Many are the options for an outdated Co-op under siege but quick action is vital, says Ben Potter
THIS was the week the Co-operative Wholesale Society, the £4 billion linchpin of Britain's Co-operative movement, finally got serious about Andrew Regan, the 31-year-old financier whom it tried to dismiss as an irrelevance.
For two months CWS, struggling to survive in its core food retailing business, has ridiculed Mr Regan's proposals to buy its non-food businesses.
Then on Thursday CWS suspended two senior executives over suspected "serious breaches of trust" and launched a full-scale investigation into their dealings on CWS's behalf with Mr Regan's companies. Yesterday, as Mr Regan prepared to launch a £1 billion bid, the fight switched to the High Court.
The allegations of moles within CWS's top management bestowed some credibility on Mr Regan's ambitions, where two months of press leaks about his plans to crack CWS's labyrinthine control structure had mostly attracted laughter.
His ability to raise £1 billion still provokes plenty of scepticism but the Co-op is increasingly seen as a lumbering, tired organisation run on inefficient lines and shackled to its past.
The calls for reform can even be heard within the movement.
David Robey, the Tesco-trained new chief of food operations at Co-operative Retail Services, the other big Co-op arm, says: "Our market share has halved in the last 10 years. If it continues to erode at the current rate, it'll force some kind of change in the structure.
"Given the competitive nature of the grocery market in the UK and the increasing scale and power of Tesco in particular, it's inconceivable that the Co-ops can carry on as they are."
The Co-op's bizarre voting structure is the clearest example of how the movement carries its past with it.
The multi-layered voting system means the executives, who are at the sharp end of the commercial activities, often have to pass major decisions up to a 28-strong board which can include lay members.
Too often, say the Co-op's critics, the result is compromise and inaction.
The scale of the decline is there for all to see. Founded 160 years ago on principles of self-help, the Co-op was Britain's largest grocer until the 1950s; these days, its market share of the packaged grocery trade is down to 7pc.
Last week's 1996 results for CWS showed trading profits from food retailing of just £37m, or 3.5pc of sales. Tesco, by contrast, does 5.8pc and Waitrose, part of the staff-owned John Lewis Partnerships, is thought to achieve about 5pc.
The independent retail Co-ops do worse as a whole. CWS also provides member retail Co-ops with £1.3 billion of non-profit food services, carries the North Eastern Co-op which makes just 1.8pc on sales of £346m, and owns a swag of other businesses -from its well-regarded funerals and agriculture concerns to engineering, property, chemists and opticians. From this ragbag, it makes just £33m, or 2.8pc of sales.
"If Sainsbury starts a price war, the Co-op could be struggling to survive 1997," says Clive Vaughan, a retail consultant at Verdict Research. "If it doesn't, I still think the Co-op is going to be struggling to make it to the 21st century."
Even Graham Melmoth, the new chief executive of CWS, says the movement must "undergo some fundamental restructuring or one day we will not have the luxury of choice".
The Co-op movement began uncertainly in the early 1830s, but in 1844 a group of Lancashire artisans formed the forerunner of CWS in Rochdale on principles of "one man, one vote", a "divi" from the trading surplus, consumer protection and quality foodstuffs.
Contemporary merchants were rapacious and given to adulterating the produce, and Co-ops prospered.
Sir William Lever unsuccessfully sued CWS in 1909 over a "deliberate attempt . . . to defraud Messrs Lever of their business " by selling 800 tons of soap to member retail societies.
By 1955 there were 932 retail Co-op societies with 12m members and total sales of £900m, including about 20pc of the groceries market. The membership now is about 6m.
In the early 1960s, resale price maintenance was abolished, paving the way for profit-driven retail businesses to reinvest their profits in new and larger stores, brand development, national marketing and labour-saving technology.
Against such competition, non-profit Co-ops with their social obligations and archaic organisational structure struggled. Their buying power was eroded, they did not have the profits to re-invest, largely missed the arrival of superstores and stayed open in towns impoverished by mine and factory closures.
When Co-ops fell into difficulties, CWS and big regional Co-ops rescued them, paving the way for the strange voting set-up and meaning that many loss-making stores are still being operated. Unable to compete even on price, they have surrendered vast tracts of the packaged groceries trade to Tesco, Sainsbury, Safeway and Asda.
"Labouring under these disadvantages, the Co-op- amazingly-has survived," Mr Vaughan says. Today there are some 50 independent retail societies headed by the two largest Co-ops, CWS and CRS.
The jewels within the movement are the Co-operative Bank, which has carved out a lucrative niche in ethical high street banking and makes a respectable 20pc return on shareholders' funds, and the Co-operative Insurance Society, one of Britain's largest insurers.
Mr Melmoth has pledged himself to improve CWS's profitability and demonstrate "excellence within the Co-operative context". Short-term measures include: a reintroduction of the "Co-op divi" in England; a national membership strategy; a "more unified front" to offer consumers a broader range of services across CWS's retail businesses ; withdrawing from superstores to concentrate on high street supermarkets and village stores; working more closely with CRS, which has its own buying group, and other retail societies. In the longer term, Mr Melmoth and Mr Robey believe a single Co-op is the best way to fight the supermarket giants.
Outsiders doubt whether the Co-op should bother with food at all, since it has been left so far behind. Mr Vaughan says they may have a role in village and convenience stores, but massive investment is needed to bring its stores up to scratch, and "hundreds if not thousands of stores" may have to close.
"Our view is a price war could break out this year. The whole point of a price war is to kick one of the weaker players out of the market, and they don't come much weaker than the Co-op," he says.
Mr Vaughan suggests the movement take a lead from Co-op Bank and exploit its ethical name to develop a distinct line of investment products, such as Peps, and products in other areas. Whichever way it jumps, Mr Melmoth must know that the time to act is now.
Bigger players than Mr Regan will also be watching.
