By Terrah Baker
It’s not easy to determine what a good profit margin is for a cooperative business model, because every co-op is different, and financial circumstances change each year, said Dan Nordley, executive director and business manager for Cooperative Grocer Network.
He also serves on a board in Michigan for the Seward Co-op Grocery and Deli with 10,000 owner-members and $28 million in revenue each year. He said, on average, co-ops run a 2 to 3 percent profit margin but when a co-op is trying to pay off capitol, make internal improvements or just keep the place afloat, the margins can increase to higher numbers — ONF has been running on 6 – 8 percent — and in his experience profit in a co-op isn’t necessarilly a negative thing.
Profits Stay Within
The beauty of the co-op business structure, he said, is in the end the profit is meant to go directly back into the business and in turn the community.
“The money never goes anywhere, even if it’s high-profit, it’s not going anywhere,” Nordley said. “It’s not going to an outside contractor to extract the money for something else.”
In the case of Ozark Natural Foods in Fayetteville, much of their profit that has gone to savings in the last several years was used Monday to pay off the $1.2 million remaining on their 20-year mortgage, plus an early pay-off fee of $500,000, bringing the total payment to $1.6 million.
Although some owners found the pay-off fee steep, ONF Board President Joshua Youngblood stated at a press conference Dec. 5 that by paying the $2.5 million mortgage off early, ONF will be saving about $400,000. They had been paying on the mortgage for three years when the decision to become “debt-free” was made. It wasn’t, however, when the co-op began saving money.
“I went through the time that we did not have enough money to go bankrupt, I told myself we would never do that again,” said Alysen Land, general manager at the co-op for over 20 years. “Once we started making money, we started separating a savings account. I wanted to insure the safety of the co-op.”
Reality Of Competition
When The Fresh Market moved in to Rogers in July, Land said ONF lost 10 percent of their sales. Nordley agrees competition with other grocers, particularly in prices, is always an issue for co-ops because they’re offering organic and local foods in smaller quantities.
“That’s always going to be a classic problem for a natural foods co-op because they’re dealing with a market supply that isn’t geared towards mass commodity like most grocery stores,” Nordley said. “That’s why co-ops are never going to be able to compete.”
But if you want to follow the money in a co-op, he said, no one is getting rich. While the general manager and other staff may be paid six times as much as the lowest paid employee in some co-ops, it’s nowhere near the separation seen at a normal corporate grocer.
A Fair Wage
According to third-party staff surveys, ONF’s employee satisfaction placed ONF in the top five co-ops nationally, with currently more than 90 employees on the payroll receiving above minimum wage and a comprehensive benefits package.
Since, as Nordley explained, fair and living wages with benefits are important in a co-op business model, moving money from that pot is not a good option. Which is why many of the businesses — including one co-op in Spain — that Land and finance managerGary Cook studied had worked to become debt-free; in order to maintain financial flexibility and stability.
At ONF, Land explained if prices come down on the products they sell, the money has to come from somewhere, and it will be one of the two things a business can control.
“At this point we have to start looking at ‘at what cost,’ and in this case it would probably be employee benefits; because you basically have two things you can control and that’s margin and labor,” Land said.
Taking Down Prices
With no $15,000 mortgage payment, Cook said the co-op would only be able to lower profit margins by at most 1.5 percentage points.
“Another way to look at it is we’re a $12 million a year store — $1 million a month,” Cook said. “The $15,000 (mortgage payment) is only 1.5 percent of that. At the very most, with the mortgage paid off, that would only give us 1.5 percent we could lower and that’s maximum.”
The co-op has taken the profit margins down 2 percentage points in the last three years, said Land, and were able to do so with cost-cutting measures like cutting programs, staff benefits and other small expenses.
Choosing A Direction
Cook explained that he was surprised by the strong dissent heard in recent months, considering the board had made the decision to pay off the mortgage over 18 months ago with two votes in favor, hosted a financial forum and held an equity drive where 1,291 owners put money towards being debt-free.
Although it looks unlikely all of ONF’s more than 9,800 owners will agree on the direction of the business structure, Land, Cook and the board members who voted for the pay-off say they’re working towards making ONF an even more successful business, an advocate of sustainable foods and steward to the community.
In fact, Land said, ONF has looked at being more than just a grocery store. She said they’ve looked at having a small educational farm, an apartment complex and with the additional $15,000 staying inside the co-op, they hope to begin even more programs, as well as complete construction projects at their current location — like completing the unfinished basement.
“With the pay-off, projects like installing solar panels are nowhere near done — we’ve just begun,” she said. Overall, many agree that ONF’s move to become debt-free was one option among many, but the one they think is the right direction for the co-op to remain a strong, viable business.
“As much as you can pay down your debt, especially in these times when there’s nothing to invest in, it’s one way you can decrease the expenses that your membership is paying as well,” Nordley said. “The less interest you’re paying, the more money that goes back to owners.”