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Co-operatives

Restructuring co-operatives as a business structure

"Mitre 10 is a brand in deep trouble" writes Neil Shoebridge today. He also wrote that Mitre 10 is a retail co-operative, something I'd forgotten. To clarify, Mitre 10 uses a business co-operative legal structure, not a corporate structure. Hence there is no one corporation owning and controlling all the Mitre 10 retail outlets.

This triggered a hunch in my mind as a business structuring lawyer about  how the co-operative structure of Mitre 10 might be speeding Mitre 10's slide against the rise and rise of the Bunnings Group Ltd retail chain. There are many reasons for Mitre 10's slide relative to Bunnings. In this article I'll focus on its structure.

For years I've been monitoring the hardware and nursery retailing sector closely as I act for affected clients who use either a co-operative structure or a corporate structure to compete in Australia's A$20 billion hardware retailing sector. This article explores the business challenge faced by co-operatives.

Bunnings is rising relative to Mitre 10. You may have missed this month's announced A$20 billion takeover bid for the Coles Group by Wesfarmers and its private equity partners. Wesfarmers owns the Bunnings chain and operates it as a corporate division. If you live in Australia you are unlikely to have missed Bunnings' print and electronic advertisements over recent years. Its rise recalls that of Home Depot in the United States.

mitre10logoIn contrast, Mitre 10 seems to be going nowhere. As an anecdotal observation, my local Mitre 10 outlet closed about two years ago. My local choice is between Bunnings or Thrifty-Link.

Aspects of business co-operatives as a type of business structure

Co-operatives, as a type of business collaboration, are often established because no single company or business entity has a total solution. A co-operative is a collaborative arrangement and stands in contrast to a corporate structure which tends to concentrate ownership and control. In New South Wales business co-operatives are regulated by the Co-operatives Act 1992 (NSW) and by the Department of Fair Trading. Similar regimes operate elsewhere in Australia and abroad.

A co-operative is a type of structure that because of its legal design features tends to maintain an "all for one and one for all" culture. Co-operatives can work very smoothly for a long time, and have for decades for hundreds of co-operatives throughout New South Wales in a host of different sectors. This is, for example, the happy history for many rural co-operatives formed by fisheries or fruit growers who form say a canning factory and facility owned by a joint co-operative.

The problem

However, problems arise when a business structured as a co-operative faces rapid shifts in market dynamics or the harsh wind of competition from a focused predator. Think Mitre 10 versus Bunnings.

Faced by competition, co-operatives sometimes need restructuring. The word restructuring involves changing legal arrangements that affect business ownership and control.

The crunch

Here a co-operative can face an insurmountable obstacle, a conflict between individual needs versus group  health or even survival. A common problem is that individual members, or groups of members, can tend to want any restructure to suit their specific needs rather than the health or survival of the collaborators as a whole. If the situation turns into a problem then challenges arise for the "all for one and one for all" culture of a co-operative.

The conclusion

Lesson 1: form follows function. Some business structures have legal design limitations making them difficult to adapt to change. Co-operatives are highly democratic structures, this is not the best structure for every strategic need.

Lesson 2: selection of a business structure is a strategic decision. This means that it is best to select a business structure only after conversations focused on long-term business strategy. It can be too hard to change some structures once participants become used to a certain balance in the way it is owned and controlled.

Following these lessons from practice, some years ago I tried to capture nutshell observations in a table reproduced below.

  • The table provides a simple overview of many complex considerations when selecting an appropriate business structure for an enterprise or restructuring an enterprise.
  • The table might only deal with the tip of the iceberg of Mitre 10's woes, but it will help anyone start a conversation about how business design affects business operations and management especially to cope with the harsh wind of competition.
  • As you'll note the table compares the business design of three types of collaborative arrangements (ie a franchise, licence and co-operative business) across seven business elements.

Franchises, Licences and Co-operatives: Differences & Framework

 

Franchise

Licence

Co-operatives

1. Nature of the enterprise

Franchising is a business technique borrowing ideas from licensing but focused on the standardisation of complete business systems.

Legal compliance is required with the Franchising Code of Conduct.

 

Licensing is a business technique involving the grant by a licensor to a licensee of a bundle of rights, as opposed to the sale of an asset.

 

A co-operative is an association of businesses which collaborate for economies of scale benefits, eg for their purchasing, marketing or manufacturing functions.

2. Business operations integrated

Integrates most business systems.  May involve the grant of rights typically over a bundle of intellectual property rights (eg know-how, goodwill, trade marks and business contacts) and some other contractually defined rights.

 

Integrates a component of a business, such as a product or service. A licence may involve the grant of a right over an intellectual property right (such as a trade mark or brand name), other assets or other contractually defined rights.

 

Integrates some business functions.

3. Participant selection

Franchisors very definitely select franchisees.

 

Licensees tend to select licensors.  They are often an established business and can demonstrate that they are in a strong position to operate the licence in question.

 

Members select the co-operative but membership is not necessarily automatic.

4. Participant status

Typically taken by a start-up known as a "franchisee".

 

Typically taken by an established business known as a "licensee".

 

Members are typically established businesses but they also include start-ups.

5. Deal Structuring

Franchisees are offered a

standard deal structure and remuneration package. Legal compliance is required with the Franchising Code of Conduct.

 

Licensees can have negotiation strength permitting them to

frame their offers.

 

Members are offered a standard deal structure and financial arrangement.

6. Duration

The duration of a franchise agreement is typically 3, 5 or 10 years, sometimes with an option to renew.

 

The duration of licences vary greatly.

 

Membership continues so long as a member is satisfied that it is receiving services warranting membership costs and procedures.

7. Ownership of goodwill

Goodwill is owned by the franchisor but the franchisee sometimes gets some "interest" in local goodwill, typically over a geographic territory.

 

There is no goodwill in a licence.

The licensor retains the goodwill in the relevant asset (eg a product, service, system or business).

 

There is no goodwill in membership.  Members retain the goodwill in their business and the co-operative retains the goodwill in its business, trade mark and identifications.


Reference: Neil Shoebridge, "Ad update is not enough for Mitre 10", The Australian Financial Review, 23 April 2007, p. 60.


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