Who are we marketing to? Who is our primary competition? What is the demographic profile of the population that is inclined to shop in our stores? What is our buying power in relation to other stores? These questions are important if we expect to operate a successful cooperative business. How should we determine what prices to charge, what products to offer, or what services to develop?
Finding the answers to most of these questions requires some knowledge about the grocery industry and knowing where we fit in that industry. A cursory knowledge of our industry is vital if a co-op's leadership is going to provide realistic direction and support for its management and membership. This knowledge helps us to know what's possible in the marketplace, where to direct resources, and what our limitations and opportunities are.
The objective of this article is to provide directors with an overview of the grocery industry and a sense of where their co-op fits in that industry, as well as some suggestions on how to apply that knowledge to their own situation.
The grocery industry is huge: annual retail sales exceed $300 billion. On the consumer end, the weekly per capita expenditure nationally is approximately $25.
Approximately 12 percent of all disposable income is spent in grocery stores. Only a few years ago this figure was closer to 16 percent. The rather dramatic decline is a reflection of many factors, of which the two-income household is probably the most significant.
Knowledge of our industry is vital if a co-op's leadership is to provide direction and support for management and members.
The immense size of the grocery industry lends itself to economies of scale. Buying in carload quantities, investing heavily in mechanized equipment and data processing facilities, and highly discounted promotional programs to gain market share, all become economically attractive in a business where the typical supermarket has annual sales of $10-15 million and wholesalers with less than $500 million in annual sales are considered small. The trend, particularly since World War II, has been towards consolidation. Fifty years ago the chain store was almost unheard of; today over 50 percent of all retail grocery sales are handled by chain stores. The independent grocery store is not threatened with extinction, but it is not likely to expand as a form of grocery retailing.
At the wholesale level, the consolidation is even more intense. Today, approximately 50 companies dominate the wholesale activity nationally.
Natural and Non-natural
What about the natural foods industry? As an industry, natural foods is a relative newcomer on the grocery industry scene. Although "health foods" have been distributed nationally by a handful of manufacturers since the 1920s, the industry did not really begin to recognize itself as such until the 1970s, when numerous retail formats, distributors and manufacturers were launched. Co-ops played an important part in these pioneering efforts -- particularly at the retail level. Today the industry is beginning to mature. Recognizable retail formats emerge more routinely, national brands have gained a modest level of consumer recognition, and wholesalers and manufacturers have rationalized the distribution channels.
At present, natural foods wholesalers seem to be taking the lead in terms of sophistication and maturation, spurred on by the same economic factors as the rest of the grocery industry: size and consolidation. Warehouses exceeding 100,000 square feet are becoming more common, carload buying is now almost a necessity, and retail services such as electronic ordering, custom pricing, product movement and gross profit reports, customized retail promotional programs, and the like, are becoming the norm. Acquisitions are occurring more frequently.
Mass Marketers, Supers, Independents
At the retail level, the pattern is a little different. The industry seems to be made up of three distinct segments: mass marketers, natural food supermarkets (usually with multiple stores), and smaller independent natural foods and health food stores. Each of these segments controls a substantial portion of an estimated $4 billion in annual sales.
The mass marketers primarily sell recognizable national brands -- Hain, Nature's Gate, Knudsen's. Their interest in natural foods retailing is primarily motivated by the high profit margins typically associated with the natural foods business and their desire to offer a product line that helps distinguish them from their competitors.
A few chains have made major commitments to natural foods retailing, often dedicating 2-3,000 square feet of their stores to prominent displays of packaged natural foods, bulk foods, frozen and refrigerated natural foods, and occasionally organic produce. Raley's in California and Fred Meyers in the Northwest are notable examples.
In the last ten years or so, the natural foods supermarket has emerged as a major factor in natural foods retailing. Patterned after the traditional grocery retailer, these stores offer a complete selection of natural foods, including perishables (produce, fish, meat and poultry, deli), in an upscale supermarket strategy. Stores of this nature usually have 8-20,000 square feet of retail selling area and are often part of a small chain of stores. Annual sales are typically $3-10 million per store. Management techniques are increasingly patterned after those of their counterparts in the conventional grocery industry. Bread & Circus in Boston, Mrs. Gooch's in Los Angeles, and Puget Consumers Cooperative in Seattle are notable examples.
The independent natural foods store continues to have a strong presence in the industry. These stores are usually small, under $3 million in annual sales, with 1-6,000 square feet of selling area. In addition to being well managed, when these stores are successful it is usually a result of locating in a market area that is demographically suited to the product offering and lacks serious natural foods competition. Other ingredients for success include: emphasis on quality products; good perishables, especially produce; a unique product mix; excellent service; marketing techniques that inform the consumer about the merits of natural food products; and a friendly, relaxed atmosphere and store decor. Although important, price and aggressive merchandising techniques are often secondary in the formula for success.
Today most retail food co-ops fit into the category of independent natural foods retailers, and many of them are thriving. New Pioneer in Iowa, the Arcata Co-op in California, Food Front in Oregon, and Cape Ann Food Co-op in Massachusetts are good examples, and numerous other abound.
Understanding Your Market
Success for retail food co-ops is usually a result of the same set of perceptions and techniques as those employed by their successful counterparts in the private sector. Understanding your market and your niche in it is essential no matter what type of store you have.
The recommendations here will focus on natural foods co-ops. Their understanding of the natural foods industry, the grocery industry, and their place in them, can be summarized in the following guidelines and observations:
1) Recognize your place in the grocery industry, particularly the natural foods industry. Specialty stores are seeing somewhat of a renaissance in grocery retailing -- to some degree the entire industry is fragmenting. You have significant potential for success as long as you exploit your specialty: natural foods retailing in a small, friendly environment.
2) Target that slice of the population that is inclined to patronize your type of store. The profile of the natural foods shopper is fairly distinguishable. Demographic studies of the natural foods shopper show one consistent characteristic: level of education. Natural foods shoppers tend to be better educated. Secondary characteristics, although they're becoming blurred as the years go by, include income level, age and family size. The natural foods shopper tends to group in upper and lower income levels, with less in middle income brackets; in younger and older age levels, again with less in middle age brackets; and to include a disproportionate number of single and childless shoppers. In sum, recognize demographically who your most likely shoppers really are and go after them. Rather than trying to fit the market to you -- a common mistake of co-op marketing strategies -- fit yourself to the market.
To measure your co-op's success in attracting shoppers, the board of directors may want to request from management a routine report of average number of daily transactions. To gain a better picture of your shopper profile, management may also conduct an annual shopper survey, including demographic data, and provide the board with the results.
3) Clearly understand what your marketing should emphasize what your shopper really wants. Attention to quality, good perishables, a unique product mix, excellent service, the availability of information and education about the merits of your products, and a friendly, relaxed physical environment are largely what your shopper is seeking.
4) Understand who your primary competitors really are. Compete at your own level -- offer better product selection, friendlier service, fresher produce, more information and education (and not just in the printed form), and a more attractive physical environment than your neighborhood independent natural foods store.
Price is usually a secondary consideration. (Most food co-ops are already priced well below their competitors on natural foods products -- often unnecessarily so.) The board of directors may want to request the results of management's routine price comparisons. From these results the board can stay abreast of the co-op's relative price position.
5) Recognize the value and role of good management. Find the best manager and staff you can, pay them well, and let them do their jobs. In consulting with almost forty privately and cooperatively owned independent natural foods stores, I have yet to find a success that doesn't have good management.
If the board expects to retain good management, competitive compensation is a must. Assistance in this area can be gained by a review of local compensation surveys (usually available from a variety of public and semi-public agencies), and by questioning other successful natural foods co-ops and stores about their management's earnings. Management consultants usually have considerable information on earnings in the industry.
6) Recognize the key operating and financial indicators for your type of store format. Industry averages for gross margin, sales per square foot, linear feet of display areas, labor costs, occupancy costs, productivity measures, etc., abound. The Natural Foods Merchandiser publishes an annual survey of retailers that summarizes many of these key indicators by store size and retail format. Cooperative Grocer has a similar survey for food co-ops only. Study and understand these key indicators. Don't fight them -- they represent the real life experience of thousands of stores and define the operating and financial parameters of your type of store.
Finally, once you've done these things, capitalize on the one important difference in what you're trying to do -- you're a cooperative! You're owned and controlled differently. Your mere existence is motivated by service to the members and the welfare of your community. You believe that cooperative ownership is vastly superior to private ownership. Tell people about it -- it's the marketing tool that makes you unique. And best of all, it comes from the heart! You will fail if you try to sell mainly ideology, but if your marketing deeds are equal to your ideals, who wouldn't want to shop at the co-op?