Promoting Pre-order Sales:

Three years ago, members of the Syracuse (N.Y.) Real Food Cooperative were forced to vote on whether their retail co-op should declare bankruptcy. Today, three years later, Syracuse Real Food Cooperative is experiencing the largest sales volume and healthiest margins of its twenty-eight year history. One of the seeds of this turnaround was a simple pre-order policy.

Demands and decline

To reverse an untenable situation at the cooperative, we needed to change several operational procedures that could be changed without also initiating a pre-order policy change. The operational procedures needing change were:

The co-op filled its shelves from an enormous variety of distributors and direct purchases from manufacturers. Co-op members were allowed to place special orders for any items from any of these vendors. All that was required on the member's part was paying a meager 15% above the cost the vendor charged the co-op. What was required on the staff's part was hours of research and individual service. Having so many vendors left the co-op very little in volume discounts and very large labor costs administering the communications and orders between the members and vendors.

A small New York distributor had heavily marketed to community organizations trying to spur buying club sales in the Syracuse area. Many members left for these buying clubs, and we needed to get them back to drive the co-op's sales back to their historic levels.

Members often pushed the co-op to focus on delivering food to lower income communities. We needed a solution that would let us have the best delivery method from the lowest cost basic and natural foods, without losing focus on the way the store makes its income -- the larger margins that come from retail natural products.

In addressing the above, we observed that in all successful cooperative movements -- including Mondragon, Co-op Atlantic and the Japanese consumer cooperatives -- buying clubs would buy from the local retail cooperatives, which purchased from the cooperative distributors. We decided to solve our problems by tackling the inefficiency of our cooperative natural products distribution systems.

One distributor + pre-order catalog

We focused our efforts on attaining the largest volume discount we could from Northeast Cooperatives by sending all our purchasing power their way. We bought bulk copies of the catalog Northeast uses to sell directly to buying clubs and placed them in our store next to a stack of pre-order forms.

Our members could purchase from any of the 11,000 items in the catalog at a small markup over the catalog price, based on member work status. We went to local buying clubs pitching the items in the catalog, the lower order volume we offered, and more frequent pickups. They would place their orders at the co-op by fax or by dropping off an order form. A buying club member would come to the co-op on delivery day to pick up the group order.

Pre-order buying went slowly in the beginning of the new policy. The largest benefit from day one was the reduced burden of product information lookup, which was transferred from the staff to the member placing the order. Instead of a member saying "I would like a case of X," they now would say "I would like a case of X with a product number of 1234" -- and they would pay in advance. This gave the co-op more money up front with less work and a larger margin due to the volume discount from our consolidated order.

The largest benefit from the pre-order policy in the first year was the organizational focus on one product list. When we switched our purchasing to Northeast exclusively, the more vocal members complained that Brand A, carried by Northeast Cooperatives, was not as good as Brand Y, which came from some other distributor we no longer used. We knew that there were not actually quality differences between these products, just historical purchasing patterns with the members. We felt strongly that the 11,000 items we now offered our members could fulfill their needs quite successfully, and we were going to wait it out.

The pre-order catalog made this wait a lot shorter than it would have been without the pre-order catalog. These same vocal members turned out to be the people who sang the praises of the pre-order catalog and the product lines in it, once they learned how much they could save. Suddenly they loved Brand A.

Boosting pre-order, then retail

After a year and a half, our membership was well trained in reading a Northeast pre-order catalog. Twenty-five percent of our gross sales came through pre-order. This is where our first learning experience came in. Repayments on the huge debt from our past left holes in our inventory. Our gross margin remained flat when twenty-five percent of sales moved from retail to pre-order.

To solve this problem, we needed to fill the holes in our retail inventory. With Northeast Cooperatives' help, we doubled our inventory on the floor. Our retail sales went up another forty percent while we maintained our pre-order levels.

We also changed our pre-order pricing level to be a uniform seven percent above catalog price. This new pricing method was easier for members to understand and did not punish members for buying a mix of retail and pre-order. These changes solved our problem of reduced margins, and we have maintained happy, healthy margins over the last eight months since we increased our inventory.

Accounting challenges

On the more technical side, a second problem came in accounting. Since we were taking in a large percentage of pre-order sales, it was important to distinguish between retail cost of goods sold and pre-order cost of goods sold. This required pulling out the prices we pay for goods that we resell through the pre-order program. We needed to find a way to flag items as pre-order on the purchase side and move items in inventory when a case is split between retail and pre-order.

We were already purchasing through the accounting system. This meant that we had all of our item purchases in a database, but we needed a way to mark on each item whether the purchase was for a retail sale or a pre-order sale. This would typically be done in an accounting or inventory system by setting up two inventory locations, one for retail and one for pre-order. Our accounting system could not handle multiple inventory locations, so we moved up the scale in accounting to Great Plains Dynamics. The co-op set up two inventory locations -- retail and pre-order -- and a segment in the chart of accounts to distinguish location. We can now print any financial statement retail sales, pre-order sales or combined, with no extra work except for the flag of items that are designated for pre-order sales in the purchase order.

Working with buying clubs

In working with existing buying clubs, we have only experienced a small amount of success. Some buying clubs found it not important to meet any more, and everyone started individually placing orders through the co-op. At the co-op, each month holds a meeting for people who want to split cases. The thought was that members could meet and work out among themselves any case splitting. The co-op would not have to deal with any of the extra labor associated with split orders. This also has had very little interest. People who live in the area of the co-op have found it easy enough to pre-order things they use enough of, and to buy the rest at retail.

Our success has come from new buying clubs in outlying areas and from small businesses. We gave presentations to some groups in the suburbs of Syracuse (20-minute driving distance), and they buy regularly as a group and advertise for their meeting ad the co-op. Coffee houses and restaurants have been able to take advantage of the co-op's pre-order policy also. This has lead to joint marketing efforts between the co-op and its new business shoppers.

Enter electronic ordering

The future success of reaching new markets lies in expanding our pre-order service to within a one-hour radius of the co-op. The region's shoppers are used to buying in bulk. Clear-Eye served the area for years, and Wegmans made its name by its bulk department. Clear-Eye is gone, and Wegmans bulk has shrunk to a tenth of its size. Our task is to find a way to make it easy for people to purchase at home and to stop by the co-op to pick up their order when they come into the city.

The web is the method to reach these shoppers. We are offering on-line pre-orders at www.foodcoop.org and letting shoppers pay on-line and pick it up in the store. Our hope is that other co-op stores will be interested in offering the same service. Then the local co-op where you would like to pick up your purchases would be the shipping method.

The current version is a little slow for on-line shoppers, but it is no work for staff to produce the pages and easy for shoppers to find any of the 11,000 products by key word. To produce the pages requires the click of a button that designates where you want the shopping cart data to go, and it is automatically generated in five minutes. This potential comes from the fact that we already load Northeast's product list every month for our pre-order and inventory systems. The second version of the electronic shopping cart will be going up this spring, and it will be incredibly fast both to produce by staff and to operate by shoppers.

The next step in the process is to build a better information system surrounding the product list we offer. We will be building web pages that allow manufacturers to update information for their products. The hope is that if enough co-op retail stores are interested in the information, we can convince the manufacturers that it is in their best interest to give us the information on each product. I dream of a system where a member could query the product list based on ingredients, manufacturer information, or special needs categories,

See other articles from this issue: #076 May - June - 1998