Eastern Canada: Natural Food Co-ops See Growth, Threats

Natural food co-operatives in Eastern Canada are facing many of the same opportunities and problems as their counterparts in the US. As more and more people become concerned about the quality of the food they are purchasing, they are seeking alternatives to "industrial" foods raised with pesticides, antibiotics, fertilizers, feed made from waste products, hormones, etc. There is also growing concern about genetically modified foods, fueled by a fear of "cigarette company science" and about economic control of the world's food supply by a shrinking number of huge mega-corporations. The result is that the "natural foods" market in Canada is undergoing rapid expansion and co-operatives are hard pressed to keep up.

There are just two co-operative natural food wholesalers in the country. While experiencing rapid growth, they face stiff competition from conventional corporate wholesalers, large new corporate players from the US, and increasingly from traditional supermarkets moving to grab a share of the rapidly growing natural food market. While co-op wholesalers have withstood competition from similar sized natural food distributors and mainstream wholesalers carrying a line of natural foods, the supermarkets and new large players constitute a new type of challenge.

Multi-national supermarket chains like Loblaws or Sobey's, whether they scatter items throughout the various departments or mount "boutique" type departments, offer consumers the convenience of getting a significant percent of their natural food needs while picking up their main grocery orders. The supermarkets are also focused on the "30% of the product that produces 70% of the sales." This means natural food co-operatives must compete not just with the convenience but with lower prices as well on that thirty per cent. An added burden is that while the supermarkets are not expected by consumers to provide the full selection, the natural food stores are expected to have everything.

The long-term risk to consumers is that the convenience/low price combination on a narrow range of goods could make business untenable for the co-operatives and family owned natural food stores that pioneered the natural food business. The logical result would be a marketplace lacking organized consumer voices like the co-ops and the family owned operations, most of whom are ideologically and ethically committed to the natural food and ecological movements. The supermarkets make innovative and formidable competitors. Loblaws, for example, have begun to introduce a natural food/organic line into their powerful "President's Choice" label. They have introduced over 100 items already and reportedly plan 300 selections.

Two Distributors: Member Profiles

Cooperative D'Alentour serves:

Individual members *3,000
Buying Clubs *300
Independent Grocers **175
* Members of the Co-operative
** Includes some small chains

Ontario Natural Food Co-op's Shifting Membership:

Buying Clubs *250410
Retail and Day Care Co-ops *1710
Non Co-op Members *--214
Non-member Customers--462
* Members of the Co-operative

Ontario Natural Food Co-op (ONFC) serves Eastern Canada along with Cooperative D'Alentour (CD'A), based in Sherbrooke, Quebec. Cooperative D'Alentour serves a primarily French speaking clientele but both ONFC and CD'A have broken the language barrier. Co-operative D'Alentour sells only natural and organic foods. Its original base was as a natural food retail and it still retains a local membership base of some 3,000 individual members in Sherbrooke and the surrounding area. Like ONFC, D'Alentour is experiencing rapidly expanding demand and sales.

CD'A also serves 300 buying club members scattered across the province and provides services to some 175 independent and family merchants around Quebec. Some of these are small chains and a few are natural food stores, but many are small grocers selling a line of natural foods in a community where they would otherwise not be served. At present these small grocers are not members, but Co-operative D'Alentour is seeking to amend its By-Laws to allow them to become members. Finally, CD'A has begun a partnership initiative to supply Co-op Atlantic. More about that below.

ONFC's primarily English-speaking clientele is made up of community-based natural food co-operatives, buying clubs, and small family-run natural food stores. ONFC's sales through the late1990s have seen steady growth -- sometimes faster than can be coped with without strain. ONFC sales extend into Atlantic Canada, supplying buying clubs, non-co-operative natural food stores and Sobey's. Sobey's competes with Co-op Atlantic, but when ONFC began providing Natural food to them, Co-op Atlantic was not interested in natural food (although it does a very small scale of business with ONFC). Sobey's chose ONFC simply because it had encountered difficulties with another supplier and ONFC had a very solid reputation.

The rapid increase of consumer concern about food has led to rapidly increasing sales that have helped move the co-operative from a period of annual losses to a solid financial performance marred only by the strains of adjusting to rapid growth and industry trends. ONFC has also benefited from the failure of a major competitor, Timbuctu. The life-saving growth has also come from solid service and aggressive marketing that brought non-co-operatively organized retail stores, many local family businesses, into the ONFC membership. Being voted the 1999 supplier of the year by natural food stores in Eastern Canada provides firm evidence that it is coping well.

ONFC also faces the threat from cross-border competition. The US giant Tree of Life recently bought into the Toronto market, the heart of ONFC territory. Tree of Life's bargaining power and economies of scale are formidable and ONFC must find strategies to respond. When added to the threat from large supermarket competitors the result is that ONFC must develop strategies to deal with two very different threats at the same time. As larger, more powerful competitors increasingly move into the market, they will approach suppliers with exclusive contract deals that cut ONFC out. This has already happened with a couple of suppliers.

Like its US counterparts, ONFC struggles on the one hand with adjusting to rapid market growth while being forced to seek ever greater economies of scale in wholesale distribution. Both have to be accomplished with difficult access to adequate capital. This has led ONFC to begin an exploration for potential of various types of partnerships. It has explored and rejected one offer for collaboration with a private company, preferring to retain its co-operative character. Interest is growing, however, in talking to potential co-operative natural food partners around North America.

If a co-operative presence in natural food wholesaling is not to be surrendered, co-operation among co-operatives to achieve economies of scale and access to capital will have to be explored with energy and innovation. Randy Whitteker, ONFC's General Manager, has little long-term faith in traditional companies serving co-operatives. Even if you have an agreement at the start, mergers and acquisitions happen so fast that guarantees written today may well be worthless in a couple of years after an ownership change.

In Atlantic Canada, Co-op Atlantic, the co-operatively owned wholesaler for a network of co-operative supermarkets, has long left the natural food business to small family run stores and has traditionally carried neither organic nor other lines of product that would make it a competitor. This was not an ideological position but rather stemmed from seeing the "natural food business" as another type of business not closely related to supermarket offerings.

Recently, competing supermarkets in Atlantic Canada, like their counterparts in Ontario and the rest of Canada have been moving into the organic and natural food business with growing selections and sections. Partly as a response and partly to deepen the consumer appeal, Co-op Atlantic is now exploring options for including organic and natural food offerings. To accomplish this, it is exploring a potential partnership with Co-operative D'Alentour. This deal would offer a substantial boost to D'Alentour, putting its product into some 175 Co-op Atlantic stores in New Brunswick, Prince Edward Island, Nova Scotia, and Newfoundland.

What is clear for all is that there is a major market opportunity in the expanding demand for better food. It seems logical that co-operatives ought to have an edge in a food market segment that requires trust, in a world where major corporations are trusted less and less, especially around food quality. Several questions remain. Can co-operators find ways innovative ways to co-operate within and across borders to grow and maintain a credible presence in the natural food business? Is there any role for other co-operatives (Canadian and US financial co-operatives) to play in providing for the equivalent of the mergers and strategic alliances needed for co-ops to achieve economies of scale? Is enough communication underway to answer these questions?

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