Food Co-ops and the Road to Organic Valley: Part 2

[Originally published in "RootStock," Spring-Summer 2009]

Part 1, published in the previous edition of RootStock, summarized twenty years of food co-ops’ early years, when these community-based groups built distribution networks and a foundation for the launching of Organic Valley. Part 2 outlines food cooperative lessons from recent years.

Cooperatives demonstrate democratic self-help. They grow from people and businesses organizing to accomplish together what they could not do alone. Cooperative enterprise has emerged in a thousand circumstances, but it especially gains recognition during times of social upheaval and economic stress. These conditions characterize today’s environment, and cooperatives have strong opportunities.

A cooperative intends to promote sharing of business responsibilities and benefits – the members are the owners and must capitalize and patronize the co-op if they expect to share in its rewards. Co-ops, both those for underserved consumers and ones for underpaid producers, are proven models of enterprise, each with its own lessons and challenges.

Today, co-ops and other forms of local food economy are getting much attention. But cooperatives are not widely understood, nor are they always appropriately operated or governed. Examining recent co-op history highlights lessons from efforts to grow democratic, community-based food systems.

Find a niche and scratch it

By the late 1980s, when a handful of producers formed CROPP Cooperative (Organic Valley), most food co-ops were successful and growing. Regional co-op distributors supplied most of their natural/organic grocery needs, and individual stores had become stronger and more professional, offering better selection and services. Quite often “the co-op” was a local market’s leading natural/organic seller. But food co-ops had little capital or unity as a business sector.

Co-op stores and distributors helped fuel growth in natural/organic food that eventually outstripped the co-ops themselves. Organic Valley benefited greatly from the support of co-op distribution networks, and food co-ops helped the OV line to become one of their top sellers. As food co-ops grew in volume, so did their value to organic producers.

But co-op distributors did not fare as well. The mid-1980s saw the end of the then-largest consumer food cooperative, Berkeley Co-op, and its regional wholesale, Associated Cooperatives. During this same period, some two dozen new co-op distributors launched their own federation and also joined the one regional association and national label program still remaining in business from prior generations of grocery co-ops. But neither effort would prove sustainable.

Consumer co-op distributors consolidated, attempting to gain economies of scale, and by the late 1990s only six such co-ops remained (not counting produce wholesalers). This dramatic shift occurred while most co-op stores were thriving. Retail managers and buyers, seeking lower prices and better distributor services, often bypassed the store’s own cooperative supplier.

The co-op distributor network largely ended in 2002, when the three largest ones closed or were sold, by agreement of co-op boards and members. Two small natural/organic co-op distributors operated for a few more years, primarily serving buying clubs in the greater South/Southwest.

The growth pattern for co-ops and organics, which bears on future attempts at retailing and distribution, unfolded roughly as follows:

• Co-ops are launched to meet needs the market is not serving, and other retailers follow success.
• Growth in a retail niche, in this case consumer demand for organic and natural foods, leads to more specialty distribution and less direct marketing by producers.
• Specialty retailers and better supermarkets do well in the new niche.
• Growth encourages larger economies of scale for distributors attempting to retain customers, who now have more options.
• Specialty distributors are gradually absorbed by larger firms with more capacity and services.

As a consequence, today we have two national distributors of natural/organic food that dominate the field. Note that high and increasing transportation costs, a certainty in the near future, will not necessarily alter these distributor dynamics.

Co-ops meet organic competition

Groceries are very price sensitive. Although natural and organic food shoppers give increased weight to other factors such as freshness and nutrition, they too are very price conscious.

During their second twenty years food co-ops, having previously established a strong presence in the natural and organic niche, faced increasing competition from natural food stores and mainstream supermarkets. While a few weaker co-op stores struggled or went out of business, many co-ops actually benefited from this expansion of the market. Why? Because many shoppers who were attracted to natural/organic foods elsewhere later migrated to the food co-op, where they found better selection, more knowledgeable staff, and the benefits of community ownership.

Co-ops supported local producers and had a corner on organics before there was any agreement on what the term exactly meant. “Organic agriculture” as an outlook well preceded the notion of USDA organic. Organic producers and sellers recognized predecessors and pioneers; there were several programs of organic certification dating at least to the 1970s; and in 1985 organic advocates founded their own national trade association. But there was no standardized federal organic rule or USDA organic label until 2001.

In the 1990s the organic industry experienced dramatic growth, along with a shakeout and consolidation among manufacturers and wholesalers. Retail co-ops continued to grow strongly, supported by distributors and developers. Cooperative Grocer, a trade magazine sponsored by regional and national co-ops, gave focus to store improvements and professional development.

Today, more than thirty years after their founding, co-ops continue to generate some of the strongest sales growth among grocery stores. Food co-ops are thriving and expanding their existing stores – but they aren’t opening very many additional stores. Co-ops tend to be cautious in risking their balance sheet capital, while they also work to build more social capital, as manifested in community ties and customer loyalty. Despite strong sales growth, the number of co-op stores has stayed around three hundred. Consequently, as total natural and organic sales has grown strongly, co-ops’ market share has not.

Declarations of interdependence

A food co-op store typically is a local enterprise. (Producer co-ops such as Organic Valley are another matter.) Without a developer or sponsor, such co-ops rise and fall mostly on their own, unlike businesses that spring from an existing operation or an established franchise.

During food co-ops’ third decade, the most profound shift was in transcending some of their independent history and giving greater recognition to common operating needs. Yet because of their origins and local identity, many food co-ops continue to wrestle with reinventing the retail wheel and to maintain a myopic outlook that says, “We’re unique!”

Food co-ops’ growing size and deepening outlook led them to break out of a fragmented business development pattern. Retail managers initiated networks for mutual support, then gradually organized themselves into regional cooperative grocers associations. Managers and the co-ops they led, along with other co-op allies, explored joint purchasing and promotions, developed retail training and best practices, and supported projects such as market research.

Many attempts at joint endeavors had previously been tried, usually with only short-term success. Annual training and networking conferences, industry trade shows, and local workshops were no longer enough, and the future of retail co-ops depended on stronger services for store management. With co-op distributors going down and their market share declining, food co-ops turned to each other, and herein lies another development lesson. If local co-ops (or other independent firms) cannot obtain necessary support as individual businesses, they can generate better trade services by forming their own cooperative.

In the 1990s, leading food co-ops formed regional associations and then established a national association. This direction has grown strongly, and members of the National Cooperative Grocers Association are creating a “virtual chain” of stores. They are reinforcing an identity that extends beyond the local community and embraces other co-ops operating under the same principles and with business needs that are very similar. The national association now includes 130 co-op stores in 32 states, with total sales of over $1 billion.

However, the lesser half of the food co-op network is comprised primarily of small stores that are not members of the national association and consequently are not benefiting directly from its programs. The national association is growing, but it limits membership to co-ops that can actively fund and participate in the cooperative and its purchasing, promotions, and training programs.

Another national program, Food Co-op 500 (later renamed Food Co-op Initiative), has strengthened the resources available to startup co-ops. These new ventures now have access to improved print, on-line, and training resources. However, while attempts at food co-op startups are increasing, these still are grassroots efforts, often small, and facing many challenges. The expansion of co-op resources and experience has not yet diminished the high-risk nature of new co-op formation.

One clear lesson from past co-op growth is that the greatest likelihood of new store success is found in additional stores launched from existing co-ops, or in acquiring a store operation that is then integrated into the co-op. But fewer than twenty percent of the nation’s three hundred food co-ops have developed additional stores by these means. New co-ops, on the other hand, can generate much enthusiasm but often cannot produce enough capital or customer loyalty to sustain the business.

Concern for community

A cooperative is a different way of owning and managing resources, an autonomous business primarily organized to serve its member patrons or producers rather than to provide financial return for investors. Cooperative purpose, fully described, is not merely to provide this or that service but more deeply to extend the democratic control of capital. Unfortunately, in addition to such capital frequently being scarce among the co-op’s member owners, the understanding of cooperatives is not well supported in schools or public programs or statutes.

Internationally, beginning in the mid-19th century, cooperatives have upheld a common set of principles, numbering six for most of the 20th century and now seven. Those principles are guidelines for putting into practice the cooperative values of self-help and solidarity. The International Cooperative Association, over one hundred years old and representing more than 70 member countries, revisits those principles every few decades. In 1995 the members added a seventh principle:

Concern for community: While focusing on member needs, cooperatives work for the sustainable development of their communities through policies accepted by their members.

It is specifically this community aspect that can provide a key cooperative difference and market advantage. Especially in difficult economic circumstances, a community needs strong cooperatives, and a cooperative needs its community. The cooperative difference is based in ownership and service, and that purpose should be a foundation for good management and governance. But building cooperative ownership rests on values of equality, equity, and mutual self-help, and realizing those values only occurs in the context of community.

Look around. As members of our various communities, we face difficulties that will exceed those our predecessors faced during the great depression of the 1930s. Among other reasons for our upcoming troubles are that we have lost most of our farmers and grower knowledge, and we have greatly damaged our precious and finite natural resources. We now must rethink many of our assumptions, our modes of work, and the ways we feed each other and share the available wealth. Cooperatives can help meet those challenges.

I urge readers to learn about cooperative history, principles, and opportunities. And I offer this catechism:

• A cooperative rule: The whole is greater than the sum of its parts.
• A cooperative outlook: Our commonality is more important than our uniqueness – we are all in this together.
• A cooperative ethic: A cooperative is a gift from those who preceded us, and we have an obligation to share it and to pass it on.
• A cooperative purpose: To realize a cooperative outlook and ethic, we must establish and extend democratic use of financial, human, and natural capital.
• A cooperative practice: Keep learning, together.