Capitalization projects at food co-ops often typically begin with one of two major scenarios: start-up or a relocation/expansion project. However, as co-ops look to best practices for all areas of co-op operations during economic challenges, an increasing number of co-ops find compelling motivation for evaluating ownership and investment systems.
If growth in sales or memberships is stagnant, or the co-op’s equity structure and perceived value in the community isn’t current with present times, it may be time to deal with ingrained systems that no longer contribute to high performance. Some restructuring may be needed in the organization.
Co-ops have a unique opportunity in their business to convert shoppers into owners. Highlighting the advantages of the co-op business structure and telling that story is something that needs to be prioritized and continually renewed. The challenge is to look at existing infrastructure (or lack) and the capacity you want to build on. Member equity, patronage dividends, member loans, and preferred shares are economic methods for building the co-op into a stronger force in its community.
“It’s a new way of looking at ourselves,” said Tami Bauers, consultant with CDS Consulting Co-op. “Our co-ops can affect our communities and the daily life of people.” It might sound counterintuitive, Bauers said, but even in this economy where more people are facing hard times, there is a large group of people still seeking investment opportunities that are sound and responsible.
What holds some cooperatives back, Bauers said, is that it can be confusing for people unfamiliar with cooperation to understand its capitalization needs and what they and the co-op stands to gain. It does require an educational effort and sometimes some research, but it is part and parcel of the co-op’s mission and principles to do so. Its payback is multiplied when you consider not only the monetary support, but what it means to the community when the co-op is thriving.
For startups this is a critical part of their ownership development process, and one that has far-reaching affects. As a co-op evaluates its capitalization structures, there are two main things to consider: what is the fair equity requirement for being an owner of the co-op, and how much capital does the co-op need to receive in member loans and preferred shares. “For startups the challenge is to finance a project from an idea,” Bauers said, “This means really explaining shared ownership to the community and encouraging people to take the risk of investing.”
As some established co-ops are learning, they may need to revisit some of their decisions from the past—especially if member equity requirements are too low and discounts or benefits are proportionally too high. “What I’m finding is there’s a lot of reluctance to make changes to ownership requirements,” Bauers said. “Some co-ops have never adjusted for what it takes to be an owner since they’ve opened.”
She admits it is challenging and fear-inducing to ask members to increase their stake in the business, but that’s part of the problem. A lot of co-op members have been conditioned to believe that the co-op is all about benefits and discounts, and the co-op ownership message about common good and co-op principles gets lost. Fast forward to a time when the co-op needs owner investment for something, like an expansion, and support from members has to be recovered, rather than built upon. “It makes it more challenging for a co-op,” Bauers said, “When it has not promoted the values of cooperation and ownership all along.”
Addressing and making such changes can be very positive. Bauers said, “For example, if someone came to you and said, ‘It’s been 20 years since we did X and now we have a more mature co-op with different needs, and if we did something different to give you something you value, how would you feel about it?’ most people are open to it.” She also said that while this may be a tough economic environment, it’s the best “message” environment. “We’re not going away, and we are doing this for them—the member owners and the community. That is our strength,” she said.
Bauers believes dealing with equity and capitalization issues is a great opportunity for communicating with the membership about the co-op’s plans, especially for boards seeking a stronger link with members. “It’s a reminder to members of their ownership in the co-op.”
At Mississippi Market in St. Paul, Minn., the co-op recently opened a new store in one of the city’s oldest neighborhoods. Although the co-op has been operating in St. Paul for 30 years, their newly built West 7th location put co-op capitalization issues especially at the forefront because of their plans to enter a market and neighborhood with a variety of incomes and cultural groups.
“Our board has been adamant about education and access for everyone,” said Darci Gauthier, Mississippi Market’s marketing and member services manager. “We get a bad rap in the natural food industry about being too expensive.” However, she believes that by applying the co-op principles to their community outreach efforts, that economic stigma is reduced when people learn what the co-op is really about.
“We spent most of our time getting the word out to the neighborhood, emphasizing co-op and inviting people in,” Gauthier said. This was a serious boots on the ground effort, as she and her staff literally walked the streets talking to people and introducing themselves.
It’s paid off. With assistance from Bauers, they were able to raise over $350,000 in member loans for the project. The first week the co-op was open in July, 160 people joined at a $90 stock investment. “It’s been really great. People are so excited,” Gauthier said.
Bauers thinks that co-ops that continually assess their capital needs and reach out to their owners and community, like Mississippi Market, will enjoy similar success. “Everyone needs the opportunity to see that equity can do so much for a co-op. It can be easier than you think to reach your goals.”