Taking Stock

Rural food cooperative case studies
reveal critical retail success factors

By Greg Lawless & Anne Reynolds,
University of Wisconsin


Editor’s note: This article is excerpted from the authors’ new
report: Keys to Successful Start-Ups for Rural Food Coops:
Four Case Studies, CIR 63, produced by the University
of Wisconsin Center for Cooperatives. Hard copies of the report
can be ordered by e-mail: dan.campbell@wdc.usda.gov, or by
calling: (202) 720-8381. It can also be downloaded from the
Internet at: www.rurdev.usda.gov/rbs/pub/newpub.htm.
The report was prepared for the North Country Cooperative
Development Fund, with funding from USDA Rural
Development.



hat factors contribute to the success or failure of a rural grocery cooperative? To find some answers, four case studies were conducted of Upper Midwest co-ops: Iron River Cooperatives, Iron River, Wis.; Root River Market Cooperative, Houston, Minn.; Viroqua Food Cooperative, Viroqua, Wis., and Tower Foods Market Cooperative, Oneida Nation, Wis.

This article begins with brief overviews of the four coops, followed by analysis of key factors that influenced the success or — in one case — failure of these co-ops.

Root River Market Cooperative — Houston, Minn.
The Root River Co-op is a full-service retail grocery store that provides a conventional inventory of foods and other grocery items in a city of 1,020, located in the southeastern corner of Minnesota. The community suffered the loss of its only grocery store in 1998.

After failing to attract a private company to run a store, a core of people in the community in early 1999 decided to try a cooperative. A study showed it would cost $400,000 to launch a co-op store. Some 310 members joined, who contributed $170,000 in member equity and loans. North Country Cooperative Development Fund (NCDF) then originated a loan for $225,000. About $12,500 in grants were also raised.

The store generated $1.06 million in the first year, about 12 percent below the projection. Operational costs had also been underestimated. To reduce costs, one of three department managers was reluctantly laid off. Sales have been evenly split among members and nonmembers. Summer has been the heaviest sales period, driven by tourism to the area. In recent years, the co-op’s gross sales have held steady at just over $1 million. A pharmacy (which rents space from the co-op) has drawn customers, particularly elderly residents. The gross margin held steady at about 25 percent during the first 5 years of operation, and it earned a 5.9 percent net profit, annualized over the past 3 years At the end of November 2004, membership had risen to 419. Based on an average of 2.58 people per household, coop membership is estimated to be 1,081 individuals.

Viroqua Food Cooperative
— Viroqua, Wis.
Located in a town of 4,335 which has become a hub of the “alternative, back-to-the-land community.” As a natural food store, it faces different circumstances than most conventional grocery stores. It serves as an excellent example of the “start small and grow” approach to food co-op development.

It started as a food-buying club in 1991. Members decided to open a retail outlet in Viroqua, incorporating as a Chapter 185 Wisconsin cooperative. While the new board did not have written a business plan or use professional consultants, it had 5 years’ experience operating a buying club of 40 core families. The co-op’s incorporation papers established two classes of stock.

When the doors opened in September 1995, the store had 600 square feet of retail space and the co-op had 95 members. In 1996, the co-op had $174,330 in gross sales. By 2003, the co-op’s gross sales had risen to $1.07 million.

The co-op did not take out any commercial or institutional loans to capitalize start-up. About a year or two after opening, it approached NCDF for the first of three small loans to finance equipment and other needs.

The co-op currently has 1,000 members representing 635 households, with 82.5 percent of sales going to members. Extremely limited retail space means employees must be constantly stocking shelves.

In 2002, a feasibility study looked at moving to a new, larger location and renovating an existing building.

Members invested $159,000 for the project. However, the co-op board ultimately decided to build a new store at a cost of $1.6 million. It authorized the sale of $900,000 of new, Class C stock, which, unlike its voting stock or Class A shares, would pay dividends. However, unlike loans with a fixed maturity date, the co-op won’t have to return the new equity until people request it.

By the end of 2004, the co-op was negotiating a substantial loan with a local commercial lender, using a USDA Rural Development loan guarantee, combined with a subordinate loan from NCDF. The co-op opened a new store in June 2005. The new building is 7,200 square feet, with 4,400 square feet of retail space. In the first two months of operation, sales were running ahead of projections.

Tower Foods Market Cooperative —
Oneida Nation, Wis.
This co-op had the misfortune of representing the only “failure” among the four case studies. The store was located about 5 miles from Green Bay, Wis., a metropolitan area of 226,778 people. Motivation to start a co-op goes back to April 1995, when a non-Native family closed its private grocery in the area.

The idea for a new grocery in the Oneida Nation became a vehicle for achieving a number of greater tribal goals: economic development and job creation, tribal self-sufficiency, improved diets and better health, food security for elders and young children, and even environmental stewardship (the store used solar power).

In January 1996, the tribe commissioned a study — the first of two market analyses conducted by major wholesale suppliers. Based on a 10,000-square-foot facility, the first study projected a 19-percent market share and gross sales of almost $3.3 million in the first year of operation. A second market analysis later reduced sales projections to $1.7 million. Both proved wildly optimistic.

The Oneida Nation agreed to provide $250,000 to the grocery store, and an application was also submitted to USDA requesting a $500,000 grant. The co-op ultimately got a $460,000 USDA revolving loan, issued through the tribe. Some projections were apparently erroneously based on that money being a grant — a misinterpretation that severely affected the co-op’s financial projections. No commercial bank loans were taken out to finance the opening of the store.

Project leaders spent 2001 developing a business plan, recruiting board members, incorporating the co-op, developing bylaws and holding community meetings. By April 2002, extensive renovations were finally underway to convert an empty warehouse in a business park into a modern, full-service grocery.

Tower Foods Market opened for occupied 8,000 square feet and had 266 members when the doors opened. Around the time of opening, a whole new slate of directors took over the board. Money set aside for board training was not spent.

In its first year of operation in 2002/2003, the grocery achieved only $452,589 in gross sales, one-third of the projection. Another sign of trouble was the turnover in management; the co-op went through four managers in 2 years. Poor location, outside competition and non-competitive prices were among other factors cited in the failure to generate more sales.

In June 2004, unable to attract further support from grants, the tribe or local banks, Tower Foods Market shut down.

Iron River Cooperatives
Inc. — Iron River, Wis.
As they struggled to clear ground and grow crops in the hard clay soil north of Iron River in the early 1900s, Finnish immigrants would trade their farm produce with local merchants for farm supplies and household goods. Unsatisfied with the available retail service, in 1914 they organized the Oulu Co-op grocery and set out to raise $2,500 to open it. The sale of $10,000 of co-op stock was authorized, at $5 per share.

Merchants responded by cutting off all credit to the farmers and stopped trading groceries for their butter and eggs. After six months, the co-op had raised only $640, but nevertheless decided to open for business in nearby Iron River. In 1916, they opened a second branch in Oulu.

Other Finns in northern Minnesota, Wisconsin and Michigan’s Upper Peninsula — many of them living and working in company-owned mining towns and remote farming communities — were also forced to deal with stores that held a virtual monopoly over trade and charged excessive prices. This led to the formation of about 65 Finnish-sponsored co-ops in the three states, very few of which failed during this period.

Success was credited primarily to the solidarity of the members and the key role played by a federated co-op wholesaler, the Central Co-op Exchange (CCE), formed by Finns in 1917. CCE not only made bulk purchases for member stores, it also helped with co-op education and technical assistance for such crucial functions as bookkeeping.

Many of the Finnish immigrants were socialists, due in part to the tyranny they had faced under the Russian Czarist regime. Their co-op stores were even called ‘Red Stores’ by non-Finns. But a struggle in the 1930s resulted in a break with the Socialist party. CCE changed its name to Central Co-op Wholesale (CCW), and replaced its red-star trade label with the twin pines logo of the Rochdale consumer co-ops.

Big economic and social changes after World War II led to the rise of supermarkets and greater auto travel. About 30 of the Finnish co-op stores failed between 1945-1963. CCW merged with Midland Co-op Inc. in 1963. By the mid-1970s, only about one-third of the 175 Finnish co-op stores still existed.

Midland merged with Land O’ Lakes in 1982. By 2004, Iron River Co-op was one of the few Finnish-origin co-op groceries still operating in Wisconsin. Today, it operates a 7,000- square-foot grocery and a 6,400- square-foot hardware store.

In fiscal 2003, the grocery and hardware stores had gross sales of $3.88 million and gross margins (after costof- goods-sold) of 26 percent and 39 percent, respectively. About 86 percent of grocery sales were made to members in 2003. The net margin (or profit) for the combined business was $88,082 in 2003. Current membership stands at roughly 4,000 households, about 3,500 of which are active.

The co-op has been negotiating with a local commercial bank to obtain financing to build a new, 15,000- square-foot building — a $2.5 million project. Thus far, the co-op has not pursued selling equity shares to members, nor does it intend to ask members to make unsecured loans — two strategies that other co-ops have used successfully to finance expansions.

By early September 2005, the financing for the new store was in place (with help from Bayfield Electric Co-op to cover a “gap”), and the board was slated to meet later that month to make a final decision on the move. “It’s gut check time: when you put all the final numbers together, does it still work?” General Manager Patrick Dooley said. Despite fully owning an empty parcel of land on the edge of town, the new plan calls for building the new store closer to downtown.

Critical success factors
• Common variables that impact the success or failure of these food co-ops were identified in this study: community and industry support; member support; quality of the business plan; business growth patterns; market niche; board and management leadership, and finance.

Competition
Three of the four cooperatives faced direct competition from grocery stores in nearby, larger communities. In each case, many members of the local community commute to work in these cities and often buy groceries on the way home. Root River Cooperative is the only grocery store in Houston, but there are two full-service grocery stores in nearby small communities, plus a Wal-Mart Superstore in La Crosse and other large groceries in both La Crosse and Winona.

Iron River Cooperatives is the only full-service grocery store within a 30- mile radius, but the co-op is concerned about a planned WalMart Superstore in Ashland. Tower Foods Market Coop faced the closest competition, with four dominant grocery stores in nearby Green Bay and a new, 68,000-squarefoot store in DePere, Wis. (five miles away).

Viroqua Food Cooperative differs because it is a natural foods grocery store, with the closest competition more than 30 miles away. Viroqua is four times larger than Iron River or Houston, and it is more isolated from large population centers.

Support from other
co-ops & community
All of the cooperatives received support from their cooperative community in the form of advisors or consultants. Two of the co-ops, Root River and Viroqua, benefited directly from the presence of strong cooperatives in their community. The two largest employers in Houston are cooperatives and each of them provided loans to Root River during its start-up phase. An attorney from the local electric coop helped the steering committee file the articles of incorporation.

In Viroqua, a local resident who had helped start CROPP, a successful organic marketing cooperative, served as an active advisor to the food cooperative. A long-time CROPP employee serves on the board of directors and provides valuable experience with marketing and operating. The Viroqua coop also benefited tremendously from support of the regional and national natural food co-op network.

Iron River was part of a movement in the early 20th century to develop cooperatives across northern Minnesota, Wisconsin and Michigan. The board and management were instrumental in starting and supporting a cooperative wholesaler (CCE) in Superior and benefited from its services for years. They occasionally attend training sessions provided by CHS Inc., but don’t seem connected strongly to the co-op community. The current situation is similar to that of Tower Foods Market, which received sporadic assistance from cooperative advisors and other food co-ops in the region. But it had no consistent relationship with another local, supportive cooperative.

Both Root River and Tower Foods Market had significant support from local officials. The City of Houston commissioned the initial feasibility study for a downtown grocery store, after the previous store closed. They also contracted with a grocery wholesaler for a design and to identify operational needs. The co-op steering committee benefited from these studies and got the support of a local lender.

Tower Foods Market was supported by the Oneida Nation from its inception and received grant/loan support based on its relationship with the tribe. The cooperative was located on tribal land, next to several service offices. The co-op didn’t seek conventional funding from local banks, and there is no evidence that it received support from Green Bay or other nearby communities. The 2004 business plan recommended a strong marketing plan to the larger trade area, but the store closed before the plan was implemented.

Member support
Iron River and Viroqua both make more than 80 percent of their sales to members. Viroqua opened with 95 members in 1995 and had 1,000 members by 2004. Members’ support allowed Viroqua to open debt-free in 1995, and members continue to show their support with equity investments and loans.

Iron River has 3,500 active members, 200 of whom attended the last annual meeting. Members are not being asked to invest in the relocation project through loans or equity.

Root River makes 50 percent of sales to non-members — many of them tourists, who are an important component of the co-op’s profitability. The coop had 310 members when it opened in 2000, and members provided over 40 percent of the funds needed to open the store. Membership has increased by 35 percent in 4 years, to 419.

The organizers of Tower Foods Market held a number of community meetings to gather support and feedback from potential members and customers. It seems clear that the co-op opportureceived overly optimistic feedback from surveys and interviews. The store opened with 266 members in 2002, among a target population of 8,876. Per-customer weekly expenditures had been estimated at $30, but was actually only $9. While the co-op had aimed to garner 60 percent of business from non-Native Americans, only about 20 percent of the co-op’s business was non-Native.

Quality of the business plan
Each of the cooperatives in this study differed considerably in their experience with business plans. Viroqua, which grew from $290 in annual sales per square foot in 1996 to $1,166 per square foot in 2003, was started without a business plan. After start-up though, subsequent expansions have been well researched and planned.

The organizers of the Viroqua coop never wrote a business plan, but they had the advantage of 5 years of experience running a food-buying club for 40 members. Like many 1970s-era natural food cooperatives, the retail store was an outgrowth of the buying club’s desire for a storefront grocery. Because members were able to “self-finance” the start-up, they didn’t need to write a business plan for a lender.

The Root River Co-op didn’t start as a buying club, but the organizers were basically re-starting a grocery store that had been reasonably profitable in the same location. The former owner shared all of his financial records with the steering committee, and the co-op also had access to a business plan previously commissioned by the city of Houston. Along with the substantial commitment of equity and unsecured loans from members, the business plan helped to convince a local bank to lend the co-op the balance of the needed start-up capital.

The founders of Iron River Cooperatives may not have written a business plan before it opened in 1916, but the co-op is in the process of putting together a detailed plan to support the request for the capital needed to relocate the store. Co-op leaders have conducted member surveys and worked with a distributor to create accurate sales and operating projections.

Community members began planning for a grocery in the Oneida area in 1996. Two market analyses were conducted by wholesale suppliers (in 1996 and 2000), and both were significantly overly optimistic. A needs assessment survey was conducted among community members. It showed mixed support for the cooperative, and the 2000 market study identified potential problems with the size and location of the store. In spite of these concerns, the study predicted profitability in the first year.

Finance
The start-up financing for each cooperative differed considerably. Viroqua met its financial goals solely through member investment. It needed $20,000 to open the store and received a major boost when one member bought $10,000 worth of stock.

Root River financed its start-up with a combination of member stock (310 members at $100 each) and unsecured member loans of $137,700 (including $20,000 in loans from two local co-ops) in addition to a loan from a local bank.

Iron River was financed by its members at start-up in 1914, but it is working with a local bank to finance its $2.5-million relocation project. Although the members voted overwhelmingly to approve the expansion, there are no plans to raise funds from members. Members invest through their patronage and the co-op regularly pays a patronage refund.

Tower Foods Market was funded through a $250,000 contribution from the Oneida Nation, along with a $460,000 revolving loan from USDA Rural Development (via the tribe). Member equity was less than 1 percent of financing at start up, and there were no bank loans. The availability of “institutional dollars” meant that organizers did not have to press tribal members to contribute equity, nor did they have to subject their business plan to the rigor of a commercial lender.

Board and management leadership
The three successful cooperatives studied have had good continuity with experienced managers. The original manager at Root River is still there after 4 years. Viroqua has had the same manger since 1998 and Iron River’s manager has served since 2000.

By contrast, Tower Foods Market had four managers in 2 years. It also experienced high turnover in community leadership. Twenty-five individuals served on the steering committee and board between 1999 and 2004. When the store opened, a completely new and inexperienced board took over.

Viroqua has had regular board turnover, but no trouble finding new people to run for the board. When the cooperative was getting ready to open, a core group of 20 members put in hours of sweat equity to renovate the space. As board members or regular members, the co-op has been able to draw on a dedicated group of supporters.

Iron River has an experienced board, with tenure of up to 15 years. Root River also has had good board continuity. The steering committee that started the co-op had a good balance of skills and shares responsibilities well. Some of these founders are still on the board.

Business growth patterns
Each of the co-ops opened in a different environment, and each of them proceeded slightly differently. Viroqua started with a core of a successful, 40-member buying club, opened in a small storefront, remodeled it extensively, reached 1,000 members and now is planning to relocate. The manager has invested in training and efficient systems, so the co-op has been able to increase sales steadily and prepare for significant expansion.

Tower Foods opened in a new location (for a grocery store), with a fullservice, 8,000-square-foot store. There were discussions about changing the product mix to more profitable natural foods, but the offerings never changed before the store closed after 2 years.

Sales were significantly under projections during that entire period.

Root River opened on the site of an existing grocery store and used that store’s records to estimate sales. This proved to be a reasonable estimate, and sales have held steady since the store opened in 2000. The manager cut operating costs in order to achieve profitability, which has been modest but consistent.

Iron River has operated for more than 90 years, but most details of its business growth were beyond the scope of this report. The current store has done well enough to develop plans for relocating to a 15,000-square-foot store. The cooperative also owns a hardware store at a separate location and shares some administrative costs with that store.

Market niche
Communities are very interested in having grocery stores, but don’t always support these local businesses. A strong niche-market can be very helpful in overcoming the inherent challenges of running a small, low-profitmargin grocery.

Three of the cooperatives were started as full-service grocery stores, serving as small, local competitors to large, regional grocery stores that dominated the market. They benefited from their locations as the sole grocery store in a rural community, but they also faced strong competition from regional stores.

Root River is located on a highway near a state park, which creates heavy summer traffic. It is on the site of a previous grocery store and thus benefits from that site identity. It also rents space to a local pharmacist.

Iron River also provides an additional needed service in the community through its ownership of a hardware store.

Tower Foods suffered from a poor location and never drew enough customers through marketing efforts. Sales figures were one-third of projections. The groceries stocked were “100 percent conventional,” and members commented that the store had no “Oneida identity.” Local products were not available at Tower Foods, and it was challenged by the many collateral goals: economic development, better health and tribal self-sufficiency. Keeping all of these goals in balance wasn’t easy for the organizers, managers or board members.

Viroqua’s natural foods focus gave it a unique identity in the marketplace. The founders knew that there was strong support for natural foods among some community members, and the competition in that niche was over an hour away.





































Keys to success…and pitfalls

Based on these four case studies, we can identify four key characteristics that contributed to the success of Root River, Iron River and Viroqua.

Potential pitfalls
The case study of Tower Foods Market Cooperative provides a detailed examination of many potential pitfalls in starting a co-op grocery. Although it might be viewed as a unique case because of its relationship with the Oneida Nation, it is probably safe to make the following generalizations as contributing to its failure: The story of Tower Foods Market also points out the importance of the “cooperative advantage.” A coop that lacks member support, especially during the critical start-up phase, will lose out on the very tangible factors (financial, leadership and expertise) that have made Viroqua, Iron River and Root River successful rural grocery stores.




September/October Table of Contents