Co-op Members Weigh Merger Vote

Eastside, Linden Hills, and Wedge Proposed Merger

Thousands of co-op members are voting this month to decide whether bigger is better. Three Minneapolis co-ops — Wedge, Eastside and Linden Hills — are proposing a merger to form a single cooperative with bigger profits and more efficient buying power.

The issue has some Eastside board members running for reelection this fall under a platform opposing consolidation. Opponents say the merger would corporatize their co-op, a place where profits shouldn’t be a driving force. Some have picketed outside The Wedge, holding signs with slogans like: “Why put all our eggs in one basket?”

The consolidated co-op would have more than 32,000 members and $75 million in sales with projected annual savings of more than $300,000, increasing pretax operating income by 29 percent in 2018.

Supporters of the consolidation say the merger would grow the cooperative economy and free up money for investment in the community. Managers say the sign on the door would remain the same at each co-op, they aren’t planning layoffs, and an estimated 20 percent of store products would continue to vary from store to store.

“What we’re proposing here is cooperation. There is nothing really radical about that,” said Josh Resnik, CEO of the Wedge Community Co-op.

The case for consolidation

Resnik said that back in 2012, there were five local stores thlling natural foods. Today he estimates there are 30 competitors. Co-ops offer organic integrity, he said, but the signage at conventional grocers can mislead people who aren’t looking closely.

The idea to consolidate came from Eastside Food Co-op General Manager Amy Fields. When Rainbow left the market, she said, significant competitors started looking at the Twin Cities for the first time. Target is investing in its grocery business, Costco is opening on Broadway, and Fresh Thyme is opening near University & Highway 280. Hy-Vee is coming to 43rd & Central in Columbia Heights, and Fields knows they’re a tough competitor from her time at a co-op in Kansas.

“As a single-store operator, it’s hard,” she said. “…I didn’t want to be collateral damage.”

Fields noticed that other co-ops work under a multi-store model, including Seward, Lakewinds and Mississippi Market, and she thought other Minneapolis co-ops could merge and do the same.

“We put our mission statements together, and we are so much more similar than different,” she said. “We can have more impact in working together.”

Fields said she hasn’t noticed competition from other grocers impacting the bottom line at Eastside thus far.

Eastside saw 10 percent sales growth during its $6.8 million expansion over the past year.

At the Wedge Co-op’s Lyndale store, sales came in 10 percent below budget this year, and staff expect sales to rebound when road construction and the store remodel are completed. The Wedge Table and commissary are currently losing money, according to a spring Twin Cities Co-op Partners finance report, and the Wedge has a plan to help the Nicollet location break even by mid-2018.

“Scale is critical to closing the gap,” according to the report. “Both the consolidation of the three co-ops and increasing sales to other outlets will have a significant impact on profitability.”

Meanwhile the Wedge’s Co-op Partners Warehouse, which distributes to 400 other co-ops and restaurants, is growing significantly, Resnik said.

Sales increased at the Linden Hills Co-op in the past year.

“We had a good year, if you strip out the expenses of the remodel,” said Alex Slichter, president of the Linden Hills Co-op Board.

Voter’s Guide material states that Linden Hills and Eastside would benefit from low debt and high equity at the Wedge. Eastside has more debt than the other two co-ops combined.

Resnik said the biggest changes in a merger would likely appear behind-the-scenes in things like the point-of-sale system or the banking. He said the amount co-ops pay to United Natural Foods (UNFI), their primary grocery supplier, is determined by the size of the business. By merging, he said they’d get deals on palettes of strawberries, for example, rather than buying by the case.

Resnik said about 80 percent of the products in each store would be similar, with about 20 percent unique to each store. He estimated there is already 75 percent overlap today, with vendors like Featherstone Farm and Harmony Valley Farm supplying every co-op.

“I don’t think it’s going to change the customer shopping experience,” Resnik said. “The name on the front door will stay the same.”

Consolidation concerns

Sue Jaeger canvassed and collected checks for the Eastside Food Co-op before it opened in 2003. She said she was surprised to learn of the potential merger, and it’s prompted her to run for election to the board.

“There certainly is a lot of competition out there, but there always has been,” she said. “Co-ops don’t necessarily compete on price.”

“The thing that really attracts people to co-ops is the sense of community,” said Seth Erling, who resigned from the Eastside board a few weeks ago in protest of the consolidation vote and is running for reelection.

“People will drive past Cub, Aldi and Whole Foods because they believe in co-op values,” Erling said. “…In the long run, it’s going to undercut what appeals to people about co-ops.”

Sixteen-year Wedge Co-op member Christopher Loch said he was disappointed about the decision to sell the co-op’s farm, and he worries that Wedge Table is draining too many co-op resources.

“…Consolidation really consolidates power big time, as we go from three GM’s/CEO to one over a much larger membership,” Loch said in an email. “So the CEO’s powers will increase dramatically while owner voices will be diluted and smaller.”

Eastside board candidate Tom Dunnwald has watched the boom in natural foods grow over time, a trend that had its roots in co-ops.

“Some people say, ‘We created this market, so we should own it,’” he said. “They should say, ‘More and more people are eating better, let’s give ourselves a pat on the back and keep going.’ Why do we imagine we want to compete with Walmart? I’m glad Walmart is selling natural foods.”

Eastside board candidate Dan Scoggins said he thinks the business case for consolidation is weak. He said savings of upwards of $300,000 per year out of $75 million in sales seems small. The projected savings don’t seem high enough to drop prices and invest further in the community, he said.

“It doesn’t seem like they’re focusing on the right things,” Scoggins said.

In response to that concern, Resnik said managers are projecting profits conservatively so as not to over-promise the savings. But a $300,000-$400,000 increase in profits in the grocery industry is not insignificant, he said.

“Businesses who get a 2 percent margin are doing quite well,” he said.

Resnik said they wouldn’t grow profit for the sake of making profit. Instead, the co-op would have more money to invest in the things people love about co-ops, he said.

The national picture

Scoggins said he sees co-op consolidation becoming a national trend.

“There is a tremendous amount of pressure for co-ops to be competitive,” Scoggins said. “All this fear of competition is driving them to expand.”

He noted that all three co-ops are members of the National Co+Op Grocers and work with CDS Consulting.

One video cited in co-op consolidation materials is a lecture by NCG Director of Co-op Development Dave Olson.

“Many of our co-ops are seeing negative sales growth,” Olson said, adding that declines extend to the produce and bulk departments, where co-ops were traditionally “untouchable.”

He said historic growth in co-ops came from serving as the main source for organic food.

“The new normal is increasingly that, not only do consumers have more choices than ever when selecting a place to go for that product, they don’t even have to leave their Festival or their Safeway or their Kroger anymore,” he said.

Co-ops in Rochester and LaCrosse in operation since the 1970s merged in 2012 to form the single entity People’s Food Co-op. Seattle’s Central Co-op and Tacoma Food Co-op merged in late 2015, according to the Seattle Times, citing greater buying power and shared administrative costs.

Resnik said National Co+Op Grocers offers resources for co-ops that consolidate, but said he hasn’t felt pressure from the organization.

“We are certainly not getting any pressure to do this,” Resnik said. “Co-ops are about self-determination. We made the decision.”

The path to consolidation

Some former co-op board members said evaluation of the merger has been too secretive, as board members were asked to sign nondisclosure agreements before learning of the proposal.

“If it’s such a great idea, let’s take time and get the facts out,” Jaeger said. “…They’re relying on people being passive and not questioning things, or not voting.”

She said about 4 percent of total membership voted in the last Eastside board election.

Regarding transparency, Resnik said managers didn’t want to bring the merger concept to member-owners until they could answer hard questions, particularly given the sensitive role of workers’ jobs.

Resnik said the managers’ conversations began nearly three years ago and they spent about six months in theoretical discussion. The managers then presented the idea to each co-op board, formed a committee with members of each co-op, and Fields said they spent a year studying the idea. When the three boards determined a merger was feasible, Fields said, they took the issue to owner-members in June. The most detailed work of hammering out a plan took place in the past six-nine months, Resnik said.

This isn’t the first time a merger has come up for a vote at the Wedge. A 1993 vote on consolidation between five co-ops failed, and the potential merger at the time included the Wedge, Seward, Lakewinds, Mississippi Market and Valley Co-op in Stillwater.

Tom Vogel, marketing manager of the Seward Community Co-op, said Seward wasn’t asked to be part of the current discussion, and he said Seward hasn’t seriously considered a merger in recent years. Vogel said the marketplace has become more competitive, although co-ops tend to focus on cooperation with each other.

“We want to see co-ops be successful,” he said.

Sandy Shipp, a former board member at the Eastside Food Co-op, served on the committee to evaluate the merger. Shipp said the committee asked about alternative strategies for broad cooperation that wouldn’t require a merger. Perhaps the co-ops could work together to purchase health care, or merge human resources departments, or consider another shared services model, she said.

“They never really went down that path,” she said. “…There are a lot of other ways we could go about promoting cooperation.”

In response to that question, co-op leadership has said consolidation is the best vehicle for improved prices and margins, providing a stronger balance sheet to weather downturns and act on expansion opportunities.

Slichter said consolidation improves the co-ops’ borrowing power.

“Legally and financially, the game changes if you have a consolidated entity,” he said.

Shipp said an additional year or two of conversation with members could generate great ideas.

“I’m really not against cooperation,” Shipp said. “I feel like the consolidation proposal [vote] has come too quickly.”

Two-thirds of each co-op’s voting members need to approve the consolidation in order to join a merger. The Wedge could pull off a merger with either of the co-ops, but if Wedge members vote in opposition, none of the co-ops will consolidate.

Voting information is posted on each co-op’s website. If members vote to consolidate, the co-ops would merge in July 2017.

Co-op members can vote on consolidation via mail, the co-ops’ websites, or at the annual meetings of each co-op.

Wedge Community Co-op

Annual meeting: Oct. 18, 6 p.m., St. Mary’s Lake Calhoun Event Center, 3450 Irving Ave. S.

Voting closes Oct. 18 at 6:15 p.m.

Linden Hills Co-op

Annual meeting: Oct. 27, 6 p.m., St. Mary’s Greek Orthodox Church, 3450 Irving Ave. S.

Voting closes Oct. 27 at 6:45 p.m.

Eastside Food Co-op

Annual Meeting: Oct. 24, 5:30-8 p.m., 301 on Main (Ukrainian Event Center), 301 Main St. NE

Voting closes Oct. 24 at 6:30 p.m.

Q&A Session: The General Manager and board members answer questions about the consolidation

Oct. 12, 6:30-7:30 p.m. at Eastside Food Co-op, 2551 Central Ave. NE

Save Our Co-ops is promoting two upcoming candidate forums:

Oct. 5, 6:30 p.m. at The Coffee Shop NE, 2852 Johnson St. NE

Oct. 19, 6 p.m. at the Solar Arts building, 711 15th Ave. NE.

MICHELLE BRUCH / [email protected] OCTOBER 3, 2016 UPDATED: OCTOBER 13, 2016

Photo by Michelle Bruch: Josh Resnik, CEO of the Wedge Community Co-op, says consolidation would boost Minneapolis co-ops. 

Photo by Michael Bayly: Chris Loch pickets outside the Wedge Community Co-op. 

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