Linking Buying Clubs and Retails for Co-op Development

Northeast Cooperatives has put serious thought into how buying clubs and retail cooperatives may exist in mutually dependent and supportive ways. Because there is such overlap of intent, desires and membership, retail and buying club cooperatives sometimes disagree intensely over issues of pricing, capture of sales, members or 'purity" of intent. Instead, because of our similarities and because we both face similar pressures from the grocery mass market world, we should work together to understand the synergy that can and does exist between cooperatives.

Part 1: The Dynamics of Buying Club Co-ops

By Deb Maynard

Understanding buying club co-ops in general and the particular co-ops in your area is important to developing a relationship that will benefit your store. Knowing who the buying club customer is, what needs are met by the buying club co-op, and what difficulties the buying club co-ops face are the key factors in developing a mutually beneficial relationship and incorporating the buying club co-op members into your store as lifelong customers.

The unique history and personalities involved in your local buying clubs are for you to discover as you build a relationship with them. But here is some general background on the contemporary buying club phenomenon:

The natural foods co-op movement of today had antecedents, but for most people began in 1960s as they became more aware of the foods they were eating, the sources of those foods, and the chain of supply that brought those foods to them. In those days, the food supply choices were limited to the mass market chain stores, "health food" stores carrying rows of supplements and Dr. Bronner's Peppermint Soap, and small independent markets stocking primarily mass market items. There were few sources of natural foods. Buying club co-ops developed as a means of obtaining the high quality food people wanted.

The politics of food was also a factor in the development of buying club co-ops. People wanted to spend their grocery dollars in ways that were in line with their value systems: less packaging, natural, no chemical ingredients, small/local rather than big/corporate, etc.

That was then, and this is now. Why do people participate in buying club co-ops today, and what are the challenges and difficulties that buying clubs face? If your store can satisfy the needs and alleviate some of the difficulties, you will be well on your way to incorporating these people into your store as customers and as members.

Availability: Many of today's buying club co-ops meet the same needs that co-ops met 20 to 30 years ago. Like other co-op distributors, Northeast Cooperatives serves many buying clubs in rural areas whose local retail shopping choices are limited to mass market stores or long drives to a natural foods retailer.

Choice: Members of these co-ops are looking for good food at affordable prices and for products that are in line with their values: organic, biodegradable, recycled, etc. In addition, more and more people are seeking out buying club co-ops because of special dietary needs and restrictions. In addition to vegetarian, vegan and kosher diets, people's food choices are limited by allergies and disease. Food allergies of many kinds seem to be becoming more common, or else more frequently identified, and it can be hard to find the special foods needed through conventional vehicles. People whose lives have been touched by cancer or other diseases are seeking sources of organic foods.

Community: Buying club co-ops meet other, less tangible needs for their members. The trends towards megasupermarkets and advertising that lacks useful product information are not to everyone's liking. Many people prefer the inconvenience of waiting for a truck to the inconvenience of pushing a shopping cart through miles of supermarket aisles. Meeting with like-minded people to distribute an order, while your kids play in the corner, is preferable to strapping your child into a shopping cart and hiking past miles of foods loaded with things you don't want your child to eat.

The buying club co-op also meets people's need for belonging and community. The order meetings and distribution days are opportunities for socializing. The functioning of the co-op provides the satisfaction of working together. The co-op is a source of accomplishment and pride. Members speak of it as "our co-op" and are right to be proud of creating an organization that serves their community.

The politics of food: As any co-op grocer knows, members can hold a wide variety of opinions on what items the co-op should buy and sell. Buying club co-ops offer a means by which people can meet their needs with products that satisfy their value systems. This can be as simple as choosing to buy an item in bulk rather than a packaged format, or can involve more complex judgments about vendors, ingredients, international politics, etc. The cooperative ownership value comes into play here as well; as a co-op grocer you are in a position to gain the loyalty and support of these customers, as you explain what it means to be a community owned business, just like theirs.

Price: And of course, there is price. People participate in buying club co-ops because they can save money on food by sacrificing some free time and convenience. If your budget is limited, you can afford to give your family better food by participating in a buying club co-op. These days, when two-income families are the norm, participation in a buying club co-op helps families manage on one income so one parent can stay home with the kids.

For all the benefits buying club co-ops can offer their members, there are balancing difficulties:

Time: In exchange for lower prices, buying club members contribute time and energy as they do the work of organizing the order, meeting the truck, unloading the truck, distributing the order, invoicing each member, handling credits and debits, maintaining the books, balancing the checkbook, having seemingly endless phone calls and meetings.

Money: Sure, consumers can save money through buying club co-ops, but buying club buying also means buying club paying. Consumers need to manage their money very differently when buying through a co-op. Most buying club co-ops require members to pay ahead; people are putting out money for several weeks worth ofgroceries at one time. One household might pay at one time for three months' supply of spaghetti sauce, a month's worth of juice, six months' supply of laundry detergent -- money is tied up in inventory. Many buying clubs deal with this issue by splitting cases, another labor intensive and billing/ordering headache.

Choice: While a distributor's catalog may offer several thousand more products than are available through a retail co-op, many of the items consumers want are available only in full cases. Buying in quantity necessarily limits the variety that a consumer can buy, when funds and shelf life are limited. A consumer might save 20 percent on a case of juice, but that will be the juice ofthe month, all month, in that household. Items such as chips, cereal, and perishables present more difficulties. Members can share cases, but the more choices there are, the more difficult it is to agree on which variety to buy. Sharing cases also means more time, phone calls and bookkeeping.

Aggravation: Wholesale buying is no picnic for the consumer. All the small problems that a retailer takes in stride are major aggravations to the consumer who is buying through a buying club coop. Most buying club co-ops get a delivery only once a month; if an item is out-of-stock, the consumer has to find another source. Late trucks, unloading in the cold, snow and rain, mispicks, out-of-stocks, gaps in co-op communications, etc., only add to the hassle.

Group dynamics: Like any other group of people, buying club co-ops struggle with internal politics. Leadership is necessary as well, and the job of co-op coordinator can be time consuming and thankless.

Delivery sites: Finding a site that is available when the truck is coming, accessible to a tractor trailer, affordable, safe and convenient is one of the biggest challenges buying club co-ops face. In more urban areas, churches and community centers are not as available as they once were, due to insurance related concerns. Sites that are available are often used by other groups as well (the Girl Scouts, AA, etc.), so the time available for the co-op is limited. As distributors' trucking schedules shift, the buying club may be scrambling to find a site available when the truck is due.

Information and education are part of the cooperative principles and a path towards greater understanding of each other. The buying club customer who wanders around a retail exclaiming about the high prices is the exception, not the rule; every buying club co-op, like every retail co-op, has its vocal fringe element. This is a problem in the store that the retailer can successfully deal with on the spot. We suggest this proven approach:

This is the retailer's opportunity to explain about overhead; use some specific examples that demonstrate the cost of doing business: What's your electricity bill every month? What do you pay for plowing? How many different insurance policies do you have to have? What does a new cooler cost? You can be specific without giving away truly confidential information. Get this customer on your side, or at least show that you are a nice person interested in a discussion. Ask the person what the up and down sides of buying clubs are.

A successful encounter with this person will be actively spread by word of mouth through the buying club co-op and will gain the retailer the respect and understanding of others in the buying club group. If you are hostile, rude or condescending, that also will be spread by word of mouth.

The issue is that the buying club member WANTS to shop your store between their once a month deliveries from the wholesaler.

Part 2: BuiIding Links Between Buying Clubs and Retail Cooperatives

By John Hatton and George Southworth

As reported in Natural Foods Merchandiser last year, the controversy of preorder buying clubs competing with natural foods stores continues. Some retailers feel challenged in their market area by buying clubs able to buy at wholesale, or a little above, cutting into the business on items that the stores expect to be their own.

At present, co-ops dominate the buying club distribution modality. But not for long. We need to have a new direct association and mutually strengthening relationship between retails and buying clubs.

Many retail natural foods cooperatives, however, actually began as buying clubs, with groups of people (often students) seeking clean foods that their local stores just weren't selling. As interest in natural foods grew, the more motivated buying club groups sought out small storefronts. Having little or no capital to invest of their own, coupled with the prevalent cultural and political sentiments of the late 1960s and early '70s, the cooperative model seemed the best way to begin retailing. Small co-ops popped up all over the country, often referred to as new wave co-ops (relative to the wave of co-op stores that began in the 1930s); some flourished and survive today, while others are only known through our cooperative history books and case studies.

Challenges for retail co-ops

Retail natural foods co-ops all over the country face many significant challenges today. Competition in the natural foods industry is changing extremely rapidly, with large natural food store chains entering or about to enter virtually every strong marketplace with large format, full-service stores offering great merchandising, well-trained staff, extensive selection, and excellent customer service. The Whole Foods chain alone commands almost 10 percent of the sales of the entire natural foods industry at the retail level. Many of these organizations have looked in the past to co-ops to acquire, develop and retain knowledgeable, competent and trained staff.

Besides the chains, other lines of distribution for natural foods have developed at a fast pace that is gaining in market share. As the traditional grocery industry has seen flat real growth (growth less inflation) for the last decade and is challenged on its own turf by the club stores (Wal-Mart, Price-Costco), more mass market chains and independents have gone after the growing natural foods marketplace. In the hotly-contested Boston market, Star Markets, a mass market grocery store chain, has opened two 30,000+ square foot natural foods formats, going head-to-head with Bread & Circus (Whole Foods). In addition, four new Trader Joe's have opened, with 163 planned for the East Coast. Leo Kahn (who started the Purity Supreme grocery chain, Staples Office Supplies, and Fresh Fields) has opened a 45,000 square foot Nature's Heartland (and a second store in December), an improved format compared to Fresh Fields. In every other marketplace, mass market stores are setting sections with the 1000 to 3000 top selling natural product items. The natural foods market that had been largely pioneered by co-ops are now or will be available in some format through almost every supermarket outlet.

There are over 300 (there were 400 a few short years ago) natural foods retail co-ops across the country. Many are under-capitalized, face some aspect of the competition mentioned above, and find themselves in a fight for their lives. In many cases - with roots as consumer co-ops not in entrepreneurial desire but rather in community activism, healthy foods, and social justice - operational effectiveness/efficiency and strong marketing skills were not considered to be needed and were not developed. The retail format ofthe 1970s co-ops continued in many stores through the 1980s and '90s, although consumers were taught by Bread & Circus, Mrs. Gooch's, Wild Oats and mass market stores carrying natural products that they could expect and seek a different presentation. Unlike in the past, we do not have the latitude ofan emerging, youthful marketplace with few competitors, one that will forgive or allow the time to correct our systemic mistakes. We must become more nimble in recognizing emerging trends and changing our business strategies to assimilate those trends.

Further, co-ops often find themselves with an aging membership and suffer an emerging difficulty in communicating with their community and attracting new members. How many co-ops have a shrinking membership as a percent of shoppers yet an expanding customer base? Defining the "co-op difference" and telling the co-op story is an ongoing challenge. According to a Nielsen poll that was conducted two years ago, cooperatives have an image of "trustworthiness," coupled with a low price image. Yet the growth of our retail co-ops is onehalf that of the natural foods industry (Cooperative Grocer, July-August 1996).

Buying club partnership: an opportunity

Natural foods retail cooperatives are being left behind by the industry that we, in large part, pioneered. Many of our stores are encountering difficulty connecting with our most natural and historic constituency: our local communities. We see mass market formats billing themselves as "clubs" having "membership" cards that mean nothing more than the customers' buying practices and preferences are tracked, with certain sale items available to reward card use. This is a sophisticated marketing attempt to have the facade of a cooperative with none ofthe substance such as ownership, member governance, or local control. None of these purported members has any ownership in or control over the organization's practices in the store where they shop. This will be the crucial cooperative difference that we must make clear to all our current and future members. Ownership, not membership, is the issue.

Interestingly enough, we have buying clubs, which can be a hot bed for cooperative development. Grassroots organizing is a challenge in any community, for any organization. Cooperatives, both retail and buying clubs, must evolve out of a shared need, vision, and values. Cooperatives are and must be directly controlled by their members, whether they are cooperative retails, buying clubs or the distributors they co-own. The distributors are secondary level cooperatives that arose out of a need for pooled procurement and efficient distribution of products, and this is one way that buying clubs and retails already cooperate.

Some estimates suggest that there are over 6500 natural products buying clubs (both cooperatively and noncooperatively organized and serviced) in the U.S. purchasing approximately $80 million annually. If more retail cooperatives are able to creatively partner directly with buying clubs (not merely through their distributors) in a significant way, there is a tremendous opportunity to enhance cash flow and product sales and services to our mutual members, as well as to strengthen linkages to the community.

What retail co-ops offer to buying club cooperatives

Based on the challenges that the buying clubs face, retail co-ops have much to offer:

1. A common philosophy.
2. The items that buying clubs have difficulty buying well on a monthly basis or in full cases or perishable products such as produce, cooler and frozen items, fresh meat and seafood, or bulk quantities such as bulk foods, or prepared convenience foods such as from the deli or cafe sections.
3. If the retailer can offer a parking lot or dock space at a slack time where the buying club can receive its order (see following examples), then the huge buying club headache of finding a stable delivery site is alleviated.
4. Alleviating the payments up front by offering weekly buying clubs, per one of the following examples.

What's working in the Northeast

We have seen a number of retailers in our region find ways to work with buying club co-ops. One co-op lets buying clubs, through pre-arrangement, meet their deliveries in the store parking lot. This simple show of good will goes a long way and draws the buying club people to the store on a regular basis, where they often will purchase perishable and prepared items that they do not normally order through their buying club. This retailer also offers special coupons to the buying clubs, distributed through the coordinators, that will draw the buying club members back between their monthly orders.

Another retail co-op's approach is to offer a cost-plus of 10% on any items that the store does not carry. Members of the co-op use distributor catalogs to look up an item, write their orders on pre-printed forms, and have to order a minimum of three pieces or a full case. Store staff bags each individual order with an invoice attached, which must be picked up within five days. In addition to the 10% cost-plus, the store also picks up their volume discount of 12% (on discounted items), totaling approximately 20-21% margin. This co-op's accountant happily balances the lower margin with 118 turns per year of presold items, and no shrink.

A third approach is perhaps the most sophisticated and interesting approach that we have observed. One privately owned store uses software supplied by Northeast to actually run a buying club within their store. Members order from the Northeast buying club price book on a weekly basis, and the store staff enter the orders into the computer, which collates the order. The collated order, sent to the warehouse, is palletized, invoiced, separate from the store's order. The out of stocks are entered into the software, which adjusts and prints an accurate invoice and packing slip for each buying club member. The staff attaches this slip to the individual order that they have processed. Stickers are attached to the orders which tell the cashiers taxable and non-taxable amounts for ringing the orders through. The store picks up the 8-15% differential between Northeast's preorder catalog and the retail catalog, as well as a 10% markup, and the store's volume discount of 11% for a total margin of approximately 26-32%, depending on the category and item. This preordering represents between 11 and 13% of the store's total business, presold at no shrink with better than the store's average turns in every comparable category. The store is able to offer many more items than it has the shelf space for. This greatly enhances the sales per square foot and lowers the operating expenses as a percentage of sales.

Conclusion

Buying clubs and retails have long cooperated to procure, warehouse and transport product by owning the distribution system together. This has lowered the cost of goods sold to both sectors by cooperating. It also has increased delivery frequency, since the trucks can be run more often due to the number of orders from the different segments. These service improvements are particularly true in rural, sparsely populated areas.

At this point we cooperatives dominate this distribution modality. But not for long. A mass market industry research group, the Consumer Direct Cooperative, as stated in an article in Supermarket News of October 7, estimates "that 5% to 15% of the retail market will be swallowed by an emerging delivery channel that allows consumers to order goods and services for pick-up and home delivery -- bypassing the traditional store." The group includes large retailers such as Wegmans, H.E. Butt, Dominick's Finer Foods, Ukrop's, with distributors including Fleming Cos, Richfood, with manufacturers such as Coca Cola, P&G, Kraft, Ocean Spray, J.M. Smucker, Nabisco, and Shell Oil. They are "now evaluating whether to move forward with more research or pilot programs to better understand the new distribution model." Their projections show that potentially 20% to 25% of consumers will have interest in signing up for this type of service." "This is another channel waiting to be developed. And either existing retailers and wholesalers will do it, or who ever the next Sam Walton or Sol Price is will do it." "It may be a question of who gets to the finish line first."

Streamline, of Westwood, Massachusetts is the focus of the project. Their consumer direct business model with 60 customers was officially launched the first week of October. They believe that this channel shift will happen in the next 5 to 7 years. At Northeast Cooperatives, we think it may happen sooner.

Microsoft has announced plans to develop business software that will facilitate the marketing, selling, ordering, picking, shipping and billing of items over the internet or through an in-house bulletin board. This sounds similar to existing co-op software, and will be exactly what the Consumer Direct Cooperative described in SUPERMARKET NEWS will need to move forward. Microsoft and others estimate that as much as 30% of the total goods and services in the United States will be sold in some manner similar to this within a couple of decades.

Recently Microsoft signed an agreement to provide total internet and associated business and recreational software with AT&T and MCI, essentially tying up the major long distance carriers. Netscape has signed a similar deal with many of the Baby Bells, the local area telephone systems. All telephone systems are negotiating business agreements or merging with the cable systems. The network, communication, and software system is going into place.

Cooperatives have the lead in that our buying club and retail distribution modalities are fully developed, tested and constitute a mature, integrated system. We need to accept the change that is coming and embrace it. We need to have a new direct association and relationship between retails and buying clubs that mutually strengthens one another. We have more in common with each other than other partnerships we could contemplate.

The contacts must be made, and the business relationships forged, on the local level, where it belongs. However, you co-own distributors that can help facilitate the initial contact. Then, as always, it is up to the membership of your mutual organizations forged, on the local level, where it belongs. However, you co-own distributors that can help facilitate the initial contact. Then, as always, it is up to the membership of your mutual organizations.