Fairbairn on Fighting Foodland: News NCG Can Use

"Mackey Suicide Note Blames Co-op Grocers for Whole Foods Bankruptcy" has long been my fantasy headline.  But that dream -- that food co-ops can somehow rise up and slay the investor-owned supermarket chains that try to steal the spirit and vibe the co-ops created -- has met its nightmare counterpart in Canada this year.

I refer to the demise of Co-op Atlantic, once the largest cooperative in Canada's eastern provinces but, as of earlier this year, gone bankrupt.  Co-op Atlantic was a cooperative federation -- a co-op of co-ops -- that can be compared to the "virtual chain" of food co-ops here in the U.S. that operates as National Cooperative Grocers (NCG).

In May, Co-op Atlantic sold its wholesale grocery business, along with a group of retail stores the federation owned, to the investor-owned supermarket chain Sobey's.  The chain also got Co-op Atlantic's gasoline business.  What were once co-op stores are now "Foodland."  The co-op gas stations are now Shell stations.   After filing for bankruptcy protection, Co-op Atlantic sold off Co-op Energy — its fuel business -- as well as its agricultural supply operations.  In short, Co-op Atlantic is no more -- a shocking development in a nation so steeped in the cooperative tradition as Canada.  Zoom out the lens a bit, to cover all of North America, and this is probably the saddest moment for consumer co-ops since the demise of the Consumers' Cooperative of Berkeley in the late 1980s.

A silver lining of sorts is that the smart folks at the Centre for the Study of Cooperatives at the University of Saskatchewan have just issued an analysis of Co-op Atlantic's demise, called "Governance as a Determinant of Success and Failure: What Other Co-ops Can Learn from Co-op Atlantic."  The lead author is the Centre's renowned cooperative scholar Brett Fairbairn, author (among other things) of the celebrated essay "Three Strategic Concepts for the Guidance of Cooperatives." Fairbairn's co-authors of the Co-op Atlantic paper are Murray Fulton and Dionne Pohler.  Fulton is director of the Centre.  Pohler is a fellow in cooperative strategy and governance at the Centre and is also an assistant professor at the university's Johnson-Shoyama Graduate School of Public Policy.  These folks are cooperative heavyweights.

And they do not mince words.  According to Fairbairn, Fulton and Pohler, the demise of Co-op Atlantic is a failure of governance.  The essay should be required reading for every member of the Board of the National Cooperative Grocers Association d/b/a National Co-op Grocers -- and, indeed, every member of every board of every food co-op that is a member of NCG and part of its "virtual chain."

"The competitive environment was undeniably tough," write the Saskatoon scholars. "The retail sector is challenging, with narrow margins and large, integrated competitors; in addition, Atlantic Canada confronted a weak regional economy and not only an aging population, but also a declining population in many centres. And the co-ops did not have a foothold in the main, growing market, the dominant regional city of Halifax."  Does this not sound exactly like the situation in the U.S., where not just John Mackey's faux co-ops but also every chain from Wegman's to Wal-Mart is stealing market share from food co-ops -- which, collectively, lack a significant presence in every metropolitan area that isn't called Minneapolis-St. Paul?

According to Fairbairn, Fulton and Pohler, failing to rise successfully to this challenge is ultimately not something to blame on store operations -- on how many brands of champagne vinegar were on the shelves or how many summer cashiers were hired to work the July 4 weekend.  Rather, "the Co-op Atlantic story highlights that in the long term the most important determinant of a co-operative’s success — or its failure — comes down to governance. Sometimes governance is understood as being primarily about how the board and senior manager relate to each other. It is about that, and also far more."

This query by Fairbairn, Fulton and Pohler seems especially chilling, given the business realities confronted by retail food co-ops everywhere on the continent:  "[W]here were the local retail co-ops — their boards and managers — in all this? It was not solely the responsibility of Co-op Atlantic to get member retails involved, to educate them, or to make sure their needs were met. In a co-operative, members have voice and power precisely to help make sure the common enterprise serves their needs and is on the right track. Based on the information we have, it is unclear whether member co-ops made compelling arguments and were not heard, or whether they failed to get involved, to educate themselves about the issues, and to speak up."

Here in the lower 48, NCG has until recently pursued a deliberate strategy of being invisible to the boards of its member co-ops.  Traditionally, individual food co-ops in the U.S. have tended to pride themselves on their independence; the folks in Finland, Minnesota emphatically do not want their co-op to look or feel anything like the food co-op in Park Slope, Brooklyn or Brooklin, Maine. (Well, okay -- it's really Blue Hill, Maine -- but that's right next to Brooklin.)  So the assumption seems to have been that the boards of U.S. food co-ops won't understand what managers viscerally grasp -- that without some degree of uniformity and joint wholesale purchasing, the U.S. cooperative grocery sector will vanish.

That's the critical problem with co-ops:  We love our democracy until we decide it will be our undoing.  Democratically controlled organizations with open memberships cannot prevent from gaining seats on boards those who cannot or will not understand the business realities that co-ops confront and the forces that drive them to combine or create virtual combinations like NCG.

"Some have argued that co-ops are prone to having relatively weak boards and overly strong managers," write Fairbairn, Fulton and Pohler. "[I]f this is true of co-ops in general, it is probably even more true of co-op federations. Lack of an outstanding board can lead to a host of problems, whether it is management that is too powerful, management that is not given sufficient free rein, or management that is simply not aligned with what members need. All longterm problems, including any caused by management, are ultimately the board’s responsibility.

"Given their drawbacks, federated structures presumably survive because they develop some offsetting strengths that a simpler, unitary, or more integrated organization would not. What defines a federation is the autonomy of the members; if a federation succeeds, therefore, it must be because of something that it does differently and better because of having autonomous members. This elusive something — we might think of it as the federation benefit — could be related to local knowledge, local resources, loyalty, or strategic insights. Economies of scale alone will not be a sufficient argument, because other kinds of competing organizations will likely be able to provide even greater benefits in this area. A federation that cannot demonstrate some unique value associated with its distinctive structure needs to reconsider its longterm viability."

Co-op Atlantic apparently failed to meet this challenge.  NCG should not make the same mistake.  Recently it has taken baby steps toward making itself known to the boards of its members, apparently because it fears the effect of member boards failing to understand that NCG has contractual rights to step in when one of its members experiences financial difficulties.  A great leap forward would be for NCG to explain to the boards of its members precisely what that "federation benefit" is.