The merger between Thomas Cook retail and the Co-operative Travel makes a lot of business sense, but the job cuts are likely to be substantial.
The commercial case is clear. First, the shops are barely making money. This morning’s announcement to the City reveals the Co-operative Travel’s retail business will deliver an operating profit of £0.1 million this year, less than 0.1% of turnover before additional costs.
Thomas Cook expects to report a retail operating profit of £12.4 million for the year to September 30 – not a fortune on revenue of £264 million (about 4.7%), but a contribution in group terms. However, add in the other costs of a retail estate and the margin – if there is one – will be miniscule.
The benefit to Thomas Cook comes in the shops selling package holidays, on which the margin can be considerably higher, and the company foresees selling more holidays in-house through the expanded chain of outlets – boosting in-house sales to 80% and adding £10 million a year in profit.
Second, the deal promises savings of £35 million a year within two years, following a lay-out of £30 million in the first year, and allows the pair to rationalise their outlets – eliminating competing stores and closing those that were struggling.
Third, the merger costs nothing up front, apart from redundancy and closure costs. Thomas Cook will split any retail profits 70/30 with its partner and make up the shortfall if the Co-operative Group’s share comes in under £40 million over the first four years.
So, for the Co-op, the deal promises to deliver £10 million a year where it currently makes next to nothing.
Fourth, the deal undoubtedly strengthens the position of UK number-two Thomas Cook “should market conditions in the UK remain weak”, which appears likely, and will bolster its share value after a difficult period.
Thomas Cook’s share price was up almost 3% by late afternoon on the day of the announcement, despite a small fall in the FTSE overall. Thomas Cook has the option to buy out its partner from the fifth year on, should that suit both.
The deal represents one of the few remaining mergers possible in UK travel retail. However, it is hard to see it as good news for head office staff at Co-operative Travel – other than for those who would welcome redundancy or relocation to Peterborough.
It must be similarly bad news for a significant number of agents at both companies. A reduction from 1,200 shops to below 900 must be on the cards – and the addition of 100 Midlands Cooperative shops will exacerbate the uncertainty for staff.
Expect a formal consultation with head office staff – principally at the Cooperative Travel – to run into the New Year, and shop closures through a large portion of 2011.
The news will also undoubtedly disturb independent tour operators, who risk losing a large slice of their high-street distribution, but it appears rather better for the agency consortia, who will now offer the only high-street outlets independent of the big two.