When the Weather Gets Rough, Co-ops Are Tough
The late 2000 merger of 28 community-based co-operatives in Atlantic Canada was a gutsy move to maintain a co-operative alternative in as many communities. The result was Consumers Community Co-operative. The co-operatives' difficulties flowed from intense price competition in their markets, made worse by their dependence on 'price focused' market positioning.
Over the past dozen or so years in Atlantic Canada, small independent family-owned grocery chains have all but disappeared, declining from about 10% of the market to less than 1%. Two multinationals were slugging it out for market share with massive price support and investment in new and refurbished stores.
The 28 co-operatives had 33 stores in widely diverse geographic locations--some more than 1000 kilometers distant from each other. They were a diverse group. Some stores were losing a little money, while others were losing a lot. Many were in poor locations and/or carried large debt loads. Six were 'conventional' co-operatives and the remainder were a discount format, Basics.
With strong support from its distributor Co-op Atlantic, the Consumers Community Co-operative (CCC) management strove to improve operational performance store by store and reap the benefits of synergy savings. The initial year-end results were very encouraging: combined pre-merger losses were cut in half. Then the going got tough.
The challenge was massive--even more massive than many expected. The twenty-eight co-operatives shared many co-operative values and ideas, but there were also distinct differences in the cultures of their boards and managements. There were some common reasons for their difficulties, but each had its own peculiar problems, history, and culture. In some of the former co-operatives, courses of action recommended by Co-op Atlantic in the past had been costly and produced poor results. In others, failure to take good advice had been costly. In many co-ops, both were true. Weaving them into one with a shared culture, with sound management practice, and effective membership input has been daunting for both management and board.
Also daunting was managing the relationship between the CCC and Co-op Atlantic. Co-op Atlantic, owned by 137 consumer and farm supply co-operatives in 5 provinces, has annual sales of more than $500 million. Simply put, whatever the CCC does has a profound impact on Co-op Atlantic, since the CCC is so large and provides such a large percentage of Co-op Atlantic's sales. Its purchases are important to Co-op Atlantic buying power. Its accounts payable are key to Co-op Atlantic accounts receivable. Co-op Atlantic decisions about format changes, financing, marketing and many other areas impact CCC decisions. Co-op Atlantic is, effectively, CCC's financial institution. As co-operative theory would lend one to expect, Co-op Atlantic and the CCC are interdependent. The challenge to the two boards is to ensure that a viable direction emerges from the actions of both.
Clear communication between the boards has at times been problematic. On the CCC board are two directors appointed by the Co-op Atlantic board. For a considerable period they saw their role as being good members of the CCC board, and not as reporting to the Co-op Atlantic Board. As in any complicated relationship, a period of cautious dancing was necessary to keep off each other's toes while learning to be partners. The CCC and Co-op Atlantic boards want and need open communication and have taken steps to ensure that all relevant board decisions are brought to the attention of both boards and managers. And tough decisions there were.
In the fall of 2002, the union representing workers at the St. John's store in Newfoundland, for reasons perhaps both good and bad, made wage demands that the board of directors felt it could not meet across the 33 stores. The store was closed. By year-end, it also became clear to the co-operative that some other branches simply could not be sustained. With great reluctance the board closed six stores. Half the closures were in shrinking markets while others were related to loss levels, location, and building quality problems.
The short-term impact on the balance sheet as a result of differences between book value and market value was negative. It dragged down results in 2002, and the impact has continued into 2003 and will show up in year-end results. But the tough consequences of the closures are behind the CCC, and the improvements in performance are just starting to show. It reminds one of a large wave breaking over the bow of a ship. Even a seasoned sailor can be forgiven a few moments of doubt that the bow will rise again. But so far, steady as she goes, the bow keeps rising.
The competitive pressure has not let up. The CCC is not standing still. Board and management are moving on a four-part plan featuring a renewed emphasis on enlarging the co-operative difference, making membership meaningful, lowering staff turnover, and conducting long-term analysis of the price strategy. Both board and management have clearly stated there are no additional plans for closure. That does not provide ironclad long-term guarantees, but the signal is clear: more closures are not seen as a key to a turnaround.
Hope in the air
The scent of hope is in the air. Co-op Atlantic's new CEO, John Harvey, came into place just before year-end 2002. Since he took over, his combination of strong business skills, solid communication ability, and keen understanding of co-operative values have encouraged local co-operatives across the region.
To many it seems obvious that the less distinctly 'co-operative' our stores are, the less members need them. The more they resemble the competition, the less member loyalty they command and the more vulnerable they become. The CCC challenge is to deepen the differences and market new and existing differences effectively. Creating a difference based on co-operative values and principles requires innovation and creativity but moves to ground where the competition cannot comfortably follow. John Harvey appears to be the ideal person to drive that change.
The shift from members in each community owning their store to 55,000 members across the region owning 26 stores has not been smooth. Members find it harder to see themselves as the real owners. In some areas, the council is made up of former board members who feel diminished by focusing on membership and being reduced to advising. Some of the trading areas have strong local membership councils, while in others it has not been possible even to establish a council. Other board members have made the transition with excitement.
The local councils are also limited by the reality that losses have still not shrunk enough to leave cash for investing in member education and involvement. For example, to minimize costs, the CCC board is not directly elected by the members but by annual meeting delegates chosen by the councils. Small budgets exist for local councils. While some are very creative with their limited financial capacity, others have not found ways to use the funds. The transition from local autonomous boards to membership councils is a slow, painstaking process. It is happening, but at a slower pace than was envisaged. Another challenge is to find ways to help members understand the important co-operative differences that do exist and the benefits to people and communities. One key point of difference is the benefits that flow simply from the presence of co-operative stores in many communities. In towns like Placentia in Newfoundland and Souris in Prince Edward Island, hard lessons were learned over the years when there was no co-operative. Prices for food and other goods were lower when the co-operative was present and higher when it was absent. In many communities gas prices fell three or five cents a litre when the co-operative opened a gas bar.
Would those prices rise if the co-ops were to close? Past experience would suggest a resounding yes, but too few remember. The presence of a co-operative in a community makes fair pricing far more likely. How do you market that benefit to a generation that has grown up with a co-operative presence and has no understanding or feeling for the experience of the past generation? That is a challenge facing all aging co-operatives, but it is keener in the CCC with the memory of lost share value and the demise of community control.
An exciting emerging point of co-operative difference is the farmer-to-family approach being fostered by the Co-op Atlantic Agri-food Strategy and strongly supported by the CCC (See CG #108, September-October 2003). New initiatives are being piloted in CCC stores to link local farmers in the area of each specific store to the Atlantic Tender branded beef, pork and chicken programs. They and other local suppliers of various products will be highlighted with pictures and publicity. Farmer-consumer co-operation and growing trust is not on the competition's shelves.
The CCC is still in a stormy sea. It has survived in spite of tremendous odds. A growing number of stores are moving toward black ink. A recent relocation of the store in Wabush Labrador has paid off handsomely. The will of the Consumers Community Co-operative and Co-op Atlantic has not wavered. The waves will continue to crash but the bow will keep rising.