No Refund For Co-op Members

Valley News Business Writer
Published: 3/30/2018 11:47:28 PM

Hanover — For the second year in a row, members of the Hanover Consumer Cooperative Society won’t be seeing a refund check arrive in the mail even though the company swung back into the black in 2017 after suffering a loss in 2016.

The absence of a refund comes as the Co-op nonetheless posted higher sales in 2017 and reduced its operating costs, it also benefited from lower corporate taxes.

Indeed, the financial picture has brightened in important respects for the Co-op, according to financial statements for 2017 released by the company this week, after a rocky couple of years in which the four-location market reported declining revenues and losses.

The recent financial statements show the Co-op’s revenues have steadily if modestly climbed after a sharp dip two years ago, and the company’s 2017 net profit of $172,000 was the largest since 2015.

But at the same time, the financial statements show the pressures the Co-op is facing as the wholesale cost it pays for groceries is rising faster than retails sales — thereby squeezing its operating margin — and membership has tumbled nearly 11 percent to 21,518 from 24,094 only a year earlier.

Wholesale costs are set by the market and the Co-op has limited leverage to control it. And Co-op officials principally attributed the membership decline to “cleaning up” the membership rolls by eliminating accounts that had been inactive for at least five years, suggesting those whom it classifies as “abandonment of interest” were individuals who had either moved away or are deceased.

At the same time, pulling in new members at a faster rate than losing old ones is a challenge because of the region’s aging population and low growth rate. Revenues have been hovering in the low $70-million range for several years, although Co-op officials say they are not discouraged.

“We don’t think we’ve hit the ceiling,” said Ed Fox, who took over as general manager 16 months ago from longtime GM Terry Appleby. “We think there is absolutely room for growth but it’s not going to be in the double-digits. When you get to a $72 million retail operation, you don’t always look at percentages. You look at real dollars.”

To some extent, the Hanover Co-op is a victim of its own success. It is the second-largest food grocery co-op in the country by revenue (the largest is Puget Consumers Co-op, aka  PCC Community Markets, based in Seattle) and also the second oldest. Membership is equivalent to 63 percent of the combined population of Hanover, Lebanon and Hartford — although in fact many are commuters who come from outside the heart of the Upper Valley.

For 2017, the Co-op’s revenues increased 0.6 percent to $72 million. Net income swung from a $118,000 after-tax loss in 2016 to a $172,000 after-tax profit in 2017, according to the Co-op’s financial statements, thanks to lower corporate taxes triggered by the federal tax cut law and a deferred tax benefit.

However, because the Co-op posted an operating loss and refunds are calculated on a pre-tax basis, no member refund checks are being issued for 2017. Nonetheless, the Co-op managed to narrow the pre-tax loss to $42,000 in 2017 from $124,000 the year before.

The last time the Co-op issued refund checks to members was for the year 2015, when it reported a $204,000 pre-tax profit.

Fox, in an interview, described 2017 as a “year in which we took a real close look at how we are operating the business” and made several moves to strengthen the Co-op’s operations.

For example, in August, a new IT system went online that allows for real-time inventory stocking and ordering, thereby freeing up shelf space to carry a wider variety of products.

The Co-op also has restructured operations at its commercial kitchen in Wilder that prepares meals, sandwiches and baked goods for sale inside the stores.

A year ago, only 35 percent of the prepared meals sold at the Co-op stores were made at its commercial kitchen, while the majority were bought from outside vendors. Now, about 50 percent of the prepared meals sold in the stores comes from the Co-op’s commercial kitchen — with a goal to reach 65 percent, Fox said.

In addition, an overnight shift is being added at the Wilder commercial kitchen to bake bread because the stores are running out of fresh baked bread by the early afternoon.

Operating expenses have been reduced partly through employee attrition. The Co-op now has about 380 employees compared to about 400 a year ago, Fox said. Store wages and benefits — the single biggest expense after wholesale product costs — decreased 6.6 percent.

Fox said that 80 percent of the employees have full benefits compared to the grocery market industry average of about 30 percent. Co-op employees are also entitled to a 20 percent discount on store purchases.

More important than total membership, Fox said, is how frequently customers are shopping — and spending money — at the Co-op. And by that measure the Co-op’s numbers are encouraging.

Co-op officials say that 25 percent of members shop at one of the Co-op’s four store locations between two and four times per week and 23 percent shop once a week. Another 23 percent shop three times per month. In all, 86 percent make at least one shopping visit per month.

Members accounted for 74 percent of the Co-op’s sales in 2017, compared to 75 percent in 2016. Grocery-related items made up 90 percent of the sales, while gas and auto repair at the Hanover location made up 5 percent of the sales.

Fox said one of reasons the Co-op’s sales had reached nearly $75 million in 2014 was because gas prices were more than $1.00 higher at the time. Even though gas accounts for a minor portion of the Co-op’s total sales, “an extra $1 per gallon on a million gallons is $1 million more in revenue.”

Fox acknowledged that Co-op sales are challenged by the proliferation of alternatives customers have for shopping — CVS and Walmart now sell nonperishable food items and ecologically-minded consumers can buy Seventh Generation cleaning and paper products online — so it is incumbent upon the Co-op to “engage” with members in a way that wants them to spend more time visiting the stores.

The Co-op is studying initiatives to broaden its engagement with members but exactly how that will manifest itself in the year ahead Fox isn’t sure yet. But it could expand upon education programs such as the cooking classes or kids’ “Jr. chef camp” the Co-op runs during school vacations.

“We want to find out what our members want,” he said.

The Co-op’s annual meeting will be held at 10 a.m. on April 7 at the Listen Community Center in White River Junction.

 John Lippman can be reached at jlippman@vnews.com.

Correction

The largest grocery co-operative in the country is Puget Consumers Co-op, based in Seattle. An earlier version of this story gave an incorrect name and headquarters for the co-op, which is also known as PCC Community Markets.




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