Atlantic Canada Merger After Eighteen Months

The fall 2000 merger of twenty-eight of Atlantic Canada's independent co-operative societies, with thirty-three stores and mounting losses, was a shotgun wedding. The choice facing each co-operative was either merge or go under. It was not like going to the altar with someone you love, but rather with someone chosen by your bank. The choice was merger or no co-operative store in your community.

In the case of Consumers Community Co-operative (CCC), the geographic area heightened the strains of a forced merger. The co-operatives are spread over four provinces and separated by hundreds of miles. Nevertheless, the merger de-monstrated the toughness and resilience of co-operative business. While the massive assault on Atlantic Canada's grocery business by two multinational competitors has all but wiped out independent grocers in the region, the co-operatives remain, and their losses have been cut dramatically.

The struggle has been tough, and the coat woven from the cloth of many local co-operatives has a few frayed edges and loose threads. Most members in local communities may still have a co-op store, but they feel like they have lost their co-op. It was not something they wanted but something they had to accept, and ownership of it for a $10 share seems remote. The new co-operative, burdened with turning around old losses, has little money to spend on member education -- education about the benefits of this more remote form of co-operative ownership or even the benefits of belonging at all. In spite of that, membership climbed from just over 45,000 initially to more than 51,000 by December 2001.

A major challenge for the co-operative in the years ahead will be to build a new kind of relationship with its membership. Upgrading of front end equipment will allow the co-operative to get a better understanding of member and non-member sales, how well it is meeting the needs of old and new members, and how to meet their needs better. One powerful assist in the process is the E-Flyer.

Almost 6,000 members get the co-operative's flyer by e-mail every Sunday afternoon. Along with price information carried in the print flyer there are e-flyer specials and a "question of the week." Board and staff have been impressed by the response rate to the e-flyer questions. For example, 94% of 256 respondents indicated that they would vote for board members if voting booths were set up in each store. The average response by December 2001 had increased to 214 people. Questions range from the use of sunscreen (55% yes; 38% no) to whether supporting the co-op benefits the community (96% yes; 4% no). Clearly this is a valuable tool for the months ahead. It is also very evident that much more will be needed if members are to see the co-operative as theirs.

From local boards to councils

Equally challenging has been the transition from local community boards to councils. The CCC has a board, and the bylaws call for local councils to be created in each local area. The councils have three key roles:

• Governance -- arranging and holding local membership meetings to elect delegates and the council, supporting the board election process, and developing resolutions for the Co-op Atlantic and CCC annual meetings;
• Member relations and member education;
• Community involvement and linkage.

The CCC needs councils that are not mired in directing the local manager but are carrying out a vigorous member-relations role and advising the board on behalf of the owners. The councils are clearly not boards, but many council members are former board members. The transition to thinking like a council member and to seeing the narrower council role as worth the effort is difficult for former board members used to a larger role.

In several communities no one was willing to serve on a council, and few to come out to a meeting. At the beginning, many councils attracted only three or four or five of the nine to twelve members called for in the bylaws. Slowly the number of communities served by CCC stores but without councils has been falling and the number on councils growing. The present mood is at once optimistic and more patient. More needs to be done to make co-op membership and council participation meaningful. Membership commitment needs to be rebuilt and renewed, community by community.

It has also become obvious that smooth functioning boards and effective governance styles are not built in a day. The CCC board has opted for a policy governance approach. This is a board that cannot afford to be mired in operations, needs to set clear policy direction and carefully measure performance if it is to turn millions of dollars of annual losses into a solid financial performance that will allow the co-op to retire debt and provide improved service to its members. The decision on policy governance was not taken lightly but with a solid sense of commitment. Keeping the board's eyes on the prize, on what they want the co-operative to achieve for its members, takes discipline.

Co-op Basics: new format

Another area of quick learning has been the Co-op Basics format that is being used in the CCC stores that were losing the most money. Basics, a discount format, involves cutting the product range by more than 50%, moving to warehouse shelving, and reducing staffing to a minimum. While previous experience was that "20% of the products accounted for 80% of sales," members quickly complained that the Basics product range was too narrow. Basics was forcing many loyal co-op members to buy too many items at the competition.

Many of the products that had been discontinued are now back on the shelves, but the process for adding new lines emphasizes choosing only those with significant sales potential. The low prices alone have not led to the kind of sales increase needed. The Basics format reduced losses dramatically, but further modifications will be needed for it to cross the line into financial health. That process of change will be rolled out over the next six months.

The merger's "synergy" savings are still increasing.

In proposing the merger one of the hoped-for savings was "synergy." This hope has borne fruit. Prior to the merger we had 28 co-operatives with 28 lawyers, 28 floor-cleaning contracts, 28 financial institutions, 28 sets of invoices, etc. Our main competition is two multi-national corporations which have a far greater number of stores than 28. The efficiency message remains clear. Synergy savings to date are in the vicinity of one half of one percent of sales and still increasing.

Another benefit has been that the single co-operative is far faster on its feet than 28 co-operatives. Changes that would have taken year to negotiate with twenty-eight separate co-operatives now can be made quickly. On the other hand, a deal with a supplier for a product that moves well in most stores means it may languish on the shelves in a number of other locations. It also makes it harder to respond at the individual store level. These problems are not insoluble but are not as easy to solve as one might hope.

Finally, the CCC has protected the Co-op Atlantic system that is owned by and serves all the other co-operative stores in the region. The CCC bought $160 million worth of groceries last year, and almost all purchases were from Co-op Atlantic. That provided the wholesale with a significant part of its income. It also accounted for a significant part of Co-op Atlantic's purchasing power and resulted in all the co-operatives in the region being more competitive.

The competition is showing signs of getting weary of the dent in their bottom lines resulting from more than five years of offering the lowest grocery prices in Atlantic Canada's history. In spite of the $130 million a year the multi-nationals have invested in new and renewed stores, nearly eliminating the small independents from the market, eliminating the co-operatives has proven much tougher. Prices are beginning to creep upward. When the CCC no longer needs a competitive allowance for any of its stores, the benefits of the struggle to keep them open will be obvious both to co-operators all across the region and to the communities where they are located. When grocery prices in the region return closer to their historic levels -- about 10% higher than in Ontario -- co-op members and all consumers will benefit from the survival of their local co-ops.

A final note: The lessons of merger savings have not been lost on other stores outside the CCC. A merger of two stores on the Acadian Peninsula has led to a much-improved result for both stores. Elsewhere, a merger debate has begun. Perhaps the next wave of mergers will be weddings where the partners arrive of their own free will. If that is so, the mergers of the future will be even more fruitful than the CCC merger.