Democratic ownership is one of the unique and valuable benefits food cooperatives offer their communities. Yet it is also one of the most commonly misunderstood concepts by the very people co-ops are designed to serve: the member-owners. Without a strong common ownership viewpoint, how can members engage in meaningful conversation about what the co-op is doing to meet their needs?
Engaging members in the articulation of the co-op’s mission is different from educating them about it. Without the membership’s overall understanding of the co-op as a shared benefit, our culture’s prevailing “me-first” attitude combined with a dose of consumer apathy could put a precious community asset, like the food co-op, at risk. Continuous education about democratic ownership is also essential, especially as the co-op looks toward the future. In co-ops around the country, this issue is especially relevant as co-op looks at the long term benefit of distributing profits via patronage rebates (aka patronage refunds) based on purchases, versus discounts given out at the cash register.
According to Peg Nolan, CDS consultant, the challenge is twofold: to engage the members in better understanding their co-op, and for the co-op’s leadership to be clear about the co-op’s current situation and its mission. “Those co-ops that have historically used patronage rebates as a way of building owner equity and building understanding of collective ownership as a means of improving their lives and communities have demonstrated long term sustainability and strength.”
Giving away discounts as a membership benefit, especially before you know the co-op has a profit, is a risky practice. Addressing that issue proactively has sometimes meant countering members who believe a change in the co-op’s benefit policy means something is being taken away from them. However, those who have gone through the change say that most people are supportive once they understand why it’s necessary.
Co-opportunity Consumer Co-op in Santa Monica, Calif., implemented their patronage rebate system in 2004. The change was prompted by costly external realities: workers’ compensation and health insurance costs skyrocketed. “We couldn’t continue to give discounts with those kinds of expenses,” said recently retired general manager Will Simon. “The membership has to understand the co-op is their business. We explained to them what the discount was doing to the business. It wiped away our bottom line.”
They instituted a much-reduced discount with a cap on it and the new patronage rebate system. Their first year with the new system yielded the co-op a $150,000 profit.
The Wedge Co-op in Minneapolis, Minn., made the switch to a patronage rebate profit allocation in 1989. The co-op did it for a number of reasons, not the least of which was a recognition that the co-op could use its financial success to finance the co-op’s mission and build a legacy for the future. Wedge membership director Elizabeth Archerd explained, “We thought more about how we could be our own economic engine. To do so we had to get out of a nonprofit mindset. We didn’t want to put our mission at risk by not paying attention to that part of the business.”
Stephen Wolfe, CDS consultant, also noted that one of the most compelling reasons to institute a patronage rebate system is the ability to shelter profits made on business with members from tax liabilities. “One of the biggest benefits of the patronage rebate is the co-op’s ability to avoid taxation. It also keeps profits in the local co-op community.” He also said that the patronage rebate system is a good way to build cash reserves for potential expansions, or other things co-op members want to do.
Wolfe pointed out that the overall benefit to patronage rebates is that it makes the cooperative much more financially sound. “In the past, food co-ops worked on eking by, but if you look to the future you always need some reserve. It’s important to have better cash management.”
He also stressed how a patronage rebate system is cost effective, even if there are expenses up-front to implement it. “It’s important to recognize it takes time to set up a system for tracking patronage and disbursing profits. But in the long run it makes more sense. And as a member, I would prefer that system, getting a statement every year from the co-op, seeing how my patronage is building up the co-op.”
The Wedge leadership knew the patronage rebate system was in keeping with the co-op principles, and an equitable way to support the community and the membership while building the co-op’s capacity for the future. “What do a few dollars given away at the cash register really mean to anyone anyway? Now our co-op members can invest thousands of dollars in efforts they really want to support,” Archerd said.
The Wedge’s numbers certainly speak to the long term benefits of instituting a patronage rebate system. In 1997, the co-op rebated $44,000 in profits back to its members in the form of cash and class B stock held in reserve. In their most recent rebate in 2005, the co-op gave back over $560,000. That’s a half a million dollar increase in less than a decade. “As stewards of our community asset, we’re not sending out anything we can’t afford. Our bills are paid,” Archerd said.
Archerd thinks food co-ops have done themselves a historical disservice by equating “co-op” with discounts in the minds of the consumers, and that it’s imperative to change that mindset. “It’s important to keep putting out big picture scenarios. Get people to understand that the patronage rebate system is fundamental to fairness and the health of the business.”
“ Nearly everybody knows it’s time to change their system, but it does take courage and clarity,” Nolan said. She offered these reasons for why it’s necessary:
For the Co-op
- A responsible method of returning surplus to the owners
- Protects co-op against lean years
- Allows option of reinvesting surplus to improve services
- Favorable tax treatment
- Encourages growth
- Sustainable even if all customers are owners
- Improves ability to be competitive
For the Member
- Supports future viability of business they own
- Improved store, products and services
- Provides fair rate of return on investment
- Benefit accumulates during the year
- May be other tangible benefits throughout the year
Archerd said, “We have an ethic of community wealth that’s separate from corporate wealth. We can develop a base of stability for our community well being. Short term thinking impoverishes our community. We need to think about our co-ops the way we think about organic soil—we have to build it up.”
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