May The Co-Op Be With You….

By: John Matthews, founder and president of Gray Cat Enterprises Inc.

When a multi-unit organization begins to grow, one common step in this process is the creation of advertising and purchasing co-ops that enable stores to pool their financial and strategic resources.

Generally, co-ops are determined using Designated Market Areas (DMA) of which there are approximately 210 of these DMA’s throughout the U.S.  Every zip code in the USA belongs to a Designated Market Area and multiple counties make up the DMA. Forming a co-op provides all participating stores within that DMA to share the costs by combining monies to provide market continuity, delivering a single message to a large geographic area.

Creating and investing as a co-op brings all stores in a geographic area together to help deliver common brand benefits as well as increasing top-of-mind awareness.  Over time, this can lead the entire organization to greater market share for the brand.

Combined with the obvious buying power that co-ops enjoy through lower cost-per-thousand investments, co-ops can position the stores to achieve greater sales potential.

The benefits of co-ops go even further and create a system in place to:

• Provide Continuity And Focus

• Enhance Cost Efficiencies And Strategic Consistency

• Create Franchisee Relationships Beyond Marketing

• Allow Franchisees To Focus On Operations

• Establish An Approval Process For Franchisees Through Voting Mechanisms

Once it has been agreed upon to form a co-op, the details of how the co-op will operate and function must follow.

Here are a number of items to consider:

DMA Definition: Nielsen television-based DMA’s are determined by counties and follow the general guidelines that if more than 50% of the population in that county receives their television signal from one market versus another market, that county is in the majority market DMA.  Fringe counties often argue that they do not receive the same coverage as core counties, but nonetheless they still receive the majority.  In addition, a DMA is determined to form a co-op if two or more franchised stores begin pooling monies for collective advertising.

Co-Op Scope and Quorum: Once the co-op is formed, certain guidelines need to be established in order to maintain the integrity of the co-op and its members.  These guidelines prevent a small group of members from getting together over coffee and determining how to spend co-op funds on behalf of the entire co-op.  Quorum guidelines are established in order to prevent such events from occurring.  With a franchise organization, stores usually become eligible to vote on co-op issues only after their store becomes operational—so they have some “skin in the game.”  In order to facilitate a quorum where votes may be cast, a minimum of 50% of the stores and 50% of the members need to be present in order to form a quorum.  In addition, each of these present members may carry additional member votes by proxy.

Co-Op Member Contributions: Co-ops are designed to locally enhance any and all plans that may be in place at a national level.  Co-op contributions and purchasing are accretive to those national plans and when vertically integrated with the national message, can help deliver greater results.  Most franchise organizations set two levels of contributions based on a percentage of sales:  a) national ad fund contribution; b) local marketing co-op media fund. The national contribution levels are usually contractually obligated per the franchise agreement with minimum levels stated for co-ops.

Voting Rights: Voting rights should be determined in advance of the co-op being formed.  Consideration should be made to determining the best route for a democratic resolution.  I have been a part of many co-op’s and have seen a wild assortment of voting structures within the co-op.  The best one that protects both the small and large franchise owner is the “One Store, One Vote Combined with 2/3rds Majority Franchise Owners.”  This ensures that a large franchisee (multiple stores) can’t run amok within the co-op, yet protects them since they have the most at stake. Co-ops should be able to increase members contributions through this voting method and only franchisees that are current in their financial obligations to the co-op, shall be eligible to vote.

Co-Op Member Protection: Additional provisions should be determined as well— all designed to protect the members of the co-op.  For instance, if a franchisee is selling their store, they should still be required to contribute up to the day of closing.  In addition, since they are leaving the system, yet their store isn’t, receiving credits for their previous contributions should not be allowed.  Once a contribution is made, it stays with the co-op.  Lastly, all co-op’s should establish how they plan to deal with franchisees that become delinquent in their co-op contributions, yet still gain the benefits of advertising.

Forming a co-op is a significant event in a company history—it states that it has arrived.  Co-op’s assist in growing the brand exponentially, adding topspin to the overall brand message of the company.  If executed properly, co-ops are a terrific way to increase customer recognition of the brand and foster an environment where market share and sales increase significantly.

John Matthews is the founder and president of Gray Cat Enterprises Inc., a strategic planning and marketing services firm that specializes in helping businesses grow in the restaurant, convenience and general retail industries.  With more than 20 years of senior-level experience in retail and a speaker at retail-group events throughout the U.S., Matthews has recently written two step-by-step manuals, Local Store Marketing Manual for Retailers and Grand Opening Manual for Retailers, which are available at www.graycatenterprises.com.

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