The ‘Share of Stomach’ Challenge at the Hanover Co-op: December Board Report

[Here's my somewhat subjective account of the December 16, 2015 meeting of the Board of the Hanover Co-op.  Sorry for the length!]

The Hanover Consumer Cooperative Society turns 80 years old next month, and the question of whether it will last another 80 loomed large at what was a relatively low-key but nevertheless consequential December meeting of the Co-op’s Board of Directors.  The chief focus of the meeting was the Co-op’s 2016 Business Plan and operating budget.

General Manager Terry Appleby, in the course of presenting his 2016 business plan, described how the grocery industry has changed since he arrived at the Hanover Co-op in 1992.  “At that time, 50 percent of the grocery business was being done by independents like mom and pop [stores] and small chains,” said Appleby, presumably including food co-ops in that figure.  “Today that number is about 13 percent. . . . It’s been a whole sea change in the way food is sold.”

He described a scenario in which consolidation is rampant, people are shopping for more and more food at convenience stores and discount retailers like Wal-Mart and BJ’s, consumers are cooking less and eating more in their cars, online food retailing is taking off, and industry insiders say the competition is no longer a struggle with just grocery chains but a fight with everyone in the food business over “share of stomach.”  What’s a co-op hoping for a second 80 years of life to do?

We don’t really know, since only the Board and not anyone in the audience could see the written business plan, each page of which was prominently stamped “Confidential.”  But the answer, apparently, is to beat the big chains at their own game by growing, sharing services and even merging.

“The grocery business is either getting merged or people are going out of business,” Appleby told the Board.  “So part of the underlying thinking about the [business] plan is that we’ve got to find ways of growing and merging and cooperating together with our partners like other coops, or find other ways of surviving as an independent.”

Does this mean that the days of the Hanover Consumer Cooperative Society as a grassroots, community owned enterprise are numbered – that the Co-op to survive must merge, or be bought out by another co-op, or just sell out altogether?

Well . . . . It’s hard to draw any other inference from what Appleby told his Board on the evening of December 16, 2015.  “ Surviving as an independent in a corporatizing world,” he said,  “is a very risky strategy.”

A mysterious plan

So, if “surviving as an independent” is perhaps too risky, what alternative does the Co-op’s general manager foresee? 

The November Board meeting offered one glimpse, in the form of the Board unanimously adopting a resolution authoring the Co-op to sign up for another two years of participating in the joint buying program of National Cooperative Grocers (NCG), a wholesale cooperative through which dozens of food co-ops acquire inventory from United Natural Foods (UNFI), the nation’s biggest purveyor of natural foods, ostensibly more cheaply than they could otherwise acquire it.  NCG insisted on the resolution, marking the first time in the organization’s ten-year history that it has ever made itself officially visible in any way to food co-op Boards and their constituents.

Another glimpse came in the form of asides at the December meeting from Appleby and Amanda Charland, the Co-op’s new director of member services, as they described upcoming efforts to assess and beef up member engagement programs.  

Charland said these efforts will begin with an effort to clean up the Co-op’s member database so that the organization will be able to purge from its rolls an estimated 7,000 inactive members, leaving around 20,000 active members (liberally defined as anyone who has shopped at one of the Co-op Food Stores in the past five years).  But it’s what she said next that is more revealing.

“The next thing,” said Charland,  “will be creating new systems. We’ll be getting a new database and we can capture information in a more efficient way.”  She said the Co-op is “looking at potential shared systems” – i.e., “shared with multiple cooperatives” under a program that she said “is with CDS and NGC.”

Appleby likewise referred to a “CDS program,” explaining that “we’ll share information with other co-ops about what’s working well so the idea is not only a pilot but to be collaborative in the process so that we’re learning from other co-ops, they’re learning from us, [and] hopefully we’ll be able to integrate best practices and maybe even find commonalities that allow us to share services and information.”

That will be confusing to the uninitiated among those who care about how and with whom the Co-op shares such sensitive information as its membership records including, potentially, their purchasing information.  NCG is described above; it is an organization that has steadfastly avoided making itself accountable to the boards of its members.  “CDS” is actually the CDS Consulting Cooperative (CDSCC), a group of consultants with close ties to NCG that offers advice and support to both co-op management and food co-op boards, including the Hanover Co-op. 

This is odd.  The CDSCC is a shared services cooperative, which means that co-ops contract directly with one of the 34 consultants who are members of the CDSCC.  So sharing member data at a national scale via a “CDS program” that somehow involves NCG has a distinct ring of mystery to it.

Employee ownership ahead?

Another enduringly mysterious aspect of the Co-op’s 2016 business plan, at least to Board members, is the question of whether the Co-op should move toward restructuring itself as a so-called “multi-stakeholder” cooperative.  This would involve a shift from a co-op that is 100 percent consumer-owned to a co-op that would have two distinct membership classes, consumers and workers, each with a designated number of seats on the Board.  The general manager and others on the management team have been openly raising this possibility for some time, but to date there have been no nibbles from Board members.

“We’ve gone through a whole period where a lot of the concern of the Board has been staff treatment,” said Appleby.  “The multi-stakeholder model anticipates ownership by the people who work for the coop and have a stake in the business.  I think that would be an interesting retreat topic. . . . If it’s just me dreaming about it and putting these things [in the business plan] every year . . . there will never be any action toward those strategic concepts.”

Board member and treasurer John Rosenquest said he was worried that such a transition would interfere with the Co-op’s efforts to raise more member capital. 

“I don’t have enough of an understanding of the multi-stakeholder model to understand how much of an impediment it would be,” he admitted.

“The multi-stakeholder model is not ‘let’s give free membership and half the equity to our workers’” replied Applebby.  “That’s not the model. . . . To me, the concept is the workers buy equity in the business and they reap the rewards of being owners.  It’s like an ESOP.”

It isn’t really like an Employee Stock Ownership Plan, though.  An ESOP is basically a retirement plan for employees, whose equity stake in the company is actually in the hands of a trustee with employees not assuming democratic control of the business.  In a multi-stakeholder co-op, employees would elect as much as half the seats on the board and would divide their share of the Co-op’s surplus according to their hours worked rather than the amount of their investment.

“I think there are people here with the philosophical bent to go on that kind of adventure,” concluded Rosenquest. “But only if it was prudent.”

WRJ = We’re Really Jazzed

The Board continued its discussion of Appleby’s 2016 business plan with a series of complaints and concerns about what’s happening in the stores – a relative rarity for a board that uses Policy Governance in part to avoid spending time on such details. 

Board member Susan Sanzone Fauver, who works in the floral department of the Lebanon store, complained that the store could haul in a much more robust trade if the prepared foods were of higher quality.  “I’ve been now to a lot of coops and it feels just more exciting to eat there,” she said. But at the Lebanon store, “You’re paying a lot, for example, for a sandwich that’s not top of the line and if you went to King Arthur, you’re paying a lot of money but you’re getting the best bread in the Upper Valley.  This is an area I think we can really improve on and that would bring a lot more people into the lunch business, and that would get them shopping.”

Kay Litten, the Board’s vice president, praised the White River Junction (WRJ) store, which opened in 2010 when the former occupant, P&C Foods, went bankrupt.  Litten said this was the place where “we weren’t supposed to succeed” because shoppers there would not pay Hanover prices for fancy foods, but she pointed out that White River Junction is now “the only store that consistently grows every month – It’s going to be bursting out of its seams pretty soon.”

Fauver pointed out that the Co-op charges the same prices for the same items in all four stores, but that many shoppers seem to think the White River Junction offers discounts.  The Co-op overall, she said, is “expensive if you buy the charcuterie . . . .we don’t have as many high end items at [the WRJ] store so you get the impression its not as expensive a store.”

Board member Sarah Blum had a different explanation for the success at WRJ.  "What’s interesting is that it is very small and I wonder if actually in some ways people really like that its not this gigantic store that they have to walk miles to get to the milk,” said Blum.  “It’s like ‘you’re in, you’re out;’ it feels like a smooth experience.”

Surplus Getting Guzzled by Gas

Blum asked Appleby to explain why his 2016 budget projects an operating deficit of 0.8 percent for the automotive Service Center adjacent to the Hanover store. 

“It means we expect to lose money on the Service Center next year,” Appleby confirmed.  “Profitability at the Service Center is determined almost solely by the margin of gas.  We anticipate greatly reduced margins.  If that happens there is very little we can do to make money.”

 Appleby then recited some history.  “Three or four or five years ago we had a string of years where we were losing money on the Service Center,” he said, “and management recommended that the Board close the Service Center . . . because it’s basically a very unprofitable business to be in.  You’re dealing with hazardous materials, it’s regulated, it’s expensive, there’s not a whole lot of margin in it.  It’s really a convenience for our members.  Well do what we can do to try to reduce expenses.”

This of course raises the question of how anyone, from the Seven-Eleven chain to the immigrant family that owns a forlorn filling station in Enfield, makes money by selling so unprofitable a commodity as gasoline.  Appleby explained the secret in stark terms.  “We don’t augment profitability with a convenience store,” he said.  “We have a very large ‘convenience store’ right next door” in the form of the Hanover Co-op Food Store and its recently completed $5 million remodel.

Cash Poverty

Appleby sounded a familiar refrain about the Co-op’s chronic lack of liquidity.  “The problem is that for 80 years the Coop has put money onto the bottom line and then given it back to the members through patronage,” he said.  “We’re an 80 year old business that has $7 million in equity.”

“If you look at PCC,” he added, referring to the Seattle-based food co-op that is the nation’s biggest, “if they open a new store it might cost them $10 million and they pay for that expansion in cash reserves.  If you look at our cash, $1.5 million, that’s not a lot of cash for a business of our size.”

“One of the things we haven’t done a good job at is telling the story of who owns the Co-op and who needs to capitalize it.,” Appleby continued.  “Every year I’ve been here, the refrain has been ‘Why isn’t my patronage refund bigger?’ when we should be having the conversation about how to capitalize the next [store] remodel.”

There was also discussion of the lease on the Lebanon store expiring at the end of 2016 and whether the Co-op would be renewing its agreement to rent space from Dartmouth College’s real estate arm, which owns Centerra Marketplace.  In the interest of allowing Co-op management remain in charge of conveying information to the Co-op’s landlord, the details of that discussion are omitted here.

You might think that after all of this discussion the Board would actually vote on something, but you’d be wrong.  Technically, the Board does not directly approve the Business Plan or budget but, rather, votes on whether the general manager is in compliance with a policy requiring him to undertake a suitable planning process.  But no such vote was taken.

Speaking of confidentiality, Board member Benoit Roisin asked whether Appleby’s Business Plan and 2016 budget, which like all Board materials are not provided to members,  would continue to remain confidential after the meeting.  Appleby’s response sheds light on what he thinks about making interesting books and records available to members. 

The Business Plan, he explained, is “the plan for our coop and there are folks who would like to see what were projecting and what our budget is.  They’re not members and they’re not interested in the health and well-being of the Hanover coop.”

Appleby said he doesn’t have any problem when it comes to “talking with members about the plan,” but he won’t give it out.

“You don’t want Price Chopper to see it,” Roisin concluded.

“Yeah,” replied Appleby.  Of course that presupposes the investor-owned supermarkets in the area are truly curious about the Co-op’s plans or financials – and that they don’t already know everything they want to know about the Co-op.

Which, in turn, raises the “T” word.

T is for Transparency – and Trouble

Once upon a time – i.e., on May 27, 2015 – the Board reconvened after a contentious election in which clamor for more transparency resulted in two incumbent Board members being defeated.  Thus the Board listed “Communications and Transparency” as among its priorities for the coming year.

Two secret Board meetings followed, and then the Board reconvened on June 24, 2015 for its regular monthly meeting.  The Board voted 9-0, with one member abstaining, to name newly elected Board member Tony Roisman as chair of a “communications task force,” although several Board members made clear at that time that they considered “transparency” to be a key aspect of the task force’s mission.  According to the minutes of the June meeting, “[t]he task force willfocus on writing and wordsmithing Board messages, along with Board communication strategy and process.  Sarah [Blum] would like to assist. Scope and guidelines need to be developed and confirmed by the Board.”

The subject did not arise at the July Board meeting.  When the Board convened on August 26, 2015, the Board took up the question again but, oddly, it was as if the June decision had never occurred.  Again, according to the minutes:  “Tony [Roisman] moved to authorize the creation of a task force to thoroughly investigate all issues and solutions pertaining to transparency and communication throughout the Co-op.”  The motion was adopted 9-0.  Roisman said the task force would present a report to the Board in December.

At the September 30 meeting of the Board, Roisman was absent and Blum reported that the task force had not yet met.  At the October 28 meeting, according to the minutes, “Tony said that he and Sarah met twice” but that “[t]he committee composition, mission, and plan are yet to be finalized.”

There is no reference to the communications task force in the minutes of the November Board meeting.

Well, the task force got plenty of attention at the December meeting.  Although there is no evidence of a Board decision to this effect, it appears that Sarah Blum is now the chair of the task force. Reportedly, Roisman had to withdraw from the task force for personal reasons unrelated to the Co-op. He was absent from the December Board meeting.

Blum said that Roisman’s withdrawal had prompted “a shift in the work.”  She explained that she had intended to have the task force conduct a survey of members and employees to find out “what they want to know about the Co-op” but “it was moving too hastily for my comfort.”  Noting that the Co-op as an organization plans a major member survey in 2016, Blum said she’d spoken with Appleby and Charland about including some communications-related questions to assist the task force.

“So, my approach now is to work on creating a matrix,” Blum said, referring to “that map that I had created during the summer which basically lays out the current communications that I was aware of from staff and the Board to the members.”  That, of course, is yet another Board document to which, ironically, members are denied access.

“My hope is that through understanding more fully what is already going on, what is already available, we will be able to identify gaps,” Blum added.

“Another level of this matrix is things that have been brought to our attention that people want – [Board] packets, financial information – we’ve gotten several messages that that stuff is wanted,” said Blum.  “How would the Board go about making those choices?  Is there a gap between the Board and the membership with what we communicate?  Do we need to provide more information?”

These, of course, are the same questions that arose during the 2015 election and its immediate aftermath. 

The Board has never approved the other members of the task force and it appears some Board members were not even aware of who else has been working with Blum.  Asked to name the task force members, Blum said the roster included Charland, an employee from the merchandising team (whose name was inaudible), along with rank-and-file Co-op members Michael Whitman and Nancy Carter.  Blum also said she had a discussion with Marilyn Scholl of the CDS Consulting Co-op, who offered a “very nice sense” of what “transparency” should mean at a cooperative:  “It’s not the ability to see all of the details but to see through all of the details to understanding key points.”

Board members Victoria Fullerton and Michael Bettman made clear their displeasure about the lack of progress and the apparent drift of the task force’s mission from what was described in the minutes of the August meeting.  Bettman pressed Blum on why she had backed off from conducting a survey of members. 

“I do not feel I have the time in my life to conduct my own survey for the Co-op, and that’s what was proposed a couple of weeks ago,” said Blum, obviously alluding to some sort of discussion that had taken place between Board meetings.  “I’m sorry, but I am not going to do that.”

Bettman replied that he wasn’t suggesting a “quantitative survey” – just an informal effort to ascertain what members what to know about the Co-op – “What are people worried about, what do people want to see?”

Blum made her exasperation plain in response.  “Do you see the concept of not being set up to handle that input?,” she replied. “I don’t know how many times I’d have to go to Buck Road [where the Co-op’s administrative offices are] to receive the mail.”

Fullerton accused Blum of getting it backwards – of asking management what it feels like disclosing before asking members what information they feel like receiving.

“I’m doing it the way I think it should be done,” Blum replied.  “I think it’s very helpful for all of us to get very well-educated on what is available” before asking members questions, presumably in the survey the Co-op will conduct in the summer of 2016. 

Board member Rosenquest suggested that rather than belabor the discussion, those interested simply attend a meeting of the task force that was planned for the following day.  That prompted Fullerton to volunteer to join the task force so that it would once again have two Board members among its ranks.

There was a long pause before Blum replied: 

“Sure -- if it’s not just a continuation of this.  I feel right now kind of barraged.”

Board president Margaret Drye said she would allow the task force to meet and decide for itself whether to welcome Fullerton aboard and how to proceed otherwise.

On behalf of the Nominating Committee, chairperson Kay Litten said that an online Board candidate application was available on the Co-op’s web site and that two applications had already been received.  She distributed a pamphlet, publicly available, with information about the process including the timeline.  We will be interviewing all people who submit applications,” Litten said.  “It’s going to be hectic.”

And . . . on behalf of the succession planning task force, which is more correctly described as a committee that is recruiting a new general manager to succeed the retiring Terry Appleby, chairperson Michael Bettman outlined a timeline that calls for seeking applications in mid-February, identifying eight to fourteen semifinalists by late March, holding interviews and then narrowing the field to between three and five candidates for the Board to meet in late May and early June.  “We can then recommend a candidate or candidates [to the Board] in mid-June,” said Bettman.  It’s ambitious, particularly for a Co-op whose general manager has not publicly announced he plans to step down from the post he has held since 1992.