Unique Causes of New Cooperative Failure

Authors: Brian Henehan, Cornell University, bmh5@cornell.edu, and Bruce Anderson, Cornell University

Reviewers: Gerald White and Brent Gloy, Cornell University

New cooperatives can be prone to a number of unique business problems. The primary goal of new cooperatives is to help address the economic problems of members or seize new opportunities. If these problems are due to overall weaknesses in the industry that members operate in, the new cooperative may begin its life in a more hostile economic environment than other firms that have the luxury of choosing their markets. The new cooperative can have little or no choice of products or services to offer; the primary focus is on the well-being of members. This can be particularly challenging when these products or services offer little or no growth opportunity and thin profit margins.

Accounts receivable difficulties can be more problematic when your customers are your member-owners. There can be a tendency, particularly in agricultural cooperatives, to invest in excessive fixed assets when the fluctuations of member production due to weather, more attractive alternatives or government policy can result in underutilized plants.

Cooperatives tend to be undercapitalized because the primary source of equity is members, and members may not be in a financial position to invest the necessary capital. A lack of capital may translate into inadequate compensation of managers.

The basic economic or social premises for forming the cooperative may be flawed to begin with. Eastern Europe or the former Soviet Union states are filled with failed “pseudocooperatives” formed by government bureaucrats with a top-down vision of what a cooperative should be, not a bottom-up focus on member needs and control. Some producer cooperatives have been formed as “captive” sources of supply by buyers of product to increase returns to buyers, not necessarily members. Government funding or grants can provide a needed initial infusion of capital for some cooperatives, but if the actual cooperative business cannot generate the cash flows needed over the long term, failure is only a matter of time.