How co-ops—businesses in which the employees are also the owners of the company—merge economic growth with social goals.
Steven van Yoder | October 2010 issue
In Quezon City, a new approach to funding funerals is just one way the Inner City Development Cooperative is bringing fresh life to this impoverished neighborhood of Manila, the capital of the Philippines.
The Inner City Development Cooperative (ICDC) offers microcredit loans, training in business skills and financial literacy, health care support, emergency programs and other services to urban squatter communities like the one in Quezon City. ICDC’s membership is comprised of more than 3,000 “urban settlers” who live in scavenged metal shacks with dirt floors built with materials gathered from nearby garbage dumps.
Eufrecina De Jesus, ICDC’s founder and director, says the cooperative model—in which the employees are also the owners of a company—is the only solution for combining the power of business with the social goal of solidarity. And ICDC’s low-cost memorial service is one way the co-op has been making a big difference.
“Funerals are an important part of our culture, yet are very expensive for the urban poor,” says De Jesus. Before the ICDC program, “many members turned to loan sharks and went deeply in debt burying loved ones. Now, as members of a co-op, they can purchase funerals that cost dramatically less than other options.”
But ICDC services don’t stop there. The co-op is expanding its activities through strategic partnerships, including an alliance with the Global Initiative to Advance Entrepreneurship (GIVE) to establish a cooperative that will provide business mentoring, socially responsible outsourcing and affordable childcare to single-parent entrepreneurs. (Full disclosure: The author is the founder of GIVE.)
The economic meltdown and subsequent global recession have exposed crucial flaws in the way the economy operates, foremost among them the realization that economic growth alone isn’t enough; to be sustainable, growth must be harnessed to social goals. Co-ops have been tying the two together since the late 18th century, when the ventures started appearing as a way for city dwellers to secure affordable food during the Industrial Revolution.
Given the economic predicament, co-op advocates believe it’s once again time for the model to shine. “If you take a look at the cooperatives when they’ve really excelled, and when people have been drawn to cooperatives, it’s when there’s economic or social upheaval,” notes Paul Hazen, president and CEO of the National Cooperative Business Association (NCBA). Increasingly, co-ops are stepping in to address current economic and social upheaval, especially in sectors in which the market and governments are unable to meet human needs.
In the U.S., Benjamin Franklin established one of the earliest co-ops, in 1752. It survives to this day as The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, the oldest fire insurance company and cooperative in the nation. Co-ops grew through the Great Depression and the New Deal, most notably in delivering electricity to rural areas.
Since the late 1960s, a wave of cooperatives have emerged as communities joined together to create businesses that stocked natural foods. But contrary to widespread belief, co-ops are not mere vestiges of the counterculture. They range in size and scope from small local storefront businesses to large Fortune 500 companies serving more than 750 million people worldwide.
In many countries, cooperatives are nationally respected brands, including the Danish butter Lurpak; Champagne Nicolas Feuillatte and the Crédit Agricole bank in France; Edeka, the largest supermarket corporation in Germany; the Dutch dairy producer and distributor Campina; and Jarlsberg Cheese in Norway. In the U.S., Land O’Lakes, Sunkist, Ocean Spray and Ace Hardware are all co-ops.
Until recently, quantifying the scope of the global cooperative sector has been difficult. But a 2009 study by the University of Wisconsin Center for Cooperatives presents a vivid snapshot of the economic impact of U.S. cooperatives: Together, 29,000 co-ops hold $3 trillion in assets, generate $500 billion in annual revenues and employ 856,000 people.
Another study, this one by the International Co-operative Alliance (ICA), showed that co-ops generated worldwide revenues of $1.1 trillion in 2008, a figure growing at 14 percent annually. Countries with the most co-operatives on the list include France, the U.S., Japan, Germany and the Netherlands. ICA’s European region, which covers 37 countries, counts 161,000 cooperatives with a collective membership of 123 million in the industrial services, agriculture, housing, banking and finance, consumer and pharmacy sectors.
This kind of research “responds to those who underestimate the significance of cooperatives,” says Maria Elena Chávez Hertig, deputy director-general of the ICA. “Because cooperatives are member-owned, they are generally not subject to stock market listings. Teams of analysts are not employed to study their performance, and the financial press often omits their results. As a consequence, there has been a tendency to marginalize the role of the sector.”
But that role is significant—and growing. Perhaps the best-known co-op in the world is Spain’s Mondragon Corporation, a federation of worker cooperatives involved in a wide range of industrial areas, employing more than 85,000 people in 256 companies. Since its founding in 1956, Mondragon has embraced a humanistic business model, following a democratic “one person, one vote” management style. In 2009, Mondragon made headlines when it entered into an agreement with the United Steelworkers to develop unionized worker cooperatives in the U.S.
Every co-op is different, but one area of common ground is a flexible business structure that’s highly adaptable to changing economic conditions, which gives workers choices in meeting challenges and guiding the co-op in a direction that best suits members’ interests. Equal Exchange is a U.S.-based co-op that began importing Nicaraguan coffee in 1986. What began as a means to help thousands of coffee farmers mitigate falling prices has grown into the oldest and biggest fair trade company in the U.S., distributing organic coffee, tea, sugar, cocoa and chocolate bars produced by farmer co-ops in Latin America, Africa and Asia.
By uniting farmers under fair trade, Equal Exchange helps cooperative partners command higher prices and provides better income for both individual members, thereby boosting cooperative organizational development strategies. Profits are invested in member-owned processing plants, educational programs for members’ children and income diversification programs that expand local economies.
“We try to fix what’s broken with the free market,” says Equal Exchange spokesperson Rodney North. “We also focus on cooperative education because, unfortunately, the general public has a limited understanding of the role cooperatives play in creating a just, sustainable economy. Core to our mission is promoting the cooperative business model as something people can get excited about.”
Cooperatives exist to serve people’s needs, not solely to maximize profits for shareholders. The cooperative ethos is embodied in the Seven Cooperative Principles, a basic road map for co-ops established in England in 1844 by the Rochdale Society of Equitable Pioneers. These principals are still widely embraced as the basis for most cooperative businesses today: voluntary and open membership; democratic member control; member economic participation; autonomy and independence; education, training and information; sharing among cooperatives; and concern for community.
Credit unions, known as savings and credit cooperatives outside the U.S. and Canada, have practiced these principles since their inception. Credit unions channel profits back to members in the form of lower fees, better interest rates and higher dividends, and deliver higher levels of customer service by putting members’ best interests first. According to the American Banker/Gallup poll, credit unions have consistently ranked high among consumers for service and customer satisfaction every year since 1983.
In Raleigh, North Carolina, new homeowners John and Jennifer Hall chose the North Carolina State Employees’ Credit Union because, aside from offering lower fees and closing costs, it did something the others didn’t. A credit union employee sat down with the Halls to explain the pros and cons of their mortgage options. Because credit union employees don’t receive commissions for the products they sell, there was no pressure, enabling the couple to see the credit union as a trusted advisor. “Being a member [of a co-op] can make a tremendous difference in your financial life,” says John.
This approach has helped credit unions absorb fewer losses while winning market share from traditional banks during the recent economic downturn. According to a report by Credit Union National Association, U.S. credit unions grew 1.4 percent in 2009 and 1.6 percent the year before. Savings rose by 10.3 percent in 2009, while loans increased by 1.2 percent. The World Council on Credit Unions reports that credit unions worldwide have seen notable growth in assets, membership, savings and other indicators.
When co-ops lead with cooperative values, consumers increasingly reward them. Cabot Creamery, for example, was formed in 1919 as a producer cooperative to help Vermont farmers turn excess milk into butter and market it throughout New England. Since then, Cabot has become a national brand and enjoyed steady sales during the downturn by combining its award-winning cheddar cheese with a demonstrated commitment to Vermont farmers.
In Switzerland, the Migros co-op is the biggest supermarket chain and largest employer. Due in part to its ongoing commitment to social responsibility, it was recently designated the country’s No. 1 brand for the first time, according to Young & Rubicam’s Brand Asset Valuator. Through a series of foundations, the Migros Group donates a yearly “culture percentage” of revenues to causes including the Migros Club Schools, Switzerland’s biggest training and post-secondary learning institution.
Co-ops are making a difference in the developing world, too. According to a report by the U.K.’s Department for International Development, cooperative sectors contribute significantly to the gross domestic product of many developing countries, including Vietnam (9 percent) and Kenya (45 percent). Cooperatives are central to delivering public utilities in many countries, such as Bolivia, where Cooperativa de Servicios Públicos, a water supply and sanitation cooperative, provides water to more than two-thirds of the 1.25 million inhabitants of La Paz, Bolivia’s largest city. The UN has estimated that the livelihood of half the world’s population is secured by cooperative enterprise, suggesting how co-ops could be part of the solution to global poverty and economic development.
In 2008, the World Bank’s World Development Report underscored the important role of co-ops in supporting economic development and the contribution cooperatives make in areas including industrialized country agriculture, biofuel initiatives in Brazil, small farmer marketing co-ops in China and producer cooperatives in East Africa.
“Financial cooperatives and their networks are re-emerging as promising institutions in rural finance in many countries,” the report stated. “Locally based, their transaction costs are typically lower than those of other financial institutions. But because they are members of a larger network, they can offer the variety and volume of financial services that rural customers require, and they can pool risks as well as costs.”
Co-ops often count profit-driven companies among their most avid members. Purchasing cooperatives help small local businesses organize to compete against larger competitors and save money in energy, software, health care and key equipment and supplies, among other items.
In 1994, Kelby Frederick of Flooring America, a flooring business in Denton, Texas, joined the purchasing co-op CCA Global Partners to compete against big-box retailers challenging his company’s survival. “Home centers were taking advantage of our fragmented industry and coming after our customers,” says Frederick. “Yet we were too small to get manufacturer rebates like our larger competitors.”
CCA Global Partners connected Frederick to a purchasing network spanning 3,800 locations. By linking independent flooring, mortgage banking and lighting companies together, CCA helped members achieve greater buying clout and bargaining power with manufacturers. Frederick is excited about CCA’s back office support, too, which includes marketing programs. “The co-op was the ultimate choice to bring buying scale to local ownership while honoring their differences and valuing their independence,” says Howard Brodsky, founder of CCA. “It allowed us to leverage our efforts to members’ best interests. By comparison, other business structures didn’t endure.”
Equal Exchange wants to ensure that cooperative business is taught in universities. It recently provided a grant to John Whitman, a professor at Babson College in Massachusetts, to design a cooperative education curriculum to be made freely available via a Creative Commons license. “We’re developing a cooperative model primer that can be adapted and taught in schools of law, medicine, public health, architecture and engineering, reaching the job seekers, entrepreneurs and policy makers of tomorrow,” he says.
Cooperatives are also banking on a UN resolution designating 2012 as the “International Year of Cooperatives” to showcase the benefits of the model. Cooperative organizations, including the NCBA and ICA, are now working with the UN to promote co-ops within government and among youth and members of the global cooperative movement.
Big public campaigns like the International Year of Cooperatives will certainly put co-ops in the spotlight. But it’s the smaller victories and local innovations that change people’s lives for the better, like the ICDC programs in Manila, that will ultimately make the biggest impact.
Steven Van Yoder, founder of the Global Initiative to Advance Entrepreneurship (GIVE), believes it’s once again time for co-ops to shine.