All for one and one for all

The cooperative structure, as a business model, has been a feature of many of the most successful businesses in the world. The key question is whether the future will support the continued use of this business model or whether it will cease to exist in its current form. Will businesses, dependent on the cooperative model, fail to evolve and thereby cease to exist?

The Oxford dictionary defines a cooperative structure as “owned and run jointly by its members with profits or benefits shared among them”. The most common origins and rationale for the formation of a cooperative was the power brought about by the aggregation of purchasing – creating economies of scale that no single entity could achieve on its own. This often, but not always, led to common branding where the individual businesses remained in independent ownership, but shared a common brand.

Cooperative or franchise?

In the current business environment people could be forgiven for wondering how a cooperative is any different to the more commonly recognised license or franchise model. A consumer perspective would unearth little discernable difference. The management perspective would reveal the primary difference. There is generally no central entity that is creating enterprise value of its own in a cooperative structure. The primary purpose of head office is to serve the cooperative members and any head office surpluses (profits) are either reinvested in agreed activities or distributed back to members.

Mitre 10, Camera House, Forty Winks, Retravision, Total Tools, and Autobarn are examples of Australian organisations that built successful businesses using a cooperative model.

By way of contrast, the typical franchise or license structure has a head office entity that is a valuable enterprise in itself, owns the primary trademarks and intellectual property, and has the opportunity to retain and drive head office profits for the benefit of the franchisor or licensor – without having to distribute surpluses back to the members (franchisees or licensees).

Boost Juice, Gloria Jean’s Coffees, Hudson, Escape Travel, Healthy Habits, Hairhouse Warehouse, and Australia Post are examples of franchised and licensed business models.

What pressure exists on the cooperative model?

One perspective suggests that the cooperative model is under no more pressure now than it was in years past. The market has always been competitive, customers are discerning, price pressure has been constant, branding is important and, ultimately, the economic environment continues to reward the businesses that are well operated, sustainable and capable of evolving with the times.

It is the last point that I believe is potentially the greatest threat to the future of the cooperative model. The ability for a business to continually evolve is a pressure that is persistently mounting on many businesses – cooperative or not. The reasons this pressure is potentially more acute for cooperative business models, includes:

s The lack of resources and capital at head office;

s The cooperative corporate governance structure;

s Member performance; and

s The ability to attract and retain quality head office management.

Lack of resources and capital at head office

This is potentially the most significant source of pressure for the ongoing development of the cooperative structure. Any business owner or leader recognises that there are finite resources or capital, but imagine for a moment that the mandate is to operate for the benefit of 50 member stores, where the equity value is only designed to be created at store level and hence the head office structure is nothing more than a conduit for group activity – with just enough funds to operate, for the year, to a plan of attack that is heavily influenced by the multiple members (owners) of the business. This is a scenario that is sure to provoke some reaction, but it has foundations in reality.

The lack of resources or capital at head office is a result of the fact the central entity in a cooperative structure is not designed to be an entity with enterprise value of its own. Consequently, the capital allocation is predominantly driven by the day-to-day needs of the business, which are typically a combination of member and management perspectives.

Granted, cooperative boards have, and will continue to identify, broader strategic issues that may bring about significant change and investment, and hence require members to inject additional capital into the network. Forty Winks is an example of a business that transitioned to a franchise structure in the early 1990s – a decision of its then 34 members.

Amongst other issues, the combination of price and margin pressures, low barriers to entry, commoditisation of products and services, technology changes, and increasing fixed costs creates a process of competitive pressures within industry. The ability to evolve the business to stay ahead and remain competitive is the constant challenge of management teams and leaders all over the country. This is no different for a cooperative, but the combination of capital, resources and speed of change presents some real challenges for future managers of cooperative structures.

The lack of resources and capital manifests itself in areas such as technology investment, marketing programs, group expansion, centralised activities (such as administration or call centres), people or supply chain investment. The impact of a member’s perspective on the lack of excess capital or resources at head office is easy to rationalise when the balance of group and individual member interests is considered. For instance, the rationale for a technology investment to improve stock management and centralised financial reporting is obvious to any savvy management team, but perhaps not urgent enough to sacrifice profit distribution for the member operator of three stores, who is comfortable with the status quo.

There is no issue with management having to account for the use of capital, or the return on invested capital, to the shareholders of a business. There is a practical difference in balancing the perspectives of operator members and management as opposed to shareholders and management. In the absence of strong governance, cooperative structures can struggle to retain or get the best out of professional management.

The cooperative corporate governance structure

The cooperative corporate governance structure is typically comprised of a cross-section of management from the head office and members from the network. As with any organisation, the structure and function of the board is critical to the overall direction and decision-making of the group.

In order for the board to function, key attention needs to be paid to the size of the board, the ability to make decisions on behalf of the group, the role of the constitution (if any), the frequency of meeting, and the rotation of members. A strong board will provide a cooperative structure with an enduring competitive advantage that can overcome some of the issues raised earlier with the objective of sustaining the profitable performance of the group. The impact of the absence of a strong board is obvious.

Member performance

Member performance can create additional pressure on the cooperative business structure. As the member is an owner (in some cases of multiple operations), there is a propensity to view the network from the perspective of their own operation.

A network can start to lose position in the market, but selected individual operators can still be achieving a strong return and hence not see the urgency to change anything at a group level.

The reality is cooperative members will have an element of self-interest that reflects the primary reason the structure has worked – individual proprietors with skin in the game maximising their outcomes. The tendency to manifest this view at a group level to maintain the status quo – either directly or indirectly through a board member – is, to a certain extent, human nature. People generally resist change, and in the absence of a strong compelling impact at an individual operator level, it is almost impossible to back.

The extent of this thinking or behaviour within a group can paralyse decision-making, or at least make the speed and nimbleness of the management decisions so slow that the competitive pressures in the market will invariably impact the group. It is simply an inability or lack of interest in seeing the bigger picture for the group’s benefit. Ironically, it is individual members that are left with the legacy of this decision, in the form of diminished asset or sale value for their individual businesses in the open market, due to the perceived position of the group relative to the market. An unfortunate legacy of past success is the inability to see the necessary changes in the future.

The ability to attract and retain quality head office management

The market is competitive for quality management and the real challenge faced by cooperative groups in the coming years is to be able to attract and retain the necessary management teams. This is not so much a financial challenge, although increasing costs at head office can be viewed as needlessly diminishing any surplus distributions to members.

This aside, the greatest challenge is the frustration that the better individual leaders face with the member and management governance structure, and the lack of resource and capital to drive the direction and performance of the group. The speed of decision-making, inability to have board members focused on broader strategic group issues, and the overall constant challenge of ‘group think’ creeping into the business will pose a serious threat to the longevity of any CEO. Management by group consensus is only suited to a handful of senior management.

What’s next for the cooperative model?

Cooperative business models are not disappearing from the business landscape in any revolutionary event. The primary issue for businesses, whether cooperative or not, is the market and economic pressures that keep profitable customers spending money in the business. Recognition must be given to the fact that a decentralised cooperative structure offers an operational resilience to market pressures, with a dynamic similar to other owner-operator structures.

The presence of the cooperative business model, and the pressures endemic to the model that have been outlined earlier, are the key issues confronting the stakeholders in cooperative structures.

The evolution of the cooperative business model is a trend that is likely to continue in response to market conditions, in an attempt to make the business model more relevant to current and future markets. There are a multitude of transition options, including, but not limited to:

s A buy out of existing members to create a company operated structure;

s The creation of a new entity and brand to evolve the structure over time; and

s The transition to a full format franchise model with a centralised entity of value.

Whether the cooperative model has had its day will become clearer over the next few years. l

Adrian McFedries is the Strategic Director of Deacons Consulting, one of Australia’s premier franchising consultants. You can contact Adrian on (03) 8686 6562 or via email at adrian.mcfedries@deaconsconsulting.com