University of Wisconsin Center for Cooperatives
Cooperative Grocer, July/August 1998, Ed. 77
Cooperative Grocer is published by Dave Gutknecht, P.O. Box 597, Athens, OH 45701
Retail Operations Survey Reports
Growth, Earnings for Most Co-ops
By Scott Beers and Dave Gutknecht
Scott Beersprovides accounting and
financial planning services to co-ops through Cooperative Development Services
and has been active with co-ops since 1978 (400 19th Av. S., Minneapolis,
MN 55454; 6121338-7459; firstname.lastname@example.org).
Dave Gutknecht edits and publishes Cooperative Grocer. Thanks to Paul Busch
for standardizing the responses and creating the data base. Thanks also
to NCB Development Corporation, which provides additional support for production
of the Retail Operations Survey.
his year's Retail Operations Survey reports double digit sales growth for the seventh consecutive year, along with increased net income. The overall rate of growth among co-op retails was 12% in 1997, and the number of profitable stores was more than 80% of survey respondents.
The sales growth rate is very strong compared to the food industry as a whole and compares well with the natural products industry figures for single store growth, reported (Natural Foods Merchandiser) at 9% for the year. Over half of survey respondents exceeded that average, the first time in years that food co-ops outperformed retails in their industry.
However, in contrast to the many new privately owned stores, there are very few new co-ops opening. So it is likely that the share of overall natural product sales by co-ops is continuing to decline.
Cooperative - and survey - diversity
Cooperative Grocer is pleased to present an updated set of performance measures for retail food cooperatives. The survey covers many aspects of food retailing, and our narrative contains opinions, commentary, and prescriptive advice specific to co-ops. For comparison purposes we refer mainly to prior CG surveys (published in each year's July-August edition). When other sources are utilized, they are so noted.
The figures presented here come from survey responses provided by 79 co-ops in the U.S. and Canada. While this is statistically a large sample size (perhaps 20%), note that the survey is not a random sample and that survey respondents changed significantly from the prior year. Only 42% of this year's population was included last year, and only 10% of small stores. The mix of stores by size is essentially the same.
Co-ops are very diverse! and this fact is somewhat
hidden by our survey report. It is really difficult to compare a store
doing $123,000/year with one doing $12,000,000/year. The survey respondents
also include a store that made over $200,000 for the year and one that
lost more than $80,000.
Retail co-ops surveyed had employment levels ranging from 0 in the smallest stores to over 170 in the largest. And on the important variable of leasing or owning store facilities, 28% own the site in which they do business.
To make the survey report more useful to readers from such varied operations, we have:
Sales: Strong growth is not the rule - Improvement is forecast
The median sales growth is 8% this year, marking the fourth consecutive year of 8-9%. A couple of very strong performers pull the mean up to 12%, but this lofty level was achieved by fewer than 1 in 3 co-op stores. Simultaneously, nearly 1 in 6 co-ops saw sales decline, and 1 in 4 had sales that didn't keep pace with inflation (3%).
In a departure from prior surveys, median growth rates are highest in small stores. This may well be a result of the change in survey constituency, but it is also a promising signal. This year's small stores have more inventory per square foot (page 21) with which to support their sales. We urge them to continue diversifying product offerings as a means of providing greater service to their members and supporting increased sales.
Expectations for 1998 are for better growth than was achieved in 1997. Few stores (4%) expect sales to decline, and only 14% expect to fall below 3% growth. Over half (53%) expect sales growth of 4-10%, while another one-third anticipate double digit sales increases.
Gross Margins: Continuing to climb
Reported gross margins increased a full percentage point to 33.5% in 1997. That's a cumulative increase of 4.4% during seven consecutive years of increase, and it's up 1.75% in the last two years alone. Since the biggest gain is in small stores, it is likely that the magnitude of this year's jump is attributable to the change in survey participation. Clearly, however, the trend for margins to increase continues unabated.
Labor Expense: Up very slightly
Labor costs continue to increase. They too are up for the seventh straight year, though our report finds them climbing only 0.1% of sales to 19.7% among all stores surveyed. As always, profitable stores have lower labor costs than do nonprofitable ones. This is one of the keys to profitability.
Although co-ops continue to report increases in sales,
their labor expense (labor as % of sales) grows even more rapidly.
As a group, as sales increase, co-ops are simply not achieving the labor
productivity gains that they should expect and demand. There ought to be
some economies of scale achieved. Instead, wage and benefit levels are
stagnating because coops aren't successfully getting more out of their
Gross Margins, Expenses go up, Up, UP
As the accompanying table of Expense and Gross Margin trends shows, co-op costs continue to escalate, and the coop solution is to continue increasing margins to cover the gap. This year some of the gross margin increase translates to improved bottom line performance. But if past results are an indicator, this will be eroded in the year ahead. Eventually, market conditions - increased competition from natural foods and mass market stores - may not allow higher margins.
The unfortunate truth is that many co-ops have not
controlled costs aggressively because they have had the luxury of being
able to continue increasing gross margins. But recall the above-mentioned
I in 4 co-op stores whose sales growth, in a booming market, failed to
keep pace with inflation.
It's noteasy to cut costs; there are hard choices to make. But there is a limit to how long the higher gross margin trend can continue. Co-ops need to get back to running lean operations that provide opportunity for boards and managers to reward productivity while holding the line on prices to members.
Service Department Difference
A service department - deli, bakery, cafe, etc. -
has a big impact on a store's income statement. These departments are high
margin, high labor sections which often set a tone for the entire operation.
They are quite popular, and almost any store expansion features them. See
the accompanying chart for detail on the impact of service departments
on labor, gross margin and sales growth.
Owning vs. Leasing
There is a negligible difference in the level of total expenses between co-ops that own and those that lease their locations. However, there is a BIG difference in how those expenses are constituted. Co-ops that own real estate have higher interest and depreciation costs than those that lease, while enjoying significantly lower physical plant costs. That stands to reason.
Balance Sheet composition is impacted more noticeably by the own/lease factor. Many of the ratios are quite different between the two occupancy strategies. The accompanying table (page 18) outlines some of the most significant variances. We will explore lease/own issues in greater depth in a subsequent article.
Discounts: Labor, Promotion, or Patronage?
Co-ops are notable, among other things, for the variety of discount policies employed and the vigor with which these policies are defended. Responding to a compelling need for distinctions about the types of discounts reported, this year we asked co-ops to tell us more. All the co-ops responding provided the total amount of discounts issued, and 77% gave us reliable breakdowns of discounts.
For the sake of consistency, we report all discounts on one line in the composite financial statements. In an accompanying table, you will find the results of the breakdown.
Discounts as a percent of sales are much higher in small and mid-size co-ops than in the large ones. We find that about 60% of discounts in small and mid-size stores are laborrelated, granted either to staff or to working members. In large stores it is 48%. All of the stores offer about 1% of total sales to all members as an incentive or "reward" for being members, and about 0.25% in discounts to seniors.
It stands to reason that you would classify employee and working member discounts as a labor expense. At the same time, it is equally clear that the senior discount is a marketing cost. We think that the discounts granted to all members by virtue of their membership are also marketing in nature. Discounts clearly are a valued member benefit, but are they the best use of the co-op's marketing dollars? (Note also, as detailed below, that only half of total sales are to members.)
Balance Sheets: A Need to be More Entrepreneurial
Cash, cash, cash. Co-ops seem to love cash. They have 20% of assets
in cash. Why? Invested well, cash will get at best a 5% return and does
nothing to serve members. We believe there are always other needs that
could be met with much of
These conservative practices may give co-ops more
trouble in the future. One long-term challenge they face is to maintain
and expand market share while remaining true to the mission to which each
is dedicated. This requires investment.
What about management? Perhaps managers - and their co-op wholesalers - should lead co-ops to take the risks necessary for long-term growth and expanded services to members. The best managers do this. Yet they are seldom rewarded for it. Their bonuses, if any, usually are tied to short-term results instead of long-term performance.
How can this aspect of co-op culture be changed in order to foster a greater entrepreneurial spirit? What is necessary for greater cooperation among cooperatives, for capital resources to be deepened, and to maximize the managerial and leadership talents in the community? This topic is increasingly urgent, and we hope for increased dialogue in future CG editions and in discussions among co-op leaders. We also hope it moves beyond talk and into an action phase.
RATIOS: Linkages and Relationships
Ratios link disparate elements of financial statements to one another and inform us about their relationship. Ratios can tell us about root strengths and fundamental weaknesses. They also allow us to compare current co-op operations with prior periods and with others in the industry.
As we do with every year's survey, we caution you that the ratios presented here are not exhaustive, nor are the results necessarily good or bad. It is up to you, the user of the information, to create a context for your analysis. As previously noted (page 18), service departments and the "own versus lease" question will impact anticipated results. Other factors may also be relevant.
Sales per square foot per year is a measure of how well the co-op is using its space to generate sales. Since facility expense is one of the largest operating costs the co-op has and is a fixed cost, good performance as measured by this ratio is vital. We have begun annualizing our presentation of this ratio, formerly a weekly figure, so it is consistent with others in the survey and because this is how most people use it. There are dramatic changes in results compared to last year, with large and small stores up over 20% while the mid-size stores decline nearly 30%. The magnitude of variance here is probably a result of the change in survey participation. In general, co-ops have impressive numbers: $666 per year compared to an industry level (NFM) of $293. Small stores especially have room for dramatic improvement, most likely by embarking into new lines like perishables. We draw this conclusion by noting that they have relatively slow inventory turnover and low inventory per square foot.
As the accompanying table indicates, sales per paid labor hour are lower than they were in 1995 despite sales growth of over 25% during the same period. Some training in effective supervision seems to be called for. Meanwhile, inventory turnover, a fundamental measure of productivity, bounces back some from the decline suffered in 1996, though it still trails the 1995 level. Since anticipated turn 95 level. Since anticipated turn rates vary widely by department, turnover goals should be set on a departmental basis and managed accordingly.
Compared to the natural products industry as a whole, coops have lower gross margins and higher inventory turnover rates. While this may indicate lower prices and higher productivity for co-ops, more likely it indicates that the co-op sales mix is tilted less toward supplements and more toward food than their counterparts.
When analyzing the asset productivity and Current ratios, it is necessary to adjust the composite figures presented here (pages 16-17), depending on whether your store owns or leases its site. Ownership stores will lag the reported restflts and lease co-ops will exceed them. As a rule, co-ops are well advised to invest their cash in the store's cash in the store's physical plant (shelving, coolers, registers, computers, etc.) and human capital (staff training), in hopes of sustaining greater sales and productivity.
Return Ratios measure the reward (net income) received in exchange for putting investment (equity) and assets at risk. Co-ops tend to be quite weak in these ratios, and often don't care since they are not motivated by profit. Still, there are numerous options for utilizing scarce co-op resources. In comparing opportunities, one of the best methods for determining which to choose is comparing the return ratios. Profits (whether called that or net savings) are not a dirty word, especially when we operate as a cooperative and return the surplus to the members. Prudent risk-taking can expand and improve cooperative services and ownership.
Wages and Salaries
The news is full of comment about the difficulty of hiring qualified help in today's job market. It's true in co-ops as well. Perhaps the greatest day-to-day difficulty is recruiting and retaining good people. Unfortunately, co-ops don't seem to be offering enhanced compensation to ease this problem, although their benefits packages often are generous.
In the mid-size and large stores, the entry level hourly rate pay reported for 1997 is exactly the same as it was in 1996. The small stores show a 10% increase, which is due in part to a change in the survey population and in part a response to the upward pressure on wages. Reading figures for wages after one year, co-ops don't appear to be taking better care of their experienced people, either. Their rates are also flat. Meanwhile, manager salaries continue to grow, though not excessively.
Benefits offered to employees are extensive and vary
significantly from small to large stores. The summary table, which looked
much like the previous year's, was deferred for space reasons until the
next issue of CG. We again emphasize the need for improved productivity
from all employees. This is the source of the co-op's ability to improve
pay rates and benefit levels. Without improved productivity, it is likely
that future surveys will continue to report flat rates and salaries.
Service to members is the essential means to the larger cooperative mission of democratic control of resources. Serving member needs, building member participation, takes many forms. Two valuable measures are percent of sales to members and annual sales per member.
Almost all food co-ops sell to non-members to build business and to bring potential members to the store. Yet growth in member equity - achieved through net savings on member sales and through member investment - remains necessary to the co-op mission. That implies a goal of growth in member sales. As the accompanying table shows, half of all co-ops record less than half of their sales to members. In all size categories this percent declined from the previous year. If the previous year. If sales to members are not increasing in a co-op, is member ownership being properly marketed? Vvhen using a member discount structure, co-ops are challenged to maintain competitive pricing for non-member shoppers and at the same time plan for year-end net earnings.
Annual sales per member indicates how much of the members' needs are met by the cooperative. Figures, shown in the accompanying table, are little changed from last year, except a much reduced upper quartile for small stores. Considering that the average per capita expenditure on food consumed at home is about $1500/year, and that most shoppers are buying for 1+ persons, co-ops obviously have much room for improvement in meeting their members' grocery needs. Member sales for co-ops in the lower quartile are only $11-15 per week; in the upper quartile they are $20 or more per week. This represents a clear opportunity for improvement, since capturing greater market share can begin with the co-op's existing members.
Net earnings is often the primary source of equity.
Member investment is the other key source of equity and is a measure of
a co-op's commitment to building democratic control of capital. Member
investment levels in co-ops continue to climb, although this year's survey
population has an upper quartile that is a smaller figure than in the previous
year. Lifetime investment ranges from a low of $15 to a high of $205, with
half of all co-ops requiring from $75-100 per member. Less common is an
annual investment, where $20 is the typical (and median) figure.
Member fees are often used to help cover costs; most lifetime fees are only $5, but a few co-ops have annual fees, typically $10 or $15. The latter group may be using the income generated by fees to disguise a weak operating result. As the "Bottom Line" table indicates, in many co-ops the net operating income is less than the "Other Income" line. A-n additional disadvantage inherent in member fees is that such income is taxable, unlike member investments.
Board of Directors
We hope all food co-op board members will read and refer to the survey results to help understand the primary operating constraints and measures faced by management, and to aid in comparing your co-op's performance with others'.
Survey respondents are incorporated as consumer co-ops (62%) as well as non-profits (25%), worker co-ops (4%) and "other" (8%). Boards of directors vary in size but most often have seven or nine members.
Employees serving on the board of directors, an uncommon practice in the business world at large, is found in two-thirds of co-ops surveyed. Election of employee directors is by the coop membership at large in three-fourths of these cases, and in the remainder election is by the member employees.
No matter what the board's composition, ask: Is the board micro-managing, lacking defined responsibilities and a clear co-op purpose? Or is the board governing within agreed-upon policies and goals, working with management to build its community through the democratic control of capital?