Development Directions, Part 2

In Part 1, "Turning Points and Lessons," I discussed the decline of two major cooperatives -- the Consumers Cooperative of Berkeley (C.C.B.) stores and DANCe (Distributing Alliance of the Northcountry Cooperatives) warehouse in Minnesota -- and proposed assumptions and directions for future food co-op development. A central assumption, as stated originally, is the need for planned growth in cooperatives and cooperative systems. The method or form of growth, discussed through examining C.C.B. and DANCe, is my general theme. Planned growth for cooperatives is most likely to be sustained, I have argued, when it is strongly member based and involves strong retail-wholesale ties. Another way of saying this is that successful development should take full advantage of existing co-op resources.

In discussing growth in cooperative businesses, the matter of size as such was not addressed, contrary to what at least one reader thought. Here, through further review of the Berkeley and Minnesota stories, I will pursue the themes of co-op growth and system integration, ending with current examples of cooperation among cooperatives involving both retail and wholesale businesses.

New views and reviews

In the Bay Area, recent events both expected and unexpected marked the winding down of what was once the leading food cooperative system in the U.S. In August, Berkeley Co-op members voted to sell the stores to a private retailer, as recommended by the board, rather than to a new co-op organizing group led by some C.C.B. members, an option that the board initially stated would not be on the ballot. And that same month, to the surprise of many, the board of directors of the Palo Alto Co-ops announced the sale of two of the three co-op stores, in response to severe cash problems.

Let's recapitulate the players and recent events:

At Berkeley Co-op, the vote to sell capped years of decline that had followed years of solid growth. The decline was precipitated by a series of new store acquisitions during the 1960s and early 1970s, crippled by inadequate planning, operating systems, and membership development. The co-op's high member enrollment, member patronage, and member capital of its earlier decades were not sustained during the expansion period. And the contracting co-op, locked into a union agreement requiring retention of the highest seniority employees, experienced increasing labor costs and operating losses.

The regional wholesale, Associated Cooperatives Inc. (ACI), declined in turn. One turning point was 1985. That year began with the bombshell revelation of longstanding financial mismanagement at ACI; after the previous year's patronage rebate had already been distributed, it was learned that C.C.B. and other member co-ops had been seriously underbilled by ACI. That also was the year of Berkeley Co-op's final attempt at revitalization through expansion, a new store in Marin. The Savories venture was in the end unsavory indeed; it called for a new marketing strategy to capture a new demographic market, with marginal member support, and it failed badly. The year ended with ACI and the Berkeley Co-op locked in a bitter dispute which brought an abrupt end to decades of grocery business between the two and led to lawsuits over financial obligations -- thereby demonstrating, it was said, a new principle learned by California cooperators while visiting co-ops in Japan: "sue me, sue you."

In 1987, a year after Berkeley Co-op stopped buying from them, ACI stopped warehousing. CO-OP Label distribution rights were brokered to a Bay Area distributor, Sierra Naturals. ACI continues to maintain assets, including property; it is a partner in a very successful distributor serving the Northwest, Nutra-Source; it is continuing its support for the Co-op Resource Center, an excellent source of literature and materials; and it recently began marketing a small natural foods product line, Pacific Gardens.

Palo Alto Co-ops, barely mentioned in my earlier historical sketch, was a leading member of ACI for many years and had the same sales volume and number of stores as the Berkeley Co-op until the early 1960s. Its growth through single store acquisitions gave it a somewhat more stable history; but in more recent years it too declined, from five stores to three, and was losing money. A remodel of their lead store last year cost nearly twice the budgeted $1,000,000 (!) and did not generate a large enough increase in sales. The Palo Alto board of directors gave no public indication that it was aware of the seriousness of the co-op's deteriorating cash situation until July, when they suddenly announced they were considering selling some of the stores. An initial proposed sale to a new company, supported by the general manager, was rejected in favor of sale to a large Canadian-based company that recently has been buying both retail and wholesale food businesses in the region. The general manager left with the sale, and now manages the two former co-op stores; this was the same person, by the way, who held the manager position at ACI during the severance of cooperative relations with Berkeley Co-op and the subsequent demise of warehousing at ACI. No member vote was required for the partial disposal of the co-op's assets -- and none was taken! Palo Alto Co-op now is left with only its Middlefield store, the oldest and smallest one, but with the potential support of thousands of members.

At Berkeley Co-op, for over a year preceding the August 1988 member vote to sell the stores, the leading proposal fora way out of C.C.B.'s decline was a worker-consumer hybrid co-op. This spring, despite agreement on the new structure, after prolonged and difficult negotiations between the co-op and the union representing C.C.B. employees, no financing could be found for it. The union then backed out, and the board, facing large daily operating losses, immediately put the remaining three stores up for sale or lease. By mid-July (when the first part of this article was written), the board had approved selling the stores to Living Foods, a Bay Area retailer; Living Foods had already lent C.C.B. over half a million dollars; and it appeared that this would be the only proposal voted on by the members. The board felt that a proposal by members who had formed the New Co-op Organizing Group could not adequately protect the rapidly deteriorating assets of the co-op. However, the board relented and agreed to place the new co-op option on the ballot as well.

The voting ended August 31, with 4584 or 59 percent in favor of the sale to Living Foods, as recommended by the board, and 3189 or 41 percent in favor of sale to the New Co-op Organizing Group. Living Foods is due to take over operation of the stores in October. It's too early to report the final status of such major issues as return of member shares and certificates, transfer of co-op employees, and any possible further action organized by co-op members.

The emperor has no clothes!

I discussed earlier the longstanding merger proposals and the factor of lack of system integration, lack of joint development, in the decline of Berkeley Co-op and Associated Cooperatives Inc. This could perhaps be summarized by saying that the two businesses were mutually dependent but not mutually accountable. Even given this reality, however, there was an alternative to the 1985 end scenario for ACI warehousing: selling the property and downsizing to a specialty wholesaler oriented around natural foods groceries -- the same kind of market position occupied by fifteen other consumer and worker co-op wholesalers in the U.S. This course was recommended to ACI by a leading co-op consultant in 1985. And Berkeley Co-op by that time had already switched some its buying to other suppliers and had long complained that ACI services were not competitive in key lines.

During decades of growth but then declining profitability, the Bay Area co-op stores appeared to be a captive market for their regional wholesaler. Later -- too late -- ACI learned that the relationship was much shakier than that, especially for an overextended Berkeley Co-op. A similar relationship characterizes the development of DANCe and other co-op wholesalers: the retail and preorder member cooperatives become for the wholesaler a market somewhat captive, somewhat shaky. They too are mutually dependent but not mutually accountable.

Here I am not merely making the point -- an important one, but so obvious it's often overlooked -- that the co-op stores do not have any buying agreements with their wholesale, despite owning it and despite it being (usually) the store's primary supplier. I also wish to highlight the weakness of the relationship overall, in services and support to the retails from the wholesale, and in the unstable pattern of development in the overall system. Are there alternatives? Yes -- but to understand the needed change, we first must look squarely at the prevailing pattern.

Recipe for failure

DANCe sales were dominated by the more than seventy retail co-op members, nearly all of them small and all of them independent. In addition, and partly in reaction to the loss of democratic control at the predecessor warehouse, the member co-ops restricted DANCe from taking leadership in a dynamic natural foods market and regional cooperative network. The wholesale was denied complete support for expanding its services and buying power, and the retails suffered from inadequate operating systems and wholesale assistance. As players in a fragmented co-op system, the stores and distributors, whether consumer-owned or worker-owned or some mix of the two, were and remain almost completely autonomous and almost completely unaccountable to one another.

"But," say the members of some, in particular the worker co-ops, we're accountable through the services we provide." This has the narrow truth of market competition in its favor, but unfortunately and characteristically overlooks the need and potential for cooperative relations of much greater depth, through agreements in areas such as operational services, purchasing, management, planning, capital, and governance.

A lack of such agreements, a lack of joint development, fuels the damage to the co-op system. For the stores, the most visible damage has been their erratic performance and the failure of so many of them, representing countless thousands of hours and dollars. The over $100,000 in DANCe member equity that was lost through warehouse operations is only the tip of this iceberg.

At the warehouse, the most visible damage fueled by fragmented co-op relations was years of drifting with no management or unaccountable management. Of course (as a former DANCe director says in the accompanying statement), it was the board of directors, and a weak board, that allowed this to go on. But the context for these crippling conditions was an inability by people in the DANCe network to agree on a mission and sustainable market position for the warehouse and a plan with the necessary resources and member backing for achieving these. A weak board and mismanagement are what you're likely to get in this context -- a cooperative house divided against itself.

Well before the end of its first decade, warehouse sales had become largely flat while expenses, especially labor, were steadily rising. With so many co-op stores within a short delivery range, the warehouse could coast for a few years on its narrow but largely captive market. Staff and board succumbed to an organizational culture which suppressed conflict and discouraged leadership, focused on internal control rather than being led by empowered and accountable management and driven by the member market. Under the guise of self-management, a once vital worker collective went from being underpaid to overpaid, understaffed to overstaffed, energetic to bureaucratic and moribund. As with many collectives, there was little defining and delegating of management powers, resulting in the most competent people leaving after a few years and de facto leadership that was less visible, less accountable. In DANCe's case, this environment nurtured a bureaucratic response to the management demands on the business, an attempt to control what was out of control, to manage by procedure rather than decisionmaking.

Directors were fearful of not going along, ill prepared by their member co-op's relation to the warehouse and ill trained once elected. The board was kept buried in paper rather than agreeing to insist on such things as management and a marketing plan. Lacking unity around these fundamentals, it should be no surprise that the business eventually collapsed. In 1984, addressing member representatives at a DANCe planning forum, I flatly predicted and described in detail the near term devolution of DANCe, but afterwards was scolded for being so critical -- despite my also having proposed a different future. *

* It was during this period, my last and very difficult stint on the DANCe board, and while also serving the national network by editing Moving Food, that I coined a phrase for a common phenomenon: "An expert is an ordinary person who is away from home."

Fast forward: end of tape

The financial and management roller coaster of DANCe's final three years, leading up to its recent sale, took place in a context established prior to that time, and was led to a great extent by people who were in position from prior to that time until the end. In 1985, its ninth year, with operating losses building rapidly, DANCe finally got its first general manager -- hired by the collective. A competent businessman from a local family-owned health food company, he brought income and expenses more in line, but was somehow supposed to manage within the procedural confines of the collective's multi-page contract and be accountable to both the workers and the board of directors. The stress of this situation made him a nervous wreck and led him to resign six months later "for reasons of personal health." This was followed by over half a year of procedural quagmire during which there again was no manager. In the organizational culture described, middle management also was weak. Operating losses returned.

The next manager, this time hired by the board, lasted fora bit more than a year. He again stanched the flow of red ink, but the organization was weak at the core. The manager initiated ambitious product line expansion, leveraged considerable debt, and made other changes that were not supported by the financial results. In a panic, notwithstanding DANCe members' appreciation of improved services and a very favorable board evaluation of the manager only three months earlier, the executive committee suddenly fired him at the beginning of 1988. Despite objections from member co-ops, the board upheld the firing and the crude handling of it, hiding behind claims of confidentiality and fears of a lawsuit by the former manager.

This time, all the old organizational problems combined with even greater financial deterioration. The leadership concentrated on covering themselves and on procedural wrangling over a new hiring. But the wounds were much too deep for the bandage of expense cutting or the crutch of an interim manager. The members were unlikely to support a demand for more capital: half of it already had been lost through negative retained earnings. And a major creditor, the Co-op Bank, was foreclosing on its loan to DANCe.

Under pressure and casting about, the board was approached with a merger/sale proposal by Blooming Prairie, the warehouse serving food co-ops from Nebraska to Chicago.** By June, the members of both federations had okayed negotiation of the sale of DANCe warehouse to Blooming Prairie; the final agreement was approved nearly unanimously by DANCe members at the end of July. It was the sale of a very weak business based in a strong but fragmented retail market to a very strong business with only a small retail base. The combined company has nearly 700 members and $13 million in annual sales, with nearly 100 retails providing half the volume.

** Chicago area accounts, all preorder cooperatives, were acquired in late 1984 after an attempt at merger with GIP-C, a small and weak consumer co-op distributor. Frontier Co-op Herbs also was one of the principals involved in the negotiations, which ultimately failed and resulted in bankruptcy for GIP-C. Forceful statements by persons who ended on opposing sides of the matter, covering issues very close to the present discussion, can be found in the final issue of Moving Food,#31, February-March 1985.

 

When the agreement was made final in August, the Twin Cities warehouse was maintained under new leadership and a new name, Blooming Prairie Natural Foods. Blooming Prairie, possessing excellent financial and management resources, now has the challenge of making the Minnesota operation viable, improving the service level, building relations with its many new members, and transforming a fragmented but well seasoned food co-op network into something stronger. The new business has at least as good an opportunity as any co-op wholesale in the country to design and provide retail services that will strengthen the regional co-op system and lead to increased depth in retail-wholesale trade and planning.

The big picture: more of the same

When Blooming Prairie rescued DANCe, the move was not only the best one possible in that situation, but a direction that already had been discussed generally for several years among the Midwest co-op warehouses. Cooperating through standardized systems, joint programs, and integration of planning has long been an issue facing these businesses -- in Duluth/Superior, Minneapolis/St. Paul, Madison, Iowa City, Chicago, Ann Arbor, Columbus, and eventually several others in adjoining regions. Perhaps the leadership of these businesses could be expected to favor such inter-cooperative agreements, since from their vantage they could more readily see not only the redundancies in every retail having different methods of operating and governance, but also the commonality the warehouses have with each other.

Does this suggest that the co-op warehouses have acted to consolidate or to effect major joint programs? Not really, though they have made many efforts in that direction. Unlike the co-ops in the federations that they themselves are, the warehouses were not members of anything in common -- at first. They have coordinated small parts of their buying and inter-warehouse trucking since their founding, and eventually they each joined Central States Cooperatives as a means of access to CO-OP Label items. But after over fifteen years, they still have only one significant asset developed as a result of such cooperation - some preorder co-op computer software now in use at four warehouses.

Again, does the warehouse system-wide vantage point mean that, unlike the pattern among the many independent co-op stores, which rise and fall almost entirely on their own, these warehouses are likely to work together rather than allow one another to die? Not really -- although there have been exceptions. Over the past several years, young co-op or collective distributors have folded in Maine, the District of Columbia, Atlanta, Chicago, Austin, Santa Fe, Los Angeles, San Francisco, Eugene, and Seattle, as well as older ones in the Bay Area and New York City region. On the other hand, in 1984 three New England co-op warehouses, each in bad shape financially at the time, had the good sense to merge and the leadership to carry it off.

I don't mean to suggest that merger or acquisition is necessarily the best way for food co-ops to strengthen their operations and fulfill their mission -- although for DANCe and Blooming Prairie it was an excellent move. Even at their geographic distance, the wholesale cooperatives are good candidates for consolidation in some form. This is due not only, as mentioned, to their history and their predisposition toward such a direction by virtue of their position in the distribution system. The growing size and complexity of their workforces and operations also fuels interest in adopting systems developed at other warehouses. Finally, these businesses are driven to joint buying by the crucial role volume plays in their ability to maintain competitive services to their members.

The need for increased sales volume at the wholesale level often has been underrecognized by federation member co-ops, who tend to occupy a more specialized niche or serve a more protected market than their wholesaler does. Today more than ever, competition from increasingly consolidated private natural foods businesses is a growing worry for co-op wholesales in particular.

Leaving aside activities around joint buying, CO-OP Label, coordinated trucking, and other areas pursued by the warehouses since the early 1970s, a glance at the most recent and serious attempt at consolidation through Central States Cooperatives (CSC) will round out this discussion and provide an instructive link to a concluding section presenting examples of successful retail-based development through cooperation among cooperatives.

For nearly ten years, as their number shrank to its present dozen, most of the food co-op wholesalers worked together, but minimally, through Central States Cooperatives excepting the West Coast warehouses, which generally were affiliated or did business with Associated Cooperatives. For two years, CSC member warehouses, some of them flourishing but most of them not, have struggled to strengthen the national organization as a focus for mutual assistance through a multi-warehouse management agreement. One by one, up to nine members, through agreement by their federation board upon recommendation by their current management, signed on for management services provided by the CSC Chief Executive Officer. The results of such access to shared professional management and increased levels of interwarehouse cooperation were significant improvements in operating systems, sales, and net earnings -- in some cases, dramatic improvement. Unfortunately, the considerable initial benefits of joint management were not always as evident a year or two into the program. The substantial financial investment required of each member wholesale became questionable to some of them, whether because the returns seemed to diminish while costs didn't, or because the management services being offered were not appropriate in other ways.

The joint management program improved the performance of participating members and generated more recognition than ever of the value of cooperative consolidation. Initial success generated a need for further development to a second phase with more CSC staffing and joint programs; unfortunately, there was not enough unity or income to sustain the momentum that had been generated. The management agreement, its costs and the person running it, became unacceptable to some members, including warehouses which had signed on earlier. A January 1988 Central States meeting in Cincinnati was the final attempt to salvage the program; it led to nothing but the reduction of the national organization, once more, to a shell, and the subsequent removal of the remaining management agreement from that organization's auspices.

With the multi-warehouse management agreement, the Central States Cooperatives members took two major steps forward -- in strengthening individual operations and in strengthening joint programs -- but took a step back with the failure to maintain the management agreement or organizational unity around any other agenda for continued development. Although present prospects for greater cooperation among the cooperative wholesalers are not bright, a few warehouses are continuing under management conducted jointly or in consultation with one another. The positive effects of these continuing ties, and of the short lived national management agreement, are in improved skills and operating systems at the individual warehouses and in lessons for the next major attempt to join forces. Competitive conditions are sure to continue generating a need for such an attempt.

Development directions

As a means of building sales volume sufficient to maintain competitive services, some of the stronger co-op wholesalers are considering new store development in partnership with existing successful retail co-ops. Such joint retail-wholesale development may be the best alternative to (1) substantial investment in generating non-member sales, or (2) substantial investment in developing system-wide retail service programs for a constituency that is both very diverse and very divided.

Many of the remaining co-op stores have become stronger businesses over time, by now well used to their independence and to minimal support from their co-op wholesale. "Why change," they may ask, "when what we have works for us?" -- thus overlooking the many failed or weak co-ops for whom such independence has not worked, as well as the potential benefits of consolidating efforts.

In eastern Canada, there is an excellent model of a program which could fit the system pattern common among U.S. food co-ops: a management agreement between Co-op Atlantic's consumer owned wholesale and its many small, independent co-op stores throughout the Maritime Provinces. Over sixty member stores voluntarily contract for management and other services, obtaining resources that they cannot adequately provide for themselves individually. The program includes a manager and key operational services provided to the retail by the wholesale; the wholesale benefits from a stronger, more stable member market. The Co-op Atlantic retail management program has been in place for years and is regarded as a very strong success. So far, not one local co-op participating in the management agreement has been lost, despite competition from much larger Canadian and U.S. companies such as Safeway -- demonstrating our theme of the crucial need among independent retailers for common programs and wholesale support. (A comparable U.S. example from private industry is IGA, the Independent Grocers Association.) Independen4 local ownership can be enhanced, not diminished, by taking advantage ofproven methods and larger resources accessible through mutual cooperative commitments.

In Manhattan, several older co-op supermarkets have long operated under ajoint management program through the New York Federation.

In Seattle, one of the most successful retail cooperatives in the U.S., Puget Consumers Co-op (PCC), has grown for nearly thirty years, one store at a time, guided by sound management, a strong member capital base, and careful planning. Its fifth store was opened a year ago, and additional stores, although not planned presently, are likely in the future. PCC is a longstanding leader in its market, in the quality of its goods and consumer services. The different store operations, serving different neighborhood markets, are based in one cooperative membership and capital plan, one board of directors, one personnel pool, and of course standardized buying and operating systems. In addition, after the independent worker co-op distributors in Seattle failed in 1984, PCC formed a partnership with Associated Cooperatives of California and two entrepreneurs with co-op experience to launch a new wholesale: Nutra-Source is PCC's main supplier and has PCC as its main customer, but also leverages even greater buying power and services through its growing position in the region's natural foods grocery sector.

In northern California, North Coast Cooperative extended its dynamic growth in the Arcata Co-op supermarket by forming a subsidiary wholesale, Whole Foods Express; then a second store in Eureka; and this fall is opening a third store in nearby Fortuna.

In Iowa City, New Pioneer Co-op, with support from their co-op wholesale in the same town, has been steadily growing in members, services, and impact - building on the approach described in their feature article in the first issue of Cooperative Grocer "successful by working on the basics" of merchandising, management, and membership. Over the past year, New Pioneer has accomplished two forms of major planned growth: a doubling of their space and a complete remodel, followed by acquisition in nearby Cedar Rapids of a small, failing co-op, which was remodeled and reopened as a second New Pioneer store.

In Minnesota, departing from the pattern in the history described above, a small co-op has made a leap forward with major assistance from the regional cooperative organizations in the nearby Twin Cities. The Anoka Food Co-op and Cafe recently completed a relocation and expansion, as well as an organizational transformation to a consumer co-op with equity based on a $90 member share. Financing was provided by Northcountry Cooperative Development Fund, in participation with a local bank, and major technical assistance by NDCF's allied non-profit, North Country Development Services. NCDS also facilitated Anoka Co-op's contracting with a member of Roots and Fruits Cooperative Produce, the Twin Cities worker owned distributor; this person took a temporary leave of absence in order to be the relocation project manager. Finally, DANCe cum Blooming Prairie Natural Foods, despite limited resources, also contributed significantly to an exciting retail development project.

In future issues, some of these promising multi-cooperative development examples will be explored in depth.

Before writing this perhaps overlong essay, I tried to arrive at a fundamental idea or statement that would capture it all -- an impossible idea, to be sure. Nevertheless, in conclusion I would like to suggest a premise underlying all my recommendations for planned growth, accountable management, strong boards, member based development, and cooperation among cooperatives. It's a notion common to all social enterprise, yet hard to see in a culture which tends to reduce everything, even cooperatives, to a form of private gain: The whole is greater than the sum of its parts If we can balance grass roots involvement with commitment to something larger than ourselves and our individual businesses, perhaps cooperatives can, after all, play a leading role in reconstruction of a more stable, humane economic order.

 

Dave Gutknecht is Publisher and Editor of Cooperative Grocer, and serves on the board of directors of the Northcountry Cooperative Development Fund; he also was on the DANCe board for seven of its first ten years.  Part 1, "Turning Points and Lessons," appeared in the previous issue (Cooperative Grocer #18, August-September 1988.