The sweeping changes in the UK food retail market over the last year - the merger of Morrisons and Safeway and the rapid expansion of Tesco, Sainsbury and others into the convenience store sector - have put the Co-op under increasing pressure, but its considerable experience as the UK's biggest convenience store operator has helped it stave off the competition, for now.
Tesco has led the wave of mainstream food retailers moving into the convenience store sector, buying the T&S and Adminstore groups. Sainsbury has also dipped its toe in the water with the purchase of Bells earlier this year, Morrisons is to rebrand a number of the smaller Safeway stores as Compact convenience outlets, and Somerfield is rolling out its own Essentials c-store banner - clear evidence that the market place is becoming increasingly crowded and competitive.
The company has today reported sales of £3 billion from its food retail operations, an increase of 17.4 per cent on the previous year, helped in no small part by solid growth from the Welcome convenience store unit, which posted a 3.4 per cent increase in like-for-like sales during the year.
Co-op said this was 1 per cent higher than the convenience market as a whole, and stressed that it did not include results from the Balfour chain acquired in 2003 - although the Alldays acquisition in 2002 had now been consolidated.
The acquisitions of these two chains has taken the number of convenience store outlets to 1,249, and the Co-op group said it would vigorously defend its position as market leader this year through both operational efficiencies - allowing it to compete more effectively on price - and through further acquisitions.
One potential acquisition is that of TM Retail, the group which owns the Forbuoys and Martin's chains which operate along the same lines as Balfour. Sainsbury had been considered the leading contender to buy the group, which has been put on the market by its investment group owners, but with only a fraction of the group's outlets meeting Sainsbury's requirements, the way now appears open for other bidders.
"There is evidence that the market is becoming increasingly competitive, both in the supermarket and in the convenience store areas," the company said in a statement. "Morrison's takeover of Safeway and the rapid pace of the supermarket groups' expansion into the convenience store sector have both put downward pressure on prices.
"Like-for-like sales for the first three months of this year are flat, with some deterioration in the performance of our larger stores. However, the Welcome brand continues to perform well, with like-for-like sales up by 3.49 per cent."
The Co-op said that it was its larger stores which had been hardest hit by the consolidation in the supermarket sector, and that it would continue to sell off underperforming outlets in this segment of the market as "these larger stores depress our overall performance", further evidence of a determination to focus on the convenience store sector.
Partly due to the necessity of integrating the new acquisitions, and partly because of the increasing competitive challenge from the likes of Tesco Express and Sainsbury Local, the convenience store sector has also been the focus of most of Co-op's capital expenditure over the last year, with 1,000 stores already refitted, including 171 Alldays stores and six Balfour outlets.
The refurbishment programme will cost around £200 million when complete in 2006, the company said, and has now been extended to include an upgrade of all point-of-sales systems throughout the food retail group, another positive reaction to the arrival of the mainstream retail groups - the pioneers of the new ion-store technology - into the convenience store sector. An overhaul of the food supply chain network is also underway.
While the expansion of the store network and the refit programme have clearly had a beneficial effect on the company's performance, they are not the only reasons for the increase in sales - or for a 63 per cent increase in food retail profits during the year.
A strengthening of the company's ethical stance during the year also paid off, with the decision to switch all its own label coffee to the Fairtrade brand proving particularly popular with consumers.
The Co-op Bank's Ethical Purchasing Index (EPI) shows that ethical food and drink sales in the UK reached £1.77 billion last year, with Fairtrade accounting for £59.5 million of this total, and Fairtrade coffee alone now counting for more than 14 per cent of the UK ground coffee market.