The Feeling Is Mutual

| FROM THE PRINT EDITION |
 
 

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.

OfferUp's Mobile Marketplace

OfferUp's Mobile Marketplace

Building a better Craigslist: OfferUp quietly makes its move.
| FROM THE PRINT EDITION |
 
 
OfferUp cofounders Nick Huzar, left, and Arean Van Veelen.
 
We all know the mother of invention. Nick Huzar’s necessity was finding a way to clear out a room for his soon-to-arrive baby girl.
 
“My wife and I were at a spot where we wanted to have kids and when she said she was expecting, I kind of went into dad mode,” Huzar explains. “I remember standing in the doorway of this room, which was about to be my daughter’s room. It was just full of stuff and I’m thinking, ‘There’s got to be a better way to sell this stuff.’ It would take forever to sell it through existing channels.”
 
Having moved on from his previous startup — Konnects, a social media platform for magazines and newspapers — Huzar was ready for his next challenge. Still, he confesses, “I had no plans on doing another startup right away. It’s a lot of work.”
 
But the idea of streamlining the buying and selling process wouldn’t go away. “I was looking at my phone and just kept thinking, ‘Why can’t buying and selling be as simple as taking and sharing a photo?’” he says. “That was the spark for OfferUp.”
 
OfferUp is a Bellevue company that runs a mobile platform for buyers and sellers. Looking for a pair of size 12 Nike Richard Sherman trainers worn “only a few times”? In mid-March, Joey in Kent was offering them up for $150. Stephen in Renton offered up a 2014 Tesla Models S with 12,141 miles on the odometer for $76,000. Martin in Federal Way offered up a pogo stick “in good working condition” for $30.
 
Huzar says he and cofounder Arean Van Veelen did a lot of homework before launching. They talked with friends, family and around 100 local merchants. 
"There's a long history of companies that tried to compete in this space and failed,” says Huzar. “Keep in mind this was 2011 and the economy wasn’t that strong, so they gave me a lot of time. I learned a lot about what they do and how they promote their stores.”
 
Huzar’s research led him to distinguish his business from Craigslist by focusing on smartphones. Virtually everyone has a smartphone on his or her person most of the time. This lessens the “friction” involved in buying and selling things.
 
“Why do we have underutilized assets at all around us?” Huzar asks rhetorically. “Because there’s a ton of friction in the process. We look at those golf clubs sitting there, and we maybe move them out to the garage and then eventually they end up in the junkyard or somewhere else.”
 
Huzar realized smartphones offer an easy point-and-click way to photograph unwanted goods and offer them for sale on the spot. A computer-based option like Craigslist, which does not have its own app, requires you to photograph the product, transfer the picture to your computer, sign in to your account and finally post the item for sale.
 
OfferUp was designed from the beginning to be a mobile app. Available for iOS and Android, the app reads a user’s location and offers tiled photos of items for sale in the local area. Users can set the app to show items within a specified range of miles and to put either the newest items or the closest items at the top of the display. Buyers click a button to make an offer or to send questions to the seller. For those wishing to sell items, it’s as simple as snapping a photo and keying in a price. “You can easily post an item and offer up in less than 30 seconds,” says Huzar.
 
Huzar also realized that, especially for internet and mobile apps, trust and safety were critical issues. So Huzar’s team decided it was important to have a real-time presence in the OfferUp app. “In the chat system we are adding more tips,” says Huzar. “If we see things that we think are questionable, we are happy to engage. We are very proactive in that.” 
 
Even with the best of application design and management processes, of course, getting a marketplace up and running is a lot different from simply offering a product. There needs to be a critical mass of buyers and sellers. Building that critical mass was the next major challenge for Huzar and his team, which officially launched with a total of four employees, including the two founders.
 
“There are a lot of challenges in getting the gears moving,” says Huzar. He started by having his friends and family try the new platform.  But that wasn’t enough, so Huzar explored an array of marketing strategies.
 
“There were a lot of failed things for sure, a lot of experiments that didn’t bear a lot of fruit,” he says. “But we persisted to figure out the right mix.”
 
While not willing to give details about what the “right mix” turned out to be, Huzar says that his team tried pretty much everything. “Any way you could try to target an audience, we tried,” he says. “We even had a booth at the Bite of Seattle. We did experiments handing out fliers. We did print. We did digital. We did everything except skywriting.”
 
While offerup is still privately held and has flown pretty much under the radar of media coverage, its growth — at least as measured in terms of transactions and employees — has been somewhere between “strong” and “spectacular.”
 
Huzar says OfferUp has been downloaded 18 million times. It recorded $3.9 billion worth of transactions in 2015. And from a staff of four in 2011, it has grown to nearly 80 today. The staff has more than doubled in just the past year. “It’s hard to speculate where we will end the year,” says Huzar, “but we are hiring aggressively.”
 
Those numbers are impressive, but the company has yet to generate revenue. The service is currently offered free to buyers and sellers and there is no advertising on the site. The business also has plenty of competitors offering many of the same mobile-based conveniences. They include 5miles, an app developed in China that has its U.S. headquarters in Dallas and has already raised $50 million after just one year in operation. While far younger than OfferUp, 5miles, which places a strong emphasis on local service, already has six million downloads and $2 billion in transactions. It also operates in many international markets, including London, Manila, Mexico City and Sydney. Spain-based Wallapop is another company with a global footprint, and then there are niche players such as Canada’s VarageSale, which focuses on providing a safe market for moms, and Poshmark, which focuses on fashion.
 
Craigslist remains king of the hill, with 45 million unique visitors in January alone. But the company has done little in recent years to improve the site and its unique visitor number is actually down 12 percent from a year ago, according to Millward Brown Digital’s compete.com website. 
OfferUp, meanwhile, has raised $93 million in venture capital and keeps finding new ways to grow. “We don’t spend a lot of time worrying about our competition,” adds Huzar. “We are singularly focused on creating the best possible experience for our users, and our traction in the market reflects that.”  
 
The venture capital community, which reportedly values OfferUp at up to $1 billion, certainly seems to believe. “It’s obviously a little scary — big valuation, no monetization,” Josh Breinlinger, managing director of Jackson Square Ventures, told GeekWire. “It’s easy to throw up the bubble flag.” But Breinlinger insists OfferUp is no bubble: “We own all of the usage, we own billions and billions of dollars of transactions. We can monetize that.”
Huzar feels the same way. “There are many different monetization initiatives we’re exploring,” he says, though he declined to be specific about those initiatives or when the company plans to implement any of them. “We feel like we’re still in the first inning as a company. We just want to make sure when we roll out things that they really add a lot of value.”