Co-ops or Corporations?

An old post card depicts a California orange grove at harvest time.

The legal rights of business associations have been in the news a lot lately, from the 2010 Citizens United decision to the Occupy movement‘s criticism of corporate personhood.  Corporations have been center stage in the coverage, and less ink has been spilled over their low-key cousins, cooperatives. But the distinction between the two forms is interesting, partly because their uses don’t always follow expectations.

For example, Sunkist, the brand of American oranges, is not a corporation, but one of the world’s most successful cooperatives.  According to its web site, the co-op was formed in 1893 as the Southern California Fruit Exchange, and in 1954 it adopted its long-time trademark as its official name.  In addition to oranges, ‘Sunkist’ is branded on crates of members’ limes, lemons, tangerines, and grapefruits, and is also licensed to the makers of Sunkist orange soda, orange-flavored vitamin C, and other common products.  Last year, the co-op, whose land-use footprint remains concentrated in groves around Los Angeles, took in more than a billion dollars in gross revenue.

Sunkist is hardly alone: Land O’Lakes, of US butter fame, is another large co-op that dominates its market sector, and among Northeast grocery chains, the ubiquitous Shop Rite is a trade name of Wakefern Foods, a co-op since its founding in 1946 by eight independent grocers from Newark.  There are other examples, of course, but the point is that the co-op business model, pioneered in the 19th century by the Rochdale weavers, and followed by Howard, Herzl, and Kazan, is in no way incompatible with commercial viability.  In fact, it is one of the most well-established methods by which small-scale and moderate-scale stakeholders can pool their resources to obtain the benefits of large-scale economies, while simultaneously retaining significant measures of individual autonomy.

An OWS protester in Zuccotti Park

In contrast to co-ops that reap large profits is a new community-owned store in the town of Saranac Lake, New York.  The store is actually organized as a traditional stock corporation– with investor shares that are voted on a pro rata basis– in spite of its grassroots-oriented purpose.  The company had its start when the town’s only chain store (an Ames) closed, leaving residents with a 50-mile trip to the closest shopping center.  (Picture that, in the Adirondack Mountains, in January, and you’ll appreciate the gravity of the town’s situation.)  Wal-Mart came along, but local activists chased it off.  Instead, the Community Store was established, and after several years of raising capital and working through logistics, it is now open.  Saranac Lake offers an interesting inversion of the Sunkist model: Rather than a well-known brand being organized as a co-op, the Saranac Lake example represents community activists who have organized for a common benefit, as a corporation.  It goes to show the flexibility that is inherent in choosing business associations for particular goals, but it’s also interesting that, in this case, the co-op model was passed over.

So, if the issue isn’t simply one of profits versus a common good, or earnings versus savings, then on what issue should the corporation/co-op decision turn?  I suspect the Saranac Lake case is illustrative, in so far as it was driven by the need to raise capital.  It is much easier to raise funds for a project– even a high-minded project whose organizing goals go beyond profit-making– when you offer potential investors pro rata returns on their stakes, and equivalent shares of power over the entity’s governance.  Any other model is a non-starter, unless you’re approaching charities or government for funding.  So, if organizers do not have enough cash on hand to begin, and debt is off the table, then a traditional stock corporation is the way to go.*

Ultimately, the need to raise capital is determinative.  Most co-ops, if you think about it, are buyers’ and sellers’ consortia.  This is as true of Sunkist and Shop Rite as it was of the Rochdale Weavers or is of a food co-op that sells bulk carob chips and Dr. Bronner’s soap.  These tend to have low capital needs at start-up, since they basically function to concentrate supply or demand.  Their members are existing merchants or dedicated activists who have resources to cover initial expenses.  Such entities distribute their benefits to all members on a pro rata basis, so the characteristics of members’ equity are less important.  That is to say, benefits accrue to all, as needed, in the form of the discounted prices that buyers’ co-ops offer their members through collective purchasing power.  Similarly, all the sellers who belong to a growers’ co-op will benefit from a contract to supply a major supermarket chain, or an an ad campaign that increases the market demand for their produce, in the form of more sales or higher prices.  The farmer who sells one truckload gets his fair share of the benefit, as does the farmer who sells ten.  Dues can be scaled to volume.  Since buyers’ and sellers’ co-ops rarely need much start-up capital, and are comprised of entities that can supply those initial needs, there is no need to create an entity that entices outside investors through the promise of its own profits.

A secondary consideration is that co-ops present the membership conundrum: If you don’t require membership of those who would obtain the benefits of a co-op, then there is no incentive for individuals to be active in the entity’s organization, let alone to provide start-up capital, or to pay the annual dues that would support operations in slow times.  It’s the classic free-rider problem.  But, if you do require membership, then you limit your customer base to those who are willing to fill out paperwork, pay dues, attend meetings, and so forth.  Among merchants, and dedicated activists, the added burdens of co-ops are not a significant problem.  Regular buyers, or true believers, will become members, do their respective parts, and enjoy the benefits.  But in retail, the membership conundrum is a lose-lose situation.  Retail stores rely heavily on casual customers, impulse buyers, etc.  These are precisely the ones who would be free-riders of an open co-op, and non-members of a closed one.

Assessing the distinctions between corporations and co-ops can provide some insight about why one form might be chosen over another in a particular situation.  The co-op model is frequently overlooked as an alternative business approach.  But, in the absence of the need for start-up capital or a broad casual customer base, it can actually be a very effective way to organize an entity.

*  Note: The limited-equity housing co-ops of New York City dodged the capital/equity issue by raising money from the dues paid to the Amalgamated Clothing Workers and other local labor unions.  That is, their initial class of investors (the unions) were actually middlemen between those whose money was being invested (the workers) and the capital assets (the buildings).  This allowed the unions to take a more egalitarian view toward investment decisions than individual investors might be inclined to do.  Meanwhile, the secondary class of investors (the co-op residents) actually did obtain pro rata shares of their limited equity: That is to say, their monetary investments were scaled to the sizes of their apartments.