Co-op Study 5

Co-operative Wholesale Society Ltd

by Manfred Davidmann

CONTENTS

Introduction

Co-operative Wholesale Society Ltd

Co-op of Co-ops

Allocating the Surplus

Organisation

Pay of Directors and Managers

Reserves

Co-op's Objectives

Accountability of Management

Performance

Co-operative Bank PLC

Co-operative Insurance Society Limited

Notes <..> and References {..}

Relevant Current and Associated Works

Relevant Subject Index Pages and Site Overview

INTRODUCTION

Co-operative Wholesale Society Ltd is one of UK's largest consumer co-ops whose founder members were co-ops. It is also one of the largest retailing co-ops and Britain's largest farmer. The study looks at its profitability, at the extent to which it serves its corporate and individual members and its democratic processes.

This is one of a series of eight studies of co-operatives and mutual societies which were undertaken to determine causes of failure and reasons for success, to see how these enterprises were controlled and managed, to learn from the mistakes of others. What is taking place is fascinating and often unexpected (See 'Relevant Current and Associated Works').

The main report 'Co-operatives: Causes of Failure, Guidelines for Success' is based on these studies. Its conclusions and recommendations are entirely relevant and cover fundamental and practical problems of co-ops and mutual societies, of members, of direction, management and control (See 'Relevant Current and Associated Works').

CO-OPERATIVE WHOLESALE SOCIETY Ltd

Co-operative Wholesale Society Ltd (CWS for short) was formed by co-ops as a co-op of co-ops, as a co-op whose members were co-ops {CWS 01}. Founder members apparently wished to benefit from bulk buying by combining their purchasing power. CWS's profits would be shared out among member co-ops in proportion to their purchases and so be passed in due course to the individual members of these co-ops.

From bulk buying CWS expanded into retailing, manufacturing and farming.

And it has expanded to do much more. Its turnover is GBP 3.0 bill and it employs 35,200 people. Its 8 distribution centres distribute 4,500 co-op brand lines. It has 660 food shops and is Britain's biggest farmer, farming 50,000 acres including 15,000 acres it farms for other landowners. It is a major funeral director, travel agent and optician.

During 1994 it sold its food manufacturing group but continues to manufacture dairy products, shirts and safety footwear. <1>

CO-OP OF CO-OPS

CWS has two divisions and two key subsidiaries. The subsidiaries are wholly owned or controlled by CWS and themselves have other subsidiaries. {CWS 02-04}

The two divisions are called

Co-operative Retail Trading Group (CRTG)
Co-operative Retailing (CR)

The two subsidiaries are

The Co-operative Bank PLC (Co-op Bank)
Co-operative Insurance Society Ltd (CIS)

Note that Co-op Bank and CIS are discussed in separate sections of this study.

Co-operative Retail Trading Group (CRTG) {CWS 03}

This would seem to be a central buying organisation which buys mainly on behalf of CWS's member co-ops, storing and distributing its purchases. It does some marketing for member co-ops, by local, at times national, advertising and by promoting co-op brands.

Co-operative Retailing (CR) {CWS 04}

Retails both food and non-food items. Provides funeral services. Has many travel agencies and optical practices. Has about 740 shops countrywide.

ALLOCATING THE SURPLUS {CWS 02}

CWS's turnover in 1995 was GBP 3.012 bill.

And here we are looking at what they did with their surplus (profit).

Surplus available for allocating includes dividends received from the Co-operative Bank of GBP 4 mill. And in discussing what CWS did with its surplus I am ignoring the relatively minor share interest.

Of particular interest are the allocations to dividends and to reserves, which account for the bulk of CWS's surplus.

Let us start with the DIVIDENDS:

The dividend to co-ops is paid for 'qualifying purchases'. This year member co-ops received GBP 1.50 per GBP 100 of purchases, other co-ops received only GBP 0.75 per GBP 100.

So member co-ops received a dividend of 1.5 per cent, other co-ops buying from and through CWS received only 0.75 per cent.

It appears that individual members, presumably members of CWS's retail outlets, received little although individuals seem to have contributed almost as much capital to CWS as member co-ops:

Now let us look at the RESERVES:

The Co-operative Bank is a fully-owned subsidiary of CWS and so I combined the bank's figures with CWS's figures, as follows:

So the total added to reserves by CWS and its subsidiary is GBP 35.1 mill. The resulting accumulated reserves amount to GBP 542.8 mill.

We can now look at what belongs to CWS's OWNERS. What belongs to owners is firstly the money (capital) they have put into the business. And secondly the surpluses (profits) retained in the business instead of having been paid out to them. In the case of the CWS, as follows:

Revaluation Reserve is the amount by which fixed assets like buildings have increased in value, for example because of inflation.

CWS double-entry bookkeeping enables us to check our analysis:

This is another way of estimating the same information. 'Net assets' is the amount of money which would be left for distributing among the owners if everything belonging to the enterprise were sold and all its debts paid.

So what we have seen is that

Note that CWS has another subsidiary, namely Co-operative Insurance Society Ltd, CIS for short. CWS has not included their results with its own.

The funds belonging to CWS's owners (members) are massive and about 25 per cent of its surplus is paid to members as dividend, 75 per cent is retained in the business.

ORGANISATION

There are thirty directors. {CWS 02}

It is difficult to see how a board of directors of thirty members can function effectively. Too many people. Difficult to get time to say what has to be said, to share knowledge and experience, to contribute.

Food and non-food retailing is organised into seven regional 'businesses'. In each region there is a Chief Officer who is responsible for trading operations as well as for 'democratic processes and structures'. {CWS 02}

'Each region shares the same centralised administrative system and controls, with distribution, buying and marketing co-ordinated nationally.' {CWS 02}

I take this to mean that there is a centrally directed organisation with departmental or divisional heads located at head office.

The work seems to have been divided into divisions such as

Trading (Co-operative Retailing division).
Buying, distribution, marketing (Co-operative Retail Trading Group division).
Administration and control (Possibly including accounting, personnel, planning, and so on).

Decisions would be made at head office and passed down the line.

'There is a clearly defined organisational structure with defined lines of responsibility and delegation of authority. Where appropriate there are procedure manuals and all operations within the Society are required to comply with them.' {CWS 02}

In the absence of more concrete information this statement indicates to me either a fairly authoritarian organisation firmly directed from above, or that there seem to be areas in which people do not work as well together as they should, or possibly a mixture of both.

We saw that the Chief Officer in a region is also 'responsible' for 'democratic processes and structures'. Presumably this means that he is responsible for arranging meetings, publicising them, preparing agendas and recording and distributing minutes, and so on.

There is a 'core membership' (?) of 275,000 individuals {CWS 02} and 'Regional meetings are held with the regional or branch committees elected by members' {CWS 04}.

Presumably individual members are customers of retailing outlets of CWS's Co-operative Retailing division who became members by paying for 10 pence shares.

'... meetings are held with ...' seems to imply discussion rather than deciding policy.

So it is difficult to see how members can influence policy of this single division within the larger organisation, and more so of the whole organisation, particularly when the organisation was originally formed to serve member co-ops and not individual members.

One kind of shares is held by Corporate Members and another kind, namely Individual shares, is held by Individual Members. These shares have a fixed nominal value and earn interest but do not carry voting rights. {CWS 02}

But 'each Individual Member has one vote in the appropriate Branch of the Society and each Branch has voting rights' in proportion to its trade with the Society. {CWS 02}

And Corporate Members, such as member co-ops, vote in proportion to their trade with the Society. {CWS 02}

Capitalism, free enterprise, call it what you will, rests on voting according to number of shares held, that is according to money invested, according to wealth. {CWS 06}

Co-operatives are based on the democratic principle of 'one person, one vote' regardless of the number of shares held or the amount of goods purchased.

Within the CWS, co-ops (not outlets) and branches (not individuals) vote in proportion to their purchases from CWS. The greater the amount purchased, the greater the number of votes. So it seems that co-operative democratic voting principles of one vote per member have been replaced by voting according to volume of purchases.

The bigger co-ops appear to dominate. CWS's own Co-operative Retailing division may be the biggest co-op and I have no information about its role in voting.

PAY OF DIRECTORS AND MANAGERS {CWS 02}

Directors do not get paid for what they do as directors. They appear to have been entitled by General Meetings of the Society to receive certain allowances, expenses and benefits. It would be interesting to know what may, or may not, be claimed by directors for what they do as directors.

The Chief Executive on his own received GBP 372,000 which includes pension contributions of GBP 30,000 and taxable benefits of GBP 8,000.

The five best paid executives received a total of GBP 848,000 which includes pension contributions of GBP 67,000 and taxable benefits of GBP 41,000.

There were 16,900 full-time and 18,300 part-time, a total of 35,200 employees. All their wages and salaries amounted to GBP 313.3 mill which includes pension contributions of GBP 10.1 mill and social security contributions of GBP 20.4 mill.

RESERVES

We saw in 'Allocating the Surplus' that

... the total added to reserves by CWS and its subsidiary is GBP 35.1 mill. The resulting accumulated reserves amount to GBP 542.8 mill.

Co-ops find it more difficult to raise capital as they do not have shareholders who can be asked to invest more. Yet much capital is required to update facilities, to open new superstores, supermarkets, shopping centres.

CWS seems to have been obtaining capital by selling manufacturing facilities and by retaining profits.

CO-OP'S OBJECTIVES

I have not come across a statement of CWS's co-operative objectives.

ACCOUNTABILITY OF MANAGEMENT

I have no information enabling me to assess how directors, executives and managers are appointed, evaluated, held to account, replaced if necessary.

And yet these are vital matters of concern to members, customers, employees and the community.

One would like to have information about how policy is decided, how it is implemented, and how those who make the decisions are held accountable for what they do and for what they fail to do.

How are directors appointed and rotated? Are directors' meetings open to all members? If not, why not? Are directors attending meetings regularly? Are they setting policies in accordance with the wishes of the members or according to their own likes and dislikes? Can they draw on independent advice as and when required? And so on.

Who appoints the chief executive and senior executives? How are they appointed? How and how often is their performance evaluated?

And how does the co-op ensure that its directors, executives and managers believe in, wish to apply and advance co-operative principles and practice?

A good discussion of the importance of such matters to the co-operative movement as a whole can be found in an article by Clive Woodcock {CWS 05}.

PERFORMANCE

660 food shops. Britain's biggest farmer, farming 50,000 acres. A major funeral director, travel agent and optician. Eight distribution centres. 4,500 co-op brand lines.

It employs 35,200 people of which 18,300 work part-time. Its turnover is GBP 3.012 bill.

Allocating the Surplus:

I could be wrong but to me the CWS looks like an unwieldy large enterprise which is not doing very well but keeps going by absorbing most of its profits.

THE CO-OPERATIVE BANK PLC

Co-operative Bank is a fully owned subsidiary of CWS (Co-operative Wholesale Society) and CWS is apparently the only shareholder. CWS's Annual Report refers to The Co-operative Bank as a 'PLC', that is as a publicly quoted limited liability company.

The bank's business would appear to be almost wholly within the UK, serving retail societies, trade unions, local authorities, small businesses and the general public.

It has 1.5 million customers, has 158 branches/outlets, employs about 3,800 people.

With total assets of GBP 3.9 billion, its 1995/96 profits are GBP 23.5 mill.

The bank is owned neither by its employees nor by its customers. I am not aware of any democratic control of its operations. A company which by itself is not a co-operative does not become a co-operative simply because it is owned by a co-operative.

It has been suggested that depositors should be transformed 'into shareholders by making the members accept full responsibility for the venture and giving members sufficient information to take key decisions.'

Apparently advocating that ownership of the Co-operative Bank should be transferred from CWS to depositors called shareholders. But Co-operative Bank is a PLC and shares would each have the same face value. It is the right to vote which has to be defined. One vote per share would transform the bank into a bank like any other commercial bank. One vote per depositor would be more democratic, more like a co-operative of investors. What about borrowers? There is a mutual interest between lenders and borrowers.

One would have to arrange matters to enable between 1 and 1.5 million customers to decide policy, actively and effectively control how policy is implemented and hold directors and management accountable.

It is an innovative bank. To mention just a few innovations, it led the way with free banking, interest-bearing current accounts and by refusing to provide credit references without the customer's permission.

So it seems to put people first and provide good service, either because it pays to do so, or because it is owned by CWS, or a mixture of both.

But I have seen reports that in 1984 it made 8 per cent of its employees redundant. And that in 1991 it made over 20 per cent of its employees redundant as it moved from branch-based to home-based (telephone) banking.

The bank's operating income in 1995/96 was GBP 237.5 mill. The surplus available for allocating to shareholders and reserves was GBP 23.5 million, after putting aside GBP 22.7 million for bad and doubtful debts.

The way I see it is that the bank is saying that GBP 22.7 million may not be repaid by borrowers. But this is a large sum, particularly as it halved the available profit. And such losses appear to be taking place each year.

Of the remaining profit of GBP 23.5 million, CWS received a dividend of GBP 4 million and added to its overall reserves GBP 13.6 million, a total of GBP 17.6 million.

The net assets of the bank, that is its reserves, which is what would remain of its assets after all debts had been paid, was GBP 112.6 million.

The Co-operative Bank has two subsidiaries and it looks as if it owns 36 per cent of the share capital of Unity Trust Bank PLC. When Unity Trust was first formed, the Co-operative Bank apparently provided eight out of fifteen directors and so had a major influence on its progress.

Commercial banks were looking at what the market would bear, at how to maximise profits, apparently without concern about losing customers as other commercial banks were doing much the same.

But Co-operative Bank acted in a more socially responsible way towards its customers than commercial banks unaffiliated to the co-operative movement.

It may be that the reason for leading the way in such matters was that the directors realised that it is good business to serve customers well.

If you like, the directors were able to realise this because of their co-operative background.

CO-OPERATIVE INSURANCE SOCIETY LIMITED (CIS)

Co-operative Insurance Society Limited (CIS for short) is a wholly owned subsidiary of CWS and seems to have only one shareholder, namely the CWS. It does pay interest on its nominal share capital.

It is one of Britain's largest insurers and one of its top five providers of personal pensions. With a staff of 12,200 and 207 offices, it insures 3.5 million families. It insures homes, cars and possessions and arranges personal pensions and mortgages. It provides insurance for most retail societies.

The market value of the assets which it holds on behalf of policy holders amounts to GBP 12.8 billion. Its combined premium and investment income is GBP 2.0 billion.

The surplus left after paying all expenses and after paying interest to shareholders is CIS's profits. Its profits are used for the benefit of policyholders and the amount allocated to policyholders for 1995/96 is GBP 581 million.

It has five subsidiary companies.

Consolidated accounts usually include assets and performance of subsidiary companies. CWS's '1995 Report and Financial Statements' includes the Co-operative Bank but not the much larger CIS.

CWS being a co-operative and apparently CIS's only shareholder, I feel that more information could have been included about CIS's performance. About results obtained, investing performance, remuneration or fees paid to directors. About how profits are estimated and shared out, and so on.

NOTES AND REFERENCES

NOTES

REFERENCES

Relevant Current and Associated Works

MAIN REPORT

CO-OPERATIVES: CAUSES OF FAILURE, GUIDELINES FOR SUCCESS

Manfred Davidmann
https://www.solhaam.org/

ASSOCIATED CO-OP STUDIES
Manfred Davidmann
https://www.solhaam.org/

1. The Trustee Savings Bank Give-Away
2. Credit Unions
3. Building Societies
4. Co-operative Retail Services Ltd
5. 5a. Co-operative Wholesale Society Ltd
5b. Co-operative Bank PLC
5c. Co-operative Insurance Society Limited
6. John Lewis Partnership PLC
7. Mondragon Co-operatives (Mondragon Corporacion Cooperativa)
8. Kibbutzim

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