Deliver the Benefits of Co-op Capitalization to Owners

Deliver the Benefits of Co-op Capitalization to Owners

  |  March 1, 2013

Our culture has a lot of beliefs about money that range from its worship to seeing it as the root of all evil. Food cooperatives especially have been historically conflicted about capital, once seeing it as the cause of destructive economic practices, to the point that raising money was once practically shunned. This left many cooperatives under-capitalized and some of them had to close their doors. It was a painful lesson, learned a little too late, about the need for capital.

A healthier approach to co-op capital has commenced in recent years, along with an increased awareness of its benefits. An increasing number of cooperatives are paying greater attention to building capital with stunning results.

In the food co-op sector, the CDS Consulting Co-op has been at the forefront of promoting the use of member capital of all types: member equity, retained patronage dividends, preferred shares and member loans. “The building of member capital in a variety of forms over recent years has resulted in the strengthening of our food co-ops in multiple ways. It serves as a healthy test of member support and engagement. Members would not invest if they didn’t believe in the value of cooperation that they are receiving and supporting,” said CDS CC member Bill Gessner who was an early visionary for building capital from members.

The resulting growth is extremely compelling. In the last five years, food cooperatives have more than doubled their retained patronage to reach $42 million, new member equity has increased by 30 percent to over $100 million, and the number of co-ops retaining patronage dividends has grown to over 60. These overlooked and underutilized tools for raising capital in co-ops is clearly a huge asset.

“From retained patronage dividend alone, we have $20 million more dollars supporting co-op development than we did 5 years ago,” said Marilyn Scholl, board leadership development consultant and manager of the CDS CC. “In the past co-op leaders didn’t understand their options and the possibilities. Once they know, they can make smart decisions.” To facilitate this knowledge, the CDS CC, Cooperative Grocer, and Wegner Associates put together Patronage Dividends: A Primer. “Because the CDS CC specializes in cooperative growth and development, we knew we needed a more sustainable and steady source of capital,” Scholl said.

“Self-help is a cooperative value. To be able to fund our own growth through our members’ participation, is a win-win-win. That’s what’s so exciting about it,” Scholl added. “As cooperatives we have something valuable to offer communities, and we want to expand and grow that. Using member’s money is a way to do it.”

Benjamin Franklin stated that a penny saved is a penny earned. In the case of retained patronage, cooperatives that have instituted patronage dividend systems are finding that the pennies really add up. Typically during profitable years, a portion of the earnings are rebated back to the members based on how much they shop at the co-op. The board can decide to retain 80 percent of that to support the co-op’s growth, and pay out 20 percent to the members in a cash rebate, according to IRS guidelines. Members get a return based on how much they shopped and the co-op gets to build capital and deduct the profit from sales to members.

What the co-op does with the retained portion of the patronage dividend is also win-win for the member and the co-op. Owners can see that shopping at the co-op makes a difference. Their patronage supports a myriad of services and educational activities, in addition to funding the co-op’s growth. It’s a painless way for members to contribute to their co-op’s capital—through patronage—no special investment package is required. It’s another compelling reason for co-ops to increase their membership rolls and convert shoppers to owners. More owners who are part of the patronage dividend system means more retained patronage for the co-op as well. The dollars do add up for the co-op’s benefit.

Co-ops bring people together, and that is the strength it builds on, members willing to pool their capital so that the co-op can continue to meet their needs. In this way, the co-op structure is designed to reward patronage and participation, not capital investment.

There are certainly drawbacks to that, in that cooperation is not a vehicle for attracting investment that only wants a high return, a challenge cooperatives are up against all the time. “There’s been an interesting shift,” Scholl said about co-ops and their ability to attract capital. “What attracts capital to co-ops is that we use member capital to leverage the outside capital we need through stronger balance sheets.” Financing for co-ops will probably never be easy, but the way to make it easier is very much within a cooperative’s power by manifesting the strengths of its patronage and equity systems.

Strong equity is also a good indicator for the food co-op sector. Steve Wolfe, chief financial officer at the National Cooperative Grocers Association, said, “Equity growing at a substantial pace decreases risk.” Risk is of high importance to the association because member co-ops collectively take risk and responsibility for payables with UNFI and other distributors. Wolfe said that risk decreases when each individual co-op has a stronger balance sheet. In terms of co-ops achieving more retained patronage, Wolfe said, “I think it’s a good trend. What’s great to see is how much the practice of retaining patronage dividends has made such a huge difference. I’m glad co-ops are taking it on and understanding the importance of growing equity.”

Another way to build capital is through preferred shares and member loans. Preferred shares are funds gained from a capital drive that is equity beyond what is required for membership. Often preferred shares start at $500 and they may yield dividends. Member loans are generally offered to members in multiple thousand-dollar increments in a non-public offering, and they earn interest. Members earn more on their money than they would keeping their money in a bank and the co-op pays less than they would borrowing from a bank. Often cooperatives offer these kinds of investments to their members when they are seeking to expand, either separately or together. Yet ongoing co-op investing could also be promoted as one of the benefits of membership.

“Rather than looking at a member loan drive as an occasional and necessary evil to expand, but as part of the services you provide as a community-owned business, your co-op will enhance your value to the community and its members,” said Ben Sandel, leadership development, startup and capitalization consultant with CDS CC. “People like to do good things with their money. They can invest in something they know, visit and use. Investing is an additional way to contribute beyond their ownership share and shopping.”

The day of the telephone call to pitch members has also changed with the use of cell phones and access to social media. Reaching members now includes a much more diverse approach that includes all of the above: phone calls, social media updates, blogs, press releases, email, and newsletters. “Like any sales process, you need to ask in multiple ways. Sometimes it takes as many as five exposures for people to finally recognize or respond to it,” said Sandel. It’s another reason why ongoing campaigns for capital are useful, it helps keep the idea circulating for when people are ready to commit. “It becomes thought of as part of the co-op’s journey to help it along and support it with our money.”

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