Adapted from an article by Marilyn Scholl l Cooperative Grocers Network (May/June 2008)
Cooperative ownership is an economic model that can create great benefits for our communities and member-owners. The cooperative model is powerful if we focus proper attention on the owner side of that compound word, “member-owners.”
Typically, members pay fees or dues and get something, such as purchase discounts, in exchange. Owners invest and benefit if the business prospers. Cooperatives work to create economic linkages with their member-owners by undertaking activities that make clear the close connection between the prosperity of the co-op and the prosperity of the member.
For cooperatives, owner equity and patronage refunds are tried and true tools that create and maintain a mutually beneficial relationship between the cooperative and its owners.
Owner equity fundamentals: Cooperative businesses require capital, and they generate capital in part through the investments of member-owners. Debt and earnings are the other primary sources of capital.
A member fee program also referred by other co-ops as a member share program has two essential goals: Members provide the co-op with an adequate capital base also commonly referred to as the co-op’s equity. The member investment creates a sense of ownership. The co-op’s purpose is to meet member needs, and members need to understand that fulfilling that purpose takes capital.
In meeting the co-op’s needs, membership fees have the advantage of being a low-cost way to build capital, since the co-op doesn’t typically pay interest on member capital as it does on debt capital. And member investments are more dependable and less risky than relying on earnings as the primary source of capital.
Cooperatives demonstrate the advantage of being community-based businesses, where a relatively small amount of investment from a large number of people can create a sizable base of funds from which to leverage larger amounts of capital. The member investments demonstrate member-owner commitment to banks and other lenders; they are also advantageous because these funds are not considered taxable income for the co-op.
Membership fundamentals: Member investments, unlike fees or dues, are refundable if the member no longer wants to use the cooperative. If a member leaves, the co-op returns the member’s capital within pre-established limits and restrictions that protect the co-op. Co-ops offer a single class of membership with the same investment requirement and the same rights and benefits for each member.
Benefits fundamentals: Equity is one side of the ownership coin, and member benefits are the other side. The owners provide tangible support for the business with their investments in the co-ops equity, and in return the cooperative provides benefits to member-owners. The most important benefit for the member is the existence of the co-op itself. People invest in a co-op because they want to use its services. In addition, members receive benefit from being a part of the community, supporting the mission of the co-op as well as the community it serves.
Discounts or patronage refunds? While both discounts and patronage refunds are tangible member benefits, and both generally benefit the owner in proportion to how much they spend, patronage refunds are a best practice for providing benefits, superior to a discount system in a number of important ways. First and foremost, patronage refunds are directly tied to the health and profitability of the business and to the essential dual role of the consumer-owner. The cooperative’s board decides to allocate earnings to the members only after ensuring that the business has actually made money. And since the business is more likely to show a profit if the members use the business, patronage refunds support a mutually beneficial relationship.
With discounts, the “earnings” are given away whether or not there are any actual earnings, because the decision about how much discount is offered is made before the sales are known. If the discount amount was set too high, then the co-op can lose money; if set too low, members may not receive as much benefit as they should. Members often have a hard time seeing how much benefit they accumulate through discounts, and shelf prices are often artificially inflated to make the discounts affordable, thereby weakening the co-op’s price image. Everyday discounts can be costly and unsustainable, while discount days are not equitable for all members.
Creating a sustainable cooperative structure: In our society, we are programmed to look out for number one; we are not taught how to create, maintain and share the ownership of community assets and common wealth. The cooperative structure offers us an economic means to meet our common needs through democratically owned businesses. When many of today’s food co-ops were established, there was a desire to create an alternative to the capitalist society, but many of co-ops threw out the baby with the bath water. Rejecting concepts equated with capitalism—profit, equity, ownership, and management—too many food co-ops went out of business clinging to their idealism.
Fortunately, we can look to the cooperative principle, along with the generations of businesses that existed before us throughout the worldwide cooperative movement, to establish effective and sustainable structures that balance the needs of individuals and of business, so both can prosper. If co-op members only look at personal gain, they miss the power of cooperation. The opposite is also true: if cooperatives don’t offer meaningful benefits to its owners, cooperative leaders have missed the point. Cooperatives must balance the needs of the owners and the needs of the business they own. Owner investment in the co-ops equity and patronage refunds are effective tools to create the right balance.
Cooperatives do offer an alternative—a business model in which no one benefits at the expense of others, that builds a community rather than drains its resources. The owners of any type of business provide capital, and in return expect some control and some return on their investment. In investor-owned businesses, those with the most money to invest have the most control and get the greatest share of the benefits. In a cooperative, owners provide capital equitably, have only one vote regardless of amount of investment, and should receive their benefit or return based on how much they use the co-op. Ultimately a co-op’s success is dependent on its understanding and effectively implementing the economics of ownership within the principles of democracy.
The notions of ownership and patronage refunds are embedded in the third cooperative principle: “Member Economic Participation.” Rising from the successful innovations first realized by the Rochdale Pioneers some 160 years ago, this principle outlines the way cooperators contribute to, control, and share the wealth created by their business. This distinctly cooperative advantage has proved itself for generations, and it is even codified in our current tax laws and IRS rules.
Cooperative membership is cooperative ownership. Our owners and directors, staff and management, should all understand that this economic model offers us many advantages, including the ability to serve members, build equity, and share in the common wealth.