September 4, 2014 / 11:08 AM / 3 years ago

UPDATE 1-Co-op tasks Pennycook to rebuild food-to-funerals mutual

(Adds CEO comments)

By Paul Sandle

LONDON, Sept 4 (Reuters) - Britain's Co-operative Group said it would rebuild its food-to-funeral operations under chief executive Richard Pennycook after the loss of control of its bank and disposals helped stem the large losses of last year.

The mutual organisation was hit by a raft of problems that culminated in a 2.5 billion pounds ($4 billion) loss in total.

Pennycook, the interim chief executive who was confirmed in the role on Thursday, said the 150-year old mutual was now on a firmer footing, but weaker first-half earnings in its remianing businesses underlined the scale of the challenge ahead.

The group posted income of 116 million pounds for the six months to July 5, compared with a 1 billion pound loss a year ago, when it partly recapitalised its bank and wrote-off goodwill relating to its acquisition of the Somerfield grocery chain.

Its remaining businesses saw a fall in underlying profit to 66 million pounds, down from 116 million pounds a year ago.

It agreed on Saturday to overhaul its governance structure, putting in place a board to return the 150-year old group to financial health.

Pennycook said he was under no illusions about the scale of work necessary.

"(The businesses) are all underperforming, and we make no bones about that, but they all fit very well with the purpose of the Co-op to serve our members and be at the heart of our communities," he told reporters on Thursday.

Pennycook said the turnaround would take three years, but the disposal of parts of the business, such as its pharmacies, laid a solid foundation to rebuild. He will reveal his strategy at the full-year results next year.

The Co-op, like Britain's other big supermarket chains, is being squeezed by discount retailers Aldi and Lidl in a grocery market that is barely growing at all.

It had a 6.4 percent share of the British grocery market in the 12 weeks to Aug. 17, down from 6.6 percent a year ago, according to Kantar Worldpanel.

Underlying profit in the group's food division fell 8.2 percent to 107 million pounds on flat overall sales of 3.6 billion pounds.

Pennycook said despite the problems of recent years, some 11 million customers a week were still coming through its doors, and there was considerable goodwill towards a group that he said was an institution. ($1 = 0.6076 British Pounds) (Reporting by Paul Sandle; editing by Sarah Young and Susan thomas)

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