Strictly speaking, a consumer co-operative is non-mutual. it is owned entirely by individual members, customers who choose to pay a small fee for a membership share. It is controlled by a board elected by those members, and practices open membership so that anyone who wishes can join. Yet in most countries customers do not have to be members in order to shop at the 'co-op'. When co-operative principles were codified in the form of the 'Rochdale Principles' in 1844, the Rochdale 'pioneers', as they were known, did not bother to specify that customers should be members; it was taken for granted that they would be. At that time, there were three main incentives for shopping co-operatively: the quality of the goods, price, and the dividend. By far the most persuasive of these was the last - the quarterly payout of significant amounts of money (that could be taken in cash or left to earn interest in a share account), calculated as a percentage of a member's purchases in that quarter. Not to be a member would have been irrational. This condition continued in the UK and in several other countries until the 1970s, when increased competition and a lack of business integration between societies led to their abandoning the dividend in favour of a new strategy of low prices or discounts paid out to all customers. Managers began to copy the retail strategies of their multiple-chain competitors, and membership ceased to have much meaning. The one notable exception is Japan, where in the early postwar period the co-op's competitors forced it to be fully mutual, insisting that all customers have to be members. It is significant that the Japanese co-operative movement is, on several criteria, the most successful in the world.

 

As we shall see further in this chapter, in some other countries the situation is now changing; membership is becoming more central to strategies for emphasizing the difference between co-ops and their competitors, and for stressing the 'co-operative advantage'. For this reason, and also-- because they are such large and comparatively successful forms of member-owned business, it is worth seeing consumer co-ops as being significant for 'mutuality'. In this chapter we shall be outlining the origins of the idea, and tracing its development from the founding fathers of Rochdale in 1844 to the present day, both in the UK and in other countries that have developed their own co-operative movements. Then we shall be asking whether this now very old form of mutual business still has a continuing purpose on behalf of consumers. Evidence will be reviewed for the effectiveness of co-ops in meeting their purposes, and the radical question will be asked as to whether the still considerable assets of the sector are being used to their best advantage. Then we summarise one recent chain of events - the attempted demutualisation of Europe's largest consumer co-op, the Co-operative Wholesale Society (CWS). The attempt failed, and we shall be drawing lessons from this for the future of consumer co-operatives.

 

 

The origins of consumer co-operation

 

In 1760, the shipwrights who worked in the British Navy's dockyards at Chatham and Woolwich did something very unusual. They bought and began to run their own flour mills. From there the idea spread along the coast to other ports such as Hull (1795), Whitby (1812), and Devonport (1816). From milling, they went into baking, and in 1816 the skilled artisans of Sheerness opened their own general store, and the classic association of consumer co-operation with shopkeeping had begun (Cole, 1944). We do not have to look far for their motives; this was a simple case of market failure. They were suffering from local monopolies of millers and bakers which resulted in high prices and adulteration of the flour. In his classic study of food during the British industrial revolution, Burnett says that in general monopoly was not important, but that it was prevalent in flour milling (1989, p95). Production was based on water or wind power that was limited to certain locations, and so entry into the market was difficult, and existing producers could easily fix prices. Consumers were tied to their localities by the poor communications of the time, and had to use local suppliers. The result was, as one report published in 1767 put it: 'Millers have indeed within a few years raised immense fortunes, and with incredible expedition; and bakers in general thrive and get rich in a proportion far beyond what is seen in other trades' (quoted in Potter, 1899, p42). Had this issue been experienced more recently, we might have expected the shipwrights to campaign for new laws banning food adulteration, to appeal to a government anti-monopolies commission, complain to their local authority consumer protection department to boycott the producers, or to have their case taken up by a consumers' association. None of these options was available, so they simply went into production for themselves.

 

This simple idea that consumers can, if they so wish, go into business for themselves, mutually providing for their own needs, can be traced from these flour mill societies right through to modern consumer co-operatives around the world. The historical development of consumer co-operation in the developed world follows closely that of industrialisation in each country (Birchall, 1997a). It is not surprising that the first co-operative movement grew up in the first country to industrialise, Great Britain. Consumer co-operatives are predicated on a division between consumer and producer that is a characteristic of industrialisation (Polanyi, 1957). They take their place among several working class self-help movements which began in the mid- to late eighteenth century and matured in the late Victorian period (late nineteenth century) as a set of highly respected and well regulated mutual institutions: they included also the friendly societies, trade unions and budding societies (Hopkins, 1995).

 

There were more attempts at co-operation, but the first successful one began in 1844 when the 'Rochdale Pioneers' opened a store in Toad Lane, Rochdale, which became a source of inspiration and guidance for the consumer co-operative movement all over the world. It was very successful in two senses. First, it showed that consumer-controlled businesses could compete effectively against private traders. At a time when wholesale and retail markets were undeveloped and inefficient (Jeffreys, 1954), the Pioneers virtually invented retail management via branch stores, and through co-operative wholesaling were able to organise distribution much more effectively than their competitors (Birchall, 1994). Second, the Rochdale society laid down some basic principles that would ensure both business success and democratic control by consumers. There was the 'dividend principle' by which surpluses were distributed regularly to members in proportion to their purchases. There was a principle of giving no more than a fixed and limited return on shares, which were not revalued in line with the value of the business but remained at their original value. Together these principles meant that there was a sound economic reason for being a member and shopping as much as possible at the 'co-op', and that the Organisation could not deform into an investor-owned business. The low cost of entry, combined with an open membership principle, meant that all but the poorest could afford to join (and even the poor could pay their share in instalments). There was an incentive to encourage others to join, because, other things being equal, the larger the membership, the lower would be the expenses and the higher the dividend. There was the principle of one member having one vote regardless of the size of shareholding, an education principle that encouraged societies to spend part of their surpluses on educating their members, and a principle of political and religious neutrality. All of these contributed towards a high quality of member participation in decision-making. There was a prudent principle of cash trading which, though it had the effect of excluding the very poor who relied on weekly credit from small shopkeepers, ensured that the business would survive in bad times. Finally, there was a principle of supplying only pure and unadulterated products, which meant that at a time of almost universal adulteration and short measures the co-operatives could be trusted to work wholeheartedly in the interests of consumers (Holyoake, 1907).

 

By the end of the nineteenth century there were 1439 co-operative societies in Britain, with over 1.7 million members and a turnover of more than $50m pounds a year. The Co-operative Wholesale Society (CWS), as well as being one of the largest wholesalers in the world, was also a major grower, manufacturer and importer, bringing to the British consumer the benefits of cheap food from abroad and cutting out the 'middle man' throughout the supply chain. By 1914 the movement was a well-established institution, celebrating an unbroken history of growth in every direction that had already lasted seventy years.

 

At around the same time as the Rochdale Pioneers were opening their store, similar experiments were being carried out in other countries, but it was only when promoters in each country discovered the Rochdale 'system' with its dividend on purchases that their own movements began to take off. In Switzerland during the 1860s, existing societies such as the Zurich Consumverein converted to the Rochdale system, and by 1904 there were 204 societies, with their own wholesale society and national union. in France, by 1907, there were 2166 societies, with over 600,000 members. The Belgian movement was inhibited by religious and political divisions, but even so by 1905 there were 168 societies with a national federation. In Italy, by 1904, there were 1448 registered societies, with around a third as many again unregistered. In Germany, early development was mainly of rural and urban credit banks, but by 1905 a central union of consumer co-operatives had 787 societies in membership, along with 260 attached to the credit banks. Their wholesale society was explicitly modelled on the highly influential English CWS.

 

In Russia, by the time of the 1905 Revolution there were nearly a thousand societies, with 300,000 members. After this, a more liberal political climate led to rapid growth, so that by the time of the Bolshevik Revolution they had become a vital part of the supply chain. Other central and eastern European, countries also established small, but nationally federated, co-operative sectors, and some can boast co-operative-type stores as old as that of the Rochdale Pioneers. In Japan, by 1907, there was a society 'in every town of any importance' (Vacek, 1989, pIO33). However, their expansion was checked by a government suspicious of independent associations. At the start of the First World War all the countries of Western Europe and Scandinavia, Russia and several countries in central and eastern Europe had well-developed consumer co-operative sectors. The largest was still the British movement, with three million members, but the Germans, with 1.7 million members, were not far behind.

 

Developments during the interwar period

It has been a curious but understandable feature of consumer co-operative history that, except in countries where they have been suppressed, they have tended to prosper during wartime. Governments come to rely on their distribution systems to meet basic needs, and the populace comes to a new understanding of the fairness and integrity of retailers who believe in putting the consumer first. By the end of the First World War, in which 'the Co-op' in Britain distinguished itself by introducing voluntary rationing before the state intervened, and by refusing to profiteer, there were over three million members. In 1917 it took the unprecedented step of setting up its own political party, and in 1918 had its first Member of Parliament elected. The Co-operative Party then entered an alliance with the Labour Party, and ever since has had several 'Labour and Co-operative' MPs and Lords in Parliament, as well as many local 'Labour and Co-op' councillors. The movement grew steadily during the interwar period. By the start of the Second World War, 'the Co-op' consisted of 1100 societies, controlling 24,000 stores, and having 40 per cent of the market in butter, 26 per cent of milk, 23 per cent of grocery and provisions, 20 per cent of tea, sugar and cheese, and so on. When rationing was introduced, 28 per cent of the population - 13.5 million people - registered with the Co-op (Birchall, 1994, ch8). It employed a quarter of a million people in retailing and another hundred thousand in manufacturing and distribution. With 155 factories, the CWS was one of the biggest businesses in the world.

 

In all countries with established co-operative movements, this was also a time of steady expansion. Because they were dealing in basic commodities, co-operatives tended to stand up to the shocks of economic depression and mass unemployment. In times of trouble, member loyalty tended to increase, even if for a while their total spending went down. In most countries the rise of big city societies and powerful national wholesale societies led by 'monarchical' managers enabled the building up of very large, modern businesses. But there were structural weaknesses: the Co-op tended to deal in a narrow range of staple food products, there were too many small societies, and these were concentrated mainly in industrial working-class areas. The movement was tending to grow organically, along lines of least resistance rather than by planned development (Birchall, 1997a). However, these weaknesses did not become noticeable until after the Second World War.

 

During the interwar period, the idea of consumer co-operation became more firmly established in North America. In Canada, it took root most firmly among the mining communities of the Atlantic Provinces. Here, for similar reasons as in mining villages in Western Europe, people co-operated to overcome the 'truck system' by which mine-owners supplied goods needed by their workforces in company stores. In Eastern Nova Scotia, they were aided by the adult education system developed by the Antigonish movement, which stressed the importance of co-operatives to the local economy (Fay, 1938). Growth was checked, though, in countries taken over by Fascist or Communist governments; autonomous consumer-owned businesses and totalitarianism did not mix. In Italy, Germany, Austria, Japan and Spain the movement was destroyed as an independent force. The threat from Communism was more subtle. In Russia, by 1918, there were 26,000 societies with 9 million members. The Bolsheviks extended co-operatives so they became an almost universal provider, though in the process they killed off the voluntary nature of membership. Lenin realised he had made a mistake, and in 1924 tried to restore their autonomy. However, once lost, it proved impossible to restore, and in 1935 Stalin completed the process by abolishing all the urban consumer co-operatives and confiscating their assets, without compensation to the then 10 million members. Despite these setbacks, by 1937 the International Co-operative Alliance had in membership 50,000 consumer co-ops with nearly 60 million members.

 

 

After the Second World War

 

After the war, the movement in the UK continued to expand. It was at the forefront of innovations such as self-service and supermarketing, but these hid underlying structural problems. With over 1000 societies, a range of different-sized shops, many of which were too small, and with a lack of integration between societies and their wholesalers, the movement began to lose ground to the multiple chains. By the late 1950s, the Co-op had 11 per cent of the retail trade, and the multiples 22 per cent, but the Co-op stopped growing and then began a long decline. What had been its strengths - local loyalties, the cherished independence of each society,  a prejudice in favour of letting managers emerge 'from the ranks' and against those who were university educated - all these began to work against the Co-op. There was no lack of detailed analysis of what was wrong (see Co-operative Independent Commission, 1958), but there was weak central direction and a determination among societies to continue trading until they had to merge in order to survive. Mergers have reduced the original 1000 societies to forty-six (as at the year 2000), but faced with some of the most effective and efficient multiple retailers in the world the movement has declined steadily until it now has a market share of just under 4 per cent. It has been overtaken by three multiple chains in its strongest area, food retailing, where it has around 7 per cent of the market.

 

The German movement was reconstituted after the war, and by 1953 had nearly two million members. However, as in the UK, it faced stiff competition. Though the German co-op continued to grow, it lost market share; by 1965 it had 8.6 per cent of the market, multiple stores 19.3 per cent and the wholesalers' purchasing groups 31 per cent (Brazda, 1989). The response was also similar. Instead of paying dividend to members, co-ops began to offer rebates to all customers, thus weakening the vital connection between membership and economic returns. Similar too were the reports on the structural weaknesses of the sector, attempts to organise mergers being hampered by weak central direction, and the resistance of small societies determined to keep their autonomy even at the risk of extinction. As in Britain, a plan for regionalisation took shape slowly and mergers took place out of weakness rather than in a planned way. In the early 1970s, in response to mounting debts, societies began to convert to a conventional limited company form, and amalgamated in one central organisation, Co-op Zentrale AG, which by 1980 was back in profit. However, weak accountability structures and fraudulent management led to further drastic reorganisation until by 1989 the movement had only thirty- seven societies, with 650,000 members. Some of the healthiest societies, such as Co-op Dortmund, resisted the conversion to a joint stock company. This society, by continuing to pay attention to member relations and pay a traditional dividend, remained highly successful (Brazda, 1989). By 1988, it had nearly half a million members and over 14 per cent of local retail trade. However, stagnating retail trade and intensified competition led to, a withdrawal of shares by members, the sale of stores, and the society's eventual dissolution (Kurimoto, 1999).

A similar story can be told in other Western European countries. In Austria, a too-rapid expansion in the 1970s led societies into a serious debt burden, and eventual amalgamation into one Konsum Austria. It is interesting to note that in the UK some co-operative revivalists have promoted the idea of one national society; in the case of Austria stagnation and the concealing of the crisis from consumer-members led, in 1995, to the national society's (and therefore the whole movement's) bankruptcy (Schediwy, 1996). In the Netherlands, in 1973, the movement had to be sold off to the private sector. In France, in 1985, around 40 per cent of the movement was sold off (Schediwy, 1989).

 

Consumer co-operators in the Scandinavian countries also faced strong competition and the need to rationalise the number of societies. They made a better job of it than their southern counterparts. In Finland, in 1983, thirty-nine regional societies belonging to the 'E-Movement' formed Co-op Finland, the third biggest company group in the country, which did manage to achieve commercial viability, though with this taking precedence over ‘social conscience’ (Schediwy, 1989). A second grouping, SOK, maintained their conscientious stance, keeping open small shops in rural areas and living off massive reserves built up in better times. Eventually drastic restructuring was needed, but this succeeded and the movement gained 23 per cent of the market (together, the two movements now have a creditable 35 per cent of the market). In Sweden, by 1970, market share was 18 per cent and membership over 1.6 million (Schediwy, 1989). Yet by the mid-1980s the movement was in trouble. Instead of amalgamating into one national organisation, the Swedish co-ops decided to form a retail group, maintaining their democratic structure but accepting the discipline of a single business organisation. There are now 102 societies, with 2.2 million members and a rising market share (Ag, 1995). In Norway, 400 societies have joined a buying group, with a corporate identity imposed by their national body, NKL. Again, market share has risen slightly, proving that amalgamation is not always the only alternative to local autonomy (Sivertsen, 1993).

 

Two success stories are the movements in Switzerland and Italy. At first, the postwar history of the movement in Switzerland follows the usual one of decline, with the closure of small shops, resistance to mergers, even the giving up of dividend in favour of rebate stamps which so devalued the idea of membership. Yet a strong central union imposed structural reforms, so that by 1983 market share had increased to 12 per cent of retail trade. One unique factor which partly accounts for the turnaround was that Co-op Suisse faced competition from another consumer co-op, Migros, founded as a conventional, and highly successful retailer, and then in 1940 given to the customers by its owner (Hasler, 1985. By 1970, its twelve regional societies had 872,000 members and a 9.4 per cent share of the market (Setzer, 1989). In Italy, we might have expected the gradual decline seen in other countries, but because of the relative backwardness of the retail trade the co-ops have experienced 'expansion and growing social recognition' (Setzer, 1989, p853), though with only a small share of a fragmented retail trade.

 

The best example of a successful consumer co-operative sector in the postwar period is undoubtedly Japan. Here the movement was reconstituted after the war under one federation. It grew quickly so that by 1947 there were 6500 societies acting as bulk-buying organisations feeding entire populations. Despite political opposition from private traders, which led to laws prohibiting sales to non-members and consumer co-operative banking, and preventing expansion beyond prefectural boundaries, movement continued to grow. By the mid-1960s it might have suffered from the same kinds of processes of stagnation and decline as occurred in most Western European movements, but three new elements ensured continued success. One was the invention of the ‘han’ or joint buying group. This rebuilt member participation from below, giving a key role to women members (most of the han were organised by women as housewives), and enabling societies to consult members regularly, involving them in product testing and consumer campaigns. The second element was the development of co-op branded goods by the national federation, goods that gained a reputation for quality, freedom from adulteration, and environmental friendliness. Third, co-operative leadership and management were revitalised by an influx of educated people who had experienced the very successful university co-operative movement, and they brought to the movement new direction and expertise. They managed to do what other movements had thought was impossible: to make large- scale organisation compatible with member democracy and organisational efficiency. Though there are now nearly 600 co-ops, the top thirty account for 60 per cent of turnover. And though 20 per cent of households are members, the average spend is low and in the bulk-buy groups is restricted to a basic range of goods, so market share is only 2.6 per cent (Nomura, 1993). It is, however, the largest retail chain in a very fragmented market, and it leads the field in the efficiency of its distribution system, the advanced use of new technology, and the development of larger stores. However, it also faces problems. Recently, the pre-eminent reputation of the Japanese movement was dented when Co-op Sapporo and two other co-ops on the same island got into economic difficulties; the Japanese Consumer Co-operative Union had to step in with a rescue operation (Kurirnoto, 1999).

 

 

A brief evaluation of the consumer cooperative form

 

The above outline history of the development of the consumer co-operative in the developed world has shown just how large it has become and how economically successful, at least until its decline in some countries since the early 1980s. It does not show to what extent the needs, views and interests of consumers have been advanced by this form of consumer self-supply, and how it compares to other ways of representing consumer interests, such as campaign groups or local government consumer protection services. A thorough evaluation of their contribution would take a major research effort, which has yet to be carried out (a cross-national study led by Brazda and Schediwy, published as a two-volume series in 1989, deals more with the economic issue of strategies for survival in the face of competition). Here we shall confine ourselves to some broad generalisations about five key indicators of success, from the consumer point of view:

·        democratic control by consumers,

·        ability to reward members with lower costs and/or better quality than competitors;

·        ability to protect consumers against market failures;

·        influence on government consumer policy; and

·        ability to meet new demands from 'ethical consumers' and environmental groups.

 

We shall confine ourselves also to a comparison between two widely differing co-operative sectors, in the UK and Japan.

 

Democratic control by consumers

There is no doubt that the societies set up as part of the Rochdale movement were highly democratic. There was one person, one vote regardless of shareholding; directors were held to account through quarterly members' meetings; and higher-level organisations were organ- ised-on the principle of federation, with the national level Co-operative Union organising annual congresses, referred to quite unselfconsciously as the 'parliament' of the movement. Commentators of the time confirm that day-to-day decision-making was characterised by tolerance, attention to detail, and open debate, backed up in many societies by a commitment to member education (Holyoake, 1907). Most societies were small, and the interest of managers was kept in check by rules restricting the proportion of employees who could be elected to the board. At first, women were excluded from office, not by rule but by social convention, but the Women's Co-operative Guild, founded in 1883, was able to train and encourage women to become co-operative board members, local government councillors and magistrates (Gaffin and Thoms, 1983). By the interwar period, there were some very large societies, but reports expressed satisfaction with the democratic side of the movement (Webb, S. and Webb, B., 1921; Carr-Saunders et at 1938). Postwar, oligarchies emerged, led by powerful individuals, and low levels of participation were reported, with only a tiny percentage of members, and with fewer contested elections (Ostergaard and Halsey, 1965). It was in the smaller societies that apathy had begun; in the large city societies elections were contested by political party groups, which kept the democratic process alive. The excessive power of top managers was illustrated by the slow pace of mergers, and there were some spectacular failures of governance by boards that allowed managers to negotiate merger terms to their own advantage. Recently, there have been genuine reforms: new directors are now offered training through an Institute of Co-operative Directors, member relations departments have secured the resources to mount effective member recruitment campaigns, and a recent report on corporate governance has prompted rule changes enforcing control by elected boards. The largest societies have evolved complex voting patterns based on regional committees, and elections are becoming more contested.

 

The experience in the other European countries where the movement has survived has followed a roughly similar pattern. It might have done the same in Japan, but for some unique factors that have encouraged the Japanese movement to maintain a high level of democratic control throughout the postwar period. In the 1960s they invented the han, bulk-buying groups of five to ten households, mainly led by women, which became the basic building block of the movement. The han, along with groups based on co-op stores, elected representatives to local committees, who then elected higher committees, which enabled even the largest societies such as Co-op Kobe to remain truly democratic. They began to reinforce this process by consulting members regularly through the ban, engaging them directly in product testing, social activities, volunteering and consumer campaigning. In this way, it seems the Japanese societies have solved the problem faced throughout the postwar period by European co-ops - how to restructure into larger organisations without losing touch with the members (International Joint Project, 1995).

 

Ability to reward members

In Britain, one of the main incentives to membership was always the dividend it has been estimated that 50 million pounds were returned to members in Britain before the First World War (Birchall, 1994). The effect was enhanced by being spread among so many working-class people, and because the dividend was often a means of small savings that allowed people to survive during recessions (Holyoake, 1907). Later, societies were criticised for giving too much dividend - sometimes up to 12 per cent of purchases - which excluded the poor because prices were kept high. Other incentives were the good quality of products, the reliability and honesty of the employees, and an antipathy towards advertising, which they felt was unnecessary. However, by the 1970s, dividend had been replaced in most societies by discount stamps given to all customers, and membership lost its meaning. The continued need to compete with well-capitalised multiple chains led to the ending of all incentives, and the 'Co-op' was felt to be no different from any other retailer. Recently some regional co-ops and the largest society, CWS, have reintroduced dividend using electronic swipe cards linked to computer systems, which automatically record a member's entitlement (Birchall, 1998b). Although this is not strictly dividend (which has to be declared after surpluses are made), it is an incentive to customer loyalty, and a basis on which the sense of membership could be renewed.

 

In other European countries, again the picture is similar. Co-ops in Norway have also reinstated the dividend using electronic cards. However, Migros in Switzerland shows that there are alternative 'social dividends'; it channels its surpluses into community education activities for members. In Japan there has always been less emphasis on the dividend - rarely does it exceed I per cent of sales. Because customers have to become members in order to trade with the co-op, other incentives can be given, such as the provision of high-quality, pure products, and social dividends such as community facilities. Co-op Kobe, for instance, has built and maintains large, purpose-built community centres in each locality within its region. Because the Japanese movement is a most efficient and modem retailer, it has avoided the vicious circle of low profitability and inability to afford member benefits. Regional co-ops provide generous community facilities that in other countries would be supplied by local authorities.

 

Ability to protect consumers against market failures

As soon as the co-operative sector became large enough, it tended to work against cartels and price-rings. For instance, when in the 1880s shipping companies imposed a price rise, the CWS simply set up its own shipping line. In the interwar period it successfully broke price-rings in the soap trade, tea imports, flour-milling, and baking (Redfem, 1938). Where prices were fixed by government marketing boards, co-ops reduced the price by giving dividend. The use of dividend was opposed by manufacturers, who organised a boycott of the Co-op; again, the movement went into its own production of goods such as lightbulbs, radios, and gramophones. Since the Second World War, the movement in the UK has not been strong enough to affect markets on behalf of consumers, though its insistence on keeping open small, loss-making shops should perhaps be seen as an attempt to mitigate the effects of market changes on those less mobile customers who bear the social costs (Birchall, 1987).

In Japan, in the interwar period, the co-op promoter, Kagawa, organised a consumer boycott of producers who would not sell to the co-ops, but again they were not strong enough to radically affect the markets. Postwar, they began to affect the retail trade through strong advocacy of consumers. For instance, they ran a campaign exposing the poor quality of milk and its adulteration by producers, and directly linking up with agricultural co-ops to ensure a pure supply for co-op members. The movement's share of the milk trade grew rapidly from 1 to 4 per cent. Since then, they have continued to link up with agricultural co-ops to guarantee purity and quality, and developed new lines such as an environmentally friendly washing powder. In the mid-1980s private traders campaigned against the movement, but a government commission found it acted as a 'countervailing power on consumers behalf' and should be supported (Takamura, 1992, p5l).

 

Influence on government consumer policies

Considering its size, the consumer co-operative movement in Britain had very little influence on consumer policy until after the First World War. The exception was the campaigning Women's Co-operative Guild, among whose successes was the inclusion of maternity benefits in the 1911 insurance Act, and the payment of the benefit direct to women (Gaffin and Thoms, 1983). The setting up of a Co-operative Party should have meant a powerful consumer advocate in Parliament, but the record is a disappointing one, of a party tied to the Labour Party and, until recently, lacking in ideas (Carbery, 1969). The Parliamentary Committee of the Co-operative Union, acting as a trade association, had some success, but by the 1960s it had been overtaken in this role by the Consumers' Association, an Organisation dedicated to campaign and research on behalf of consumers. Recently, it could be argued that all-party groups in Parliament have been more effective, for instance in protecting building societies from predatory takeovers, and promoting co-operative housing (Graham, 1998; Love, 1998). In Japan, the movement has suffered from a quite hostile political climate, because of the political power of the private traders linked to the ruling liberal democratic party. Its impact on government consumer policy has also been limited.

 

Ability to meet the demands of ethical consumers                               

The movement in the UK has been quite responsive to ethical demands. During the 1960s, the main issue was a boycott of South African goods, which showed how effective consumers could be when they could vote as to whether a retailer stocks certain goods. More generally, the CWS has been committed to rigorous testing of products for purity in order to produce the Co-op brand, though the impact of this was lessened by a lack of publicity. In the 1970s, the UK Co-operative Bank began an ethical stance, being the first to introduce free banking and publish its charges. It now has a full set of ethical and environmental policies which are endorsed by its customers through market research (Birchall, 1998c). Its parent company, CWS, has launched an 'honesty in labelling' policy and has become the foremost retailer of 'fair trade' products. On the other hand, its competitors are also joining in with ethical stances of their own, realising that the 'ethical consumer’ is a significant part of their market. A new consumer co-operative has been launched called 'Out of this world', which provides information on products through a computer and assures its members that all their ethical concerns will be considered. Clearly, there is potential for consumer-owned businesses to map out new areas of ethical concern and in so doing to attract new members. In Japan, the ethical stance of the movement regarding pure food and the environment is already well established. The latest ethical concern is with a growing elderly population. The han groups are expanding into welfare work; and becoming less of a women's movement, and more a community movement involving working men and women of all age groups (Takamura, 1992).

 

 

The attempted demutualisation of CWS

 

Before we make a final evaluation and look at the prospects for consumer co-operatives in the future, it is important to learn the lessons from the one attempt at demutualisation that has occurred so far. As we have noted, co-operative sectors have sometimes demutualised in order to restructure and to bring in new institutional investors such as trade unions and co-operative banks, but they have never been attacked from outside.

The Co-operative Group (CWS) Ltd is the biggest consumer co-operative in Europe (measured by turnover). Founded in 1863 as the wholesaler and manufacturing arm of the British retail co-operative movement, it is now in reality a group of businesses engaged in food and non-food retailing, funerals, milk production, travel agency, optical services, car sales and garage services, agriculture, engineering and property investment. Among its subsidiaries it has two that are themselves big businesses: the Co-operative Bank and the Co-operative Insurance Society (CIS). Although it sold its food-manufacturing arm in 1994, and is no longer a traditional wholesaler, it co-ordinates a buying group, the Co-operative Retail Trading Group (CRTG), and is responsible for negotiating with manufacturers to produce 'Co-op brand' products. Because it has absorbed, rationalised and invested in over fifty societies, many of which were making a loss, its ownership structure is a hybrid of corporate and individual members. Its corporate shareholders include fifty retail co-operative societies and 120 other co-operatives, and half a million individual members who join through the Society's stores. Its position in the co-operative sector is crucial. In the words of its current chief executive, Graham Melmoth, 'A strong, broadly-based CWS is the rock on which the consumer co-operative proposition stands' (quoted in Birchall, 1998b, pl6).

 

However, when the media began to be interested in the CWS early in 1997, as a result of the rumours of an imminent take-over bid, financial journalists were quick to point to the group's under-performance compared to conventional investor-owned companies. Media criticism also focused on the failure of attempts to merge CWS and the second largest co-operative retailer, CRS (a merger that has since taken place, but only after CRS experienced losses it could not sustain). Under a previous chief executive, CWS had been concentrating on becoming an effective retailer, but had not been emphasising its co-operative nature. With Graham Melmoth's appointment late in 1996, CWS began a strategic review of its business. The Co-operative Bank was growing rapidly, partly because of the development of bold ethical and environmental policies that caught the imagination of existing customers and encouraged many new ones. It was embarking on yet another venture called 'Inclusive Partnership', which emphasised its honesty and sense of responsibility towards all those affected by its business. The Bank had proved that the co-operative form, if defined concretely in terms of an ethical business and backed by a vigorous advertising campaign, could prove a positive advantage in the competition with conventional investor-owned banks. Other parts of the CWS Group lacked such a positive image, though the retail arm had been presented as 'the 'responsible retailer', launching campaigns, for example, on the honest labelling of foods, the customer's 'Right to Know', and healthy eating. On Melmoth's appointment, the 'co-operative difference' began to be stressed. A dividend card was developed that records customer discounts every time they buy from a CWS outlet. Clearly, before the take-over bid, CWS was already trying to establish a new corporate image based on its co-operative nature, but this was interrupted by the need to fight an unexpected battle for its very survival.

 

Co-operative market share of retailing has been failing steadily since the mid-1950s, from a high point of 12 per cent to below 4 per cent. One consequence has been that the CWS's food factories have been under-used, and the Board decided they would like to sell them. In 1994 they accepted an offer from Andrew Regan, an entrepreneur who bought the food manufacturing arm for 111 million pounds and then, after closing some factories and boosting profits in others sold them on, making a net profit thought to be around 3 million. Regan then planned to buy and asset-strip CWS itself-, he had backing from the City of around 1.2 million, the value of CWS's holdings being thought to be between 1.8 and 2 billion. Regan's strategy was reported as being to make an offer for the CWS to its Board, which could only be accepted if the organisation were converted to a company. The Board would then call a general meeting of members to vote on the proposal, and if they backed it, a formal bid would be made. Press speculation had it that Regan planned to keep the food business and to sell the Co-operative Bank (reputedly to the Allied Irish Bank), and the CIS.

However, the complex CWS representative process stood in his way. Because of its unique history, CWS has corporate members and individual members. In accordance with co-operative principles, voting among corporate members is weighted according to the value of purchases made and not by one organization, one vote, or by the value of shareholdings. Corporate members are themselves co-operatives, with their own individual members, who therefore exercise very indirect control over CWS through their representatives. Individual members of CWS Retail are organised into branches, which elect representatives to regions and then to a block of seats on the Board. Unlike building societies and other large consumer co-ops, individual members do not vote directly in CWS annual general meetings, only in their branch and regional meetings. In these respects, CWS democracy is much less direct than that of other co-operative and mutuals, being designed to balance the interests and powers of two very different types of member. There is another important difference between CWS and mutuals in the financial service sector: CWS, like other consumer co-operatives, has an active and committed base of members who are already involved in its democratic process. Members of the Board are much more answerable to their own members, whether these are individual members of CWS or of the societies in membership of CWS.

 

The bid from Regan's investment company, Lanica, never materiabed. CWS found out that one of their senior managers was leaking large amounts of information to the demutualisers, and a High Court injunction was granted, preventing use of the information so provided. CWS also began to investigate further the extension to the Hobson supply contract, finding that a mysterious payment of 2.4 million pounds had been paid to a Cayman Islands account. Because of the taint of illegality, and because of the strenuous defence put up by CWS, the financial backers of the bid pulled out. CWS directors were able to send the bid back to the senders 'unopened and unread'.

 

 

Evaluation of the ‘Lanica Affair’

 

How should we evaluate this, the first ever hostile attempt to take over a consumer co-operative society? There is not much theoretical generalisation to draw on when it comes to comparing the inherent efficiencies of one form of private sector business with another. Compared with the intense interest of public choice theory in the relative merits of public and private service delivery organisations (see Pollitt and Birchall, 1998), this is an underdeveloped area; as Bager points out, theorists are more concerned with what organisations do than with what they are (Bager, 1994). Buckland and Thion suggest 'organisational form is a consequence of the nature of the agency problem presented, and the mode of its resolution' (1991, P357), and that non-plc forms have been set up to solve problems of market failure in the 'normal' market. Consumer co-ops are an example of collective consumers solving their own agency problems. This was certainly true in the early days, with food adulteration, inefficient, credit-based private retailing, and underdeveloped wholesale distribution (Birchall, 1994). However, it is difficult to apply this insight to the current co-operative sector, whose existence is based more on institutional inertia, the interests of managers in keeping it trading, and the cushioning effect of large asset bases tied up mainly in property, than on any perceived need to solve agency problems in today's market. In a simple sense, CWS exists because it has continued to exist. As we have noted, it is underperforming compared to its competitors. This could point to inherent weaknesses of organisational form, but equally could be a legacy of its role as an ‘ambulance' for financially weak retail societies, and of the commitment of its directors to keep open less profitable community-based shops. It has certainly not been trading on a level playing field with its competitors. There is some strength, also, in the argument that co-operatives' 'bottom- line' is different, and that they should not be compared directly with investor-owned businesses. However, while going some way to defend a low profit to capital ratio, this argument does not explain why co-operative societies have been under-performing on several other key indicators such as retail sales per square metre of store space. Regardless of their ultimate goals, they are simply not as good at retailing as their multiple chain competitors.

 

This point is softened somewhat by examples of regional co-operative societies in some parts of Britain that are performing well, both in turnover and profitability, in comparison with similar retailers. The key to success seems to have been good management, a strong local identity, development of profitable non-food business such as funerals, travel agency and car sales, and a business strategy of upgrading existing town centre and community-based stores rather than attempting to enter the superstore market where their competitors are strongest. In some instances, notably in travel and funerals, they have broken price rings operated by their competitors and met Buckland and Thion's expectation that non-plc forms will flourish where markets are failing.

 

In order to prove the hypothesis that co-ops are inherently less efficient than plcs in the retail sector, one would have to take all of these points into consideration, and then focus on some other key variables that have been identified as affecting performance: for example, ability to raise capital, differences in managerial incentives, and governance and accountability structures, between the co-operative and plc forms. Co-operatives are unable to raise money through share issues, and tend to borrow more from banks. However, they have had some advantages over their competitors: they have inherited a strong asset base in commercial and industrial property and can raise funds from their members through non-voting preference shares. In 1958, the seminal 'Gaitskell Report' on the consumer co-operative sector in the UK estimated that there was more than enough capital to support an enormously ambitious modernisation programme (Birchag, 1994). However, since then, the asset base has mostly been squandered in stemming trading losses, and the potential for raising money from members has not been fully exploited (see Kurirnoto, 1999).

 

There are certainly differences in management incentives: co-operative managers cannot receive share options, though their salaries and bonuses do keep up with those of their competitors. There was, until the 1980s, a tendency to recruit from within, thus ensuring the loyalty of co-operative staff but not always guaranteeing competence. However, there has been a great deal of movement of top managers between the sectors, and co- operative boards seldom complain of an inability to recruit people of talent. More serious is the charge that the governance of co-operatives allows managers to under-perform because directors put more value on social aims and preservation of existing jobs than on profitability. During the postwar period, there has been a gradual separation of two aspects of the organisation that had previously been held together: the business enterprise, and the membership association (Stryjan, 1994). There had always been tensions between these two aspects of a co-operative, but they had been held together by one fundamental mechanism: the regular payment of dividend on purchases. Neglect of the membership base and abandonment of dividend have meant that there has been literally no one to complain when co-operatives return low profits.

 

In many societies, managers and directors have been insulated from almost all pressure from members. They have been able to hide poor trading results, and remain unaccountable until they have had to ask members to endorse a merger with a larger co-operative because the society was effectively bankrupt. The restoration of dividend through the electronic card might induce members to put pressure on their managers for higher returns. A more likely alternative will be the forming of a membership group interested altruistically in providing a 'social dividend'. One regional society, the Oxford, Swindon and Gloucester, has begun to allocate a small percentage of surpluses to a development fund for new co-operatives, to be matched by local authority funding, and this has revived interest in the performance of the society by local activists. However, many societies still have an accountability deficit.

 

Can the CWS prevent further attempts to take it over? There is no doubt of the determination of co-operative managers and directors to defend the Society. The review that had been begun before the take-over bid produced a fundamental restructuring of the business, a new retail trading strategy concentrating on the Society's strength in convenience stores and small supermarkets, and a new focus on the CWS as a family of businesses, emphasising the potential synergies between them. There was also an ongoing commitment towards changing the organisational culture, with a training course in 'Co-operative Values, Principles and Future' being extended to all 35,000 staff, and with a stated determination to change from a 'command and control' style to one of empowerment. In October 1997, the CWS Board introduced some rule changes that would make it more difficult for a hostile take-over to succeed, such as requiring card votes for changes of rules, and higher thresholds for the numbers required to call special general meetings. They could have played down membership altogether, but to their credit the Board declared a commitment to expanding and encouraging a more active membership base, accepting that in the long run this is the best defence against take-over.

 

Other societies have also made rule changes and restricted membership to people who lived in their trading area, making them sign a declaration of support for co-operative principles or prove their loyalty to a particular store before allowing them to join. However, legal barriers to conversion will always be limited by the need to safeguard the rights of individual members. In the future, the continued existence of co-operatives will depend on their ability to compete effectively in the markets in which they operate, and to provide benefits to members that they cannot get from conventional companies. These will include both material rewards and the satisfaction that comes from ethical trading. Co-operatives have to call out to, and to have faith in, the loyalty and conunitment of their members.

 

 

Can consumer co-operatives justify their continued existence?

 

Why should co-operatives survive? This question has been raised most urgently by the attempted demutualisation, some of whose supporters argued not just that there was an economic incentive for conversion, but also a kind of moral imperative to make good use of assets that were currently being under-used. There are three kinds of argument in favour of the continued use of these assets by co-operatives: arguments derived from a critique of capitalism; arguments derived from co-operative principles; and arguments about market failure. They each have two aspects to them, which tend to merge but need to be kept separate: an ideal argument about how the co-operative form ought to be superior or will be in the future; and an argument derived from real instances of successful co-operative action.

 

It is possible to create systematic models of political theory that value different types of Organisation for reasons to do with ultimate values such as liberty, equality and fraternity, and second-order values such as democracy and self-help (Birchall, 1988, 1997b). Here we shall note how various authors have defended co-operative forms from an idealistic perspective. Ephraim Gil provides a high-level argument for a 'practical strategy of long-range evolution' towards a co-operative economy (1998, p5). It contains a critique of the existing, mainly capitalist, system: that it puts profits before people, displaces workers, relocates where labour is cheaper and so on. A counter-strategy of local economic development in which capital is under local control would put great stress on co-operatives and mutuals. Stanley Maron contrasts competitive capitalism and what he calls 'consensual economics', pointing out that unrestrained capitalism has caused economic chaos and acute problems of redistribution (Maron, 1998). He believes that a new class of consumers is being formed in the global market that is the potential foundation for a new conununitarian economics. Obviously, despite the high level of abstraction in such arguments, the role of CWS and similar organisations is seen to have great potential. A less abstract argument is provided by Gray and Mooney, who see co-operatives as being rooted in class practice, and conversions as having the effect of a permanent loss of 'class instruments' that removes them from possible availability during periods of class mobilisation (1998, p42). Their argument applies specifically to agricultural co-ops and their conversion to plcs, but it might well apply to consumer co-ops if they are seen, as they traditionally have been, as part of a wider set of working- class institutions. However, it is difficult to envisage a scenario in which organisations such as CWS would become a focus of class action; the traditional links with the labour and trade union movement have almost completely withered (and in any case it could be argued that the class basis of the co-ops' customers has always included artisans and lower middle classes). More generally, arguments for a 'social economy' or third sector distinct from, and challenging, public and private for-profit sectors, have some salience, and a defence of CWS and similar organisations could be mounted on the basis that their conversion would be a loss to this sector. The smaller the sector, the less influential, and the less able to demonstrate a different set of corporate values.

 

The second kind of argument derives from co-operative principles. Co-operatives are constituted as democratic organisations on the basis of one person, one vote; they return surpluses to members in proportion to trade and not to capital; and so are designed to have a different relationship between people, capital and economic results. it can be argued that these in-built principles are an indirect critique of the plc form, and represent an alternative model of exchange, with people taking precedence over capital. Though they are not anti-capitalist, they have the potential to embody alternative values and so should be preserved (Michelsen, 1994). Gray and Mooney identify a rhetoric of member-ownership and control among co-operative advocates that allows us to see co-operatives as different types of organisation by design and purpose, by aspirations and relationships between stakeholders' (1998, p45). This kind of argument does not demand on co-operatives always living up to a particular set of  values, merely on their existing as an alternative form. Their existence is in itself a challenge to orthodoxy. However, one can see how limited the argument is when faced with evidence that this form is less efficient and effective than the plc. One cannot escape the need to evaluate the actual practice of co-operatives.

 

The third kind of argument is one we have already met, the argument from market failure. Anheier and Ben-Ner argue that, in a perfect world of pure private goods and perfect information, we would not care what type of organisation provided goods and services (1997). In reality there are externalities and a lack of information, and if this causes a structural deficit between producers and consumers, consumer co-ops are one option. However, there are other options such as state regulation, consumer associations, or self-regulation by the producers, and a good case could be made out for a historical shift, in Western Europe at least, from the consumer co-operative model to these other alternatives. Economic theory is good at specifying the conditions under which co-operatives might arise, but less good at explaining their continued existence. For instance, Femida Handy (1997) offers two major explanations for the existence of non- profits: contract failure (the inability of plcs to generate trust among consumers), and government failure (the inability of governments to meet the needs of public-service users). The co-existence of non-profits and for- profits is explained by the fact that they cater for heterogeneous demands. However, Handy's most convincing example derives from the elderly care sector, where there are acute problems of information and trust, and it cannot account for the co-existence of consumer co-ops that (until the recent attempts to emphasis the 'co-operative difference') have seemed intent mainly on copying their competitors. Again, we come back to the uncomfortable conclusion that consumer co-ops exist because they have existed, and no one has yet attempted to take them over or convert them from within into a for-profit form.

 

 

Conclusion

 

The success of CWS in defending itself against a hostile take-over bid does not show that consumer co-operatives in general are safe. We have noted that, because of its complex ownership structure and the illegal way in which its opponents operated, CWS has enjoyed certain advantages that other co-ops would not have under similar circumstances. In particular, the loyalty of its members was never put to the test. However, in the UK, the shock caused to other consumer co-operatives has led them to strengthen their constitutional defences, and to take steps to develop an active and loyal membership. Their best defence may be in not being a very attractive prospect for take-over in the first place. Their continued poor performance relative to their competitors in the food sector makes them (with a few notable exceptions) less obviously worth asset-stripping than was the CWS with its large banking, insurance, funerals, travel and other businesses. On the other hand, with the competition in the UK food sector becoming more intense, and the development of new retail sites giving way to growth by acquisition, some of the town centre assets of regional co-operative societies may come under intense scrutiny, and the loyalty of their members may yet be put to the test.

 

What does the case of the CWS show about whether consumer co-ops are inherently less efficient and effective than their competitors? There are three reasons why the City might back a take-over bid: because there are substantial reserves that can be released by demutualisation, because the targeted business is under-performing but has substantial assets, or because it is performing well and can add value to a competitors business. The first reason applies to financial services, but not to co-operative retailing; co-operative reserves tend to be fully utilised. However, CWS shows that the second and third reasons can both be present at the same time: underperforming in food retailing, CWS also has substantial businesses - banking, insurance, travel, funerals - that are outperforming the competition. This indicates that the question as to whether consumer co-ops are inherently less efficient than their competitors can only be answered in relation to each retailing sector. The nature of the competition, the relative advantages of having an established market presence, the ability to differentiate by marketing the 'co-operative difference', vary by sector.

 

For academic observers, the attempted take-over gives a new salience to the 'reproduction perspective', which sees the continued existence of co-operatives as an ongoing achievement, 'a project that has to be reinvented anew every day' (Stryjan, 1994, p75). It also questions the traditional dichotomy between the business and the association; instead of seeing these as irreconcilable, we begin to see them as complementary; under threat of take-over, members become both investors in the business and protectors of the association. Case studies of faded co-operatives show that development of the business away from a sound membership base tends to be unsuccessful; ultimately, democratic deficit leads to unsound business structure (Kurimoto, 1999). The CWS take-over bid also shows that it might lead to loss of the business, when members are asked to vote to dissolve the association. In consequence, CWS and other regional societies have begun to take some tentative steps towards the reintegration of the business and the association. They realise that members give them a potential business advantage over their competitors as well as forcing managers and directors continually to justify the continued existence of the co-operative. If they are unsuccessful, co-operative advocates will have to begin to address seriously the question of whether their assets can be better used in other ways. If they are successful, they will demonstrate that there is still a limited but useful place in the market for the consumer co-operative form.