STRATEGY

The Benefits of Joining Cooperatives

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Mike Fleck still feels the sting whenever he sees the billboard. You can't miss it if you are heading east on Route 37, a hypnotic unfurling of strip malls, pizza joints, and chain stores in Toms River, New Jersey. The message: "Benjamin Moore has a new home. House of Paints," followed by an address less than two miles down the road.

A few yards past the sign stands Flecks Paint Spot, a Benjamin Moore dealer for 18 years. Last May, Benjamin Moore unceremoniously yanked its line from Fleck's two paint stores, costing him $350,000 worth of annual business -- 18 percent of his sales for 2008. Benjamin Moore told Fleck that, as one of its signature store dealers, he had violated his contract by letting his sales of the product fall and by failing to stock one of its new lines. But Fleck believes the company had another motive: to punish him for joining the Coatings Alliance, a cooperative of paint retailers that manufactures its own products. As a member, Fleck has a financial stake in selling C2, the alliance's line of premium paints, which he offered alongside cans of Benjamin Moore. "I think [Benjamin Moore] wants to stick my head on London Bridge and make an example of me," Fleck says. A spokesman for Benjamin Moore declined to comment.

Despite the blow, Fleck is glad he has joined the co-op. For starters, members of the alliance are rallying around Fleck, extending his payment schedule and including him in trade show presentations. Co-op partners have traveled to New Jersey on their own dimes to work behind the counter and train Fleck's five employees in selling C2 products. They even hosted a wine-and-cheese night at Flecks Paint Spot for local decorators, some of Fleck's most valued customers. "I don't know how they find the time, because they have their own stores to run," says Fleck. "But I appreciate what they're doing. They've made the job enjoyable again."

The Coatings Alliance was born of one man's exile from Corporate Color. Tom Hill III, a vice president of research and development at paint company Pratt & Lambert, was cut loose in 1996 after Sherwin-Williams acquired his employer. After turning consultant, Hill heard frequent complaints about paint manufacturers focusing on the big-box chains and ignoring smaller chains. "The big companies knew how to sell to the Home Depots and Wal-Marts of the world," says Hill. "They did not know how to deal with the independent channel."

Hill wondered: Suppose small paint retailers got together to manufacture their own brand of premium paint -- just for themselves? In other words, how about a co-op? Such organizations are common: Think Land O'Lakes and The Associated Press. Worldwide, 750,000 co-ops serve more than 730 million members, according to the National Cooperative Business Association. Most co-ops form to achieve purchasing or marketing clout.

What Hill had in mind -- a group of retailers manufacturing their own product -- was less common but not unprecedented. Ace Hardware, for example, is a cooperative of more than 5,000 stores that manufactures some of its own branded lines. That model makes increasing sense, as it has gotten easier for small businesses to share information and collaborate, says Stephen Spinelli, the president of Philadelphia University and an expert on co-ops. "If you have enough [retailers] with entrepreneurial incentives working together," says Spinelli, "they can be more innovative, versus a corporate chain."

In 1998, Hill and his co-founder, Greg Stebbe, invited five paint dealers to hash out a business plan for what would become the Coatings Alliance, based in East Amherst, New York. The group envisioned a manufacturer whose customers would also make all decisions. Each member would make a one-time investment of $50,000 to fund research and development, manufacturing, and operations. The alliance would then sell the members products at prices that would raise margins to as high as 60 percent, compared with margins of 30 percent to 40 percent for many other paints. "We flipped the traditional industry model, where paint companies made large margins and retailers made small margins," says Hill.

For its product line, C2 Paints, the alliance adopted a European system that draws on 16 base colors instead of the typical 12. Its marketing innovations included poster-board-size paint samples customers can take home to observe how Swallow Tail blue will look in the powder room, and color chips made from actual paint. That may not sound revolutionary, but standard chips are made from inks or lacquers, which means what customers see in the store may look different from what dries on their walls.

The alliance's governing structure, too, sets it apart from other manufacturers. It is run by six committees composed of member-dealers. That helps provide C2 with quick and reliable market research. "People are basically running focus groups with their customers every day," says Hill. "They bring that feedback straight to us."

The marketing committee holds weekly conference calls to discuss advertising that promotes both C2 as a national brand and individual retail partners. The color committee meets at varying intervals to refresh the 496-pigment line once every three years. "The groups are very small, and the more often they meet, the smaller they are," says Harry Adler, a third-generation owner of Adler's Hardware & Design in Providence. "It's 180 degrees from bureaucratic. We are as quick with decision making as anything I've ever experienced."

The committee chairpeople report to Hill, and Hill reports to the executive committee, which determines the co-op's strategy. One issue before the committee is whether to expand sales of C2 to nonmember paint stores. More stores selling C2 paint would mean more income for the alliance. But some worry that nonpartners won't give the product the kind of sales effort they feel it deserves. "We debate that all the time," says Hill.

Today, the Coatings Alliance is 52 members strong. Its $10 million in annual revenue is used to support R&D, manufacturing, and marketing. The cooperative has accomplished its principal goal: making partners less reliant on large vendors.

But it has also made them competitors to those vendors, and that leaves some potential partners skittish. Hill says several dealers have decided not to join the alliance out of fear of losing their Benjamin Moore lines. All they have to do is look at what happened to Mike Fleck. He continues to sell down his remaining inventory of Benjamin Moore paints. But when that runs out, Fleck will have to rely on his C2 sales, along with those of a few other brands. Still, he is confident C2 will eventually more than make up for the loss of Benjamin Moore. "People try it, and they like it," he says. "And it's much more profitable than any line out there."

Last updated: Feb 1, 2010

LEIGH BUCHANAN | Staff Writer | Editor-at-large, Inc. Magazine

Leigh Buchanan is an editor-at-large for Inc. magazine. A former editor at Harvard Business Review and founding editor of WebMaster magazine, she writes regular columns on leadership and workplace culture.




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