and other payables | - | 1,081 | - | 1,081 |
| Total financial liabilities | 111 | 1,766 | - | 1,877 |
| Fair value through income statement £m | Amortised cost £m | Loans and receivables £m | Total £m | |
|---|---|---|---|---|
| 2021 | ||||
| Assets | ||||
| Other investments | 1,372 | - | - | 1,372 |
| Trade and other receivables | - | - | 612 | 612 |
| Derivative financial instruments | 4 | - | - | 4 |
| Cash and cash equivalents | - | 56 | - | 56 |
| Total financial assets | 1,376 | 56 | 612 | 2,044 |
| Liabilities | ||||
| Interest-bearing loans and borrowings | 123 | 853 | - | 976 |
| Derivative financial instruments | 5 | - | - | 5 |
| Trade and other payables | - | 1,139 | - | 1,139 |
| Total financial liabilities | 128 | 1,992 | - | 2,120 |
The following table provides an analysis of financial assets and liabilities that are valued or disclosed at fair value, by the three-level fair value hierarchy as defined within IFRS 13 (Fair Value Measurement):
As pricing providers cannot guarantee that the prices they provide are based on actual trades in the market then all of the corporate bonds are classified as Level 2.
Co-op Annual Report & Accounts for 2022: Financial Statements 203
| 2022 £m | 2022 £m | 2022 £m | 2022 £m | 2021 £m | 2021 £m | 2021 £m | 2021 £m | ||
|---|---|---|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||
| Assets | Assets | ||||||||
| Financial assets at fair value through the income statement | Financial assets at fair value through the income statement | ||||||||
| - Funeral plan investments | - | - | 1,369 | 1,369 | - Funeral plan investments | - | - | 1,372 | 1,372 |
| - Derivative financial instruments | - | 8 | - | 8 | - Derivative financial instruments | - | 4 | - | 4 |
| Total financial assets at fair value | - | 8 | 1,369 | 1,377 | Total financial assets at fair value | - | 4 | 1,372 | 1,376 |
| Liabilities | Liabilities | ||||||||
| Financial liabilities at fair value through the income statement | Financial liabilities at fair value through the income statement | ||||||||
| - Fixed rate sterling Eurobond | - | 95 | - | 95 | - Fixed rate sterling Eurobond | - | 123 | - | 123 |
| - Derivative financial instruments | - | 16 | - | 16 | - Derivative financial instruments | - | 5 | - | 5 |
| Total financial liabilities at fair value | - | 111 | - | 111 | Total financial liabilities at fair value | - | 128 | - | 128 |
Funeral plan investments are classified as level 3 under the IFRS 13 hierachy. Level 3 fair value measurements are those derived from valuation techniques that include inputs that are not based on observable market data (unobservable inputs). The vast majority of our funeral plan investments are held in Whole of Life (WoL) insurance policies. The plan investments are financial assets which are recorded at fair value each period using valuations provided to Co-op by the policy provider. The plan values reflect the amount the policy provider would pay out on redemption of the policy at the valuation date with the main driver being underlying market and investment performance.
The value of the Eurobonds carried at amortised cost is disclosed in Note 21. The equivalent fair value for the unhedged proportion of bonds that are now carried at amortised cost would be £222m (2021: £287m) for the 2026 Eurobond.
There were no transfers between Levels 1 and 2 during the period and no transfers into and out of Level 3 fair value measurements. For other financial assets and liabilities of the Group including cash, trade and other receivables / payables then the notional amount is deemed to reflect the fair value.
Third-party valuations are used to fair value the Group’s bond and interest rate derivatives. The valuation techniques use inputs such as interest rate yield curves with an adequate credit spread adjustment.
Co-op Annual Report & Accounts for 2022: Financial Statements 204
The Group classifies its financial assets as either:
Financial assets are recognised on the trade date which is the date it commits to purchase the instruments. Loans are recognised when the funds are advanced. All other financial instruments are recognised on the date that they are originated. The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. The Group initially measures a financial asset at its fair value, with the exception of trade receivables that don’t contain a significant financing component or where the customer will pay for the related goods or services within one year of receiving them. For financial assets which are not held at fair value through the income statement, transaction costs are also added to the initial fair value. Trade receivables that don’t contain a significant financing component or where the customer will pay for the related goods or services within one year of receiving them are measured at the transaction price determined under IFRS 15 (Revenue from Contracts with Customers). See accounting policies for revenue and IFRS 15 in Note 2.
Financial assets are derecognised (removed from the balance sheet) when:
• the rights to receive cash flows from the assets have ceased; or
• the Group has transferred substantially all the risks and rewards of ownership of the assets.
A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. When an existing liability is replaced by the same counterparty on substantially different terms or the terms of an existing liability are substantially modified, the original liability is derecognised and a new liability is recognised, with any difference in carrying amounts recognised in the income statement.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market which we do not intend to sell immediately or in the near term. These are initially measured at fair value plus transaction costs that are directly attributable to the financial asset. Subsequently these are measured at amortised cost. The amortised cost is the initial amount at recognition less principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, less impairment provisions for incurred losses.
When a customer takes out a funeral plan the initial plan value is recognised as an investment asset in the balance sheet and at the same time a liability is also recorded in the balance sheet representing the deferred income to be realised on performance of the funeral service covered by each of the funeral plans. The investments are held in insurance policies or cash-based trusts and attract interest and bonus payments throughout the year dependent upon market conditions. The plan investment is a financial asset, which is recorded at fair value each period through the income statement using valuations provided by the insurance policy provider or reflecting the trust cash balances. The performance obligation to deliver the funeral is treated as a contract liability (deferred income) under IFRS 15. The deferred amount is subject to adjustment to reflect a significant financing component which is charged to the income statement each period. The liability accretes interest in-line with the discount rate applied to the plan on inception. The discount rate applied is based on an estimated borrowing rate between the customer and the Group at the point the contract is entered into. The contract liability is held on the balance sheet as additional deferred income until the delivery of the funeral at which point the revenue is recognised. The Group is currently reviewing the impact of IFRS 17 (Insurance Contracts) on the accounting for funeral plans. The new standard will be applicable to the Group for next year's reporting (2023). Details of the expected impact on the Group is shown in our Accounting Policies and Basis of Preparation section on page 218.
FBOs are attached to Guaranteed Over 50’s life insurance plans (GOFs) sold by the Group’s third party insurance partners. An FBO is the assignment of the sum-assured proceeds of a GOF policy to Funeralcare for the purposes of undertaking their funeral. In exchange the GOF customer is awarded a discount on the price of the funeral. No revenue is recognised by the Group at the point of assignment and instead an element of the costs that have been incurred in obtaining the FBO are deferred onto the balance sheet. These are then expensed at the point of redemption when the revenue is recognised. Any plans that are cancelled are written off at the point at which Funeralcare are made aware of the cancellation. A separate provision is also made to cover the expected cancellations of FBOs. No investment or liability is recognised for FBOs as the option does not guarantee a funeral and the liability for which remains with the insurance partner. Any difference between the funeral price and the sum assured at the point of redemption is the liability of the deceased estate or whoever takes responsibility for arranging the funeral.
Co-op Annual Report & Accounts for 2022: Financial Statements 205
Notes to the financial statements continued
LCIPs can be paid for by instalments over between 2 and 25 years or they can be paid off in full at any time during this period without any penalties. If the plan holder dies before the instalments have been made in full (and provided that the plan has been in place for at least 12 months or the cause of death was as a result of an accident) then the funeral will still be provided by Funeralcare and the customer will not have to settle the outstanding balance on any instalments and the balance of any monies owed will be waived. Any outstanding amounts owed to Funeralcare (the difference between the full value of the plan and the amount paid up to death by the customer) are covered by an assured benefit from a third party insurer. The assured benefit is between Funeralcare and the 3rd party insurer and has nothing to do with the customer. Funeralcare continue to apply instalment monies received against customers' individual funeral plans until such time as a plan is redeemed and/or cancelled. Until fully paid, LCIPs are judged to represent insurance contracts and as such fall under the scope of IFRS 4 (Insurance Contracts). The assured benefit between Funeralcare and the 3rd party is judged to represent a reinsurance contract under IFRS 4. In line with IFRS 4 Funeralcare account for the LCIPs in the same way as a normal funeral plan (see accounting policy above). The Group is currently reviewing the impact of IFRS 17 (Insurance Contracts) on the accounting for LCIPs. The new standard will be applicable to the Group for next year's reporting (2023). Details of the expected impact on the Group is shown in our Accounting Policies and Basis of Preparation section on page 218.
The Group uses derivative financial instruments to provide an economic hedge to its exposure to interest rate risks arising from operational, financing and investment activities. In accordance with its Treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. Derivatives entered into include swaps, forward rate agreements, commodity (diesel) swaps and energy contracts. Derivative financial instruments are measured at fair value and any gains or losses are included in the income statement. Fair values are based on quoted prices and where these are not available, valuation techniques such as discounted cash flow models are used. Interest payments or receipts arising from interest rate swaps are recognised within finance income or finance costs in the period in which the interest is incurred or earned.
Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its operating activities (primarily trade receivables) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. Credit risk from balances with banks and financial institutions is managed by the Group’s Treasury department in accordance with the Group’s policy. Investments of surplus funds are made only with approved counterparties and within credit limits assigned to each counterparty. Counterparty credit limits are reviewed by the Board on an annual basis, and may be updated throughout the year subject to approval of the Risk and Audit Committee. The limits are set to minimise the concentration of risk. Financial assets held at fair value through the income statement are primarily held in low-risk investments.
The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, Eurobonds and leases.# Co-op Annual Report & Accounts for 2022: Financial Statements 206
Trade receivables and contract assets
An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on days past due for groupings of various customer segments with similar loss patterns (for example, by business division, customer, coverage by letters of credit or other forms of credit insurance). The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. Generally, trade receivables are written-off if past due for more than one year and are not insured or subject to enforcement activity. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets disclosed in trade and other receivables (Note 17).
Impairment of financial assets carried at amortised cost
The amount of the impairment loss on assets carried at amortised cost is recognised immediately through the income statement and a corresponding reduction in the value of the financial asset is recognised through the use of an allowance account. A write-off is made when all or part of an asset is deemed uncollectable or forgiven after all the possible collection procedures have been completed and the amount of loss has been determined. Write-offs are charged against previously established provisions for impairment or directly to the income statement. Any additional recoveries from borrowers, counterparties or other third parties made in future periods are offset against the write-off charge in the income statement once they are received. Provisions are released at the point when it is deemed that following a subsequent event the risk of loss has reduced to the extent that a provision is no longer required.
What does this show?
This note shows the value of capital expenditure that we're committed to spending in the future as at the end of the period. If appropriate then it also shows potential liabilities which aren't included in our balance sheet as it's only possible, rather than probable, that we'll have to pay them.
Commitments:
a) Capital expenditure that the Group is committed to but which has not been accrued for at the period end was £12m (2021: £6m).
Contingent liabilities:
b) i) In common with other retailers, the Group has received Employment Tribunal claims from current and former food store colleagues alleging their work is of equal value to that of distribution centre colleagues and differences in pay and other terms are not objectively justifiable. The claimants are seeking the differential in pay (and other terms) together with equalisation going forward. There are currently circa 4,000 claims and it is anticipated that this number will rise, though it is not possible to predict the point to which this may increase or the rate of increase. These equal pay claims are initiated in the Employment Tribunal and claimants will need to succeed in three stages to succeed. The first stage concerns whether the roles of store colleagues can be compared with those of warehouse colleagues. In light of European and Supreme Court decisions, Co-op Group has conceded that it will not contest this point. The second and third stages are concerned with an equal value assessment between comparator roles and if this is shown to be the case, a subsequent consideration of Co-op Group’s material factor defences (which are the non-discriminatory reasons for any pay differential). It is expected this litigation will take a number of years to final resolution. The claims are still at an early stage; the number of claims, merit, outcome and impact are all highly uncertain. No provision has been made as it is not possible to assess the likelihood nor quantum of any outcome. There are substantial factual and legal defences to the claims and the Group intends to defend them robustly.
b) ii) In early February 2023 a claim was issued against Co-operative Group Limited and certain of its subsidiaries (Co-operative Group Food Limited, Co-operative Foodstores Limited and Rochpion Properties (4) LLP) by the liquidators of The Food Retailer Operations Limited in connection with transactions which took place in 2015 and 2016 relating to the Somerfield supermarket business acquired by Co-op in 2009. The amount claimed is approximately £450m plus further unquantified amounts of interest and costs. Co-op strongly disputes both liability and quantum of the claim and the claim will be vigorously defended.
What does this show?
Related parties are companies or people which are closely linked to the Co-op, such as members of our Board or Executive (or their families), or our associates and joint ventures. This note explains the nature of the relationship with any related parties and provides information about any material transactions and balances with them.
| Relationship | 2022 £m | 2021 £m |
|---|---|---|
| Subscription to Co-operatives UK Limited (i) | 0.7 | 0.7 |
| i) The Group is a member of Co-operatives UK Limited. The Group’s Independent Society Members (ISMs) include consumer co-operative societies which, in aggregate, own the majority of the corporate shares with rights attaching as described in Note 25. The Co-operative Group has a 76% shareholding in Federal Retail and Trading Services Limited which is operated as a joint buying group by the Group for itself and other independent co-operative societies. The Group acts as a wholesaler to the other independent co-operatives and generates sales from this and the arrangement is run on a cost recovery basis and therefore no profit is derived from its activities. Sales to ISMs, on normal trading terms, were £1,855m (2021: £1,756m) and the amount due from ISMs in respect of such sales was £144m at 31 December 2022 (2021: £134m). No distributions have been made to ISMs based on their trade with the Group in either the current or prior periods. |
Transactions with directors and key management personnel
Disclosure of key management compensation is set out in the Remuneration Report. A number of small transactions (such as the purchase of funeral services) are entered into with key management in the normal course of business and are at arm's length. Key management are considered to be members of the Executive and directors of the Group. Key management personnel transactions noted in the year are £29,000 (2021: £nil). Other than the compensation set out in the Remuneration Report, there were no other transactions greater than £1,000 with the Group's entities (2021: £nil).
Total compensation paid to key management personnel is shown below.
| 2022 £m | 2021 £m | |
|---|---|---|
| Key management personnel compensation | ||
| Short-term employee benefits | 3.1 | 3.8 |
| Post-employment benefits | 0.1 | 0.3 |
| Other long-term benefits | 1.1 | 1.3 |
| Termination benefits | 1.6 | - |
| Total | 5.9 | 5.4 |
What does this show?
This note shows the main companies and societies we own, what percentage we own and the type of business they are involved in. All of the principal subsidiary undertakings as at the period end are registered in England and Wales and their principal place of business is the UK. See general accounting policies section on page 212 for a Group structure diagram.
| Society | Holding % | Nature of business |
|---|---|---|
| Angel Square Investments Ltd | 100 | Holding company |
| CFS Management Services Ltd* | 100 | Service company |
| Co-operative Group Holdings (2011) Ltd | 100 | Property management |
| Co-operative Group Food Ltd | 100 | Food retailing |
| Co-operative Foodstores Ltd | 100 | Food retailing |
| Nisa Retail Ltd | 100 | Food wholesaling |
| Co-op Insurance Services Limited | 100 | Insurance (marketing) |
| Funeral Services Ltd | 100 | Funeral directors |
| Co-op Funeral Plans Ltd | 100 | Funeral plan services |
| Co-operative Legal Services Ltd | 100 | Legal services |
| Rochpion Properties (4) LLP | 100 | Holds property |
All of the above have been fully consolidated into the Group's accounts. There are no non-controlling interests in any of these entities.
Notes
i) All of the principal subsidiaries are audited by EY LLP.
ii) *CFS Management Services Ltd ceased trading on 31 December 2021.
iii) All transactions between entities are in the usual course of business and are at arms length.
What does this show?
This note shows the number of active members that we have at the end of the period as well as the benefits earned by those members for themselves and their communities during the period. Active members are defined as those members that have traded with one or more of our businesses within the last 12 months.
| 2022 m | 2021 (unaudited) m | |
|---|---|---|
| Active members | 4.4 | 4.2 |
| Membership and community rewards (within the income statement) | 2022 £m | 2021 £m |
|---|---|---|
| Member reward earned | 20 | 21 |
| Community reward earned | 18 | 19 |
| Total reward | 38 | 40 |
Member and Community rewards are both earned at 2% (4% in total) of eligible spend. Full details of our overall investment in our Communities can be found in our Co-operate Report.
What does this show?
This note gives details of any significant events that have happened after the balance sheet date but before the date that the accounts are approved.# Notes to the financial statements continued
Bond liability management exercise – on the 1st March 2023 the Group repurchased £100m of the £300m 5.125% Sustainability Bond (due May 2024) from bond holders following an over-subscribed tender exercise. This was announced to the market on 27th February 2023. The bonds were bought back at 99% of par value.
Rolling Credit facility (RCF) refinancing – on the 20th of March 2023 we concluded an amendment and extension exercise for our Revolving Credit Facility. As a result our £400m RCF will increase in size to £442.5m until September 2024 when it will fall to £360m. The £360m facility will mature in March 2026. New sustainability metrics will be added into the facility during 2023, linking Co-op’s commitment to sustainability with its financial facilities.
What does this show?
We have sold our petrol forecourt sites during the year. Given the scale of the disposal we have provided some additional information in this note to help our members to understand the impact of the sale on our financial statements. This includes the profit that we have recorded on the disposal as well as the impact on our year-end Balance sheet and Income statement going forward.
On 31 August 2022 the Group announced its intention to sell its 129 petrol forecourt sites to Asda. The deal completed as planned on 30th October 2022 for an enterprise value of £438m (£609m including IFRS 16 lease liabilities) with a purchase price of £458m, including £24m of non-cash consideration and the sale is therefore not impacted by the ongoing CMA review.
For Interim (HY22) reporting the assets and liabilities associated with the sites were classified as held for sale in our consolidated balance sheet as their disposal was highly probable at the half-year date. For full-year reporting and as the sale has now completed then the assets and liabilities associated with the disposal have been removed from the Group's consolidated balance sheet and the profit on sale has been recognised in our Consolidated income statement.
The results of our petrol forecourt sites, upto the point of disposal on the 30th October, are classified as Continuing operations within our Income statement and are included within the results of our Food business (see Note 1; Operating Segments). The disposal of our petrol forecourt sites does not meet the threshold for classification within Discontinued Operations (see the Key Judgements section of our Accounting Policies and Basis of Preparation section on page 214).
As part of the sale process the petrol sites will transfer on a rolling basis during a handover period of approximately 12 months which is governed by a transitional service agreement. The Group have assessed the nature of the arrangement and concluded that Co-op are acting as agent in the facilitation of the transaction for the end customer, but as a principal for supplying goods to AFS (Arthur Foodstores Limited - the entity that was sold to Asda) under the service agreement, and consequently will record the revenue and costs of supplying the goods gross, as well as recording the outsourcing fee charged to AFS in income.
Oct 30th 2022 Balance Sheet on disposal (petrol forecourt sites)
| £m | |
|---|---|
| Property, plant and equipment | 89 |
| Right-of-use assets (leases) | 131 |
| Goodwill and intangibles | 107 |
| Inventories | 19 |
| Trade and other receivables | 43 |
| Cash in hand | 5 |
| Deferred tax assets | 2 |
| Total assets | 396 |
| Lease liabilities | 171 |
| Trade and other payables | 97 |
| Total liabilities | 268 |
| Net book value disposed | 128 |
Profit on disposal (petrol forecourt sites)
| £m | |
|---|---|
| Consideration - cash received | 434 |
| Consideration - non-cash* | 29 |
| Costs to sell | (16) |
| Net book value disposed (as above) | (128) |
| Profit on disposal (petrol forecourt sites) | 319 |
*Non-cash consideration comprised £24m of intercompany loan novation from Co-operative Foodstores Limited to Asda. Total consideration of £463m differs from the purchase price of £458m stated above due to £5m of corporation tax group relief written off.
** Proceeds received in 2022 per the Cashflow statement of £408m comprise the £434m cash proceeds noted above (net of £10m not yet received pending final completion accounts) less costs to sell of £16m as noted above.
Income statement result from petrol forecourt sites - year to point of disposal on 30th October 2022
| £m | |
|---|---|
| Sales | 842 |
| Operating profit | 47 |
Cashflows from petrol forecourt sites - year to point of disposal on 30th October 2022
| £m | |
|---|---|
| Net cash from operating activities | 78 |
What does this show?
This section outlines the general accounting policies that relate to the financial statements as a whole. Details of other accounting policies are included within the notes to the financial statements to which they relate. This allows readers easy access to the relevant policy. This section also gives details of the impact of any new accounting standards that we've applied for the first time and the expected impact of upcoming standards that will be adopted in future years where that impact is likely to be significant.
Co-operative Group Limited ('the Group’) is a registered co-operative society domiciled in England and Wales. The address of the Group’s registered office is 1 Angel Square, Manchester, M60 0AG, and the trading locations of all stores and branches can be located on our website https://www.coop.co.uk/store-finder.
The Group accounts have been prepared in accordance with UK adopted international accounting standards for the 52 week period ended 31 December 2022 and in conformity with the requirements of the Co-operative and Community Benefit Societies Act 2014. As permitted by statute, a separate set of financial statements for the Society are not included. The accounts are presented in pounds sterling and are principally prepared on the basis of historical cost. Areas where other bases are applied are explained in the relevant accounting policy in the notes. Amounts have been rounded to the nearest million. The accounting policies set out in the notes have been applied consistently to all periods presented in these financial statements, except where stated otherwise. The accounts are prepared on a going concern basis. See later section on ‘ Going Concern’.
In preparing the Groups’ Consolidated Financial statements management has considered the impact of climate change covering both the financial statements and the disclosures included in the Strategic report. This included an assessment of the potential impact of, and associated responses to, climate change, and how that could impact the non-current assets that we hold as well as our expectations of future trading conditions. This assessment did not identify any requirement to shorten asset lives of the Group’s asset base and neither did it identify any material impact on the valuation of the Group’s assets or liabilities or the cashflow forecasts used to assess the going concern basis and the viability statement. Furthermore, our forecasts do not include any material spend in relation to climate change. The Group will keep this assessment under review and continue to monitor developments in the future.
The financial statements consolidate Co-operative Group Limited, which is the ultimate parent society, and its subsidiary undertakings. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The diagram overleaf shows the composition of the Group and its principal subsidiaries. Further details can be found in Note 32 (Principal subsidiary undertakings). A full list of subsidiaries that make up the Group for the purposes of these financial statements can be found at: http://www.co-operative.coop/investors/rules
Co-operative Group Ltd
Co-operative Group Holdings (2011) Ltd
Rochpion Properties (4) LLP
Angel Square Investments Ltd
Co-operative Group Food Ltd
Funeral Services Ltd
Nisa Retail Ltd
CFSMS Ltd **
Co-operative Foodstores Ltd
Co-op Funeral Plans Ltd *
Co-op Insurance Services Ltd
Co-operative Legal Services Ltd
Direct holding
Indirect holding
All shareholdings are 100% owned unless otherwise stated.
* Co-op Funeral Plans Ltd is owned 33% by Co-operative Group Ltd and 67% by Co-operative Group Holdings Ltd.
** CFSMS Ltd ceased trading on 31 December 2021.
The Group and its main trading subsidiaries prepare their accounts to the first Saturday of January unless 31 December is a Saturday. These financial statements are therefore prepared for the 52 weeks ended 31 December 2022. Comparative information is presented for the 52 weeks ended 1 January 2022. Since the financial periods are virtually in line with calendar years, the current period figures are headed 2022 and the comparative figures are headed 2021. Co-operative Insurances Services Limited and certain small holding companies have also prepared accounts for the period ended 31 December 2022.# Co-op Annual Report & Accounts for 2022: Accounting policies and basis of preparation 213
One-off items include costs relating to activities such as large restructuring programmes and costs or income which would not normally be seen as costs or income relating to the underlying principal activities of the Group. To help the reader make a more informed judgement on the underlying profitability of the Group, a non- GAAP measure: underlying profit before tax, has been presented. This is shown at the bottom of the income statement and we show the adjustments between this measure and operating profit. In calculating this non- GAAP measure, property and business disposals (including individual store impairments), the change in value of investment properties and one-off items are adjusted for.
Financial assets and financial liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to do so and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
The preparation of financial statements that comply with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
In the process of applying the Group’s accounting policies, management has made the following key judgements which have the most significant impact on the consolidated financial statements:
Determination of accretion rate: Funeral plans
A significant accounting judgement is present in deriving a suitable accretion rate to apply to the monies received from a customer when they purchase a funeral plan. The accretion rate is required to reflect the borrowing rate that would be applied between the Group and the customer in a separate financing transaction reflecting similar credit characteristics and similar security at the point the contract is entered into. These rates are then fixed for the duration of the plan and we have plans which are up to 36 years old. We derive the relevant accretion rates based upon UK AA rated average corporate bond yields. When a customer enters into a funeral plan, the monies they pay to the Co-op, less an admin fee, are invested in whole of life insurance policies with FCA regulated institutions protected by the Government’s financial services compensation scheme. For further protection, the proceeds of the investments are held on trust by an independent trustee, Apex Corporate Trustees (UK) Limited, to ensure that the customer is entitled to the benefit of the invested monies in the event that the Group goes out of business. Given this protection and security, a UK AA rated average corporate bond yield is considered to have a similar risk profile as that of a separate financing transaction between the Group and a customer and hence a suitable reference point for an accretion rate.
Determining the lease term of contracts with extension and termination options
The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The Group has the option, under some of its leases to lease the assets for additional terms of 5 to 10 years. The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew.
Petrol forecourt disposal
The Group has disposed of 129 petrol sites during the year through the disposal of the company Arthur Foodstores Limited (AFS). The performance of these sites has not been classified within Discontinued operations in our Income statement (so has remained within Continuing operations to the date of disposal) as it is our judgement that the sites sold do not constitute a major separate line of business. This is in line with how these sites were run operationally and how performance was reported to our Board. As part of the sale process the petrol sites will transfer to the purchaser on a rolling basis during a handover period of approximatley 12 months which is governed by a transitional service agreement. The Group have considered IFRS 10 and concluded that Group is not the decision maker during the transition period, nor does it exercise influence over decision making. The considerations under IFRS10 are as below:
a) Power over the investee - in the transitional service agreement period the Group is obligated to provide Co-op Group branded and non branded goods to AFS, however it is clearly stated in the franchise agreement that in this relationship, Group acts as an agent. The Group also has no voting rights, rights to change key management personnel, apoint or remove an entity that directs the activities or direct or veto AFS in transactions for the benefit of the Group. Therefore, we are confident Group does not have power over AFS.
b) Exposure, or rights, to variable returns from its involvement - the only returns for the Group are the outsourcing fee at a variable % of net sales, but the magnitude and variability of this is not signigicant enough for the Group to have control.
c) The ability to use its power over the investee to affect the amount of investor's returns - scope of decision making is limited to the activities set out in the franchise agreement and the Group has limited power to change the basis of operation, Group makes an overarching commitment to not treat the AFS properties differently to the core estate during the transition period but Asda acts as a guarantee for the franchise agreement and therefore ultimately has responsibility for performance of the business, remuneration is proportionate to the services provided to AFS at a % of grocery net sales and is largely in line with the basis used for other franchise agreements in the Group, and Group has no other interests in AFS to provide returns.
In regards to the recognition of revenue, the Group has assessed the considerations of IFRS15 to determine that with regards to the end customer, Group acts as an agent, but in relation to the sale of stock to AFS the Group is the principal. This means that the (equal and opposite) revenue and cost of sales associated with providing the goods to the AFS stores is recorded gross rather than net in the case of an agent, and the outsourcing fee is also recognised gross. The Group has considered the 3 examples from IFRS15 B37 in relation to sales to AFS to come to the conclusion that Group is acting as the principal:
a) Primary responsibility for the good or service meeting customer satisfaction - Group's responsibility in the franchise agreement is to provide Co-op Group branded and non branded goods on the same basis as pre-sale, and therefore has the responsibility to provide the stock to meet AFS's specifications.
b) Inventory risk - Until stock ordered for AFS is delivered to the stores, it is held in the depots and the Group holds the risk of leakage or wastage. If any goods were delivered faulty, AFS could return these and Group would have to take the cost of replacing this stock.
c) Discretion in establishing the price - this is limited due to the CMA investigation and is therefore a neutral point.
Pensions (Note 27) – the Group’s defined benefit pension obligations are determined following actuarial advice and are calculated using the projected unit method. The assumptions used are the best estimates chosen from a range of possible actuarial assumptions which may not necessarily be borne out in practice. The most significant assumptions relate to the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexities involved in the valuation and its long-term nature, the Group’s defined benefit obligation is highly sensitive to changes in these assumptions. Further details of the financial and demographic assumptions that have been used are shown in Note 27 along with associated sensitivities to those assumptions.
Impairment of non-financial assets (Notes 11, 12 & 13) - the carrying amount of non-financial assets (such as property, plant and equipment, right-of-use assets, goodwill and intangibles) are reviewed at each balance sheet date and if there is any indication of impairment, the asset's recoverable amount is estimated. The recoverable amount is the greater of the fair value of the asset (less costs to sell) and the value in use of the asset. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit (CGU) exceeds its estimated recoverable amount. For property assets the fair value less costs to sell are measured using internal valuations based on the rental yield of the property.
This review is performed annually or in the event where indicators of impairment are present. At 31 December 2022, the Group has considered whether general uncertainty in the wider macro-economic environment including the cost- of-living crisis, rising inflation, energy price increases, the on-going conflict in Ukraine as well as the continuing impacts of the COVID-19 pandemic has the potential to represent a significant impairment indicator. Despite the difficult trading conditions and associated additional costs of serving our customers the Group’s main business areas have proven resilient and the performance of the Group’s cash-generating units has remained strong. Therefore, management concluded that the impact of the factors noted on the longer term outlook for these cash generating units did not constitute an indicator of significant impairment and hence a full impairment test across all CGUs was not required. This judgement is unchanged from 1 January 2022.
The Group estimates the value in use of an asset by projecting future cash flows into perpetuity and discounting the cash flows (DCF) associated with that asset at a pre-tax rate of between 10-11% (2021: 7-9%) dependent on the business. The key assumptions used to determine the recoverable amount for the different CGUs, and the sensitivity analysis that is undertaken, are disclosed and further explained in Notes 11 and 13.
The Group is currently working to identify the physical risk to our business and supply chains from the changing climate, along with the potential impact of policy, technology and market changes as we transition to a lower carbon future. This is a developing area with inherent uncertainty which is constantly evolving. The work being undertaken will help inform our overall response to the risks and opportunities that are identified. Our assessment of the impact of climate-related risk and related expenditure is reflected in the financial models and plans and will continue to be monitored in future periods.
Provisions (Note 24) – a provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The most significant provision for the Group relates to property provisions for non-rental costs associated with properties that are no longer used for trading purposes and significant assumptions and estimates are made in relation to the estimation of future cash flows and the discount rate applied. See Note 24 for further details.
Pre-need funeral plan obligations (Notes 14 & 23) – the Group holds investments on the balance sheet in respect of funeral plan policies which are predominantly invested in individual whole-of-life insurance policies and, to a much smaller extent, independent trusts. The investments are also subject to an annual actuarial valuation at a portfolio level. This gives an assessment as to the headroom of the funeral plan investments over an estimated present value (on a wholesale basis) of delivering the funeral. The headroom (pre-tax) is estimated to be £471m (2021: £295m), see Note 14.
The actuarial report is a best estimate and is neither deliberately optimistic nor pessimistic. It is prepared by independent actuaries based on management assumptions such as future funeral and disbursement inflation. It's not possible to reasonably forecast future inflation rates with any certainty but to aid the reader and for illustrative purposes each 0.5% (50 basis points) increase in the inflation assumption would reduce the surplus by approximately £53m (2021: £94m). Each 0.5% (50 basis points) reduction in the discount rate would reduce the surplus by approximately £34m (2021: £70m). Both of these sensitivities include allowance for assets held that would move in line with liabilities.
Under the revised IAS 37 approach the actuarial cost to be used in the assessment of onerous liabilities should be the lower of the wholesale cost and the internal cost per redemption calculated under the standard (and on this basis the "wholesale" cost has been used). The wholesale actuarial valuation is based upon the Group's estimate of the direct cost for a third party funeral director to perform the promised services and the payment of associated disbursements (crematoria, clergy fees etc) as if the Group were not in a position to carry out these funerals. The future Group administrative costs of maintaining the current funeral plans are allowed for, but no allowance is made for any incremental overheads of the third party because it's assumed that the provider could absorb these funerals into their existing infrastructures. These costs do not represent the expected internal cost of fulfilling the funeral and allowing for these costs in the valuation may materially affect the results.
The Group has considered the following standards and amendments that are effective for the Group for the period commencing 2 January 2022 and concluded that they are either not relevant to the Group or do not have a significant impact on the financial statements :
Certain new accounting standards and interpretations have been published that are not mandatory for 1 January 2022 reporting periods and the Group has not early adopted the following standards and statements. The adoption of these standards is not expected to have a material impact on the Group’s accounts:
Amendments to IAS 12 - Deferred Tax related to Assets and LiabiliƟes arising from a Single TransacƟon *
Effective for annual periods beginning on or after 1 January 2023.
The adoption of the following standard will have a material impact on the Group’s accounts when adopted and the Group’s assessment of the impact of the new standard and interpretation is set out below:
| Title | # Co-op Annual Report & Accounts for 2022: Accounting policies and basis of preparation
The adoption of IFRS 17 in 2023 will represent a fundamental change to the way that we currently account for all of our funeral plans and waiver insurance policies under IFRS 15. The main areas of change will be:
Management are currently reviewing the likely impact of the change in accounting on our financial statements although the changes are expected to be material. For illustrative purposes only; the tables below show how and where the adoption of IFRS 17 is expected to impact the Group's primary statements (so no numbers are provided).
Net Revenue
The result of our insurance activities will be shown separately from the Group's main Revenue line:
Insurance finance income / expense
Income Finance income / expense will include the following items:
Under IFRS 17 the Group may elect to disaggregate certain elements of finance income / expense that arise due to changes in assumptions (such as the discount rate or inflation) and record the impact of those changes in Other comprehensive income (OCI) rather than in the Income statement.
Assets
Contract assets, which includes fulfilment costs (acquisition costs) of funeral plans, will be included in the measurement of insurance contract liabilities and no longer recognised as an asset. A new line item called Reinsurance contract assets will be included in our balance sheet.
Liabilities
Contract liabilities in the balance sheet will be replaced with insurance contract liabilities.
Opening reserves
The adoption of IFRS 17 will require us to restate our opening balance sheet position as at 2nd January 2022.
Contract Assets
Contract assets (deferred fulfilment / acquisition costs) will be included in the measurement of the insurance contract liabilities. As such, the "Increase / or decrease in contract assets" line in the reconciliation of operating profit to net cashflow will no longer be required.
Contract Liabilities
The line item "Increase / or decrease in contract liabilities" will be replaced with "Increase / or decrease in insurance contract liabilities".
Re-insurance contract assets
A new line item called "Decrease/(increase) in reinsurance contract assets" will be included.
Applicable to annual reporting periods beginning on or after 1 January 2023 - for the Group
Date of adoption by the Group: This is next year’s financial statements (2023) and the first time we report under IFRS 17 will be at the half-year 2023.
The application is retrospective so we will be restating opening reserves as at 2 January 2022.
The Directors have considered the Group’s business activities, together with the factors likely to affect its future development, performance and position. The Directors have also assessed the financial risks facing the Group, its liquidity position and available borrowing facilities. These are principally described in Note 21 to the accounts. In addition, notes 21 and 28 also include details of the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives and its financial instruments and hedging activities. The ongoing impact of the Ukraine/ Russia conflict and the UK recession have been taken into account, as explained in more detail in the Directors’ Report.
In making their assessment the Directors have noted that the consolidated Group accounts show a net current liability position. This is not uncommon for a retail business and represents the usual balance sheet position for the Group and consequently the Directors do not believe that the net liability position impacts their overall assessment of Going Concern as outlined hereafter.
The Group meets its working capital requirements through a number of separate funding arrangements, as set out in detail in Note 28, certain of which are provided subject to continued compliance with certain covenants (Debt Covenants). Profitability and cash flow forecasts for the Group, prepared for the period to December 2024 (the forecast period), and adjusted for sensitivities considered by the Board to be severe but plausible in relation to both trading performance and cash flow requirements, indicate that the Group will have sufficient resources available within its current funding arrangements to meet its working capital needs, and to meet its obligations as they fall due. Sensitivities have been applied to the market conditions of each of our trading businesses, as well as applying sensitivities to our key strategic activities and in respect to the ongoing energy cost increases, inflation and supply constraints. Further details of the Director’s assessment can be found in the Going concern and Longer Term Viability sections of the Directors’ report on pages 122 – 125.
After making all appropriate enquiries, the Directors have not identified any material uncertainties and have a reasonable expectation that the Society and the Group have access to adequate resources to enable them to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the Group’s financial statements.
In our opinion:
* Co-operative Group Limited’s consolidated financial statements (the “financial statements”) give a true and fair view of the state of the Group’s affairs as at 31 December 2022 and of the Group’s income and expenditure for the 52-week period then ended;
* the financial statements have been properly prepared in accordance with UK adopted international accounting standards in conformity with the requirements of the Co-operative and Community Benefit Societies Act 2014;
We have audited the financial statements of Co-operative Group Limited for the period ended 31 December 2022 which comprise:
* Group Consolidated balance sheet as at 31 December 2022
* Consolidated income statement for the 52-week period ended 31 December 2022
* Consolidated statement of comprehensive income for the 52-week period ended 31 December 2022
* Consolidated statement of changes in equity for the 52-week period ended 31 December 2022
* Consolidated statement of cash flows for the 52-week period ended 31 December 2022
* Related notes 1 to 35 to the financial statements, including a summary of significant accounting policies
The financial reporting framework that has been applied in their preparation is applicable law and UK adopted international accounting standards in conformity with the requirements of the Co-operative and Community Benefit Societies Act 2014.
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.# Report of the Independent Auditor
In making the going concern assessment, we have considered the following: The Group has net current liabilities of £283m (2021: £960m), which is common in the retail industry due to the working capital cycle. The Group has net debt of £1,639m (2021: £2,436m) of which £780m (2021: £976m) is subject to covenant testing twice a year. Cash generated from operating activities was £455m (2021: £178m) and was higher than the prior period, primarily due to favourable movements in working capital balances. We identified the following significant assumptions made by management which have influenced their going concern assessment:
* Extent to which the inflationary pressure on product costs, payroll and energy prices will be passed through to consumers;
* Extent to which pressure on consumer disposable income impacts sales volumes;
* Achievement of further projected cost saving initiatives.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group’s ability to continue as a going concern for the period to 31 December 2024. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern. Going concern has also been determined to be a key audit matter.
¹ Adjusted revenue is calculated as total Group revenue less revenue generated by the Federal Joint Buying Group (Federal per Note 1 of the accounts) as this revenue is passed through at nil margin therefore does not represent revenue the Group has performed services to obtain from which it derives an economic benefit.
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each component within the Group. Taken together, this enables us to form an opinion on the financial statements. We consider size, risk profile, the organisation of the group and effectiveness of Group wide controls, changes in the business environment, the potential impact of climate change and other factors such as recent Internal audit results when assessing the level of work to be performed at each component. In assessing the risk of material misstatement to the financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, we included in our audit scope all nine (2021: nine) reporting components of the Group. Our audit scope therefore includes all the principal business units within the Group. Of the nine components selected, we performed an audit of the complete financial information of the Food, Wholesale, Funeral, Insurance and Corporate components (“full scope components”) which were selected based on their size or risk characteristics. For the Legal component (“specific scope component”), we performed audit procedures on specific accounts within that component that we considered had the potential for the greatest impact on the significant accounts in the financial statements either because of the size of these accounts or their risk profile. The Property component was designated as specified audit procedures scope. The remaining two components were designated as review scope. The below tables summarise the coverage which has been obtained in respect of the Group’s Profit before tax, Adjusted Revenue and Total Assets in both the current and prior audit periods. The audit scope of the Specific scope component may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant accounts tested for the Group. The audit scope of the Specified procedures component will include procedures which have been designed to address specific areas of risk within the component which will contribute to the overall risk assessment at the Group level. The review scope components together represent 0% of the Group’s adjusted revenue and 0.3% of the Group’s total assets. For these components (CFSMS and ASIL), we performed other procedures, including detailed analytical review, testing of cash balances, testing of intercompany balances for elimination, testing of equity balances and journal entry testing. We performed this testing to respond to the potential risks of material misstatement to the financial statements.
| Current Period Coverage | Profit before tax % | Adjusted Revenue¹ % | Total assets % |
|---|---|---|---|
| Full Scope Components (5) | 80.75 | 99.42 | 98.05 |
| Specific Scope Component (1) | 2.95 | 0.48 | 0.30 |
| Review Scope Components (2) | 0.10 | 0.00 | 0.31 |
| Specified Procedures Component (1) | 16.20 | 0.10 | 1.34 |
| Total | 100 | 100 | 100 |
| Prior Period Coverage | Profit before tax % | Adjusted Revenue¹ % | Total assets % |
|---|---|---|---|
| Full Scope Components (5) | 74.82 | 99.48 | 97.93 |
| Specific Scope Components (1) | 19.40 | 0.11 | 1.47 |
| Other Procedures (2) | 0.40 | 0.00 | 0.32 |
| Specified Procedures Component (1) | 5.38 | 0.41 | 0.28 |
| Total | 100 | 100 | 100 |
¹ Adjusted revenue was calculated as total Group revenue less revenue generated by the Federal Joint Buying Group (Federal per Note 1 of the accounts) as this revenue is passed through at nil margin therefore does not represent revenue the Group has performed services to obtain from which it derives an economic benefit.
We revised our scope for the Property component from specific scope in the prior period to specified procedures over material balances in the current period. The purpose of this component is to dispose of and manage property on behalf of the group once assets within the wider group become non- trading. We revised our scoping of the Legal component from specified procedures to specific scope due to the increased contribution to Group profit which has been made by this component in the current year. CFS Management Services was reduced to review scope, from specified procedures, due to a reduction in the balances in the division.
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components by us, as the primary audit engagement team, or by component auditors operating under our instruction. Of the five full scope components, audit procedures were performed on one of these directly by the primary audit team.## Audit Report
The rest were performed by component teams except for certain centrally managed balances audited directly by the primary audit team. For the specific scope component, where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole. During the audit, an EY Group-wide team planning event was held with representatives from all full and specific scope component teams in attendance which involved discussing the approach with the component teams. The primary team interacted regularly with the component teams where appropriate during various stages of the audit, discussed issues arising from their work, attended closing meetings with component management, reviewed key working papers and were responsible for the scope and direction of the audit process. During the current period’s audit cycle, the Food and Funeral component teams were based together with the primary team in the Co-operative Group Head Office in Manchester. This allowed the Group audit partner to meet regularly with the component team during the performance of the audit. The Food team also made visits to the Wholesale component based in Scunthorpe. The other full scope components: Funeralcare, Corporate and Insurance were led by the Group audit partner. This, together with the additional procedures performed at Group level, gave us appropriate evidence for our opinion on the financial statements.
Stakeholders are increasingly interested in how climate change will impact the Group. The Group has determined that the most significant future impacts from climate change on their operations will be from:
These are outlined in further detail on page 65. The Group have also explained their climate commitments on pages 40-43. The Group disclose the key physical risks relating to the impact of flooding and extreme heat, also the wider impacts on the global food supply chain. The Group see their key transitional risks as: Carbon pricing relating to greenhouse gas emissions, market risks and changing customer behaviours, policy risks from new legislation and technology risks creating required investments. All these disclosures form part of the “Other information,” rather than the audited financial statements. Our procedures on these unaudited disclosures therefore consisted solely of considering whether they are materially inconsistent with the financial statements, or our knowledge obtained in the course of the audit or otherwise appear to be materially misstated, in line with our responsibilities on “Other information”.
In planning and performing our audit we assessed the potential impacts of climate change on the Group’s business and any consequential material impact on its financial statements. The Group has explained in the Accounting Policies and Basis of Preparation section and in Note 11 and 13 their articulation of how they have reflected the impact of climate change in their financial statements and forecasting. The significant judgements and estimates currently reflect the known impacts of climate change and will continue to be reflected in their financial models and plans to reflect the future economic impact on their business model, operational plans and customers. Therefore, the potential impacts of future plans are not fully incorporated in these financial statements.
Within the “other information”, the Group disclose details of their “Climate Plan” which sets out how they are working to transition to a lower carbon future and become a net-zero business before 2040. Our audit effort in considering the impact of climate change on the financial statements was focused on evaluating management’s assessment of the impact of climate risk, physical and transition, their climate commitments, the effects of material climate risks disclosed on page 63 and the significant judgements and estimates disclosed in notes 11 and 13, also disclosed within the accounting policies and basis of preparation section. Our audit effort also assessed whether these have been appropriately reflected in asset values where these are impacted by future cash flows and associated sensitivity disclosures (see notes 11, 13 and 27) following the requirements of IFRS. As part of this evaluation, we performed our own risk assessment, supported by our climate change internal specialists to determine the risks of material misstatement in the financial statements from climate change which needed to be considered in our audit.
We also challenged the Directors’ considerations of climate change risks in their assessment of going concern and viability and associated disclosures. Where considerations of climate change were relevant to our assessment of going concern, these are described above. We have not identified the impact of climate change on the financial statements to be a key audit matter or to impact a key audit matter.
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.
| Risk # Risk Our response to the risk Supplier income
Income through the year (2022: £626m, 2021: £726m)
Income accrued at period-end (2022: £116m, 2021: £116m)
The Group receives money back from suppliers specifically through the Food and Wholesale divisions. This supplier income is categorised as bonus income, promotional income and long-term agreements (LTAs). The terms of agreements with suppliers can be complex and varied. There can be performance conditions or promotional periods that span the Group’s reporting date. Due to the complexity and judgement required in relation to bonus income and LTA
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income, there is a risk that a misstatement in the calculation of income may occur either accidentally or purposefully through management override of controls and this could arise at any time during the period. Promotional Income relates to short term promotions which are less complex and settled through offset in the period. The risk of misstatement through the period is reduced, however, the risk related to manipulation at period-end to misstate profit remains. The risk has been amended in the year to focus on both overstatement and understatement considering the performance of the group relative to the incentive targets of executives.
Refer to the Audit Committee Report (page 86); Accounting policies (page 211); and Note 4 of the Consolidated Financial Statements (page 157)
Our procedures in the Food and Wholesale components addressed 100% of the Supplier Income balances during the year.
Key Observations to the Risk and Audit Committee
Promotional income, bonus income and LTA income were recognised in the correct period. We did not identify any material misstatements through either management override, error or manipulation of the period-end figures through manual journals.
Funeral plan liabilities (2022: £1,723m, 2021: £1,793m)
Finance cost (2022: £55m, 2021: £59m)
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Cancelled plan provision (2022: £9m, 2021: £39m)
The accounting for pre-need funeral plans is inherently complex, contains several estimations and judgements, and involves manual processes which are more susceptible to misstatements. The determination of the accretion rate is a critical estimate, it is applied throughout the lifetime of the contract until the funeral is provided, at which time the value that has been accreted is recognised as revenue in the income statement. During the lifetime of the contract, the increase in the value of the liability is taken to the income statement as a finance expense. There is a risk of misstatement to the valuation of the funeral plan liability and measurement of revenue and finance cost recognised in the income statement should the accretion rate not reflect an appropriate borrowing rate as required under IFRS 15. There is also a risk of a misstatement in the determination of the cancelled plans due to the manual nature of the process. Given the estimation involved in the determination of the accretion rate for funeral plan liabilities, as well as misstatements identified in previous years due, we have identified the risk of error in the accounting for pre- need funeral plan liabilities as a significant risk.
transactions are initiated, recorded, processed, and reported. We will test the design effectiveness of key controls within the process.
* We performed testing to assess the completeness and accuracy of data inputs to the model prepared by management to calculate the liability accretion expense in the current period.
* We used a data analytics tool to recalculate the accreted liability for all funeral plans and assess the sensitivity of the accretion rate applied by management.
* We obtained evidence of after-date cash for a sample of plan debtors using a lower testing threshold to confirm the plan is not cancelled.
* We compared the plan debtor’s ledger at two discrete points in time to identify non-moving plans which is an indicator of a cancelled plan.
* We challenged the treatment of the adjustment required for cancelled plans by assessing the plans against the contractual terms and conditions for when a plan is deemed to have been cancelled.
* We assessed the debtor balance amongst live plans for mismatches between the debtor balance and associated deferred income balance.
* We performed a stand-back test to assess the judgments taken around funeral plan accounting using evidence from the above testing.
Our procedures in the Funerals component addressed 100% of the Funeral Plan liabilities, finance costs relating to the pre-need policies and the provision for cancelled plans.
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In the year we have amended the risk to exclude inappropriate plan asset valuation this year given the satisfactory results of testing in the prior year. We have also excluded the risk associated with the assessment of onerous contracts given the increase in headroom. We have amended the remaining elements of the risk in the year to focus on both overstatement and understatement considering the performance of the group relative to the incentive targets of executives.
Refer to the Audit Committee Report (page 86); Accounting policies (page 211); and Note 23 of the Consolidated Financial Statements (page 187)
Key Observations to the Risk and Audit Committee
Funeral plan liabilities and the associated finance costs are recorded in accordance with IFRS 15. Cancelled plans were appropriately eliminated from Funeral plan debtors and Funeral plan liabilities and the residual provision for cancelled plans was appropriate.
PPE (2022:£1,631m, 2021:£1,912m)
RoU Assets (2022:£882m, 2021:£1,086m)
Goodwill (2022:£744m, 2021:£862m)
Food Goodwill
Goodwill related to the Food component amounted to £723m (2021: £840m)
There is a risk of Food Goodwill
Food Store PPE/RoUA £2,285m (FY21: £2,583m). The Food division operates the Group’s largest Property, Plant and Equipment (‘PPE’) portfolio. During the year, management recognised an impairment charge of £71m (FY21: £22m). The tougher trading environment described above has increased the inherent uncertainty in forecasting future cashflows used in the impairment assessment.
An impairment to the Food Goodwill was unnecessary. The impairment charge in respect of the Food store portfolio appropriately reflects changes in forecast performance. The Corporate right of use asset impairment has been appropriately updated to reflect the highest and best use of the asset under IFRS 13. The disclosures related to the impairment assessments and related sensitivities are in accordance with the requirements of IAS 36 “Impairment of Assets”.
The derecognition of the Petrol Forecourts was consistent with the principles of control under IFRS 10 and the resulting gain on disposal was appropriately determined and presented in the income statement. Refer to the Audit Committee Report (page 86); Accounting policies (page 211); and Note 35 of the Consolidated Financial Statements (page 210).
There are over 600 platforms which operate across the Group. Some of these legacy systems are complex, have been built up over time and there are varying levels of integration between them. The systems are important to the ongoing operations of the business and to the integrity of the financial reporting process. There are limitations in the functionality of certain of the Group’s IT systems which necessitates dependence upon manual interventions and complex key control account reconciliations and workbooks between the general ledger and sub-ledger/manual workbooks in the financial close process. Manual interventions are susceptible to the risk of management bias or misstatement. The IT limitations in the Funeralcare business also impact the significant risk” Accounting for pre-need funeral plans under IFRS 15” due to the complexity of the calculations.# ISA 315 (Revised) “Identifying and Assessing the Risks of Material Misstatement” became effective for the current year which has led to additional audit procedures being performed on relevant IT systems in order to better understand the IT General Controls
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion.
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.
We determined materiality for the Group to be £47.9 million (2021: £47.4 million), which is 0.5% (2021: 0.5%) of adjusted revenue. Revenue is a key performance indicator used by management to monitor the Group’s performance and also the figure which we believe to be relevant to the members when assessing the performance of the Group. However, we considered adjusted revenue to be a more appropriate performance metric on which to base our materiality calculation. Adjusted revenue was calculated as total Group revenue less revenue generated by the Federal Joint Buying Group (Federal Sales per Note 2 of the accounts). We concluded it was appropriate to deduct Federal revenue as it is passed through at nil margin and therefore does not represent revenue the Group has performed services from which it derives an economic benefit. In concluding on this benchmark, we considered that the primary users of the financial statements were the Members. Providing services for Members and their communities, Meaningful Membership benefits, employee discounts and charitable contributions are key performance indicators for Members. These amounts are a function of revenue. Accordingly, we consider revenue to be a more relevant performance benchmark than profit before tax and EBITDA. This benchmark is consistent with the prior period.
which operate on those systems. We determined there to be 59 systems which are relevant systems. The significance of the risk has remained the same in the current period as the prior period. reconciling items in both complex and non-complex areas of accounting.
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, including the Group’s IT environment, our assessment of the Group’s overall control environment, conversations with the Group risk and internal audit function and the number of audit misstatements identified in the prior period, our judgement was that performance materiality was 50% (2021: 50%) of our planning materiality, namely £24.0m (2021: £23.7m). Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current period, the range of performance materiality allocated to components was £4.8m to £18.0m (2021: £4.7m to £17.8m).
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £2.4m (2021: £2.4m), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion.
The other information comprises the information included in the annual report other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information contained within the annual report. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives
Starting basis
* Starting point - £11,480 million total third party revenue
Adjustments
* Remove £1,895 million of revenue generated by the Federal Joint Buying Group
Materiality
* Totals £9,585 million adjusted revenue
* Materiality of £47.9 million (0.5% of adjusted revenue)
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rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. We have nothing to report in this regard.
The directors have instructed us to express an opinion on whether, based on the work undertaken in the course of the audit, the information given in the Corporate Governance Statement on page 70 is in compliance with the following provisions: Section 2 provision 3, Section 5 provisions 1, 3, 5 and 6 of the Co-operative Corporate Governance Code issued in November 2019 (‘the Code’). We have nothing to report in this regard.
We have nothing to report in respect of the following matters in relation to which the Co-operative and Community Benefit Societies Act 2014 requires us to report to you if, in our opinion:
* The Society has not kept proper books of account; or
* The Society has not maintained a satisfactory system of control over its transactions; or
* The financial statements are not in agreement with the books of account; or
* We have not received all the information and explanations we require for our audit
International Standards on Auditing (ISAs) require us to review the directors’ statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the Group’s compliance with the provisions of the UK Corporate Governance Code specified for our review.## Responsibilities of directors
As explained more fully in the directors’ responsibilities statement set out on page 129, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect irregularities, including fraud. The risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the Group and management.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities . This description forms part of our auditor’s report.
Following the recommendation from the Risk and Audit Committee we were appointed by the Society on 21 May 2016 to audit the financial statements for the 52-week period ending 31 December 2016 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments is 7 periods, covering the 52-week periods ending 31 December 2016, 5 January 2019, 4 January 2020, 2 January 2021, 1 January 2022, 31 December 2022 and one 53- week period ending 6 January 2018. The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group and we remain independent of the Group in conducting the audit. The audit opinion is consistent with the additional report to the Risk and Audit Committee.
This report is made solely to the Society’s members, as a body, in accordance with Section 87 of the Co-operative and Community Benefit Societies Act 2014 and our engagement letter dated 13 January 2021.# Co-op Annual Report & Accounts for 2022: Jargon Buster 243
The table below explains in simple terms how the APMs are calculated and why we think they are useful measures to use. Where possible we also call out the nearest equivalent IFRS measure and cross-refer to the section of the financial statements where we reconcile between the APM and that IFRS measure. We've introduced 2 new APMs this year in EBITDA and underlying EBITDA (see tables overleaf for definition). These new metrics are in addition to our usual APMs that we referred to last year. The Group's primary APM is Underlying profit / (loss) before tax. As defined overleaf; EBITDA is a measure of operating profit before depreciation and amortisation and we've introduced these metrics this year as we believe it will help our members to further understand how our businesses have performed. The metrics remove the impact of the Group's historic capital expenditure profile which has changed significantly in recent times and so it gives the reader additional useful information on our current performance. There are lots of technical words in our accounts which we have to use for legal and accounting reasons. We’ve set out some definitions in the jargon buster table below to help you understand some of the difficult phrases accountants like to use. When a word is in bold in the jargon buster table that means you can also find the definition of that word in this table. There is also a “What does this show?” introduction to every note to the accounts describing in simple terms what the note is trying to show. Initially though we define and explain some of the Alternative Performance Measures (APMs) that we use throughout the Annual Report and Accounts.
Our Annual Report and Accounts includes various references to Alternative Performance Measures (APMs). These are financial ratios and metrics that are not defined by International Financial Reporting Standards (IFRS) and as such they may not be comparable with the APMs that are reported by other entities. We include our APMs in the Annual Report and Accounts as we think they give useful information to our members to help them better understand the underlying performance and financial health of their Co-op. We don’t however think the APMs that we provide are better than the statutory measures noted under IFRSs and they are not meant to replace them.
Co-op Annual Report & Accounts for 2022: Jargon Buster 244
| APM | Definition and Purpose: | Closest IFRS equivalent | Where reconciled in the financial statements |
|---|---|---|---|
| Like-for-like sales | Definition and Purpose: Like-for-like sales growth relates to growth in sales at those Food stores that have been open for more than one year (with any sales from stores that have closed in the year being removed from the calculation and prior year figures). The calculation includes VAT on sales but excludes fuel sales from our petrol forecourts. For Wholesale then the like-for-like metric relates to those partners (stores) that have been with Co-op for more than one year (with any sales from partners who have left in the year being removed from the calculation). The measure is used widely in the retail sector as a relative indicator of current trading performance versus the prior year. It is also helpful to our members in comparing our underlying performance and growth against the wider market as well as against other retailers (as it removes the impact that opening and closing stores may have on absolute sales levels). | There is no close equivalent to this measure under IFRS. | Not applicable as there is no close equivalent to this measure under IFRS. |
| Underlying operating profit before tax | Definition and Purpose: Underlying operating profit reflects our operating profit before the impact of property and business disposals (including individual store and branch impairments), the change in the value of investment properties and one-off items. We exclude these items as they are not generated by our day-to-day trading and by excluding them it is easier for our members to see and understand how our core businesses are performing. | Operating Profit. | Income statement and Note 1 (Operating segments). |
Co-op Annual Report & Accounts for 2022: Jargon Buster 245
| APM | Definition and Purpose: | Closest IFRS equivalent | Where reconciled in the financial statements |
|---|---|---|---|
| EBITDA (Earnings before interest, taxation, depreciation and amortisation) | Definition and Purpose: EBITDA is calculated by adding back depreciation and amortisation charges to Operating profit. Operating profit is stated before interest charges and taxation. EBITDA is a non-GAAP measure of performance which helps us to understand the profits our business segments are generating before capital investment and interest charges. | There is no close equivalent to this measure under IFRS. | Note 1 (Operating segments). |
| Underlying profit / (loss) before tax (PBT) | Definition and Purpose: Our underlying PBT figure is simply our underlying operating profit (as calculated above) less our underlying interest (being the day-to-day interest we pay on our bank borrowings and lease liabilities). Other interest income or expense such as our net interest income or expense on funeral plans is either not generated by our day-to-day trading or is not considered by management in the day-to-day running of the business as it distorts the underlying trading performance of the Group. Such items are not included in our underlying PBT metric so it is easier for our members to see and understand how our core businesses are performing. Again the measure looks to remove those items that are not generated by our day-to- day trading (as per the definition noted above) but we also include the day-to-day finance costs of running of our businesses. | Profit before tax. | Note 1 (Operating segments). |
Co-op Annual Report & Accounts for 2022: Jargon Buster 246
| APM | Definition and Purpose: | Closest IFRS equivalent | Where reconciled in the financial statements |
|---|---|---|---|
| Underlying EBITDA | Definition and Purpose: Underlying EBITDA is calculated by adding back depreciation and amortisation charges to Underlying operating profit. Underlying operating profit is another one of our APMs and is defined in the table above. It is stated before interest charges and taxation. Underlying EBITDA is a non-GAAP measure of performance which helps us to understand the underlying profits our business segments are generating before capital investment and interest charges. | There is no close equivalent to this measure under IFRS. | Note 1 (Operating segments). |
| Net debt (interest bearing loans and borrowings only) | Definition and Purpose: Net debt is made up of our of bank borrowings and overdrafts off-set by our cash balances. The figure excludes any lease liabilities. The metric provides a useful assessment of the Group’s overall indebtedness which in turn reflects the strength of our balance sheet and consequently the financial resources available to us to employ and direct on behalf of our members. | Interest bearing borrowings less cash and cash equivalents. | Consolidated statement of cashflows. |
| Total debt (including lease liabilities) | Definition and Purpose: Total debt is made up of our of bank borrowings and any lease liabilities that we have. It excludes any cash or cash equivalent balances that we may hold. The metric provides a measure of the Group’s gross indebtedness. # Co-op Annual Report & Accounts for 2022: Jargon Buster |
Hedging: The Group use derivatives to protect themselves from adverse movements in exchange rates or interest rates.
IAS: International Accounting Standards. The Group use these as the accounting rules. There are many different IASs that cover various accounting topics (e.g. IAS 38 is for intangible assets).
IFRIC: International Financial Reporting Interpretations Committee. These are interpretations of IASs or IFRSs that the Group also has to abide by.
IFRS: International Financial Reporting Standards. Similar to IAS, but cover different subjects.
GAAP: Stands for Generally Accepted Accounting Principles. This is the common set of accounting principles, standards and procedures that companies must follow. Sometimes, companies want to provide different measures to help readers understand their accounts (such as underlying profit) where there isn’t a standard definition – these measures are called Non-GAAP measures.
Impairment: Sometimes our assets fall in value. If a store, branch, business or investment is not doing as well, we have to revalue it and put the downward change in value as a cost in our income statement.
Income statement: This not only shows our income as the name suggests, but also what our costs are and how much profit we’ve made in the year.
Intangible asset: We have assets at the Co-op that we can’t see or touch which are shown separately to other assets. These include things like computer software and goodwill.
Interest rate swaps: We like to know what interest we’re going to be paying in the future so we can manage our businesses effectively. We enter into arrangements with banks so that we can do this – for example, if we have debt where the interest rate can vary, we can buy an interest rate swap which means that instead we’ll pay a fixed rate of interest. The value of these swaps can go up or down depending on how the market expects interest rates to change in the future.
Inventories: This represents the goods (the stock) we’re trying to sell. The cost of this is shown on our balance sheet.
Inventory provision: If some of our stock isn’t selling, we write those costs off to the income statement and hold a provision against those goods on the balance sheet.
Investment properties: Properties that we don’t trade from, and which we might rent out or hold onto because the value might go up, are called investment properties.
Invoice discounting facility: Invoice discounting is an arrangement with a finance company so that we can be paid for amounts we are owed on invoices earlier than the date our customers are due to pay us.
Lease Liability: This represents the discounted future payments we are due to make to suppliers in exchange for the right to use their equipment or property.
Liability: This is an amount on our balance sheet which we’ll have to pay out in the future.
Like-for-like sales: The measure of year-on-year sales growth for stores that have been opened for more than one year.
Listed debt securities: People can trade some of our debt such as the Eurobonds. When this is the case, it’s a listed debt security.
Member payments: This is an amount we’ve paid our members in the year and approved at the AGM such as dividends.
Member rewards: These are the benefits that members have earned for themselves during the year as part of the 2% membership offer.
Net assets: Same as equity.
Net debt: This is the debt we have less any cash that we might have.
Net operating assets: Net assets less investments, funeral plans, deferred tax, pension surplus and drawn debt.
Non-current: An asset or liability that is expected to last for more than one year.
Non-GAAP measure: GAAP stands for Generally Accepted Accounting Principles. This is the common set of accounting principles, standards and procedures that companies must follow. Sometimes, companies want to provide different measures to help readers understand their accounts (such as underlying profit) where there isn’t a standard definition – these measures are called non-GAAP measures.
One-off items: Items that are not regular in size or nature and would otherwise cloud the underlying profitability of the Group are stripped out. This could include a large IT project or a large restructuring exercise.
Onerous leases: When we close a store we sometimes still have to pay running costs until the lease runs out (such as rates). When this happens, we make a provision for the amount of the running costs we will have to pay in future and hold this on the balance sheet. Rental costs are excluded from this provision now we have adopted IFRS 16 (Leases) as those costs are included in the lease liability.
Operating profit: This is our profit before we have to pay any interest to our lenders or tax to the tax authorities. It is also stated before any net finance income / (costs) from funeral plans.
Operating segments: This is an accounting term for the different businesses we have. When the financial performance of one of our businesses is reviewed separately from the other businesses by our Board, we call that business an operating segment and its sales and profit are disclosed in Note 1.
Other comprehensive income: Sometimes we have big fair value movements on long term assets and liabilities. The income statement is meant to show the performance during the year, so to avoid this being distorted by these big changes, they are shown separately as other comprehensive income.
Parent: This is the owner of a subsidiary.
Payables: Another name for liabilities.
PAYE: Pay As You Earn. A tax which is paid on wages.
Pension interest: This is the interest that we’re allowed to show in our income statement and is the discount rate used to discount the pension liabilities multiplied by the pension surplus or deficit last year.
Performance obligations: These are promises to provide distinct goods or services to customers.
Prepayment: When we pay in advance for a cost which relates to services that will be received over a future period of time (for example, rent or insurance), we hold that cost on our balance sheet as a prepayment and then spread the cost over the period of the service.
Present value: This is the value of a future cost or income in today’s money and is arrived at by discounting.
Provisions: This is a liability, but one where we’re unsure what the final amount we have to pay will be and when we’ll have to settle it. We use our best estimate of the costs and hold that on the balance sheet.
Realised gains: This is when we sell an asset for a profit.
Receivables: When someone owes us some money, we hold that amount as a receivable on our balance sheet.
Related party: This is a company or person that is closely linked to the Co-op. It’s usually a member of our Board or Executive or their close family plus companies such as our associates and joint ventures.
Remeasurement gains / losses on employee pension schemes: There are lots of assumptions that are used when valuing pensions. If those assumptions change this can have a big effect on the size of the pension asset or liability. So that we don’t distort the income statement, this effect is shown in other comprehensive income.
Repayment notes: This is a type of loan, which we repay either in instalments or in a lump sum at the end of the loan.
Return on plan assets (pensions): This is the income our pension assets have generated in the year.
Revaluation reserve: When we revalue a property upwards, we’re not allowed to put this unrealised gain through our income statement or within retained earnings as law dictates that this can’t be distributed to members until the property is sold. It’s then ring-fenced as a specific reserve.
Revolving Credit Facility (RCF): This is money that our lenders have agreed we can borrow if we need to. It works a bit like an overdraft.
Right of use asset (ROU): This is an asset that we don’t own legally, but which we lease from another party. The asset represents the value the Co-Op has in being able to use the asset over the length of a lease contract.
ROCE: Return on capital employed. This is based on our underlying profit we make in the year divided by the net operating assets we have.
Sale and leaseback: This is when an asset is sold to a third party and then immediately leased back under a lease agreement. For the Co-op, this usually relates to the sale of a building such as a store.
Sensitivity analysis: When an item on our balance sheet varies in value from year to year based on some estimates that we make, we show a sensitivity analysis which shows you how much the asset or liability would change by if we were to change the estimate.
Share capital: This is the amount of money that our members have paid us to become members less any amounts that we’ve repaid to them when they cancel their membership.
Society: The Co-operative Group Limited is a registered co-operative society. We sometimes refer to our collective whole as ‘the Group’ or ‘the Society’ and the terms are broadly interchangeable.
Subsidiary: This is a company or society that is owned by another company.
Supplier income: Sometimes our agreements with suppliers mean they will give us money back based on the amount of their products we buy and sell. We call this supplier income.
Reserves: See Revaluation reserve.
Restated: Sometimes we change the numbers that we showed in last year’s accounts.
Retained earnings: See Revaluation reserve.
Retirement benefit obligations: See Pension interest.This might be because we have changed where or how we record certain things or it could be that we have corrected an error. There are strict rules around what can be changed and when we make changes we explain why in the accounting policies. This is all the profits we’ve made since the beginning of time for the Co-op that have not yet been paid out to members. Another term for our pension liabilities. This is the amount of equity we have, but excluding any share capital.
Co-op Annual Report & Accounts for 2022: Jargon Buster
Co-op Annual Report & Accounts for 2022: Five year summary (unaudited)
Five year summary (unaudited)
£m | 2022 | 2021 | 2020 | 2019 | 2018
---|---|---|---|---|---
Revenue | | | | |
Food | 7,805 | 7,671 | 7,765 | 7,505 | 7,274
Wholesale | 1,439 | 1,386 | 1,577 | 1,423 | 983
Funerals | 271 | 264 | 272 | 272 | 283
Insurance (marketing and distribution) | 24 | 34 | 6 | - | -
Legal | 46 | 39 | 37 | 39 | 34
Federal | 1,895 | 1,756 | 1,813 | 1,613 | 1,532
Other businesses & Costs from Support functions | - | 1 | 2 | 12 | 56
Total revenue | 11,480 | 11,151 | 11,472 | 10,864 | 10,162
Underlying (loss) / profit before tax | | | | |
Food | 139 | 156 | 350 | 283 | 204
Wholesale | 22 | 7 | 6 | (10) | (21)
Funerals | 16 | 12 | 16 | 12 | 23
Insurance (marketing and distribution) | 8 | 15 | (2) | - | -
Legal | 8 | 5 | 4 | 6 | 2
Other businesses & Costs from Support functions | (93) | (95) | (139) | (118) | (111)
Underlying segment operating profit | 100 | 100 | 235 | 173 | 97
Underlying net interest expense on lease liabilities | (76) | (76) | (72) | (74) | -
Underlying interest | (55) | (56) | (63) | (64) | (64)
Underlying (loss) / profit before tax | (31) | (32) | 100 | 35 | 33
EBITDA (i) | | | | |
Underlying segment operating profit (above) | 100 | 100 | 235 | 173 | 97
Depreciation (plant, property and equipment) | 244 | 254 | 250 | 252 | 256
Depreciation (right-of-use assets) | 119 | 122 | 113 | 110 | -
Amortisation | 27 | 29 | 17 | 17 | 15
Underlying segment EBITDA (i) | 490 | 505 | 615 | 552 | 368
Insurance (underwriting business) - (iii) | | | | |
Revenue | - | 12 | 273 | 315 | 323
Underlying PBT | - | (1) | 19 | (10) | (1)
Profit / (loss) on discontinued operation | 67 | 13 | 5 | (16) | (230)
Other performance items | | | | |
2% Member reward (iv) | (20) | (21) | (45) | (59) | (60)
2% Community reward (iv) | (18) | (19) | (13) | (11) | (12)
Profit / (loss) after tax - continuing operations | 243 | 32 | 72 | 49 | 66
ROCE (ii) | 3.1% | 3.2% | 8.1% | 6.0% | 4.7%
Balance sheet items | | | | |
Total assets | 8,229 | 9,180 | 8,986 | 9,913 | 9,547
Group net debt (excluding IFRS 16 leases) | (333) | (920) | (550) | (695) | (796)
Group net debt (including IFRS 16 leases) | (1,639) | (2,436) | (1,975) | (2,165) | -
Total equity | 2,718 | 2,939 | 2,669 | 2,685 | 3,061
Net debt: EBITDA ratio (excluding leases) | 0.68 | 1.82 | 0.89 | 1.26 | 2.16
Net debt: EBITDA ratio (including leases) | 3.34 | 4.82 | 3.21 | 3.92 | -
Total pension assets | 7,124 | 11,452 | 11,708 | 11,168 | 10,271
Total pension liabilities | 351 | (9,194) | (9,854) | (9,304) | (8,412)
Total net surplus | 7,475 | 2,258 | 1,854 | 1,864 | 1,859
Business-specific measures | | | | |
Total Food like-for-like sales increase | 3.2% | -2.9% | 6.9% | 1.9% | 4.4%
Number of Food stores | 2,377 | 2,584 | 2,613 | 2,611 | 2,582
Total Food sales area ('000 sq ft) (ii) | 7,685 | 8,276 | 8,407 | 8,327 | 8,292
Number of At-need funerals sold | 93,867 | 90,731 | 100,943 | 90,630 | 95,363
Number of Pre-need funerals sold | 16,774 | 44,751 | 42,497 | 49,066 | 55,593
Number of Funeral homes | 818 | 830 | 840 | 998 | 1,049
(i) See Jargon buster on page 243 for definition.
(ii) Quoted across all years excluding petrol forecourt area but including in-store space at those sites with a petrol forecourt.
(iii) Our Insurance underwriting business has been held as a discontinued operation from 2018 and was sold on 3 December 2020.
(iv) Our membership proposition was updated from October 2020 such that member and community rewards are earned at 2% each (so 4% in total) on own brand purchases (prior to that it was 5% and 1% respectively).
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