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Balance needed for Co-operative

The Co-operative Group has not had its woes to seek in recent years, but they deepened yesterday with the announcement of losses of £2.5bn for 2013.

Not only are they the worst results in the group's history, they come after a succession of crises: the disastrous takeover of Britannia, the attempted purchase of Lloyds branches, the fall of its chief executive Paul Flowers and the resignation of his successor. Together, these difficulties have shattered the image of what was once seen as a model of sound, sensible business values.

In admitting the scale of the losses in 2013, the Co-op's chief executive, Richard Pennycook, yesterday rightly identified the two most important strands of the group's ongoing problems. The first is its banking arm, which was responsible for the great majority of the 2013 losses (£2.1bn); the second is the fine detail of its mutual structure, which Mr Pennycook says needs fundamental reform.

On the first issue - the banking business - most of the trouble stems from the takeover of the Britannia, which in retrospect was misguided but which at the time had the support of the Labour government. In the end, it proved to be disastrous for the Co-op and led to private investors having to rescue the bank last year.

However, banking is not the only problem in the Co-op's business model. Its supermarket arm has also been malfunctioning, partly because of the acquisition of the Somerfield chain which left Co-op with a large number of big stores and partly because of the crisis in the supermarket sector as a whole and the challenge from budget operators such as Lidl.

What is obvious now is that the Somerfield and Britannia deals were strategic and financial mistakes, but they also shone a light on the second problem: the mutual structure. Former chief executive Euan Sutherland called the group ungovernable and there is an emerging consensus that change is needed, not least because a lack of reform will make it difficult to attract a new chief executive.

The question is how far reform should go. Many members are worried the group's values and structure are under threat, which is understandable, but the particular arrangement at the Co-op, based on a series of committees, makes it difficult for the chief executive to take the kind of decisions that would be taken for granted in other businesses.

The answer is not to impose a corporate structure that is alien to the Co-op, but the group must find a balance between a sound mutual structure and the business sectors in which it operates. Fellow mutual Scotmid, for example, has stayed focused on its core portfolio of chemists and funeral directors. Part of the Co-op's problem has been that it has expanded beyond its core into sectors unsuited to its mutual status.

Either a more appropriate structure must be found for the Co-op as it is now or its businesses must be separated off and run in different ways. Whatever happens, the aim must be to ensure the Co-op is more businesslike when it needs to be while also remaining true to its co-operative values.

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