Capital: Sources and Abuses

david gutnecht

Discussions here reflect much that has been learned about cooperative capital as well as lessons still to be absorbed by some food co-ops. Gone, for the most part, are formerly common practices in which food co-ops asked for a small investment or fee from co-op members, while offering purchase discounts that yielded financial benefits greatly outweighing the member’s investment. Here are best practices around owner equity, summarized several years ago by Bill Gessner:

"Many food co-ops are increasing the member share requirement and/or moving towards annual equity infusions (with a higher cap or no cap), including the retained portion of patronage dividends.

"Additional nuggets of wisdom that have emerged over the past 35 years include:

  • Member capital should come in the form of equity investments, not dues or fees. (Dues and fees are taxable income and don’t stay in the member’s name.)
  • Don’t use the term life-time membership. (Members may vote to increase the equity share requirement at some point.)
  • Develop ways to raise additional equity from current members—through retained patronage rebates or an annual equity investment requirement.
  • Co-ops should base their member equity requirements on an examination of the co-op’s long-term equity needs, not what they think they can successfully ask of their members.
  • There should be an approximate balance between a co-op’s member equity (symbolizing the cooperative) and retained earnings (symbolizing the business), roughly within a 1:2 or 2:1 relationship.
  • Members should provide at least 50 percent of sales (a symbolic measure but indicating a truly consumer-owned cooperative).
  • Find new ways to continuously educate members and potential members on the benefits and responsibilities of member ownership of consumer food co-ops."

These lessons have been embraced by many co-ops. However, examples remain where the owner investment reflects neither the growth of the co-op business nor the impact of inflation on the needs of the business. Net earnings alone usually will be inadequate to capitalize a growing business—years of operating in the black can still leave a co-op unable to meet the challenges and opportunities of a business relocation or acquisition. What is more, a $100 investment established 20–30 years ago is equivalent in purchasing power to perhaps half that amount today. Inflation undermines household buying power, but it also undermines cooperatives whose investment requirements don’t change.

Among the best examples of improved practice in building member capital among food co-ops are member investment or loan drives. These campaigns supplement the capital generated by the requirements of membership. The latter shared capital contributions are a foundation of cooperatives, but collectively they may be inadequate to the needs of the business. Member loans and investments in preferred shares often are critical in leveraging the benefits of cooperative capital.

To many readers, these lessons will seem familiar, and that is a sign of the maturing of our co-op business sector. But I am less certain about the degree of recognition of such fundamentals in some of the new enterprises that food co-ops and other local food activists are discussing. Specifically, there is enthusiasm for a range of ventures in distribution, value-added production, and local economy projects such as food hubs. 

These ideas are about urgent needs and real business issues. However, while some food co-ops demonstrated in earlier years that gaps in services and potential new enterprise could be addressed with minimal capital and minimal economies of scale, such examples are no longer compelling. Food distribution and value-added production are very different animals than retailing and direct marketing. Additionally, grants and subsidies that make a co-op launching possible are not likely to be ongoing elements of a sustainable business.

New food ventures need plans that include growth in revenues at a margin and volume that cover operations and can be sustained in the marketplace, along with capitalization that will allow such growth. Multiple stakeholders also bring multiple demands in balancing capital needs and member services. Basic precautions—yet too often passionate conviction and strong needs overshadow sound planning. 

See other articles from this issue: 165 April 2013