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

12 September 2019

Interim Results for the six months to 06 July 2019

Co-op community impact grows on strong Food performance

Co-op highlights H1 2019: Investing for the benefit of our members and communities

·; £29 million returned to members and £6 million to 4,000 local causes.

·; Total sales increased by 12% to £5.4 billion.

·; 22 consecutive quarters of like-for-like* sales growth in Food - total sales up by 3% and like-for-like sales up by 1.7%.

·; Extended online food delivery trials in London using zero emission electric cargo bikes and by partnering with Deliveroo.

·; Funeral revenue falls by 6%, driven by an unexpected 10% fall in the death rate and our conscious decision to hold prices in a changing and competitive market

·; Funeralcare to concentrate on innovation, choice, flexibility and partnerships - giving the same level of focus and care to develop the business as the Co-op did with the reset of its food business five years ago.

·; Co-op Health expected to be rolled out nationally by early 2020 bringing convenience to pharmacy and health services.

·; Re-entered the life insurance market, launching Co-op Life Cover, including innovative payment holiday option.

·; Successfully re-financed £300m of existing debt, through a Fairtrade Sustainability Bond - twice over-subscribed and a UK retailing first.

·; The Co-op named Grocer of the Year at the Grocer Gold Awards and Consumer Business of The Year at The London Evening Standard Awards.

·; Co-op members back accelerated sustainability, packaging and community goals:

o All Co-op direct Green House Gas emissions to be reduced by a further 50% by 2025.

o We will ban the use of black and dark plastic packaging from October to make it easy to recycle.

o Ambitious Co-operate 2022 community plan focusing on saving community spaces, improving wellbeing, skills and education.

Financial highlights: In line with plan

·; Significant accounting standards change in H1 2019 following adoption of IFRS 16 in relation to lease accounting.

·; Total sales increased by 12% to £5.4 billion, reflecting full contribution of Nisa business and continued strong performance of our Food business.

o Total Food sales grew by 3% to £3.7 billion and like-for-like sales by 1.7% despite highly competitive trading environment.

o Funerals and Life Planning sales fell 6% to £163 million. Results driven by a 10% reduction in the death rate and the continued reshaping of the business in response to market changes.

·; Underlying business performance in line with plan, enabling £35m of member value to be generated.

On an IFRS 16 accounting basis for 2019:

Total Underlying Operating Profit** increased to £64m from £50m in 2018, of which:

o Food was £120m (2018 £80m)

o Funeral and Life Planning was £13m (2018: £28m)

Profit Before Tax reduced to £25m (2018: £44m)

On a non-IFRS 16 accounting basis for 2019 - Like-for-like:

Total Underlying Operating Profit reduced to £36m from £50m in 2018, of which:

o Food was £95m (2018 £80m)

o Funeral and Life Planning was £13m (2018 £28m)

Profit Before Tax reduced to £30m (2018: £44m)

·; Supporting function costs increased by £13 million (excluding IFRS 16) due to greater investment in our digital capability and increased marketing activity to promote our Co-op difference.

175 year anniversary demonstrates long-term impact and sustainability:

This year marks 175 years since the Rochdale Pioneers opened their first Co-op shop and we continue to stay true to their founding principles by measuring our success not just in pure commercial terms but in the way we create value for our members and Society as a whole. Our Stronger Co-op, Stronger communities plan is helping us move from strength to strength as our customers recognise that choosing Co-op also means choosing to do good for their communities.

We want to help create stronger, more connected communities, which is why this summer we launched our Endangered Spaces campaign in partnership with Locality, with the aim of protecting 2,000 community spaces by the end of 2022.

o The Co-op Foundation has awarded more than £1.4 million to help 20 community organisations grow their activities and secured £1 million of government funding to help over 7,500 young people improve local spaces.

In addition to our work on reducing plastic and greenhouse gas emissions, we have written to Local Councils which collect food waste but do not yet accept our compostable carrier bags in their collection services, to ask them to change their policy so we can play our part in reducing plastic contamination and diverting food waste from landfill.

The Co-op's ability to support our community and campaigning activities is driven by strong businesses:

·; Our Food business continued to perform well in a fiercely competitive market.

o We have the highest shopper frequency in the market as customers regularly visit their Co-op - our 1.7% growth in like-for-like sales was a particularly strong performance, given outstanding sales last year on the back of the FIFA World Cup.

o We had a successful Easter bank holiday, driven by a competitive offer and helped by the warm weather, and our summer saver deals have also proved popular.

o In our wholesale operation 90% of Nisa partners have now taken lines from across Co-op's own brand products, which are now generating weekly sales in excess of £2.5m.

o We've established six Co-op franchise stores; three are Costcutter-owned stores and three are on university campuses.

§ The university-based stores provide greater access to the student market, whilst providing valuable market data which we can feed into our business, to ensure our Co-op continues to meet the needs of a younger audience.

·; Under new leadership, our Funerals and Life Planning business has reviewed its strategy focusing on support for families, broadening customer choice, competitiveness and channels to market.

o Sales during the period were significantly impacted by an unexpected 10% fall in the death rate. Funerals conducted in the period fell to 48,423 compared to 53,213 in H1 2018.

o We welcomed the Government's announcement, in June to crack down on the use of high pressure and misleading tactics to sell funeral plans. We are working closely with the CMA investigation into the at-need funerals and crematoria markets.

·; In Insurance, we have invested to increase product development and raise the business's profile so we can meet the ever-increasing needs of our members in the future.

o In addition to returning to the life protection market, we introduced an innovative "graduated" product for young drivers, saving them an average of £300, as a reward for safe driving.

·; Our Legal Services business continues to perform well, with Probate revenue up 37% and Estate planning revenue up 20%. We are the leading provider of probate in the UK.

·; The launch of Co-op Health saw us return to the health sector, with a disruptive, capital light, digital offer giving customers a range of ways to access their medication, with a service provided by a brand they know and trust

o This year we began a 'click & collect' trial, using lockers in Co-op food stores.

Outlook

·; With Brexit continuing to create uncertainty, we continue to plan and prepare as best we can. In the event of a "no deal" Brexit there is an increased risk of some disruption to our supply chain, however we will do all we can to protect our customers and members from this impact.

·; We are progressing with the ambitious plans we have for our funerals business amid unprecedented market change. We are confident these changes will position the business for long-term success, providing our customers with the support and choices they require at their greatest time of need.

·; Likewise we are optimistic with the opportunities which exist in insurance, as we progress a deal with Markerstudy subject to regulatory approval, as well as our legal and health sectors, where our historical expertise and ambitious growth plans, provide the basis for us to increase member value in the years ahead.

·; We will continue to innovate and invest further within our food business to maintain the competitive advantage within the convenience sector.

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

"We've enjoyed another good six months where the strength of our business has led to a further £35 million of value being generated for our members and their communities. Our food business continues to perform strongly in a highly competitive market and has now recorded 22 consecutive quarters of like-for-like sales growth. As our largest business, it is providing the fuel for our growth in terms of member value and community impact.

"In funerals we are actively re-positioning the business to meet the changing needs of our members. We are the market leader but we will also lead the market in providing better choices and options for our customers in the years ahead. Likewise, the development in our insurance, legal and health businesses will enable us to significantly broaden the range of Co-op services, in areas where our members know the Co-op difference can be clearly seen."

Allan Leighton, Chairman of the Co-op, said:

"We have made further progress during the first six months of this year and the strength of our business can be seen by our underlying financial position and through the increasing impact we're having in local communities.

"The Co-op is now 175 years young, and we have worked hard to ensure that we remain relevant to all generations and in particular younger co-operators. Whether this is using our presence at eight music festivals to introduce people to our values and ways of doing things, or by developing motor insurance products specifically with the needs of young drivers in mind. The Co-op is thriving and we are committed to growing our Co-op difference and impact for generations to come."

Ends

Media Enquiries:

The Co-op

Jon ChurchTel: 07545 210812

Russ Brady Tel: 07880 784442

Tulchan Communications

Jonathan Sibun Tel: 020 7353 4200

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.

Co-operative Group Limited

Interim Report 2019

We're creating value for our members

12% growth in Group revenue

£78m Group operating profit

Co-op Health launched

£29m Returned to members through 5% reward [same as h1 in 2018]

£6m Returned to local communities through 1% reward [same as h1 in 2018]

Five more Co-op Academy Schools opened

Three Co-op franchise stores opened on University campuses

£2.5m Weekly Co-op own brand product sales through Nisa partners

£290m invested in sustainable businesses by Co-op pension fund

Chair's introduction

Through 2019 we're marking the 175th anniversary of the birth of the UK co-operative movement. The social and economic challenges of 2019 are very different from 1844, but fundamentally our approach to them remains the same. Our job is to run a commercial enterprise on behalf of our members that's responsible and successful and creates a better, fairer and more co-operative world. And at a time of growing political and social polarisation, thinking co-operatively looks more urgent than ever.

This report on the first half of the year shows that we continue to focus on being a competitive, innovative, responsible, and growing business. By building a stronger Co-op we can create stronger communities. We're using this anniversary year to identify the challenges of today for individuals, communities and the planet as a whole. We've been refining our work to better address those challenges.

Democratic accountability has always been a core principle of the co-operative movement. In 2019 we demonstrated this through our AGM and elections of our Member Nominated Directors (MNDs) and Members' Council Representatives.

Sarah McCarthy-Fry was elected as an MND for the first time this year. Sarah's been a committed co-operator for over 25 years and was previously a Labour and Co-operative MP, representing Portsmouth North, and served as a minister in Gordon Brown's government. Sarah is currently a finance director at GKN Aerospace. We welcome Sarah to the Board. Paul Chandler was re-elected. Gareth Thomas was not re-elected and I'd like to thank Gareth for the great service and professionalism he brought to us over the last two years.

Our Members' Council is also a key element in ensuring we are accountable and listening to our members. The Council has continued to support, challenge and influence our thinking during the first half of the year. We are grateful for its passion and commitment.

Allan Leighton

Group Chair

Chief Executive's introduction

Value for a Co-op member comes in many forms. It's about more than individual reward and lowering prices. Our members want to do good in their community and they want their Co-op to make a difference in society. I'm delighted to say that in the first six months of this year we've achieved these things in numerous ways. We've grown the reach of our brand to new markets and new customers. We've innovated in our products and services. And we've developed our community support to encourage co-operative approaches to local challenges. I'm particularly pleased with the launch of our new Co-op Health business, the rapid growth of the Co-op Academy Trust and experiencing over five years of uninterrupted like-for-like sales growth in Food.

Through our Co-op member rewards we've returned £29m to individual members through the 5% reward and £6m to local causes through the 1% reward, that's in line with the same period last year. We've also put in place new structures to help our growing network of Member Pioneers bring people and communities together. Meanwhile, we've launched our campaign to save 2,000 public spaces and stepped up our work to address crime in our towns and cities.

We know that climate change and plastics continue to be a concern for our members. It's also a real priority for us and we've made some great progress so far this year. By 2020 we will have eliminated the most difficult to recycle plastic packaging and all single-use plastic in our own-brand packaging will be gone by 2023.

Changes to financial reporting

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 IFRS 16. 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, and in our full annual report next spring, 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 £5.4 billion, an increase of 12% from half-year 2018, reflecting the full contribution of our Nisa business and continued strong Food performance. In an ever more competitive environment, like-for-like Food sales have increased by 1.7%.

Profit before tax was £25 million but on a like-for-like basis, excluding the impact of IFRS 16, it was £30 million, down £14 million from 2018 mainly reflecting lower operating profit in our funerals business.

Our funerals business has had a challenging year with a fall in sales and profit. We have also seen unprecedented market change, which has required us to re-think and adapt our business to set it up for future success. Funeral sales were also impacted by an unexpected 10% fall in the death rate. We know there is more to do and are meeting these challenges head-on. We plan to reposition and grow the business by focusing on improved value, more innovation, and greater choice for families, making it easier for them to get the support and care they need and expect from Co-op.

The finance review on page 21 has more detail on our financial performance including our key underlying profit before tax measure, individual business profits and our balance sheet.

However, how we measure our success at Co-op goes well beyond the traditional corporate balance sheet. Just as it was for the Rochdale Pioneers 175 years ago, creating value for our members has a much broader meaning because, for us, commerce and social responsibility are bound together in a single endeavour.

It's what we do

Since May we've been explaining how choosing Co-op means choosing to do good in your community and around the world. Through our advertising, we're showing how trade with Co-op supports our ambition to grow Co-op Academies; how it helps us to expand our Member Pioneer network; how it allows us to continue our commitments to 100% British meat and our sourcing of Fairtrade; as well as our work to make our roads safer and, most importantly, our communities stronger.

In the year ahead we're determined to deliver on our purpose of championing a better way of doing business to create a stronger Co-op and stronger communities. We'll continue to make the connection between great products and services and 'doing good' for you and your community throughout our marketing plans. In November we'll highlight this message as we pay out millions of pounds to this year's local causes chosen by our members. And our Christmas advertising will build on this theme.

Commercial strategy

To enable that broad creation of value for our members we must continue to operate our business successfully.

Our core food store business is performing well in a fiercely competitive market and we continue to innovate and reach new customers as this report shows. Our expanded wholesale operation supports this strategy, offering Co-op own brand products to independent store owners.

After a difficult 2018, our funerals business, under its new managing director, Sam Tyrer, is starting to implement the findings of our review to build a strong business for the long term. We're putting particular focus on the care we provide to families, customer choice, competitiveness and channels to market. We're also examining how to expand our offer to better address all aspects of how we say farewell to loved ones, including developing eco-friendly funerals and extending our range of services after the funeral. In the first phase of our plans, we're looking at how we best support our front line colleagues so they can prioritise their care to customers

The funeral market remains highly competitive and the unexpected fall in the death rate has been a key factor in our performance, as it has for our competitors. Meanwhile, we welcomed the government's announcement in June to crack down on the use of high pressure and misleading tactics to sell funeral plans which has given all funeral plan providers a poor reputation. We're also working with the Competition and Markets Authority (CMA) on their investigation into the at-need funerals and crematoria markets and welcome the work they are doing on behalf of consumers.

At the beginning of 2019 we announced the sale of our insurance underwriting business to Markerstudy. Part of the sale is to put in place a new long-term arrangement for distributing Co-op branded motor and home insurance products underwritten by Markerstudy. Our accounts for 2018 and 2019 show our insurance underwriting business as a discontinued operation.

As we wait for the deal to work its way through regulatory approval, our insurance business has continued to increase its profile and product development, together with other partners, so we can meet the ever-increasing needs of our members in the future. This year has seen us return to the Life protection market and also launch new products for motorists and young home renters.

Our Legal Services business is continuing to do well across all of our practice areas, in particular probate, estate planning and family law.

We've re-joined the health market this year in an innovative and modern way based on digital technology. We're starting with a focus on repeat prescriptions because we believe we can offer a safe and distinctive service that can integrate with our food store estate to provide a range of delivery options. Ultimately, our aim is to promote good health in our communities by encouraging people to look after themselves, reducing preventable health problems and the burden on the NHS.

Awards

Over the last few years we've become used to winning numerous awards for the quality of our products and services and that's because we've given focus and investment to our core offering across all of our markets. This year though, we've won significant recognition for the business as a whole: Grocer of the Year at the Grocer Gold Awards; and Consumer Business of the Year by the Evening Standard. Our business leadership was recognised too in Jo Whitfield's Veuve Clicquot Business Woman Award. And finally, Co-operatives UK honoured us for being the 'Leading Co-operative of the Year'. You don't earn this calibre of recognition without being a distinctive business with a first-rate offering. Every one of our Co-op colleagues can take great pride in these achievements which show how we've successfully turned the business around in recent years.

Brexit

Like all big businesses, we've continued with our Brexit planning since the end of March and we know we need to be ready for all eventualities. If a negotiated withdrawal from the EU doesn't take place at the end of October, we expect some disruption to our supply chain, at least in the short term, and we'll do our best to protect our members from any inconvenience. We're particularly concerned about what a no-deal Brexit will mean for the British farmers whose produce we've championed over the last few years.

We're also mindful of how Brexit has exposed deep divisions within our communities with strong feelings of disempowerment and neglect expressed by many. These are serious matters that an economic resolution to Brexit will only partially address. We continue to believe that the values of co-operation can create stronger, more resilient communities and we're developing our ideas for 2020 on how we can use co-operation to bring back individual and communal self-confidence.

As we pass the half-way mark, we don't underestimate the challenges we face in the second half, most notably Brexit and the turnaround of our funerals business. Despite this we are satisfied with our progress, in particular how we're staying modern and relevant as a commercial enterprise driven by our ambition to create a better, fairer and more co-operative world for our members.

Steve Murrells

Chief Executive

Stronger Co-op

For us, success means a great deal more than maximising bottom line profit, but to achieve our broader ambitions we must continue to be a growing, competitive, innovative and responsible business.

GROWING

Online

We're introducing new technology to grow our business in ways that make sense for our predominantly convenience store estate. In March we launched an online delivery service trial for our food stores. It's the first time that we've offered online delivery sales via a dedicated website. In addition, we're delivering the online orders using zero emission electric cargo bikes. The trial was initially launched at the Co-op's Kings Road store in Chelsea, London, but it's been rolled out to a further eight. In August it will expand into a further 13 stores in the capital. We've also extended our partnership with Deliveroo in London and Manchester to reach Edinburgh, Milton Keynes and Brighton.

Stores and Products

Our Co-op store estate continues to grow with 20 new shops opened in the first six months of the year and 94 refits developed. We have a strong focus on our offer and relaunched our Irresistible pizza range, highlighting our continued drive to raise quality and create innovative products.

Food to Go

Food to Go is the fastest growing category in convenience and this year we've begun working with Superdrug to offer a range of 40 Co-op lines in seven stores. They're all in highly transient locations in Edinburgh, Bristol and East Midlands' airports, as well as Brighton, Sheffield, London's Victoria and London's Fenchurch Street train stations. These trials are showing great results, helping us to tap into 'food to go hotspots', to grow our presence in new locations and reach new customers.

Wholesale

In spring 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 have seen a rapid uptake of this, with over 90% of Nisa partners having now taken lines from across the range. Co-op own brand products are now generating weekly sales in excess of £2.5m from Nisa stores, and we are rapidly approaching our target of 10% of Nisa sales being Co-op own brand products. The integration of Nisa into the Wholesale business has transformed the proposition Nisa partners are able to offer their customers and we will work to ensure they continue to benefit from the wider offering. For more information please see the finance review on page 21.

Festivals

Building on last year's success, in April we announced an unprecedented presence at music festivals for 2019 in partnership with Live Nation. Through the summer we opened 6,000 ft. pop up shops at eight UK music festivals. Most notable was 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. It allowed us to introduce our Co-op heritage and values to younger and older generations who are not familiar with the ethical values which have always underpinned our business and which align well with the festival's own outlook.

Co-op's festival partnership with Live Nation has also been recognised at a number of industry awards, including the Festival Supplier Awards, European Sponsorship Association Awards and the UK Sponsorship Awards.

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. Unlike other major brands which have developed a franchise proposition, our Co-op franchise provides exactly the same offering as if we owned and ran the store ourselves. We currently have six franchises open via three Costcutter-owned stores and three on university campuses at Leeds, Kent and Newcastle with more confirmed to open this year. Our aim is to have 150 franchises open by 2022. We're carefully screening potential franchisees to ensure our values are aligned and commercial opportunities are strong for both parties.

Opening our franchise store in February at Leeds University, the fifth biggest university in the UK, was a milestone for us. The average sales uplift in the franchised stores has been more than 80%. And 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.

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's 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. By 2020 we'll be across all of England. Since the AGM the app has been downloaded nearly nineteen thousand times and we have more than five thousand active customers. 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.

COMPETITIVE

To remain competitive across all of our markets we need to make sure we run an efficient operation and continuously review our pricing.

There's still intense competition in UK food retail and expanding our wholesaling operation means we have greater purchasing strength with our suppliers. At a more tactical level, our summer saver deals on popular products like beer and pizza proved popular. We also had a successful Easter bank holiday, driven by a competitive offer and helped by the warm weather. In addition, we're increasing the reasons for customers to come to our stores through providing Amazon and John Lewis collection lockers.

The approach we're moving to with Insurance, using an external underwriter, is reflected in our Travel insurance policy. Throughout the first half of the year, sales have been strong. This competitive new insurance product, which doesn't exclude holiday makers with existing health conditions, has kept ahead of target.

Addressing funeral affordability is a priority for us and we've continued to see a significant rise in the number of families choosing our 'Cremation Without Ceremony' product.

In 2018 we set ourselves long-term targets for cost reduction and we've met the targets set for the first-half of 2019. We'll continue to look for more opportunities so that we can invest into the growth of the business.

INNOVATIVE

Pay-in-Aisle

Research shows that consumers are using cash less and less, so we're rolling out more till-less technology in our food stores. During the summer we extended the trial of a new Pay-in-Aisle app to more than 30 stores. While cash is still common in convenience stores, we've seen a 10% decline in the popularity of notes and coins during the last two years, with contactless, cards and other payment methods now making up more than one in two transactions. Using the app, which we first began testing last year, customers scan products on their own device as they walk around the store. When they've finished shopping, the cost of the shop is deducted from their Apple or Google Pay account with a touch of a button.

Graduated Young Driver

In the summer Co-op Insurance introduced a new policy designed to further reward our safest young drivers. The 'Graduated Young Driver' policy will offer drivers who've been on Co-op's Young Driver telematics policy for two yearsor more with a high Safe Driving Score the chance to be 'unboxed'. Qualifying customers who have 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.

Life Insurance with payment 'breaks'

This year we've re-entered the life insurance market launching Co-op Life Cover. 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, 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.

RESPONSIBLE

Sustainability

We know sustainability is an area our members feel passionately about and our Members' Council continue to push our thinking in this area. At our AGM our members voted to accelerate our work to reduce our Greenhouse Gas (GHG) emissions and backed global goals to limit warming to the most stringent of targets. Having halved our GHG emissions in the ten years from 2006, we're now going further by reducing our direct GHG emissions by 50% again by 2025. All Co-op stores, offices and funeral homes already use 100% renewable electricity.

Soy

In April we made a commitment to only source 100% sustainable soy as a way to prevent de-forestation and the loss of native vegetation caused by ever expanding soy cultivation.

Soy plays a part in the production of many products and the average European eats more than 60kg a year. The increasing demand for soy animal feed and rising global consumption of meat is having a major impact on the environment and wildlife.

Plastic

We'll have eliminated the most difficult to recycle plastic packaging by 2020 and all single-use plastic in our own-brand packaging by 2023. By 2021, we'll use a minimum of 50% recycled plastic in own-brand plastic trays, pots and bottles. All our own-brand packaging will be easy to recycle by 2023 (80% by 2020).

Our pop-up store at the Glastonbury festival gave us the opportunity to trial our 100% compostable packaging for ten types of our sandwiches. We also sold recyclable aluminium cans of spring water and refillable water bottles and brought back our pioneering deposit return scheme for plastic bottles which can be placed in reverse vending machines.

Pensions

In June the defined contribution section of the Co-op's pension fund changed its investment strategy to invest more in companies that score highly for sustainability and with an emphasis on mitigating climate change. This means approximately £290m out of Co-op employees' £315m defined contribution assets will be invested 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

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.

Campaigning

The safety of our colleagues has been a concern of our members for some time and at the end of last year we adopted our new campaign 'Safer Colleagues and Safer Communities' with the support of our Members' Council. We're tackling crime in our stores through investment in technology and security but we also want to address the root causes of the problem in our communities and influence the government and judicial system.

At our AGM we announced our new partnership with the Damilola Taylor Trust and we'll be funding one of its skills training programmes for young people at risk of falling into a life of crime. 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've also submitted our own 70-page report with ten key recommendations for the government to consider.

We've commissioned new academic research into violence on shop workers and we published the findings in September. In November we'll be hosting a conference to mark the beginning of Usdaw's 'Freedom from Fear' week. 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.

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 BAME community.

The first six months of the year have seen significant progress for our slavery campaign, including increased government support for slavery survivors and strengthening of the Modern Slavery Act's requirements for business. Our Bright Future partnership, which is providing training and work opportunities, is now the biggest employment programme of its kind for slavery survivors in the world.

Child bereavement

We've taken the lead in calling on the government to waive child burial and cremation fees, to ensure there is consistent support for bereaved parents across the country. Following our continued campaigning, we were pleased that the government has now implemented the Children's Funeral Fund, meaning that more parents across England will have access to some financial support.

Stronger Communities

We've used this year to develop our ideas for how we support local communities so that we're addressing today's challenges in a co-operative way. Our community plan, developed with input from our Members' Council, 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 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. We're also working closely with our charity arm, The Co-op Foundation, to focus on these areas.

Community spaces 

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.

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 early September we'd had nearly 1,000 applications from community groups looking for financial or specialist support to help 'save' local spaces.

Our Co-op charity, The Co-op Foundation, has already awarded more than £1.4 million to help 20 community organisations grow their activities and secured £1 million of government funding to help more than 7,500 young people improve local spaces. As part of Endangered Spaces, Space to Connect, its new £1.6 million partnership with government, will build on this work.

We've also begun a partnership with the charity Steel Warriors to create outdoor gym equipment in community spaces manufactured from melted knives taken off the streets by the police. And we're recruiting local trainers to teach new skills using the equipment. The first gym is being launched in September in Ruskin Park, Lambeth.

Mental and physical 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 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.

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. Co-op Academy Schools and our apprenticeship programme will have an important part to play in this. So too will our digital hub in Federation in Manchester. 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.

Our main focus this year will be on Spaces, however we'll be working in all three areas continuously because we recognise that they all connect and overlap.

Co-op Academies Trust

Promoting co-operative education and skills remains a central theme of our responsible approach to business

Since the start of 2019, the trust has added five new schools including two special schools in Bradford. This makes Co-op Academies Trust not only the fastest growing academy trust 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. There are now 23 Co-op academies and colleges across northern England in some of the most economically challenged areas in the UK.

Member Pioneers

We already have 300 Member Pioneers around the country and are constantly adding to them. By 2020 we aim to have a Member Pioneer in each of our communities acting as community catalysts. In February this year, 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 120 Member Pioneer Co-ordinators, 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.

Looking ahead

For the rest of 2019 and beyond, we're going to continue to grow all of our businesses in a responsible and sustainable way that's good for our members and for their communities.

We'll keep innovating in all areas and maintain our competitiveness and relevance in the markets in which we operate. In Food we'll continue our trials of new online ordering and delivery technology and continue to improve and expand our reach through wholesaling and franchising.

In Funerals we'll implement our turnaround plans so that we become not only the biggest provider but the leader in setting the highest standards of care and the greatest choice. In Insurance we'll continue to develop new products and see through our deal with Markerstudy. And in Legal we'll be extending the reach of the business through partnerships and introducing new technology into our offer.

In all we do, we'll continue to show the link between choosing Co-op and choosing to do good.

Principal risks and uncertainties

The Directors have reviewed the principal risks and uncertainties faced by Co-op and the risks set out in the 2018 Annual Report and Financial Statements are still relevant for the second half of 2019.

The Directors use our Co-op enterprise risk management framework to continuously monitor and re-assess our actions in relation to a changing business environment. Consideration is given to emerging risks and to any change in internal and external influences that could impact our business model and how we operate.

Brexit - with a deal or without a deal

A disorderly Brexit, or the threat of withdrawal from the European Union on unfavourable terms, still poses a significant risk to the structure of the UK economy and could also impact many parts of our business, our partners and the markets we operate in. We're still very much focused on Brexit uncertainty and, as the political and economic situation evolves, we'll develop and reassess our response plans.

Changes to principal risks

We've identified a new principal risk in 2019. The value of our funeral plan investment portfolio is sensitive to a number of factors, such as funeral costs and macroeconomic and market conditions. This can mean that, when plans become due, the available funds are lower than expected, making them less profitable than planned. We closely monitor the management of the portfolio and make adjustments as conditions change. Our latest actuarial valuation of the plans showed that the value of investments is £120m above the wholesale cost of performing the funerals. The risk in this area is to our future profits and not to the funeral plan holder, whose funeral is guaranteed under our plans. Given the size of this portfolio, we've called this risk out separately in the principal risks outlined below.

Following the Grocery Code Adjudicator's (GCA) investigation which completed in March 2019 into Co-op's compliance with elements of the Groceries Supply Code of Practice (Code), we've developed a clear implementation plan. Activity has been underway for some time and good progress made to address the underlying findings of the five recommendations made by the GCA. We are putting fixes in place quickly and effectively and taking effective steps to ensure full compliance with the Code. The 2019 GCA survey results, announced in June, reported Co-op as the most improved retailer. It was confirmation that our activity is having a positive impact and that we're taking the findings of the GCA's report seriously. Monitoring of our compliance and risk management activity is included within the Regulatory Compliance risk below, which remains stable.

The risks below have the potential to impact the delivery of our business strategy and our commitment to create value for our members and communities. These are summarised as follows:

Emerging Risks

The main emerging risks being monitored relate to changing regulations. In the food and drink sector this is expected to place restrictions on the promotion of food with high fat, salt and sugar content.

The outcome of the Competition Market Authority's review into the funeral industry and HM Treasury's proposals for the regulation of funeral plans are expected to lead to changes in the funeral and funeral plan markets.

More information on the principal risks and how Co-op mitigates those risks can be found on pages 41-42 of the 2018 Annual Report.

Our financial performance

Our accounts have changed significantly this year because of a major new accounting standard, IFRS 16, which we've adopted from the start of the year. It makes understanding our financial performance compared to last year more difficult, so we've included some additional information below to help explain it more easily.

IFRS 16 requires us to put leases onto our balance sheet that previously were not included, in particular over 3,000 leases on trading properties that we rent. In total, lease liabilities of £1.5 billion (representing future financial commitments) and a 'right of use' asset of £1.1 billion (reflecting the value of our right to use the asset) were brought onto our balance sheet. In our full year income statement operating profit will benefit by around £60 million as annual rental payments of around £160 million are no longer included and are replaced by additional depreciation (£100 million). However the full year profit before tax impact will be £10-£15 million adverse after charging lease interest of £75 million. Although our 2019 results are prepared under IFRS 16, 2018 numbers are not required and so are not directly comparable. We've included tables below to show 2019 on both a reported basis (prepared under IFRS 16) and like-for-like with 2018 (excluding IFRS 16).

Revenue increased to £5.4 billion, up £0.6 billion, or 12%, compared to 2018. Our wholesale business accounts for £0.4 billion of this increase, reflecting that we acquired Nisa in May 2018 so had two months trade compared to a full six months this year. Our Food business continues to perform strongly with a 3% increase in sales to £3.7 billion.

Profit before tax was £25 million compared to £44 million in 2018. However on a like-for-like for basis, excluding the impact of IFRS 16, it was £30 million, down £14 million from 2018 mainly caused by a £15m fall in operating profit in our funerals business. Trading performance is discussed in more detail below.

Our profits are shown after deducting the amount our members have earned through the 5% and 1% member rewards which totalled £35 million in the first half of the year (2018: £35 million).

We show how we adjust profit before tax to get to our underlying profit before tax in note 1 of our interim financial statements. We also include a jargon buster on page 56 to explain the accounting terms we have to use.

How our businesses have performed

Food sales of £3.7 billion were up 3% on 2018, with like-for-like sales up 1.7%. The growth in like-for-like sales is particularly pleasing given that last year sales were very strong on the back of the World Cup and favourable summer weather.

Underlying profit in our Food business was £120 million in 2019 compared to £80 million in 2018. However on a like-for-like basis excluding IFRS 16, profit was £95 million, up 19% on last year, reflecting the strong sales performance together with good cost control.

Our Wholesale business generated sales of £0.7 billion in the period and made an operating loss of £2.2 million compared to a £5 million loss last year. The £2.2 million loss comprises a trading profit of £0.4 million offset by £2.6 million of amortisation charges (similar to depreciation) on the intangible assets arising on acquisition. The 2018 loss included one-off costs of buying the Nisa business.

Our Funeral & Life Planning business saw sales fall by 6% to £163 million largely reflecting lower funeral numbers this year. The market remains highly competitive and the unexpected fall in the death rate has been a key factor in our performance, as it has for our competitors. We have responded to customer desire for lower cost funerals and cremation without ceremony for which there is growing demand and this too has reduced selling prices and has an impact on profit. We conducted 48,423 funerals in the first half of 2019 compared to 53,213 in the first half of 2018.

The fall in volumes reduced Funeral & Life Planning underlying profit to £13 million, down £15 million on 2018 (£28 million).

Supporting functions costs increased by £13 million on a like-for-like basis (excluding IFRS 16) reflecting continued investment in members and one-off gains in 2018. Additionally in 2019 we invested in membership initiatives and IT as we 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.

We announced the sale of our insurance underwriting business, CIS General Insurance Limited ('CISGIL'), to Markerstudy in January this year. In our year end accounts CISGIL became classified as a 'discontinued operation' which means that we no longer treat it as an ongoing business operation of Co-op and so its results are not included within profit before tax. This treatment remains appropriate at half-year on the basis that we expect the sale to complete later this year. The £14 million loss in prior year represented the trading loss of the business in the first half of 2018.

Disposals, property valuation gains and one off items

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

Property and business disposals include the profit or loss on disposal of trading units together with costs of vacant or closed properties. The 2018 loss of £26 million included vacant property cost provisions of £21 million.

The £11 million gain on our investment property portfolio in 2019 principally relates to planning permission gains on one particular site.

One-off items in 2018 included a profit of £20 million from changes to pension benefits. The £7 million credit in 2019 relates to a reduction in the amounts we are required to pay for the acquisition of Nisa which is payable over a number of years depending on the trade passing through Nisa from its partners.

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. At half-year lease interest was £37 million on a total lease liability of £1.5 billion.

Excluding IFRS 16 lease interest, financing costs were £6 million higher this year. Underlying interest was £1m higher. The remaining increase comprises to £4 million of costs and fees relating to the refinancing of our bond debt (included within non-underlying interest) and a £7 million adverse movement in fair values offset by a £6 million increase in pension interest income. The adverse fair value movement arises because in 2018 we had a gain from revaluing our debt according to its market value at that time.

Our total net debt at the end of the period, including the IFRS 16 lease liability of £1.5 billion was £2.3 billion. Excluding the lease liability, net debt was £0.8 billion, up from the same time last year (£0.7 billion) but in line with 2018 year end. Net capital expenditure this year was £206 million compared to £145 million in the first half of 2018.

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.

Tax

The £26m tax credit arising at half-year is largely due to a one-off credit of £31 million caused by a change to our method of calculating the deferred tax arising on fixed assets additions.

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 half and full year 2018. The table below shows the amounts brought onto the balance sheet from the start of 2019.

The £0.9 billion increase in total assets from £9.5 billion at 2018 year end to £10.4 billion at this half-year reflects £1.1 billion of assets introduced under IFRS 16 as shown above, offset by a £0.2 billion reduction in pension assets.

The actuarial surplus of our largest pension scheme, PACE, decreased by £0.2 billion to £1.6 billion largely because the interest rate used to value pension liabilities decreased from 3% to 2.2%. The interest rate we select is based on advice from our actuaries and is based on corporate bond rates as at 6 July. It's important to remember that the accounting valuation of pension schemes is quite different to the valuation basis used by Trustees. The Trustees' valuation uses a more prudent basis which reflects the low risk assets that we are invested in. Nevertheless we are well funded and in surplus on this basis, though the surplus is significantly lower than the £1.6 billion shown in our accounts.

Total liabilities increased by £1.3 billion from year end to £7.7 billion this half-year reflecting £1.4 billion of IFRS 16 adjustments relating to lease liabilities.

The assets and liabilities of CISGIL are classified as held for sale because of the planned sale of the business to Markerstudy. CISGIL became classified as held for sale in the second half of last year.

Total equity, or members' funds, were £2.7 billion at half-year, a fall of £0.4 billion from year end relating to the £0.2 billion reduction in opening reserves from adopting IFRS 16 and the £0.2 billion decrease in pension assets discussed above.

Looking ahead

The short term outlook is challenging. Brexit continues to bring uncertainty particularly with the increasing prospect of leaving the EU without a deal. We continue to plan and prepare as best we can. We are also in the midst of turnaround plans for the funerals business that has seen unprecedented market change. We expect that the sale of CISGIL, our insurance underwriting business, will proceed before year end but we await regulatory approval.

Despite this we are confident that we are well placed to meet those challenges. We have sensitised our forecasts to include pessimistic views on various risks such as the Brexit impact, a general downturn in trading and a delay in the sale of CISGIL and this gives us confidence that our funding and balance sheet position are robust. Our Food business continues to deliver strong like-for-like sales growth at rates above the food retail market. We continue to innovate within our businesses to drive our competitive advantage and we continue to invest in our stores and branches. But most importantly we will continue to grow in a Co-op way that is responsible and sustainable and benefits our members and their communities.

Responsibility statement of the directors in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

·; the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU

·; the interim management report includes a fair review of the information required by DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year

By order of the board of Co-operative Group Limited

Allan Leighton 

Chair

11 September 2019

INDEPENDENT REVIEW REPORT TO CO-OPERATIVE GROUP LIMITED

Introduction

We have been engaged by Co-operative Group Limited ("the Society") to review the condensed set of financial statements in the half-yearly financial report for the 26 weeks ended 6 July 2019 which comprises the condensed consolidated income statement, condensed consolidated statement of comprehensive income, condensed consolidated balance sheet, condensed consolidated statement of changes in equity, condensed consolidated statement of cash flows and the related explanatory notes. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Society in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Society, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in the general accounting policies section of the 2018 Annual Report, the annual financial statements of the Society are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the Society a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the 26 weeks ended 6 July 2019 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP

Manchester

11 September 2019