Member Equity: Essential Foundation, Educational Tool

Member Equity: Essential Foundation, Educational Tool

Columinate | 01-07-2003

Most people know that if they were planning to start their own business or buy an existing business, they’d have to ante up a certain amount of capital, or equity, to get it launched. In addition, as the business grew, its equity needs would be something to be continually mindful of. Yet in co-ops, the importance of owner equity seems poorly understood as a source of capital.

Our co-ops are packed with people who view joining the co-op as a way to receive certain benefits—and they are not at all clear about what ownership means and may not recognize the co-op is using their investment to realize individual as well as community and social benefits.

In the average co-op, this doesn’t necessarily manifest as a problem until the time the co-op is faced with the need to change something about their existing program. Some co-ops may even be faced with having to change from an annual fee to an equity structure. Others may not have changed their equity requirement in decades and need to raise it in order to reach new goals. Either way, how this organizational challenge is addressed through educational and other efforts is critical.

Good Foods Co-op in Lexington, Kentucky changed its membership requirement from a $10 annual fee to a $200 equity investment in the fall of 2002. In addition, they legally incorporated as a cooperative from their previous nonprofit status, and dropped a 5% discount in favor of a patronage rebate system. Although the change had been in the works for over five years, the move and expansion to their current location precipitated the necessity. They needed to pay for the new space, had cost overruns, and all their cash was depleted. “We had nothing to fall back on,” said Ann Marx, owner services/marketing director. “When we had the discount we were giving away profit before we knew we had it. It was not a solid business practice.”

“It’s important for people to understand the co-op is a business, not a club or a charity,” said Marilyn Scholl, a board consultant with CDS. “Somebody has to provide capital, and in any other business the owner does that. But in integrating business with the cooperative idea, the financial reality is one part of the story.” Scholl stressed that finding compelling ways to excite members about the idea of ownership is important to a co-op’s ability to reach its full potential.

Marx said, “When we had the $10 fee it was like using pebbles to build a foundation. It wasn’t solid. We needed the concrete blocks of equity to be a solid foundation and help move us into the future.” She used that analogy when talking with their staff and members.

“We did a lot of education. The first thing we did was educate staff about why equity is important because they would be the first ones answering questions,” said Marx. “It took a lot of coordination and communication between the board and management. It was a tremendous project, and the key was getting the buy-in of the staff.”

The process took about a year and included getting legal advice, using professional consultants, as well as holding meetings and staff trainings. It was also labor-intensive. “Every member in line at the cash register got information. We didn’t start with a blitz, but built up to it,” Marx said. “Once we explained to them why we needed to make the switch to equity people really got it. I think it’s because the staff believed in it.”

“What Good Foods Co-op did with their equity switch was not only get members to vote ‘yes,’ but they created a group of people who understand that they are one of the owners of the business,” said Scholl. Scholl theorized that a co-op movement strategy to change the relationship with shoppers and members in this way has potentially great benefit. “If members continue to be satisfied with their role as an owner, the benefit goes well beyond the monetary investment.” Satisfied owners are more likely to be loyal to the co-op, to keep informed, to participate in elections, and use the power of word-of-mouth to promote the business they co-own.

Good Foods Co-op will be able to put the idea to the test sooner than later. A natural foods chain store (Wild Oats) is opening in August in Lexington. “Having competition on the heels of this change is unique, but it’s important for us to tell our story to our customers and members before Wild Oats gets entrenched,” said Marx. “Part of ownership is investing, and they will be more invested on an emotional and spiritual level because of the financial commitment.”

Denise Chevalier, who consults with stores going through expansions, said the stores with the greatest success at raising equity “get into the psychology of ownership.” She noted that the need for more member equity always comes up during expansions, and is a great opportunity to educate people about ownership. “Typically in expansions the need to raise equity funds is a fundamental component.” The process of expanding and building a store presents an opportunity to reacquaint people with the idea of true ownership.

When the Rochdale Pioneers founded their grocery cooperative in 1844 in England, they had to come up with six weeks worth of wages to invest in order to open their co-op. By comparison, the investment in a food co-op today is not such a huge stretch—and perhaps this is part of the problem. For many of the new wave food co-ops, equity investment wasn’t even part of the concept at the beginning, as people invested sweat-equity into their co-ops. Some co-ops are challenged to change if they want to grow.

“The good news is once people understand equity they get excited. It rings true,” said Peg Nolan, a CDS consultant in the area of strengthening the co-op advantage. “When you think about it, it’s a radical idea—people taking charge of their economic reality.”

The opportunity for any co-op, not just the ones expanding or seeking ways to immediately raise capital, is to find ways to communicate to owners about ownership. “There’s not a direct connection in the minds of members to the other economic, social and community benefits. It’s an education issue. We need to expand the concept of equity and ownership within our co-ops and in the community,” Nolan said. “We need many entry points and opportunities for people to grow their understanding.”

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