University of Wisconsin Center for Cooperatives
Purchasing co-ops realize big savings for small operators
by Jody Padgham
The Country Today
February 28, 2001
While I am only dreaming of the yearly return of green to my land, friends in the greenhouse business are busily preparing to tantalize me with new varieties and old favorites to fill out my garden color scheme. I look forward to several visits to the local flower farm to choose the perfect combination of plants, relying on the greenhouse grower to assist my selection. I really need, and look for, that personal attention- for both myself and the plants they have nurtured so well.
But, my greenhouse friends tell me, it’s getting ever harder to make it in the business. Low price competition from national chains combined with rising cost of production makes the bottom line ever tighter. The greenhouses, as many small businesses today, are being squeezed from both ends. The personalized service and local ownership I support may be in jeopardy.
Other small independent businesses in similar situations have found one way to fight these challenges, through the formation of industry specific purchasing (or ‘shared-services’) co-ops. Each of these cooperatives bring together from several to hundreds of independent business owners to gain the benefits of volume purchasing, joint advertising and marketing and other services that allow them to more effectively compete with ‘the big guys’.
You may be surprised by the long list of purchasing co-ops (and businesses that belong to purchasing co-ops) that are easily recognized names in our lives. The Associated Press news service, Ace and True Value Hardware, Best Western Hotels, Coast-to-Coast stores, Dunkin Donuts of America. These large co-ops, with hundreds of members, all have been built based on maintaining the ongoing independence and serving common needs of their membership. There are hundreds of less well known, smaller scale purchasing co-ops serving independent businesses throughout the state and the country.
The Independent Pharmacy Co-op, which started in Madison, WI is a wonderful example of how purchasing co-ops have allowed independent businesses to be competitive. In the 1980’s the pharmaceutical industry was going through huge changes- with large volume purchasing discounts set by wholesalers and new laws that regulated markups. Larger was rewarded, chains gained a strong competitive advantage. But the Independents didn’t want to give up. Mike Flynt, of Mallatt’s Pharmacy in Madison, researched the possibilities of independent pharmacies joining together to form buying clubs. A meeting was called among store-owners, who could technically be considered competitors. In the face of desperate economic reality, the pharmacies agreed that joint purchasing was worth pursuing. Letters explaining the concept were sent to independent pharmacies throughout the state, and with the help of the University of Wisconsin Center for Co-ops, two years later the Independent Pharmacy Cooper!
ative (IPC) was up and running. The co-op is now a very profitable member-owned business, offering joint purchasing, volume discounts, rebates and many other programs to over 2,200 members around the country. This winter, with potential competition in the form of a Walgreens moving in as a new neighbor, Flynt of Mallatt’s states that IPC has allowed him to maintain a strong and competitive business over the years. Though not pleased by the possible addition of the Walgreens to the neighborhood, Flynt knows that his store will be able to compete on price and selection with the national giant, due to the services of IPC.
Possible services provided through a purchasing cooperative could be: negotiating prices with vendors, purchasing of supplies or inputs for the business, offering private labeling or branding, providing joint advertising or marketing, offering common billing services, joint insurance purchases, warehousing products for members, providing educational, consulting or business services or management services for members. My small greenhouse neighbors may form a purchasing co-op with others in the area to take advantage of volume discounts on larger coordinated orders for potting supplies, seeds, soil or amendments. Use of the internet and fax machines makes joint purchasing or system sharing even easier and more economical than before.
Initial membership investments to start a purchasing cooperative will vary with the size of service package the cooperative would like to offer. Up-front investments provide the cooperative with working capital to start, but are compensated for through low prices, discounts and rebates as services are taken advantage of. A simple buying group like the greenhouses might form could exist with little overhead and volunteer labor, needing an investment of only a few hundred dollars per member. Purchasing co-ops formed with businesses that are in resale that would handle the majority of a member’s product needs could require a much higher investment (into the thousands of dollars). Ideally a co-op would be set up so a members initial investment would be equaled in discounts and cost savings within a year or two.
I encourage small business owners to start thinking about how they can work with their fellow independents to gain strength and keep alive their alternatives to store chains. If you are interested in exploring the possibilities of a purchasing co-op in your business sector, please contact me at UWCC for more information, or read the publication "Basics of Organizing a Shared-Services Cooperative" (USDA Rural Business and Cooperative Development Service Cooperative Services Service Report 46, on the web at http://www.rurdev.usda.gov/rbs/pub/SR46.pdf or ordered from the UWCC offices at 608-262-0705)
Jody Padgham is an outreach specialist with the UW-Center for Cooperatives. She may be contacted at 230 Taylor Hall, 427 Lorch St., Madison, WI 53706; telephone 608/262-0705, email email@example.com