Entry of Not-for-Profit Food Cooperatives and Its Implications on For-Profit Retailers

Abstract

To revitalize local communities and economies, more not-for-profit food cooperatives (coops) are establishing their presence in less-populated areas or poor communities in recent years. This trend has motivated us to examine the entry conditions for food coops with the following two related social missions: (A) maximize profit to support the local community needs; and (B) maximize sales to support the local economy. We analyze the competition between an incumbent for-profit retailer and an entrant not-for-profit coop in a market comprised of heterogeneous consumers with different annual consumption rates and social conscience levels. We examine the coop's pricing strategy and entry conditions, the impact of the coop's entry on an existing for-profit retailer's sales and profit, and the conditions under which the retailer should deter the coop's entry. We find that a coop can afford to enter the market only when its fixed annual operating cost is below a certain threshold. Upon entry, we find that it is optimal for the coop to set a membership fee and a member-only discount to attract at least consumers with high consumption rate. We further show that the entry of a coop with social mission (B) is more detrimental for the retailer than the entry of a coop with social mission (A). This insight becomes more prevalent when we examine the retailer's deterrence strategy. Specifically, we find that it is optimal for the retailer to tolerate the inevitable entry of a coop when the coop's annual fixed operating cost is below a threshold, where this threshold is lower for the coop with mission (B) than mission (A). Our results generate managerial insights about the pricing and entry strategies of not-for-profit food coops, help explain the coexistence of not-for-profit food coops and for-profit retailers in practice, and suggest that coops with mission (A) have a higher chance of survival.