07/11/2006 - 21:00

Co-operative approach may shift as legal changes loom

07/11/2006 - 21:00

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Often viewed as relics of another era co-operatives may benefit from proposals to give them far more flexibility.

Co-operative approach may shift as legal changes loom

Co-operatives may have slipped below the radar in the business community, but proposed new state laws may allow co-operatives – which command combined revenues of $2.5 billion in Western Australia – to expand their operations and move into new markets.

By all accounts well overdue, the Cooperatives Bill 2006 is the latest chapter in the evolution of the co-operative business model, which has its ideological roots in the principles of collective ownership and the combining of resources to achieve economy of scale and critical mass.

In recent years, the model has been adapted to allow for the formation of buying groups and diversification of investments, or has been abandoned altogether for more a corporate business model.

Wesfarmers, IGA supermarkets and more recently the Capricorn Society, are all examples of WA companies that began as co-operatives but ‘went corporate’, either through buy-outs or by corporatising their business models.

There are currently about 65 active co-operatives in WA, covering a range of industries including retail, agriculture, manufacturing and taxi services – some of which they dominate.

With the origins of the WA cooperative movement dating back to 1915, today’s cooperatives are still governed by legislation more than 60 years old.

But the new bill, according to Consumer Protection minister Michelle Roberts, will replace the Companies (Co-Operative) Act 1943 and bring co-operatives up to current companies law.

Among the objectives of the legislative change was to allow co-operatives to seek investment capital outside their membership, remove barriers to interstate trading and bring WA in line with legislation in other states, Ms Roberts said in a recent statement.

“This will bring laws governing co-operatives into the 21st century,” she said.

The proposed changes will come too late for the likes of auto parts buying group Capricorn Society Ltd, which changed to a public unlisted company in August, vacating the position of WA’s top co-operative with a membership of 10,000.

It cited issues with the co-operative structure’s efficacy when dealing with interstate trade, and restrictions in how a WA-registered co-operative could operate under the Financial Services Reform legislation, as reasons for the change.

However, Capricorn denies it has abandoned its roots, with CEO Trent Barlett telling WA Business News last week it had enshrined many of the values of the co-operative in its new corporate constitution.

The legislation review process has the approval of the state’s peak body, Cooperatives WA, which has been in consultation with the government in drafting the new laws.

Cooperatives WA secretary Peter Wells said the review was somewhat overdue, and was confident the new legislation would more clearly define the responsibilities of co-operative members.

“This legislation is going back to the simple premise that a co-operative is meant to exist for the benefit of its members,” Mr Wells told WA Business News.

“Benefits come to members by doing business with them, and if your members aren’t transacting with the co-op, they shouldn’t be on the share reg ister.”

The new laws will also further clarify accountability issues, and reinforce the cooperative business model.

“The new legislation is bringing [co-operatives] closer to the corporations act requirements for operations of the board, and their general accountability in terms of modern business practice,” Mr Wells said.

“It also sets some clear guidelines on the existence of co-operatives…and brings greater focus on the members of the co-operative to actually have business dealings with their co-operative.”

With the exit of Capricorn, grain handler and marketer CBH Group has now taken over as the state’s biggest co-operative.

CBH Group is currently controlled by 5,500 grower members, and has diversified through the formation of two subsidiaries – Grain Pool Pty Ltd, which it merged with in 2002, and engineering and logistics company Bulkwest Pty Ltd.

Also ranking in the top co-operatives in the state, in terms of memberships, are United Farmers Co-Operative, WAMMCO, Swan Taxis, Co-operative Purchasing Services (trading as Makit Hardware and Servis Hardware), and Community Co-operative Travel (trading as Travellers’ Choice travel agents).

CBH chief executive officer Imre Mencshelyi said the co-operative had already adopted commercial principles, while maintaining the basic elements of the co-operative model.

“We manage a co-operative as if it was a corporation, but we still have the very basic elements of the co-operative engrained in the organisation,” he said.

“The members still have one-person one-vote. We focus very much on service, and any surplus that is generated from the business goes back to members in the form of services and/or infrastructure.”

While the co-operative model places restrictions on relationships with other corporate entities, the CBH model has allowed the group to merge with other companies as part of their growth strategy.

“We’ve had the flexibility in the structure to grow, through the acquisition of businesses…but the co-operative model has prevented us from, for instance, merging with a listed entity,” Mr Mencshelyi said.

“But what we’ve been able to do is accommodate, under our current structure, the acquisition of other businesses to grow.”

Mr Mencshelyi did not rule out the possibility that CBH will corporatise its business and shed its co-operative structure some time in the future.

There are currently pressures from within its membership to put the issue back on the table. The decision was put to vote in 2000, with 58 per cent of members voting in favour of corporatisation; less than the 75 per cent needed for change to be implemented.

“I think the day will come when that will be a reality,” Mr Mencshelyi said

“When growers want to realise their equity and realise their value in the organisation, that’s the time it’ll be driven to change.”

Liquor store co-operatives Liquor Barons and Route 66, which previously shared the same space for their respective head offices in Como, have recently parted ways, with Liquor Barons relocating its head office to Wembley.

Liquor Barons general manager David Sinclair said the co-operative had maintained steady growth in numbers since its formation in 1991, beginning with 10 members, peaking at around 40 in the late 1990s just before the arrival of the Australian Liquor Group (owners of subsidiary Liquorland), and currently sitting on 33 members.

“ALG, who started up as a public company, attracted a number of members away from the co-operative…That was the biggest change in one hit,” Mr Sinclair said.

All members of the co-operative, comprising of retail store owners, receive the benefits of bulk buying power, with returns re-distributed back to members.

 “We don’t have overheads; it’s a non-profit area here in the [head] office. We generate funds and have a very lean structure, and any profits we make get returned to the members via rebates,” Mr Sinclair said.

The emergence of the franchise model has somewhat overshadowed the co-operative, with the number of new co-operatives sign-ups slowing in recent years.

Mr Wells said that, although there were some similarities between the two models, there were inherent differences in terms of ownerships and governance.

“A franchisee can run his business how he likes, as long as he operates within his franchise agreement. But he really has no control over that franchise agreement,” Mr Wells said.

“But with a co-operative, the members can come together and decide what those rules should be, and if they need to be changed they can change them.”

In a recent application of adapting traditional business models to fit industry requirements, the Caxton co-operative was formed by a small group of franchisees, who pooled their resources to form a niche printing business.

The five Snap Printing franchisees effectively merged the two models together in order to cut down on costs and improve individual efficiencies.

“This is a co-operative formed by a group of people who decided by acting collectively, they can make their own individual businesses more efficient,” Mr Wells said.

“They identified within their business a way of doing things more efficiently, and instead of investing in more printing machines in their individual outlets, they pooled their resources through a co-operative.”

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