Does The Co-Op Food'S Ethical Stance Affect Their Profitability?

During this investigation I aim to answer the question does the Co-op Food's ethical stance affect their profitability? I will do this by acquiring information on the Co-op's profit, comparing it against other supermarket chains within the UK. I also aim to produce some of my own primary research, trying to se if people do avoid or go to the Co-op because of their ethical views.

The Co-op food business is part of the Co-operative group that has business ventures in food retailing, banking, pharmaceuticals, insurance and fashion.

The Co-op's food operating profit for 2005 was Ј71.6M; with the groups operating profit Ј308.4M. The Co-operative group hope one day to become the best co-operative in the world. (See appendix 1). The Co-op food currently has 1713 outlets within the UK, employing just fewer than 44000 employees and they consider themselves to be leading supermarket that offers the best and wide ranging fair-trade products. (See appendix 2). They pride themselves in their work with the environment, community and also offering foods for everyone within their stores. (See appendix 3). I aim to investigate if this ethical and admirable way of trading affects their profit against similar stores that are not as ethically and socially aware in their trading.

One of the main factors that affect the Co-op's way of trading is the way in which they have introduced fair trade and ethical trading into their business. They believe that they have a social responsibility to adhere to and are involved in initiatives and schemes to promote and implement ethical and fair-trading, such schemes like the "Ethical trading initiative". The Co-op also sells fair trade products in every single store and is the only retailer to stock their own fair trade brand. The food stores numerous fair trade products, in which some cases they were the first in the UK to sell such products. They were also the only supermarket in the UK to sell the Fair Trade white wristbands, a worldwide effort to raise awareness of the fair trade movement. The co-op has won numerous awards for their work as well, signifying that they are doing something and it has not gone unrecognised.

Furthermore the Co-op works hard to make sure there business does not have a detrimental effect on the environment. They have introduced biodegradable bags and packaging, a UK first, plus they have supported many other schemes to protect the world we live in. (See appendix 4)

However does the Co-op's ethical trading prevent them for being as profitable as they could be?

To compare profits of the Co-op food and other supermarkets I will use the formula of return on net assets (RONA). I am using this method because it shows how efficient a company is and how much profit they return from the capital invested in their company. It measures performance. I will look at the return on net assets over two years and a few similar companies to Co-op, such as Tesco and Morrison's.

2004 2005

Co-op food 7.7% 7.5%

Tesco 38% 37%

Morrisons 23% 7%

(See appendix 5 for details.)

The figures show surprising results. As you can see the Co-op's RONA is far lower than Tesco and, for one year lower than Morrisons. This would leave me to suggest that the Co-op's ethical trading does affect their profitability. However, maybe a more relevant explanation is the economies of scale that Tesco and Morrisons gain but the Co-op does not. These economies of scales help the likes of Tesco and Morrison's to demand cheaper prices for the quantities that they buy in. They can also afford to buy in such vast volumes because of the floor space in which they hold, maybe another reason for higher profits in comparison to Co-op.

I can suggest this about the Co-op because I have used the method of RONA to calculate a measure of profitability. As opposed to just looking at operating profit, which would show me how much money a company has made, however this would not account for many things that affect profit, like the number of stores and the store size. So it is a reliable way to compare profitability, as the figure I get is the measure of performance of a company over a year, so a this point in my investigation I could interpret that the Co-op's ethical trading does affect their profitability, in a negative way.

However I cannot just leave my investigation there, as I have only looked at the profits of a company, which does give insight into a company but it does not tell me about consumer opinion and how a company is reflected within their market. So in order to realise what views consumers have on the Co-op I have devised a questionnaire to give to them. I asked 5 people I knew who regularly go grocery shopping and I also went to my nearest Co-op store and asked customers to participate. (See appendix 6)

My questionnaire was successful in my opinion as it gave me a rather good insight into consumer opinions of the Co-op. (See appendix 7)

I asked 10 people to complete my questionnaire, 5 of those did shop at the Co-op and 5 did not. This was purely a coincidence to get exactly half and half. From the results I can see that most people knew about the way Co-op trade, whether it is ethical, fair-trade or community. However my results were surprising and they showed that although over 70% of people knew something about the Co-op's ethical trading, but only 40% shopped there because of this. This has got to tell me something about the Co-op; either its pricing is too high, or it does not sell the right products that consumers want. Some would say that the Co-op's unique selling point is their ethical trading as the are the most ethically aware supermarket in the U.K. so they should have a market to aim at, in which at the moment they are the market leaders, however if they cannot guarantee the custom of the people who are likeminded as themselves then they are going to fail, this could be one reason for the extremely low RONA percentage.

Another point that would worry the Co-op is that people 75% of the people who shopped at the Co-op specifically because of their way of trading said they didn't mind paying premium prices for goods. This would worry the Co-op as their own customers realise they are paying very high prices; this could be a reason why they are unable to attract more customers, something that is affecting their profitability. However this point could be turned on its head, as customers who recognise they are paying