Cooperatives, or co-ops, are business structures where the organization is owned by its members who may be growers or farmers, workers, or other stakeholders. A co-op exists to benefit the members and provide them a voice in the business’s operations. In this article, our experts explore both challenges and opportunities for consumer products co-ops today.
Co-ops return profits to their members alongside other advantages and protections. These organizations are all around us, including food production, retail, banking, healthcare, utilities, and more. A few common examples include Ocean Spray Cranberries, Blue Diamond Nuts, Cabot Creamery, and Florida’s Natural Orange Juice.
While co-ops face the same challenges as other consumer products companies in terms of market penetration, competitive activity, and retailer pressures, they face unique hurdles given their business structure. Such complexities make it even more critical that consumer products co-ops have a sound business strategy and execution plan to satisfy their stakeholders. Below, we break down a series of common challenges faced by consumer products co-ops in addition to vital areas for growth.
Many of the challenges co-ops face revolve around similar fundamental challenges including joint ownership, organizational complexities, and unique value chains.
1. Difficulty Achieving Consensus:
Co-op ownership often means that the needs of all members must be considered. Where a traditional business can sometimes afford to prioritize only the majority’s interests, co-ops must support their owners who depend upon the organization. Thus, strategic decisions that involve risk or significant change can take more time and communication across the organization and ownership. Depending on the nature of the strategy, approval or buy-in may be needed from both organizational leadership and individual members. As a result, key decisions can sometimes be slow, and thus impede results.
Additionally, the Board of Directors is elected from within co-op membership and is often more involved than with traditional CP companies. Co-op board members face unique pressures to make decisions that have impacts on their membership. It’s not unusual to have situations where a decision that benefits the health of the company may be at odds with the immediate needs of the growers.
Clarkston’s Co-op Tips: Make sure to account for the increased decision-making time and wide perspectives of stakeholders when planning a new initiative. Use the additional review time with stakeholders as an opportunity for effective change management rather than as a pinch-point to key project milestones.
2. Leadership Experience:
Farmer-owned co-ops have a long history of leadership coming up through the ranks. Board members are often farmers, and they value an understanding of the co-op business in their C-suite leaders. The backgrounds and experiences of co-op leaders compared to CP leaders can be dramatic. As a result, there may be less industry strategy expertise. There can, however, be advantages in that leadership who came up through the co-op have a more holistic view of the firm’s value chain.
Clarkston’s Co-op Tips: Co-ops need to carefully balance strategy and business expertise with non-traditional forms of leadership. Review your board and senior leadership bench for diverse types of experience. Where appropriate, look for outside board members who can add diversity of perspective. Provide opportunities for leadership to train and network with other CP companies.
3. Organization Culture Conflicts:
Co-ops may struggle to define themselves internally. The mission of the business sits squarely around being a co-op, but the success and profitability of the business depend upon acting as a CP company. Finding the right balance of potentially competing interests can be very challenging – resource allocations and strategic priorities are critical but complicated decisions.
Clarkston’s Co-op Tips: Alignment across the organization is key. A strong corporate- and co-op-wide communications strategy will build alignment on the overall identity, mission, and expectations of the organization. Build an intentional and deliberate culture that supports the co-op mission while building a strong CP strategy.
4. Difficulty Funding Major Projects:
Many co-op members rely upon annual profits from the business to make ends meet, especially in agriculture. As a result, there’s pressure to return profits at year’s end rather than re-invest into capital investments. Combined with the number of decision-makers, this makes it relatively more difficult to fund major projects that may be vital for long-term success. Within the agriculture industry, farmers also don’t have large margins on crop yields. As a result, there’s often not much surplus profit to make large investments feasible. External injections of capital are often necessary to scale these businesses but can be difficult to secure.
Clarkston’s Co-op Tips: Focus on a long–term strategy to gain alignment on capital investments and allocation of more scarce resources. Bring a creative mindset to find innovative ways to achieve goals with less capital investment, such as partnerships.
5. Product Commoditization:
Many farmer co-ops produce commodities that are difficult to differentiate in the marketplace – e.g., fruits, vegetables, juices, and food ingredients. As a result, pricing is very competitive as many market competitors produce similar products. Food co-ops that produce raisins, fruit juices, dairy, nuts, olives, and other similar products, for example, may struggle to attain premium pricing in a commoditized space. Communicating a brand’s co-op roots and structure to consumers to justify a premium price can be a challenging message.
Clarkston’s Co-op Tips: Invest in sound brand marketing and consumer engagement strategies to ensure your brand has a clear identity to stand out in the commodity crowd. Explore alternative product and brand positioning to further differentiate as well.
6. Complexities with Supply-Driven Forecasting:
Compared to demand-driven forecasting, or the production of what a firm believes it can sell, many co-ops are obligated to sell whatever is produced. This often means that prices can be driven down in the event of low demand, which can hurt profits and brand image. Additionally, challenges in production, like natural disasters in the case of agriculture, can create supply surpluses and deficits both of which disrupt business plans.
Co-op brands can struggle to compete with major CP competitors in their category where funds for marketing can be limited or scarce given internal competing resources. For those that can, there is an opportunity for private-label production to increase plant efficiency and reduce overhead costs. This may, however, exacerbate product differentiation concerns. For example, a large fruit juice co-op may sell its own brand and manufacture a slightly different formula for resale by large retailers.
Clarkston’s Co-op Tips: Invest in sound forecasting tools, technology, and human resources. Plan for a variety of scenarios through the annual planning and S&OP process to ensure you have a strong handle on the risks and opportunities around your supply and demand structures.
Opportunities for Consumer Products Co-Ops
Co-ops require additional care when it comes to strategic decisions. With the right experience and mindset, they can think creatively and seize opportunities to succeed in the marketplace for the benefit of their owners. Here are a few critical foundations in co-op strategy to ensure long-term success.
- Create a Long-Term Strategic Plan: Short-term needs in a grower co-op are ever-changing with commodity prices, weather conditions, and economic volatility. Co-ops must strengthen and continuously evolve their strategic plan to ensure it achieves long-term objectives, protects members, and ensures the organization’s future health. Clarkston’s EDM and BF2P methodologies are effective ways to help co-ops create a clear and actionable strategy.
- Develop a Sound Innovation Structure: While it’s often difficult to differentiate a commodity, innovation is still possible and essential to carve out a profitable niche. Notable examples include Ocean Spray, a cranberry grower co-op that has ventured well beyond cranberry sauce and juice into supplements, snacks, and wellness, and Blue Diamond, a nut co-op, which uses almonds to make a wide range of products including flour, beverages, snacks, and more. Co-ops should consider profit channels that are relatively less saturated but are still connected in the consumers’ minds with their core category.
- Build a Flexible Supply Chain: Many co-ops have a long legacy of being vertically integrated to produce and manufacture everything in-house. Because capital investments are challenging for co-ops, this structure can limit their growth potential and innovation pipelines. Co-ops should review their supply chains through a lens of resilience, optimization, and innovation. There isn’t a one-size-fits-all rule, but co-ops should examine all different means of manufacturing, distribution, and packaging to find the right set of solutions for margins and quality. Finding avenues to build flexibility will yield rewards for the organization in times of stress, as well as provide opportunities to capitalize on market trends and innovations.
While running and operating a co-op has additional challenges compared to a traditional CP company, the rewards are enormous. They can provide a long-term, stable market for goods that will keep the growers or farmers on the land while providing essential products to the U.S. economy. Co-ops, however, must innovate and strategize well in advance to overcome challenges that traditional CP companies don’t face.
If you’re a co-op who is thinking about short- and long-term strategy, reach out to us. Our team can help ensure success, both for the commercial entity and its member-owners.
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Contributions from Jake Park-Walters