Consumer cooperative

What Is a Consumer Cooperative?

A consumer cooperative is a type of cooperative business owned and controlled by its members, who are typically the consumers of the goods or services provided. These organizations operate for the mutual benefit of their members rather than for profit maximization for external shareholders. As a segment of cooperative economics, consumer cooperatives aim to provide high-quality products or services at competitive prices, with any surplus revenue often returned to members based on their patronage. This unique business model fundamentally shifts the focus from investor returns to member value.

History and Origin

The modern cooperative movement, including the concept of a consumer cooperative, has its roots in 19th-century England. Facing difficult working conditions, low wages, and high prices for essential goods, a group of 28 artisans in Rochdale, Lancashire, established the Rochdale Equitable Pioneers Society in 1844. This group, known as the Rochdale Pioneers, is widely considered the prototype for the modern cooperative society and founders of the cooperative movement¹⁹, ²⁰. They pooled their limited financial resources to purchase basic necessities at lower prices, then distributed any surplus back to members based on their purchases, a practice that became known as the patronage dividend. The principles they adopted, emphasizing open membership, democratic control, and member economic participation, formed the basis for cooperative movements worldwide and are still championed by organizations such as the International Cooperative Alliance.¹⁷, ¹⁸

Key Takeaways

• A consumer cooperative is owned and democratically controlled by its members, who are also its customers.
• The primary goal is to provide goods or services to members at cost or with a minimal margin, rather than to generate profits for investors.
• Surplus earnings are typically returned to members in proportion to their purchases, through patronage dividends, or reinvested to benefit the cooperative.
• They operate across various sectors, including retail, housing, utilities, and finance (e.g., credit unions).
• Consumer cooperatives emphasize member participation, education, and community involvement.

Interpreting the Consumer Cooperative

A consumer cooperative is interpreted through its adherence to cooperative principles, which prioritize member needs over external financial gains. Its success is not measured solely by financial metrics like return on investment but by how effectively it serves its members, provides value, and strengthens the community. This often involves offering higher quality goods, promoting local sourcing, or providing essential services in areas where traditional businesses might not operate due to perceived lack of profitability. The democratic governance structure, typically "one member, one vote," ensures that the cooperative's direction reflects the collective will of its user-owners.

Hypothetical Example

Imagine a small town where residents are dissatisfied with the limited selection and high prices at the sole grocery store. A group of residents decides to form a consumer cooperative to address these market imperfections. They collectively raise initial capital investment through membership fees to open their own grocery store. Each member contributes, gains voting rights, and is entitled to a share of any surplus profits based on their annual purchases.

For instance, if the cooperative generates a surplus of $50,000 in a year and a member, Sarah, spent $2,000 at the store while total member purchases were $1,000,000, her share of the patronage dividend would be:

Sarah's Patronage Dividend = ( (\frac{\text{Sarah's Purchases}}{\text{Total Member Purchases}}) \times \text{Cooperative Surplus} )
Sarah's Patronage Dividend = ( (\frac{$2,000}{$1,000,000}) \times $50,000 = $100 )

This $100 can be returned to Sarah in cash, as store credit, or as allocated equity in the cooperative, directly benefiting her based on her engagement with the business.

Practical Applications

Consumer cooperatives are prevalent in numerous sectors, addressing diverse member needs. In the United States, they are prominent in rural electric utilities, providing power to millions across large geographic areas¹⁶. Credit unions are another widespread example, offering financial services like loans and savings accounts to their member-owners¹⁵. Food cooperatives, housing cooperatives, and insurance mutuals also exemplify the consumer cooperative model.

These organizations often fill market gaps or provide essential services in underserved communities, contributing significantly to the economic impact of their regions. For instance, rural electric cooperatives support thousands of jobs and contribute billions to the U.S. gross domestic product annually¹⁴. Government agencies like USDA Rural Development offer programs and resources to support the establishment and growth of rural cooperatives, recognizing their role in local economic development and improving access to goods and services¹², ¹³. The National Cooperative Business Association (NCBA CLUSA) provides data and advocacy for the cooperative sector in the U.S., showcasing their collective influence across various industries¹¹.

Limitations and Criticisms

Despite their benefits, consumer cooperatives face various challenges. One significant limitation is often the difficulty in raising large amounts of capital for expansion or modernization, as their structure prioritizes member benefits over external investor returns, which can limit their access to traditional equity financing¹⁰. Decision-making can sometimes be slower and more complex due to the democratic, member-driven nature, requiring consensus among a diverse membership base⁸, ⁹.

Consumer cooperatives also face intense competition from larger, investor-owned corporations that often benefit from economies of scale, extensive marketing budgets, and streamlined supply chain operations⁶, ⁷. Maintaining member engagement and education about the cooperative model can also be an ongoing challenge, especially as cooperatives grow in size. Additionally, like any business, they face operational risk management issues, including financial mismanagement or lack of experienced leadership, which can lead to underperformance or even failure⁴, ⁵. Cooperatives UK highlights issues such as balancing diverse member interests and effectively communicating the cooperative difference to new generations.

Consumer Cooperative vs. Worker Cooperative

The key distinction between a consumer cooperative and a worker cooperative lies in their primary membership and purpose.

While both share common cooperative principles like democratic control and member economic participation, the consumer cooperative focuses on optimizing value for its customers, while the worker cooperative focuses on empowering its employees as owners.

FAQs

How does a consumer cooperative benefit its members?

A consumer cooperative benefits its members primarily by providing access to quality goods and services at competitive prices. It may also return surplus revenue to members in the form of patronage dividends, offer better product selection, or provide services that might not otherwise be available in the market.

Are consumer cooperatives tax-exempt?

Generally, consumer cooperatives are not exempt from federal income tax in the same way some other non-profit organizations might be. However, under Subchapter T of the Internal Revenue Code, cooperatives can deduct certain distributions of net income (patronage refunds) made to their members from their taxable income. This means the income is typically taxed once, at the member level, if it relates to a business activity. Patronage refunds from consumer cooperatives for personal, living, or family items are generally not considered taxable income for the member¹, ², ³.

What types of products or services do consumer cooperatives typically offer?

Consumer cooperatives offer a wide range of products and services. Common examples include groceries (food co-ops), electricity (rural electric cooperatives), housing (housing co-ops), financial services (credit unions), and insurance. They can also exist for healthcare, telecommunications, and retail goods.