The Limits of Co-ops

I recently gave a talk to some retailers with a problem. For many years, these mom-and-pop shopkeepers have belonged to a cooperative. The co-op functions as their distributor: it supplies them with merchandise cheaply enough to make them competitive with chain stores, it controls brand names that consumers know, it advises them how to display their merchandise and plan special events, it represents them when new government regulations pose a threat.

So what’s the problem? The co-op hasn’t been doing terrifically of late, as competition in the retail market is changing. The shop owners want to keep it, because they value its services. But they also are the co-op’s shareholders, and they know that their personal wealth will take a hit if the co-op goes into decline. The question is what to do.

This is actually an old question. Retail co-ops have been around since the industrial revolution; Britain’s Co-operative Group dates its birth to 1844. In the United States, they began around World War I, when chain stores began taking a significant share of the grocery market. Chain grocers, back in those days, could underprice mom and pop largely because they could buy directly from manufacturers, obtaining volume discounts and avoiding payment of commissions to wholesalers. Some of them, such as A&P, a company I’ve written about, also developed powerful brands. Co-ops provided these same benefits to small stores. By banding together, small retailers could buy in quantity, and the co-ops could build brands just as chains did.

The co-op movement was highly successful in some areas of retailing, notably groceries, drugs, and hardware. IGA–the Independent Grocers Alliance–was a household name in the town where I grew up. I suspect that few of the people in New Jersey and Connecticut who buy their food at ShopRite realize that it really isn’t a chain, but a group of separately owned stores that all receive their goods from, and use the brands of, Wakefern Foods, which in turn is owned cooperatively by the store owners.

Co-ops thrived for decades, and they arguably helped mom-and-pop stores survive the chain store onslaught. But many of them have gone by the boards, largely for reasons beyond their control. Their retailer-members, largely small merchants, often lacked the cash to build big, modern stores like the chains owned. If a retailer-member failed to keep its store looking good, the co-op could usually do little about it. With the arrival of television advertising in the 1950s, consumers were persuaded that nationally advertised products were better than the goods in their local store. As a result, co-ops’ brands became associated with outdated, down-market stores and low-quality products.Some retailer-owned co-ops have managed to overcome these obstacles, but many have not.

Today, the incredible rate of change in retailing poses a daunting challenge for co-ops. Almost by definition, co-ops move slowly. Management cannot make major changes without the approval of a board comprised of retailer-members, many of whom may not see the need. Repositioning the brand requires convincing the members of the urgency of drastic change, a process that can take years.

So while I’d like to be optimistic about the future of retailer co-ops, that’s not easy. Co-ops have played an important role in retailing, and in helping independent retailers stay in business. There are a handful of exceptionally well-run operations, which I very much admire. But for the most part, the retailer co-ops’ day has passed. I think it’s better to recognize that, and to look for alternatives, rather than to wait for the good old days to come back.

2 thoughts on “The Limits of Co-ops

  1. Graham

    Whilst I agree in large part with your piece, I disagree with the premise, embodied in your title, that there are limits to the cooperative model. You say quite rightly that management cannot implement major change without the support of the members. The same is true of any investor-owned business. So what’s making a difference here? The quality of management is key. In the case of the investor-owned approach, the board’s ambition is perhaps more narrowly focussed on maximising profit for the shareholders and in pursuit of that they will buy in the best quality management they can afford, raise capital as needed, and make changes with often limited regard to their employees or the communities in which they operate. Growth is king. In the context of the retail cooperative, I would suggest that the members are perhaps looking at the overall business in a different context. The goals and ambitions of the owner members are likely to be wholly different. Their challenge is to be able to survive and thrive in a marketplace that is increasingly dominated by these rapacious investor owned operations that seek profit at any cost. It may be that in this harsh environment some of these cooperatives are not equipped or able to rise to that challenge. And that will, at the end of the day, be as likely to be detrimental to the long term interests of the consumer as it is to the cooperative. The failing here is not implicit in the cooperative business model, but in the way that it is is being implemented by board and management alike, failing to understand the strengths and weaknesses of the model.
    Looking away from shopkeeper-owned retail cooperatives to employee-owned retailers (a famous example in the UK is the highly successful John Lewis chain) and consumer-owned retailers (of which there are many successful examples in the US and across the world), and the picture is rather different. Of course these approaches also have their problems, their failures as well as their successes, but the point I make is that the cooperative business model is not inherently weaker than an investor driven approach, and can be highly successful.

    Reply
    1. Marc Levinson Post author

      Your point that there have been many successful cooperatives is certainly true. But in general, I think, cooperatives have a more difficult time adjusting to changing circumstances because they do not feel investor pressure, which can make it harder for their members to accept the need for change. In the food retailing industry in the United States, to take one example, there used to be many large cooperatives in which individual shop owners jointly owned a warehouse and distribution business that bought in bulk, so the small retailers could offer store brands at prices similar to those of chain stores. Over time, almost all of these cooperatives have failed, and, with only one or two exceptions, those that remain have been marginalized. One reason for this is that when some of the cooperators failed to maintain their own stores, adversely affecting the image of the cooperative’s brands, there was no way for the other cooperators to force them to live up to standards that might have been in all members’ interest. Another reason is that many of the cooperators, running family-owned businesses, were happy with matters as they were and saw no urgent need to adjust as the grocery trade changed around them. I know of cooperatives that have successfully changed with the times, but the lack of external pressure seems to make this more difficult.

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