When a Natural Foods Supermarket Arrives in Town, the Co-op Changes.

"Prospects look pretty good for the co-op"

Weaver Street Market

Carrboro, North Carolina
10,000 sq. ft. totaI/7500retail; $3.8M 1993 sales. Target markets: urban population 40,000, high income, high education

Manager Ruffin Slater:

In 1990, Wellspring, a natural foods supermarket, opened 3 miles away. Initially we projected a sales decline of 20%, whIch Is about what happened. Our sales have sInce surpassed the level prior to Wellspring's opening.

We cut back our operations accordingIy. Mainly we scaled back expenses, holding them to the same percent of sales. Positions were cut primarily through attrition. Secondly, we emphasized the community and cooperative aspects of the store in our marketing, in how we positioned ourselves.

Thirdly, last year (August 1993) we made a major new capital investment in a store reset, adding a bakery with all new equipment; we spent about $500,000. This was financed through the same sources as our original package: 1/3 community development bank, 1/3 city government, 1/3 member and community loans. When Whole Foods bought Wellspring, they put $10000 into two stores, putting in a bakery, and have since then built a third store in the area. We didn't want to sit around, we made a similar aggressive move. After the renovation, our sales growth rate rose from 6 to 12 percent. It has given people a new reason to come to the co-op.

Our next push will be to turn more shoppers into members, and to increase the equity we are getting from members. We've been pretty market driven, and need a stronger member role.

Prospects look pretty good for the co-op. We made what we saw as a 7-year investment. We can grow more in our present facility, and have some room for future expansion.

One thing that was important for us when competition came in was how we framed the issue. People tend to become very anxious in such situations. We were very proactive, saying what we thought would happen, showing that sales would go down, based on where our shoppers were coming from and where the competition was, but we would still be viable, people wouldn't lose their jobs. It was an opportunity to redefine ourselves, a challenge to work together better. We gave people assurance that though things were going to be harder, everything would work out. No one will ever be in an industry without competition. Now we know what it looks like. All we have to do is respond.

"Two years later, we are a stronger organization"

La Montanita Co-op Supermarket

Albuquerque, New Mexico
10,000 sq. ft. totaI/6000 retail; $5.3M 1993 sales Target markets: 6300 members; residential, campus neighborhood, urban population 600,000

Team Manager Eric Stromberg:

After Wild Oats opened a 24,000 sq. ft. natural foods supermarket in north Albuquerque in May1992, the co-op initially lost 15 percent of sales, and the first year's sales were 3 to 7 percent below the prior year.

We concentrated on advertising, refining pricing, controlling costs, negotiating better volume discounts, and on improving customer service, supervising and hiring practices. We emphasized being community owned, having been here 18 years, and that we give an annual refund.

Our pricing structure was actually competitive; a newspaper survey showed that the co-op had the lowest prices. We began a markel basket program, using a rotating perishables list and a stable grocery/bulk list of two hundred key items. We checked prices everywhere in town on these market basket items -- our purchasers went to Wild Oats every week.

To make up margin elsewhere, we made more use of variable markups, with more conscious goals. We went to all our major vendors and asked for help. We got better discounts from nearly all of them, and in the end they got greater volume from us. We actually increased gross margin by nearly 1 percent while maintaining a very positive price image.

We looked at costs and set about a painful wage restructuring. We had been running from 21 to 24 percent of sales for total payroll package. We looked primarily at benefits. We limited full-time positions and reduced sick and holiday pay for full- and part-timers. The most important piece was a limit on growth in payroll that was pegged to the Consumer Price Index: after quarterly performance reviews, the percent of increase in payroll cannot exceed the CPI increase.

For sales increases, we concentrated on improved customer service and increasing the average transaction. Here is where supervisor training was important, helping us put out a consistent message to staff and to customers. The average sale went up from $13.70 to about $14.80.

We believe that Wild Oats took a year and a half to reach profitability. They cracked a tough market, a high income but conservative area. They have a lot of shoppers, but maybe not a lot of heavy shoppers. When sales began declining, the co-op had a game plan for marketing, merchandising, and pricing, but not for dealing with already high payroll and operating expenses. Two years later, we are a stronger organization; sales are running 12-18 percent over 1993, this year an estimated $6.2 million.

"Get our act together"

People's Food Co-op

Ann Arbor, Michigan
2 stores: Packard has 4000 sq. ft./1200 retail; Fourth Avenue had 3000/1000; new Fourth Avenue has 6200 sq. ft./3000 retail. Combined 1993 sales $2.3M. Target markets: 2500 active members, 100,000 city population including U of M campus

Financial Manager Dave Blackburn:

We began planning over 3 years ago to find a store that would, if possible, replace both of our existing stores as well as be downtown. Failing to find that, we stayed with two stores and are replacing our Fourth Avenue store with a facility triple the size and only two doors away. The new store has much better visibility and is located across the street from the very popular farmers market. Due to open in July, this relocation will allow us to keep ourcurrent customers and gain many more. In ourcurrent facilities, labor costs are too high; with so mucri inventory aownstairs, increased sales doesn't help much to improve our labor to sales figure. Our strongest motivations to move were to have a facility that would be more efficient and easier to shop. Many people with kids had stopped coming, and our customer base had actually begun to shrink slightly.

In July 1993, Whole Foods opened a 15,000 square foot natural foods supermarket on the east side, having renovated a former grocery. A leading industry consultant projected a drop of 25 percent in our sales in the first year. Those projections were borne out: an initial drop of 15 percent was followed by a further drop of 10 percent as more people tried the new store. Most of the loss has been at the Packard store, which is about a mile from Whole Foods. Our other retail competitor, on the westem fringe of town, has experienced less of a sales loss since Whole Foods opened, again indicating the importance of proximity.

The experience has reaffirmed what we knew before: we must get our act together with a good facility and a clear marketing plan telling people why we're different. We're positioning ourselves with our new store and a more aggressive marketing plan. Whole Foods appears to be not meeting their projections, failing to cut enough into sales at Krogers and a local chain, Busch's, both of which have improved their natural/organic sections. The natural foods pie is growing in Ann Arbor, and our new facility will enable us to take advantage of that. Ann Arbor is a fairly upscale community, and we couldn't reach out to other market segments until we had a presentation they would feel comfortable in.

A REAL Cautionary Tale

Mississippi Market

St. Paul, Minnesota
5900 sq. ft. total/4800 retail; $3.5M 1993 sales. Target markets: 1700 members, residential and campus neighborhood, large metropolitan area

Manager Mary Courteau:

SInce the February 1991 opening of our new store, we have continued to experience strong saIes growth. In 1993, we began actIvely negotiating to rent an 18,000 square foot store one mile away, and closer to the heart of our market. It was also the only available mid-slzed supermarket facility in our part of St. Paul. We were InitIally approached by the owner of the building and negotiated with hlm for a full year. We were very excited by this property because we are maxed out in our current building (est. $4.1 M sales in 1994). This move would have situated us for a long time.

There were issues around confidentiality, versus involving members with decision making, that we may not have handled well. On the heels of our attempted consolidation with several other metro co-ops, which was narrowly voted down, board members were especially concemed with keeping members informed. The building owner was uncomfortable with the level of member influence conceming how the store would look, what kind of products we would sell, and with the instability of the board of directors. Later I found out that he'd had a previous lease negotiation with another metro co-op fall through for some of these reasons.

We lost the site in May 1994 to Whole Foods, which does not yet operate a store in the Twin Cities area, but will next year. Although our bid was competitive, and even with the weight of our co-op distributor Blooming Prairie as leaseholder, the financial security of our offer could not compete with the strength of our competitor's financial situation. The perceived cooperative structure (and the real cooperative structure) didn't give the owner enough security.

As it happened, our board elections occurred at the same time as negotiations drew to a close. Now half of our board does not share the history or understanding of the decision making that brought us to this point. We need to have a clear strategy within nine months: are we going to scale back, plan a second store? How will we survive? Member loyalty and increased membership will help us, and staff and management are beginning to emphasize more the local ownership of the business. But we must re-examine our vision. As I see it, the current situation is the most significant challenge facing this business in our fifteen year history.