why a coop business model?

January 30, 2008 3:09 AM

How does a co-op business model benefit the company? and can any industry use a co-op business model or is it reserved only for smaller/niche markets with passionate buyers?

I am curious as to why a company would choose a co-op model? I have a local mec.ca and they are quite popular among the outdoor/hiking/camping/etc crowd. Their webpage states they are not about making money but to serve its community(members). What is it about co-op that allows them to operate the way they operate now that a non-co-op model can't? tax benefits? more $$ ? or is it really goodwill?

Can say, a computer store use a coop model? a video game store? an aftermarket car parts store?

So far, I have only heard of supermarkets and outdoor camping gear(rei.com, mec.ca) stores use a coop.

comments?

posted by brinks to work & money (11 answers total)

From the International-Cooperative Alliance site:

Co-operatives are enterprises that put people at the centre of their business and not capital. Co-operatives are business enterprises and thus can be defined in terms of three basic interests: ownership, control, and beneficiary. Only in the co-operative enterprise are all three interests vested directly in the hands of the user.

For-profit companies are designed to produce a profit for the owners, but since the owners of a co-op are also the customers, lowered prices and extra services are acceptable instead of profits.

Wikipedia has a list of co-operatives that should give you an idea of the types of businesses that can be co-ops.
posted by burnmp3s at 4:13 AM on January 30, 2008

There's two typical types of co-ops: buyer's co-ops and worker's co-ops. The most common examples of these are probably food co-ops.

With buyer's co-ops, people who shop at a store are members, they pay a fee to be a member which essentially buys them a 'share' of the co-op. The benefits of this type of co-op for the members are usually either (a) lower prices for products (b) specific control of the types of products offered. For example, you might start an internet co-op to bring broadband to a rural area where it otherwise wouldn't be affordable enough for a single person to pay the costs. Buyer's co-ops can take other forms; for example, ACE Hardware is a co-op, but it's an owner's buyer's co-op; all owners of ACE Hardware stores are owners of the co-op, and use it to buy goods collectively.

With worker's co-ops, the workers are the beneficiaries of the co-op structure. Sometimes the workers will have to invest money if they join an established co-op, but more often than not, the workers are the founders of the co-op and are invested in ways that aren't just monetary. The main benefit of this structure is that it enables the workers to set business policy. These co-ops are often collectives at a small level, but may adopt more hierarchical structures as they get bigger.

Basically any form of business can use a co-op model; buyer's co-ops (as with most food co-ops) are pretty easy for the general public to understand and don't require much investment of time or energy. If you want more control or involvement, choosing another type of co-op can allow for this.
posted by beerbajay at 4:26 AM on January 30, 2008

The University of Wisconsin Center for Cooperatives has loads of information.
posted by Floydd at 6:30 AM on January 30, 2008

Credit unions are essentially banks on a co-op model. You may also be interested in mutual insurance companies - although Wikipedia explains that a mutual organization is not a true co-op, there are quite a few similarities.
posted by DevilsAdvocate at 6:39 AM on January 30, 2008

Coops don't always deliver lower prices, though. In some cases they do, and in some cases they don't. It depends on the specifics of the industry.

In many cases, coops don't exist because they can't compete effectively with for-profit companies.
posted by Pants! at 7:56 AM on January 30, 2008

IANAL, but I dealt with this a bit in forming a non-profit company in the U.S. Basically, the qualifications for certain tax-exempt statuses (e.g. 501(c)3) are geared toward organizations that you are a member of rather than ones that simply sell a good or service. It's extremely difficult to set up a non-profit store that works just like a for-profit store, only without the profits.
posted by mkultra at 8:19 AM on January 30, 2008

There are also a lot of agricultural producer co-ops that handle things like packaging, advertising and distribution. Ocean Spray is one example. Many/regional dairys are co-op as well. Ethanol plants too.

I don't know what ever came of it, but a decade ago there was a lot of flap about the governance of REI, as a co-op it didn't have to have the same transparency as a public corporation.
posted by Good Brain at 8:44 AM on January 30, 2008

I'm a co-operative developer in Ontario, Canada.

There are lots of different types of types of businesses where they would work as a co-operative. In its most general definition, a co-operative is a member-owned business. The members do some sort of business with the co-operative and receive some benefit (there is a financial benefit but often there is other value associated with the model) to being a member. If you can articulate this in a meaningful way, you can usually build a co-operative model around it. In Ontario and Canada, it's always one member, one vote, regardless of the amount of investment in the business, so it's inherently equitable. This is a philosophical distinction of the co-op model, but there are some jurisdictions where the principle is applied differently, I believe.

Co-ops are defined by who the membership is and the value that it provides to being a member. So, when MEC says that they are not about money, it means that they are not solely maximizing return on investment (which is the case with business corporations). They share this value with all co-ops in that the primary motivation of a co-operative business is value to members. However, that being said, a co-op has to have a sustainable business model to survive as any other successful business or organization does - so there is a financial benefit aspect to the business operations that can't be ignored and in many cases is a key part of the value that members get out of co-op. Sometimes that's a cost savings thing instead of a strict return on investment thing.

Co-ops can be small or large - they aren't just for niche markets, although they work extremely well in situations where there is a strong local/regional component to the work. Gay Lea, a dairy co-op here in Ontario, has about 25% or 26% of all the dairy farmers in Ontario as members. The Co-operators is a co-operative insurance company that is enormous in scope and one of the larger insurers in Canada, if not the biggest. Their website outlines how and why they use the co-op approach.

Depending on your jurisdiction, there are different tax benefits for co-op shares, etc, than private company shares. There may also be incentives to using the co-op model in some jurisdictions depending on government support - as there is in Quebec related to the support of co-operative health and home care operations and not-for-profit organizations, which for-profit facilities cannot take part in.

Because of the "it's value, not cost" mentality, co-ops are often able to operate in communities where private businesses cannot or will not - i.e. a co-op grocery store will stay operating in a community because the local members need the service and profit margin is not as important as it may otherwise be with a private business with a mandate to maximize return on investment. Different measure of success. Same with some northern or remote communities here in Ontario where the big 5 banks will not open a branch, so a credit union is the only financial service available to members and has been for decades.

However, a co-operative model is not always appropriate by any means. It IS surprisingly flexible and can often be a good option to explore. Especially when you consider that because of the 'one member, one vote' principle that all co-ops share, it is very difficult for a co-op to be taken over without consent and a private business can't own a co-op, however a co-operative can own a private business. This provides a number of options that blend the benefits of both co-ops and traditional private business in a way that can provide strong value to members.
posted by Cyrie at 12:17 PM on January 30, 2008

I can't speak to the reasons but just as a data point, be aware that KPMG is a Swiss cooperative, where each national practice is a member. So sometimes coops can be huge multinationals.
posted by TheNewWazoo at 12:19 PM on January 30, 2008

In BC, there are a lot of co-ops with a lot of different purposes. You might want to check out the BC Cooperative Association website. They have quite a few good resources there and some newsletter you can browse through to get an idea of what sort of co-ops are out there. I'm sure you're familiar with credit unions, as DevilsAdvocate mentioned, since you are in BC (VanCity is the biggest one in Vancouver, I think). There are co-op grocery stores, hardware stores, garden stores, gas stations, etc. I'm involved in the start up of a truck sharing co-op right now and there are lot of other energy/transport co-ops (green energy, biodiesel, etc.) MEC is an excellent example of a co-op that works really well and they have some good information about how co-ops work on their site (check out the FAQ for information on taxes that you asked about).

Your questions:

How does a co-op business model benefit the company?

There is no company to benefit, just a cooperative. The co-op model is designed to benefit the members of the cooperative. In the same way, the publicly-traded corporation model isn't designed to benefit the company; it is designed to benefit the shareholders (though this can be argued).

and can any industry use a co-op business model or is it reserved only for smaller/niche markets with passionate buyers?

In theory, any industry can use a co-operative model. For example, banking isn't a niche market, but BC credit unions do well in it. Co-operatives can have a harder time raising capital, so they aren't as common in industries that require a lot of capital, but there is nothing legal preventing this.

I am curious as to why a company would choose a co-op model?

Companies don't choose a co-op model: generally, a bunch of people get together and form a co-operative. They do so because they think the co-op would benefit them (or the world in general). Some businesses have become co-ops after first being under other corporate structures, but that is less common.

What is it about co-op that allows them [MEC] to operate the way they operate now that a non-co-op model can't? tax benefits? more $$ ? or is it really goodwill?

Well, the big difference is that MEC isn't trying to make a profit. So, all other things being equal, MEC will be able to sell the same products cheaper than a for-profit corporation that will need to actually make a profit. Taxes don't really have much to do with it, since any for-profit corporation could be subject to the same taxation if they didn't make a profit. There are a lot of other reasons why MEC is such a success that aren't directly related to their corporate structure (e.g. ethical and environmental sourcing, excellent warranty service, knowledgeable staff, MEC-brand products, etc.) MEC also has an incredible amount of goodwill that they have built up over the past 35+ years and people know that MEC can't be sold to another corporation that will treat their customers poorly (and since the board is elected by the members, they have a say in how MEC is run).

Can say, a computer store use a coop model? a video game store? an aftermarket car parts store?

Yes.
posted by ssg at 12:21 PM on January 30, 2008

Here's an example of an co-op gone wrong: Pedernales Electric Coop. FYI, Pedernales is the largest electric coop in the country. PEC4U has more info.
posted by Pants! at 4:42 PM on January 30, 2008