The Co-operative Group Building for the future Annual Report & Accounts 2011 good for everyone Introduction Building the 1 Headlines 2 Who we are right momentum 3 What we do 2011 has been a time of severe challenge for the UK 4 Chair’s overview economy. Customers and businesses alike have been Business review assailed by rising costs, credit squeeze and uncertainty 6 Group Chief Executive’s overview about the future to an extent unparalleled in recent times. 8 Key Performance Indicators Against this background we have performed solidly, delivering profitability in line with expectations while maintaining our core capital and liquidity. 10 Performance review More importantly, we have been building for the future and investing in the 16 Financial review services, systems and structure we need to deliver real value to our customers 19 Our people and members, while setting out to realise the true potential of our brand. 20 Social goals It is especially in hard times like these, that our customers and members look to us to hold firm in our commitment to bring both value and values to 22 Principal risks and uncertainties the market. Our investment in our vision and plans for long term growth mean Governance that when better times come – and they will – we will have the foundations in place to build lasting success. 26 The Co-operative Group Board of Directors 28 Management Executive 29 Report of the Group Board of Directors (including Corporate governance statement) 37 Remuneration report Financials 47 Independent auditor’s report 48 Consolidated income statement 49 Consolidated statement of comprehensive income 50 Consolidated balance sheet 52 Consolidated statement of changes in equity 54 Consolidated statement of cash flows 55 General accounting policies 57 Notes to the financial statements 169 Analysis of profits from regional business activities The Co-operative Group Annual Report & Accounts 2011 | 1 Headlines Introduction Financial headlines Operating profit before Gross sales significant items Underlying operating profit Members funds (Total equity) Amount paid to members £13.3bn £585m £526m £5.0bn £142m +1% +1% –13% +4% +37% Business review Gross sales £m Underlying operating profit £m* 13,144 13,272 602 12,043 526 464 9,098 380 7,911 319 Governance 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 As per note 2: Revenue As per note 1: Operating segments Financials Operating headlines Co-operative Food delivers resilient performance Strong results from Specialist Businesses Co-operative Food has now completed the integration of Somerfield Co-operative Specialist Businesses enjoyed good year on year growth, and has weathered the worst of the enduring economic downturn. with a diversified portfolio offsetting pressure in specific sectors. In It is now well placed to move into a development phase spurred addition to profit growth, improvements in employee engagement and on by a focus on product innovation, major improvements to supply customer satisfaction to record levels, ensured a strong year across the chain and a new customer-focused strategy. entire balanced scorecard. Transformation of our Banking Group Co-operative Banking Group continues to deliver stable operating profits while maintaining robust capital and liquidity levels. Meanwhile a major transformation programme is focused on delivering a truly integrated and customer-centred core banking operation. * Underlying operating profit measures the normal underlying business performance and removes from operating profit the following volatile or one-off costs: property disposal losses, investment property valuation fluctuations, significant items, fair value amortisation and Financial Services Compensation levy. It is shown in the operating segments note (note 1). 2 | The Co-operative Group Annual Report & Accounts 2011 Who we are The Co-operative Group is the UK’s The Co-operative business model largest consumer co-operative, offering As a co-operative, the Group is jointly owned by over 7.2 million individual members and in the region of 80 Independent Co-operative Societies. We are a wide range of services including food, in business to serve them and their communities, and our business is run for their benefit. We listen to member opinions and integrate these into our financial services, pharmacy, funerals, business activities and our social and campaigning agenda. Our pioneering involvement in Fairtrade and combating climate change reflects the values legal services, life planning, motor of our members and their desire to build a better future for themselves, their vehicles and electrical goods. We also families, their communities and the wider world. Individual members of the Group exercise democratic control by serving on operate commercial activities in security its 48 area committees and seven Regional Boards, or by voting in elections, attending twice yearly members meetings held throughout the country or and clothing and have established a participating in other consultation initiatives. joint venture with Thomas Cook, which Our profits are shared with each member, in proportion to how much they trade with us over the year. Our member democracy model offers constitutes the UK’s largest travel agency. individuals the opportunity to play a direct role in the future development of the Group. Members may stand for election to their area committees; area The Group generates an annual turnover committee members in turn are elected to Regional Boards and ultimately of £13.3bn, employs more than 102,000 to the Group Board. people and operates over 5,000 retail trading outlets serving more than How we are governed 21 million customers per week. The Co-operative Group is owned and democratically controlled by its members, who elect representatives to oversee the business. The Group Board is entirely non-executive, and consists of 20 directors, fifteen of whom Our purpose, vision and aims are elected from our Regional Boards while the remaining five are elected Our purpose is: from Independent Co-operative Societies. Each year one-third of Board members are required to seek re-election. To serve our members by carrying on business as a co-operative in accordance with co-operative values and principles. Three Subsidiary Boards are responsible for our major business units – Co-operative Food, The Co-operative Banking Group and Co-operative Our vision is: Specialist Businesses. To build a better society by excelling in everything we do. The Group Board is responsible for the long term success of the Group by: Our aims are: • Ensuring that the Group’s affairs are conducted and managed in accordance with its purpose and objectives, the best interests of the – To be a commercially successful business Group and those of its individual and Independent Society Members – To meet the needs of our customers and the communities we serve • Determining the vision and strategy of the Group in consultation with – To respond to our members and share our profits the Group Chief Executive and the Executive – To be an ethical leader • Overseeing the Group Chief Executive and the Executive in the day to day management of the Group – To be an exemplary employer • Monitoring performance against key financial and non-financial indicators – To inspire others through co-operation • Overseeing the Group’s risk management systems • Setting standards in governance matters The Group Chair, Len Wardle, is elected from the Group Board and is a non-executive director of the business. He leads the Board in determining strategy and objectives. The Group Chief Executive, Peter Marks, is appointed by the Group Board and has direct responsibility for the Group on a day to day basis. He implements the agreed strategic objectives and is accountable to the Board for the financial and operational performance of the Group. With effect from 1 January 2011 the Group Chief Executive has led a unified Group Executive. More details on our governance model are contained in the corporate governance section of the directors’ report. The Co-operative Group Annual Report & Accounts 2011 | 3 What we do Introduction Food Banking Group We are the UK’s leading community food retailer, selling food and family We are Europe’s most sustainable financial services provider, offering consumables UK-wide through 2,801 local, small and medium stores banking and insurance services to personal and business customers. We operate through 342 high street branches and 22 corporate banking Key facts Headlines 2011 centres, telephony and online channels 5th largest food retailer in the UK Invested heavily in reorganisation of Key facts Headlines 2011 Business review supply network for smarter, quicker 2,801 stores – one in every UK service UK’s most diversified mutual Transformation programme postal area improving customer experience Product innovation and marketing Includes The Co-operative Bank, 14.5m customers served per week and access to full product range focus stress value Insurance, Investments, Asset 60% of UK customers shop at a Management and internet bank smile Life and savings review concluded Ethical leadership shown in Co-operative Food store over the year as Banking Group focuses firmly promoting healthy eating and Vision to become the compelling on core banking proposition Market-leading policies in place animal welfare through own-brand co-operative alternative to promote animal welfare and product lines Ethical lending and investment healthy eating principles agreed with customers and members See page 10 See page