Scotmid warns of increasing challenges as profits slump

Chief executive John Brodie gave an upbeat verdict of the results against a backdrop of falling retail sales, tough competition, higher National Living Wage costs and growing cost of goods, sparked by weaker sterling since the Brexit vote. But he warned the challenges facing the co-operative are likely to become even more stringent in the current year, with the announcement of a snap General Election ramping up the political uncertainty already brought by Brexit and the Trump victory in the US election. He raised the prospect of costs, in the shape of apprenticeship levy, rating revaluation and National Living Wage, continuing to rise.

Mr Brodie, who said the company had shed 150 jobs under efficiency measures designed to combat rising costs last year, said: “We expect 2017 to be an equally or more challenging year than 2017. We have had the announcement of the General Election, which may bring potentially more short-term uncertainty. But whatever the outcome may be [it] will hopefully lead to longer-term certainty.”

Mr Brodie noted the fall in sterling since the UK voted to leave the European Union had its most pronounced effect on its Semichem toiletries business, which sources some products in Europe. But he said these higher costs had been partially offset by an increase in trade from consumers in the Republic of Ireland visiting stores in Northern Ireland close to the Border, thanks to the strength of the euro versus the pound. Scotmid has 25 stores in Northern Ireland.

Brexit has also had an impact on its pension deficit which grew by £7.1m. That was attributed to lower gilt yields as a result of the cut in interest rates following the vote to leave the EU. Scotmid noted, however, that it ended the year with assets in excess of £91.5m, despite having used some of its surplus to reduce the pension deficit. The deficit now stands at £22.5m.

Scotmid said its trading profit was boosted by a £5.1m revaluation gain from its property investment portfolio. It benefited during the year from property rental income growth, thanks mainly to the renewal of the lease on one of the society’s main commercial properties. Elsewhere, it reported a year of growth in its funeral business, amid increasing funeral plan sales. Two new funeral offices were opened, in Livingston and Edinburgh.

Meanwhile, Mr Brodie expects the controversial revaluation of business rates to result in an annualised cost to the co-operative of £500,000. The retailer said it had been virtually impossible to legislate for the increase because it only received notification of the higher bills in December, with the new charges taking effect from April.

“It is very difficult for longer term planning when you have to face cost increases announced at such short notice,” Mr Brodie said.

Mr Brodie, who said retailers will not benefit from the rates relief announced by the Scottish Government, fed his thoughts into the Barclay Review of business rates via trade groups. Asked how he would like to see the valuation system improved, the retailer said he would like to see the rates burden on retailers reduced to reflect the challenges the sector now faces.

Mr Brodie declined to comment in detail when asked how Tesco’s bid for Booker will affect the convenience store sector if the deal goes through. But he said the proposed acquisition underlines the rapid pace of change now seen in the sector. He added that Scotmid remains open to making acquisitions itself, but noted that it was currently getting better value from investing in improving its existing store estate.

The society invested £10m in capital expenditure last year, which included the development of its foot-to-go offers in stores. Scotmid employs around 4,300 staff in 300 stores.