Mondragon's Eroski as a Mass Retailer

"If we are not economically efficient we cannot be socially effective."

Almost all Spanish consumers are now familiar with Eroski, the growing national retailer whose stores are named either Eroski or CONSUM. What is unique about Eroski is that it is the Distribution Group of the Mondragon Cooperative Corporation, the world's largest worker owned cooperative. Eroski is the largest Spanish-owned retail food chain and the fourth largest retail group in Spain.

Recently, Eroski has been substantially increasing all elements of its organization. From 1994 to 1999, the Eroski Group added 599 new supermarkets and 1,942 new convenience stores. In 2000 the Eroski Group opened 114 new supermarkets. As of the end of 2000 annual sales had grown to over $3.8 billion. From 1998 to 2000, the Eroski workforce increased from over 13,200 to 23,317, and consumer membership increased to over 452,000.

At the end of 2000, the Eroski chain was composed of 47 Eroski hypermarkets, 796 CONSUM supermarkets, 569 CHARTER self-service shops, 2,714 associated franchise self service stores, 26 cash and carries, 24 gas stations and 104 travel agencies. Eroski has signed a strategic alliance with four other Spanish chains to open up over 500 new stores under the CONSUM and Eroski names in the next five years. This October, Eroski announced that it had bought 5 existing hypermarkets from Carrefour, the largest foreign-owned retailer in Spain.

Origins

Eroski began in the small town of Mondragon (then home to 30,000 people) in the Basque region of Spain in the 1950's. The Basque region had opposed Franco during the Civil War and paid a heavy economic price for its role. Franco was committed to a long term plan that would remove the Basque language and culture from the region. Under Franco, economic policies ensured that the region stayed poor.

Under these circumstances, a young Basque priest emerged with an idea about how to generate employment and build community. The priest had been a journalist for a Basque newspaper during the Civil War and had been sentenced to death for his activities. Through luck, the sentence was never carried out. Father Don Jose Maria Arizmendiarrietta had studied the writings of Robert Owen and the founding of the first modern co-op in Rochdale. He went about building a network of interlocking cooperatives that would build a vibrant local economy. His intent was to stem the huge out-migration of Basques from the small Mondragon valley in the heartland of Basque country. Today, the institutional effort is known formally as the Mondragon Cooperative Corporation (MCC), and there are a number of excellent books that describe its success. Let us examine how Eroski developed from the Mondragon experience.

In 1958, the San Jose Consumers' Cooperative began operation in Mondragon. On December 24, 1959, it was one of the four cooperatives, which created Caja Laboral (the bank owned by the Mondragon cooperative sector). During this early period of Mondragon's growth as a worker cooperative, ten of the consumer cooperatives in the Basque Country joined together. Later, the members of the Mondragon cooperatives supported the transition to a hybrid worker-consumer controlled retail cooperative named Eroski; Eroski joined the Mondragon Community on January 1, 1970.

Eroski eventually prepared to move beyond its regional chains. It obtained organizational capacity from the Mon-dragon Cooperative Corporation and investment funds from Caja Laboral. Based in the MCC infrastructure, Eroski was equipped to serve a region of Europe that had been neglected by national and international chains. However, the larger French owned retailers were eying Spain for expansion and looking into the Basque Country.

By the 1980's, Eroski had grown to be the largest regional food retail chain in the Basque region, but competition was growing both from within Spain and from the French retail giants. Eroski recognized that it had either to become a large national chain or face the likelihood that as a regional chain it would wither away under competition.

One almost accidental occurrence may have produced a key change in Eroski's direction. In the 1980's, a group of cooperators from the Valencia region of Spain came to learn about the Mondragon method applied to Eroski. With the support of Mondragon they returned to the Valencia region and started a chain of supermarkets called CONSUM. CONSUM was a worker-consumer hybrid like Eroski that did very well in the region. The outcome of its success was to show that the Mondragon model could be exported to other parts of Spain and was not just a phenomenon that could work only in the context of the Basque people and culture.

Two major changes occurred in the mid-1990s. First, several other Spanish regional chains also recognized that multi-national competition was inevitable and that they could not survive as regional retailers. As a result, Eroski was able to arrive at agreements to consolidate a number of the regional supermarket chains into the Eroski network. In the late 1990s, Eroski emerged as a national retail force with a new branding philosophy. The nearly 800 supermarkets are called CONSUM and the 47 Hypermarkets are called Eroski. A new CONSUM label program was developed and is applied to goods sold in both the CONSUM and Eroski stores.

These developments were extremely innovative and gave the Eroski Group the leadership role in Spanish retailing. The jump from a small regional retailer to dynamic national grouping occurred in less than a decade.

Governance challenges

Eroski's governance includes both consumers and workers. Consumers join Eroski as voting members, pay about $75 a year for membership, and receive a 5% discount on purchases. Consumer members elect 250 consumer member delegates to the Eroski General Assembly, where the Governing Council, composed of six consumer members and six worker members, is elected. The President of Eroski is by statue always a consumer member. There are consumer member committees at each Eroski store.

To become a worker member, employees must invest $6500 in Eroski. (To become a member of the MCC Industrial Group employees must invest $11,000). Most Eroski employees invest their membership through regular deductions over three years. Employees of acquired chains are given five years to join Eroski. Over 95% are joining Eroski, as they become eligible. Employees who are not members receive only 25% of the Eroski member profit sharing plan.

The worker members elect 250 worker member delegates to the General Assembly. From among themselves the workers also elect the sixteen member Regional Social Council.

The growth of the Eroski Group created major challenges to the Mondragon way of doing business. Topics being discussed within the Mondragon Cooperative Corporation:

1. Eroski was the MCC's first organizational growth beyond the Basque region, putting non-Basques into leadership positions and investing Mondragon internal capital.

2. By 1999, Eroski Distribution Group had leapt past the Mondragon Industrial Group sector in sales, investments and employees. This shifted the dynamics of long range planning from the 40 years of emphasis on the Industrial Group.

3. The Eroski Distribution Group is adding new employees at a faster rate than the Industrial Group. The majority of the new employees in the Distribution Group are female as opposed to the mainly male workforce of the Industrial Group. Turnover is higher in retail, and jobs are lower paying and start at less than full time. The Distribution Group requires only $6500 in investment compared to the $11,000 required from members of the Industrial Group. There is a higher non-member percentage in the Distribution Group and a need for stronger education about worker cooperatives.

4. Whereas most Industrial Group growth is still centered around Mondragon, the Distribution Group has reached every corner of Spain. This changes Eroski corporate culture from a Basque regional one to an all-Spain perspective.

5. Most of the Mondragon Industrial Group member co-ops are generally one-location enterprises where the worker members see the board members everyday at work, at meetings or in the local community. The Eroski Board members and Councils are spread at close to a thousand locations throughout Spain -- there is a different sense of direct governance with few workers knowing board members.

6. There are now over 23,000 staff in the Eroski Distribution Group, and consumer membership has grown to over 450,000. The size is immensely disproportionate to the average member size of the Mondragon co-ops. Only a few co-ops in the Industrial Group are larger than 500 members.

7. The Distribution Group is growing through alliances and franchises with other retailers. These joint ventures take a number of forms: Eroski investment, Eroski ownership, joint ownership or full MCC style firms. How do worker ownership, control and culture fit these different structures?

8. The Distribution Group has also added over 1000 convenience stores under the CHARTER name. These units are family run franchises rather than worker owned enterprises, part of the Eroski buying group but not of the MCC culture.

9. The Mondragon philosophy of a returning cooperative results to community stakeholders was clearly understood when the enterprise was in the Mondragon valley. That communal philosophy is now being practiced in different ways throughout Spain. As a retailer, Eroski Distribution Group is one of the largest contributors to charity, the largest retailer of fair trade third world goods, the largest retailer of locally produced and organic products, and it has made the largest investment in community development in Spain.

Father Don Jose Maria Arizmendiarrieta lived to see many of his co-op models succeed before he died in 1976 (one year after Franco, the man who had sentenced him to death). I think he would be pleased at the strength of the Mondragon model, how well it has been applied to retail, and how successfully it is being replicated outside the Basque Country.