The cooperative business structure has been around for over 500 years. Co-ops play a critical role for agriculture producers, but given the reputation of co-ops and steady trend of demutualisation some think they are a dying form of business.
By the end of this article, hopefully you’ll be pretty impressed by what this organisational structure can do. But before we get to that, we probably need to take you through the various types of co-ops.
You see, it can get complicated quickly, because of the versatility of co-op structures. When a group comes together, it can do so for a variety of reasons and outcomes.
To help navigate the basic types of co-ops we propose a metaphor to help you better understand the different types of co-ops. This metaphor is not very sophisticated but works for a high-level introduction to co-ops. If you want to know more, check out the resources on the Business Council of Co-Ops and Mutuals (BCCM) website.
Co-Operatives as Ice-Cream
The Neapolitan Flavours
Vanilla Ice cream
The most common type of co-ops – and what most will think of as Co-op 1.0 – are commodity-based co-ops, also known as marketing co-ops.
We call these amazingly successful businesses vanilla co-ops because they are enormously widespread across the globe. Vanilla ice-cream is also incredibly widespread and popular.
Commodity-based co-ops are gathered around the production, sale and value adding of a commodity. Members are typically early in the supply chain of a commodity, such as farmers, producers, transporters and processors. Access to economies of scale is a very attractive feature of commodity co-ops.
This type of co-op helps mitigate risk, match scale of production with larger supply chains for consistent pricing and supports producers in social and educational endeavours.
Commodity-based co-ops across the world account for most of the one billion people who are members of at least one cooperative.
- Mustard Growers Co-op
- Namoi Cotton Co-op
Chocolate Ice cream
Community-based co-ops are formed around a specific location. They build infrastructure or enterprises for social and economic profit based on geographic location. Just like chocolate ice-cream, these co-ops have raving fans that want to get their friends involved.
Establishing new local businesses as co-ops is a local investment and employment opportunity. For many social entrepreneurs, a community-based co-op can be a better organisational structure than the popular B Corp certification of a standard corporation. However, in Australia, we tend to create corporations by default.
- Community-owned solar, schools, post-offices or pubs…etc
Strawberry Ice cream
Platform cooperatives are about connecting a group of people with a common interest, regardless of their geographic location. They are usually digitally enabled with e-commerce and social media and use APIs to integrate with other services.
As a business, this flavour of co-op wants members, not ‘shareholders’ and ‘customers’.
This does not mean that they are less sophisticated – far from it! Platform cooperatives operate across many industries already, from insurance, lending, real estate and financial services through to bookstores, drone operators and enterprise co-ops.
- Digital Farmers Markets
- 2-sided marketplaces
- Social ventures that aren’t local in nature
Strawberry co-ops using digital tools can often compete with corporations and when they do, they have the additional benefit of providing deeper levels of engagement than most digital businesses can muster.
To carry on the metaphor, you could say strawberry ice-cream leaves a stain (impact).
Who Uses Co-Ops and Why?
Cooperatives were used to crowdfund long before ‘crowdfunding’ was even a term. Producers would get together and invest the capital they needed in storage or processing facilities that alone none of them could afford, but together everyone would use.
Cooperatives that aggregate investment on behalf of members are now alive and well in many communities internationally and locally. Because we don’t yet have equity crowdfunding legislation for private companies in Australia, many people are using cooperative structures and Cooperative Capital Units. Watch this space… it’s going to heat up!
Cooperatives are more democratic than corporations. In a corporation, the person with the greatest number of shares has the greatest number of votes. In a co-op, every member has a vote, regardless of the cooperative capital units or commercial arrangements in operation – one member, one vote.
This doesn’t mean co-ops aren’t commercial – it just means they don’t seek maximum capital return for shareholders. There’s plenty to go around including for founders, entrepreneurs, investors and lenders, but there’s a requirement for co-ops to act in members’ interests first and foremost. This is a good thing. It aligns interests and enforces behaviours like actually being customer-centric, employee-focused and governing well.
The natural evolution of a successful rewards-based crowdfunding campaign – like you have seen on Kickstarter or Pozible – is the co-op and not the corporate structure.
The purchase of Oculus Rift (a new type of virtual reality goggles) by Facebook is an example of why crowds prefer co-ops.
People who have provided $50 to a campaign are often as engaged as those that have provided $500 to a campaign. They all appreciate the power of numbers and feel engaged in the enterprise and not just the product.
To continue our ice-cream metaphor, you could see rewards crowdfunding as one of the ingredients you need to have in place to make any sort of co-op; probably sugar.
Initially, cooperatives were used for bargaining and securing power at the negotiating table. Being part of a cooperative gave farmers price security and played a part in the early days of every commodity you care to think about. Today, co-ops are still very effective in this role.
AgTech has been a particular focus of Ethical Fields and we are catalysing a ‘data co-op’ that allows producers (i.e. farmers) to own and value-add the information associated with their production. We see this as a critical time in the ag-data industry and we don’t want to see farmers miss out on the value whilst ‘Big-Ag’ sees farmers as customers. If you have an interest in this field of endeavour then get in touch.
Ethical Fields are approved service providers on the expert panel of the Farming Together Program. So if you are a farmer-led initiative that qualifies for the program, you can get our support across forming, organising, funding and operating – free – courtesy of Farming Together.
The Farming Together program is essentially a support group for fans of vanilla ice-cream who are looking at other flavours to add new value to their businesses.
Innovators and End-Users
Another interesting use-case for co-ops is where innovation connects with end-users. In the research and innovation sectors, everyone wants to do better in translating great research into social, economic and environmental impacts – we think co-ops have a role to play.
Universities create new technology, but they generally don’t have a remit for commercialising it. In most cases, they spin-out or license existing corporations for commercialisation.
The term ‘commercialisation’ actually boils down to making sales to end-users. The corporation is inclined to pay as little as possible for the technology whilst maximising profits by charging end-users as much as possible.
The continued collaboration between end-users and the researchers who gave birth to the innovation are typically given lip-service by commercialisation companies. Many times this disconnect between researchers and end-users is un-officially encouraged by the company as further R&D costs money and the connection between end-users and researchers puts pressure on product iteration rates.
By contrast, ‘cooperative commercialisation’ can provide membership to both innovators and end-users. This tighter connection can be used to provide a more functional relationship.
At Ethical Fields, one of the things we are working on with Australian universities and the agriculture sector is gaining pre-commitment on first-run technology via a co-op. This ‘crowdfunding’ brings down the costs for everyone. Cooperatives of the ‘chocolate flavour’ (community-based co-ops) can then improve utility at a local level and finally, data from the sensors can feed into data co-ops that add value to farmers’ agronomy and value to researchers working on the next version of the technology to further meet farmer needs.
Bringing it back to our ice-cream metaphor, a cooperative commercialisation pathway may include ‘scoops’ of each flavour of ice-cream working together to make a classic dessert.
In many ways, worker co-ops (the first was established 300+ years ago) were the pre-cursor to unions. Regardless of your feelings about unions in today’s economy, historically they did promote workers’ rights, which saw more investment in education and created safer workplaces – so fewer people died doing their jobs.
Unions also reduced many forms (but not all) of discrimination and exploitation and were the reason employers provided workers compensation insurance and pensions. Most of us value these things, but not necessarily unions.
Worker co-ops are being revived in the form of cooperatives focused around a digital platform supporting engagement and transactions with customers (i.e. these platform co-ops are strawberry ice-cream for us). Platform co-ops are seen by some as a remedy to the valid concerns arising from the Uber-of-X business model, which fails to translate economically and socially. For example, Stocksy is a photography cooperative that pays members for their photos and videos and provides a dividend. Their story of growth in the mature stock photography market is inspiring.
Platform cooperatives are hotting-up as digital tools. Open-source trends and globalisation break down traditional employee-employer relations and relegate the union movement which grew to meet the needs of workers.
With suggestions that Twitter may become a co-op, you will see platform co-ops and other worker-based co-ops grow in popularity with both users and workers.
As we have outlined previously on our blog local businesses have an unfair economic advantage, many products and services become cheaper as the points of production and consumption become closer. This economic advantage puts outsiders at a disadvantage.
Using economic advantage and mixing it with the many advantages of a co-op, like having a social or environmental purpose, increased stakeholder engagement, improved democracy and transparency, digital tools and reduced marketing costs – the businesses that result from communities getting together are tipped to explode.
We already see co-op owned schools, solar production and storage, post offices, pubs and even a breweries. In the UK, co-op business structures are even more sophisticated and have become a popular alternative investment platform that appeals to retail investors. At the time of writing, there were 841 Community Share listings either completed or currently open for investment.
Co-ops are now set for a renaissance of popularity. For the most part, we can thank digital tools for making co-ops easier to form, organise, fund and operate – hence why we call them co-ops 2.0.
Of course, co-ops are in the process of ‘catching up’ with corporations in a few areas. Professional advisors are more comfortable with corporate structures and commentators often blame co-op failure on the structure by default. The BCCM and the cooperative sector generally do an amazing job addressing these issues. But it stands to reason that cooperatives that have been with us for 500 years will continue to be important in the future.
Indeed, increasing popularity of co-ops owes gratitude to growing dissatisfaction with the corporation as a one-size-fits-all business structure.
The good news is that co-ops are not a protest vote. They are instead a deliberate alignment of interests. The profit motive and capitalistic tendencies of the corporation are moderated with democratic virtues of one-member-one-vote and the transparency and sense of community that comes as a result.
We hope you’ll watch, join and ultimately become a member of the Co-Ops 2.0 movement.