How To Set Up A Direct-Charge Co-op
(Page 2 of 4)
July/August 1970
By R.S. Staples
II-WHY
GENERAL CONDITIONS
In general there are two sets of reasons for the move toward direct-charge co-operatives. One is found in the general conditions faced by consumers in Canada, the other lies in the history of the co-operative movement itself.
It took the women's protest movement of 1966 to demonstrate clearly that many Canadians are seriously concerned about the high cost of things that their families need. The expensive methods used to persuade us all to buy more and the bad taste and questionable morality of much of the advertising to which they are exposed is resented by many.
One of the best ways for conscientious consumers to control the highly questionable influence of advertising is to take control at the source. A direct-charge co-operative does not have to advertise its products to maximize income because its income does not depend on an increased volume of sales. Indeed this is one of its great strengths as compared with private-profit business. A typical chain store for example, is caught up in a bad situation which it is powerless to change. Real money must be spent in efforts aimed at persuading consumers to come to its stores and not to patronize other stores. At the same time the other chains are doing the same thing, resorting to all kinds of advertising, gimmicks, specials, stamps, contests, games. From the standpoint of any particular chain this seems to make sense, from the standpoint of consumers it definitely does not make sense, it is mainly waste. A consumer-oriented distribution industry with direct-charge co-operatives as its base could bring great simplication and distinctly lower costs of distribution.
Furthermore the consumer has a basic right to know what he is paying for. At present he has no idea what the costs of manufacture and of distribution are. How can he make an intelligent choice if he does not have access to such basic information? Why all the mystery? Isn't freedom to know what they are paying for one of the freedoms consumers should insist upon having? Wouldn't this one step clear away much of the present consumer unrest? Consumers have to buy, just as they have to breathe. At present price is the big factor in decisions about the purchases they choose to make. But though price is a main consideration in determining value it may include charges for unnecessary costs. In a direct-charge co-operative every feature of financial transactions is known to the members. And as the principle of direct-charge extends farther and farther back toward production the area of mystery will diminish.
There is another point. If present trends continue the food industry in Canada will be dominated by a very few very large firms. Already the combination of a large food manufacturer and a large advertising agency is almost irresistibly powerful. A new product can be conceived, produced and marketed successfully without much reference to its value from the consumers' standpoint.
It doesn't have to be that way. There is no reason why consumers have to spend their money the way they are spending it now. The co-operative approach has been available. People can have their own stores, their own purchasing service and eventually the products they want. The money consumers are spending for food and other necessities creates the huge and powerful industrial complexes which confront the consumer. He can, if he wishes, use his own money to create his own system. The ultimate power is his.
CO-OPERATION
Co-operation is such a beautiful and sensible idea that it is pertinent to ask why it has not gone further. Consumer co-operatives have been known in Canada for 60 years or more and there are quite successful co-operative stores in most parts of Canada. But in the total picture, consumer co-operatives could only be described as insignificant. Value of merchandise handled is around 2% of the Canadian total. Surely it is not unreasonable to conclude that generally speaking the present operating methods of consumer co-operatives, with their roots in Europe in the previous century, are not being accepted by Canadians under present-day conditions.
The reason is that, typically, the successful consumer co-operatives of the conventional type find it necessary to operate in a manner calculated to attract people in off the street as it were. Some are building strong institutions and saving money for the members too, but since orthodox methods of merchandising are being used costs of operation are much the same as in other stores.
It becomes apparent that the weakness in consumer co-operatives lies mainly in the connection between the co-operative and the member; obviously consumer co-operatives are not capitalizing on their one great potential strength-membership. To remedy this situation the direct-charge co-operative has appeared. It provides its members with merchandise at cost and expects these members to pay the operating expenses, whatever those expenses may be.
This means that there has been a rather clean break with the inadequate operating methods used in the past. Those methods were based on the theory that returns paid out of hoped-for surpluses were the main advantage for the members, and assumed that most of the necessary equity capital could be collected by adding to the price of the merchandise. The necessary volume of business was to be achieved through orthodox sales promotion.
In summary then here are some of the advantages of the direct-charge method of organization.
1) It is not necessary to attract customers through advertising, stamps, specials, loss leaders, contests, games or gimmicks, so costs are less and annoyance reduced.
2) The requirement that each member must pay his portion of operating costs is understandable and acceptable.
3) Since the co-operative adds no markup, prices can be much below prices in other retail stores.
4) High financial reserves will not be necessary; reliance is placed on share capital as equity financing. Capital is provided by all members at the same rate.
5) Purchases per average member will be relatively large because prices are so low.
6) Because of the more rapid turnover, inventory will be relatively low reducing the need for capital and floor space.
7) Operation is simpler. For example, pricing is merely a mathematical calculation, records of purchases by individual members will not be necessary.
8) Because members will be anxious to keep costs within reasonable limits the number of brands and lines can be reduced and shopping times spread throughout the week.
9) Each member assumes his fair share of financial respon sibility but with a maximum of freedom; as he is paying his portion of operating costs weekly he is under no moral obligation to buy from the co-operative.
10) Management is under pressure to get prices to members lower, not higher.
11) "Service-at-cost" is not just a watch word; it is applied literally and openly.
12) Since the direct-charge co-operative is not dependent on gross margin for its revenue the risk of loss or failure is greatly reduced, provided, of course, that budgeting is sound.
13) The direct-charge co-operative is a simple and direct plan of organized purchasing which represents purely the consumer interest.
III-WHERE
It is sometimes said that before a certain type of co-operative is organized the need for it must be ascertained. This is no problem in connection with consumer co-operatives for there is always need. The need finds expression in different ways.
In the first place distribution costs are high, there is convincing evidence that if consumers will organize their purchasing along direct-charge co-operative lines they can save more than 10% of what they are spending for groceries as compared with ordinary retail stores. As growth occurs and they reach back through production to the sources of supply it is likely that costs can be reduced by considerably more. It is the paradox of our economy that production can be so efficient and distribution so costly; it is quite common for consumers to be paying a price which is double the cost of manufacture.
But in the long run the social aspects of this question are even more significant. Alienation is the curse of our age. The modern little man and his little family finds himself lost in the forest of big governments and monstrous corporations. His only hope of staying sane is to organize; so he has the church or his fraternal society or his professional association or his labour union. He should also organize as a consumer; the power of consumers is potentially by far the greatest of all.
Social needs may be more compelling than appears at first glance. We find many of our well-placed and well-educated young people who are not satisfied to be lost in the forest and they would like to cut it down. One family of Canadians in four lives under conditions of poverty by any reasonable definition of that word, with many of the Indians and the city slum dwellers at the bottom of the scale. The direct-charge approach to consumer organization is so simple and effective that perhaps at long last even poor people can begin to get value for the money they spend.
But to say that there is always a need is to beg the question to some extent about exactly where a direct-charge co-operative should be started. After all, people are everywhere and they are all consumers. The first requirement as we shall examine more closely in the succeeding chapter is a few people in the community who will give the necessary leadership. Because of its nature a direct-charge co-operative can only be undertaken by the people themselves; the idea can come from outside, outsiders can provide assistance, but the drive must come from within.
One of the most important points has been left until the last. Some direct-charge co-operatives have found it very difficult indeed to find space for a depot which is consistent in size and in cost with the number of members likely to be involved at an early stage. This possible difficulty has to be taken into account when a decision is being reached as to where a direct-charge co-operative should be situated.
To summarize this section briefly here are the main considerations when deciding where a start should be made.
1) Leadership, both locally and regionally.
2) Members. It is necessary to know at the beginning how many members will be actually involved in the early stage. You can't set up a direct-charge co-operative which is capable of serving 300 members and expect the expense to be carried by an initial group of only 50.
3) There must be appropriate space in a suitable building, and in most cases parking will be necessary.
4) Financing is an important consideration. It is not likely that the members can provide the necessary investment capital from the start. In most cases a small loan is necessary and security is not usually too good.
5) There must be a source of supplies at fair prices, so far this has not presented any great problem.
IV-HOW
ORGANIZING
If a person wishes to explore the possibility of organizing a direct-charge co-operative the steps to be taken are clear enough. The objective has to be to find a basic group of interested people. The group does not have to be large, but it must be well-informed, enthusiastic and broadly representative of the community as a whole. It will be necessary to distribute written material and carry on discussions until the members of the group have a clear understanding of direct-charge co-operative principles and their implications. Each member of the group should be able to describe how a direct-charge co-operative operates and to defend its methods.
If it is the intention to organize a direct-charge co-operative to serve the interested citizens of an entire city or town, care must be taken to ensure that the organizing group represents informally the various social organizations which are active in the community. To a greater extent than one might expect, the makeup of the basic group determines the makeup of the membership in the early years. If the citizens in general get the idea that, for example, the new co-operative is of interest only to labour union members there is evidence that it is not easy to interest the community as a whole at a later stage. On the other hand, if the leadership is made up mainly of professional people it may not be as easy as one would suppose to interest the wage earner. A few key people from all community groups should be involved in the early meetings.
As far as techniques are concerned, there is no good substitute for informal and friendly discussions over a cup of coffee in the home of an interested family. These small exploratory discussions could spread through the territory. It is not usually difficult to find a few interested women, each of whom would be quite prepared to invite a few of her neighbors in for an interesting evening to talk about what might be done through co-operative organization. A very brief description of the basic characteristics of a direct-charge co-operative should be distributed at these meetings as a basis for discussion. In this way a desirable level of uniformity in the presentation of the idea can be achieved even though different leaders attend the meetings throughout the community.
PUBLICITY
At about this stage it would be a good idea to give general publicity to the proposal under discussion as a newsworthy development. People are likely to take more interest in such a move if they have encountered references to the idea through the usual sources of information. A reporter could be invited to a meeting or two. Radio discussions in the hours when women are likely to be listening have proven to be a very effective means of communication.
The start is the difficult time and this of course is the reason why a basic group of enthusiastic leaders is indispensable.
HOW LARGE?
Since in most cases the board of directors will wish to engage some person as manager who will be responsible, at least on a part-time basis, for certain aspects of the operation, perhaps 50 members could be regarded as the practical minimum with 100 members a more viable objective.
In some cases the problem has been tackled from the other end. That is, conveniently located store space has been found at a reasonable rental. A monthly budget of expenditures was prepared. That total was divided by four to obtain weekly costs and the result again divided by an acceptable weekly operating charge (usually in the $1.75 to $2.00 range). The number of members which it is necessary to have at the start thus became apparent.
Basic groups which are organizing direct-charge co-operatives at present have one advantage. Though the trail is still rather uncertain some pitfalls can be avoided on the basis of the experience of the earlier groups and every effort should be made to obtain the benefit of this experience. There is plenty of indication that a group will find it advantageous to get in touch with other direct-charge co-operatives.
There is no reason why a small group cannot commence operations informally, that is without a charter, but before too long it is desirable that incorporation be applied for. Only through incorporation can the financial liability of the directors and members be limited and full authority be extended to officers to enter into arrangements for renting property, borrowing money and the like on behalf of the co-operative.
The group will seek to incorporate under the appropriate legislation in its province of course. The cost varies from province to province but is not prohibitive.
FINANCING
When a new direct-charge co-operative is being incorporated the authorized capital will likely be the minimum provided for in the provincial legislation. But in the case of direct-charge co-operatives starting on a large scale, care should be taken to ensure that capitalization is adequate.
A careful study of financing methods in use by direct-charge co-operatives indicates that the following plan is best. When a person applies for membership he is required to purchase two shares of $5 each (installment payment of the $10 may be arranged if necessary), and at the same time the member undertakes to buy an additional $5 share each quarter after the first. That is, the member invests $25 in share capital of the co-operative in his first year of membership and $20 in each succeeding year. There should be no limit mentioned in the by-laws or in the undertaking given by the member. A limit can be established based on the needs of the organization by a recommendation of the board, endorsed by resolution of a meeting of the members. This method provides for a desirable level of flexibility because no one can foresee the capital needs of the organization through the years to come. The required investment in share capital can be adjusted from time to time as the years pass, if necessary. A copy of the membership application form in use by CSD Ottawa is attached as Exhibit "A". Improvements may have been made by others.
The by-laws should provide that no interest or dividend is paid on share capital. This is justifiable because members are investing in share capital at the same rate. To pay a dividend on shares would only raise operating costs and mean that the members were taking money out of one pocket and putting it in the other.
It seems equitable to permit a member to withdraw from membership and to recover the investment in shares if he is moving away from the area which the co-operative can serve or on proper notice, say two months. Legislation regarding the purchase of shares from a member by a co-operative is not the same in all provinces. As an example in Ontario a co-operative can use only surplus funds to purchase shares from members; so, since a direct-charge co-operative will not have surplus it cannot redeem shares. However, a direct-charge co-operative should undertake to assist the retiring member by transferring his shares to another member thus ensuring that he gets his money back.
Perhaps without realizing it at first direct-charge co-operatives appear to have solved the problem of equity financing. Though a co-operative requiring the investment of only $10 at the start will be very short of money to cover the cost of equipment and inventory, the steady inflow of new capital will correct that situation before too long.
It is a simple matter to spread the operating costs among the members. In a very small operation with the depot open only, say, a couple of days a week, an inventory of merchandise carried over can be taken at the close of every weekly operation and the financial position readily ascertained. In a larger operation it may be sufficient if a budget is prepared based on an inventory taken at the end of each three-month period. (Operating statements will need to be prepared much more frequently of course.) On the basis of the expenses in the previous quarter the board will prepare a budget for consideration of the membership in meeting. The budget of expenditure should include all possible expenses including provision for expenses like insurance, auditor's fees, and taxes which may occur only once a year and for an allowance to cover inevitable breakage and loss in merchandise.
Once the budget of expenditure is established for the succeeding quarter the total is divided by 13 weeks and by the anticipated number of members; the result is the weekly operating charge. This is the sum which each member must pay weekly. A specimen calculation for a hypothetical co-operative which has achieved 300 members is appended as Exhibit "B".
There are several operational methods which need to be watched very carefully from the very beginning. We will deal with these only briefly.
BUYING
A direct-charge co-operative is an organization which purchases merchandise on behalf of the member. It is when the merchandise is coming into the store that the effective purchase is made. Once it is in the store it is owned by the membership as a group and must be paid for by them. The selection of lines to be handled and brands to be stocked involves numerous difficult decisions. If the co-operative is going to stock all the brands found in a large supermarket it will need a relatively large store, relatively high capitalization and its costs will be higher than necessary. Careful consideration must be given to the brands which are to be purchased. Committees of members should be involved in these decisions.
CONTROLS
An inexperienced group which is opening up a direct-charge co-operative may not understand the necessity for carefully controlling delivery of merchandise. As the operation grows there are rather sophisticated procedures for this, but here it is enough to say that no merchandise should be paid for until the bill has been endorsed by a representative of the co-operative after an actual count of the delivery has been made. Similarly, merchandise which is being returned, e.g. stale bread, must not be removed from the co-operative until it has been checked by staff.
Historically one of the most neglected areas of operation in a new co-operative, whether conventional or direct-charge, is in the field of accounting. The organizing group may not appreciate the importance of good records (many small business men have the same attitude) and the result is that the co-operative is in financial difficulty before anyone knows. Accounting is one thing that cannot be improvised. The group simply must find a person who can and will make certain that there are adequate records from the very first day. Furthermore, it is not enough that the information be recorded, there must be provision for making up statements at the end of accounting periods very promptly. Obviously a board of directors cannot intelligently prepare a budget for a month or a quarter unless it knows with reasonable accuracy what the costs were in the previous period. Some of the provincial central co-operatives operate bookkeeping services which should be considered by any direct-charge co-operative in the area.
MANAGEMENT
It is imperative that adequate provision for competent management be made from the very start. Even in a very small direct-charge co-operative operating on a part-time basis, someone must be responsible. It is one function of the board of directors to name such a person and clearly outline his duties and provide him with clear policies under which to operate. Such policies will concern accounting, purchasing, receiving, displaying and necessary controls of cash and merchandise. As the co-operative grows its success will depend on employees to a very large extent. The board must develop progressive policies on employee development and benefits.
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