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The Co-op Group has warned of continuing food supply and inflation problems after revealing that profits more than halved last year due to supply chain disruption and increase in staff salaries.

The mutual said underlying profit for 2021, removing a one-time gain of £99m from the sale of the co-operative bank in 2017, was down 57% to £100m, from to the previous year, and that sales slipped to £11.2 billion, from £11.5 billion.

Sales in the group’s food business fell 2% to £9.1bn despite investing £140m in opening 50 new stores and redeveloping 87 others, and spending of £18 million to cut prices. While in-store sales declined, online sales rose from £70m the previous year to £200m, partly thanks to tie-ups with Deliveroo and Amazon.

Sales also fell in the co-op’s funeral business, falling by £8m to £264m.

Shirine Khoury-Haq, the cooperative’s new acting general manager, said: “Last year, we faced significant challenges, including significant supply chain issues in the second half of the year, which come at the same time as the transformation of our food business and rising inflationary pressures.

“The challenging operating environment has had a disproportionate impact on our food business, given its focus on the community convenience market, with an operating model that relies more on supply chain flexibility.”

She said the co-op would reconsider its current strategy of opening 50 to 100 stores a year, as she suspected a change would be needed given the shift to online shopping and cost challenges.

Khoury-Haq said inflation and supply chain problems were not just caused by the war in Ukraine, which has driven up energy prices and affected the supply of wheat and edible oils .

Even the price of coffins in the group’s funeral business has increased due to global shortages of wood and other resources, in part due to the pandemic.

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Problems with heavy rain and flooding in Spain, which supplies large quantities of fresh vegetables to the UK at this time of year, have also affected supplies of broccoli, courgettes and other vegetables. Khoury-Haq, who replaces Steve Murrells in May, said the co-op had been forced to source elsewhere or offer alternatives due to shortages.

She said some food price increases were ‘inevitable’ this year, but the co-op was trying to ease customer issues by not raising the price of 1,000 key items and adding 100 more products to its budget range. .

The co-op said it outperformed the grocery market. However, it expects its food business “to face continued challenges during the year” amid “inflationary pressures and economic uncertainty faced by customers”.

Allan Leighton, Co-op President, said, “The economic headwinds appear severe and will be difficult to manage, but with our planned and ongoing strategic investments, our Co-op is well positioned to weather the storm and thrive beyond.”

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