Strategy: Retrenchment for the Co-op Group to Reduce Gearing

The Co-operative Group, which has endured a pretty horrific period recently, is now firmly on a path of retrenchment. It is starting to take some substantial steps to dispose of business units in order to reduce the group's high level of debts (gearing) and to focus the group on core activities.

Two recent examples help illustrate the strategy.

Today, the Co-op has announced that it is sold its entire Farms Division to the Wellcome Trust for £249 million.

In an even larger disposal last month (July 2014), the Co-op sold its entire chain of pharmacies to a large privately-owned wholesaling business Bestway Group for £620 million.

The Co-op Group has always maintained a highly diversified portfolio of business interests, ranging from financial services, to grocery retailing and funeral services. However, only their funeral services business is a market leader. A key strategic weakness that has dogged the Co-op for some time is that their diverse portfolio has struggled to remain competitive against much better resourced competitors.

So, the decision to dispose of “non-core" businesses looks like a sensible move, particularly as the group struggles to deal with significant debts. The Co-op was badly damaged after the group was hit by a series of financial scandals at its banking division, which in turn resulted in a £1.5bn recapitalisation.

With the group's debts still relatively high, we can probably expect to hear of more disposals. Will the funeral business be next?