Can Cooperative Businesses Save Communities?

September 2, 2016

NOTE: Images in this archived article have been removed.

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Coffee roaster business image via shutterstock. Reproduced on with permission.

Nearly a decade after the beginning of the Great Recession, the economic recovery has been concentrated in a few sectors and a few places, mostly fields in technology and in coastal cities. Many Americans have been left behind in jobs with stagnating wages, while rising housing costs prevent them from moving. To stabilize their communities and rebuild the household wealth lost in the financial crisis, many Americans—particularly those in once decaying inner city neighborhoods—are turning to the model of co-operative businesses, which emphasize joint ownership by workers and democratic management.

James Razsa, a 32-year-old resident of the traditionally blue-collar Boston neighborhood of Dorchester, is one of them. He’s a founding partner of Democracy Brewing, a co-op brewery currently raising money to start production.

“I’ve done a lot of unpleasant jobs,” he said. “Starbucks was where I started to understand that a lot of my co-workers were living in poverty. We were taking $2,000 in profit a day and sending it to people who had never been there.”

Starting a co-op was a way to have the best of both worlds, he said. He gets to do a job he loves and be a business owner.

Razsa isn’t alone, either.

The number of worker co-operatives in the United States has been growing for two decades, according to the Democracy at Work Institute, and employee-ownership advocacy organizations such as the Democracy Collaborative and the Surdna Foundation report surging interest since the financial crisis.

The Democracy Collaborative in particular has been at the forefront of a new model for Rust Belt cities struggling with growing poverty and unemployment, called the Cleveland Model from the city where it was first put into practice. The result, called the Evergreen Cooperative Initiative, was launched in 2008. Evergreen partnered with local educational, healthcare, and charitable organizations to start worker co-ops to provide some of the millions of dollars worth of goods and services they need every year.

The model has since been taken to Rochester, New York, where the Democracy Collaborative helped develop the Market Driven Community Cooperatives Initiative. According to NextCity, Rochester’s anchor institutions collectively spend $1.7 billion a year on goods and services. Rochester’s initiative is focused on the city’s Northern Crescent neighborhoods, areas just outside the downtown where over 60 percent of the residents are living below the poverty line. The Evergreen Initiative also started in a high-poverty neighborhood, Greater University Circle.

The higher wages and shared ownership of co-ops have also helped them and their members stabilize and rebuild their communities.

“[We want to] create a space like an old public house,” Razsa said. “It was a place where you passed the hat or planned the next labor rebellion. Recreating that third space was important.”

Credit unions, essentially banks owned by their depositors, are also playing a role. Melissa Marquez, the CEO of the Genesee Cooperative Federal Credit Union, which is working with the MDCCI to provide small business loans to start up co-ops, said in an email that “Increased net worth (rather than equity stripping) increases stability for families and minorities in Rochester.”

In Britain the Northern Counties Permanent Building Society suspended mortgage payments during a miners’ strike so its members could keep their homes, according to The Catholic Herald. Then it demutualized and collapsed during the financial crisis, ending up nationalized in 2008.

Success is far from guaranteed. The Surdna Foundation report “Ours To Share,” published earlier this year, praised worker ownership in general as a way of increasing access to capital, building wealth, and maintaining productivity that’s as good as or better than conventionally owned and managed firms. But the report notes that there have been problems: for example, Evergreen’s businesses struggled to become profitable for several years, with no employees or consultants having experience in the types of businesses they were working with.

“Creating a local economy from the ground up, however, turns out to be a complex endeavor … first you have to create wealth in order to share it,” the report noted. According to the Democracy Collaborative’s report “Worker Cooperatives: Pathways to Scale,” “Lack of business experience is a key barrier that limits startup and growth of worker co-ops. Many worker co-ops are initiated by workers who have relevant job and industry expertise, but lack business management experience.”

This is one area where Democracy Brewing is ahead of the game. Its board of directors features Jason Taggart, an experienced craft brewer at John Harvard’s Brewery and Alehouse in Cambridge, and Rob Evert, a co-executive director of Equal Exchange, a co-operatively owned cafe business. The business model also involves providing education and assistance to people interested in starting and running co-op businesses, Razsa said.

Another challenge is getting the start-up capital for businesses. Credit unions, for example, are limited in how much they can lend to small businesses and conventional sources aren’t always willing to see eye to eye.

Razsa said that Democracy Brewing had $400,000 in conventional start-up money lined up, but the rate of return the lender was demanding would have meant paying employees poverty wages. As a result they’re trying to raise the money through Kickstarter.

Unfamiliarity with the model and a perceived lack of accountability lead traditional lenders to be skeptical and reluctant to lend to worker co-ops, according to the “Pathways to Scale” report. Marquez said that before lending to a co-op, Genesee reviewed incorporation papers to see who could make decisions. She added that members with more than a 10 percent stake in the co-op also signed on as personal guarantors. At the same time, Marquez said she looked at it as no different from lending to any other small business with more than one owner.

Earlier this year an Italian dairy co-op made international headlines when they couldn’t get a bank loan and so they sold bonds backed by the parmesan cheese they were making.

The continued economic uncertainty and lagging recovery in much of the country suggests that co-ops will continue to attract interest.

“People are very excited,” Razsa said. “We’re going to start their imaginations going.”

Tags: co-operatives, new economy, worker-owned co-operatives