The Co-op Difference and Capital

What distinguishes the cooperative store from other retails will vary according to the features of the particular market the store is in and how the co-op has defined its niche in that market. However, cooperatives' ownership would seem to be a common essential aspect which differentiates them from their competitors.

Unfortunately, this very feature -- of ownership by members on a democratic basis -- is often neglected or underemphasized. Co-ops, particularly consumer co-ops, are known to be commonly, even chronically, undercapitalized. Members are too often the owners in name only, and their investment in the co-op but a token one.

Of course, many other small businesses suffer from a weak capital base also. And a business may be undercapitalized for other reasons -- from consistently unprofitable operations, or because it is growing at a rate incommensurate with its level of assets. But in the case of food co-ops, often the key factor is lack of significant member investment.

Weak Assets

Lack of owner equity results in (1) weak or inadequate assets and (2) increased reliance on debt capital. With inadequate assets, you will find:

  • a lack of cash-leading to loss of purchase discounts, no reserves, and overdraft problems;
  • a lack of inventory;
  • an inability to maintain and invest in equipment and facilities.

As a consequence of these conditions, profits are diminished or losses increased, which further depletes capital.

More Debt Capital

Overreliance on debt financing -- that part of the assets not financed by the owners -- can mean:

  • high accounts payable and problems with creditors;
  • high other liabilities, the risk of penalty charges, and higher interest charges (debt service);
  • an inability to leverage additional financing, particularly when the lending institution cannot be shown that the owners are making a significant investment themselves.

Weak in planning and managing their capital needs, many food cooperatives rely on means such as member loans and earnings from the business. But these sources of capital seldom are sufficient or as effective and stable a source as member equity investments.

If there is pressure to meet all the capital needs through operating profits, the results probably will be higher prices and/or lower wages.

300 Percent R.O.I.!

The failure to recognize the role of capital is often compounded by co-ops which not only require little or no equity investment by their members, but also give these same members a discount that is in disproportion to their financial contribution. To take a hypothetical example, but one which is similar to many real instances: A co-op may give a five percent discount to members (aside from any work-related discount), when the only membership requirement is an annual $10 share. At $50 in grocery purchases per month for a typical member, the discount earned by this $10 is $30 annually. The return on investment is irrational and does not reflect a plan to build the cooperative's earnings and equity on what should be the aim of any co-op: increasing member purchases and member ownership.

A further problem is the occasional co-op practice of simply charging a non-refundable fee, which is taxable income to the business; the alternative is member investments or shares recorded as equity on the co-op's books, to be repaid under conditions set by the bylaws and board of directors.

Cooperators talk a lot about ownership and control, and both are fundamental to cooperative enterprise. But in order to avoid an attitude whereby a food co-op is looked upon as a social club but not as a business, the members will have to give at least as much weight to real ownership as they do to democratic control.

Dave Gutknecht is publisher and editor of Cooperative Grocer.

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