The Davis Food Co-op capital plan is one that has developed step by step over the past eight years. It is not perfect, and were we starting from scratch might not be today's choice. On the other hand, it is formed by existing reality. Where we started from and where we need to go, however, are common to many other co-ops. Therefore our journey could be replicated by your co-op. This article may help you get there quicker than we did.
Before reviewing elements of a successful capital plan, emphasis must be given to strategic planning. Capital planning must be an element of any organization's strategic planning process. It is one of the most critical of resources that you must obtain. At Davis Food Co-op, now that we have adopted our capital plan, we no longer need to have the member equity program as part of our strategic planning process. We know how much we will get each year from the program and we can depend upon the member equity as part of our capital planning.
Unfortunately, Davis Food Co-op has only just begun a strategic planning process. So far its been a painful one for the board. Over the past five years, the development of the member equity program has usually generated strong resistance or disinterest from some board members and from staff members. Only through persistence by a few over a very long time, and my own single minded focus on member equity and development of capital, did it remain a priority. I continue to be disappointed in the board's lack of support for what I consider to be one of the necessary cornerstones of business success. However, now that we are enjoying the benefits of capital, people are beginning to see its value and the plan is gaining belated recognition.
The following are elements your co-op should consider in creating your own capital plan.
* Low entry level: To ensure you have access to the widest number of interested customers it is important to have a low cost way for new members to join. At Davis Food Coop we have kept initial entry into the co-op at the same level for many years. There is a $5 dollar membership fee and a ten dollar share investment. Give everyone a chance to join; if they like it they'll stay and willingly invest annually.
* Annual investment requirement: I learned a lot about member capital from the Berkeley Co-op patronage refund system. When member equity growth is tied only to profitable years it will have the worst impact upon access to capital when you may need capital the most. An annual share requirement irrespective of profitability gives the co-op a consistent supply of equity.
"How many stores have languished for years,
* The best time to make changes: The best time to make major adjustments in your capital plan is when you are buying a building, moving, or doing a major remodel. Two of our major modifications occurred in association with the purchase of the building and a recent major remodel. Making changes in the capital plan was also critical to winning the confidence and approval of the National Cooperative Bank for our two separate loan applications. When you are in the position to give something of real value to the members they will agree to increasing their own equity. The members understand what they are getting for their increased investment.
* Why pay for equity capital? Are you paying 35% interest for capital? By not raising your money from member equity and obtaining it from retained earnings, you are deciding to pay approximately 35% (taxes on nondistributed earnings) for your capital. Does that sound smart? Many co-ops without a substantial member equity program depend on profits to provide the co-op with capital. In these cases the co-op must first make the profits to have the capital available.
* It takes a lot of capital to run a supermarket. Let's take a look at the 1992-1993 Davis Food Co-op balance sheet. To serve the needs of our members we have $1,897,225 in assets. With that money we bought a building, equipment, supplies and inventory and we have the cash needed to run our business. Divide that cost by 4000, the number of active members being served by the facility, and the capital outlay is $474 per member. Because we have not raised that amount of capital from member equity, we are forced to gain it from retained earnings and to borrow.
Calgary Co-op in Canada is the largest consumer cooperative in North America with 1992 FY volume at $510 million and membership at 313,000. Calgary's maximum equity is set at $600 per household, which increases each year by $50. Because of their access to capital the co-op has been in a position to grow to having sizeable market share in Calgary. At present they have $176 in average contributed member capital. The average contributed equity at Davis is $42.66.
When Davis Food Co-op began there was a $10 lifetime membership. When the co-op was incorporated in the 1970s it was changed to $100, the maximum allowed by state cooperative law at the time. In 1992, members voted to increase the limit to $300, the new state maximum. (See accompanying chronology.)
At the $20 per year required annual investment it takes up to 15 years for someone to max out. That may seem a long time -- it is! However, a $20 annual investment is an easy deal for almost everyone. And although people in a university community move quite often, there are a lot of people who stay.
* Inflation factor: One of the elements missing from the Davis Food Co-op plan is an inflation factor. It is a continually overlooked limitation. Inflation is a predictable occurrence and ought to be part of the capital plan. To keep up with inflation I have suggested at Davis that we present for membership vote a change in the bylaws which would increase the annual required member share investment by $5 every five years. Therefore in the year 1995 the present $20 would be changed to $25, and in the year 2000 to $30. Voting on capital is always so difficult in food cooperatives and something boards love to avoid, to the detriment of the organization. Yet capital needs go up because of inflation -- do we really need to have a membership vote? Why not have an inflation factor vote one time only, then get on with other issues?
Chronology of Capital
Joining the Davis Food Co-op requires $20 (originally $10). Assessing additional shares requires a vote of the board of directors. The maximum required investment per shareholder is $300 (formerly $100).
$10 Initial "fee" or "share" before 1982; 1981 by-laws established a $100 lifetime investment.
$10 share due April 30, 1982
In 1993, the maximum required investment per member shareholder was raised to $300.
* Equity plans need to be understandable: Joining the local food co-op should be easy, but it almost never is. There's only one grocery store in America where you need an orientation session to understand how to shop. When you add member work, discount, merchandising and other policies, it is a lot to explain.
When we ask people to pull out their checkbook to buy a membership we'd better have a simple explanation. A complicated formula is the kiss of death. "It's so much to join and so much every year" is good enough for me. If your cashiers cannot explain the plan in a short few sentences at the checkstand, it probably needs work.
* There are two kinds of people in our co-op: As our equity plan has evolved I've come to understand that we need a system that is equitable -- equitable from the point of view of obtaining $300 in member capital from two groups: 1)the group for whom $300 up front is a lot of money, and 2) the group that can make a $300 investment without any problem. The answer is you need one plan with two different elements. The first we've arrived at with our $20 a year investment, the second is the reward for the $300 Co-op Partner (explained next). Clearly it is working for us: 88 percent of our volume is done with member shoppers. In our case, less than 70 percent would tell me that our annual member investment is set too high.
* Making co-op members our co-op partners: During the 1993 share drive the board adopted a program to reward members who brought their shares up to the $300 maximum. We offered to give those members an annual $20 gift coupon. When we had our campaign to buy the building two years ago 63 members brought their shares up to $300. Since the new program, the number of Co-op Partners totals 126, who provide $37,800 in member equity. Co-op Partners thus provide over 10% of the contributed capital of just over $356,000.
It is my belief that at least one third of our active membership could easily be at the Co-op Partner level. They have the money, they just need to be convinced. If they were, look at the outcome: 1000 Co-op Partners X $300 = $300,000. That would double our present contributed member equity. We could substantially pay down our bank debt of $900,000 and reduce our interest costs which presently run at $60,000 annually. With more $300 Co-op Partners, we could save ourselves a lot of money.
* People need to be educated: Equity is an investment not a cost. Educating the board, staff and members about this issue is critical and constant. How often does the conversation end up with "How much does it cost to join?" People do not like to part with their money. You'd better give them good reasons for their investment.
Marketing Capital: "Define Your Value"
By Doug Walter
Colts are awfully cute when they first try to run, but they're not very efficient at getting places. That image sums up the Davis Food Co-op's efforts to attract share investments from its members, as I've seen them in my dozen years as a member and three years on staff. The knees knock, or the head and tail seem to go in different directions. But the colt learns, as I think we have.
The key to marketing share investments, or any other form of member equity, is to define the value you are offering. Tell people honestly what they'll get, in improvements to the store, the staff, and their spirit. A Co-op T shirt may have a nice design. But people will only put up $100 for it if they have a bursting pride in what it represents. A gift certificate is nice too, but nobody is going to put up money now unless they expect they'll want to buy the products offered.
Key to our success, I think, has been the turnaround in our sales and margins from 1987 to 1992. Double-digit growth in sales compounded year after year, and strong margins to go with it, provide a lovely cushion for soliciting investments.
Strong sales allow us to say, "you already love us," to members and prospects, and they agree. How much simpler, then, for them to agree with the rest of our pitch. We've often followed with a variation on "make a good thing better": better, we've told them, because your investments will help buy new equipment, train our staff, buy the building, or remodel to expand our selling space.
Strong margins mean there is some money in the organization. We've rarely been lavish in our spending to attract investment, but we can offer small incentives. Equally important, we can avoid the pinched, "we're-in-a-crisis" look that seemed to accompany some of our early drives.
Success breeds success in fundraising, and raising equity is no exception. That doesn't mean share drives are only for co-ops with awe-inspiring balance sheets. Your success could be how well you've been able to articulate a vision of a better alternative, how attractive your remodel will make your store, or how well you're serving your members and community. Celebrate your successes, because it will make you look good, and it's a lot more fun than worrying.
Don't be afraid, though, to mourn your losses. If something hurts, talk about it, and use the discussion to review, diagnose and (with luck) heal. Capital raising involves real people with real needs. You should try to highlight the joy of filling those needs, but don't be afraid to be honest about serious problems or agonizing reappraisals.
Make sure that when you commit to raising capital, everyone buys in. The operational staff have to support a capital drive, and not just morally. When a shopper asks a question about your drive, it shouldn't matter (much) if your staffer is in an aisle stocking bins -- the staffer should be able to answer the most basic questions and direct the shopper to where "all the answers" are. If our staff smiles, gets a share form in the shopper's hand, and thanks them for investing, I believe we've created a very positive impression.
It is important to stay humble, for a variety of reasons. If you give your members an over-optimistic view of your capital needs, they're going to give you far less credibility when you come back to them with subsequent needs. If you've told them we're in a tunnel (with reasonable optimism about its length), they'll believe you more when you talk about the light you see at the end.
Stay humble when you talk to members about equity, because you're speaking about shares they own! Increasing professionalization of your co-op is nothing to hide, but it can be communicated. Just remember what you're building on and whose money you're building with. There's no need to make a cult of your founders, but volunteers (whether as workers or investors) deserve openhanded acknowledgment.
Speaking of volunteers, don't be afraid to use them creatively in your marketing. Someone who has already invested is in an excellent position to turn around and ask others to follow them. They may not be as articulate as you, but they clearly believe whatever argument convinced them to invest. Many members of our board sat at a table in our lobby during our "Buy the Building" drive, and I think it was an important element in our success.
My last thought is make 'em laugh. That may not work for you or your co-op, and we haven't tried it every time. But to celebrate, involve everyone, and keep hubris at bay, it helps to have some humor in your materials and approach. Jokes shouldn't deprecate harshly, but there's nothing wrong with poking some gentle fun at yourself. Perhaps the leaks in the roof stem from splashing in the staff hot tub? I'm sure that dignity and sober reflection bring investments from many, but laughter is a pretty potent solvent. I like to think it adds a little to what we have accomplished here in Davis.