Borrowing member capital ideas from US food co-ops

The 1854 Almanac of the Rochdale Pioneers asks: “How many stores have languished for years, flabby in pocket and lean in limb because its shabby minded members starved...

The 1854 Almanac of the Rochdale Pioneers asks: “How many stores have languished for years, flabby in pocket and lean in limb because its shabby minded members starved it by hardly subscribing one pound each?”

This is still a crucial question. Who your co-op gets most of its capital from dictates who it belongs to – and growing a co-operative businesses requires a lot of capital. So where do co-ops get their capital – their members, or the banks? Too little equity capital from members means too much debt from the bank.

That’s where the Co-operative Group is today. In early 2014 it owed £1.4bn and was paying £100m in annual interest – giving the banks a veto over its structure and strategy. The consortium of lenders clearly exercised those powers in their successful efforts to remove majority board control from the members.

With those changes made, and pharmacies, farms and Sunwin sold off, the overall debt has been lowered. But with member capital at

£1 per member, the Group will remain a vastly over-borrowed organisation under the control of its lenders.

In his plan to “revive” the Group, chief executive Richard Pennycook has repaired the balance sheet. That’s an important start – but a key tenet of any “revival” must also be the return to building member capital. This would strengthen the balance sheet, build equity and lower borrowing costs – and is, perhaps, a way back to increased member say in the organisation.

So allow me to share with you how a group of hippies and anti-war activists addressed the need for capital to fund a new wave of food co-ops in California. They had to do it with their own money because no one else would lend to them. They are small, and young, compared to the Group – but when it comes to their capital platform, they have built strongly for the future.

Let’s look at where the ten largest California co-ops are today.

At the end of 2013, the ten largest consumer food co-ops in California had $163 million in sales. Individually in volume they range from $2 million to $31 million in annual sales.

Relative to the Co-operative Group, the composite numbers are of interest.

Capital Categories for the Top Ten Largest California Food Co-ops (financial figures in US dollars):

Members: 86,000 (mainly families or households)
Annual Sales: 163 million
Shares: 16.46 million
Preferred Shares: 4.33 million
Retained Member Patronage (Dividends): 775,000
Member Loans: 207,000
Retained Earnings: 9.37 million
Member’s Capital in our Co-ops: 31.51 million
Long term bank debt: 5.8 million

Member’s capital is over five times more than long-term debt

The 86,000 member households have:

Invested in shares an average of: $242 dollars per member
Hold retained Member Patronage of: $9 dollars per member
Have lent to their own co-ops an average of: $2 dollars per member
Hold retained earnings held by their co-op of: $109 dollars per member
All capital from members: $362 dollars per member
The co-ops owe long-term debt of: $67 dollars per member

So the ten California food co-ops finance their operations using $362 of their member’s capital and borrow only $67 dollars per member from banks.

Having come from England to the US in the 1960s, I knew how the UK co-op sector obtained member capital; my parents worked for the Blackpool Industrial Co-operative Society. The general thrust was that the co-op retained part of the customary annual dividend and added that to the members’ share account. But in postwar Britain,
co-ops were having a hard time making a profit, and mostly stopped paying dividends. Thus, the traditional method of accumulating member equity was no longer working – but no new member capital format was brought in.

Most co-ops turned to long-term debt from external sources, with the co-op’s property as collateral.

The same thing happened to the “old-wave” consumer co-ops in the US. By the 1980s, most were losing money or only marginally profitable. Lacking member equity, the capital needs of US consumer co-ops were met by an increase in debt.

When most of the new wave of co-ops started, they began with a $10 lifetime membership. That worked when they were all-volunteer buying clubs, with little to no inventory. But as they grew, moved to stores and hired staff, they had to rethink; with no banks willing to lend, they borrowed from members – eventually building a healthy framework based on member capital.

How are Food Co-ops in California Capitalised?

Not every co-op is the same, but here are the capital features food co-ops use most. Most co-ops allow for either some or all of the following categories of capital.

1. A Shares or Voting Shares (This group of shares assigns one vote per member)

An investment of $10-$25 is required on joining the Co-op.

Food co-ops using only one class of shares usually require a member to invest another $10 to $25 each year until the member has an investment of up to $300. That is the maximum amount that a co-op can obtain from its members in California without being required to get a permit from the Department of Corporations. When the Davis Food Co-op began its program, it gave members who invested their $300 up front a $10 dollar store credit coupon in December.

2. Preferred Shares Known Also as B, C & D Shares

Food co-ops issue these additional classes of shares to provide different powers to the members who hold these shares. A holder of Preferred Shares will be paid out ahead of A Shares in the case of failure of the co-op.

However, the main reason that food co-ops issue Preferred Shares is to obtain equity from the members upon which there might be payment of an annual rate of nominal interest.  Each class of Preferred Shares will spell out the interest earned and the amount required.

For example, the Sacramento Natural Foods Co-op (SNFC) presently intends to move to another nearby location to accommodate its fast growth. In an effort to lower the outside borrowing of the capital that will be needed, SNFC made available three classes of Preferred Shares to all members who had already acquired $300 in A shares. In the case of SNFC, A shares in the Co-op do not earn any interest rate. SNFC has therefore over $2.1 million dollars of interest-free capital obtained from its members. SNFC sold out $1.5 million in B, C and D shares in about 90 days. The C share investment of the member cannot be liquidated for at least 4 years but will earn an annual interest rate of 2.5%. The D Share investment of the members cannot be liquidated for five years and will earn an annual interest rate of 3%. This satisfies most bank requirements that Preferred Shares are redeemable only with the board’s approval and the bank’s permission.  There is no secondary market allowed for any share issued by the co-op.

3. Retained Patronage

An amount retained by the co-op from the patronage refund earned by the member. The co-op attributes these funds to the individual member but does not pay it out to the member.  It is on the balance sheet as equity. In the US, there are tax deductions for co-ops using this mechanism.

4. Member Loans

On some occasions, a California food co-op will find it more advantageous to take on member loans to use towards capitalization of a specific project. The State of California allows co-ops to borrow from their members in what is called a “limited offering”. The member loans can be taken from a certain restricted number of members (quite often no more than 31 member investors) who must have a certain personal asset size to qualify to lend to the co-op. However, member loans are written to ensure that any lender’s rights come first.

5. Retained Earnings

All ten of the largest California food co-ops have strong retained earnings — $109 dollars per member.

From the bank/lender’s perspective Capital Categories 1 through 5 are all regarded as member equity and are subordinate to any bank debt. With $362 of member equity and retained earnings ahead of them, the bank/lender is assured of a strong borrower and therefore allows for the co-op to obtain a competitive borrowing rate.

Long Term Borrowing

Five of the ten largest co-ops in California have no long-term debt at all.


As much as the Co-operative Group is looking at governance issues, it needs now to address the issue of member capital. Solving both will return the Co-operative Group to its potential and promise. Each are necessary but neither one alone is sufficient. The Co-op Group would do well to emulate the forwardness of their founding fathers, the Rochdale Pioneers in the starting quote about member capital.

Sometimes, the all-too obvious is forgotten. Let us remember that “the capital co-operatives need is in the pockets of their members”.  With today’s crowd sourcing, a whole new world of member capital is open to the Co-operative Group.  The co-opportunity should not be neglected.

• David Thompson is President of the Twin Pines Cooperative Foundation and has invested $600 in non-interest bearing shares of the two food co-ops he and his family are members of (the Davis Food Co-op and the Sacramento Natural Foods Co-op). He has been writing about the need to plan for member capital for co-operatives since the 1970s. In 2010, he was inducted into the US Cooperative Hall of Fame.

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