December 14th, 2019

Wrench thrown into co-op retailing

By COLLIN GALLANT on August 30, 2019.

Federated Co-op is evaluating how a move by Calgary Co-op to end its grocery purchasing agreement could affect the other 170 regional co-ops in Western Canada.

The board of South Country Co-op is drafting a statement to members and a strategy to respond to news that the largest retail co-operative in its network will no longer buy groceries from its parent organization.

Calgary Co-op will begin purchasing wholesale groceries from competitor Save-on Foods starting in April 2020, media outlets in that city reported late Wednesday.

That’s an apparent side-step of the main legs of the co-operative retailing system, where local and regional co-ops band together to operate manufacturing and supply networks, then earn a proportionate share of the profits.

That’s the main selling point to customers, who can become members and receive a dividend on purchases.

Administrators with Medicine Hat-based South Country Co-op told the News the board of directors was preparing a special statement to 40,000 members. It could be released on Friday.

Calgary Co-op states that it is acting in the best interests of its members to keep costs low in a competitive market.

Top officials at Federated Co-op told Calgary media that the move is regrettable and somewhat puzzling.

“This play seems odd to me because you don’t own any piece of the vertical (supply chain), and you’re shifting that business to a direct competitor (Save-on-Foods),” said FCL vice-president Vic Huard. “For the long term, that doesn’t scan with me.”

The profitability of the FCL’s manufacturing interests plays a large part in determining member refunds given at independent co-ops across Western Canada. FCL also owns large warehouses in Calgary, where “several hundred” jobs could be affected, according to a statement by CEO Scott Banda.

“We’re now evaluating impacts and planning our next steps,” Banda said in a release.

“This is going to have a short-term impact on the Co-operative Retailing System but FCL remains committed to ensuring that local Co-ops continue to provide high-quality food store services in their communities.”

There are 170 regional co-ops in the FCL system, including Medicine Hat-based South Country and Pioneer Co-op, which serves southwest Saskatchewan.

Pioneer CEO Larry Kozun declined to comment when contacted by the News.

In terms of size, South Country is the fourth largest, behind Calgary, Saskatoon and Winnipeg.

Just as members earn a share of profit on retail goods sold, local co-ops are reimbursed a portion of the manufacturing profit on the goods they buy wholesale from FCL.

That refund, known as patronage, makes up a large portion of the member dividend each year.

For 2018, FCL returned $780 million in earnings to regional co-ops through the system, on record earnings of $1.1 billion that was driven largely by high margins on fuel sold from the FCL refinery in Regina.

Calgary Co-op will continue to purchase bulk fuel from FCL.

The grocery contract for Calgary could total about $400 million, which equates to about 20 per cent of FLC’s grocery segment revenue in 2018.

Save-on-Foods operates seven stores in Calgary, where Calgary Co-op has 19 grocery outlets and also owns stores in the metro area around the city, including Airdrie, Cochrane, High River, Okotoks and Strathmore.

South Country Co-op, which formed several years ago when Medicine Hat and Vauxhall Co-ops merged, has the trading rights to the remainder of southern Alberta, including Lethbridge.

Save-on-Foods, a private company owned by Jim Pattison Group of Companies, opened its first store in Medicine Hat this spring.

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