THIS week the Channel Islands Cooperative Society wrote to its members to forewarn that the annual dividend (“divi”) paid on qualifying purchases in its stores might be reduced or suspended entirely for the 2023 financial year.
“The decision to write to members at this time reflects our policy of total openness and honesty in all we do,” they said. “Our members are the Channel Islands Coop and we are determined to be upfront and transparent about their business.
“This is a moment in time. The board and executive have been grappling with unrelenting global pressures for nearly five years and we have reached a point where we must take bold and decisive action if we are to rebuild and grow. We appreciate this warning will be a shock and unwelcome to many. However, we will continue to talk to our members and other stakeholders to reassure them we are behaving in an ethical and professional manner, with their best interests at our core.”
How has the Coop found itself in this situation?
The Channel Islands Coop is not alone in this situation. The food retail sector across the UK has suffered from the combined impacts of Brexit, Covid-19, international conflicts, rising inflation, high interest rates and unsustainable hikes in transport and energy costs.
We have not been immune to these pressures, but we face additional costs because Jersey imports nearly all food, and operating costs are higher than elsewhere.
There are signs that some of these pressures are beginning to subside: inflation is finally falling, and we expect rate cuts in the UK; supply chains are returning to pre-pandemic levels and UK markets are becoming accustomed to post-Brexit transportation and Customs rules.
We want to be able to take advantage of these improvements, and now is the time to strengthen our foundations to enable growth, sustainability and future success for the benefit of all our stakeholders, and our Island community.
How did you not predict this?
Every part of our business has been hit at different times by some or all these events and managing them has been challenging. Predictability has been almost impossible as matters out of our control unfolded.
The board and executive have fought every fire to ride the storm but there is only so long you can do that. We have absorbed much of the cost inflation we have experienced where we could.
It is imperative to stress the Coop is in a strong financial position, but our profitability for the year has been affected. Though the decisions we are making this year may be tough and unwelcome, they are necessary if we are to maintain our position as the leading Channel Island food retailer. We are one of the largest employers in the Channel Islands and one of the best-loved brands: we take those positions very seriously and sometimes we have to make difficult decisions in the best interests of the business.
Why did you only announce this now?
Some have questioned why we are issuing this warning now, and we didn’t let our members know last year. The plain fact is as we started the last financial year, there was no reason to believe we would not be able to maintain the divi at forecast levels of 4%.
Our financial year end is in January and, although we are still working on the final numbers, it has become clear that a 4% divi for the last year is unrealistic. The divi is not proposed to the membership until the annual members’ meeting (AMM), some four months from now. We could have waited until the meeting to announce our proposal, but that would have been in our view the wrong thing to do. We are open and honest with our members and our colleagues and giving forewarning that we may have to propose a lower-than-expected divi was the right action to take.
It has given our members time to ask us questions, and to consider the facts ahead of the AMM.
Why have you taken this action?
Dividend is based on sharing profits. It is not usual for businesses to review their dividend every year; in fact, many have reduced the dividend they pay to shareholders over the last couple of years because of the tough economic climate. With a reduction in surplus generated last year, maintaining a 4% dividend is simply unaffordable.
We have also taken the difficult decision to cancel colleague bonuses; this decision affects everyone in the business, from the executive to the shop floor. This is regrettable but necessary for this year; our colleagues have worked extremely hard and it is a shame their combined efforts have not been reflected in our financial results for the year.
Are shareholder A and B funds safe?
There has been some concern expressed about the security of shareholders’ funds. Our members can still deposit funds in their share accounts and earn interest on the balance.
It is essential that our members understand the funds they hold in their A and B share accounts are unaffected by any decisions relating to the 2023/4 divi. They can check their balance at any time using the member portal and this is fully secure and will continue to earn interest.
So how is dividend calculated and how safe are savings?
The estimated divi is calculated throughout the financial year but may only be paid when CI Coop achieves a net surplus from all its activities. The board considers the financial results, recommends the payment of a dividend and the members then vote on the recommendation proposed.
The board must propose a divi that is appropriate based on the financial performance of the business over the previous year. The decision around the amount of divi that will be paid in May 2024 relates solely to the financial year ending 14 January 2024.
It is important to state that no decision has been taken on divi yet – our letter to members was to let them know it may not be what they are anticipating.
Contrary to common belief, the divi is not guaranteed and has always been dependent on the society’s ability to pay based on the previous year’s performance and known costs, just as it is with any company. It is not a fixed amount, but we understand some people may think it is.
We know some members have decided to close their share accounts and withdraw their funds. There is no need to do this because the amount of the 2023 divi does not affect their savings. It’s also worth pointing out that if members close their account, they will not be eligible if any divi is declared in May, and we don’t want them to miss out.
And what of the future of the divi?
We know many customers like the divi because they have grown up with it. But the way we reward customers needs to be reviewed. Is the current scheme fit for purpose in the modern world? Does it really meet the needs of our customers? Does it restrict the true value we want to be giving to our customers every day or do they want to wait a year until they receive their rewards? These are all questions we are considering.
We are looking at several options for the future, including divi. We have some exciting plans, introducing technology for those who want it and recalibrating our rewards proposition to make value and benefits more immediate for customers, and allow us to engage better with members. We will share more about these plans with members and customers in the coming months.
That doesn’t mean to say we will not continue to reward our shareholders by sharing profits when we can: this is the bedrock of the Coop. Our founding principles of sharing our success with our members does not change, nor does our commitment to supporting our communities.
How can you be making a loss with the prices you are charging?
Last year the Jersey Competition Regulatory Authority conducted an independent review of the groceries market in Jersey and concluded that not only is there good competition, but food retailers here are not making excessive profits.
The difference in shelf prices between Jersey and the UK, for example, is attributed to higher operating costs and taxes.
If you break down the average costs for groceries in Jersey, nearly 65% of the price customers pay is what the supermarket is charged to buy it from wholesalers and suppliers, 25% goes on operating costs and 5% is GST. That leaves just 5% profit for the retailer on every item that passes through the till.
With little control over the wholesale price of goods, and keeping our costs controlled while ensuring our staff are well looked after and our premises well maintained. When prices go up it is our profit margin that is squeezed unless we pass those costs on to our customers. We have worked hard to avoid doing that in the current climate, where cost of living is our customers’ number one priority.
We maintain consistent pricing across all our stores, whereas we are aware this is not the situation in some competitor stores, and have a track record of innovation in the grocery market, including the introduction of self-service tills and our partnership with Carrefour in France to bring a fresh selection of international products to our stores, broadening choice for customers.
So, what is the strategy for the future?
Some people have asked why we have opened new stores, extended our pharmacy offering and installed new technology. These investments are part of our long-term strategy to build a better business for our members, customers, colleagues and suppliers.
These investments are funded from our own capital and depreciated over a number of years, not from revenue, so they don’t impact on the divi.
We will continue to deliver this strategy, innovating and replacing obsolete equipment, improving our customer experience and seeking other revenue streams.
Our priority is to return to better financial performance, which will enable us to reward our loyal customers and shareholders appropriately.
Why should we continue to support the Coop?
Being a shareholder keeps the Channel Islands Coop in local ownership. More than that, members can hold us accountable for the way we run the business and the decisions we make.
We believe there are even more ways to thank our members for their loyalty, through more and better price promotions, giving back real value and money in the pocket of our customers every day they shop with us. The Channel Islands Coop is also a major supporter of local charities and community causes and being a member means you are part of that philanthropy – our members are indirectly and sometimes directly giving back to their community.
We can only do this if our members continue to support us, through the good and the bad times.
What happens next?
The financial accounts will be published in April for members to examine.
A proposition on the divi, based on those accounts, will be presented at the annual members’ meeting in May. Members will be asked to vote on the proposal at that meeting, to accept it or reject it.
But rejecting it doesn’t mean a better offer will be made. The board has to decide what the business can afford to pay, and the proposal will be the best they can offer in the financial and economic circumstances.