The Feeling Is Mutual

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When co-op managers from around the country met in Seattle last October, they devoted one convention day to a collective busman’s holiday, boarding buses for an organized tour of Seattle-area cooperatives.

They strolled the aisles at a local PCC market, surveying shelves of health foods and learning how a neighborhood buying club grew to become a chain of natural foods markets that sells a half million dollars per day worth of organic everything. They bused over to REI’s monumental flagship store and marveled at how a huge national chain with 122 stores and $2 billion in sales could have evolved from an idea cooked up 75 years ago by a few Seattle mountaineers. They clustered in front of the sedate Capitol Hill offices of People’s Memorial, and heard the story of the nation’s largest funeral cooperative, which has 80,000 members.

While Seattle is best known for Fortune 500 corporations like Boeing and Microsoft, these visitors experienced the city as a cooperative Mecca, the epicenter of a historic movement that is a quiet but crucial facet of the Northwest culture and economy.

“If you’re into cooperatives, you want to come to Seattle to see what they’re about,” observes David Woo, a Philadelphia cooperative activist who got his start selling outdoor equipment at REI in Philadelphia.

In addition to the nation’s largest consumer and funeral co-ops, Seattle and Washington state are also home to the nation’s largest health cooperative, one of the largest credit unions, along with dozens of rural electrical co-ops, farmer co-ops, grocery co-ops and more.

“There’s something in the water out there in Seattle,” suggests Liz Bailey, a vice president of the National Cooperative Business Association, which hosted the October convention. “Something that breeds the cooperative spirit.”

The NCBA is a national organization that represents several hundred cooperatives, including several of Seattle’s, most of which defy the popular stereotypes attached to cooperatives.

“When most people think of co-ops, they think of counterculture hippies and ‘Kumbaya,’” Woo observes, strolling through REI. “But Seattle demonstrates that those stereotypes are ridiculous.”

These days, when many Americans despair over Wall Street’s astronomical salaries and ravenous corporate tactics, co-ops serve as a reminder that there are other ways to do business in the American marketplace.

A recent study at the University of Wisconsin identified more than 29,000 cooperatives across the United States, holding a staggering $3.1 trillion in assets and generating $500 billion in annual sales. They employ 856,000 people who earn $25 billion a year in wages. Most of these are consumer co-ops like REI, PCC Natural Markets and the rural electrical cooperatives. But there are also more than 700 purchasing co-ops like Ace Hardware and True Value, whose independent hardware store owners cooperate to buy goods in bulk, enabling them to compete with the big-box stores.

About 1,500 producer co-ops are owned by independent farmers who market their produce cooperatively. Darigold, the marketing subsidiary of Seattle’s Northwest Dairy Association and a household brand name across the region, is wholly owned by 542 dairy farmers who account for nearly a quarter of U.S. exports of cheese and other dairy products. (See page 48.)

While they may vary dramatically in their missions and membership, these diverse businesses share one crucial characteristic: They are owned by their members—buyers, sellers or, less frequently, workers. There are no sole proprietors, no stockholders demanding higher profits and annual dividends. The customers, or the producers, also share ownership of the business, electing its board and shaping its policies, and in some way sharing its profits.

Some, like Seattle’s Group Health Cooperative, are legally organized as nonprofits. Most, however, are for-profit businesses. Either way, cooperatives are not charities; if they lose money, they fail.

Cooperatives also share another important characteristic: They are responses to something that doesn’t work quite right in the free market.

“Cooperatives are born out of adversity,” says Diane Gasaway, a former banker who now directs the Northwest Cooperative Development Center. “They are formed to serve a need that the conventional marketplace isn’t serving.” Economists call this a market failure. Electrical co-ops were formed to bring power to rural areas that private utilities wouldn’t serve. REI was formed to make available high-quality outdoor gear that wasn’t available at Sears. Credit unions cropped up as a response to bank failures, many of them during the 1930s.

Darigold was created in 1918 as a way to market a highly perishable product that has to be processed daily. “It’s essential that dairy farmers have a stable market for their products,” Darigold CEO Jim Wegner explains. And that requires cooperation among farmers who might otherwise be competitors.

Cooperation isn’t always easy, says Gasaway, whose organization helps groups start new cooperatives around the region. “You need the impetus of the market failure to start. And that need has to be compelling enough to keep people at the table, because it’s hard to play in the same sandbox as other people.”

The cooperative impulse—the idea that people can solve economic problems by working together—is as old as civilization. But the legal and business concept is usually traced to the Rochdale Cooperative in the English Midlands, where weavers and other craftspeople founded a cooperative store in 1844 as an alternative to the predatory pricing of company stores. That concept crossed the Atlantic Ocean with European immigrants who formed cooperatives to defend against monopolistic banks and railroads.

In Washington, those populist impulses led to the establishment of the Washington State Grange and the Peoples Party, rooted in Puget Sound farms and in the logging camps and mills at the turn of the century. Many of those pioneers were avowed socialists and labor radicals, but others were nonideological farmers and workers trying to defend themselves against the chronic economic cycles of the era.

The cooperative explosion occurred in the 1930s, when bank failures and the Great Depression left people looking for alternative ways to buy, produce or market their goods. REI, People’s Memorial, BECU and many producer and electrical co-ops were founded in the mid-1930s. The seeds were sown for Group Health around 1937, and it went into business 10 years later.

For the likes of REI and Group Health, the growth rate has been phenomenal—and sometimes controversial. True believers suspect that the cooperative mission diminishes in inverse proportion to the size of the membership and the flow of money. “When members no longer feel like owners, you’re too big,” says Derek Hoshiko, who has organized small cooperatives in the Seattle area. “They begin competing with other communities. I’m a member of REI, but I don’t really feel like an owner there.”

That impulse is understandable to anyone who subscribes to the social or environmental values often attached to cooperatives, says Gasaway. But cooperatives are real businesses that deal with all or most of the same economic realities as the conventional business across the street. Contrary to many assumptions, she says, most cooperatives have to make a profit, which is subject to income taxes. Those taxes may be lower than for the corporation next door, because co-ops return much of their profits to members, who generally pay individual taxes on that income.

For profit or not, cooperatives have worked their way into every corner of regional and national economies—from retail to farming to electricity and health care.

And what next? Gasaway’s organization has helped a group of home health care workers organize a cooperative in Bellingham. Think about it, she says: You have a huge generation of aging Baby Boomers, many of them with money to spend, who will be needing care, and many of them would rather get it at home. Home health care workers require substantial skills, but are poorly paid, averaging about $11 an hour. As a result, they’re hard to get and hard to keep. You have a fast-growing demand for care, and a shortage of people to provide it—a classic market failure.

“Cooperatives could provide more consistency to caregivers, patients and their families,” Gasaway says. “And you can do this because you’re not paying a third party; there are no CEOs and stockholders raking income off the top.”

Today, the idea of a home health care co-op may seem farfetched. But no doubt that’s what people thought 75 years ago about a group of Seattle mountaineers who thought a little co-op might be a good way to acquire some good climbing gear.

 

A Co-Op Sampler

Some cooperatives based in and around Seattle

REI (Recreational Equipment Inc.): Launched by Seattle mountaineers in 1935 as a way to obtain quality climbing equipment, REI has become the nation’s largest consumer cooperative, with 3.5 million members and $1.8 billion in sales through 122 stores in 29 states. This year, REI paid out $165 million in dividends to members and employees.

Darigold: It’s the brand name used by the Seattle-based Northwest Dairy Association, which is one of the nation’s largest producer co-ops, with sales of milk, cheese, butter and other dairy products exceeding $2 billion per year. Founded in 1918, Darigold is owned by more than 500 independent dairy farmers, who compete with other co-ops and conventional dairies around the country. (See Executive Q&A, page 48.)

Group Health Cooperative: Established in 1947, Seattle-based GHC is the nation’s largest consumer-governed health care organization, boasting more than 600,000 members in Washington and northern Idaho. With nearly 10,000 staff, including 1,100 physicians, Group Health is frequently cited as a potential model for a future national health care system.

BECU: Credit unions are classic cooperatives, wholly owned by their members. Founded in 1935, BECU (formerly Boeing Employees Credit Union) is the state’s largest and the nation's fourth largest, with 800,000 members and $10.8 billion in assets in 2011.

PCC natural markets: The largest consumer-owned natural food co-op in the nation, with nine stores in the Seattle area, PCC (for Puget Consumers Coopeartive) claims more than 45,000 member-owners, $161 million in sales and net income of $2.3 million in 2011.

People’s Memorial Funeral Cooperative: Since its founding in 1939, People’s Memorial has grown to become the nation’s oldest and largest co-op of its kind. Based on Capitol Hill, it has about 80,000 members and handles nearly 10 percent of funerals in the Seattle-King County area. About 95 percent of its funeral arrangements are simple cremations, with an average cost of about $850.

Peninsula Light Co.: “PenLight” is the state’s second-largest electric cooperative, delivering federal hydropower to some 31,000 homes across 112 square miles in the Gig Harbor area. Most of Washington’s electrical cooperatives are in rural Eastern Washington.

Tree Top: Owned since 1960 by Eastern Washington apple growers, the well-known juice cooperative processes more than 300,000 tons of apples and other fruits per year. Sales in 2011 were $370 million, returning 19 percent on members’ investments.

Making the Consumer Connection

Making the Consumer Connection

How three new companies are reinventing the shoe, the bicycle and the children’s play fort.
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Billy Price struggled nearly 20 years to find a better, easier way to put on his shoes. August Graube was convinced kids would love bigger, snappier building blocks. Kartik Ram wanted the bicycling public to help produce a sleeker, sexier electric bike.

By putting new twists on old products — using zippers to secure footwear, snap-together panels to build play forts, crowdsourcing to inform design — three of the newest consumer-product companies in the Puget Sound region are creating a buzz around ideas that, in one sense, are hardly new, while, in another, are revolutionary.

They are also creating their own playbooks, borrowing from successful retailers, high-tech firms and online businesses to forge their own paths. They’re building virtual teams and hiring people who possess the expertise they lack — be it in distribution, marketing or manufacturing. And they’re tapping alternative funding sources for startup capital, including crowdfunding and business competitions.

These entrepreneurs are not interested in being one-hit wonders and are working on additional products for their markets. Like many other inventors and entrepreneurs, they share the gift of optimism, a penchant for risk taking and the patience required to continually refine their ideas and products.

AN OPEN-AND-SHUT CASE FOR ZIPPER SHOES

Function and Fashion: Billy Footwear cofounder Billy Price, left, wants his line of zippered shoes
to be stylish enough to appeal to a wide audience. 

Paralyzed from the chest down in 1996 after breaking his neck in a three-story fall, Billy Price longed to put his on shoes by himself. It’s something he struggled with for years. He also wanted shoes more fashionable than the adaptive ones available on the market for people with spinal cord injuries. 

A project manager for the Federal Aviation Administration who lives in Seattle, Price kept thinking about making stylish shoes that could be worn not just by those with disabilities, but also by young children, older people and anyone else who might have difficulty with conventional footwear.

Price found a partner to bring his vision to life in late 2011 when he became reacquainted with Darin Donaldson, a childhood friend who, as luck would have it, had attended Port Townsend’s Shoe School and gone through the process of creating a woman’s boot. Price already had a shoe idea in mind: a riff on a slip-on shoe that he modified. With more tinkering, the pair created a shoe that incorporates a zipper that goes around the front of the shoe, allowing the upper portion to flip open to one side so the wearer can essentially step into the shoe and then zip the top closed.

Taking advantage of connections Donaldson created while developing his unsuccessful woman’s boot, they quickly developed a prototype. “It came back in very good quality and was functional, considering it was the first prototype we made,” says Donaldson, a serial entrepreneur. 

Price adds, “When that prototype came in and we showed it to people, they would just shake their heads in disbelief because Darin just nailed it.” 

The self-funded shoe company has seven styles for sale on its Billy Footwear website — billyfootwear.com — as well as at amazon.com. The shoes are made in China. The company has applied for a patent on its distinctive design.

Price and Donaldson still work full time at other jobs and are raising money to create more designs, add more sizes and increase inventory. They hope to introduce a more supportive but still fashionable line for older adults. Billy Footwear has already hired several employees to handle logistics and sales.

The company recently raised more than $32,000 through a successful Kickstarter effort, which augments personal funding Price has provided. Donaldson says the company plans a private offering later this year. In the meantime, Billy Footwear is hitting the road with an eye toward having its zipper shoes available in stores next year.

“I’ve been in a wheelchair for half of my life,” Price says, “and half my life, I couldn’t put on my own shoes. Now I can.”

Price also likes that his company’s creations don’t stigmatize the differently abled.

“This,” he says, “is truly a shoe that appeals to everyone.”

CULTIVATING A CHILD'S IMAGINATION IS A SNAP

"Luckily, Kids Love It": August Graube tried 165 prototypes before hitting on the right formula for Fort Boards.

Seeing how children loved building with giant Lincoln Logs gave August Graube the idea to create Fort Boards, a set of large, flat building panels he began selling late last year.

The former employee of Pacific Studio, a Seattle-based creator of exhibits, was working on a children’s exhibit for the new home of the Museum of History & Industry in 2012 when he saw how much fun children have building large structures. He knew kids would love a product that could allow them to build large forts — and anything else their imaginations might conjure — at home.

It took Graube three years and, by his count, 165 prototypes to arrive at a winning combination. He discarded six iterations of a huge Lincoln Logs-style product made of plywood; it cost too much and would have been dangerous. He then tried 60 versions of a smaller flat board made of extruded polypropylene, but it was too flimsy and didn’t work well. He liked the size of the smaller board but knew it had to be constructed of a different material, so he progressed through nearly 100 more iterations of a smaller flat panel made of injection-molded plastic, which he 3D printed.

The end product is a flat piece of plastic about the size of a sheet of paper. Each panel snaps easily to the next and is locked in place — either flat or at a variety of angles — by a snap-on hinge. Kids use the hinges and plastic pieces to build igloos, airplanes, castles and other shapes. Graube recently received a utility patent for Fort Boards, which also is trademarked. 

Like many inventors, Graube took a big risk, paying to build the final prototype without kid testing it because the upfront tooling costs forced him to jump-start production, which takes place in Indiana. “Luckily, kids love it,” Graube reports. “It’s intuitive, with only two interlocking parts, so it’s easy to learn.” 

Schools, children’s museums and hospitals have snapped them up as teaching tools, interactive toys for play spaces and small-motor-control therapy aids. “Children’s museums have told us they’ve never seen more engaged dads,” adds Graube, who says specialty toy retailers will soon begin carrying Fort Boards.  

One pack of Fort Boards panels and hinges costs $125. Graube, who lives in Seattle, has hired marketing and logistics help for his South Lake Union venture, which has been funded by friends, family and $20,000 from winning the grand prize in this year’s Microsoft Small Business Competition. 

“Seeing people’s creativity with them has been amazing,” Graube says.

Like Price and Donaldson, Graube is already at work on his next product, another activity-related children’s product that works with the Fort Boards. He expects to start selling it late this year or early next.

PUTTING A CHARGE INTO BICYCLE DESIGN

Charging Ahead: The Zeitgeist X City Bike, left, weighs less than 50 pounds
and incorporates a slim lithium battery that fits into the frame's down tube.

Kartik ram approaches his startup as a student of business. Make that many businesses. He hopes to tap into the mindset of people who shop at Apple and Nordstrom. And then there’s the Whole Foods shopper. And the Uber rider.

He wants to grab a page from Tesla’s playbook, copying the launch of the Roadster, which broke the electric car mold. Ultimately, he wants to be the Warby Parker of electric bikes, selling mostly online (at zeitgeistmobility.com) but not avoiding retail shops entirely. In time, in fact, he wouldn’t mind selling his Zeitgeist bikes at REI.

Above all, Ram doesn’t want the Zeitgeist to be something that sits in the garage as an afterthought.

“We want to make it so you just don’t leave home without it,” he says.

The Zeitgeist X City Bike is a $4,000 carbon-fiber, motor-assisted bicycle designed in partnership with award-winning Danish designer Brian Hoehl. It weighs only 44 pounds. (A less expensive “S” version made of aluminum alloy weighs just over 50 pounds.) 

Most electric bikes are clunky and heavy, saddled with large motors and with what Ram says are cheap parts. The Zeitgeist, manufactured in China, is lean and sleek and contemporary looking. It has a high-end Shimano drive train with a 500-watt Bafang motor that helps when climbing hills. The Tektro hydraulic disc brakes make stopping a sure thing, and the Alex 36-hole alloy rims and Schwalbe tires make the ride a smooth one. A 36-volt battery, hidden inside the  frame, uses high-density lithium-ion technology similar to the batteries powering Teslas.

The bike can travel between 80 and 100 miles — depending upon the conditions — on a single charge, and Ram regularly beats cars traveling up Queen Anne hill, passing cars on his Zeitgeist as drivers struggle up the steep hill.

Zeitgeist’s co-founders are Ram, a veteran of Alibaba and Singtel (short for Singapore Telecommunications) and also managing partner of Fashion Fund, a crowdfunding platform for the fashion industry; and Gregg Stewart, formerly of AOL, Telegraph Media Group and others. They don’t want to sell electric bikes to biking enthusiasts but to people who haven’t ridden a bicycle in years, who want a better travel option as city traffic creates gridlock, and who don’t want to perspire too much during their commute.

Zeitgeist recently sold its bike through the Crowd Supply fundraising platform to test the market and as a way to get buyer feedback so it can then improve the design. Ram says the company is cash-flow positive and that it will take only a few hundred bike sales to make the company profitable. With subsequent designs, Ram and Stewart plan to apply for multiple design and utility patents.

Each bike is profitable on its own, and the first iteration, like Tesla’s Roadster, is designed to test the market and make sure the business model works. “We’re selling a better-quality bike and can get higher margins selling it direct,” Ram says. “We don’t have to allocate 40 percent of our costs to paying for real estate.”