UCL School of Management

29 March 2021

How grocery co-ops fit into the competitive landscape

A photo of organic fruit and veg on sale in brown crates.

Image: Scott Evans

Do for-profit supermarket chains tolerate higher-priced co-ops?

Modern food cooperatives, a legacy of 1960s counterculture, would seem well suited to an age of socially responsible consumption. Not-for-profit and owned by members, grocery co-ops promote healthy eating and sustainable agriculture, source from local producers and provide services to their local communities.

Still, co-ops remain a tiny part of the U.S. grocery scene, accounting for just $2.3 billion in revenues, according to the National Co+op Grocers trade group, with some 147 co-ops operating 200 stores. In contrast, Kroger’s 2,742 stores generated more than $132.5 billion in 2020 sales.

working paper by Eindhoven University of Technology’s C. Gizem Korpeoglu, UCL School of Management’s Ersin Körpeoğlu, UCLA Anderson’s Christopher Tang and Fudan University’s Jiayi Joey Yu uses a competition model to consider co-ops’ place in the competitive grocery landscape. They focus on differing social missions co-ops employ and how those would help in entering a market. In the model:

  • A co-op that charges higher prices and strives for its own wider profit margins — to support local healthy meal programs, cultural events and other community activities — is more likely to be tolerated by for-profit chains focused on sales volume. We’ll call these community co-ops.
  • Co-ops that aim for higher sales volume at the expense of profit margins —creating jobs, sourcing from local producers and supporting the local economy — are more likely to trigger a tough competitive response from for-profit chains, which will slash prices to keep a co-op out of the market. We’ll call these people’s co-ops.

Many shoppers believe co-ops are more expensive than conventional grocers. The reality is more complicated — surveys suggest co-op prices are higher on some items, such as dairy and frozen foods, and lower on produce and bulk goods. But even the co-op industry acknowledges, “There are highly visible products that we may price significantly higher than the competition.”  

Some of the difference in prices is simply a matter of size. Even smaller for-profit chains find it difficult to compete with the vast economies of scale of Walmart or Kroger.

Higher priced co-ops succeed in part by attracting socially conscious shoppers less sensitive to price; the satisfaction they get shopping at a co-op acts as a kind of invisible discount. Co-ops can also reduce the pain of higher prices with member-only discounts. By effectively setting discounts and membership fees, profit-maximizing co-ops, in particular, can encourage shoppers who spend a lot on grocers to become members, maintaining profits.

The modern cooperative movement, which goes back to the 19th century, saw a re-flowering in the 1960s and ‘70s. One of the oldest, the Puget Consumers Co-op of Seattle, or PCC, began as a buying club in 1953 and opened its first store in 1967, becoming a pioneer in the emerging natural foods movement.

Some co-ops serve members only, while others are open to everyone. Members are charged an upfront fee and receive discounts on all their purchases and, with some cooperatives, have to volunteer a certain number of hours a month.

Both types of co-ops require the presence of lots of socially conscious shoppers, and either one will hurt the profits of existing grocers.

But community co-ops (higher-priced) can thrive by going after just the high-conscience shoppers, who are willing to pay more and leave less socially conscious consumers for the for-profit store. But people’s co-ops (lower-priced) need to attract more low-conscience shoppers to boost sales and will use the lure of lower prices to do so.

People’s co-ops’ lower prices also pose a greater threat to profits of the existing grocer, which would have to cut its prices to stay competitive. While grocers will lose some market share to community co-ops, the loss of business is less costly than the lower margins needed to keep the co-op out of the market.

The paper only considers what happens when a co-op enters a market with an existing grocer, but the model could be useful to a new breed of co-ops moving into rural areas or urban neighbourhoods that lack a full-service grocer — areas known as food deserts.

Co-ops like people’s — those willing to accept lower profits in favour of higher sales — may be perfectly suited to thrive in underserved markets where no for-profit competitor exists. Their mission of providing jobs and supporting local producers may also make them a good fit.

This article originally appeared in the UCLA Anderson Review. https://anderson-review.ucla.edu/how-grocery-co-ops-fit-into-the-competitive-landscape/

Last updated Monday, 29 March 2021