Brattleboro Food Co-op Board of Directors

Informational Meeting for Shareholders on Patronage Dividend

March 18, 2009

The River Garden 153 Main Street, Brattleboro, VT

 

 

Directors Present: Lucinda Alcorn, John Hatton, Bob Lyons, Cynthia Moore, Bill Murray, and
Suzy West.

 

Management Present: Alex Gyori, Bruce Boardman, Dick Ernst, and Bj Davis.

 

Approximately 35 shareholders were present.

 

The goal of this meeting was to answer shareholdersŐ questions about the proposed patronage dividend program, which, if passed, will replace the 2% shareholder discount that is currently given at the register. The patronage dividend program will not affect the 10% senior citizen discount and 8% shareholder labor program.

 

Cynthia Moore, treasurer, gave an overview presentation and John Hatton facilitated questions during and after the presentation.

 

The advantages to moving to a patronage dividend include:

á       It is a more fiscally responsible way to manage the coopŐs moneyŃpatronage dividends are disbursed annually and only when the coop knows it made a profit;

á       The coopŐs assets overall are increased, which is advantageous in actuality and to lenders;

á       ItŐs a business decision that will benefit the coop in the long term: it allows a portion of allocated patronage dividends to be reinvested in the coop tax-free;

á       There is a significant tax savings because the coop doesnŐt pay tax on the portion of profit from sales to shareholders allocated to patronage dividends. Had a patronage dividend program been in place in 2007 and 2008, the coop would have saved $104,787 and $51,661 in taxes, respectively.

 

Comments from shareholders included:

á       Given the current economy, it might be good to put this off until next year;

á       Concern that this is a disincentive to shop at the coop, and the number of shareholders might drop if this passes;

á       A suggestion that the coop make a provision guaranteeing that the patronage dividend at year-end will be at least 2% to shareholders;

á       What happens to the (up to) 80% that doesnŐt get disbursed to shareholders?

á       Will shareholders still get their $80 equity share returned to them if they leave the coop?

á       What about the profit on sales to non-shareholders?

á       Is this decision tied to the redevelopment project?

á       The reasoning behind moving to a patronage dividend program is rational, but there is an emotional component to this change, especially for long-time shareholders.

 

To respond to these questions and comments, members of the Board and Alex Gyori, general manager, offered the following:

 

á       The patronage dividend, and the tax savings, only applies to sales to shareholders because there is an IRS regulation that profits made on sales to shareholders are not taxable in a cooperative model (patronage dividend).

á       The Board, on an annual basis, decides how much to distribute and how much to retain to reinvest. At least 20% has to be disbursed to shareholders; the other 80% would be balanced against the capital needs of the coop, meaning some or all of it might be retained. This assumes there is a profit.

á       The retained portion is held in an equity account in the shareholderŐs name, but shareholders donŐt have access to it. If the coop didnŐt need that money, it could be disbursed back to the members, but that would take a special decision by the board.

á       Shareholders who leave the coop get their $80 equity share returned to them. There is a bylaw provision that the money can be disbursed only when a replacement share is purchased by a new shareholder, but because the coop is always getting more new shareholders than ones withdrawing their shares, historically the money has always been returned.

á       The 20% returned in patronage dividends is returned proportionally to the amount of purchases each shareholder makes in the fiscal year. Shareholder purchases would include those made at DottieŐs, which are not currently allowed the 2% register discount.

á       Patronage dividends are considered a Ňbest practiceÓ for rewarding consumer-owners. Other co-ops that have made this transition have not reported any noticeable drop in membership as a result of the transition.

á       The Brattleboro Food Coop has approximately 4,700 active shareholders. Sales to shareholders are 52-53% of overall sales.

á       Guaranteeing that shareholders would see a patronage dividend of at least 2% would not be a prudent business decision. In years when the coop is not profitable, this guarantees an additional loss that the coop wouldnŐt have had otherwise.

á       The patronage dividend disbursed to shareholders is not taxable income if their purchases were for personal use.  If they were for business use, then they are taxable.

á       Part of the motivation for bringing up the patronage dividend question now, after many years of discussion by Board and management, is that it puts the co-op in a better financial position for the redevelopment project, long-term.

á       The money going into the construction of a new building doesnŐt reduce profit, except for the interest paid on the loans. The question is really one of cash flow; the coop is building an assetŃitŐs consuming cash. In other words, assuming a profit, the 80% portion of a patronage dividend retained (i.e., reinvested in the coop) does not pay for the project, but it does make the coop stronger financially.

á       There may be one or two years right after the new coop opens that there wonŐt be a profit and, therefore, no patronage dividend, but the purpose of the redevelopment project is for the coop to continue to grow and be healthy.

á       If this passes, the coop will discontinue the 2% discount it gives to members of other coops as well.  If the patronage dividend doesnŐt pass, this practice may still be re-evaluated.

á       The threshold where itŐs deemed not worth the coopŐs effort to mail a dividend check to shareholders is if the check is for less than $1; this is evaluated annually.

 

General comments:

á       It was suggested that people do the math based on their own purchases to understand what the 2% discount means to them. In 2008 the average 2% discount per shareholder was $36.

á       If you think as an owner of the business about the retained portion of patronage dividend being reinvested in the coop, one result could be better prices. Shareholders were encouraged to separate ŇwhatŐs good for meÓ from whatŐs good for the business. It is necessary to balance both interests.

á       If prices seem too high, thatŐs a different issue than patronage dividend. The coop pays livable wages to staff and provides health benefits. In addition, there are unsafe working conditions in the store that need to be addressed. All of these cost money and impact pricing.

á       In the current 2% discount model the average shareholder discount is $36. This is a difference of roughly .50/week.

á       The most compelling reason to pass a patronage dividend program is the money the coop can save in taxes. WeŐre worried about our $25, $35 a year; we should be thinking in terms of the money the coop will save, which affects all of us.

 

Meeting ended at 8:12 PM

 

Submitted by Ann Wright,

Board Administrator

 

Approved by the Board of Directors, April 6, 2009