Taking a Hard Look at 'The Co-op Difference'

When a competing natural foods store comes to town, it forces a co-op to sit up and take notice. In 1981, when Wellspring Grocery opened four blocks from the Food Co-op in Durham, North Carolina, it highlighted the co-op's problems and demonstrated how many customers a high quality natural foods operation could attract. Responding to Wellspring and finding a market niche alongside it has been a major challenge for the Durham Food Co-op.

Wellspring is an example of a natural foods store that sees service as an important item. It has what the co-op lacked: convenience, ease of shopping, and the availability of a wide range of products. A Wellspring customer could be in and out again quickly without having to mark down prices, ask where something is or wait on an inexperienced cashier -- delays common at the co-op. Even committed co-op shoppers found themselves traveling to Wellspring for fresher produce or to pick up something the co-op didn't stock or was out of.

On top of its good service, Wellspring performs many community functions that co-ops pride themselves on. Wellspring purchases produce from local growers in quantities that, unlike the co-op's, are large enough to make that support meaningful. A customer at Wellspring was and still is more likely to get accurate and complete product information than one at the co-op. Wellspring even supports political events, such as the local nuclear disarmament campaign.

Stagnation at the co-op

That the co-op could and should learn something from Wellspring seems obvious in retrospect, but it took the co-op several years to react to what it saw. Part of the problem was a confusion over to what extent Wellspring served the same market as the co-op. Even though Wellspring did much of what the co-op intended to do, there were enough differences between the two stores to lead to the perception that they served different markets. Wellspring wooed most of its customers from traditional chains such as Kroger and A&P, not from the co-op. The co-op was a membership organization that required each member to work two hours per month in the store. It was somewhat insulated from competition, because many co-op customers shopped there out of commitment to co-ops without evaluating it against other stores.

In reality, the two stores' markets were somewhat different, but they overlapped considerably. The co-op lost 30 percent of its business when Wellspring opened. And Wellspring shoppers made up much of the co-op's potential growth market.

The co-op moved so slowly in reacting to Wellspring mostly because of characteristics related to its cooperative structure: its collective decision-making, its member labor system, and its political mindset. A key problem with collective decision-making involves confusion over responsibilities. In the Durham Food Co-op's case, it was never clear who was responsible for analyzing the effects of Wellspring and for developing a response. Without any clear leadership on this issue, it proved difficult to focus attention and rally consensus.

The decision making problem was exacerbated by the fact that the management was overly consumed with doing what the member labor system was supposed to do but never actually did, which was operate the store. While the staff was already putting in overtime to compensate for the irregular supply of member labor, the Board was loathe to take it to the task of producing a turnaround. Contributing to the stalemate was an attitude on the part of some members that improving the store's appearance and efficiency and attempting growth was "selling out" to the yuppies.

The result was that the co-op, for all its talent, was less well run than almost any private business, especially compared to nearby Wellspring. The crucial innovative role, played in small businesses by the owner and larger companies by the management, was played at the co-op by no one. The management had little incentive to do the planning and research necessary to orchestrate a turnaround, since it was not paid for this work or promised the authority to implement a plan. Wellspring's decision to forego a cooperative structure to avoid this sort of paralysis seemed wise. During the years in which the co-op stagnated, Wellspring thrived and made use of the time to plan an expansion into a new store.

Durham Food Coop

Total Size: 1300 sq. ft.

Retail Space: 1150 sq. ft.

Sales (May 1986): $26,000

Average Sale Per Customer: $13.00

Gross Margin: 23%

Labor as % of Sales:
      19.0% (incl. discounts)
      10.0% (not incl. discounts)

Departmental Breakdown:
      Produce 20%
      Grocery 80%

Management changes

The Durham Food Co-op's cycle of indecision was cracked only when a financial crisis struck. The co-op lost $7000 in 1985; the volume of business was simply insufficient to support the overhead. Labor costs were as high as industry averages, even with all members working. Prices were not significantly low enough to justify the hassles of shopping there.

A consultant's report recommending hiring a general manager split the staff and board. The ensuing conflicts eventually led to several board members resigning and a restructuring of the staff from three co-managers and a bookkeeper, to two co-managers.

The remaining co-managers used the breakdown in authority to push for several changes. Following up on a fall referendum, the work requirement was dropped. And the member labor system was restructured to require workers to sign up for the same job for a four-month period. Work shifts were extended from 2 to 3 hours, and members were given the option of working a shift once a week, once every other week, or once every fourth week. The more often one worked, the higher the discount.

The two managers formed a worker cooperative between themselves and arranged to be paid on a strict percentage of sales basis (currently set at 10% of sales). Under the plan, the workers pay all taxes and allocate their own benefits from their percentage. The plan represents a built-in incentive clause for the workers: if co-op sales grow, their pay automatically increases. It also represents a savings to the co-op over what it was paying its labor, and makes payroll a variable expense that rises or drops with the co-op's fortunes.

The co-op also embarked on a rapid store renovation. The layout was re-arranged and new shelves were built. Wellspring contributed to the effort by donating three coolers, a checkout counter and ten small grocery carts. New suppliers and products were added to stock the shelves as inventory was increased by a third. The staff also negotiated lower prices on several items, including milk and bread, with the latter appearing with the co-op's own label. The rate of change was rapid. It felt as if three years of catching up was happening in three months.

The results have been favorable. Co-op sales since the first of the year are running 25 percent over last year, at the same time that Wellspring was tripling its size as a result of moving into its new store, now only two blocks away. There have been some ruffled feathers, mostly because communication could not keep up with the rate of change. The re-appearance of the co-op newsletter and a membership meeting have diminished this problem. An evaluation of the staff's performance showed most of the co-op happy with the direction of the changes.

Sustaining the turnaround

Now that the co-op has closed some of the gap between it and Wellspring, its next challenge is to clarify its market niche. The existence of Wellspring is significant for this process in two ways. With an annual volume over $4,000,000, Wellspring is the overriding factor in the market. Any significant co-op growth means competing with Wellspring for that market. The existence of Wellspring also benefits the co-op, however. Wellspring does an enormous amount of research about products, which allows the co-op to identify new products much quicker than it would otherwise. The co-op can also borrow ideas of ways to display, package and dispense foods. Wellspring has also served to introduce natural foods to a huge quantity of people. Appealing even to the fringe of Wellspring's market could be a significant boon for the co-op.

One possible strategy for the co-op is to provide nearly the same service as Wellspring, but beat it on price. The co-op's price advantage could be significant, since Wellspring is locked into high prices to maintain the image it cultivates and the many "frills" it offers.

Marketing the co-op on the basis of low prices may be more complicated than it first appears, however. The co-op currently beats Wellspring's prices across the board, but many customers think of the co-op as being high priced, according to a recent survey of co-op shoppers. In order for this to be a successful strategy, the co-op may need to improve its price image through techniques such as heavy promotion of a select number of "super bargains" and the substitution of small sizes, such as 12-ounce bags of coffee and undersized broccoli. Some members question whether these techniques, which are designed to fool the consumer, are appropriate for a co-op. A low price campaign would also have to beat the prices of a new generation of supermarkets with extensive produce, cheese and gourmet selections. Beating everyone's prices consistently would require a hard look at the efficiency of some of the aspects that make it a co-op, such as the member labor system.

A second option is to try to market the co-op as an "alternative" store. When Wellspring moved into its new location, it lost some of the coziness that distinguished it from supermarkets. It also added a meat and fish section, which offended some of the natural foods community. The co-op could pick up on these themes and emphasize its other alternative aspects as well. Where else, after all, can one work for a discount, participate in decisions, and discuss food politics openly with the store management? Such a strategy would certainly satisfy the current membership. At the recent membership meeting, a member labor system open to all and food politics were rated "must haves."

A third alternative would be to tailor the co-op to a certain size (say 500 households) and try to serve this limited group as well as possible. Such a strategy concedes the mass market to Wellspring, and focuses all of the co-op's attention on those who really want a co-op. This strategy might follow the direct charge model, in which each household pays a weekly fee of a couple of dollars, and shops at extraordinarily low prices. This model encourages each household to buy as much of its needs as it can at the co-op, since the price is so low once the fee has been paid. The advantages of this system are its predictable revenue and shopping patterns.

Membership: the co-op difference

Whatever marketing niche the co-op pursues, it needs to take advantage of the areas in which it has a comparative advantage over Wellspring and other stores. To start with, the co-op needs to realize the benefits of having several hundred owners by having its members contribute more towards the capitalization of the store. Members currently invest only five dollars when they join the co-op, in the form of a refundable certificate; they also pay one dollar a month dues. (Unlike under the direct charge model referred to earlier, however, this "dues" figure is not calculated based on overhead costs.) The membership can afford to invest more, and they need to if the co-op is to replace and upgrade its equipment.

The co-op needs to take much better advantage of the unique situation whereby its customers are also its owners. Co-op members potentially care more and will do more for their store, but only to the extent that they feel a part of the business. Currently the quality of the relationship between the decision-makers (the staff and Board) and the membership is not all that different compared to other stores. This has to do with the fact that the means by which that communication occurs are conventional -- newsletter, signs, flyers and a suggestion board. The unexceptional communication that results from these bureaucratic channels contrasts markedly with the lively and sometimes passionate discussion that occurs when members are engaged personally in discussion -- either with a manager in the store or at a membership meeting. The co-op would benefit from an ongoing structure in which members were part of a small group that meets regularly to hear about what's happening at the co-op and to provide input.

The member labor system can be a distinct advantage over other stores, but only if it's refined so that it's not only an attraction to members but is also a competitive economic advantage. The difficulties caused by an uneven supply of labor have been alleviated by requiring all members to choose a regular shift for a four month period. Much of the work in a grocery store is easy enough that a part-time worker can do it, if systems are self evident or there are written instructions when they aren't. But members can't expect the co-op to be able to compensate them at market rates for work they do as a volunteer in their own store. Instead, the benefits accruing to the co-op as a whole, and the enjoyable nature of the experience, need to be emphasized.

Finally, the co-op needs to take advantage of being a part of the family of co-ops. For the last year, the managers of nearby retail coops have met together monthly, a program started by Walden Swanson when he was at Mountain Warehouse. Out of the meetings has come talk of forming a worker cooperative that would contract to manage some of these stores. The advantages in purchasing, financial work and supplier development of having shared, quality management could be considerable. The Durham Food Co-op has also benefited from consultation with co-ops from Cambridge, Massachusetts to Mt. View, California. It has been heartening to telephone around the country and receive a warm response because it is another co-op calling.

For a followup story on the formation of a new cooperative in the same area of North Carolina, see "Weaver Street Market: A modern day co-op story," CG #21, February-March 1989.

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