Co-op.gp. 25 Regulatory News (42TF)

24 April 2020

Annual Results Announcement: 52 Weeks to 4th Jan 2020

Co-operation is working

Total revenue up 7%, underlying profits up 50% like for like1

 Six years continued like-for-like sales growth in Food

£76m returned to members and local causes

Business plays critical role in ensuring community resilience through coronavirus

Co-op difference highlights

· Creation of further member and community value, with £76m returned - £59m to members directly; £17m to 4,400 local causes chosen by members and colleagues. More than £260m paid to members and communities over last three years

· Active membership at 4.6m; successful focus on driving young membership, with 36% of new members aged 35 or under

· Issued £300m sustainable bond, with proceeds used to drive Food's Fairtrade offer, ensuring better deal for producers

· Pension Fund combines strength with sustainability: defined benefit surplus in excess of £1.8 billion; £22m invested in affordable housing; £320m defined contribution assets switched into specialist climate change fund

· A further £1.2m invested into Co-op Academy schools in 2019, as part of a four year commitment to invest £3.6m; six new schools opened, taking total to 24 at year end; plans to grow to 40 in next two years

· Further development of award-winning Safer Colleagues, Safer Communities campaign; launch of NightClub initiative to improve wellbeing of night shift workers - directly tackling issues to support colleagues

· Launched community strategy around Spaces, Skills, Sustainability and Wellbeing:

o Uses almost 40% recycled plastic in Co-op own brand food packaging, banned black plastic and rolled out the UK's first nationally available compostable carrier bag to 1,000 stores

o First British retailer to have science based targets to reduce greenhouse emissions and to sign the UN's Our Only Future campaign at New York Climate Action Summit

o Cut waste to take food approaching its use by date off sale early to donate to food banks for meals

· Work under way to develop detailed Shared Value measurement framework to show social and environmental impacts, along with traditional financial measures

1On a comparable basis excluding impact of new lease accounting standard IFRS 16 (Leases). See the Financial Performance section for further details.

Financial highlights

· Total revenues grew 7% to £10.9bn, driven by continued strong performance from Food, including annualisation of Nisa wholesale, acquired in May 2018

o Revenue in Food rose 3% to £7.5bn; like-for-like sales up 1.9%; Co-op has now delivered six years of like-for-like Food revenue growth

o Wholesale like-for-like revenues increased by +1.1%, outperforming the market by +1.4%. Nisa attracted 94 new Partners to the business

o Funeralcare and Life Planning revenue reduced year-on-year (-3.2%), reflecting moves to cut prices and improve choice and lower death rate

· Group underlying profit before tax, excluding IFRS 16 impact, up 50% to £50m2 (2018: £33m), driven by Food's strong performance; underlying PBT with IFRS16 £31m (2018: £33m)

o Food delivered underlying operational profit of £283m (£235m on a like for like basis excluding IFRS 16, against £204m in 2018)

o Profit before tax for 2018 has been restated, reduced by £10m, following the identification of some historical accounting errors within Nisa

· Capital expenditure of £439m to ensure Co-op is well positioned for future growth:

o Food: investment of £342m in new outlets, refitted stores and supply chain

o Funeral & Life Planning: £29m invested in infrastructure and technology

· Net debt reduced to £695m, excluding lease liability (2018: £764m)

Operational highlights

· Another strong year for Food business, which outperformed the wider market:

o Opened 79 new stores; refitted 152 stores and extended 10

o Taking 52 week Kantar total grocery data to the end of 2019: 133,000 additional households served in 2019 vs. the previous year

o Positivity towards Co-op Food up 3% in 2019 compared to 2018. Co-op increasingly known for championing important issues and being involved in community

o Successful trial of home delivery; delivery options to now be expanded, with online same-day services made available across almost 100 towns and cities, served by 650 Co-op stores, with delivery options including Deliveroo

o Launched 554 new products and improved more than 1,000 existing product lines, including award-winning Irresistible pizza range and rollout of GRO vegan range; plan to expand vegan offering through 2020

o Nisa acquisition continued to deliver volume growth for Wholesale business with sales of £1.4bn (£1bn for eight months), successfully delivering against strategy of increasing Co-op buying power and achieving wider distribution of Co-op own-brand products into more communities

· Market for Funeral & Life Planning business remained challenging; clear turnaround strategy in place

o Revenue declined 3%, reflecting continued investment in price reductions with lower-cost funerals and lower death rate. Continued close work with CMA on market investigation into sector

o Legal Services revenues increased 13% to £40m, making Co-op leading personal legal services provider in UK; further investment in online platform to fuel growth

2We note that our auditors have qualified their audit opinion in respect of our interpretation of IFRS 15 (Revenue from Contracts with Customers) as applied to our Funeral Plans. We believe that our treatment most fairly reflects the true underlying commercial nature of a Funeral Plan and our true Financial performance in our Funeral business (as explained in the General Accounting Policies section). We remain firmly of the view that the approach we took in 2018 when we first adopted IFRS 15 (Revenue from Contracts with Customers) remains appropriate. We sought advice from another accountancy firm when we first adopted IFRS 15 and our approach also received an unqualified audit opinion from our auditors for 2018.

· In a year of transformation, Insurance began to deliver on strategy of developing and distributing more products and solutions for members

o Re-entered life insurance market; member-designed cover offers payment holidays for those in financial difficulty. Introduced innovative safe driving policy for young drivers, with savings of more than £1000

o Sale of CIS General Insurance Ltd ongoing; insurance underwriting treated as discontinued business to reflect this process 

· Following launch, Co-op Health app downloaded more than 150,000 times

COVID-19 response

o Co-op colleagues in Food and Funerals recognised as key workers, keeping communities and economy working; 56,000 front line colleagues rewarded with £150 bonus and an extra day's holiday, all worth more than £13m

o Created temporary jobs for more than 7,000 people out of work as normal workplaces closed; all posts filled within seven days

o New Co-op Members' Fund established to support Foodbanks, address funeral poverty and help local causes directly supporting crisis effort; members now able to share rewards received from shopping to fund

o Boost to planned payments for Local Community Fund causes in April to more than £4.5m

o Delivering £1.5m of food to FareShare and donated Easter TV advertising to the charity in support of food banks. Activated a text service for customers to make further contributions

o Vouchers given in lieu of free school meals to Co-op Academy pupils and extended into Easter holidays so Co-op school pupils don't go hungry

o Co-operate launched - online resource signposting volunteers and those in need to local and national support initiatives

o 700+ Member Pioneers, an increase of 100 since 2019, continuing to support volunteering initiatives in their areas, helping vulnerable people and reducing isolation

o Funerals business working directly with government to face into challenges COVID-19 causes for the sector

o Downloads of repeat prescription app tripled, enabling safe delivery of thousands of medications direct to homes

Outlook

· With the continued COVID-19 outbreak and other factors, the outlook is uncertain:

o We expect additional costs associated with COVID-19 to be in excess of £200m, which will in part be offset by increased food sales and the expected business rates relief announced by the Chancellor

o The Competition and Markets Authority extended statutory deadline on Funerals Market Investigation by six months; Co-op will continue to work with CMA on this and with HM Treasury and the Financial Conduct Authority on the proposed regulatory framework for pre-paid funeral plans

o We continue to work with the FCA on its market study into the pricing of home and motor insurance

· Against this backdrop, we are clear on strategy to deliver sustainable growth for the Co-op and to continue to add value for members and for communities

Steve Murrells, Chief Executive of the Co-op, said:

"The Co-op made further financial progress through 2019, showing that co-operation is working. While we didn't know it at the time, that performance set us up well to withstand the impact of the COVID-19 crisis and to enable us to support the communities we operate in.

"No part of our business has been unaffected by the outbreak of the virus and we have played a critical role in communities throughout the UK. Our Food business has helped to feed the nation and our Funeral colleagues have been there for families at their time of greatest need. All of this work will continue and I could not be more proud of our people who have delivered - day in, day out.

"Co-operation is something that is central not just to our business model, but to everything that we do and we are committed to continue to deliver against our vision of Co-operating for a Fairer World. Against the backdrop of COVID-19 we will review the strategy we had embedded across our businesses, aligning commercial and community objectives. Our responsibility as a co-op is to ensure that through our businesses, our wider influence is used to make the communities in which we operate feel stronger and more connected. That drives the business decisions we make - not profit alone and not shareholder value. The importance of that has never been so stark and we will continue to play our part for as long as we need to."

Allan Leighton, Independent Non-Executive Chair of the Co-op, said:

"The Co-op is drawing deeply on our values of commercial responsibility and community concern to play our part in responding to COVID-19. Our commitment is to do all we can to help our members, customers and colleagues through the weeks and months ahead. It is already clear that COVID-19 will have profound consequences for the UK and global economy and our Co-op members and customers will not be immune.

"Against that backdrop, our results for last year show that we are in a strong position to keep playing our part. At the Co-op, however, we measure our success differently. Strengthening and sustaining our local communities is fundamental to us and in 2019 we gave £17m to more than 4,400 local causes.

"Looking ahead, we believe that co-operative business endeavours and co-operative ways of working will be needed in the future even more than they were in the past."

Ends

Media Enquiries:

The Co-op

Jon ChurchTel: 07545 210812

Russ Brady Tel: 07880 784442

Headland Consultancy

Susanna Voyle

Tel: 07980 894557

Fay Rajaratnam Tel: 07812 811374

About the Co-op:

The Co-op is one of the world's largest consumer co-operatives with interests across food, funerals, insurance, legal services and health. It has a clear purpose of championing a better way of doing business for you and your communities. Owned by millions of UK consumers, the Co-op operates 2,600 food stores, over 1,000 funeral homes and it provides products to over 5,100 other stores, including those run by independent co-operative societies and through its wholesale business, Nisa Retail Limited. It has more than 63,000 colleagues and an annual revenue of over £10 billion.

CHAIR'S INTRODUCTION

 "Our business is drawing deeply on our values of commercial responsibility and community concern to play our part in responding to Covid-19."

As we've been preparing this report, the UK and the wider world has become engulfed in an unprecedented health and economic crisis. Our business is drawing deeply on our values of commercial responsibility and community concern to play our part in responding to Covid-19. Our commitment is to do all we can to help our members, customers and colleagues through the weeks and months ahead.

We've all experienced the speed at which the crisis has developed and the radical responses introduced by the Government. In Steve Murrells' business overview, you'll see how we've been responding to the situation across our business areas, as well as the action we've taken to support local communities. I'd like to give a special thanks to our colleagues, especially in our food stores and funeral homes, who've responded so well to the additional pressures created by the pandemic.

It's already clear that coronavirus will have profound consequences for the UK and global economy and our Co-op members and customers will not be immune.

One of the many consequences of the pandemic has been the need to move the date of our 2020 AGM and run it in a very different way to ensure social distancing and compliance with government guidance. That means we're telling our members not to attend the meeting in person. I never thought I'd say to our members that they should not attend our AGM but it's one more example of an extraordinary situation. We still want our members to have their say by voting online or by post in advance of the meeting and submitting questions via an online tool. Taking care of our members and each other is our key priority right now, as well as complying with Government guidance. I've discussed it with Nick Crofts, our Council President, and we know this is the right thing to do.

This is our 2019 report and financial statements, so we're looking at the year gone by before the current crisis. I'm proud of what we've achieved last year and we want to share all of the good work with you, even though this may seem a little strange when you read the report with the current backdrop. We have included reference to the coronavirus pandemic where we think this is appropriate and helpful.

High Streets under pressure

Even before the outbreak of coronavirus, the High Street in 2019 was under considerable strain. At the end of 2019 the Centre for Retail Research reported that UK high streets had shed more than 140,000 jobs during the year. Some big name brands went under and, up and down the country, more than 60 shops a day were closing their doors for the last time. For those still in business, sales have been mostly flat or down. According to the British Retail Consortium, 2019 was the worst year for its members for a quarter of a century, with food retailers failing to gain any uplift in the final month of the year. Experts and commentators put the blame on the economic and political uncertainty caused by Brexit. The dour mood at Westminster had spread to the whole country. The high street closures were not only bad news for the businesses concerned, and their employees, but for the local communities they serve, too.

It's against the background of this challenging and highly competitive market that the Co-op is reporting continued like-for-like growth in our food stores, along with new store openings. In addition, we've launched a new digital-led business with Co-op Health and seen extensive product and service innovation in our Funerals, Insurance, and Legal businesses. We're staying modern and relevant by embracing new technology and responding quickly to the changing needs of all our customers.

Commercial performance

Our results are particularly complicated this year because of accounting changes discussed later. Although our income statement shows profit before tax of £67m against £83m last year this is distorted by the accounting changes. A truer measure of our performance is our underlying profit before tax. As explained in more detail later, this was £50m up £17m on 2018 on a like for like basis.

Generating value

Profitability is not the only way we measure our success at the Co-op. Strengthening and sustaining our local communities is fundamental to us, and in 2019, we gave £17 million to over 4,400 local causes. In fact, we've shared £56m since we launched our Local Community Fund in 2016. By using the data we've collected through our new Community Wellbeing Index, we have a clear idea about how best to support those communities. This insight is now reflected in our 'Co-operate 2022' community programme which our Members' Council helped to develop. We're prioritising local initiatives that are supporting and protecting local community spaces and mental and physical wellbeing. And we're looking to enable all generations to develop and share their skills to boost individual and community wellbeing.

Last year, the Co-op Academies Trust opened six more schools bringing its total to 24. Co-op Academy schools are raising standards and improving the opportunities for thousands of children in some of the most disadvantaged areas in the north of England. Meanwhile, our charity, the Co-op Foundation, is also contributing to these priorities. The Foundation has supported more than 200 community spaces, including through its £1.6million 'Space to Connect' partnership with the British Government.

Another way in which we return value to our 4.6 million members is by giving them a national voice on the issues that matter most to them. It's because we've listened to our members, and their elected representatives on our Council, that we're tackling crime and the causes of crime both locally and nationally; it's why we're raising awareness of the importance of community spaces; and why we're taking seriously our responsibilities for the growing climate emergency.

New challenges, new vision

Throughout 2019 we marked the 175th anniversary of the birth of the co-operative movement in the UK. We chose to use the anniversary to think carefully about how we respond in a co-operative way to the new challenges we face in the world. 

Although the issue of leaving the EU has been settled, there remain many divisions in society that, as a business founded on ideas of fairness, deeply concern us. The ever-widening gap between the richest and poorest; the inequalities between the north and the south; divisions between towns and cities; gender, ethnic and religious discrimination; and differences in outlook between old and young - all work against us achieving the ideals of co-operation that first inspired our business founders. The current pandemic has also highlighted the inequalities between those who have secure employment and the many millions who are self-employed and reliant on ongoing work and income.

Our long-term thinking about the relationship of our business to wider society has led us to adopt a new vision statement: 'Co-operating for a fairer world'.

Our aim in the years ahead is to help prepare our local communities for the difficulties and the opportunities to come in a rapidly changing world. We want to give communities the tools that will allow them to take more control of their lives. We especially want to make sure that a younger generation has a fair chance to be the best they can. We believe that co-operative business endeavours and co-operative ways of working will be needed in the future even more than they were in the past.

However, we know that our Co-op can't fix all that's broken. And nor should we try. We should look first at how we run our own affairs and how we touch the lives of others. We want to focus on areas of concern that are relevant to our members and relevant to the products and services we sell. Above all, we must set out to make a tangible difference. And by working co-operatively with others, we can greatly increase the difference we make. An early test of our new vision has been the response we've made to the coronavirus outbreak which Steve Murrells sets out in his introduction below.

I'd like to thank my fellow Board directors for their work throughout the year. I also want to acknowledge the unique role of our elected Council members in the governance of our Co-op and the invaluable contribution they continue to make to all aspects of our work. Our Council makes sure that we stay true to the Values and Principles of Co-operation that have been our most important inheritance from Rochdale for the last 175 years.

Finally, let me welcome our new Member Nominated Director Sarah McCarthy-Fry, who was elected in May 2019, and Shirine Khoury-Haq who joined our Executive team and Board as Chief Financial Officer in August.

Allan Leighton

Chair, Co-op Group

CHIEF EXECUTIVE OVERVIEW

"Safeguarding the health of our front line colleagues has been a top priority."

This is our 2019 annual report and accounts, but I feel I need to start my overview with what's happening in the world right now.

Since early March this year no part of our business operations have been left unaffected by the consequences of the Covid-19 virus.

As a national food retailer we're playing a critical role in maintaining the basic necessities of life through an exceptional time in the nation's history. Like other food retailers, we've been working hard to keep our shelves stocked so everyone can get what they need when they need it.

However, a dramatic increase in purchases in the early weeks of the pandemic did place severe pressure on our store colleagues and logistics network. Like others, we introduced restrictions on customers' purchases to help stabilise availability. We've also introduced temporary changes to our trading hours to give colleagues more time to clean the stores and re-stock and have implemented social distancing guidelines across our store estate and depots. Vulnerable customers, those that care for them, and NHS workers are being given shopping priority at the start of the day.

In just seven days we recruited and trained 5,000 additional colleagues to work in our stores and across our logistics network. Many of our new Food colleagues were recruited from the leisure, hospitality and catering sectors which saw significant layoffs as social distancing came into force.

Across the world, as the virus has advanced, we've seen high numbers of deaths and huge pressure on healthcare systems. As a national funeral provider we're working closely with the Government and NHS Trusts to share our expertise and provide support. The new regulations for Covid-19 related deaths have changed the way we can care for the deceased and the type of funerals we can arrange. Our Funeralcare colleagues are supporting bereaved families as best they can under the emergency procedures now in place, this includes offering a live streaming facility for the funeral service. As with Food, we've also been recruiting new colleagues into Funeralcare to make sure we have the capacity required in the weeks ahead.

Safeguarding the health of our front line colleagues has been a top priority. We've introduced protective plastic screens at every checkout across the UK, in addition to the extra gloves and sanitisers we've made available. We've also sourced additional personal protective equipment (PPE) for our colleagues in Funeralcare. At the beginning of the crisis we made changes to our colleague sickness and absence policies. No colleague will be disadvantaged due to the unprecedented circumstances we're all facing, in particular the need to self-isolate if you, or anyone in your home, is showing symptoms of the virus.

It's impossible to predict with any certainty what the full impact of Covid-19 on our business operations will be. So far, we estimate that the impact on our costs is between £200 and £275 million, including significant increases in payroll, logistics, store expenses, investment in colleague safety and the impact of social distancing on the type and size of funerals we undertake. Some of this will be off-set by increased food sales and the changes to business rates announced by the Chancellor as part of the Government's Covid-19 response.

At the same time as our business response, we've been doing all we can to support local communities.

As the economic impact of the virus began to take hold and food bank donations from customers dropped, we announced a donation of £1.5 million worth of food to FareShare, a national charity tackling hunger, which supports over 11,000 local organisations including food banks across the UK. Ahead of Easter, we pulled our planned Easter promotions TV advertising campaign, and donated the airtime - worth £2.5 million - to promote giving to FareShare. Alongside the TV advert, we've set up ways to donate money to the charity via text or in-store.

With charitable fundraising more difficult and local needs increasing, we decided to bring forward part of our annual pay out to the local community causes our members have been supporting through their 1% Co-op Member reward. This has given £4.5 million to more than 4,000 local causes at a critical moment. We've also asked our members if they would like to donate their 5% reward to help tackle food shortages and funeral poverty at this difficult time for so many people.

As schools began to close, ahead of the official national closure, we stepped in to help the 6,500 pupils at Co-op Academy Schools who receive free school meals. We provided £20 per week for each student using Co-op gift cards to bridge the gap while the Government was organising its own national response. We've also extended to non-Co-op Academy schools Co-op gift cards as a solution to providing help to their own pupils and several hundred schools have taken us up on this.

Meanwhile our national network of 700 Member Pioneers, an increase of 100 since 2019, has been supporting local communities in a variety of ways including setting up 'mutual aid' groups to co-ordinate support for the most vulnerable. They've also been sharing key resources through social media, such as a guide from our charity partner Mind on how to support your mental wellbeing while being in isolation.

We decided to accelerate the reach and functionality of our new online platform 'Co-operate' which connects people to local support and information. This new platform is now focusing its support on helping individuals and communities to stay connected and respond to local needs during the pandemic and on-going social isolation.

Co-operating for a fairer world

As our Chair Allan Leighton set out, our new vision 'Co-operating for a fairer world' gives us our long-term direction of travel for every aspect of the business. It's a vision which embraces everything from the strategic and operational decisions we take to run our Co-op, to how we develop our work to support the local communities we were set up to serve. It's a way of thinking and behaving that you won't see in any other national UK business. It's distinctively co-operative because it demonstrates our belief in the co-operative values of democracy, equality, and self-responsibility all placed in the service of achieving a common good for our communities. In short, you achieve a fairer world by being co-operative.

Co-operative thinking doesn't mean that we forget what it is to be commercially focused and financially rigorous. The importance of running a commercially successful business as well as a community-minded one, is also an inheritance passed down to us from Rochdale. Our ethical intentions have to be right but so too do our business strategies and our efficiency at implementing them. This report shows how we're doing just that.

Environmental awareness

In 2019, the world seemed to wake up to the need to act on the accelerating climate emergency. We've long recognised this need and have been working to reduce our operational greenhouse gas (GHG) emissions since 2006 - halving them over that time. In 2019, in response to our members AGM motion to respond to the climate emergency, we went even further. We've set science-based targets to reduce our direct emissions by an additional 50% by 2025 and our product-related emissions by 11% by 2025 compared to 2016.

We've also become the first UK retailer to sign up to the United Nations' 'Our Only Future' campaign for businesses to meet the 1.5°C target for global warming and reach net zero GHG emissions across both direct and indirect emissions by 2050 at the latest. Targets are all well and good but it's our performance that we should be judged on and from 2016 to 2019 we reported a 39% reduction in our direct GHG emissions and a 2.5% reduction in our product-related emissions.

Understanding our financial performance in 2019

As Allan explained in his introduction, our headline business performance figures are difficult to compare with last year because of a significant change to financial reporting in respect of accounting for leases, called IFRS16. This means that our financial commitments relating to leases are now shown on our balance sheet. It doesn't change how we run our business, nor the business cashflows, but it does have a significant impact on our reported profit and our balance sheet. So for this report (as we did in our 2019 Interim Report) we're including additional numbers in the finance review, as though the new reporting regulations didn't apply, so that year-on-year performance can be seen on a like-for-like basis.

Our Group turnover was £10.9 billion, an increase of 7% from 2018, reflecting the continued strong Food performance. In an ever more competitive environment, like-for-like Food sales have increased by 2.7% (convenience) or 1.9% (total Food excluding fuel). Profit before tax was £67 million but on a like-for-like basis, excluding the impact of IFRS16, it was £79 million, marginally behind 2018. Our underlying profit before tax, which excludes the impact of non- trading items such as disposals and one-off items, was £50m on a like-for-like basis excluding IFRS 16 compared to £33m last year, a £17m increase principally reflecting strong profit growth in our Food business.

The numbers above also include a restatement of our results following the identification of some historical accounting errors in relation to the acquisition of Nisa in May 2018. These errors arose because of control weaknesses over some finance processes within Nisa and our new finance team are working to resolve these issues. The errors impact the consolidated balance sheet at 5 January 2019 with net assets overstated by £33m, the balance sheet of Nisa at acquisition in May 2018 when net assets were overstated by £23m, and the consolidated income statement for 2018 that overstated profits by £10m. More detail is given in our Financial Performance section and in Note 38 to the accounts.

IFRS15 - financial reporting for funeral plans

We have made the difficult decision to disagree with our auditors over the appropriate accounting for our funeral plan arrangements in full knowledge this has led to a qualified audit opinion in respect of our application of the IFRS 15 accounting standard on revenue recognition. We have taken this decision both because we believe it is the most appropriate accounting interpretation of what is a highly judgemental area but also because we have an obligation to prepare accounts for our members that are clear and understandable. We are firmly of the view that our approach most clearly reflects the true commercial nature of our funeral plan arrangements. See our Financial Performance section for more detail.

BUSINESS OVERVIEW

Food

The biggest part of our business is Food and once again we've shown our ability to win as a co-op. 2019 saw a sixth successive year of like-for-like sales growth in our food stores, a performance matched only by the main discount retailers in the market. Underlying profit in Food was £283 million in 2019 compared to £204 million in 2018. On a like-for-like basis excluding IFRS 16, profit was £235 million, up 15% on last year, reflecting the strong sales performance but also good cost control. We've remained focused on our strategy of being closer to where our customers are and adapting to external market trends and customer needs.

Nisa continues to grow as a wholesale platform and with a refreshed strategy in place we can see significant potential and growth in the business. Nisa has connected well with the Co-op over 2019 and we're seeing great collaboration between colleagues and unlocking product and proposition opportunities for partners. This remains a strategically important acquisition for us, enabling us to expand into 4,000 new outlets with our Co-op brand in a capital light way, generating cash and buying scale.

As the world changes at pace, the lifestyles of our customers are adapting and, as a result, so are their needs and expectations as food shoppers. Our members and customers span all generations, each with different needs from convenience shopping. We also see the general public as a whole becoming more aware and responsive to health and environmental issues. Ethical consumerism is growing rapidly, as our own research has shown. We're in no doubt that the Co-op's leadership in ethical retailing over the decades has been a significant contributor to this welcome trend. Our plans over the coming years will see us face in to these issues even more.

We're continuing to strengthen our own store estate and we're opening new stores in more communities across the country. 2019 saw the Food business win some incredible awards. A key highlight was The Grocer's Gold award for 'Grocer of the Year'.

As you'll see in this report, Co-op Food is innovating, growing, and finding new ways to define 'convenience'. Our Food business also creates a vital anchor point in local communities up and down the country. We, and our millions of members, think of ourselves as a community asset, a focal point from which wider co-operative endeavours can spread. We have no intention of retreating from the high street but while we welcome the Government's short term business rates relief in response to coronavirus, we'd welcome long term Government reform to give us a level playing field with our online competitors.

Funeralcare

Our funerals business had a challenging year, with sales and profit down on 2018, a situation we were already reporting at the half year. Although funeral sales have been impacted last year by a 2% fall in the death rate, we know that the most significant factor in our performance has been the unprecedented change in public expectations and wishes which means we need to innovate and adapt to recover performance. By mid-way through 2019 we had agreed our turnaround strategy which will take a number of years to fully implement.

Our strategy is focused on supporting our colleagues to deliver the very highest standards of care and service for families and their loved ones. We aim to reposition, innovate and grow the business by modernising our offer and providing greater choice for families, improving value, and making it easier for them to get the support and care they need and expect from the Co-op. Over time, we plan to introduce new ranges and services so that our clients can create a very personal tribute and we'll make a step change to the end-to-end customer journey.

We know that the families we help have changing expectations about how they want to stay in touch with us, so we'll develop our face-to-face, telephone, text and online communication channels in ways that integrate all these forms of communication into a seamless customer experience. We'll be there for them whenever they need us.

Affordability is a central part of our strategy, but we won't be compromising on quality. In 2019 we held our At Need funeral prices all year. We'll be holding all of our prices for 'At Need' funerals for the foreseeable future and we're adopting a more agile and local approach to pricing. We're also looking at more flexible payment options. Meanwhile, we're removing significant cost from the centre during 2020 and maximising the efficiencies of running a national operation.

It was good to see very significant increases in colleague engagement scores across Funeralcare by the end of 2019, with our colleagues showing a renewed confidence in the future. Customer satisfaction has also increased, with over 600 customer compliments each week and high levels of recommendation.

As we complete this report, it's already clear to us that we will have to pause important aspects of our turnaround plans while we focus on the unprecedented demand being made on our funeral business by the coronavirus outbreak. We're currently reviewing all aspects of our implementation and will defer some initiatives to later in the year or beyond. Our immediate priority is to support bereaved families and the Government's efforts on dealing with the pandemic.

Alongside all of this, we're continuing to work with the Competition and Markets Authority (CMA) on their investigation into the funerals and cremation market. We have, from the outset, welcomed the Government's work on behalf of consumers and fully support a statutory regulator for the funerals sector covering quality and transparency with inspection and enforcement powers.

However, the CMA is consulting on a wide ranging set of proposals, which, if implemented in full, are likely to have repercussions for the sector and our business and we do not believe are warranted. The coronavirus outbreak is also likely to have implications for the sector which will need to be taken into account by the CMA in the scale and timing of further regulatory change. We also recognise that there's a pressing need in the funeral plan market for increased transparency, a ban on aggressive sales, and better financial protection for consumers. We welcome bringing funeral plans under the direct remit of the Financial Conduct Authority as the only body with appropriate expertise.

Insurance

At the beginning of 2019 we announced the sale of our insurance underwriting business to Markerstudy. Part of the agreement will put in place a new long term arrangement for Co-op to distribute Co-op branded motor and home insurance products underwritten through Markerstudy.

Co-op Insurance saw a loss mainly reflecting an increase in the underwriting costs of personal injury claims. Our accounts for 2019 show our insurance underwriting business as a discontinued operation.

As we wait for the deal to be approved by the regulators I want to thank our Insurance colleagues for their on-going commitment. Our insurance distribution business has continued to increase its profile and product development so we can meet the ever-increasing needs of our members and customers in the future. This year has seen us return to the life protection market and also launch a new product for young drivers.

Our ambition is to meet more of our member and customer insurance needs, more of the time and to deliver growth and good returns in a capital light way. We're building on our unique Co-op advantages - our membership, our trusted brand, and our community presence. We've put new teams in place during the year to develop how we use member insight and data to reach our members and customers, refine our offer and improve our partnerships. Sales of our travel insurance grew by 41% in 2019 due to returning customers, increased awareness of our product and several well publicised difficulties across the holiday and travel industry. Meanwhile, our home and motor policies continue to score highly across all categories within the recently announced 2020 Consumer Intelligence Awards.

In March 2020, as a result of the worsening global coronavirus outbreak, we regrettably paused the sale of our travel insurance to new customers so that we could focus on protecting our existing policy holders. It will still be possible to renew existing policies, however, we're having to include a temporary coronavirus exclusion. This is in line with the insurance industry as a whole.

As social distancing measures were brought in across the UK, we co-operated with the Association of British Insurers (ABI) to support those affected by the impact of Covid-19, as well as those who want to help their communities. For anyone that needs to work from home because of Government advice or are self-isolating, home insurance cover will not be affected and customers don't need to contact us, provided that the work is clerical in nature.

If customers have to drive to work instead of getting public transport because of the impact of Covid-19, their car insurance policies will be valid. And if customers are using their car for voluntary purposes in any capacity as an NHS volunteer to support others who are impacted by Covid-19, cover will not be affected and they do not need to let us know. Additionally, key workers needing to use their own car to drive to different places of work because of the impact of Covid-19 will not be affected and do not need to tell us.

Legal Services

Our Legal Services business is continuing to do well across all of our practice areas, in particular probate, estate planning and family law. In 2019 Legal saw a 13% increase in revenue to £40 million and profits up £4 million to £6 million reflecting strong growth in probate together with operational improvements that have accelerated progression of cases.

In 2019 the probate registry office was impacted by reforms, and grants of probate were delayed by up to 13 weeks (from the previous norm of two weeks). Our probate business dealt exceptionally well with this challenge and minimised the disruption to our business and clients.

During the early weeks of the coronavirus outbreak we saw an increase in customer demand for our will writing services. In addition, we continue to maintain our focus on developing legal-tech services to make accessing legal help smoother and more convenient. Our partners will need and want more effective and efficient services for their clients as we emerge from this challenging period. We intend to provide engaging, value-added legal services and help our partners in the recovery phase.

Co-op Health

Following the launch of Co-op Health in May 2019, we've successfully re-entered the healthcare market, with the first digitally-led business from the Co-op. The number of customers choosing a new way to manage their medication through our Co-op Health app and having it delivered to their home or Co-op Food store, has continued to grow. We're also seeing that customers are happy with the service we provide, with 95% rating our service as good or very good for ordering medication. As is the case with all start-up ventures, we have spent much of the first 10 months establishing the fundamentals of our business, learning about what works for our customers, and developing our product accordingly.

With many people having to self-isolate at home due to coronavirus, our online prescription and delivery service is seeing greater demand. We're working to make sure we can meet that need despite Co-op Health being a fledgling business.

Investing and planning for the future

Over the next two years we'll continue to invest in all parts of our Co-op, however, in the context of the economic impact of the pandemic we'll be reviewing priorities and timelines.

We're putting in place stronger finance control frameworks in Nisa to make sure this part of our business is in line with the rest of our Co-op. Meanwhile, in our support functions across the business we're also putting in place improved guidance for our managers to ensure we are spending our members' money wisely.

We continue to plan as best we can for the future UK trading relationship with the EU. Of particular concern for us will be the additional costs and complexity of supplying our stores in Northern Ireland and our wholesale customers in the Republic of Ireland. We're dedicated to maintaining high welfare standards in our meat and poultry and to continuing our commitment to British farming.

As we publish these results, and witness the scale of the disruption and the impact on both health and livelihoods, a UK economic downturn looks inevitable. Our members and customers will not be immune from this. As a result, we're re-visiting some aspects of our business planning for 2020 and re-prioritising some initiatives so that we can focus on the current crisis and give the support that's most needed. We're also looking at the conditions we expect to be facing in 2021. To make sure we can keep doing the right thing for our colleagues, members and communities, we need to work as efficiently as we can, be cost conscious in all we do and ensure we make the right financial and strategic decisions now for the challenges we know are still to come. This will never have been as important to us as it will be in the coming months.

Our country is at its best when it comes together and we look out for each other. Community is everything right now. Our business sits at the heart of communities across the length and breadth of the UK and we're going to continue to play our part by doing the right thing.

Finally, let me thank our 62,000 colleagues working across the business in customer-facing and support roles. It's their hard work and commitment to our values, especially through these exceptional times, that make us who we are today.

Steve Murrells

Chief Executive, Co-op Group

CO-OPERATING FOR A FAIRER WORLD

GROWING OUR CO-OP BUSINESS

We're constantly looking for new and better ways to reach more customers with Co-op products and services. For us to win as a co-op we need to grow as a co-op and we're finding new and creative ways to do this in every part of our business.

We've set out below the key initiatives and plans we had in place for our various businesses. Like all businesses we're facing challenges as a result of the coronavirus pandemic and we are having to adapt our plans in the short term to address these issues. This will likely put on hold or delay some of the plans for 2020 and beyond.

New food stores

We have continued to invest significantly in our Food Store Estate with 79 new stores across the UK by the end of 2019. We also refitted 152 stores and extended ten others. As the largest UK convenience retailer we have opened new stores across the country and in total we invested £187m in our new store development and refit programme.

Improved products

We're constantly developing our products; improving quality and helping our customers and members to make informed choices. We continue to promote a healthy range of products with clear nutritional information.

At the start of 2020 we launched our new plant-based brand called GRO, available from up to 6,000 Co-op and independent stores. The meat-free food market is growing and our research shows that the market has topped £1bn for the first time ever and has more than doubled in the last 20 years. As a convenience retailer, with more than 2,600 stores covering the length and breadth of the country, it's important that we have an offering for vegans and vegetarians as well as the growing number of flexitarians to meet increased demand.

During the year we also relaunched our Irresistible pizza range with improved and innovative toppings with help from our Co-op Members.

Wholesale

In spring 2019 we marked the first year of our Wholesale expansion through the acquisition of Nisa. We've set up a single buying operation for all of the stores we supply, with Nisa partners able to select from 2,000 Co-op own brand products. We've seen a rapid uptake of this, with 90% of Nisa partners now taking lines from across the range.

The integration of Nisa into the Wholesale business has transformed the proposition Nisa partners are able to offer their customers with some like-for-like sales as strong as our own Co-op stores.

Festivals

Building on last year's success we attended even more music festivals in 2019. In partnership with Live Nation, we opened 6,000 ft. pop up shops at seven UK music festivals through the summer. This was in addition to our festival store at Glastonbury which we branded as '31 Toad Lane' in recognition of the 175th anniversary of the Rochdale Pioneers opening their first shop. We were able to introduce our Co-op heritage and values to new customers who weren't familiar with the ethical values which underpin our business and which align well with the festival's own outlook.

Co-op's festival partnership with Live Nation, and in particular our approach to environmental sustainability, has also been recognised at a number of industry awards, including the Festival Supplier Awards, European Sponsorship Association Awards and the IGD Shopper Activation Excellence Award.

Franchising

Franchising has long been a feature of consumer retail co-operatives on the continent and now we're beginning to use this way of reaching new markets in the UK. Our franchises are a capital light way to extend our reach. We now have eight franchise stores open via three Costcutter-owned stores, four on university campuses at Leeds, Kent and Newcastle as well as our first Nisa partner.

Opening our franchise store in February 2019 at Leeds University, the fifth biggest university in the UK, was a milestone for us and the new store has achieved significant sales uplift. It's clear that our quality, convenience and ethical values are a great fit with the student population. Students are 'accelerated adopters' giving us early insight into likely market trends and they're an important demographic for us as we develop our food retail offer across our entire estate.

Building on the success of our first three University based franchise stores, in September we announced a deal with the National Union of Students to be its exclusive retail grocery store franchise partner which could see us serving seven million students with food products and services over the next five years.

New insurance products

In the summer Co-op Insurance introduced a new policy designed to further reward our safest young drivers. The 'Graduated Young Driver' product offers drivers who've been on Co-op's Young Driver telematics product for two years or more, and who have a high Safe Driving Score, the chance to be 'unboxed'. Qualifying customers who've proven to be consistently safe drivers can have their black box switched off, will be offered our most competitive rates and, by carrying forward their safe driving score, can continue to save up to £300 on their renewals.

In 2019 we also re-entered the life insurance market launching Co-op Life Cover in partnership with Royal London. The product, which has been designed with input from Co-op members, includes the option to take two six-month payment holidays throughout the lifetime of the policy after a 12-month qualifying period, whilst allowing their policy to remain in force. Customers can also opt to reduce their cover level rather than pay back any shortfall at the end of the payment holiday window.

Co-op Health

In May we launched Co-op Health with an initial focus on repeat prescriptions. The health market is changing fast and parts of it are clearly broken and need fixing. Our new app makes ordering repeat prescriptions easier for customers and more efficient for the NHS.

Our app links directly into GP surgeries and gives a convenient, safe and secure connection. For our launch, the repeat prescriptions business focused on major cities like Manchester, Liverpool and London. In 2020 our prescription service will be available across all of England.

Since the AGM, the app has been downloaded more than 147,000 times. We've also begun our 'click & collect' trial, using lockers in Co-op food stores. We'll soon increase the app's functionality as we continue to learn and understand more about what our customers need.

New Legal Partnerships

Building partnerships with other businesses has been a key aspect of the growth of Co-op Legal Services. In October we secured a partnership with the Institute of Professional Will writers (IPW). IPW is a membership organisation with over a thousand members who provide will writing services to their client base. When IPW members identify a probate need they will now refer the customers to the Co-op. This will be an important new relationship for us, especially as IPW were previously working with one of our competitors.

We're currently in talks with several well-known businesses about how our services can help their customers with probate or estate planning. We expect to make more announcements during 2020 as we begin to rapidly expand our growth through a business to business strategy.

CONVENIENT AND INNOVATIVE

We've long understood the importance of convenience for our Food business and are continuing to develop solutions and services to meet changing customer needs. The importance of being convenient is now being applied to the commercial development and growth of all parts of the Co-op's offer. Achieving convenience is closely linked to our innovation, technology and the use of data. As a Co-op, we want convenience to have an ethical dimension too, making it easier to do good for yourself and others through your purchases.

Supporting bereaved families

As we implement our turnaround strategy for Co-op Funerals, we're putting great emphasis on developing a range of ways for us to support families through their bereavement. Face to face contact remains essential for the sensitive service we're providing. However, we know that families are looking for a range of ways to talk to us; from the moment a loved one passes away, to how we keep in touch through all of the decisions and preparations that must be made for the funeral itself and the support that's needed in the weeks that follow. So we're investing in our online presence and in the functionality of our website. We also want to improve our 24/7 phone availability and the way we use text messaging if that's a preferred way of communication for the family.

Food to Go

'Food to Go' is the fastest growing category in convenience and in 2019 we've been opening new 'On the Go' store formats with products aimed at busy city workers looking to 'grab' breakfast, lunch or dinner, both hot and cold. The stores feature extended food ranges to appeal to health conscious consumers including more vegetarian and vegan products, as well as free water taps for customers to refill their own bottles, and self-serve hot soup and porridge. Our third On the Go store was opened in Moorgate in the City of London in January 2019.

Online ordering and home delivery

In March 2019, Co-op Food launched its same day online delivery service shop.coop.co.uk, using low and no emission cargo bikes from our Co-op Kings Road store in Chelsea in London. It's the first time that we've successfully offered online delivery via a dedicated website. By the end of 2019, we were operating out of 32 hub stores covering central London and Manchester centre. In parallel, Co-op Food continued to expand online delivery services through partnerships with Deliveroo and Starship, accelerating scale across the UK to reach ever more customers.

At the beginning of 2020, we announced that Co-op Food will be continuing to expand our own services out of around 400 hub stores, serving 1,169 catchments around the UK including Southampton, Liverpool, Leeds, Manchester and London.

Co-op App

In the summer we launched a new Co-op App for our members which allows them to make weekly savings in addition to their 5% and 1% Co-op Member rewards. Each week members can choose two offers to take advantage of from a list tailored to them. It's a great example of how we're using data and insight to personalise our offer and make relevant recommendations. It was developed with the help of our members, 16,000 of whom took part in the trials. So far 265,000 members have downloaded the app saving themselves a total of £697,000. Over time we'll be adding to the app's functionality. As part of coronavirus response to ensuring availability of food to all of our customers we have temporality suspended our weekly offers to members.

Young Drivers

We've changed the web journey for our Young Driver telematics insurance product by integrating mobile and pc platforms and improving the quote information we provide. The result has been an improvement in online completion rates by over 50%, leading to an increase in directly sourced Young Driver sales and associated cost savings.

Legal innovation

In October our Co-op Legal Services were given an 'Excellence in Innovation & Technology' award by the Law Society for our Family Law team's pioneering approach to digital technology. This includes the development of our online divorce tool, our work with the UK Government to digitise the submission of divorce paperwork, the production of a wealth of online content and the use of in-house technology to support flexible working. By embracing new technology, we're able to more effectively and efficiently fulfil the needs of our clients, while also helping to shape the future of the divorce process in England and Wales.

Investment in technology was a key focus in 2019. The Estate Planning business rolled out a new proprietary client service platform which improved document production quality and timelines. In addition, our platform has unique risk management and compliance features. The probate business rolled out a new cloud-based client service platform which keeps partners in touch with case progress through the key stages of case management.

We're committed to significant future technology investments and have plans for several cloud-based applications.

Involving our Co-op Members

A significant difference in how we run our business is the time we make to involve our Co-op Members in developing our products, services and community plans.

We've been using technology and innovative ideas to enable our Co-op Members to be more involved in the business they collectively own. Almost 148,000 members joined in with Co-op activities 219,000 times during 2019 and together they clocked up around 20,000 hours of their time to working with us, ensuring that new Co-op products, policies and services better met the needs of members.

Our members helped us to launch new pizza toppings, design new crisp flavours and develop new digital apps. Once again, we ran 'Join In Live' events across the country during the autumn so our members could put questions to our elected Council Members and to our Board Directors.

Through sharing personal stories and life experiences, our members have also helped us to explore topics such as period poverty, bereavement and youth loneliness. And, by working together, we're taking steps to break down some of the barriers that prevent people from talking about these issues. Our members have also been essential to the development of 'Co-operate 2022' community priorities.

In 2019, our total number of active members was 4.6m, in line with 2018. However, a focus on attracting younger members saw a 36% increase in new members aged 35 or under.

Through 2020 our members will be working with us to develop new food, insurance and funeral services and products. They'll also help us to test new online services, promote Fairtrade, share their priorities with our Members' Council, support our community plan and provide the members' eye view on many other ideas we're considering.

A RESPONSIBLE CO-OP

Responsibility has always been central to our approach to running all aspects of our Co-op. Our ethical approach to business means we care about every link in our global supply chain and the impact we have on the planet. It means we take seriously our responsibility towards our own colleagues who we see as the strongest advocates of our Co-op. To achieve this level of responsible commerce, we need to create a co-op culture which spreads well beyond the business.

Colleagues

We care about the wellbeing of our colleagues and it's important to us to offer them the support and advice they most need. Responding to the coronavirus has demanded we adopt new ways of working for many colleagues which have involved balancing work and family responsibilities in a whole new way. We know this is far from straight forward for many colleagues, especially when schools are closed and child care provision is unavailable. We're supporting our thousands of colleagues who are now working from home through established flexible working policies while team leaders are being encouraged to regularly check-in on their colleagues' morale. We've also benefited from recent investment in technology which has enabled good individual and team communications to be maintained.

For our colleagues in food stores and funeral homes our priority has been their wellbeing, both physical and mental. Our Funeralcare colleagues are supporting families and the NHS through the worst consequences of the crisis, while our colleagues in stores are part of the essential work of keeping the nation fed. At the beginning of the epidemic we provided extra sanitisers and time for hand washing and store cleaning. From the start of April we installed protective plastic screens at check outs. In recognition of their ongoing commitment, we gave a 'thank you gift' of £100 cash, £50 worth of Co-op Food, plus an additional day's annual leave to all of our front line Food and Funeralcare colleagues, totalling more than £13 million.

Over the last few years we've developed a suite of new policies and practical support including: Lifeworks, our employee assistance programme; help with mental health awareness; a new menopause support policy; and financial support partnerships to help with debt management and savings. These initiatives have gained even greater importance since the coronavirus outbreak.

Our colleagues in Funeralcare deal with grief and death on a daily basis and we're exploring more ways to be able to support them. We're implementing an approach to wellbeing that helps both our leaders and colleagues to better support each other. We're testing a number of approaches focused on: training our leaders to identify signs of anxiety and depression in their teams; learning how to talk about issues and know where professional support can be accessed; helping colleagues to support each other as peers; and offering tools and coping mechanisms to enhance colleague resilience.

From our food depots colleagues to our night ambulance drivers in Funeralcare, we rely on having a 24/7 workforce at the Co-op. We know that poor sleep patterns can have a serious impact on mental wellbeing. So through 2019 we worked with our colleagues and with the Wellcome Trust to understand the challenges of shift working and the importance of sleep. As a result of this research, we've developed 'Nightclub', a 32ft mobile container which is travelling around the country to offer night shift workers practical support with their sleep health. On offer in Nightclub are interactive exercises, mini experiments and expert-led talks to learn about the science behind sleep.

One of priorities through 2019 was to create a more diverse and inclusive culture across our Co-op. Our strategy focuses on designing and developing the foundations that enable us to create, sustain and embed an inclusive culture. To that end, we've continued to use celebratory events such as National Inclusion Week, International Women's Day and Pride to build awareness of why diversity and inclusion is important in the Co-op and to include colleagues in the conversation. In 2019 our campaigns went bigger and bolder to reach our 62,000 colleagues.

We have grown our diversity and inclusion pioneers across all business areas from 80 to 150. Our colleague pioneers support our Diversity and Inclusion Strategy by leading the conversation; and helping leaders and colleagues understand the value and importance of having a more diverse and inclusive Co-op.

Gender pay gap reporting shows the overall difference in the average pay for all men and women across our Co-op and more information on this can be found in the Report of the Remuneration Committee in our Annual Report. We want to do more monitoring and reporting on diversity across the business looking at gender in leadership roles, how well we attract and retain black, Asian and minority ethnic colleagues, and how well we retain young people as our future talent pool.

You can read more about our support for colleagues in our Sustainability Report.

The Future of Food

Our Future of Food ambition, setting our ethical approach to food retail, was launched in 2018. The ambition has three core areas: sourcing and creating with care; treating people fairly; and learning and celebrating together, with a series of ambitious goals underneath each. Those renewed commitments were built on decades of environmental responsibility which had already seen the Co-op take a lead on the use of renewable energy, ethical trading relationships, and testing on animals. During 2019 we saw the public's rapidly growing concern on environmental issues, particularly around sustainable sourcing and the use of plastic. Our members and customers want action and solutions and they want them fast. We believe they are right to expect this.

Throughout 2019 we made rapid progress in our Action on Plastic plans - removing black plastic, moving our packaging to 76% recyclable packaging by line to reflect what customers see in store (95% by weight). This work has included innovations like making our ready meal packaging easy to recycle and using aluminium and cardboard alternatives where we can. We've also increased our use of recycled plastic content in our bottles and oils.

We rolled out compostable carrier bags across the UK to stores in areas where food waste is collected, and lobbied local councils that don't to change their position. We continued to strengthen our Fairtrade commitments - celebrating 25 years of Co-op support for Fairtrade with our members, customers and suppliers.

In April 2019 we made a commitment to only source 100% sustainable soy as a way to prevent deforestation and the loss of native vegetation caused by ever expanding soy cultivation, predominantly for use in animal feed.

We committed to reducing our greenhouse gas emissions in line with limiting global temperatures to 1.5°C, pledging a move to net-zero by 2050 at the latest. This commitment applies not only to the carbon footprint of our business operations but to the much more significant climate impact created by the products we sell.

In June we announced we were accelerating our efforts by promising to halve the direct greenhouse gas (GHG) emissions from our business from 2016 to 2025, and reduce the GHG emissions from our products by 11% over the same period. In September we became the first UK retailer to sign on to the United Nation's 'Our Only Future' campaign for businesses globally to meet the 1.5°C target.

Our Future of Food ambition was awarded the IGD Sustainable Futures award and commended for being "the blueprint that others should follow".

In 2020, we intend to accelerate our plans on plastics, our climate change ambition, and will continue to collaborate with our members to find sustainable solutions to the challenges ahead.

Responsible pension investments

In June we changed the default investment strategy for the defined contribution section of the Co-op's pension fund to invest more in companies that score highly for sustainability and with an emphasis on mitigating climate change. This means approximately £320m of Co-op employees' defined contribution assets was switched to invest in a fund with a conscious bias towards companies and bonds that score well on environmental, social and corporate governance performance.

Meanwhile, affordable housing projects in East Lothian, Glasgow and Yorkshire have been built thanks to the £50m investment in social housing which our Pension fund announced in 2018.

Sustainability Bond & Fairtrade

At the end of May, we became the first UK retailer to issue a sterling-denominated Sustainability Bond. It's raised £300m and we're using the funds exclusively on supporting and promoting Fairtrade, including Fairtrade producers and their communities. Co-op intends to allocate the net proceeds of the Sustainability Bond issuance to the costs of bringing Fairtrade products to customers, marketing and promoting Fairtrade products and wider Fairtrade movement. Our continued commitment to Fairtrade comes as some other major retailers are scaling back their investment despite it being a key source of support for communities around the developing world.

You can read more about our achievements as a responsible business in our annual Sustainability Report.

A CAMPAIGNING CO-OP

We have a long tradition of campaigning on the issues that matter most to our members. Our aim is to provide a national voice that can speak to local and national decision makers. We also set out to develop practical solutions that can be shared with others and scaled up to a national level.

The safety of our colleagues has been an increasing concern of our members and our Executive for some time and at the end of 2018 we adopted our new campaign 'Safer Colleagues and Safer Communities' with the approval of our nationally elected Members' Council.

We're tackling crime in our stores through investment in technology and security and by lobbying Government to take the issue seriously. However, we also want to address the root causes of the problem in our communities. At our AGM we announced our new partnership with the Damilola Taylor Trust and in 2019 we funded one of its skills training programmes for young people at risk of falling into a life of crime, and we'll continue this support in 2020.

Following the call for evidence by the Home Office, we encouraged and supported more than 600 of our colleagues to come forward and record their experience of crime in the workplace. We also submitted our own 70-page report with ten key recommendations for the Government to consider. We commissioned new academic research by Dr. Emmeline Taylor into violence on shop workers and published the findings in September. In November we hosted a summit to mark the beginning of Usdaw's 'Freedom from Fear' week with Sadiq Khan, Mayor of London, alongside our Food Chief Executive, Jo Whitfield, as keynote speakers. At the start of 2020 thousands of our colleagues wrote to their MPs asking for their support in pushing the Government to take further action.

Meanwhile, we're continuing to invest in store technology such as our intelligent CCTV equipment which helps us to gather evidence and work with the police to secure convictions. We've also been testing body cameras in a number of stores with a view to rolling this out to our shops in the most affected areas.

As well as supporting many local projects tackling the causes and consequences of crime through our Local Community Fund, we're also partnering with specific crime initiatives in London and Manchester tackling the root causes of crime.

At our AGM we launched our partnership with the knife-crime charity Steel Warriors. This multi-million-pound investment was begun following our decision to stop selling single pack kitchen knives in our stores. We donated our existing knives to Steel Warriors who create free community gyms in places impacted by knife crime. The gym is made from knives surrendered or seized from the streets and melted down to make equipment. In 2019 we opened two new gyms in Lambeth and Finsbury Park in London. Our aim is to help Steel Warrior build 20 open-air gyms across the UK with six opening in 2020. Alongside the gyms, we're also providing certified personal trainers to offer training sessions to youngsters of all abilities at the same time as promoting an anti-knife crime message.

In 2020 we'll focus our direct support for colleagues working in those shops which account for the majority of all crimes committed against our estate. We'll continue working with local and national politicians, Police and Crime Commissioners and the Home Office to raise understanding of the issues and push for new legislation. We'll invite politicians to visit our stores to see the affect crime has on our colleagues.

Our campaigns on Loneliness and Slavery continue to be influential in the public debate on these issues. In May we hosted the Loneliness Action Group's national conference with the Government Minister for Loneliness, Mims Davies MP, speaking. We also published new research on the effectiveness of our Community Connector programme and on loneliness in the black, Asian and ethnic minority communities.

We continued to lobby for enhanced support for victims of Modern Slavery throughout 2019. We helped to coordinate a 'victim support' petition hand-in at No 10 Downing Street and the Home Office in March, urging the UK Government to back Lord McColl's 'Victim Support Bill' and provide survivors of modern slavery with 12 months' support (rather than 45 days). The combined petition comprised 64,241 signatures. We also worked with The Sun's 'Stamp out Slavery' campaign, calling for the Government to support Lord McColl's Bill.

We were delighted when, in April 2019, a Judicial Review relating to Victim Support was carried out, resulting in an extension of support given.

SUPPORTING OUR COMMUNITIES

For generations our Co-op has been famous for its work supporting local communities. Over the years we have evolved how we do this, responding to changing needs and challenges. Today, we are continuing to strengthen the communities in which we trade through practical help based on evidenced based research and listening to our members.

Community pay out

In November our annual pay out of our Local Community Fund gave more than £17 million to 4,400 local causes across the UK. The money is raised through the 1% our Co-op Members earn when they buy Co-op branded products and services and through the carrier bag levy in England and Scotland. Our members can choose to give their 1% from three local causes selected in their area. Since its launch in 2016, the Local Community Fund has given £56 million to thousands of local causes across the country at a time when public funding has been rapidly decreasing leaving many important projects vulnerable to closure.

As highlighted earlier in this report, we took the decision to bring forward to April a part pay out of £4.5 million for this year in recognition of the additional strains all local causes are facing as a result of coronavirus.

Co-operate 2022

We used 2019 to develop our ideas for how we support local communities over the next few years so that we're addressing today's challenges in a co-operative way. Our community plan, which we're calling 'Co-operate 2022', was developed using data from the Community Wellbeing Index and with input from more than 10,000 Co-op members and our Members' Council. It builds on all the work we've been doing since 2016 to create stronger communities.

As this work has evolved, we've been putting ever greater emphasis on projects which will bring people together and promote co-operative solutions. Through our Community Wellbeing Index, and our broader research and consultation work with members and communities, we've identified three priorities for our community work: Community Spaces; Physical and Mental Wellbeing; and Education and Skills. We're aligning the work of our Member Pioneers behind this plan and giving priority through our Local Community Fund to local causes working on these issues. Our charity, the Co-op Foundation, is also contributing and, in 2019, launched a £3m extension to its #iwill Fund. Grants will support young people to advocate to improve spaces, and help each other during bereavement and on the move from primary to secondary school.

We want to create stronger, more connected communities that bring people together. To achieve that, communities need good physical spaces, both indoor and out, and we know these are under threat. One of the best ways to address social exclusion and mental and physical illness is to help and support people to connect with their local communities. We want to encourage that to happen by making it easier for communities to create, secure and use social spaces, and encouraging local initiatives that bring people together and address isolation and health issues. We also want to build powerful virtual community spaces too where local initiatives can be shared, calls for support made, and connections built that will enable great things to happen.

Endangered spaces

At the start of the summer we launched our Endangered Spaces campaign in partnership with the charity Locality. Our aim is to protect 2,000 community spaces by the end of 2022. By the end of the year we'd helped 300 community groups looking for financial or specialist support to help save local spaces. Additionally, we've supported 1,466 local causes using community spaces through the Local Community Fund.

Our charity, The Co-op Foundation, is contributing to our work and by the end of 2019 had helped to improve more than 200 spaces. It awarded almost £900,000 of grants from its Space to Connect partnership with Government and supported green spaces in Wales through funds raised from the Welsh carrier bag levy.

Mental wellbeing

We know that health issues - both physical and mental - are becoming more urgent and better understood. Mental health diagnoses are rising, particularly among younger people. Our Community Wellbeing Index data shows high levels of prescriptions relating to depression, diabetes and obesity in some areas of the UK. Meanwhile, nearly half of adults believe they've had a diagnosable mental health condition at some point in their lives. We also know, through our work to tackle loneliness, that mental and physical health issues are a huge driver of social exclusion and therefore isolation.

In October we announced, with the support of our Members' Council, that we're going to raise £6 million over the next 18 months to fund new research, services and advocacy activity to build individual and community resilience improve mental wellbeing.

We're partnering with three charities which together cover every part of the UK: Mind (working in England and Wales); SAMH working (in Scotland); and Inspire (in Northern Ireland).

It's the experiences of our colleagues and our knowledge of local communities that's led us to make mental wellbeing a priority. There are many things that can affect both mental and physical wellbeing, including work. From Funeralcare colleagues dealing with bereaved families, to food and logistics colleagues dealing with shift patterns, to financial worries and general work load that can affect all colleagues. And course, coronavirus is creating further anxiety and stress across the UK.

As we did with our loneliness and social isolation work, we'll be doing research to help us understand where we could make the greatest difference with the money we raise. We'll also be campaigning at a national level to improve how decision-makers understand mental health and what legislative changes could help.

Education and skills

We want to support individuals and communities to reach their full potential across all life stages. This is especially important in our fast-changing digitally driven world. Our support for the Co-op Academies Trust and our apprenticeship programme will have an important part to play in this.

As part of our aim to promote co-operation, we want to explore ways to share skills, especially across the generations. We'll look to create a platform for doing this.

This year our Co-op took on its 5,000th apprentice since 2011. In 2019 there were 1,000 apprentices working across the business including degree level training in partnership with Anglia Ruskin University. We pay the full rate for the job and offer permanent contracts from day one. Our apprenticeship programmes are reducing attrition and enabling internal mobility across the business. They're also creating our own Co-op trained talent pipeline including links into our Co-op Academy schools.

Some colleagues who had applied for the apprenticeship programmes weren't meeting the minimum entry requirements in maths and English, particularly where English wasn't their first language. To support them and increase inclusivity, we developed a Pre-Apprenticeship Programme using a combination of face-to-face and webinar teaching. All but one of the first 16 colleagues have successfully achieved their qualification and are now moving on to a full apprenticeship programme. We're the first national UK retailer to introduce this approach and we're supporting other retailers who want to follow. In November we were awarded Apprenticeship Employer of the Year at the annual Personnel Today awards and also achieved the Princess Royal Training Award.

By December 2019, the Co-op Academies Trust has added six new schools including two special schools in Bradford. This makes the Co-op Academies Trust not only the fastest growing academy trust in the UK but also the most diverse in terms of age and ability. The Trust now educates more than 15,000 students with a full range of abilities, from early years to sixth form. At the year-end there were 24 Co-op academies and colleges across northern England in some of the most economically challenged areas in the UK. The aim is to have at least 40 schools by the end of the academic year 2021/22.

BUILDING CO-OPERATION IN OUR COMMUNITIES

Not only do we want to be co-operative in all we do as a business, we also want to increase co-operation in every sphere of public life. We're committed to the idea that through co-operation you will create fairer outcomes in all walks of life. Sometimes this is about simply bringing people together. At other times it's about helping to create structures and models of organisation based on co-op principles of ownership and governance.

Member Pioneers

By the end of 2019 we had more than 600 Member Pioneers around the country and are constantly adding to them. Our Member Pioneers are part-time employees dedicated to being community catalysts able to bring people and ideas together to make great things happen locally. In February 2019, following extensive discussions with our Members Council and consultation with our trade union partners, we announced a new team structure for our Member Pioneers. We've introduced a National Member Pioneer Manager, ten field-based Member Pioneer Managers, and approximately 100 Member Pioneer Coordinators, each working two and a half days each week. This new structure is enabling us to better manage and co-ordinate their work and make sure it's aligned to our priorities.

Co-operate platform

Over the last 18 months we've spent time learning what stops communities from coming together. We've been talking to volunteers, organisers, charities, social entrepreneurs and those who just want to get involved but don't know how.

We know there's no shortage of people who want to help, and no shortage of organisations and groups desperate for that help. However, the tools to help them are often hard to find, hard to use and don't connect to each other. So we're creating a new platform that brings together people, digital tools, and physical community assets.

We're calling it 'Co-operate' and it's for people that care about their local community and want to come together to get things done. Our ambition is to create the national community centre for local co-operation that connects people in and across communities.

It can help people find out what events and activities are happening that benefit their community, see how they can help, or even start something themselves. As we evolve Co-operate it will continue to help overcome more of the problems that we've heard are stopping communities making good things happen. It will help you find a community space that's available when you need it, it will help you club together financially to reach a goal more easily, and it will help you campaign with others to take a stand on something you're passionate about.

In 2019 we began testing Co-operate in Trafford and Leeds and then extended our trials to other parts of Greater Manchester and to parts of London. As the social impact of the coronavirus began to become clear, we accelerated the platform's functionality and reach so it could be used across the UK to co-ordinate local responses to the virus and point people in the direction of helpful information. Early indications are that it's proving a welcome and needed initiative.

Greater Manchester Co-operative Commission

The North West of England is the home of co-operation in the UK and we were pleased to be invited by the Mayor of Greater Manchester, Andy Burnham, to be one of the commissioners involved in a new report putting forward recommendations for promoting co-operation across the city-region. Through 2020 we'll continue to work with the Greater Manchester authority and our other co-operative partners to encourage and facilitate co-operative solutions to social and economic issues.

LOOKING AHEAD

As we publish this report, it's clear that the Covid-19 virus is causing hugely significant disruption to the UK economy as well as to everyday life in the country. 2020 will now be dominated by this global event. If movement restrictions continue for some months, we'll need to adapt to new patterns of shopping and respond to any disruptions within the food supply chain. We'll continue to work closely with the Government and industry bodies to ensure the resilience of all our businesses and we're following all advice on protecting the health of our colleagues and customers. With the disruption set to continue into the foreseeable future, we'll be reviewing our business planning and investment decisions to ensure they are still appropriate in these rapidly changing conditions.

To deliver our long-term vision of 'co-operating for a fairer world' we need to be commercially successful by providing a compelling co-operative offer across every part of our business. For the next few years we'll continued to invest in modernising our business so that we're innovative, competitive and convenient in all we do.

To maximise the value we can return to our members, we'll create stronger insight into the cost of our operations and focus on cost control by introducing new expenditure frameworks to guide our senior managers.

In the coming months we should begin to understand the Government's plans for our post Brexit trading relationship with the EU and the rest of the world. This is likely to have consequences for our Food supply chain and the way in which we supply our stores in Northern Ireland. We'll continue to talk to the Government about our commitment and belief in the importance of high animal welfare standards and the need to support our British farmers. Whatever the outcome of the trade negotiations we'll be ready, having already spent the last two years preparing for all possible Brexit scenarios.

In Funeralcare our focus will be on responding to the pandemic and supporting the NHS. This means that the full implementation of our turnaround strategy will be delayed.

Our Insurance business will continue to develop its new operating model and we currently plan to introduce innovative insurance products this year in the areas of home, motor and commercial.

In 2020 we're relaunching Co-op Power which provides access to renewable energy to other businesses and organisations. Our scale means we can make this more affordable to smaller energy customers. We're also able to offer consultancy services to other businesses and organisations based on our knowledge and experience as a pioneer in using renewable energy.

Although we're still in the storm of the Covid-19 crisis and responding to the serious health and economic consequences of the pandemic, as a business we're already starting to think about the longer term implications of what's taking place this year. When social distancing restrictions begin to be lifted, it's likely that new patterns of economic and social behaviour will emerge and potentially become the new 'normal'. How we work, how we travel, and how we make consumer choices will be greatly influenced by our current experience. So too will public thinking about the importance of resilient community life and individual wellbeing.

As a national Co-op we recognise that as we recover from this global shock there's an opportunity to bring to the fore the values of commercial responsibility and community strength which have always been central to our work. In the coming months we'll assess how we should be responding operationally for the longer term and how we can encourage the best of the nation's crisis response to continue beyond the current emergency.

Our financial performance

IFRS 16

Our accounts have changed significantly this year because of a major new accounting standard, IFRS 16, which we adopted from the start of 2019. Our accounting policies note explains IFRS 16 in more detail but the headline is that we are now required to put leases onto our balance sheet that previously were not included, most significantly over 3,000 leases on properties that we rent. This means our balance sheet now includes lease liabilities of £1.5 billion (representing future financial commitments) and a 'right of use' asset of £1.0 billion (reflecting the value of our right to use the asset). It also has a big impact on profits, most notably rent of £159 million is no longer included in our income statement, depreciation increased £104 million and net lease interest of £74 million is included. The overall impact on operating profit is a £55 million increase whilst profit before tax is £12 million lower.

Our 2018 numbers are not restated for IFRS 16 which means understanding year on year performance is quite complicated so we've included some additional information below to help.

Restatement of Nisa results

In early 2020 we identified some historical accounting errors relating to stock, supplier income, creditors and cash in the Nisa business that we acquired in May 2018. These errors impact the consolidated balance sheet at 5 January 2019 with net assets overstated by £33m, the balance sheet of Nisa at acquisition in May 2018 when net assets were overstated by £23m and the consolidated income statement for 2018 that overstated profits by £10m. The goodwill arising on acquisition of Nisa has also increased by £23m because of the change to the acquisition balance sheet.

There are 3 key areas of the £33m overstatement to net assets. A £20m understatement to creditors has arisen from cut-off errors where no liability had been recognised for stock received before year end but not yet invoiced and errors relating to tobacco stock picking in the warehouse. Receivables were overstated by £9m relating principally to errors in the calculation and timing of recognition of supplier income. Finally a £4m error arose on cash which relates to a historical error in the bank reconciliation. These errors demonstrate historical weaknesses in balance sheet reconciliation processes both through poor understanding and design of reconciliations and lack of robust review and experienced oversight.

The errors were uncovered by the new dedicated and experienced senior finance team appointed by Co-op to lead the NISA financial integration within Co-op's financial reporting and control environment. Alongside ensuring the new finance team have appropriate support and resource to improve the control environment in Nisa, a key priority will be to accelerate the integration of key Nisa finance processes into the core Co-op financial control environment. Prior to this issue emerging we had already set out that one of our key strategic priorities for the coming year is a review of our operating model and particularly our Control framework and we will use the lessons learnt from the Nisa issue to inform this work.

We have restated the 2018 Consolidated balance sheet and Consolidated income statement for these errors and full details are shown in note 38 of our accounts.

Qualified audit report

We note that our auditors have qualified their audit opinion in respect of our interpretation of IFRS 15 (Revenue from contracts with customers) as applied to our funeral plans. This relates to a highly judgemental area of IFRS 15 as to whether a sale contains a "significant financing component" and whether the amount received from the customer is "variable consideration". This issue and accounting rationale are explained in detail in the General Accounting Policies note in the key judgements section.

We remain firmly of the view that the approach we took in 2018 when we first adopted IFRS 15, and that was supported by both our auditors and the advice we took from another accountancy firm at the time, remains appropriate. We have considered the views of our auditors and the decision to continue with this accounting approach was made in full knowledge that it would lead to a qualified audit opinion. It is not a decision we have taken lightly but we have carefully considered both the technical accounting interpretation as applied to the particular nature of our funeral plan arrangements and the need to present clear and understandable accounts to our members.

We believe that our treatment most fairly reflects the true underlying commercial nature of a funeral plan sale. The accounting policies note sets out the illustrative impact of the alternative approach that our auditors believe we should adopt. As noted above, as well as disagreeing with that accounting interpretation, our view is that this approach would make our accounts very difficult to understand for our members and not fairly reflect our true financial performance.

Summary of financial performance

The tables below show 2019 on both a reported basis as in our income statement (prepared under IFRS 16) and on a like-for-like with 2018 (excluding IFRS 16). The 2018 figures for Nisa are restated for the accounting errors discussed above:

Our headline performance

Revenue rose by £0.7 billion to £10.9 billion, a 7% increase compared to 2018. £0.4 billion of this increase relates to our wholesale business which had a full year's trade in 2019 compared to eight months' trade in 2018 following the acquisition of Nisa in May 2018. Revenue growth also reflected a strong trading performance in our Food business with revenue up £0.2 billion or 3% driven by like for like sales growth that once again exceeded the market as measured by IGD.

Profit before tax was £67 million compared to £83 million in 2018. Excluding the impact of IFRS 16 (as shown above) profit before tax was £79 million, marginally behind 2018 but comprising a £17million increase in underlying profit before tax offset by £21 million from the impact of non-trading items such as disposals, one-off items and market valuation changes on our swaps and debt movements. These are discussed in more detail below.

Our underlying profit before tax comprises core trading profits less underlying interest (essentially interest on borrowings). This was up by £17 million, on an ex IFRS 16 basis with strong profit growth in our Food business largely offset by a fall in Funerals profits and increased Support function costs relating to investment in membership and IT. Trading performance is discussed in more detail below.

We show how we adjust profit before tax to get to our underlying profit before tax in note 1 of our interim financial statements. Our jargon buster also explains the accounting terms we have to use.

Our profits are reported after deducting the amount our members have earned through the 5% and 1% member rewards which totalled £70 million in the year (2018: £72 million).

Last year end the results of our insurance underwriting business, CIS General Insurance Limited ('CISGIL'), were reported as a discontinued activity following the announcement of our plans to sell the business to Markerstudy and put in place a long-term arrangement to distribute insurance products under the Co-op brand. The treatment of a business segment as a discontinued operation is based on an expectation that a sale will normally complete within 12 months. However there are exceptions to this, particularly in a case such as this where a longer period arises because of regulatory approval. We remain confident that the deal will complete and therefore continue to treat CISGIL as discontinued.

How our businesses have performed

Food sales of £7.5 billion were up 3% on 2018, with like-for-like sales up 1.9% beating the market as measured by IGD by 2%. This continued like for like sales growth reflects our great products, new product innovation and continued investment in both our physical estate and e-commerce solutions for customers and members.

Underlying profit in Food was £283 million in 2019 compared to £204 million in 2018. On a like-for-like basis excluding IFRS 16, profit was £235 million, up 15% on last year, reflecting the strong sales performance but also good cost control.

Our Wholesale business recorded sales of £1.4 billion in the year compared to £1 billion in 2018 which included eight months trading since acquisition. The business recorded a loss of £10m in 2019 against a (restated) £21 million loss in 2018 that included integration and acquisition costs. As noted above we identified several accounting errors relating to the reported results of Nisa at acquisition date in May 2018 and during 2018 such that the previously reported loss of £11 million for 2018 is restated at £21 million loss.

Revenue in our Funeral & Life Planning business fell by £10 million, or 3%, to £307 million reflecting both lower funeral numbers and our response to a shift in customer choice with growing demand for lower cost funeral options and choices such as cremation without ceremony. The market remains highly competitive and the unexpected fall in the death rate has been a key factor in our performance. We conducted 90,630 funerals in 2019 compared to 95,363 in 2018, a 5% reduction.

These challenges saw underlying profit fall by £13 million on an ex IFRS 16 basis from £25 million to £12 million. On a reported basis under IFRS 16 underlying profit was £14 million. We are now implementing our turnaround plans for the business that are set out in more detail in our Chief Executive's introduction.

Our Funeral & Life Planning business includes our legal services business, Co-operative Legal Services ("CLS"). CLS had an excellent year with a 13% increase in revenue to £40 million and profits up £4 million to £6 million reflecting strong growth in probate together with operational improvements that have accelerated progression of cases.

Supporting functions costs were £110 million but on a like-for-like basis (excluding IFRS 16) were £115 million, an increase of £8 million reflecting increased investment and one-off gains in 2018. In 2019 we invested more in membership initiatives, increasing our Share of Voice to raise awareness of Our Co-op values and purpose, and we invested more in IT, updating our estate and continuing to move away from datacentres into more flexible Cloud arrangements. This additional investment was partially funded by cost savings generated by our 'Fuel for Growth' programme including organisational design changes.

As noted above, CISGIL is classified as a 'discontinued operation' which means its results are included at the foot of the income statement, below profit before tax. The loss on discontinued operations this year of £16 million largely relates to additional costs relating to the sale of the business. The £230 million loss in prior year related to the write down of assets in the business, costs of selling and separating the business and £29 million of trading losses.

Property revaluations, disposals and one-off items 

The table below shows one-off items, disposals and property valuation gains in the year (losses are shown in brackets):

We have a significant property estate including food stores, funeral homes, investment properties and vacant ex trading properties. This can lead to significant property related items such as disposal profits and losses, closure costs and vacant property holding costs, impairment of carrying values of assets and revaluation gains on investment properties. We also have some one-off gains this year relating to largely non-recurring items. These are discussed in more detail below.

The £27 million increase in the value of our investment properties relates to planning gains and market value uplifts across our investment property estate including a gain of £21 million on one site. In 2018 we had two particularly large planning gains and a development opportunity that together generated £25 million on just three sites.

One-off items

The £11m gain in respect of Nisa consideration arises from a reduction in the creditor relating to deferred payments for the acquisition of Nisa which is payable over a number of years depending on the trade passing through Nisa from its partners. The £13 million gain on Bank IT separation relates to costs of separating our systems from those of Co-operative Bank. This was a largely IT programme that ran over several years and completed in late 2019 with final costs £13 million lower than we had provided for after reaching a final agreement on cost sharing and scope with Co-operative Bank.

In the event of making adjustments to prior year earnings we have taken a prudent view and have revised the carrying value of the intangible assets in Nisa. We remain confident in the future trading and growth of the Nisa business.

Property and business disposals

The write down of assets of £44 million in 2019 relates to goodwill, right of use assets and fixtures and fittings on stores, branches and other properties that are not generating enough cash to support the value of those assets. Typically these relate to loss making sites. The increase in 2019 is largely because of IFRS 16 as we now have write-downs relating to right of use assets as well as fixtures and fittings and goodwill.

The profit on sale of property of £22 million includes an £7m profit on the sale of Northern Ireland funerals homes and a £14 million profit on the sale of several food stores. With the introduction of IFRS 16, provisions for the cost of holding vacant properties no longer include rent as this is already shown in the lease liability. Instead, under IFRS 16, the right of use asset is impaired if the leased property is vacant or earning insufficient income to support the right of use asset value.

The £34m loss in 2018 (prior to IFRS 16) included a provision increase of £26 million for rent and other holding costs arising from leases we are committed to on buildings that we no longer use.

We closed our online Co-op Electrical business early in 2019. £8 million of costs including property closure and holding costs, stock write-downs and redundancy were provided in 2018 when the decision to close was announced.

Financing

Our financing costs are shown in the table below (costs are shown in brackets):

As noted above IFRS 16 brings interest on the lease liability into our income statement and this was £74 million relating to a total lease liability of £1.5 billion. Excluding IFRS 16 lease interest, underlying interest was in line with last year.

Pensions finance income is based on the pension scheme surplus on an accounting basis at the start of each year and the £16 million increase this year reflects a £300 million increase in the accounting surplus at the start of 2019.

Our total net debt at the year end was £2.2 billion including the IFRS 16 lease liability of £1.5 billion. Excluding the lease liability, net debt was £0.7 billion, a reduction of £100 million from the £0.8 billion at 2018-year end (details of what is included in net debt are provided in note 21).

In the first half of 2019 we raised £300 million in the first sustainable bond issued by a UK retailer at a coupon of 5.125% maturing in May 2024. We tendered our existing £450 million 2020 Eurobond debt and repaid £274 million, leaving a principal balance of £176 million. Additionally, we rebased our interest rate swaps in relation to our bonds, and this produced a net cash inflow of £27 million due to changes in prevailing market rates since they were first taken out.

We invested £439m million of capital expenditure in 2019 principally on Food refits (£94 million) and new stores (£80 million). We also invested £29 million in our funerals business, £60 million in our Food supply chain and £53 million in technology to upgrade IT systems to improve supply chain and service to Food stores. We also made deferred payments of £32 million relating to the acquisition of Nisa where consideration is payable over several years. This capital spend was partly funded by £123 million of cash from disposals, mainly property sales.

The Trading Group is comfortably within the ratios of debt and interest agreed with our banks and our funding position is strong.

Tax

We won't be paying corporation tax in respect of the year because we've brought forward tax losses and capital allowances. In 2019 we paid £207 million (2018: £196 million) to the government in respect of VAT, business rates, Stamp Duty Land Taxes and Employers' National Insurance

The current tax charge of £7 million shown in the accounts relates to amounts payable to CISGIL for tax on its losses. A similar tax credit of £7 million appears within CISGIL's own results and is included within the loss on discontinued operation.

There is a total tax credit of £18 million for 2019, this is due to a one-off £48 million credit adjustment in respect of prior years' deferred tax. Without this there would have been a tax charge of £30 million on the £67 million Profit before tax arising from continuing operations. The £48 million credit is mainly in relation to a £43 million revision on the timing of when deferred tax is expected to come into our income statement in the future.

See notes 8 and 15 for more detail about these two issues.

We retained the Fair Tax Mark accreditation in 2019 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/.

Our balance sheet

IFRS 16 has significantly changed our balance sheet. As with the income statement, these changes impact 2019 numbers but not the comparatives for 2018. Most notably the balance sheet includes £1.0 billion of right of use assets and £1.5 billion of lease liabilities but several other balance sheet items are also impacted to a lesser extent as discussed below. The impact of applying IFRS 16 at the start of 2019 was to reduce net assets by £0.2 billion. This is the key element in the reduction in retained earnings from £2.9 billion to £2.7 billion.

The £45m reduction in property, plant and equipment ("PPE") includes a £41m reduction relating to IFRS 16 mainly due to transferring assets we lease under a finance lease into right of use assets. £308 million of capital expenditure on PPE is largely offset by disposals of £43 million and depreciation of £252 million.

The actuarial surplus of our pension schemes remained at £2 billion, in line with last year. However whilst the overall surplus was largely unchanged, there were significant movements that netted off with a £0.9 billion increase in liabilities offset by a corresponding £0.9 billion increase in assets. The liability increase largely reflected a change in the interest rate used to value pension liabilities which decreased from 3% to 2%. The interest rate we select is based on advice from our actuaries and is based on corporate bond rates at year end. The change in assets largely reflects the fact the scheme largely invests in gilts and corporate bond assets which have moved in a similar way to our liabilities. It's important to remember that the accounting valuation of pension schemes is quite different to the statutory valuation bases which drives deficit funding contribution requirements. These valuations use bases which reflect the assets that each scheme is invested in. Pace and Somerfield, our two biggest schemes, use more prudent bases, with Pace being in surplus and Somerfield broadly fully funded. Two other schemes use slightly weaker bases and are in deficit.

Other notable movements in the balance sheet include a £133m reduction in provisions which includes a £72m reduction because of IFRS 16 adoption. As noted above, provisions for the cost of holding vacant properties no longer include rent because this is instead shown as write down in the value of the right of use asset relating to that lease. The remaining reduction is due to payments in the year including a single large lease surrender payment. Contract liabilities relating to funeral plans have increased £87m in the year mainly reflecting £154m of new plans sold in the year offset by £65m of plans redeemed.

The assets and liabilities of CISGIL continue to be classified as held for sale because of the planned sale of the business to Markerstudy as noted above. Its assets are included within a single line "assets held for sale" in the balance sheet and similarly its liabilities which are all included within "liabilities held for sale".

The Group continues to consolidate the Reclaim Fund Limited ('RFL') as it is a 100% owned subsidiary of the Group. However, RFL is a not-for-profit organisation whose surplus is held entirely for the benefit of Big Lottery Fund and as a result the Group gains no financial benefit from RFL. If the Group were to cease consolidating RFL, this would result in a one-off charge to the income statement of £74m.

Looking ahead

As we finalise this report, the biggest challenge facing our business, and the nation as a whole, will be the scale of disruption caused by Covid-19 and the significant human and economic impact. In the immediate weeks ahead, we'll continue to focus on our response to the current crisis making sure we maintain business continuity and colleague capacity to deal with increased demands and changed ways of working. The global consequences may cause longer term issues for our food supply chain in the months ahead, and, with the Government and other retailers, we'll need to respond to this.

As social distancing and movement restrictions are lifted, we'll closely monitor longer term changes in consumer behaviour particularly around patterns of food buying and travel.

The longer the crisis continues the deeper the national economic consequences will be. It looks increasingly likely that the UK will be facing a significant economic slowdown which our members and customers will not be immune from. In light of this, we're reviewing all of our investment plans and will re-prioritise as necessary.

* For more details on the restatement, refer to the general accounting policies section.

** The Group has initially applied IFRS 16 (Leases) at 6 January 2019 using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative impact of applying the new standard is recognised in retained earnings at the date of initial application. For more details on the impact of the IFRS 16 (Leases), refer to the general accounting policies section. To further help the reader we've also included additional tables in 'Our financial performance' section showing 2019 results on both a reported basis (prepared under IFRS 16) and a like-for-like with 2018 (excluding IFRS 16)