How To Set Up A Direct-Charge Co-op

How to set up a direct-charge co-op to purchase groceries from wholesalers or other sources at the lowest possible cost.


| July/August 1970



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Co-op expenditures list.


Diagram by MOTHER EARTH NEWS staff

In case you haven't noticed, there's a small revolution taking place in food distribution. All over this continent, groups of folks are setting up co-operatives, bypassing the local supermarket and dealing direct with wholesalers, farmers and food processing plants.

Why? Well, Gordon Inkeles, who helped set up the original San Francisco coop, once gave this comparison: When Safeway was selling oranges for 15 cents each, the co-op was offering the same oranges for 3 to 5 cents a throw.

The average U.S. co-op, so far, has been rather free-form (a few are described in this issue) but, in Canada, some really business-like co-operatives have been organized. This article gives all the specifics:

After two years of study, the first direct-charge co-operative in Canada, Co-operative Supplies Depot of Ottawa Limited, was incorporated in June of 1968. Growth was rapid and — by January, 1969 (when the report was written from which the following information is taken) — CSD had 970 members and was on the verge of setting up a second depot. At that time the success of CSD in Ottawa had already inspired the establishment of 13 other such Canadian co-ops. We do not have any recent figures but we understand that the direct-charge co-operative idea has continued to mushroom at an increasing pace in Canada.

What is a Direct-Charge Co-op?

In briefest terms a direct-charge (d-c) co-operative is an organization established by a group of people to purchase groceries from wholesalers or other sources at the lowest possible cost.

A direct-charge co-operative is not a business in any ordinary sense of the term. It does not buy at one price and obtain its income by selling at a higher price. A direct-charge co-operative provides a service, a purchasing service, and the members pay the cost of that service by dividing it among themselves. (Incidentally, no direct-charge co-operative should be required to pay business tax because of its operating methods.)

In most respects, a direct-charge co-operative is not different from a conventional co-operative. It follows democratic principles by limiting each member to one vote. It eliminates profiteering by paying no dividend on the share capital contributed by the member.

When a direct-charge co-operative incorporates it does so under the usual legislation in its province thus becoming subject to the rules and regulations which govern all co-operatives. Under the legislation the co-operative establishes its by-laws, arranges its financing and holds its annual meetings of members. The annual meeting elects the board of directors. The board engages a manager and guides the organization throughout the year.

But the direct-charge co-operative has added two principles which are very basic to its function. The first concerns its policy on pricing and is often stated thus: There are no hidden charges. This means (a) there is no markup on merchandise; the price for an article is established when the co-operative makes the purchase and it turns over to the member the merchandise at that price; and (b) pricing does not include provision for accumulation of capital. This is in contrast to private-profit business and many conventional co-operatives which accumulate capital from the gross margin.

The second basic principle which distinguishes a direct-charge co-operative concerns operating revenue. In a direct-charge co-operative expenses are collected directly from the member; that is, each member undertakes to pay his portion of operating expenses as long as he is a member. There is no relationship between the operating charge he pays and the amount of merchandise he buys. Indeed he pays his operating charge even in weeks he buys nothing on the grounds that the expense has continued.

There are other important points. Value to the members is the prime consideration in the selection of merchandise and not profitability from a merchandising standpoint. Since a member must pay his portion of operating costs he is involved in all decisions which affect those costs as far as possible. Voluntary work is encouraged on a well-organized basis to provide members with opportunities to learn more about the co-operative and to reduce costs.

In a direct-charge co-operative members also undertake to make investment in share capital at a stated rate in order that the co-operative may have a fund to equip the depot and acquire inventory. Steady accumulation of capital will free the co-operative in time from the necessity for borrowing money and provide funds for expansion.

In summary then if you find an organization established under co-operative legislation to procure merchandise for its members, each member having undertaken to pay his portion of operating expenses as a direct charge rather than in the form of a markup you will have come upon a direct-charge co-operative, for this is its distinguishing feature. 

Why Arrange a Direct-Charge Co-op?

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 simplification 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 responsibility 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.

Where to Seek Members

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.





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