From Discounts to Dividends

The Co-op is community owned.

In early 2008 the Co-op Board clarified its vision for the relationship between the owners and the Co-op. That relationship will be built on three pillars: meaningful owner benefits, meaningful owner engagement and the Co-op having a positive impact on the world on the owners’ behalf.

As a first step in realizing that vision, the Board committed to making the change from discounts at the register to Patronage Dividends. From April through Sept 08,leading up to the Annual Meeting in October, the board worked to engage with all of our owners, listen, discuss and amend the plan to ensure that they create a new benefits package that is exciting to owners, sustainable to the Co-op, and flexible enough to accomplish both.

As of January 1st , 2009 The Lexington Cooperative market will no longer give out any discounts at the registers to its member-owners.

Exciting New Benefits for Member Owners Start January 1, 2009:

Everyday Basics Program: Owners will pay every day low prices on at least 25 basic food items throughout the store. Items will include staples like bulk grains, beans, flour, sugar, granola, nuts and tofu. Each item is labeled in the store.

Monthly Bonus Buy Program: Owners will receive 15-20% off regular price on a variety of monthly specials. This is in addition to the CAP flyer specials.

Streamlined Special Order Program for Member Owners: Our special order program will be easy and transparent, with published case pricing on the foods you buy most- and one stop shopping for all store departments. Non- owners will no longer be able to special order products form the Co-op.

2 Owner Appreciation Days : We’ll hold two Owner Appreciation Days per year with additional discounts.

Education: We’ll have seminars and newsletter articles on topics like how to cook using whole ingredients, and how to eat well on a budget.

Newsletter: Bi- monthly newsletters mailed to owners.

Vote!: receive the right to vote for the owner representatives to the Board of Directors and any bylaws changes.

Credit Union: Eligibility to join the Buffalo Co-operative Federal Credit Union.

Patronage Dividends: Our goal is to return at least 10 % of Co-op profits to owners every year thorugh patronage dividends.

And lastly, but most importantly…a dynamic, natural foods store in a friendly environment.

the details on Patronage Dividends:

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 co-operatives throughout the world (including REI, Organic Valley, and most natural foods co-ops) do this through a system called Patronage Dividends. Since 1988, the Lexington Co-operative Market has returned profits to our owners before we made them, in the form of discounts at the registers. Patronage dividends provide the co-op with the opportunity to offer a greater number of services to owners, our community and our future.

here’s how dividends work:

The Co-op provides its owners with a great grocery store. Every owner purchase is recorded at the registers. When the Co-op is profitable, the Board and management review plans and obligations, and decide on how much of the profit to reinvest in the Co-op. The money that is not needed to reinvest in the business is returned to the owners in the form of store credit or (if requested) a check. Each owner’s patronage dividend is based on the amount of their purchases over the fiscal year (July 1- June 30.)

The Board decides which profits to reinvest in store and which to return to owners.

Dividends are exciting, sustainable and flexible. Discounts are not.

Exciting: Few if any owners of the Co-op express excitement at receiving their 2% discount. At Co-ops that use Patronage Dividends, owners express excitement when they get their dividend 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 just 5 of the 20 years since the Co-op has been giving a basic member discount at the register. Dividends 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. The discount level does not change based on the performance of the Co-op or the changing needs of the owners. With dividends, every year the board decides whether to return profits to owners or to reinvest them in improving services.
Dividends give the Co-op a tax advantage.
The Co-op does not pay tax on the income that we declare as dividends. 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 dividend.

Dividends are more in keeping with the Co-operative Principles.

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

Dividends reinforce the true relationship between owners and the Co-op.

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 dividends, they see that when the Co-op succeeds, they benefit.

Everyone’s Doing It.

Over the past 15 years, nearly all of the natural foods co-ops that used to give discounts at the register have switched to a Patronage Dividend system for the reasons outlined above.

Who can I talk with/ email ?

Tim Bartlett 886.1036 x 101
Jenny Bruce 886-1036 x 109
board@lexington.coop

some questions answered

What are patronage dividends?

Will there be other Owner Benefits in addition to patronage dividends?

Yes! But they will be flexible and change often to keep them exciting to the owners and affordable to the Co-op.

Owners-only monthly specials in addition to the CAP flyer
Continuation of the Owner Appreciation Day in July & Holiday Open House in December.
Special orders for Owners only
Continuation of such services as newsletters and participation in co-op governance.

What are the disadvantages of a register discount to the co-op?

The current register or point-of-sale discount has several disadvantages:

It is an advance on income that is not necessarily there, possibly 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.
Large natural foods supermarkets may enter our market in the next few years, providing additional competition. Increasing competition forces lower shelf prices, which reduces the store’s income. This increases the relative value of the discount, thereby increasing the chances that the store will lose money.

What are the advantages to the co-op of patronage dividends?

Patronage dividends have several distinct advantages over a register discount program:

First, unlike a register discount, a patronage dividend program will never cause the store to lose money, even with increased ownership or reduced income.
It will provide owners with exactly their fair share of the store’s income, which might be more or less than the amount provided by their current discount.
Patronage dividends allow the member-owners, through their Board, to decide what happens to the Co-op’s profits each year.
Patronage dividends make it possible for us to finance our future projects instead of taking out bank loans, we keep our money working in our community for our purposes, rather than contributing to the profits of a bank that may be spent or distributed outside our community.
• The Co-op realizes substantial tax advantages

Do I have to pay income tax on my patronage dividend?

NO! Your patronage dividend is considered a reduction of household food costs and not income, therefore it is not taxable. However, if you make your purchases for business purposes, your dividends taxable.

How will transactions be tracked?

The sales total for each owner transaction will be automatically recorded at the registers and credited to the owner’s ownership number. Reports at the end of the year will indicate total purchase amount for each ownership number.

How will dividends be calculated?

First, sales from purchases made by all owners during the year will be totaled. Next, each owner’s contribution to total ownership sales will be calculated as a percentage, based on the total amount of purchases tracked and reported for each ownership number that year. This percentage represents each owner’s proportional share of the store’s profit for the year.

How much will we receive in patronage dividends?

At the end of each year the BOD will determine how much to give back to each owner. Board members will look at the profitability of the store, our current needs, and long-term goals; the amount of the dividend will depend upon all of these factors.

What are retained dividends?

At a minimum, 20% of each yearly dividend will be refunded either by check or as a store credit, with the remaining portion held by the co-op for new equipment or repairs, unexpected operating expenses or other needs as identified below. Retained dividends not spent will be placed in savings. The BOD on an annual basis will determine the percentage retained.

What if the Co-op does not make a profit?

In years when the Co-op does not make a profit, no dividends would be distributed. Owners would still receive any other benefits that were given in the store on a daily basis.

Shouldn’t we pay back our debt before we distribute dividends?

It is normal and appropriate for a business like ours to finance a portion of its operations with outside debt. As long as the Board is confident that we are able to service that debt, we expect to be able to distribute patronage dividends in profitable years.

bylaws that address the issue of patronage dividends

3.3 Rights. Each member-owner shall be entitled to make purchases from the Co-op on terms generally available to member-owners, to receive benefits and entitlements on an equal or ratable basis with other member-owners, and to participate in the governance of the Co-op as set forth in these bylaws.

Article 8. Patronage Refunds:
8.1 Distribution of net savings. The realized net savings of the Co-op, to the extent that it is attributable to the patronage of member-owners, shall be received and held by the Co-op for and as the property of its member-owners, the basis of each member-owner’s interest therein being as set forth in this article. Such net savings shall be allocated and distributed among member-owners as patronage refunds in proportion to their patronage and in such a manner as to constitute patronage dividends within the meaning of federal income tax law. In determining and allocating such adjusted net savings, the Co-op shall use a single allocation unit except to the extent that, subsequent to the adoption of these bylaws, it shall engage in any new and distinct line of business.

8.3 Consent of Members. By obtaining or retaining membership in the Co-op , each member-owner shall there by consent to take into account, in the manner and to the extent required by Section 1385 of the Internal revenue Code, the stated dollar amount of any written notice of allocation in the taxable year in which such notice is received.

8.4 Retentions. A portion of patronage refunds may be retained for the reasonable capital needs of the Co-op. Such retentions shall be credited to revolving capital accounts in the names of recipient member-owners, shall accrue no monetary return on investment, shall not be transferable. They shall be re-deemed when deter-mined by the Board to be no longer needed for capital purposes. At that time they shall be redeemed in the order of the oldest out-standing amounts and on a pro rata basis among such amounts. Retentions may also be redeemed under compelling circumstances as determined by associates. Retentions shall be subject at all times to being offset by amounts otherwise due and payable to the Co-op.

The History

History.