Brett Theodos, Leiha Edmonds and Corianne Payton Scally
A report from the Urban Institute
In this report, we provide an overview of the role cooperatives can play in building healthy, equitable, and sustainable communities, and explain how to advance that work through federal, state, and local policy. The policy objectives we present are intended not to simply grow the field of cooperatives, but to enhance the work of cooperatives that address economic and racial disparities in the United States.
Major 20th-century federal policy initiatives enabled U.S. communities historically excluded from resources and services to use cooperatives to band together and create new opportunities. From bringing electricity to rural America to accessing financing and credit services for people with low incomes, cooperatives have addressed significant market failures and offer an inclusive model of employment and business ownership. For more people to have the ability to improve their health and wellness, they need good jobs, stable housing, and access to critical resources. Equally important is an empowering environment that provides community members opportunities to develop and exercise leadership skills to influence policies that impact their lives, families and neighborhood. Today, cooperatives with engaged memberships that aspire to cooperative principles offer solutions to some of the country’s biggest issues. For example, cooperatives help renters purchase homes, help people set up checking accounts or take out loans, help families access affordable child care, help older adults find reliable home care, and help people access fresh food.
Moreover, crises like the COVID-19 pandemic and the ongoing violence of racism harm communities of color, which are experiencing higher rates of death due to the coronavirus, higher mortality rates during police encounters, and higher unemployment rates. As policymakers consider how to help their communities recover from these crises, new initiatives are critically important. Cooperatives offer a business model informed by the needs of workers and their communities, and they are striving to mitigate layoffs, protect the health of workers and clients, and support the struggle for racial justice.
Cooperatives are part of the solution to such problems, but federal, state, and local government policies are needed to help cooperatives operate at their full potential. In this report, we describe four broad policy goals and six specific policy objectives that policymakers can use to improve how cooperatives serve their communities. The four near-term policy goals are as follows:
- LEVEL THE PLAYING FIELD Cooperative sectors can be disadvantaged by federal, state, and local policy.
- HELP GROW THE NUMBER OF COOPERATIVES IN UNDERSERVED MARKETS Policy can do this by helping new cooperative businesses start up, converting existing businesses into cooperatives, preventing cooperatives from demutualizing by selling the cooperative to investors, and preventing cooperatives from failing.
- HELP GROW THE SIZE AND MARKET SHARE OF EXISTING COOPERATIVES Cooperatives benefit from increased employment (or membership) and higher revenues or profitability.
- SUPPORT AND INCENTIVIZE COOPERATIVES TO REACH UNDERSERVED PEOPLE AND COMMUNITIES Policy supports should target cooperatives that provide resources to people and communities who are underserved by mainstream institutions and businesses.
Moreover, the six specific areas where policy can help cooperatives build an inclusive economy are as follows:
- POLICIES DIRECTLY AFFECTING COMMUNITIES OR CUSTOMERS Policymakers can improve policies for communities and customers, thereby supporting cooperatives’ inclusive-growth work. Such policies can involve consumer finance, child care, food access, and affordable housing.
- ENABLING LEGISLATION States can adopt general incorporation statutes to provide a more inclusive framework enabling cooperatives of all types to form and operate effectively in their state of origin.
- ELIGIBILITY AND REGULATION Agencies can expand programs (such as the Community Development Block Grant) or adjust regulations (such as the Workforce Innovation and Opportunity Act) to better include cooperatives.
- FINANCIAL SUPPORT Cooperatives can advocate for dedicated local and state government funding as well as tax credits and other subsidies to support employee ownership and the conversion of businesses to worker cooperatives.
- TECHNICAL ASSISTANCE AND TRAINING Congress can enhance funding for technical assistance and training via the U.S. Department of Agriculture’s Rural Cooperative Development Grants (RCDGs) and Small Business Development Centers.
- PREFERENCES IN CONTRACTING AND PROCUREMENT Policymakers can encourage preferential procurement and contracting processes for cooperatives with clear social mandates.
Policy strategies to build a more inclusive economy with cooperatives
The impact of COVID-19 threatens the resilience of workers, businesses, and communities with staggering job losses and untold local-business failures. As the pandemic ripples through the economy, people of color, workers with low incomes, and business owners are being disproportionately affected. To address these problems, federal, state, and local policymakers working to make their communities healthier and more inclusive and resilient are turning to the cooperative business model. By providing business supports and adequate financing and eliminating barriers to existing programs, policymakers can encourage cooperative businesses that preserve the benefits of local business ownership, save jobs, and build and sustain communities.
The policy environment—from city economic development initiatives to state enabling statutes to federal tax law—influences how cooperative businesses start up, grow, and thrive in their communities. Cooperatives operate in a policy environment designed primarily to address the needs of investor-owned corporations and individual proprietors. Though most cooperatives are corporations, the cooperative ownership model means that policies and regulations, if not well crafted, can unintentionally create barriers that exclude cooperatives or make eligibility and compliance complicated and costly.
In this report, we present ideas for how federal, state, and local policy can help cooperative businesses seeking to build inclusive economies develop. We begin by defining the cooperative sector and ways cooperatives positively affect people and communities. We then describe internal and external challenges that cooperatives face. Next, we present four intermediate goals to guide thinking around policy design and implementation, and we describe six specific areas of policy need. We conclude by discussing steps for advocacy and action that will advance these goals.
This report is for audiences inside and outside the cooperative sector. For members of cooperatives and stakeholders in community development, economic development, and public policy, we hope to provide a better understanding of how cooperatives can build healthy, equitable, and sustainable communities—and how to advance that work.
We drew the themes and topics from a review of the literature on cooperative policy, 20 interviews with leaders in different cooperative sectors, and insights from roundtables hosted by NCBA CLUSA International and the Cooperative Development Foundation in nine regions across the U.S.
THE COOPERATIVE APPROACH
Cooperatives are democratically controlled member-owned business enterprises. They are formed to help small enterprises gain parity with large investor-owned competitors, to address market failures where neither the private sector nor the government provide a needed service, or to give consumers the choice of an enterprise and business model that better meets their common needs and aspirations.
In this report, we focus on three primary types of cooperatives as well as hybrid models. The three primary types are consumer cooperatives, marketing and purchasing cooperatives, and worker cooperatives. Hybrid models include elements of two types and have evolving work arrangements. As drawn from The ABCs of Cooperative Impact (Theodos, Scally and Edmonds 2018), cooperatives can be categorized into the following types:
- CONSUMER COOPERATIVES Membership comprises people who want to buy goods or services from the cooperative. Consumer cooperatives operate in various sectors, including grocery stores, utility services, housing, insurance, and consumer finance (credit unions). Membership is most often made up of residents living in close proximity to the cooperative business. An example is the Seward Community Co-op, a cooperative grocery in Minneapolis located five blocks from where George Floyd was killed by police. Over 60 percent of worker-owners are people of color and 50 percent of worker-owners live within one mile of the store.1 Responding to community needs, the cooperative participates in federal and state food assistance programs, provides discounts to shoppers participating in the Supplemental Nutrition Assistance Program and the Special Supplemental Nutrition Program for Women, Infants, and Children, sells bulk items and pantry staples at break-even pricing, and offers discounted memberships that can be paid off over time from patronage (i.e., the cooperative sends profits back to member-owners). In addition, it pays a minimum of $15 an hour to its workers, more than 50 percent of whom are people of color living within a mile of the store.2
- PURCHASING AND MARKETING COOPERATIVES These cooperatives serve members’ marketing, processing, and purchasing needs. They are typically formed by independent businesses in service sectors such as retail, hospitality, and agricultural business (which includes farming, fishing, and forestry). For example, member-owners of the purchasing cooperative CCA Global Partners include small independent lighting and flooring businesses.3 The joint purchasing and marketing cooperative helps business owners compete with big-box stores. Another example is Cabot Creamery, a marketing cooperative that provides its dairy farmer owners access to regional, national, and international markets that would not otherwise be available to independent producers.
- WORKER COOPERATIVES These are businesses owned by some or all of their employees. In a typical worker cooperative, all workers receive a salary. At the end of each year the cooperative’s net earnings are distributed among member-owners based on a membership-approved formula. Most worker cooperatives are small. An example of a larger worker cooperative is Isthmus Engineering and Manufacturing, a designer and manufacturer of custom automated equipment that grew from eight worker-owners in 1982 to 75 in 2020.
- HYBRID AND PLATFORM COOPERATIVES These include two emerging models: consumer-worker cooperatives and cooperatives focused on workers in the freelance economy, which is often online and app based. Consumer-worker cooperatives are owned and managed by employee members and consumer members. This model is used by grocery and retail-based cooperatives, among other types. An example of a hybrid consumer-worker cooperative is the Black Star Co-op in Austin, Texas. Black Star is cooperatively owned by 3,500 people and organizations and is democratically managed by its workers through a worker’s assembly. An example of a platform cooperative is Up & Go. Cooperatively owned by a group of housekeeping professionals, the app allows consumers to schedule house cleaning directly with housekeepers. The app returns 95 percent of the amount paid for the service to workers; comparable noncooperative apps return only 50 to 80 percent. To lower costs of insurance or work materials, platform cooperatives can also adopt aspects of the purchasing-cooperative model.
Cooperatives of these types are found in every U.S. state and vary in size and concentration.4 Many are small businesses, such as Dill Pickle Food Co-op in Chicago, which has a market and deli location and 2,350 members. Others, such as Land O’Lakes, Ace Hardware, and Navy Federal Credit Union, are large and widely known.
In 2018, Urban identified seven ways that cooperatives can positively impact people and communities. These guide the premise of this policy report—that is, that policy can support cooperatives insofar as they work toward these broader societal goals. Cooperatives can make a difference in increasing access to affordable quality products, services, suppliers, and markets, lowering costs and serving markets and communities historically seen as “higher risk” or underserved. They can improve business sustainability and promote community commitment. By design, they encourage democratic governance and empowerment and can be leaders in creating equity, diversity and inclusion. They can generate financial security and advancement for workers and support local and regional economic growth.
These benefits look different across sectors and cooperative types. Food cooperatives provide healthy foods and support and sustain local agriculture. Worker cooperatives provide workers with low wages, a say over how their work is done and an opportunity for business ownership. Community Development Credit Unions (CDCUs) provide financial products and services tailored to the needs of consumers with low incomes. Electric utilities deliver a mix of services in rural communities, including broadband in regions where private-sector providers will not offer it and innovative on-bill financing for energy efficiency upgrades.5 Purchasing cooperatives keep small independent businesses sustainable by offering lower prices for supplies and quality marketing services and materials. Agricultural cooperatives allow producers to share in value-added processing and marketing.
Cooperatives also offer business solutions that prioritize stability for workers and communities during economically volatile periods. Small businesses are being sold or closed as baby boomer owners retire in unprecedented numbers.6 Coupled with the wave of closures resulting from the current economic disruption, this will result in the shuttering of many main-street businesses. Alternatives like worker- and consumer-owned cooperatives offer succession solutions and opportunities for workers or consumers to save otherwise healthy businesses by purchasing them collectively. Although data on cooperative survival rates in the U.S. are limited, research in Canada suggests that cooperatives survived at higher rates over a five-year period than noncooperative businesses (these rates were 66 versus 43 percent in British Columbia and 64 versus 39 percent in Quebec) (Murray 2011).
CHALLENGES TO LAUNCHING, SUSTAINING AND EXPANDING COOPERATIVES
Though cooperative business models could greatly improve health, equity, and resilience in U.S. communities, there are obstacles to their adoption and expansion. Cooperatives face challenges in accessing federal, state, and local programs that provide funding and technical assistance to start-ups. In addition, lending to a collectively owned entity can pose difficulties for some financial institutions. Furthermore, many cooperatives serve communities that investors do not consider profitable, such as communities with small populations and low average incomes. Although such cooperatives deliver much-needed services (e.g., electricity, broadband, housing) and jobs, net earnings in such communities are lower than in more populated and affluent ones. Moreover, operating in more affluent communities can also be challenging: for example, the cost to acquire and develop housing units in expensive housing markets is high, making it difficult for limited-equity housing cooperatives to finance expansions there (Temkin, Theodos and Price 2013).
Cooperatives also face challenges operating in sectors that have thin profit margins or that face considerable risk, challenges that are not unique to cooperative businesses. New noncooperative small businesses fail at high rates—roughly 50 percent do not survive five years (SBA 2012), and failure is appreciably higher in some sectors. The picture, however, is better for some cooperative sectors. For example, 66 percent of food cooperatives that have opened since 2006 are still operating.
International research suggests that cooperatives are more stable and stay in business longer than noncooperative businesses when able to access appropriate financing and technical support (Novkovic and Nembhard 2017). High-quality technical assistance during start-up is one thing that may improve long-term success.
Being built and governed by members presents unique internal challenges for cooperatives, in addition to the general risks inherent in starting a small business (Kramper 2012). These challenges can pertain to membership capacity and the cooperative structure (Fulton and Hueth 2009). Access to capital can be another problem: members are often the primary source of equity for cooperatives starting up or expanding, a problem exacerbated by barriers to U.S. Small Business Administration (SBA) guaranteed loans. A cooperative with too few members or whose members are not in a financial position to invest will not have the financial assets to maintain operations, which can lead to long-term challenges such as underpaying staff or a lack of adequate reserves. In addition, undercapitalization can lead cooperatives to over rely on member labor for tasks that may require external expertise (such as building maintenance or bookkeeping) or to limit the goods and services produced and sold owing to cost, making them less competitive with better capitalized businesses.
There can be competing interests in running a cooperative. For example, cooperative businesses’ long-term financial health can be at odds with member-owners’ short-term financial needs. This tension may emerge, for example, when determining whether to reinvest net earnings in the cooperative or disburse more cash in patronage dividends. Interests may differ between members of different generations: for example, owners nearing retirement may wish to cash out their investments. Moreover, members may disagree about how to price the goods and services they buy from or sell to the cooperative; members may hope to pay less or be paid more than the cooperative can sustain in the long term (Fulton and Hueth 2009). In addition to all this, cooperatives are democratic organizations whose members mandate transparency and equitable decisionmaking to address competing interests—a benefit that can also pose coordination challenges.
Another challenge is that cooperatives that are forming require sufficient time to recruit enough owners to be viable. For example, grocery cooperatives expect to spend longer than two years recruiting owners and raising capital before they begin operations.7 A cooperative that attempts to begin operations without sufficient membership is more likely to fail.
Public sector leaders looking to advance goals related to community wealth building, equity, and inclusion play a critical role in overcoming many of these challenges. In the next two sections, we articulate key goals for cooperative policy and provide an overview of six cross-sector policy objectives.