Japan: Restructuring Consumer Co-ops (1996)

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    This document has been made available in electronic format
         by the International Co-operative Alliance ICA 
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                         July, 1996

          (Source: Review of International Co-operation,
          Vol.89, No.2/1996, p.69-74)
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          Restructuring Consumer Co-ops and Co-op Principles
                       by Akira Kurimoto*
          **************************************************


Introduction
------------
In contemporary society, it is argued, the organisation based
on equality and democracy will inevitably transform to one of
control and subordination as it develops the division of
labour. Especially in large scale organisations, the real
power of decision-making tends to be detached from the
grassroots basis and concentrated on a few professionals or
elites. This tendency is referred to as "iron law of
oligarchy". It is also noted that the ownership of stocks
becomes dispersed among a large number of shareholders and the
management functions become highly professionalized as the
corporation grows into a largm firm. As a consequence, it
becomes difficult for the average shareholder to keep track of
the overall affairs of the firm and substantive control over
these affairs is gradually transferred to its managers. Such
is a phenomenon known as "management control." The consumer
co-operatives are not exempt from these general trends,
which have even been intensified.in the process of
restructuring.

Is it impossible to reverse such trends? Is it realistic to
maintain the democratic structure and administration while
achieving highly efficient operations?

To answer these questions, this paper deals with the
restructuring process of consumer co-operatives and its
implications on the recently revised Co-operative Principles.
It also presents some suggestions on how to strengthen the
co-operative identity in such a process.

Restructuring Process 
---------------------
Consumer co-operatives in the industrialized countries are
facing tougher competition prompted by the globalized economy
and advanced information technology. To meet this challenge,
they are restructuring through the following processes: the
merger of primary level co-ops to create economically-viable
regional co-ops, the replacement of small older shops by
larger modern outlets,  streamlining of distribution channels
through integrating retail and wholesale functions,
concentrating on retailing by withdrawing from production.
increased dependence upon external capital, and strategic
alliances with private companies. 

All these measures are closely interlinked and generate common
effects on the co-operative's activities, although there are
some differences in the approaches of the national movements.

Merger of Primary Co-ops
------------------------
In most of the industrialized countries structurml changes
have been strenuously  implemented since the 1960s via mergers
and amalgamation of primary co-ops to create economically-
viable regional co-ops. For instance, in the 1950s, there were
1,000 consumer co-ops in the UK compared to around 50 in 1994,
of which the largest two societies, i.e. CWS and CRS,
represent almost half of the aggregate retail turnover in the
British consumer co-ops. In Italy,  where there were mergers
over several decades, the sales of the 17 largest regional
co-ops account for 7 per cent of the total turnover. In Japan
where the co-op's operation areas are confined to prefectures
by law, regional federations have been formed by  co-ops
operating in several prefectures to pool their buying power
and promote store development. Through these processes, the
size of co-ops has been considerably enlarged.

Creating  Modern Larger Outlets
*******************************
In parallel with the mergers, the retail network has been
modernised by closing small older shops and opening large
modern outlets. In most countries co-ops have made continuous
efforts to develop superstores and hypermarkets and now are
among the largest operators of these types of stores in the
respective countries, while a great number of smaller shops
have been turned into franchised convenience stores. Nowadays
special emphasis is being paid to the development of discount
stores in response to the challenge of "hard discount" stores
and  in some cases co-operative organizations have bought the
private discount chains and run them in their original names.
As a result, the co-ops' network has been significantly
modernized although they have still a large number of
traditional shops. 

Streamlining of Distribution 
----------------------------
The process of horizontal integration at the retail level has
coincided with that of vertical integration between primary
co-ops and their wholesale federations in most countries. More
and more of the planning, purchasing and other important
functions have been centralized in the federations, leaving
the role of sales agents to the primary co-ops. 

In the smaller countries these processes have  resulted in the
formation of single national societies such as Konsum Austria
and EKA Co-op in Finland. In those countries where the
federation system is maintained, there exists a strong
tendency towards a national integrated society to meet
ever-increasing competition in the Single Market, as is the
case in the formation of KDAB, which integrate the economic
functions of KF and Konsum Stockholm. Nowadays, most of
European consumer co-ops have a tightly-knit corporate
structure similar to their counterparts in the private sector.

Withdrawal from Production
--------------------------
In the process of reorganization, some national federations
withdrew from production of Co-op labelled products and other
industrial goods in order to obtain liquidity and to
concentrate on retailing as the main battlefield in the
struggle for survival. This move can be explained by the fact
that it became extremely difficult to maintain such industries
meeting the challenges posed by the Single Market because of
high costs for Research and Development and marketing of new
products. In the 1990s, KF, FDB and CWS sold most of their
factories and entered into&agreements with private
manufacturers to produce their own brands. They then bought up
private chains of specialist stores and/or discount stores,
thus diversifying the retailing activities.

Dependence on External Capital
------------------------------
To finance the large-scale investment needed for the
restructuring process, a number of measures for capital
formation have been introduced: the issue of non-voting
preference shares or  share certificates and the introduction
of investor members, etc. These are designed to attract
investment from more or less external sources of capital,
including pension funds and other institutional investors.
This process culminated in the transformation of the co-ops
into joint stock companies to raise capital on the stock
exchange. In Germany and Finland, holding companies were
established by the co-ops and related organizations to control
the business units owned by them. But the experiences of co-op
AG and EKA Corporation show that this holding company model
has not proved to be successful as far as we know.

Alliances with Private Companies
--------------------------------
In the hope of strengthening the competitive edge in the
globalized market, many retailers have entered into strategic
alliances for collaboration in buying, store development and
logistics beyond industries and boundaries. In Europe, several
international buying groups have been formed among major
retailer groups. Even co-operatives had joined such buying
groups, i.e. Migros in AMS and Co-op Switzerland in Eurogroup
respectively, while NAF (the Scandinavia-based co-operative
joint buying group) had ties with DeuroBuying. 

Crucial Problems 
----------------
Such processes$have inevitably created crucial problems in
relation to the Co-operative Principles. First of all, the
enormous size of co-ops achieved  through mergers and
integration makes the members' democratic control more
difficult. The large-scale regional co-ops or the nationwide
integrated co-ops tend to lose or weaken their membership
basis, since the ordinary members will be alienated from real
decision-making in matters affecting their interests while the
central executives will make all the important decisions
without bothering with members' opinions. In the case of
associated companies, members have no access to influence
their business policies. Even when the primary co-ops will be
maintained, their functions will be hollowed out and reduced
to the mere legal entity which owns the whole structure
without any real power. The closure of smaller shops in the
neighbourhood has often left the movement without
communication channels between members and managers. Such
trends are leading to intensified "management control" at the
expense of members' democratic control.

Secondly, in order to finance the great amount of investment,
more and more co-ops are raising capital from the external
sources, not from their own members, thus neglecting the
presence of members' economic participation. Except for a few
cases (Japanese co-ops, co-op Dortmund and so on), co-ops have
been not so active in encouraging members to invest in shares
and many have given up paying dividend, a portion of which
could be reinvested as shares. As a result, the members' share
investment has become minimal and nominal and its proportion
in the equity capital has been considerably lowered. On the
other hand, the reserves have been the mainstay of the co-ops'
equity but they become increasingly difficult to build up due
to the shrinking surpluses in the competitive environment,
because the members' contribution to capital, both individual
and collective, is on the decline.

Thirdly, the increased dependence upon external capital may
infringe upon the autonomy and independence of the
co-operative. There are a number of examples of raising
capital from external sources and the most typical one is
listing stocks in the capital market  after transforming into
a joint stokk company. This way of raising capital proves to
be very efficient but also involves a great deal of risk and
may easily result in loss of self-control and independence.
This had happened when the top management of co-op AG had made
a series of manipulations in financial operations to list
stocks on the market and raise their value artificially. In
1989 only 18% of its stocks were held by the original
shareholders while 72% were dominated by four foreign banks.

Possible Solutions
------------------
These problems are deeply embedded in the restructuring
process itself and there appears to be neither alternative
ways nor easy solutions. In the global economy, consumer
co-ops seem to be doomed to deviate from Co-operative
Principles, but I strongly believe efforts should be made to
maintain and strengthen the co-operative identity as the
competitive edge over competitors.

Firstly, the integrated approach in the strategic planning
should be sought so as to include not only  the business and
investment plans, but also the members involvement policies.
These plans principally deal with strengthening the enterprise
basis through restructuring the business activities,
investment in and sell out of properties, strategic alliances
and so on. However, they should be accompanied by policies and
measures for strengthening the membership basis by improving
information/education, encouraging members' involvement in
co-operative affairs, etc. These different aspects of planning
should be integrated into long-term strategies and daily
operations. We can see some good examples; KF's statement of
vision seeks to combine business activities, member
organisations and the consumer movement; the social reports of
Migros and CRS or the social balance sheet in Italian co-ops
emphasize social aspects to balance with economic ones. In the
planning process, at least the core members including board
and committee members at the primary co-op or branch levels
should be informed and consulted. The balance of centralized
decisions and decentralized ones should be carefully
sought as well.  

Secondly, the intermediate organs between the board and
individual members should by established to supplement the
statutory bodies (general assemblies etc.). Sectional boards,
shop/district commmttees, consumer panels etc. need to be
created and revmtalized. The Japanese Han groups are also
functioning as the basic communication channels between
members and management, while study groups based on specific
themes such as health, environment,welfare and so on are
attractmng more people, especially the younger generations.

Thirdly, a strong financial basis should be built on the
members' share investment and reserves. Co-ops should make
special appeals to members for further investment through
raising shares or bonds. They also need to carefully build up
reserves representing the collective accomplishments of
members' efforts through obtaining their consensus in
allocating the larger portion of earnings.

Conclusion
----------
It is possible to develop excellent co-ops through
revitalizing co-operative features while maintaining
competitiveness on the market. To this end we need to find
good examples of successful co-ops around the world and
analyze carefully why they are doing well and how they are
combining the economic efficiency with members' involvement.
It will be no doubt one of the important contributions which
co-operative researchers can make to co-operative practice.

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Publications by Akira Kurimoto
-------------------------------

25 Years History of the Japanese Consumers' Co-operative
Union, JCCU,(Japanese) (Tokyo, 1977)

Perspectives of Consumer Co-operatives in the Industrialized
Countries, Minerva Shobo,(Japanese) (Kyoto, 1987)

'Japan's Consumer Co-operative Movement : A Comparative
Review', Robert Owen and the World of Co-operation, Robert
Owen Association of Japan, (Tokyo, 1992).

For more information, please contact: Akira Kurimoto, Manager,
International Department, Japanese Consumers Co-operative
Union, 4-1-13, Sendagaya, Shibuya-ku, Tokyo (Japan)

E-Mail    :    jccu-int@mxb.meshnet.or.jp
Phone     :    81-3-3497-9103
Fax       :    81-3-3497-0722

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*    Mr Kurimoto is currently the Manager of the International
     Department of the Japanese Consumers Co-op Union. Born in
     1949, he graduated from the Faculty of Law of the Tokyo
     University and has been employed by the JCCU since 1973.
     He has written several books and articles, a brief list
     of which is given at the end of this article. This
     article is based.on a paper presented at the ICA
     Co-operative Research Forum in Manchester on Sept. 17-18,
     1995