Monday, November 11, 2013

Under the dome.

When the small blame the big for their smallness.

Followers of TV series will no doubt recognize the title. It alludes to that Stephen King sci-fi series in which a small American town is enveloped in an invisible dome that some alien force created to protect a mysterious butterfly cocoon.

The dome was impervious to any onslaught, including nuclear devices, and created the setting for producers to fall back on the old themes of good versus evil, black hat against a white hat, and villain against hero in portraying the behaviour of the town’s residents. And of course, in true “who shot J.R.?” style, the series exasperatingly ended with the hero at the point of being lynched when the dome came down.

Being a sucker for a good metaphor, my attention was fully captured by an anonymous e-mail from “Swellendammer”, a local with an axe to grind against the Sentraal Suid Co-operative, commonly called S.S.K. He likened the doings of this agricultural co-op and dominant force in the Overberg district to that of the enforcers of the dome, stopping short of accusing the organisation’s leaders of being the big black hatted villains lynching the small business heroes.

He asserts that the size and power of SSK and the number of its tentacles that stretch into every activity in South Africa’s third oldest town and beyond is an unfair obstacle in ensuring the livelihood of many other small and struggling businesses. Those tentacles reach into retail of produce, hard and soft goods; credit provision, hardware, arms, clothing, property, liquor, motor sales and repairs and many more. The co-op is the major shareholder of the town’s largest shopping mall.

All of the above is in addition to the co-op’s and its subsidiaries’ core businesses of supplying products and services to farmers, oil extraction, refinement and marketing; and animal feed production. On top of that SSK has just absorbed the interests of Mosselbay’s Tuinroete Agri Ltd (TRA) which increases the co-op’s presence from Robertson in the West to Plettenberg Bay in the East, and will boost the group’s annual turnover to about R2bn with the co-op itself contributing at least half of that.

Not willing to let go of a good metaphor and with the merger hot off the press, I decided to explore the David versus Goliath theme and forwarded Swellendammer’s mail to SSK. Within an hour I received a reply from its Finance and Administration GM, Villiers van Veen suggesting a personal meeting.

The first thing that struck me was the modest co-operative head-office, housed in an old two story building that somehow belied the co-op’s R800-m assets, and contrasted sharply with those majestic foyers that hallmark the Sandton premises of financial institutions that I used to frequent regularly. Van Veen himself is equally incongruous. He is a refugee from those very same august Sandton premises, where he used to be an investment risk specialist and asset manager. He took flight, he says, from a seemingly meaningless life to become involved in his first passion, agriculture. In his current position he has joined a group that can be described as visionary co-operative trail blazers.

A one-hour appointment became two hours of animated discussion and I left convinced that SSK represents much more than a co-operative or a different way of doing business. Within this, one of the oldest (founded in 1931) and biggest agricultural co-operatives in the country, lies a business model that is fresh yet very old, that is unique but the same and that is definitive proof that the oldest economic principle known to man – that of adding value to other’s lives – is the ultimate foundation of what all transaction should be about. It is the only valid source of tangible wealth creation.

The potential of co-ops as an alternative to private and public companies in creating sustainable wealth and employment has long been known and it’s a subject I will have to return to in a future article in the broader context of agriculture, labour and others. To determine what has made SSK successful where many others have either failed or converted to limited, profit driven companies, one has to reveal the human story against the metrics. The only way to do this is to examine its Contribution Account extrapolated from the Value-added statement in its latest annual report.

What is clear from the outset is that no-where in essence does the co-op transgress sound business principles of efficient use of capital, maximum productivity and competitiveness against some very big actors, including discount retailers and other agricultural suppliers . On some of the social dictates such as CSI and BEE it is ahead of its equity based peers. Its operational model is a mix of trading, processing and manufacturing and of every R100 of supplies it uses from others, it adds R14 value. This may appear small, but it hides the exceedingly important feature of the enabling and empowering relationship with those suppliers, a large part of who are local, albeit incestuous in some instances.

More than half of wealth created goes to employees and 7% in cash to its owners. This is part of bonuses based on a member-ownership structure in which all of its nearly 1000 members have the same number of “shares”, big or small, old or recent as long as they can prove being part of the agricultural value-chain. These bonuses are calculated on members’ dealings with the co-op itself and only 20% is paid in cash and the rest ploughed back into the co-op. This accounts in part for the large 38% allocation to savings and in turn its vigorous local capital expenditure in agricultural infra-structure which also explains the relatively low tax share of wealth of 2%.

This is a fairly marked deviation from conventional corporate capital behaviour where they sit on billions of reserves and seek short term returns in non-core speculative investments. Farmers baulk at such trifling things!

Apart from access to Landbank capital, for which SSK has to jump through onerous hoops, and which is used to fund farming ventures of its members, SSK has proved that a co-op needs no special treatment – not from government, society, consumers or business. It does have its complexities and intricacies and hurdles in its founding have been huge compared with a normal company. Van Veen relates with a touch of emotion and pride that these were overcome with sacrifice, patience, prudence and perseverance – the antipathy of the accepted behaviour of most companies today.

But its real success lies in a very, very simple principle: its owners are also mostly its customers and servers are served. It encourages above all else full appreciation that its existence is dependent upon the value it adds to others.

So in answer to Swellendammer, I could find no evidence that SSK represents a malevolent monopolistic dome. Indeed the opposite: without it this region would be very much the poorer. SSK’s growth and size is less of a threat to the community than it is to itself. In growth and takeovers of companies it is perhaps treading unchartered waters for a co-operative. Large assets and huge turnovers become a potential breeding ground for greed and predatory behaviour, the nemesis for an institution that relies heavily on the patience and goodwill of its participants. It becomes increasingly difficult to resist the temptation of changing to a limited company and converting its members’ interests into tradable equity.

We all have a special empathy for small business, the small supplier and the mom-and-pop ventures. But another of Boetcker’s “cannots” says: “You cannot strengthen the weak by weakening the strong.”

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