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From #113, July - August 2004
2003 Survey Shows Strong Growth, New Challenges
B Y P A T R I C I A C U M B I E A N D T H E D A T A A N A L Y S I S T E A M
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2003 Survey PDF Version (100Kb)
(includes charts and data not found on this web page version)
For food co-ops, if ever there were a good time to put those thinking caps on, this is it. The results from the 2003 Common Cooperative Financial Statements (CoCoFiSt) annual summary show that co-ops are still performing well in the maturing organic and natural segment of the grocery industry. However, 2003 was not a “business as usual” year—neither for co-ops nor in the food industry generally. There were dramatic circumstances and trends that affected the industry as a whole: inflation was low, the economy stagnant, our country at war.
This year’s Cooperative Grocer financial report is based on data from 83 co-ops with 98 stores—a larger population than in the 2002 annual report. In a very challenging period for grocery retailers, co-ops continue to grow strongly. (For more on how the data was collected, see “Methodology,” page 24.)
According to the 71st Annual Report of the Grocery Industry in Progressive Grocer, 2003 saw the lowest sales increases in the grocery industry since 1992-3. Food Marketing Institute (FMI) reported that total supermarket sales were up 2.6%, but net profits were down .4%. For food co-ops in 2003 compared to 2002, overall sales growth was 10.4%, while net income decreased by .2%.
The Natural Foods Merchandiser’s (NFM) “Market Overview 2003” states that natural products sales in all channels grew 8.1% over 2002. In addition, natural products stores averaged 9.9% growth for 2003, with 69% reporting increased sales.
Co-ops strong in sales growth
Sales for food co-ops show positive growth nearly across the board: 90% of stores report sales increases, yet that growth is slowing. In comparable co-op stores, sales grew an average of 8.6%. Whole Foods also reported comparable store sales growth at 8.6%, and Wild Oats was at 2.4%.
That 8.6% rate of growth for co-ops marks a decline from the previous year. Lee Lancaster, financial manager of Food Front Co-op in Portland, Oregon, commented on what this year’s numbers suggest: “We have been industry leaders for the last several years in sales growth. But as sales growth declines it will be harder to be profitable unless we aptly utilize the tools and networks we have developed for ourselves to cut costs and expand more effectively.”
Expanding on this point, Walden Swanson, CoCoFiSt consultant with Cooperative Development Services, said, “As margins and growth rates decline in the maturing natural food industry, co-ops need to focus even more on controlling operating costs, as well as continually emphasizing the cooperative difference. We have certainly made progress in both areas in recent years, but we have to continue that positive trend.”
Opportunities and challenges
The results from the 2003 CoCoFiSt data suggest many opportunities and challenges for food co-ops in 2004 and beyond.
Opportunities include:
• Using our very strong and cash-heavy collective balance sheets to invest in improvements for the good of our members and future members
• Using our significant market share and industry-leading comparable store growth rates to lower cost of goods, achieve economies of scale, and provide additional services to strengthen locally owned cooperatives
• Effectively using cooperative networks, structures, and tools to support each others’ efforts
• Making a difference in the world by accentuating the cooperative advantage, especially being locally and community owned, and bringing inherent trust to market transactions.
Challenges include:
• Surviving this phase of the industry life cycle, characterized by declining gross margins, sharp competition, and continued consolidation
n Driving down costs in order to maintain net operating margin
• Figuring out a way to jointly leverage under-utilized, individual co-op balance sheets in order to create new stores and undergo expansions
n Providing a model and the necessary resources that enable co-ops to expand efficiently and make it possible for potential members to start new co-ops in their communities
n Reinvesting in fixed assets to buff up physical facilities to better service our customers and members.
For food cooperators, one response to these opportunities and challenges is to continue to be watchful of trends and continue to ask questions, seek data, and draw conclusions with one another to facilitate good decision making on a store, regional and national level. The areas to be especially mindful of include trends in gross margin, sales growth, and labor (both wages and benefits).
One trend appears to be a certainty: health insurance costs continue to rise, often by double digits. According to a recent report in the New York Times, health insurance is expected to rise 10% this year, following on the heels of annual increases of 14–18% over the last few years. Overall costs for personnel increased at co-ops in 2003 and are expected to increase in the grocery industry as a whole. Labor and benefits will continue to be challenging issues.
And finally, food co-op collaboration through a newly reorganized National Cooperative Grocers Association (NCGA) has created more opportunities for co-ops to further efforts to decrease costs. National buying programs that reduce cost of goods sold (COGS), and other programs that reduce operating costs and increase operating efficiencies, are only the beginning of what we will need in the future.
Looking at the data, the analysis team focused on the following areas:
• Gross margins
• Competition and growth
• Store department trends
• Labor
• Cash
• Expansions
Gross Margins
Co-ops fared well compared to the rest of the industry. While Whole Foods, Wild Oats, and NFM all reported that gross margins declined in 2003, co-op gross margin levels remained relatively static in comparison with 2002. Small stores took a slight decrease, others managed a slight increase.
On the department level, meat margins grew 5.5% and deli margins went up 1.6% in 2003, and these margins accompanied strong sales growth in those two departments. Meat sales grew 20%, and deli sales rose 11% over the previous year. Margins slipped slightly in produce, grocery, and health and body care, and the rate of sales growth, while positive, was also down in those departments.
Could it be that the competition—natural food chains, mainstream organic sales, and Wal-Mart—is affecting food co-op margins? “What we’re looking at could be normal variation, but it does seem that competition is putting pressure on margins,” said Walden Swanson. Lower margins may not be a problem if coupled with higher sales. For example, the NCGA’s Co-op Advantage Program (CAP) may actually decrease overall margins for the store but increase the amount of gross profit dollars earned because of sales increases associated with the program. Increasing competition means that co-ops need to have a thoughtful strategy in this phase of the industry lifecycle in order to emerge as one of the survivors.
Almost all of the food co-ops represented in this report are also participating in CAP (Co-op Advantage Program), a buying program that brings more value to retailers by adding sales volume, using lower price points on selected products. According to NCGA national promotions manager Annie Hunt, volume in CAP has nearly doubled in the last year, and the CAP program is very successful at gaining efficiencies by organizing promotions on products that are common to a group of stores. It has also been successful at catching the attention of vendors who recognize the value of teaming with stores that connect directly with their shoppers as members.
Hunt thinks the current challenge to margin might be answered by strategic category management and merchandising support and off-the-shelf merchandising plans. “We have a commitment to local identity and individuality that we have to balance with our commitment to finding efficiencies in those things we all do the same,” Hunt said. “We have the opportunity to create national and regional merchandising efficiencies that add value for our members and allow co-op stores to focus on developing local connections. Stronger category management will allow us to support the similarities from store to store and could free up co-op staff to focus more on developing and promoting local vendors and products,” Hunt said.
Competition and growth
Competition on nearly every front continues to intensify in the grocery industry. Wal-Mart remains the largest-volume retailer of groceries in the country. In 2003,
Wal-Mart opened 200 supercenters; by 2007 it plans to have 2,000 supercenters nationwide and expects to capture 35% of all grocery sales. The Progressive Grocer annual report predicts that supercenters and dollar store formats that offer “better values” are most likely to see the strongest growth in 2004, followed by upscale and specialty food stores.
According to an ACNielsen survey, the lure of supercenter convenience and low price now attracts 54% of the population. As suggested in Progressive Grocer, for many grocery retailers, the search for growth has been transformed into a struggle for survival. And while food co-op growth rate is one of the highest in the industry, note that our market share has steadily decreased as traditional supermarket channels sell more and more of the products we sell.
Organic food sales grew 20.4% during 2003 to reach $10.38 billion, according to the Organic Trade Association’s 2004 manufacturer survey. U.S. organic food sales have grown between 17% and 21% each year since 1997, OTA said, while total U.S. food sales over this time period have grown in the range of 2% to 4% each year.
Organic and natural foods chain competitor Whole Foods enjoyed healthy sales growth in 2003, according to the Whole Foods 2003 Annual Report. Their expansion strategy included opening 12 new stores and acquiring 29 existing stores in 2003, a direction they will continue in 2004 through global expansion. WF also states that 66% of their sales can be attributed to perishable departments, which ACNielsen calls the “sleeping giant of retail”—meat and deli departments top the list in growth as well as in consumer purchasing frequencies.
Consumers who buy a combination of organic and conventional foods represent a huge opportunity for growth in the organic category, according to panelists who spoke at the All Things Organic trade show this year. Marketers were advised to target these “mid-level” or moderate organic consumers. As mainstream grocers put more emphasis on perishables and organics, co-ops will need to distinguish themselves more clearly within the marketplace.
Store department trends
Co-op sales growth slowed significantly in produce from 11.3% in 2002 to 7.5% in 2003, while sales rose 20% in meat and 11.04% in deli. Bakery sales growth rate also slowed. Progressive Grocer reports that the low-carb trend may have affected sales, depressing bakery, fruit juices, pastas, potatoes and cookies and crackers, while meat experienced a significant boost in sales. Although some retailers report the low-carb craze as “over,” others say it is still going strong.
Margo O’Brien, general manager of St. Peter Food Co-op in St. Peter, Minnesota reports that she thinks the low carb trend has had an effect on her produce department. “People have stopped buying potatoes, which is normally one of our top 10 best-sellers. Conventional grocers in my area are experiencing the same thing.”
Co-op retailers may find the dip in produce sales a concern, given the emphasis on produce as a primary factor in attracting consumers. When choosing where to shop, most important to consumers are a clean, neat store (88%), high-quality fruits and vegetables (85%), high-quality meats (80%), low prices (79%) and courteous, friendly employees (74%), according to the FMI. “Produce departments often set the tone for the store, and they are struggling to be the draw that they have been in the past,” said O’Brien.
“The decline in produce sales growth is troubling.” said Lee Lancaster. “It’s a trend that we need to understand.” He postulated that while co-ops are good at innovating, bringing new products and concepts to the marketplace in the organic and natural category, co-ops have more difficulty when they have to face look-alike competitors.
Labor
Labor expense is increasing faster than gross margin, not only for co-ops but also for natural products retailers as reported in NFM. In co-ops, total labor expense increased across all store size categories. Co-op store sales per labor hour (SPLH) increased slightly, while FMI reported that productivity by this measure decreased during 2003 in the grocery industry. (See chart, page 25.) Lee Lancaster noted that when margins are falling and sales growth slows, it is necessary to monitor productivity measures more closely.
Employee benefits are a rising concern for both employers and employees. Progressive Grocer cited benefits costs as the anticipated number one operational problem for grocers in 2004, competition was number two, and wage costs came in third.
Carolee Colter, a personnel consultant with Community Consulting Group said, “We know benefits are going up because of the increasing cost of health insurance. Larger co-ops have some leverage, but small co-ops, like all small businesses, have seen double digit increases in insurance premiums.” She also noted that she hears from more and more employees that they can’t afford health insurance.
Many co-ops, when faced with the need to address rising costs, are exploring options with their employees to adjust group plans in ways that meet staff needs and also curb benefit costs. Such options might include lowering premium costs by going with a higher deductible or modifying other benefits coverage. Some co-ops have supplemented their insurance coverage with a self insurance plan.
However, Colter is not convinced that paying people more will necessarily translate into higher productivity. “Cooperators want to see employees making more, but all systems have to support that decision.” She believes this includes putting more organizational attention into training, management role modeling, and developing a productive pace in the workplace.
Colter offers two approaches for making those structural changes that support paying a livable wage: reduce turnover and get better at supervision. “It’s important to track turnover—constantly hiring and training is expensive.” Find out if turnover is specific to certain departments, and if it is happening within the first 90 days or after the first year. Turnover has been down because of the economy, but human resource personnel must be proactive and prepared for the time when the economy picks up, so they can still attract the best people. If turnover is low, but labor costs still rise, Colter suggests looking at supervision issues. “People want to do good work,” but if expectations are unclear or there are no role models or training, “it is possible to fall into problems.”
Cash
Cash rose again in 2003 for food co-ops, and the challenge of effectively leveraging food co-op balance sheets continues in 2004. Compared to our primary competitors our debt to equity is lower and our current ratio is higher, indicating that we are not working our owner’s equity as hard as our competition works its equity. Therefore, return on members’ equity for co-ops is quite low.
The effect of the Northeast Cooperatives and Blooming Prairie warehouse changeovers caused “other income” lines to go up for co-ops in those regions. Some of the windfall money may have been spent on improvements. “Having the money makes you want to invest it in your co-op,” John Eichholz said about the cash increases for Green Fields Market from the merger of Northeast Cooperatives, “especially if you have been deferring maintenance or other improvements.”
Yet net income went down and payroll costs increased faster than gross margin in 2003. John added, “A lot of those improvements may have been classified as expenses, not capital expenditures, which could help to explain why net income went down.”
There have been some great examples of cash being used to benefit the co-op movement. As noted in previous issues of Cooperative Grocer, co-ops have invested their money individually and as regional associations into NCGA and have also invested in the National Co-op Bank (NCB) to collateralize loans for NCGA and its members.
Food co-ops are well positioned, with strong balance sheets. Our collective balance sheet has a lot of capacity to support improvements, expansions, and new stores. The challenge is in learning how to effectively leverage the balance sheets of individual co-ops to meet the needs of co-op members and the broader cooperative mission.
Expansions
According to NCGA, 45 co-ops are engaged in expansion or are planning expansions in this year and the next—a good indication of potential growth. However, achieving profitability continues to be a concern for expanded stores. Past analysis of CoCoFiSt data has shown that co-ops on average do not experience profitability until the sixth quarter after an expansion.
“The question may be, are co-ops expanding capacity before or after their physical expansions?” asked Kate Sumberg, CoCoFiSt consultant. She noted that it might take fewer quarters to reestablish profitability if the bottom line is good and operations are showing some efficiency before an expansion. Sumberg
suggests that a stronger co-op expansion strategy may help stores that are poised to expand.
At Valley Natural Foods in Burnsville, Minnesota, the co-op relocated to a larger store in 2001 and has performed very well. In 2003, Valley Natural Foods was the only co-op in the CoCoFiSt database that showed up in the top ten co-ops in each of three categories: Operating Income (4.3%), Turns X Earns (3.3), and Sales Growth (25%). (See charts for more on these measures.)
Susan McGaughey, Valley Natural’s general manager, said, “The main contributing factors to our success have been the systems we had in place before we moved and were able to count on in our new location.” She credits the implementation of an integrated store data program as one of those critical pre-expansion systems. They started using the system integrated with their accounting in 1997, and it was already developed and functioning well prior to the expansion. Because of this system, they are able to get immediate feedback on inventory, labor, and margin in a very timely manner, taking the guesswork out of whether operations are efficient.
McGaughey said, “We moved into our new location June 6, and by July 15 I had operating data, including June financial statements. I feel that’s been the backbone contributing to our success. Using an automated system set up the flow of operations and allowed us to follow a more efficient direction. We welcome ‘out of the box’ thinking, and using an automated system has freed up our time to utilize the creative thinking process.”
McGaughey noted that the co-op also worked on creating other functional systems. The board worked on policy governance, the store staff used CoCoFiSt to help with benchmarking, and the expansion offered them the opportunity to amp up their marketing and store branding within their new facilities. “If you do not already operate efficiently and have good systems in place, the expansion efforts may fail,” McGaughey said.
NCGA reorganization
With the reorganization of the cooperative grocers associations into one national organization, the NCGA can positively affect co-ops’ abilities to compete, especially in the areas of purchasing, labor benefits, marketing, and expansions. NCGA is poised to assist co-ops with identifying and responding to trends as well as increasing other opportunities nationally, regionally, and at the individual store level. Robynn Shrader, CEO of NCGA, pointed out that with members collaborating, overall operational efficiencies could be gained, with the benefit ultimately going to co-op members and consumers.
Said Shrader, “The future of the NCGA system depends on our ability to deliver products and services to our member stores that enhance their ability to compete locally. As we organize around our similar needs, we can promote the things that make co-ops unique in their individual communities.” ADDENDUM TO ORIGINAL DATA: Corrections to data in the above survey for Return on Assets and Return on Equity were published in the Nov.-Dec. 2004 edition. Link to: cooperativegrocer.coop/admin/index.php?edit=true&id=554
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Editor: Dave Gutknecht dave@cooperativegrocer.coop
Managing Publisher: Dan Nordley dan@triangleparkcreative.com
Webmaster: webmaster@cooperativegrocer.coop