It’s October and we’ve entered the season when we’re most likely to ask ourselves, “Where does all the money go?” I can’t answer that question for your household, but in this article I’ll address “where the money goes” that you spend at the Co-op.
Food expenditures: The macro view
The U.S. Department of Agriculture’s Economic Research Service (ERS) compiles a mind-boggling array of statistics on food consumption, prices, individual and household food expenditures and costs. In 2011, the last full year for which statistics are available, Americans spent 1.3 trillion dollars on food at and away from home, or about $4,229.00 per capita. We spent 9.8% of our disposable personal income on food; that breaks down to 5.7% on food consumed at home, and 4.1% on food purchased and consumed away from home. The total percentage of disposable income spent on all food has remained below 10% since 2000, with the proportion spent at home and away from home varying by only a few tenths of a percent from year to year. Americans spend less on food, as a percentage of income, than citizens of any other country in the world.
So, where does over a trillion dollars spent on food actually go? The ERS compiles another set of statistics, called the Food Dollar series that provides that information. These numbers also provide some useful insight into the impact of our spending and eating habits.
The ERS series tracks the food dollar three ways:
- The Marketing Bill Dollar is a simple division between farm share, the amount of the food dollar that goes back to the farmer, and the amount that goes to all the post-farm activities, or marketing, it takes to put food on the consumer’s plate. In 2011, this split for the total (food consumed in and away from home) food dollar was 16 cents farm share, 84 cents to the marketing share (rounded to the nearest whole cent). The farm share number includes the farmer’s costs of production; when these costs are removed, the amount that the farmer “makes” is reduced to about 7 cents. The farm share of the total food dollar has been decreasing since 1993, when it was 18.4 cents, remaining below 16 cents since 2000.
The split between farm share and marketing share is dramatically different between food purchased for home use or eaten outside the home. The consumed-at-home food dollar returns 24 cents to the farmer; food eaten out returns only four cents of each dollar to the farmer. The farm share of food eaten out has also been decreasing for the past two decades, and the amount of the food dollar spent away from home has climbed. The implication is clear: the more we eat out, the less money reaches the farm, making a bad situation worse for small and mid-sized farmers. Similar numbers obtained for processed foods, the more processed a food item is, the less money returned to the farmer.
- The Industry Group Dollar allocates the food dollar among ten industry groups that comprise the supply chain it takes to move food from farm to plate: farm and agribusiness, food processing, packaging, transportation, retail trade, food services, energy, finance and insurance, advertising, and legal and accounting. The majority of the total food dollar is split between food processing, 22 cents; food services, 31 cents; and retail trade, 12 cents. As you might expect, the numbers change when allocated to food consumed at home versus food eaten out. For example, food eaten at home returns 21 cents to the retail trade, food eaten out returns less than 1 cent to retail trade but 71 cents to food services.
- The Primary Factors Dollar allocates the food dollar to U.S. worker salaries, rents to food-industry property owners, output taxes, and imports. Salaries and benefits take 50 cents of the total food dollar, with a drop to 45 cents for food consumed at home and an increase to 56 cents for food away from home. The labor force includes workers and executives in the ten food chain industry groups. The farther the food travels from the farm to plate, the more labor sectors are involved. When you choose locally produced food, you eliminate many of these middlemen, returning more money to the farmer.
Let’s go shopping
Let’s follow the money spent on a shopping trip at the Co-op. We’re going to spend $20.00 on ingredients for a meal, buying locally produced and organic products when possible. After all, in the most recent customer survey, our “emphasis on natural and organic products,” and “focus on local products and vendors” were the top two reasons you gave for shopping at the Co-op, so the shopping trip should reflect your values.
Starting in Produce, we’ll pick up an amazing bunch of fresh, local green kale (I’m writing this in August), one of our ESP, Everyday Sale Price, items. Right now, an employee of the farm delivers our kale to our store in a returnable, reusable bin. No middleman distributor, minimal transportation miles and green packaging too. Cost: $2.29. Add a half-pound of Wisconsin-grown button mushrooms, also ESP priced and delivered to us by the grower, for $1.49, and a couple of nice-sized fair trade organic bananas ($.99/lb) for $1.70.
A package of Madison’s own RP’s Pasta linguini costs $3.29, it pairs nicely with the Italian Sausage prepared by our own Willy Street Co-op Kitchen, a 1/2 pound (two large sausages) will run $3.49. Be like the French! Add a local baguette from Batch Bakehouse, $3.75. Coffee’s never cheap, but you can buy beans in bulk here and grind them in the store. For our needs today we’ll buy 1/3 pound of locally roasted Just Coffee beans for $3.99.
Our basket contains:
How it breaks down
Our fiscal year ended on June 30th, and the following numbers are current for FY 2013. A comprehensive presentation of the Co-op’s financial information is distributed to all Owners in the Annual Report. The Annual Report for FY2012 is available online, the report for FY2013 will be sent to members in late fall. I urge you to read the Annual Report as a supplement to this article. Owners should feel free to contact our management staff or Board of Directors at anytime about financial matters.
In FY2013 the Co-op sales were $38.78 million dollars. Our cost of goods sold was 63.7% of sales, or $12.74 of our basket. Personnel expenses (including wages, benefits, taxes, workers comp insurance, training, perks, and profit-sharing) were the next biggest chunk of expenses at 24.9% of sales; add $4.98 to the basket breakdown. Occupancy and operating costs expenses, which are the cost of keeping the lights on, property taxes, and recurring variable costs like paper towels, linens, credit card fees, and gasoline, consumed 5.5%, $1.10 of the basket. Depreciation and amortization amount to 1.1%, 22 cents of the basket; administrative costs, governance, and promotions make up the rest of our expenses at 2.8% of sales, .56 cents, bringing our total expenses, not including labor, to 9.4% of sales for the fiscal year. Our income statement concludes with a few additions and subtractions for taxes, interest, and miscellaneous income. We are left with a net income from this purchase of 2.3%, or 46 cents out of $20.00.
Net income is an important investment of your food dollar. It is money that allows us to finance more of our own future expansions and improvements, less from outside borrowing. It is also the source of the patronage refund, surplus income that’s returned to Owners in the form of store credit and retained patronage equity.
Patronage refunds, which is money returned to Owners based on purchases, have been possible in 2010, 2012, and 2013 (NOTE: The 2013 patronage won’t be approved until October 1st. It would be very unexpected if the Board did not approve another patronage refund). The Board of Directors determines when and how the refunds are allocated to owners. In FY2012 the patronage refund was $474,267. These are dollars not subject to federal or state income taxes, which means more money stays in our community, increasing the impact of your local purchases, improving the Co-op’s financial health and securing its future!
Going farther: Your money beyond the Co-op
The Co-op retains only a small portion of your food expenditure for the future use of the business. Most of the money goes out in the form of payments to vendors, service providers, and employee salaries. And, since such a large percentage of our product mix is local, your food dollar spent here has a bigger impact on the local economy than it would if spent at a national chain store.
Cost of Goods: keeping it local
It is the stated policy of the Co-op to be a cornerstone of a vibrant, economically sound community by working in partnership with, and fostering the success of locally and cooperatively produced food and other goods. (Ends Statement, Policy A3). Our $20.00 sample basket contains 91% local product, some produced within blocks of the East location. Our commitment to local products (defined as made within 150 miles of the Capitol, or within Wisconsin) goes beyond choosing what goes on the shelf. We also provide a “vendor break” to the pricing of local products. Small business production costs are almost always higher than a large manufacturer, which is usually reflected in a higher consumer price. The vendor break means we apply a lower margin (markup) to determine our retail price so the local product can compete in price with national or regional brands; the competitive price increases the sale of the product and thus income to the local company. The ESP, Everyday Sale Price, program provides a similar price adjustment to increase the affordability of many staple natural products.
Each January the Produce buyers get together with local growers to plan purchases for the following growing season. Our preseason meetings provide growers a purchase commitment for their planning purposes, and we have an assured supply of the fresh, organic, local products shoppers demand; as allowed by the weather, of course! Our buyers actively seek out new items and growers each year. According to the 2012 Annual Report, the Co-op bought produce from 34 local growers, 25% of our annual produce purchases, or nearly $900,000 going into the local agricultural community from one department alone.
More importantly, through this process your dollars go directly from the Co-op to the farmers, or in some cases farmer cooperatives. The farmers control their costs of production, processing and transport, and there are no middle distributors, so the “farm share” of the food dollar spent in the Co-op can be, seasonally, far above the national data splits given at the top of this article. It’s worth noting too that organic farmers make higher incomes; studies from Purdue University and others show organic farmers benefit from higher prices at the farm gate, and lower production costs. (www.non-gmoreport.com/articles/jun06/organic_farming.php)
According to Independent We Stand, a local business advocacy group, “Locally owned businesses reinvest in the local economy at a 60% higher rate than chains and Internet retailers.” Jeff Milchen, co-founder of the American Independent Business Alliance, says that on average shopping at locally owned establishments can leverage community funds times three. This is an economic reality supported by numerous studies. Across the board, if you shop at the Co-op and especially if you buy local products, much more of your food dollar stays in Wisconsin with the food producers.
Labor: we pay a living wage
Almost $5.00 of the shopping basket pays for personnel costs here at the Co-op, including wages and benefits, profit sharing, and mandated payroll taxes. In FY2012 we had 289 employees. They were paid an average wage of $13.51, reflecting our commitment to paying a living wage, as well as the longevity of many of our staff members (we retain our employees at a very high rate of 78%). We establish pay rates for staff positions using a model developed by the Cooperative Grocer Information Network (CGIN). Starting pay for all positions meet or exceed the CGIN living wage rates after 3 months of satisfactory employment. By contrast, a Wal-Mart employee in 2011 earned $8.81. (NOTE: Our entry level positions do not meet the Dane County living wage as Dane County sets that wage excluding any consideration for benefits that employees may receive.)
Co-op employees may also receive profit-sharing payments, as allowed by the financial status of the Co-op, and criteria approved by the Board of Directors. Profit shares are authorized by Board policy B1, which calls for “some portion of staff compensation contingent upon the financial performance of the Co-op,” and recognize the positive contributions of employees to the financial success of the business.
Promotions: Giving back, helping out, having fun
Although a small part of the shopping basket, just 34 cents, the cumulative effect of the promotions expense is large. Your money is felt by the wider Madison community, through our sponsorship of large, entertaining events like the Waterfront Festival and the Willy Street Fair, and institutions like WORT Community Radio and Wisconsin Public Television. It also touches the community at a personal level through Access Discounts given to eligible low income Owners in order to make natural foods available to a wide population. We annually provide cash and food donations, over $64,000 in FY2012, to dozens of deserving non-profit organizations, all of which are listed in the Annual Report. (These items are separate from the Community Reinvestment Fund grants and your contributions to the CHIP program.)
Some advertising costs, and funding for this newsletter and the website, both essential vehicles for communicating with 31,000 active Co-op Owners, reside in the promotional budget. I hope this article has communicated a better understanding and appreciation of the ways your food dollar is used by your Co-op to operate our unique community asset.
Slotting fees and rack jobbers:
Ways the Co-op doesn’t spend your money
A cooperative is a singular business model; the Willy Street Co-op is no exception. Our business is founded on seven guiding principals dating back to the 19th century, updated and restated in 1995 for the 21st century, and none of them include “seek income by creating a hidden unequal advantage” in the text. We are also committed to a “cooperative and transparent relationship with your food providers.” We’re also a small business that deals extensively with other small local businesses; we adjust to their needs in numerous ways and pay a higher price for their goods. The annual Owner survey tells us that high prices are the top reason survey respondents don’t shop at the Co-op more often, a problem our buyers and managers continually work to resolve within the principles, bylaws, policies and guidelines established by our Owners and the Board of Directors. We can reduce some prices by adjusting our markup, and providing benefits to Owners in the form of discounts and patronage refunds. One thing we can’t do is act like a lot of other retail grocery stores. Large supermarket chains and warehouse stores are able to cut their product costs by buying huge quantities of goods and then storing and distributing it to retail outlets as needed. Some of the biggest chains dictate wholesale prices to their suppliers. Our Co-op doesn’t have the buying power or the ability to backstock enough product, especially refrigerated product, to last for days or weeks. Many of the shipments we receive have surcharges added to cover volatile transportation costs.
We make product choices guided by a product selection philosophy developed and approved by the democratically elected Board of Directors. The full text of the selection philosophy, including reasons we will add or discontinue a product, can be found online at www.willystreet.coop/cooperate-your-co-op.
Other groceries use a different approach, charging (or, “accepting”) suppliers “shelf fees,” also called slotting fees, to put a product on their shelves. The Food Marketing Institute refers to such fees as slotting allowances. These fees may also be euphemistically referred to as trade promotions, paid for by the supplier. They appear to have been introduced in the mid-1980s, becoming more prevalent in the 1990s.
Generally, suppliers pay slotting fees under an agreement that guarantees them shelf space for a period of time. Some fees are charged only for the introduction of new products, some to keep existing shelf space (so-called pay to stay fees), to obtain premium product placement, or to exclude a rival product. The cost of these fees is typically negotiated privately, and no industry-wide numbers, apparently, are available. The FTC and other economists have mounted periodic surveys to try to assess the practice, but not much hard data have been developed. The FTC found in a survey it conducted in 2003 that the average amount of fees paid (per item, per metropolitan area, per retailer) for five new grocery items ranged from $2,313 to $21,768. In the same study the FTC reported suppliers surveyed indicated, “that a nationwide introduction of a new grocery product would require $1.5 to 2 million in slotting allowances.” The FTC also believed that the frequency and amounts of slotting fees paid to retailers their survey reported almost certainly underestimated the practice. Retailers argue that slotting fees help offset the cost and risks of introducing a new product, and to recover some of the money the retailer shells out in advance if a new product fails. The American Antitrust Institute testified to the US Senate in 1999 that slotting fees were detrimental to smaller retailers who “may pay more than their larger rivals for goods on their shelves, thereby becoming uncompetitive in their resale prices…” Detractors also believe fees may also be unfairly passed on to consumers in the product price, and stifle innovation.
A pair of Penn State economists conducted a survey in 2009 to determine how prevalent slotting fees were for organic grocery products. They sent their survey to 900 retailers, including all 200 cooperative grocery stores listed with the National Cooperative Grocers Association. They received 159 responses (of which only 1% were cooperatives.) They concluded that 31% of the surveyed stores accepted slotting fees for organic packaged and prepared foods. (Slotting Fees for Organic Retail Products: Evidence from a Survey of US Food Retailers, by I. Julia Marasteanu, Penn State University. Draft: May 2011.)
Slotting fees are not part of the Co-op’s business model. As Dean Kallas, our Grocery Category Manager, has said, “We put products on the shelf based on our product selection philosophy, not the manufacturer slotting fees. Our first responsibility is to our Owners, not to the vendor who can pay the most.”
Another industry practice the Co-op does not engage in is called rack jobbing. Rack jobbers can be product resellers, wholesale representatives, or product manufacturers. The rack jobber pays a fee to a store to use floor space, then sets up and maintains their own display of goods, typically, as the name implies, using their own racks, although sometimes they may use store shelf space. In addition to renting the store space, the rack jobber may split revenues with the store, i.e., there may be a consignment-type agreement put in place. Rack jobbers are common in convenience stores, selling anything from CDs to potato chips, and the practice can be beneficial to small product manufacturers or craftspersons. But we prefer to use our foyers for community newspapers and other free information.