The challenges facing small co-ops – and how to overcome them
2022 03 30
There are over 5,000 co-ops in the UK; 3 million around the world. But how easy is it to set up a new one, and find the right support? We’ve spoken with four co-op development workers and three regional organisations who are often the first port of call. What support and funding is available, and what are the biggest challenges?
According to Oliver Sylvester-Bradley of the Open Co-op, setting up a small co-op is fundamentally easy. “People waste huge amounts of time worrying about their legal structure, but you can set up a simple co-op by forming a co-operative association between a few founding members in minutes, by agreeing to follow the co-operative principles,” he says.
“It’s very easy if you are of the DIY persuasion,” adds Alex Lawrie of Somerset Co-operative Services. “A very basic legal structure can be set up for £30 or so using free guides available online; and of course, an unincorporated group can (for a small scale, simple activity) can just start trading with no legal costs at all, and no tax to pay if it is fully mutual.”
Cath Muller of worker co-op support agency Radical Routes agrees: “It’s easy to register a company for £15 with a mate, copy the Articles of Association from Radical Routes’ How to Set Up a Workers Co-op and start advertising your services on social media.
“How far that gets you in terms of generating a liveable income is another matter! But for many who are already working in a gig way, slowly ramping a business organically is doable. The financial problems come with licences, permits, equipment, premises, safety procedure and GDPR etc.”
But others warn that setting up a co-op is harder than it should be.
“The people I help to set up small co-ops have usually spent days, months or even years searching the internet for information on how to set one up; there is information out there, but it doesn’t solve their problem,” says Phil Beardmore, who has been helping to set up co-ops in the West Midlands for around 25 years. For a start, the different legal and governance options can be overwhelming.
“Most people will need expert help from a co-operative development worker,” he adds, “but the problem people have is finding one – the coverage of co-operative development agencies (CDAs) is uneven and patchy across the country.”
In Mr Beardmore’s region, there is a small fund administered by Co-operatives West Midlands, from Central England Co-operative, which offers half a day with a CDA to help with legal and governance options. There is also a national network of support run by and for emerging worker co-ops.
“I would always recommend joining the Worker Co-op Loomio group and Facebook page, and Worker Co-op Solidarity Fund,” says Ms Muller. “These are good places to garner crowd wisdom, make connections and possibly get a tiny bit of funding.”
Mr Lawrie highlights how Co-operatives UK provides a nationwide service through its website, but organisations rooted in local regions differ greatly in terms of what they can do – and who pays for it. “Some are funded to provide free advice (eg Co-op Futures and the Wales Co-operative Centre), some aren’t funded but offer some free advice anyway (us), and others are consultancies that can only help once a source of funding has been identified.”
He adds: “CDAs have been through two decades of a catastrophic decline in which their business models have been disrupted by political change in local authorities and by the internet. They have failed to work together to develop new business models – despite promising experiments such as Stirchley Co-operative Development’s ultra-localism, our use of social investment, Co-operative Assistant Network’s suite of models and diagnostics, Co-op Futures ‘strong relationship with Midcounties, or HCED’s property development.
“The result has been that the co-op sector in the UK has contracted every year for at least the last five years and maybe longer, with market share leaking away to for-profit businesses.”
Small co-ops, big challenges
Making the transition from a group of volunteers with a good idea to a trading and sustainable co-operative business is another challenge. “It’s a big threshold to cross from your existing world to something that might be economically riskier,” says Mr Beardmore. “But we know that co-ops are more likely to survive than other social business models.”
These challenges vary by sector, he says. “Among small energy co-ops, for example, those that thrive have scaled up, employed staff, and collaborated with other co-ops. Those who haven’t moved beyond small projects, that are heavily reliant on volunteers, are prone to burnout.”
“Fundamentally, the challenges usually depend on existing levels of resource, time, capabilities and the capacity for risk,” says Ms Muller. “It also depends on the nature of the business and whether people are starting something new to them or transitioning from an existing business. Some people are able and willing to borrow to fund the set-up and development period, some are not. Some models are easy to copy, others are pioneering.
“Working across cultural differences is difficult – that’s true whether it’s a co-op or not. But it does exacerbate the difficulties of creating a well-functioning collective – non-hierarchy requires very good communication and value alignment.” Because of this, one of the biggest challenges she sees is a group learning “how to work collectively and managing different expectations”.
The lack of funding at different stages is another recurring theme: “Without investment to help get off the ground small co-ops usually rely on the sweat equity of their founders, who can often get burned out or demoralised before the co-op is generating enough income to pay fair wages,” says Mr Sylvester-Bradley. “This capital conundrum is one of the issues we are aiming to solve at coopdata.club, by providing a mechanism for co-ops to leverage other co-ops’ email lists for cross-promotion. Co-ops want to help other co-ops, so it makes sense for them to promote each other to reduce customer acquisition costs.”
People’s personal situations also make it more of a challenge, adds Cath Muller. “It is harder [to set up a co-op now] than it was pre-Universal Credit,” she says. “It was harder on JSA than it was on Unemployment Benefit before that. It’s been getting harder over the years as the government makes it more difficult or more time-consuming to not have an income from employment, which is a common way that small co-ops manage to develop their co-ops, particularly if they don’t have a good credit rating or can’t risk borrowing money. And undoubtedly the sky-rocketing cost of housing is making everything harder that involves life changes and risking one’s income.”
To co-op or not to co-op?
With patchy support and challenges to face, is the co-op model always the best option?
“If you have a group of people with a good idea to create economic or social value, who want to co-operate with each other, then there is usually a co-operative model that will fit, but there are times when the choice between a co-op and another model is very difficult,” says Mr Beardmore.
Ms Muller agrees. “It’s really tempting if you’ve got a co-op and community empowerment mindset to think that co-ops are the solution for everything, but trying to help other people is basically charitable.
“Unless you’re able to do enough education, persuasion and inspiration to get people to want to help themselves and to find the capacity for that, the chances of a co-op (particularly a workers’ co-op) succeeding with extremely limited resources is low. Co-ops in those circumstances often need funding to get to a secure position and often it’s easier as a charity.”
For a small business owner looking to move on, they would be giving up a lot if they transferred their business to a worker co-op rather than to an employee benefit trust model, where tax breaks mean they get paid back in five years, adds Ms Muller. “Hopefully that will change, as Co-operatives UK is lobbying for an extension to the tax incentive to cover worker co-ops. On the other hand, if you want to do anything with a group of freelancers or anything collective with an app, a co-op is the absolute no-brainer way to go. There is a huge amount of goodwill around and some actual mutual aid and support through CoTech, through UnFound, through the Platform Co-operativism Consortium.”
Mr Lawrie sees a lack of awareness of co-ops as part of the problem. “Most people who are open-minded [are] unaware that co-ops exist – so they start a company by default. A great many people wish to not share control or profits fairly and so a company is the only option for them. And charities are a better bet when the intended beneficiaries of the activity are not realistically capable of directing it (eg a wildlife sanctuary).”
Another issue he sees is co-op culture – or the lack of it. “The co-op movement itself is divided between huge retail co-ops prone to conglomeration and executive capture, and tiny co-ops fuelled by individual ego,” says Mr Lawrie. “Although progress has been made connecting social investors to emerging co-ops, this is only really working in low-risk sectors. It adds up to a business culture that is lacking in confidence and dynamism, unable to adapt quickly to threats and opportunities, and falls under the sway of accountants and consultants with no interest in co-op values. Worst of all, the inherent advantages available to a director of a co-op are routinely neglected in favour of half-hearted attempts to ‘be more like a proper business’.”
So what’s the solution?
“Firstly develop a range of equity investment funds so more ordinary people can make tax-advantaged investments spread across a number of co-ops generally, but early-stage co-ops and CDAs especially,” says Alex Lawrie. “Describe the business model and professional practice of co-operative development work in a standard and replicable format. And identify sectors where opportunities for growth overlap with concern for the community (eg advanced recycling; low-input farming; autonomous rail and water vehicles; integrated transport services; social purpose AI; heat pumps) and incentivise the formation of new co-ops in those sectors.”
Collaboration is also key. Phil Beardmore gives the example of fuel and energy co-ops: “We are seeing millions of households thrown into fuel poverty for the first time. There are co-ops doing great work to help people in fuel poverty, but it is difficult to sustain this activity. We don’t have co-operative models to help the fuel-poor that are easily replicable; community energy models that are focused on generating renewable energy or retrofit, haven’t fully crossed over into helping the fuel-poor.
“A lot of the best work in fuel poverty is delivered not by energy experts, but by advocates working for locally based community anchor organisations. These organisations are charities, but of the entrepreneurial kind, and they are well placed to help with fuel poverty because they can attract charitable funding that co-ops can’t because fuel poverty alleviation is essentially philanthropic. We need to explore collaboration between charities and co-ops.”
Plenty of small co-ops thrive. In Northern Ireland, craft beer co-ops like Lacada and Boundary have worked very well and the Belfast Food Co-op is an emerging consumer co-op working to establish a strong membership in north Belfast. Rabble is a worker co-op with a strong ethos in human rights and activism that offers IT solutions to like-minded campaigning organisations. Jubilee Farm is a successful community benefit society using a Community Supported Agriculture (CSA) model, and NICE is a community energy solar bencom created in 2014.
In Wales, Arfon Timber Co-operative is another great example of a flourishing smaller worker co-op, designing and building resilient timber structures, fusing traditional techniques with contemporary eco-building technology. All the timber is sourced locally and processed at its own sawmill.
“As a collective, we found we were able to go for bigger, more interesting contracts and invest in better tools and infrastructure,” says Jane Davidson, one of the co-op’s six worker members. “We are able to team up on some of the necessities of running a business – things like insurance, administration and advertising, which frees up more time and resources to do what it is we actually do. We find we work in less of a hand-to-mouth way – allowing us to take a step back and look at where the business is going – and where we would like it to go.”
We also spoke with regional organisations in Wales, Scotland and Northern Ireland.
“Economic development is now a power partially devolved to local authorities but out of the 11 council areas in NI, only the Belfast City Council explicitly mention co-operative development in their strategy and have allocated resources for the support of new co-ops in the area,” says Tiziana O’Hara, who heads up Northern Ireland’s Co-operative Alternatives, a CDA based in Belfast.
“The Department of the Economy and Invest NI do not have any strategy to grow the co-operative sector in NI, nor to financially support and resource a co-operative development agency for the region, although we asked repeatedly and publicly.”
Co-operative Alternatives sustains itself mostly through resources from outside the region (such as Co-operatives UK’s The Hive and the Co-op Group’s charity arm, the Co-op Foundation) or direct payments from its members. The only programme of support that was funded by NI has been the Community Shares Ready! programme between 2013-2018; this was £300,000 and it raised in excess of £950,000 shares from local people.
“Currently, the hard-won support for co-operatives from Belfast City Council consists of a limited amount of mentoring days (in average 3-4 days per emerging co-op), with seed funding to pay for the registration fees and the use of model rules and, in the past two years only, some additional support for raising awareness of the co-operative model,” she says.
“In addition, we have also secured a Co-op Foundation grant for a two-year project called ‘Cultivating Community Farming’. We will work with 10 groups and organisations helping them to develop communities interested in farming and farmers interested in communities.”
She adds: “There are some development gaps – for instance, lack of skills in democratic governance and decision making, membership engagement, capital raising etc. but also barriers such as access to land and no seed and development funding to support early stages.”
Ms O’Hara believes there is an opportunity for co-ops to create a model of growth that would connect well-established co-operatives with emerging co-ops and more collaborations across the sector. But she is wary of too much scaling up. “‘Scaling up’ enterprises may distract from the opportunities that co-operation can offer and the development of value-driven supply chains,” she adds.
Clare Alexander at Co-op Development Scotland sees the start-up stage as “quite straightforward”, but here too the issue is funding: “Co-ops can face difficulty accessing capital as their structure means there isn’t always clear ownership, making it more difficult for traditional lenders to invest. Achieving scale is another reason that some co-ops fail. It can be challenging making sure that they have enough production to feasibly and consistently supply markets. Keeping the membership engaged after a co-op is set up is also a challenge we see.”
She adds: “Co-ops exist to serve their members, whether they are customers, employees or the local community. Because they do not need to bring benefits to outside shareholders, co-ops focus on making sure members get the best service. The model is ideal for groups looking for a fairer, more just and ethical way to trade or communities looking for a way to collectively buy into a project to help their local area.
“The pandemic generated further interest in alternative business models as many of our norms were questioned and there was a desire to live differently. As we look to economic recovery, Scotland’s National Strategy for Economic Transformation (see news, page 11) seeks to reorient our economy towards wellbeing and fair work, delivering more employment and better wages. Inclusive models such as co-operatives have a critical role to play in this.
The Wales Co-operative Centre delivers Social Business Wales (SBW), which provides support to new and established social businesses – co-ops, social enterprises and employee-owned businesses. Groups are allocated a business adviser who will help them look at strategic and business planning and the right structure.
“Funding is still a challenge,” says enterprise programme director Glenn Bowen, who notes that many traditional lenders still require personal guarantees. “Blended finance options are available through Social Investment Cymru that is run by Wales Council for Voluntary Action (WCVA) and we also work with a number of other funding bodies, including Co-operative & Community Finance.
“Time is also a barrier. If you are setting up as a sole trader the individual is able to make decisions and act very quickly. Within a co-op, we have to keep all our stakeholders aligned.”
He believes there is an opportunity for co-ops “as consumers are thinking more about how they spend their money. More and more they want to buy things in a way that doesn’t harm the planet, consumers want to use their purchasing power to improve their communities. The challenge will be the funding needed to scale up – particularly around digital and platform co-ops.”
In Wales, many will register as a company but will use specialist articles that include co-op principles. Others starting out will choose the charity model. “One big advantage that charities have is rate relief (80% mandatory rate relief and a 20% discretionary rate relieve). Charitable Community Benefit Societies are also eligible but many local authorities are not aware of this.”