Natural Foods Merchandiser

Co-op Over Adversity

Back in 1997, Paul Miller had a small organic farm and a big problem. He had markets for all the French green beans, lettuce, peppers and Asian vegetables he could grow, but the two-and-a-half acres of South Appalachian Highlands he cultivates in northeast Tennessee just weren't producing enough revenue.

"I was thinking, 'How the heck am I going to make my tiny little farm make an income for me?'" Miller says.

Around the same time, a commercial community kitchen, where producers could manufacture small quantities of specialty products like jams and sauces, was getting its start in nearby Treadway, Tenn.

"University of Tennessee fans were waiting for me to make a salsa for them," Miller says of his Volsa Salsa, a tangy dip made from orange peppers and tomatoes and sold to orange-and-white wearing fans of the Volunteers.

But making the salsa was one thing. What Miller and other small-acreage farmers in his corner of the state wanted was to add value to their raw agricultural products. What they needed was some marketing juice.

Today, Miller and 29 others are members of Appalachian Spring Cooperative in Sneedville work together to produce, process and market specialty foods.

"We wanted to create an organization that would have a centralized marketing function so efforts would not be duplicated and our products could get into wider markets than the individual producers could access themselves," says Miller, who now recruits new members into the cooperative. "We can envision our products sold in urban areas all over the country and maybe in Europe."

Appalachian Spring is one of 48,000 U.S. cooperatives that provide an estimated 120 million Americans with services ranging from retail sales and agricultural marketing to funeral services and banking.

Changing economic conditions, notably the consolidation of conventional farming, forced several large supply cooperatives into Chapter 11 bankruptcy in the past three years, including giants Agway Inc. and Farmland Industries. All but three distribution co-ops serving natural retailers have failed or been acquired; most recently Blooming Prairie Cooperative and Northeast Cooperative were brought under the United Natural Foods Inc. umbrella.

Still, just as they have done since 1752, when inventor and statesman Benjamin Franklin organized the first co-op, the Philadelphia Contributionship for the Insurance of Houses Against Loss by Fire, cooperative businesses have been formed to satisfy unfilled business niches and solve problems by calling on the collective expertise—and combined financial might—of the communities they serve.

"Cooperatives tend to be problem solving," says Dave Gutknecht, publisher and editor of Cooperative Grocer magazine. "They often accomplish for a community or group what they can't do themselves."

Supplemental Income
Now going into its second year of production, Appalachian Spring markets small batches of Southern regional specialties such as sweet potato butter, corn relish and chow-chow, and is developing high-end gourmet products such as baby vegetables, exotic beans and fruits pickled in varietal vinegars.

Initially funded with a $15,000 grant from the U.S. Department of Agriculture's Sustainable Agriculture Research and Education Program, the co-op is helping wean family farms off of tobacco farming. In Tennessee, tobacco reliably produces $2,000 per acre in supplemental income each year. "When tobacco is gone, there aren't many things that can do even close to that," Miller says. "We're trying to encourage people to choose options that have the best potential to produce maximum revenue."

There are about 3,400 agricultural co-ops in the United States. They range in size from the tiny Appalachian Spring, which so far is marketing products to homespun and naturals retailers in east Tennessee, to giant producer co-ops that own and market more than 1,000 major brands, such as Sunkist, Blue Diamond, Land O' Lakes and Organic Valley, whose marketing reach extends across the United States and sometimes beyond.

About 30 percent of all farmers' products are marketed through ag co-ops, which did about $99.7 billion in business in 2000, according to the National Cooperative Business Association. Some of those co-ops are helping producers keep a bit of that revenue in their pockets by adding value to raw agricultural products— baking their wheat into loaves of bread, stewing their organic peppers into gourmet salsa or making their organic milk into cheese.

"Farmers might be working in a cooperative, but if they don't do processing to make the bread or something else out of their product, they are not capturing much of the value the customer is paying for—that's going to some other producer, processor or middleman," Gutknecht says. "Co-ops have been able to realize more income for their producer members by getting into some of the value-added products."

Becoming a processing co-op that also markets its products, such as Organic Valley, can require financial investment from outside the membership pool. This has forced co-ops to also think about other sources of funding and has resulted in new financial structures that allow investors to get some return beyond a year-end patronage dividend. The new structures also allow the co-ops to recruit top-flight marketing and business talent—luring people who, were they employed in the conventional grocery stream, would expect financial incentives like bonuses and stock options, a perk typically not available to co-op employees.

Academics typically classify cooperative businesses as traditional or new generation. Traditional co-ops usually have a basically open membership and members can redeem their shares when they leave. New generation co-ops typically accept only members who "qualify," perhaps because they farm a particular variety of wheat or grow organic produce. When they leave the co-op, they can sell their shares to someone else who meets the qualifications. Both models lack a mechanism to draw outside investment, which means they are less financially flexible than a corporation.

A third model has begun to emerge: the Wyoming Cooperative. This has its roots in the lamb processing industry and was piloted by the Mountain States Lamb and Wool Cooperative.

"The Wyoming model looks like a limited liability corporation and allows outside investors," explains Kim Zeuli, director of the University of Wisconsin Center for Cooperatives. Wyoming co-ops have two classes of investors: member investors, who contribute equity and use the services of the co-op; and patron members, who invest but do not use the services. "The whole reason it was created was to get access to additional capital beyond their members," Zeuli says.

This new option may help co-ops expand without imploding. For some, the path to new capital sources has been fraught with peril.

Wholesale natural products distributor Frontier Natural Products Co-op formed a wholly owned corporation, Frontier Natural Brands, to develop and expand its Simply Organic and Aura Cacia lines. "It was a way in which the co-op could stay really strong and recognize more gain by developing more brands inside the organic and sustainable movement," says Chief Executive Office Andy Pauley. "We could get bigger and expand more into the mainstream, and funnel proceeds back to the co-op. Some of those funds would be distributed to members. The remainder could act as a seed venture capital fund for more natural products businesses.

"All that said, the proof was in the pudding," he says.

Frontier now is looking for a buyer or investor for its Simply Organic line and is attempting to right its core businesses that listed when the co-op turned its attention to the launch of a 70-SKU series of add-meat dinners, seasoning mixes, side dishes and spices. Though Frontier is struggling, Pauley says the co-op is not in as much pain as it would be were it still exclusively a co-op.

"We still think the model is viable, still believe in the concept and are still attempting to do it," Pauley says. "But it is not as easy as you can write it down."

300 Stores And Holding
Retail food co-ops had a heyday in the 1920s and '30s. "But like most independent stores, they faced increasingly strong competitors among supermarkets in the '30s," Cooperative Grocer's Gutknecht says. "Co-ops in the '30s and '40s were carrying mainstream goods with an emphasis on quality. They also did the very first informative labeling and consumer protection."

Today, most of the 300 remaining retail co-ops hold similar values. "In addition to that, we've got more call than ever for community-based economics and community-based institutions that are open, welcoming, democratic and trustworthy," Gutknecht says. "Co-ops are in a good position on that score as well."

Though there has been a "slow winnowing of stores that lack certain basic strengths of retailing—management, capitalization, location—most co-op stores have survived and done rather well," he says.

This is due, in part, to many co-ops' willingness to replicate the co-op model on an organizational level. Many stores, he says, have organized into regional associations that give them the power of size in buying, training and standardized reporting. "They have been able to overcome some of the limits of their fragmented nature and are closer to being a chain—or at least a virtual chain."

Retail co-ops typically are single store operations, though some have expanded. The largest in the United States is the seven-store Puget Consumers Co-op in Seattle. More typically, retail co-ops have a couple of stores—Outpost Natural Foods in Milwaukee, Wis., for example—or, like Weaver Street Market in Chapel Hill, N.C., have added complementary businesses such as bakeries and restaurants.

A Cooperative Grocer survey indicates single-store growth for cooperatives is in the 10 percent to 11 percent range, a rate that is exceeded at only one or two large chains, Gutknecht says.

Some of this success has to do with the social and economic climate of the moment, says Robynn Shrader, executive director of the National Cooperative Grocer's Association. "There are many examples of how the corporate world has gone awry and there is very little trust now in the corporate model of doing business.

"People are looking for ways to effect change in their own backyard. Community-owned businesses offer that opportunity," she says.

—By Dana Coffield. Additional reporting by Nancy Nachman-Hunt and Scott Silverman.

Natural Foods Merchandiser volume XXIV/number 3/p. 52, 54

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