A Suggestion for Co-op Survival

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From #104, January-February 2003

A Suggestion for Co-op Survival

A look at the alternative business structure of Park Slope Food Coop

B Y   J O E   H O L T ZPark Slope Food Cooperative in Brooklyn, NY

After reading the multiple survival warnings and advice in the September-October issue of Cooperative Grocer, the concern I have had for years about the long-term viability of many co-ops has increased.

When Park Slope Food Coop opened in Brooklyn, N.Y., in 1973 we already had two health food stores in our neighborhood. Access to health foods was not the foundation nor the niche on which this co-op was built. This was true for co-ops in many other urban areas as well. Now co-ops throughout the country are faced with not being the only show in town.

The Cooperative Grocers Associations are a positive development, as is the idea of banding co-ops into a nationwide chain of sorts. However, I do not think either or both of these will do enough to put many co-ops in the position to withstand the pressures that will be released when the high-margin health food industry stops being such a high-margin industry. I fear that the allegiance to co-ops may not be sufficient if members have to pay a substantial price premium and that many co-ops' volume could fall to levels at which their businesses cannot be sustained.

The Park Slope model

Many food co-ops and health food stores use a markup averaging nearly 60% to yield a gross margin of around 37%. The typical independent conventional supermarket uses a mark-up of about 34% to yield a gross margin of about 24%. As the marketplace becomes more saturated with health foods over the coming years it seems likely that the margin on health foods will start falling toward conventional levels. Selling health foods at lower margins has started, but the practice is still not widespread. As the industry matures, I expect it will become prevalent. Which co-ops today could manage to make it with margins of 28% or 30%, let alone the 24% of many conventional supermarkets and still lower margins for Wal-Mart?

Our co-op had a gross margin of 16.9% last year, and we had a sales volume of $11.6 million. This year, due to our expansion into an adjacent building, sales will go up to about $15 million. (Add another 20% for store sales at conventional margins -Ed.) We generally turn our inventory between 45 and 50 times a year, and the current year is now at the annualized rate of 46 turns. We have 40 employees. Our sales per staff hour are about $190 despite our low prices. Our annual sales per square foot of selling space was over $3,300 before we expanded, and now with our selling space doubled to 6,000 square feet we are already back up to $2,500 per square feet.

Our co-op is only open to members, and all adult members are required to work unless they are on parental leave or are disabled. Members primarily work in groups that come together again and again throughout the year on the same day and at the same time of day. The work requirement is 2.75 hours every four weeks.

We have been growing at over 30% per year for more than a year now, and the pace appears to be increasing. We hope it doesn't, because it's hard to deal with. We have more than 8,000 adult members, and by the time you read this it will likely be over 8,500. In other words we are experiencing wild popularity right now. It will stop. When we added space in the past we grew rapidly until members started leaving due to overcrowding. Adjacent space will never again be available to us, and adequate alternate locations are not readily apparent. If the current rate of growth continues we will reach over-capacity in a year or so.

I know many co-ops abandoned work requirements in the 1970s and almost all others got rid of them in the '80s. This could be the time when it makes sense to take a fresh look at the advantages of a well-managed, universal work requirement system for co-ops in towns where there is more than one store. By definition, our co-op excludes all those who choose not to work for whatever reason. This would not be appropriate as the only store in town. I was at a co-op conference circa 1980 when a couple of staff from another co-op told me our co-op was exclusionary. My answer was yes, perhaps that is true, but charging anywhere near suggested retail on health foods was also exclusionary and that we each had to live with the problems of the exclusion we chose.

Benefits of working membership

Following are some of the benefits that we enjoy because we require all adult members to work. Member labor provides about 75% of our total hours worked: We can keep our prices low primarily because we can keep our payroll low. The local health food store has prices that average more than 50% higher than ours. A member who works is also a member who is likely to shop here. The resulting predictable sales patterns contribute to our high inventory turns.

Working helps strengthen the connection one feels. The feeling of ownership one gets from working cooperatively far exceeds that felt from only a monetary equity investment. Working usually will put members much more in touch with cooperative values and principles. One-price/one-work-requirement/everyone-a-member fosters a feeling of equality and camaraderie.

When members work in consistent groups, the amount of responsibility that the group can take on far exceeds what you could expect from individuals not in a consistent group. When people join for savings and years later no longer really need the savings, they tend to remain members because they feel connected. They realize that cooperative values and principles are important to them.

Even though the savings are substantial, by not connecting those savings directly to work through a discount program, we avoid the potential legal and payroll tax related entanglements that could result.

By not having to fit into one of a variety of discount programs, people are less likely after awhile to think of the co-op as an entity outside of themselves that they are making a deal with. They are less likely to evaluate their work contribution in dollars and cents. We average less than 10% staff turnover per year. Part of the reason is the challenge of working with so many members and how interesting that makes our work lives. Keeping this system going is no picnic. We have lots of problems. They usually are quite different than the ones I read about in this periodical and in the workshop titles for co-op conferences.

It may turn out that in the long run our survival is just as tenuous as that of a co-op that has only 3% of its work performed by member labor, but I think that will not prove to be the case. I think we are in a reasonable position, if we can deal with our growth, to withstand the marketplace pressures over the next couple of decades.

I urge co-ops that are at risk to consider converting to an organized, required-member-labor system, and I urge co-ops who intend to open up a new location to make that location for working members only and at great prices.

In response

Park Slope Food Coop (PSFC) is always interesting as a successful example of a highly participatory cooperative business. Since the cost of most of the labor (75%) is not factored in, a well-managed PSFC has outstanding operational numbers. Members tend to be loyal shoppers and get exceptional prices, while the seven general coordinators and two computer programmers receive a good salary ($50,000/year in 2003) and benefits package, and 32 mid-managers will soon be at $16.02/hour.

Is their model exclusionary? There are reasons to suggest that it is, beginning with its member labor requirement. In addition, PSFC has historically often had to turn away prospective members, and in his article Joe Holtz anticipates that happening again. While that is in some ways a problem of success, and while it is true that each co-op has to define and uphold its own membership requirements, to me it is a different matter and unfortunate for a co-op to be closed to new members.

The defensive response about lower than suggested retail prices suggests that PSFC serves more low and moderate income members than other co-ops. Does it in fact do so? I doubt it, though perhaps PSFC does have a strong proportion of educated moderate income members--I add "educated" because eating a mostly natural/organic diet on a moderate income is possible even at suggested retail prices if one is a mindful shopper, buying in bulk when possible, being selective about grocery items that are high cost and high on the food chain, and eating mostly at home. But such a person might not want to have to work at the co-op in order to shop there. Indeed, Joe acknowledges this by suggesting that the universal mandatory labor model would not be appropriate for the only co-op store in town. Finally, the PSFC model may not be easily replicable in another town. Other co-ops have a smaller demographic base; PSFC can draw members from a population of several million people within a few miles. And larger food stores carrying natural/organic, stores that are now co-ops' primary competition, have had less difficulty entering other urban areas than in the very tight New York City market.

All of the above considerations are part of why there are no other examples in the entire country of a food co-op with the model and scale of PSFC. -D.G.

Joe Holtz is general manager at Park Slope Food Coop: PSFCJoe@aol.com.

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See other articles from this issue: #104 January - February - 2003