Remember the Member

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There is a revolution going on among food cooperatives in the U.S. The root of the revolution is that many food co-ops are now fully engaged in the capital business. Our success as retailers has brought on an era of major remodels, relocations of existing stores, and an increase in the number of co-ops adding new branches. Without a doubt, food co-ops in the U.S. are on the move in epic proportions, and that requires money and plenty of it.

The question is, whose money? It is time for co-ops to access the biggest tool for expansion of our co-ops and the co-op movement, the capital our members have. Millions of dollars of capital sitting in our member’s pockets are going unused! Start thinking about ways you can get your members to invest more in your co-op. Your co-op needs to plan how to ask for and successfully obtain member capital.

The National Cooperative Grocers Association reports that at least 50 percent of food co-ops in the U.S. are undergoing some form of expansion. The capital needed for buildings, equipment, and inventory is far beyond these co-ops’ ability to finance growth through retained earnings. To finance this immense natural growth, food co-ops need to look at acquiring substantially higher levels of capital.

Capital is destined to be much more of a factor in our future than it ever was in our past. However, money from those with outside interests (banks) does not come cheaply or without tight strings. The higher cost of bank interest ends up increasing our shelf prices.

During this difficult era in the economy and tighter lending practices, member capital gives cooperatives a lead over our competitors.

Capital for cooperatives
To understand the need for capital in the natural foods industry, look at what happened to Whole Foods this fall. Whole Foods sold 17 percent of the company to Leonard Green & Partners in return for a capital infusion of $425 million. John Mackey, Whole Foods’ chief executive, said the investment from Leonard Green & Partners would help the company “manage through these difficult economic times while continuing to invest prudently in our long-term growth.”

Whole Foods will now pay 8 percent per year on investment, in addition to allowing the investor to gain a 40-percent return on the stock price. This gives us a clear idea of how much our major competitor is willing to pay for equity capital.

When it comes to equity, Whole Foods does not have what co-ops have: member capital! However, this potential access to capital is presently underutilized and not well understood.

My own co-op, the Davis Food Co-op, ignored suggestions to take full advantage of member capital for a major remodel. Instead, the DFC ended up borrowing only debt capital from a foreign-owned bank. The contested member vote on the almost $4 million bank loan passed by only 98 votes. However, as a result of the issues raised, the DFC is now pursuing a program of raising member capital.

Co-ops need to understand they are now permanently in the capital business. Some cooperatives are leading the way in creating more sophisticated ways of raising capital from their members. Here’s how three food co-ops have successfully structured the cooperative to obtain member capital in both shares and loans:

North Coast Cooperatives (NCC), two stores in California, projecting $26 million sales in 2009. Members are required to have a $25 Class A voting share and up to $300 in Class B shares ($10 per share). Members having the full amount of Class B shares are allowed to invest in any dollar amount of Class C Shares. C Shares currently earn 3.5 percent interest (slightly higher than a bank and set quarterly) and can be withdrawn with a month’s notice. In 2006 NCC members had $165,225 in Class A, $704,632 in Class B and $1.7 million in Class C shares. In addition, members have loaned $555,500 to NCC. They receive 6-7 percent interest on the loans. Capital of $3.1 million comes from co-op members.

Weaver Street Market, three stores in North Carolina, projecting $28 million sales in 2009. Weaver Street is a hybrid model of both worker and consumer members. Membership capital required is based upon household size ($75 one adult, $135 two adults and $175 three or four adults). Weaver Street’s recent issue of member loans helped to finance their third store in Hillsborough. During 2008 worker-owner equity reached $374,151, consumer equity reached $1,143,241 and loans from members $1,324,750. Capital of $2.8 million dollars comes from co-op members.

Seward Co-op, a single store relocating in Minneapolis, Minnesota, projecting $20 million sales in 2009. To become a member one must invest $75 in shares. Seward offered member loans and $500 Class C shares as part of its $10.5 million capital drive to finance its new store. The majority of member capital was in loans totaling $1.2 million. Depending on size and terms, these loans paid rates ranging from 5 percent to 8 percent. The co-op also raised $300,000 in Class C shares. The intent is that the co-op will declare a 5 percent dividend. To finance the relocated store, capital of $1.5 million has come from co-op members.

The key lesson from each of these three stories is to remember the member! The members of our food cooperatives have all the funds we need to fund our local co-ops, along with our cooperative development funds and co-op partners.

Capital cooperation among cooperatives
To fund its growth, Organic Valley created Class E shares as a method for supporters to invest in the cooperative (www.organicvalley.coop/our-story/invest/stock-prospectus: www.organicvalley.coop/our-story/invest/stock-prospectus ). As of the end of 2008, Organic Valley has obtained $21.7 million in Class E shares, which are equity investments from supporters. The goal for 2008 had been $4 million raised in Class E, yet ­Organic Valley received $9 million. The 2009 goal is the same: $4 million.

Almost 1,400 investors (93 percent individuals and 7 percent entities) have invested an average of $15,800 in Class E shares. Food co-ops and members of food co-ops are a significant group, making up about 35 percent of the investors. Twin Pines Cooperative Foundation is the largest investor in Class E Shares, and we are extremely pleased with the partnership we have built with Organic Valley under the leadership of Jerry McGeorge, director of cooperative affairs. Since 2003, TPCF has invested $300,000 and promotes Organic Valley in the food co-op community. In return Organic Valley has contributed $40,000 in matching funds and support dollars for Twin Pine’s Cooperative Community Fund program.

In 2004, Twin Pines suggested to Diane Gloede, Organic Valley’s investment relations manager, that Organic Valley advertise Class E shares in food co-op newspapers. Class E investments from three cities show that food co-op members responded strongly by investing in Class E shares; Minneapolis/St Paul ($262,000), Milwaukee ($134,000) and Davis ($273,000). Diane said, “Advertising in food co-op newspapers/newsletters has been both effective and relatively inexpensive. It is a great way to target our core consumers.”

Equal Exchange (www.equalexchange.coop/investing www.equalexchange.coop/investing ) has $5.2 million in external investments (mainly shares), which include an innovative CD program offered through Wainwright Bank in Boston. Equal Exchange cannot market the shares publicly due to securities laws restrictions on soliciting investments, and is also limited to only 500 members of the share class available to outside investors. Many investors appear to be food co-op members, but there is no tracking on that basis. About one-third of Equal Exchange investment supporters come through socially responsible brokers. To learn about the Wainwright Bank CD program, visit, www.wainwrightbank.com/html/nonprofit/ savings/equalexchangecd.html.

Four years ago, Equal Exchange had a min­imum share investment of $1,000-allowing the fund to collect $1,000 from 500 investors to obtain $500,000. As their capital needs grew, Equal Exchange needed to change the minimum share amount to $10,000-since the 500 shareholder limit cannot be changed. The maximum obtainable is now $5 million dollars.

Alistair Williamson, Equal Exchange investment coordinator, said, “About 35 percent of our capital comes from Massachusetts, 20 percent from California. The rest is from all across the country, not to mention many coffee co-ops in Mexico, Nicaragua, and Costa Rica. Long term, we’ll need a new capital model, due to the restriction on the number of shareholders we can have.”

Members of food co-ops are strong supporters of Equal Exchange, buying its products and supporting its projects to help coffee farmers. Many food co-op members who go on Equal Exchange coffee tours end up being investors. Since 2005, Twin Pines/Cooperative Community Funds has invested $200,000 in Equal Exchange. In return, Equal Exchange has contributed $25,000 in matching funds and support dollars for the Cooperative Community Fund program.

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David Thompson is president of Twin Pines Cooperative Foundation, which sponsors twenty-five Cooperative Community Funds (www.community.coop).