Davis Food Co-op: Turnaround Tale

The Davis Food Co-op is having the best year in its 17 year history. With this year's sales projected at $3.8 million, active membership at 2100, and annual profitability expected to be 3 percent, the co-op is booming. Involvement is high, with close to 300 members working in the store each month and being rewarded with a 5 percent discount. With 40 staff, sales up more than 30 percent over last year, and a new mercantile department about to open, the future looks bright for the Davis Food Co-op.

However, this picture of prosperity only appeared during 1988. The prior period, 1986-87, was the worst of times for the co-op. Sales volume dropped over 10 percent, serious losses piled up quarter after quarter, and Carol Shearly, the longtime manager, gave notice she want to pursue a new career. What follows is a chronicle of what the Davis Food Co-op did to move from near death as a community institution to its role as the most dynamic retailer in downtown Davis.

Site improvements and management

One of the keys to the Davis Food Co-op situation, and where our story begins, dates to November 1985, when the landlord who subleased the building to us decided to give up the lease; this was after less than three years, rather than the six years we had been expecting. In negotiations with Safeway, the master leaseholder, we were quickly confronted with a difficult choice: either we leased the entire 22,000 square feet or we had to vacate the 11,000 we were actually renting. Adding another $5,000 per month in rent was not our first choice -- but survival was. So, the Davis Food Co-op signed a lease for the entire building.

In January 1986, after taking over the master lease, the co-op negotiated a long-term at-cost lease with the Davis Community Clinic for half of the empty 11,000 square feet. The clinic used a large community development block grant for its own improvements. The co-op only covered its lease costs but did reduce the ongoing monthly losses. Unfortunately, it would be two years before all the other space was leased.

In 1986 and 1987, through the efforts of members and others, the Davis Food Co-op won a total of $45,000 in direct community development block grants from the City of Davis to attract new small businesses to the vacant spaces. In November 1987, the Sunshine Cafe opened up; in February 1988, Tomaso's Tomato Pies followed; and in July 1988, Berry's Used Books completed filling the vacant spaces. The block grant paid for most of the improvements and costs associated with making the overall site look attractive.

In March 1987, after a national search and four months without a manager, the co-op appointed Dennis McLearn of Fortuna, California, as general manager. Dennis had many years of retailing and management experience and had served in a number of positions at the Arcata Co-op (now North Coast Cooperative), including general manager. Prior to appointing Dennis, the co-op appointed Ken Krueger (former manager of Isla Vista Co-op) as comptroller/merchandiser. Along with the two new appointees, the co-op made Carol Johnson operating manager and appointed all three as a management team.

Pricing and image

A major immediate challenge (as Dennis explains in more detail below) was to examine and change the store's pricing. Dennis worked with senior staff and board to initiate a major bylaw change which affected the pricing structure. The change was from a system of surcharges for non-working members and non-members to one of a discount for working members, shelf price for members, and a surcharge for nonmembers. The campaign to win member approval was a long educational task; when the votes were counted in September 1987, the members had voted by more than 80 percent to approve the pricing change.

One step taken in conjunction with the pricing change was a shift in our major wholesaler. The management team had researched our existing wholesaler and Certified Grocers (a retailer-owned cooperative), and the conclusion was clear: joining Certified meant at least a 2 percent cut in our cost of goods. At the same time, they required a sizable working discount and long term capital commitment. But in signing on with Certified, we not only lowered our costs -- we gained access to their considerable resources in planning and resetting our facility.

Managing a Turnaround

By Dennis McLearn

In 1987, it was apparent to me, as well as many others involved, that the co-op's continued focus on working members was a major concern. A non-working membership had been approved two years earlier, which had resulted in increased membership and the following surcharge system: working members paid shelf price, nonworking members paid a 9 percent surcharge, and nonmembers paid a 15 percent surcharge.

Approximately 65 percent of our volume was coming from the working members. The effect of this was to focus the co-op's attention on increasing the number o fworkmg members, rather than focusing on the real problem: <em>only the working member price was competitive with the other markets in the area.</em> I saw my task as twofold: we needed to change the structure so that non-working member prices were competitive (while not negatively impacting the working member), and to sell this concept to the co-op's board and membership.

Having worked through many possibilities, Ken and I presented a plan to the board of directors under which members would shop at shelf price, working members receive a 5 percent discount, and non-members pay a 5 percent surcharge.

It doesn't take a genius to see that one can't go from a surcharge system to a discount system without negatively affecting the margin or prices. Another component of this plan had to be a change in our primary grocery wholesaler. This change, to Certified Grocers, reduced our overall cost of goods by 2-4 percent.

Yet another component was a major reset of the entire store. Certified played an invaluable role here, as their professional expertise in the planning stages and their actual manual labor were invaluable.

The results are in: we have a new organization, we have staff people at every level who are proficient and efficient. We are approaching decisions in a decidedly cooperative manner, while applying sound business practices to those decisions. Here are some measurable changes over these past two years:

• Personnel costs have gone from 16.5 percent to 14.5 percent, yet everyone who has been here these two years has had approximately a 20 percent increase in their individual wages.
• Margin has increased from 23 to 27.5 percent.
• Sales have increased from $2.5 million to a near $4 million pace; we are still experiencing a 35 percent gain over our previous year.

Bottom line -- one year ago, our retained earnings were a negative $30,000. By the end of our current quarter, we will have $60-70,000 in retained earnings. The cooperative's total equities will have gone from approximately $90,000 to substantially over $200,000.

Marketing a Changed Co-op

By Dave Webb

Bad news has a sneaky way of overstaying its welcome. Certainly, by 1986, the Davis community had heard its share of bad news about its food co-op. Our image problems were many. One was unprofessionalism of presentation, a small store struggling to fit into a supermarket-size space. Secondly, our niche was not clearly defined. We were half grocery store and half health food store, and instead of being perceived as a novel fusion of the two, we were viewed as indecisive. In addition, our financial struggles were widely known, creating the image that we were a failing business.

Thus, the turnaround of the Davis Food Co-op had to be a turnaround in image as well as substance.

Our first task was to convey the changes the co-op had undertaken. We launched our campaign with a new ad format in our weekly newspaper ads, a new, widely distributed brochure outlining these changes, a new membership brochure, new point-of-purchase signs, even newly designed grocery bags, all touting the "Off To A Fresh Start" theme. Over and over again, we pounded these points home: the co-op has new management, there are a thousand new items in the store, and a dramatically reduced surcharge. We celebrated our 15th anniversary with a Tasting Faire, sampling 40 foods free of charge. We utilized radio ads during this period as well.

The second tool we used conveying change was testimonial ads in the newspaper. We ran a picture and personal statement featuring local sports celebrities and other community characters. Testimonials put a human face on our mercantile efforts; people trust them in a way they don't trust the usual advertising superlatives.

We use direct mail both to counter that nagging image of unprofessionalism and to further clarify our niche. Every month, we piggyback a Davis Food Co-op brochure to a local mass-mailer. This goes to half the households in town. The brochure (which I do in-house) features 25 food items carefully selected to convey healthy food, good price image, and a tinge of the quasi-gourmet. This, like most of our graphic related work, is done on a Macintosh computer, with a Pagemaker/ReadySetGo program. It's a 6-panel, two-fold, three-color brochure that was pictured in the Natural Foods Merchandiser, and recently won an award from the International Association of Business Communicators. The image conveyed by the brochure is informative, humorous, and a far cry from traditional grocery store advertising. 10,000 brochures cost us $1700, printed and mailed, not including 50 hours staff time.

In terms of our niche, there is an established consumer trend towards natural foods, as doubts about food safety intensify. Within days of the recent Chilean produce incident and apple scare, both NBC News and Newsweek were at the co-op for stories on organics. Add the cooperative principles of education and consumer empowerment, and it is clear that the co-op movement is better suited than most to sell healthful food to the as yet uninitiated. By emphasizing organic produce, natural meats, and other products that convey good health, we have clearly delineated our place in the market. Basic marketing tools have helped insure that our audience instantly equates healthier food with the Davis Food Co-op.

Another major factor was our change in advertising and outreach focus. The image of the Davis Food Co-op was at the time one of multiple negatives for the many in Davis, and some positives for a few. (In an accompanying piece, outreach director Dave Webb describes in more detail our situational analysis and strategy.) Key elements of the marketing campaign were the pricing change, a great increase in product offerings, extensive promotion through attractive brochures sent by direct mail, and testimonial advertisements.

Among the product line and store set changes, of particular note is the bulk section. The co-op purchased a new set of bulk bins, with the help of a $18,500 loan from Associated Cooperatives, of which Davis Food Co-op is a member. The bulk section was then moved to a new part of the store, where it gained identity for the first time as its own department. Since the move, department sales have increased 35 percent, and its net is 15 percent of total profits. (The bulk section at the co-op was featured in an article in the February 1989 Natural Foods Merchandiser.)

Members and shoppers alike slowly began to respond to all the changes. For the board and staff, 1987 seemed like a revolutionary era. However, the immediate response in volume was minimal. Not until April/May of the next year did a significant sales increase begin -- it took six months for the hard work and changes to take effect.

Capital

Help in the form of working capital in this period of growth and change was obtained through a $15,000 loan from the National Co-op Bank Development Corporation. The bigger change, however, came in addressing a pattern of member shares being used to cover unprofitable operations, and the consequent decline in value of those shares.

Previously, the Davis Food Co-op had raised its share capital through two methods. One was to initiate a $10 share assessment annually by sending out a notice. The second was to discuss an additional $10 share assessment at the board level and then present the assessment at one of the semiannual meetings. If the members approved the assessment, we then sent out notice and started all over again. Each year the approximately $20,000 cash inflow was equal to our annual losses. Without this capital we would not have survived. But the methods for securing it were time consuming and left members depressed and resentful.

In April of 1988, to complete the series of major changes, the board proposed a bylaw amendment on member shares. The new plan, later approved by the members, calls for an annual $15 share from each member until the member has $100 total in shares. The simplicity of the mechanism reduces everybody's time and effort, and the co-op now can depend on this source of capital. With 2,000 active members, the co-op is looking at $30,000 in annual capital from members.

During the 1989 spring share drive, the co-op has added the benefits of a membership card. The "co-op saver" card will offer discounts at over 20 local stores and service establishments. Our active households are now a major segment of the Davis market. We expect the card to extend the value of co-op membership far beyond the store.

David Thompson is a board member at Davis Food Co-op and is vice president of Western states for the National Cooperative Business Association. Dennis McLearn is general manager at Davis Food Co-op. Dave Webb is marketing director.