Board's Eye View

From Discounts to Patronage Refunds

Posted on Thu, Feb 28, 2013 @ 04:43 PM

Patronage Refunds vs. Monthly Discounts, DiagramAs the newest Board Member, I was thrilled to attend the Co-op Board Member Leadership Seminar in Minneapolis in mid-January. This was an opportunity to interact with other Co-op Board Members from around the upper Midwest, learn from their experiences, brush up on co-op finance, and share the successes of the Viroqua Food Co-op.

We can be quite proud of our Co-op’s accomplishments, our staff’s performance, and owner involvement in Co-op governance. While we sometimes think we are unique in many ways, seeing how other more mature co-ops have dealt with growth issues, fiscal stewardship and local market conditions enabled us to view our shared path in order to better serve local, organic and healthy food to our community.

As we start 2013, the VFC Board is finalizing the plans for the future of the patronage refund program. By now most owner-members have received, and hopefully cashed, their fiscal year 2011-12 patronage checks.

The patronage checks returned $40,000 of Co-op profit to the members based on total shopping expenditures for the fiscal year ending 6/30/12. This rebate reinforces the fact that the Co-op is financially healthy and committed to sharing that success with the owner-members.

Part of what separates consumer co-ops from other businesses is that co-ops return their profits to owners in proportion to how much they patronize the business. Most cooperatives throughout the world (including REI, Organic Valley, and most natural foods co-ops) do this through a system called Patronage Refunds. Since 1995, the Viroqua Food Co-op has returned profits to our owners before we made them, in the form of discounts at the registers.

The Board has discussed at length the phase out of the previous monthly owner 5% shopping discount and opted for the phase in of the owner patronage refund.

There are disadvantages to our current monthly discount system. It is an advance on income that is not necessarily there, potentially causing the store to lose money or exacerbate losses from other sources. If the store loses money, it hampers its ability to function properly and meet its financial obligations, and the ownership as a group suffers.

Patronage refunds are exciting, sustainable, and flexible. 
Discounts are not.

Exciting: At co-ops that use Patronage Refunds, owners express excitement when they get their refund notice and see how they have helped to contribute to the success of the business they own.

Sustainable: Discounts distribute profits to owners before we make them. The Co-op has been profitable in 11 of the 16 years since the Co-op started giving monthly owner discounts at the register. Patronage refunds allow the Co-op to be profitable and to reinvest those profits into services that meet owner’s needs and impact the world on their behalf.

Flexible: A discount level does not change based on the performance of the Co-op or the changing needs of the owners. With patronage refunds, every year the board decides whether to return profits to owners or to reinvest them in improving services.

Patronage refunds give the Co-op a tax advantage.
The Co-op does not pay tax on the income that we declare as a patronage refund. The Co-op is required to distribute 20% of declared dividends to owners­—roughly the same amount that it would pay in corporate taxes. Therefore, it benefits both the Co-op and owners when owners use their patronage refund.

Patronage refunds are more in keeping with the Co-operative Principles.

Patronage refunds allow for democratic allocation of surpluses each year by the Board of Directors as outlined in Co-op Principle #3.

Patronage refunds reinforce the true relationship between owners and the Co-op.

Monthly discounts at the register foster feelings of entitlement (as an owner, I deserve to pay less) and frustration (why isn’t the discount bigger?). When owners receive their refunds, they see that when the Co-op succeeds, they benefit.

The patronage refund program will fully replace the once-a-month 5% shopping discount by the end of March 2013.

In the coming months, owner-members will vote on revising our existing Co-op bylaws to fully transition to a patronage refund system for future years. In the future, store management may still enact one-time discount programs as part of special promotions or in-store events.

Michael Link, 
VFC Board of Directors

Michael Link

Tags: Board of Directors, Monthly Discounts, Patronage Refunds