What is the shipping and handling charge?
EXPLANATION OF THE CUSTOMER SHIPPING AND HANDLING CHARGE
The coop does not buy wholesale from the producers and sell retail.
Producers set their own prices, so we don't have a wholesale mark-up.
We charge the producers a commission to sell through the coop, and the customer members pay a commission to buy through the coop. That is how we get the money we need to operate. We pay for rent, utilities, supplies, equipment, materials, mileage, work-credit, accounting fees, and etc. on down the list of typical business expenses.
The producer commission is 10%, and the customer commission is 10%, so the Oklahoma Food Coop operates on a margin of 20% of our sales, which is much less than the margin of a conventional grocery cooperative. I have discussed this with various people in the conventional grocery cooperative movement, and their typical mark-up on wholesale prices is 30-35%.
Why is it called shipping and handling?
Because if we call this commission "shipping and handling" (which it is, because it pays for the process of getting the groceries to the members), the charge does not incur sales tax. If we call it "customer commission", then sales tax will be charged on the fee. So naming it "shipping and handling" saves the member money.
Why don't we load all the fees on the producers and not charge the customers?
Both producers and customers are members and we have felt from the beginning that both should support the coop's operations. ("We" being the original organizing committee and the subsequently elected officers and board.) If we simply charge the producers 18%, then they will raise prices to incorporate that additional charge, and that will increase the sales tax paid by the customers.
Operating Surplus and Patronage Refund
If the coop ever develops an on-going operating surplus, members would be eligible for an annual refund of that surplus in proportion to their patronage. This means that if we had $600,000 in annual revenues, and earned a hypothetical $50,000 in operating surplus, and a given member spent $1,000 with the coop during the year, that member would be entitled to a patronage refund of $37.00.
This would be calculated as follows:
Shipping and handling paid by customers is 44% of our operations revenue . . . the $1,000 member represents 1/600th of our total revenues . . . so that member contributed 1/600th of the operating surplus derived from customer shipping and handling charges.
$50,000 times 44% divided by 600 equals $37 patronage refund.
On the producer side. . . if a given producer sold $30,000 during that year, his or her percent of our total $600,000 revenues would be 5%. Producer contribution to our hypothetical $50,000 operating surplus is 56%, or $28,000. So that producer would be entitled to a patronage refund of 5% times $28,000, or $1,400.
NB: When we get to this point, this calculation may need to be refined a bit, as I am not a great mathematician. But fortunately for us, we have some great mathematicians in the coop so when we do this the equations will be fine tuned and confirmed by them.
What is "this point" where we would make patronage refunds?
Oklahoma law allows a cooperative to retain operating surplus as working capital, up to the point where the fund equals twice the amount of the capital invested by the membership. So if we have 2,000 members (and we do as of last month), we could maintain a working capital fund of $200,000. Any operating surplus after that fund was "filled" is required by law to be refunded to the membership.
In practice, if the coop became so prosperous and efficient that we were generating a significant operating surplus each year, we would probably reduce our charges. However, if we err, we will want to err on the "operating surplus" side, rather than reduce our charges so much that we end up running an operating loss. So the time will likely come when each year members will see an annual patronage refund.
Each member holds a literal property right as a member of the coop in the assets of the coop. For our fixed assets, each member's property rights are equal. For operating surplus, each member's property rights are based on their patronage (that is, their personal contribution to that surplus).
Bob Waldrop
president and general manager
Oklahoma Food Cooperative
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