La Siembra Co-operative Inc.
The Co-operatives Secretariat
New Economy Development Group
January 5, 2006
La Siembra Co-operative Inc.
- Balancing social justice and business principles -
La Siembra Co-operative is a young Ottawa worker co-op that has shown significant progress in six years, with annual sales growing from $47,000 in 2000 to $2.2 million in 2005. Grounded in fair trade and co-op principles, this organization believes in fair distribution of profit—its mission includes assisting co-op producers to improve the livelihoods of family farmers and the well-being of their communities, and educating consumers on the benefits of fair trade and organic alternatives.
La Siembra has grown from a small supplier of hot chocolate to one that offers a full range of cocoa and sugar products under its Cocoa Camino brand name and private labeling arrangements. Its raw products of cocoa and sugar come from farmer co operatives in South and Central America, as well as the Caribbean, and the fair trade premium that La Siembra pays allows these co-op members to improve their farming operations, upgrade their standard of living, and invest in community development projects.
In order to achieve such a mission, La Siembra has focused on increasing its capacity to produce high quality products for the Northern American marketplace—the more products its sells, the more its co-op producers and family farmers benefit. Financing this growth has forced the co-op to develop innovative means to raise debt and equity capital. A successful share offering and the ability to attract socially-minded investors in Ontario, Quebec and British Columbia has resulted in over $600,000 in equity investment. When combined with funds secured through debt sources, the total capital raised by La Siembra to date is over $1 million. With a target of 40% annual growth in the long term, the co-op recognizes that it must continue to pursue creative solutions to address the ongoing challenge of capitalization.
Strong and evolving partnerships, as well as the recruitment of skilled members and staff, have been key factors in the growth of this co-operative. La Siembra has shown commitment to the democratic principles of the co-op model, and as the organization moves forward, it will be critical to respond to growth in a way that reflects member values and translates into a successful worker-owned co-operative. The goal of achieving a triple bottom line demands a balance between the social and economic missions of the co-op. Growing competition and production factors beyond the control of the co-op may create new challenges in the future. Yet, La Siembra has achieved significant success in the past six years, and it is committed to being a leading fair trade organization in North America.
This detailed case study traces the evolution of the co-op and its lesson learned, with a special focus on how La Siembra has financed its growth.
Table of Contents
- 1. Introduction
- 2. Descriptive Profile and Contextual Background
- 3. Evolution of La Siembra
- 4. Lessons Learned
- 5. Summary
1.1 Purpose of the Project
The La Siembra Co-operative Inc. case study is one of seven case studies commissioned by the Co-operatives Secretariat, at Agriculture and Agri-Food Canada.
The co-operatives included in this series of studies are geographically representative of Canada and focused in six priority areas: adding value to agriculture; improving access to health and homecare; supporting economic development in rural, remote and northern communities; developing aboriginal communities; integrating immigrants into Canadian communities; and encouraging community solutions to environmental challenges. La Siembra Co-operative Incorporated (La Siembra) is located in Ottawa, Ontario and satisfies the first of the six priority areas: adding value to agriculture. In addition to bringing a niche food product to the Canadian and international market, La Siembra is meeting the social and economic needs of its members by promoting fair trade and a more sustainable environment through the application of organic farming practices and value-added relationships with their producer co-operatives.
The purpose for undertaking this series of case studies is to examine and understand particular co-operative business practices and responses to specific challenges and opportunities. The mandate and activities of co-operatives across Canada clearly places them in the forefront of an approach which emphasizes both social and economic objectives. An examination of co operative business practices and the challenges and practices is illustrative to persons interested in using the co-operative model to promote their interests. Collectively and individually, these case studies will provide direction upon which to build and innovate within the co-operative movement. This series of case studies has been developed in cooperation with an advisory steering committee established by the Co-operatives Secretariat composed of individuals with backgrounds in co-operative development, business and community economic development, and a variety of sector expertise.
The co-operatives for this series of case studies were selected through discussions with the Co operatives Secretariat and their Co-operative Development Initiative Steering Committee. Innovative co-operatives were chosen from different regions of the country that might be of interest to the co-operative community across the country.
To collect the information to develop this case study, the consultant was provided with key documents, reports and websites related to La Siembra co-operative, the agricultural sector and fair trade. In addition, a number of key informant interviews were conducted. A draft of the report was provided to the co-operative to review and comment on before the cases study was completed.
2. Descriptive Profile and Contextual Background
La Siembra Co-operative Inc. (La Siembra) was founded in August 1999 as a worker co-op offering organic fair trade hot chocolate under the brand name of Cocoa Camino. Located in downtown Ottawa, Ontario, the enterprise was founded by three people with experience in the fair trade industry and business development, as well as an interest in development education. Capitalizing on their experience and areas of interest, these three worker-owners decided to establish a co-operative that would benefit family farmers in developing countries, as well as educating North American consumers and providing a high-quality, certified fair trade organic products. It was their objective to build a leading fair trade organization in North America.
This case study places specific focus on the challenge of capitalization and illustrates how La Siembra has responded to the ongoing need for capital during six years of continuous growth.
2.2 The Fair Trade Concept
In general, "fair trade" refers to a particular sort of trade where the terms of trade are designed to create a situation that is more equitable for producers. The internationally agreed definition and intent is as follows:
"Fair trade is a trading partnership, based on dialogue, transparency and respect that seeks greater equity in international trade. It contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers—especially in the South.
Fair trade organizations (backed by consumers) are engaged actively in supporting producers, awareness raising and in campaigning for changes in the rules and practice of conventional international trade".Footnote 1
The membership criteria for the North American Fair Trade Federation illustrates what this definition means in practice:Footnote 2
- paying a fair wage in the local context;
- offering employees opportunities for advancement;
- providing equal employment opportunities for all people, particularly the most disadvantaged;
- engaging in environmentally sustainable practices;
- being open to public accountability;
- building long-term trade relationships;
- providing healthy and safe working conditions within the local context; and,
- providing financial and technical assistance to producers whenever possible.
Essentially, buyers purchasing a product which has been certified as "fair trade" pay a social premium over and above the price of the product, which the producers can then invest in local development. While fair trade is best known for coffee, in fact over 20 different products are imported from developing countries under fair trade certified conditions. These products are then sold in a number of cities across North America, Europe, Australia, New Zealand and Japan. Examples of food products in addition to coffee include tea, cocoa, bananas and fresh fruit, honey, sugar and juices. The list of fair trade products continues to grow each year, for example goods such as wine, fruits, nuts, spices and oils will soon be offered. Non-food products, such as jewellery, handcrafts, and soccer balls, have recently become available.
Between 2002 and 2003, fair trade labelled sales across the world grew by 42.3%Footnote 3 to reach 83,480 metric tons. Global sales of cocoa products tripled from 2000 to 2003 with a growth rate of 110% in 2002-03 alone. As of February 2005, FLO International reported 422 certified producer organizations worldwide representing 1,000,000 families of farmers and workers in 49 countries.
2.3 The Worker Co-op Model
The founders of La Siembra chose the co-op model as an organizational structure because it was most reflective of their personal values and principles. Governance of the co-operative is guided by seven internationally recognized co-op principlesFootnote 4 including: open and voluntary membership; democratic member control; member economic participation; autonomy and independence; education, training, and information; co-operation among co-operatives; and concern for community. La Siembra is also guided by the broad principles of fair trade which, as noted above, promote trade partnerships based on dialogue, transparency and respect, and seek greater equity in international trade.
La Siembra operates as a for-profit worker co-op. The Ontario Co-operative Association defines a worker co-op as "a business in which 75% of the workers are also owners, each having one vote, with a minimum of 3 worker-owners. Worker-owners provide themselves with employment and share democratic control of the business, while providing goods and/or services to the community."Footnote 5 A paper prepared for the Ontario Worker Co-op Federation in 2003Footnote 6 identified that the average worker co-op in Ontario had eight worker-owners and employed three people.Footnote 7 Additionally, forty percent of the co-ops surveyed were engaged in supporting international communities in some manner, fair trade being one example; and 80% had developed a mission statement or social objectives.
2.4 A Niche Market
La Siembra wanted to expand the fair trade industry beyond coffee in North America. They researched the potential for several fair trade organic products before a niche market for hot chocolate was determined. The co-operative selected this particular product because there were no other fair trade, organic hot chocolate products on the market at the time. After agreements were negotiated for the purchase of cocoa originating from certified fair trade co-op producers in Costa Rica, La Siembra began mixing, packaging, and selling fair trade organic hot chocolate in small independent health food stores across Ottawa.
Production was carried out by the worker-owners at the home of one of the members, with the support of family and friends. Shortly thereafter, production was moved to the basement of a local church. The three worker-owners operated the business during evenings and weekends in addition to full-time jobs with other employers. In the first year, the business was built on a combination of owner investment and sweat equity. Sales totalling $47K were recorded at the end of the first year of operation (May 31, 2000).
September 2000 saw changes in ownership at La Siembra. The three founding members made the decision to sell the business due to the heavy workload of what was essentially two full-time jobs. The shares were purchased by two new worker-owners who had experience in business and international development but were new to the fair trade organic industry, as well as the co operative model. Two of the original founders stayed connected to the co-op as advisors and the third later rejoined the co-op as an employee.
3. Evolution of La Siembra
3.1 New Ownership & New Directions
The new co-op owners had two closely linked goals: to develop a family of premium quality products and to build a sustainable production chain which would provide economic, social and environmental value at every stage of production.
To accomplish these goals, the co-op owners saw a clear need to focus on product development and marketing. Together they invested $26K in the co-op and became full-time worker-owners. This new investment was in addition to $15K invested by the initial shareholders with Class A shares in the co-op. The new owners divided their time between different functions, so that one led sales and marketing activities while the other focused on production and finance.
Expansion of the "Cocoa Camino" product line was needed to address the seasonality of hot chocolate and cocoa. The owners realized that new, complimentary products could be added and sold under the Cocoa Camino brand name, which would help address the challenges stemming from high sales in the fall and winter months and slower sales in the spring and summer period. By increasing product diversity, they hoped to even out cash flow and generate quicker turnaround of product. As well, an increase in revenues from new product sales was required to sustain the owners' full-time salaries.
The production of hot chocolate was moved from Ottawa to a company in southern Ontario that was willing to do limited production runs. Outsourcing direct production of the hot chocolate enabled the worker-owners to fully direct their energies towards product development and marketing.
Sales grew to $86,849 for the year ending May 2001, up 46% from $47,042 in 2000. Given the focus of owner energy on new product development and financing, it seemed that the business was growing largely in response to pent-up and emerging demand. The fiscal year 2001-02 saw continuing growth, the hiring of a sales and marketing co-ordinator for the Québec region, and the introduction of several new products. La Siembra also made its first producer visit in 2001, travelling to the Dominican Republic to visit CONACADO, its new fair trade cocoa producer.
In early 2002, La Siembra added imported sugar to its product line. The sugar was purchased from mills in Paraguay with premiums paid to the local cane producer co-ops. La Siembra launched chocolate bars in early 2002 following successful market testing at the Canadian Health Food Association Trade Show in Toronto in late 2001. Additionally, La Siembra entered into a three year partnership with Equal Exchange to supply private label hot cocoa. This new relationship was significant for La Siembra given that Equal Exchange, founded in 1986, was the largest and most established fair trade co-operative in the United States.Footnote 8 The partnership provided La Siembra with an opportunity to reach the US market and achieve greater economies of scale. Both organizations had more to gain as partners than competitors, and this partnership, both on a business level and a co-op to co-op level, has continued to thrive and provide rich value for both organizations.
In June of 2001 a comprehensive business plan was developed in-house. This document outlined growth plans for the co-op as well as the capital needed to finance growth. The owners began to actively pursue financing sources with the goal of raising $250K-$350K to cover projected expansion costs and cash flow requirements. When mainstream financial institutions turned down requests for financing, La Siembra approached the Caisse Populaire with whom they had an existing relationship.
La Siembra found that the Caisse Populaire took a progressive look at their business from the outset. In the first year of start up, La Siembra was awarded with the "Entrepreneur of the Year" award by the credit union. In addition to banking support, the Caisse Populaire arranged for La Siembra to talk with the Export Development Corporation regarding receivables insurance as well as the credit union's international accounts manager who also worked with currency exchanges. To assist La Siembra in raising financing for expansion, the Caisse Populaire offered to increase the existing line of credit from $15K to $30K for short term needs, and agreed to extend the line of credit to $100K on the condition that the co-op raise a matching amount of capital in equity.
With this opportunity at hand, La Siembra began putting together a pool of equity from diverse sources. Class A shares sold to the initial shareholders amounted to approximately $15K. Investment by the new set of owners added $26K. A loan was approved by the Canadian Alternative Investment CooperativeFootnote 9 in the amount of $50K, while the Tenacity Works Fund,Footnote 10 managed by the Canadian Worker Co-op Federation,Footnote 11 extended a loan of $30K. Many of the loans from the Caisse Populaire and CAIC initially required a personal guarantee from the worker-owners.
With additional equity still to be raised, the owners launched an intensive capital campaign focusing on private investors in Ottawa. They began by holding investor meetings in the summer of 2001 to animate the business plan. Presenting a well researched plan coupled with the multiple benefits of organic and fair trade practices, the owners were able to provide socially minded investors with an opportunity that paid multiple dividends. The timing was fortunate, as media focus on child slavery in Africa at the time had generated a greater public awareness of inequitable trading issues. La Siembra was offering local investors an opportunity to be a part of the solution - as well as an avenue for advocacy and quality control. It became apparent to La Siembra that return on investment and involvement with a co-op model played a much smaller role in the investment decision than the opportunity to take action against unfair trading practices. Thirty-five people in the Ottawa area attended the first investor meeting and signed letters of intent to the amount of $40K. Over a period of seven months, investors made an equity commitment to La Siembra of $95K.
As a member co-op of the Canadian Worker Co-op Federation (CWCF), La Siembra was able to offer its shareholder members the option of investing La Siembra shares in a Self-Directed Registered Retirement Savings Plan (RRSP) set up under the CWCF.Footnote 12 For La Siembra, the RRSP option was an attractive selling feature for investors, especially in the early days when shareholder dividend payments were smaller. Initially, about one third of the investors chose the RRSP option. As dividend payouts grew, the RRSP option became more of a bonus than a key feature for investors.
3.3 Industry Recognition
In the fall of 2002, members of La Siembra were surprised by a nomination from Co-op AmericaFootnote 13 for a 'Socially Responsible Business Award' for the North American Products Industry. The members were perhaps even more surprised when they won the award at the Natural Products EXPO East in Washington, DC. This national products industry award was significant for La Siembra in that it recognized the company on a national level, both in terms of products and as a business model. As the first Canadian company to win this award, it invoked recognition from the industry and provided credibility for those beyond the co-op and fair trade sectors.
In response to the nomination, La Siembra was required to submit an overview of all the areas of the co-operative. This document, outlining the vision and values of the organization, was written in a comprehensive manner that incorporated the traditional economic considerations at La Siembra, as well as its social and environmental principles and practices. The final document was straightforward and transparent, providing a detailed description of areas such as ethics, accountability, governance, financial returns, employment practices, business relationships, products and services, community involvement, and environmental protection. Supporting statements such as the one below, from industry peers and experts, funders, board members, retailers, and fair trade organizations lent support to the fact that La Siembra was "walking the talk."
"I am pleased to provide a reference in support of La Siembra Co-op's nomination for a Socially Responsible Business Award. La Siembra not only contributes to improved trading conditions for small cocoa farmers through its sales of certified fair trade cocoa and chocolate products, but they carry these values into our own community in Ottawa through their support for local educational and cultural events such as film festivals and world music concerts, community development education seminars, and by providing food products and educational materials for fundraising events on behalf of community organizations. This consistency of attention to all stakeholders, from their third world suppliers to their customers in our community in Ottawa and Canada, is an example of business as it should be practised in our globalized world. I'm proud to be an investor in and supporter of La Siembra Co-op."
Bob Thompson, International Development Consultant
(Founder / former Managing Director of TransFair Canada, former Chair of Bridgehead Inc.,
Winner of 1999 Ontario Ethics in Action award for "Socially Responsible Business-Individual")
La Siembra promoted their achievement by issuing a press release to all media outlets in Canada, which resulted in a variety of coverage through TV, radio and print mediums. The co-op was strategic in how it positioned itself in terms of its area of expertise with the media. In essence, it created an alternative story for the media, which, using the award as a platform focused on fair trade and the cocoa industry. The media picked up on the piece because it offered an alternative view of the impact of globalization and an action oriented approach to addressing issues such as child slavery. Through this strategic positioning, La Siembra established credibility with the media as a resource on fair trade issues and cocoa products.
3.4 Capitalization Through a Public Offering
Capitalization of the co-op via new shareholders continued to grow. By the fall of 2002 the organization knew that it was only a matter of time before it would reach the allowable cap of 25 shareholders for issuance of shares without a prospectus. Growth beyond 25 shareholders was restricted according to the Co-operative Corporations Act of Ontario which specified that the co op could not sell, dispose of or accept consideration for securities unless the co-op filed with the Superintendent an offering statement and obtained a receipt. This cap posed a real barrier to La Siembra in terms of its ability to continue to attract new investment to finance growth. Mainstream financial institutions were still reluctant to invest in a co-operative and the organization was mindful that it needed to maintain an acceptable debt-to-equity ratio for its existing funders and lenders. Raising equity through investor-shareholders provided a viable means for keeping the cost of money affordable through manageable annual dividends while also keeping the ratio of debt-to-equity in line.
External advice was sought and after conducting its due diligence, La Siembra decided to rewrite its incorporation papers to allow the organization to raise essentially unlimited dollars and an unlimited number of shareholders. A consultant was secured to assist in the writing an offering statement which was then submitted for approved by the Financial Services Commission of Ontario. This statement included all details about the sale of Membership Shares as well as Class A (Supporters) and Class B (Members) Preference Shares. Co-operative Membership Shares (which do not pay dividends but are voting shares) and Class B Preference Shares were offered for sale to members only, while Class A Preference Shares were available for purchase by anyone. The minimum individual purchase amount for Membership Shares was $100, while $1,000 and $5,000 were the minimum amount for Preference A and B Shares respectively. Currently, prospective members of the co-op are required to purchase a minimum of one Membership Share and five hundred $10 Preference B Shares.
From May 31st, 2002 to 2005, La Siembra raised approximately $500K of new investment from investors in Ontario, British Columbia and Quebec. The strategy for reaching investors outside of Ottawa was accomplished by linking with socially responsible organizations that had an existing network which could disseminate information about upcoming investor meetings. The investor meetings were held in Nanaimo, Victoria, Vancouver, Montreal, Toronto and Ottawa.
3.5 New Product Development and Distribution
La Siembra continued to grow the Cocoa Camino product line with the addition of a new retail sugar product and posted sales of $992K in 2002-03, a 428% increase over the previous year. For the first time, a profit was realized by the co-op. This amount of sales also resulted in $44K in above-market premiums paid to producer farmers. Eighty percent of the company's growth could be attributed to the launch of chocolate bars, increasing bulk sales to suppliers, and sales of private label hot chocolate.
In 2003-04 La Siembra introduced mini chocolate bars and sugar sachets, and negotiated new bulk ingredient relationships with a number of Canadian suppliers. Sales to Equal Exchange increased due to growing demand for private label products including a newly introduced baking cocoa supplied by La Siembra. At this time, the co-op also began working with Canadian manufacturers such as Nature's Path and Organic Meadow to convert their existing products to organic fair trade supplies. Additionally, La Siembra supplied sugar and cocoa to the OntarioBio Farmer's Co-op for a branded organic fair trade chocolate milk—the first diary product to be certified as fair trade in North America.
Distribution took a new turn in 2003-04 when La Siembra was approached by Loblaws to supply 150 stores with organic fair trade products. Responding to consumer demand and an evident growth opportunity, Loblaws was ready to move quickly and within a couple of short months La Siembra products were on the shelves. La Siembra believed that they were chosen by Loblaws because the co-op was national, produced quality products, and had a solid reputation. It was also felt that their recent industry award had inspired confidence in the retailer. Initially volumes were slower than expected, but sales grew gradually. This new channel of distribution was important for La Siembra because it gave the co-op confidence to pursue the mass market, building on the direct-to-warehouse piece and developing their ability to respond to high volumes of product. More retailers were added during this time period including Overwaitea and Save-On-Food grocery stores in western Canada. The co-op's original customer base, the independent health food stores, continued to be a strong source of sales at 69% of the total.
Three new products were introduced in 2004-05 and expansion through retail distribution continued as products were listed with A&P and the Safeway grocery chains. Sales to Equal Exchange remained strong and in this year the co-op exported its first product to Japan. Agreements were negotiated with two new cocoa producers in Peru and the co-op also launched its new Cocoa Camino packaging. The chart below shows a breakdown in sales for the year ending May 2005:
|Type of Sale||Percentage of Total Sales (2005)|
Source: La Siembra Annual Report 2005
3.6 Mission and Profile
The mission of La Siembra is:
- To be a leading North America fair trade organization;
- To offer consumers high quality, certified, fair trade organic products;
- To assist co-op producers to improve the livelihoods of family farmers and the well-being of communities; and,
- To educate consumers as to the benefits of fair trade and organic alternatives
This mission indicates that the co-op is not just selling a product, it is also selling a value. The marriage of product and value can be clearly seen in the economic and social missionsFootnote 14 of the organization. The economic mission of La Siembra is closely related to self-sufficiency and sustainability in three main areas:
- To generate sufficient income for producers to allow them to improve their livelihoods and the quality of life in their communities;
- To generate sufficient income to cover operating costs; and,
- To generate sufficient income to provide a reasonable rate of return for investors
The social mission explains the impact (and means) that La Siembra has strived for in its business operations. These social impacts affect five key stakeholder groups:
- Producers — by improving their standard of living through a more equitable profit margin and assistance to producer groups;
- Mainstream competitors — by increasing awareness of the opportunities to work according to ethical and fair trade principles;
- Retailers — by creating more opportunities for the marketing of fair trade products;
- Consumers — by increasing awareness of fair trade and encouraging value-based purchase decisions; and,
- Staff — by creating a high quality, democratic working environment.
There is a complimentary fit between the multiple missions of the organization and the co-op model. For La Siembra, the key advantages to the co-op model have been the goodwill, sharing of information, support and resources. Fair trade is a complimentary concept as producers are also co-op organized. Furthermore, fair trade reinforces components of the co-op structure and philosophy—that an organization takes care of itself and other co-ops. It is interesting to note that most of the worker-owners at La Siembra were not familiar with the co-op model when they joined the organization, and in fact had few expectations in terms of what the model could offer. However, both of the current executive directors have been inspired by the co-op structure, as have newer co-op workers, so they are now enthusiastic spokespeople.
3.7 Sales and Revenues
As the chart below indicates, sales at La Siembra have grown significantly over the last 6 years. The relationship between growth in share capital and revenues is a positive one so that generally there is a sharp sales increase in the year after new capital has been raised. Gross profit has hovered around 30% in the last three years while net income has increased substantially during the same time period. The co-op continues to apply an "efficiencies first" mentality with a focus on margin and budget control. A total of $130,000 has been paid in above-market premiums to producers in the Dominican Republic, Peru, Paraguay and Costa Rica since La Siembra was established and the impact of these premiums can be seen in a variety of community projects. Investor dividends have also increased in the last three years from 1.3%, to 2.1% to 4%.
|Gross Profit Margin
|Above Market Premiums to Farmers
The co-op model has presented some challenges for La Siembra. The ability to attract large investors as a means of capitalization has not been possible. These investors typically want a place on the organization's board, however, current worker co-op legislation in Ontario does not allow for non worker-members to act on the board of directors. The provincial restriction of 25 shareholders per co-op in the absence of a registered offering statement also handicaps the ability of a co-op to raise investment. And while the decision making nature of a co-operative produces good results, it is time-consuming because of all the input required. A good internal vetting process is important, as is the ability of management to recognize when it needs to seek advice from external resources.
Currently, there are five worker-owners at La Siembra, as well as five employees and two part-time staff. Many of the current staff have experience in international development. Collectively, the co-op is fluent in English, French and Spanish. Historically, the strategy for recruiting new worker-owners and employees has been to attract talented self-starters who were capable generalists and adaptable individuals. As the organization continues to grow, roles are becoming more specialized, and individuals with more specific experience and knowledge are being sought.
For about two and half years in the early stages of its operation, La Siembra did not have sufficient cashflow to pay a fair wage to its worker-owners. On the advice of an external advisor, the co-op began recording this sweat equity contributionFootnote 15 to the organization. Recording and compensating for sweat equity allows a co-op to remunerate all the work at a fair rate without necessitating immediate cash flow. To recognize sweat equity, labour is tracked and given a fair wage, similar to paid wages.
As a worker-owned co-op, La Siembra places a high value on self-help, democracy, equality, equity, and solidarity. The organization is committed to creating a culture that empowers employees by helping them develop the skills, vision and ability to change themselves and the world.Footnote 16
The Board of Directors, which is elected by the worker owners, is currently comprised of four worker-owners. The Board hires the executive director(s) who are responsible for the day-to-day management of the co-op and hiring of workers and employees. It is clear from the business structure that the senior worker-owners in the organization have a dual role in the areas of governance and management.
3.9 Future Directions
La Siembra plans to continue to diversify its Canadian product line into the future by adding new products under the "Cocoa Camino" brand name. With a goal of increasing current sales by 40% in the long term, the co-op will focus on higher volume mainstream supermarkets in Canada and expand the distribution network in target organic and fair trade markets. An increase in sales of bulk ingredients will also be pursued given the low overhead expenditures per sale, high volume, and reasonable profit margins offered.
As in the past, one of the key challenges in achieving these objectives will be securing the necessary capital to finance growth and cashflow. The co-op is in the process of raising $200K in new investment and negotiating increases in its line of credits. Establishing and growing quality partnerships with producers, processors, and distributors will continue to have a significant impact on the success of La Siembra. Emerging competition as a result of the growing organic and fair trade movement will require careful monitoring so that appropriate strategies are adopted.
Currently, the co-op has ten worker-owners and employees. Additional human resources will be needed to support growth plans. La Siembra acknowledges that the co-op cannot grow from 10 to 25 people without internal growing pains, and that such development will require commitment and careful management to ensure the co-op's culture and principles are maintained.
La Siembra has experienced tremendous growth over the last six years and has developed a solid reputation for product quality and organizational integrity. The worker-owners acknowledge that the challenge moving forward will be to continue to respond to growth in a way that is consistent with the values of the co-op and translates into a successful worker-owned co-op. Balancing issues such as the ratio of debt to equity, time spent raising money, the cost of money, and maintaining control of the co-op will need ongoing attention as will the drive to find creative solutions to capitalization.
4. Lessons Learned
4.1 Factors and Barriers to Success
Staff & Management
La Siembra has been successful in recruiting and retaining capable and talented staff who have developed into "pillars" within the organization. The organization has recently implemented a generous worker/employee benefits package. Management recognizes that paying attention to the human health of the organization is very important and will continue to play a significant role in the success of the co-op as it evolves.
Management capability has grown organically at La Siembra and strong strategic planning skills have been demonstrated. The wisdom to be reflective, understand management and organizational weaknesses, and know when to solicit external advice and expertise has also been shown.
La Siembra is a values driven business. As such, it is not easy to recruit workers and employees who have co-op and fair trade values, and the necessary skill set to meet specific job requirements. As the co-op grows, efforts must be made to expand the pool of people possessing all three of these characteristics, especially co-op and fair trade values. The sector needs to find a way to nurture young people who can bring the desired values, knowledge and experience to the table.
Leadership & Governance
The democratic governance model used at La Siembra has created synergy and resulted in a collective that is larger than the sum of the individuals involved. This is not always the case in traditional start-up businesses where one person may be the driving force behind an enterprise. La Siembra has drawn on the resources of the broader co-op movement, including for example the Canadian Worker Co-op Federation and the Ontario Co-op Developers Network, for advice on business strategies. Resources such as these are important for organizations in the start-up and growth stages, but are not always accessible or affordable for sole proprietorships or mainstream forms of small business.
While the decision making process in the co-op model can produce better informed outcomes, the democratic process can take time away from sales and capitalization efforts. The multiple roles of individuals can also create difficulties. Because of the integration of vertical management and horizontal staff relationships, co-op members need to be clear about what role they are playing, as well as the boundaries of that role. Using co-op and fair trade principles as checks and balances, La Siembra addresses this ambiguity with their commitment to the vision and values of the co-op, as well as implementation of policy and good communication.
La Siembra appreciates the value of partnerships and their potential to act as launch pads to new opportunities. Partnerships for the co-op have taken a number of forms including relationships with associations, suppliers, lenders, producers, and competitors. The partnership with Equal Exchange has been especially valuable for La Siembra, providing a source of benchmarks for the co-op as it evolved, as well as a means for achieving economies of scale and expanding into the US market. With an emphasis on transparency and the goal of creating value for both sides of the partnership, these two organizations have shared information in areas such as cost margins, partnerships and policy. The result is an evolving relationship that assists both of the co-ops to adopt more progressive measures to support workers. Although still a smaller and much younger organization, La Siembra is now finding that it can provide Equal Exchange with valuable knowledge and ideas from its unique perspective.
Despite the constraints of limited access to capital and the provincial cap of 25 shareholders without an approved prospectus, La Siembra has raised over $625K in share capital. The coop has also been successful in securing approximately $450K in debt including approximately $200K from Shared Interest,Footnote 17 a co-op lending society in the UK that works with fair traders throughout the world. By amending their articles of incorporation and preparing an offering statement, the co-op has been able to reach socially minded individuals in three provinces through investor meetings organized by like-minded companies. Using a presentation that balances business and fair trade, the organization has been able to raise money, advance the concept of fair trade, and promote the co-op and its products. La Siembra has found these investor meetings very valuable.
However, raising equity in this manner has also had its drawbacks. Cultivating new investor-shareholders is not always timely, as new investments do not always coincide with the periods when the organization has its most intense cash needs. In addition, La Siembra has found that shareholder liaison and oversight activities are becoming more costly and time intensive as the pool of investors grows. There are also regulatory issues that create difficulties. Ontario, Quebec and British Columbia each have different filing and reporting requirements for shareholders. Timing and duration for offerings, costs, and reporting requirements vary from province to province. At the present time, there is no national format for a small business offering.
La Siembra entered into the organic fair trade sector at a good time. Pioneers like Bridgehead had been working in the industry since 1975 and mainstream retailers and consumers were ready for new products. La Siembra made a good decision to provide chocolate bars that would appeal to both the organic and fair trade consumer. Steps to bring visibility to the fair trade movement in people's own space, such as grocery stores, are now needed and will serve to increase the momentum of the sector. On the other hand, as the movement grows, so too do the possibilities for misinformation and a dilution of the integrity of fair trade concept, which could impact individual fair trade co-ops.
The continuing growth of the sector provides new sales opportunities for La Siembra. It also creates a growing draw for new entrants to the industry. The potential exists for mainstream competitors with strong financial resources to bypass La Siembra in the production chain and go directly to the producers. The investment that the co-op has, and is, making in building loyalty and long term commitment with their producers will be a key factor in how new entrants find ways to compete in the sector.
Fair trade organic products cost a premium to buy. Consumers are willing to pay this premium because of the perceived social value in buying the product. A downturn in the economy, such as a recession, could cause people to re-evaluate their expenditures on "socially responsible" products. If price sensitivity increases, companies that sell fair trade products could become vulnerable and the sector could experience a stall or decline in growth.
Triple Bottom Line
La Siembra is creating a new economic model—one with a triple bottom line. Success must be defined carefully, as it is not only about growing sales and wealth creation. At the same time, the co-op must behave like a business and cannot ignore its economic mission. Accounting for the triple bottom line is difficult as the financial statements do not estimate the return from social and environmental benefits. Although it is understood that these "soft" investments generate real value, there is no definitive way to estimate and report their impact. A widely accepted (and understood) means of social accounting is needed to capture the true bottom line of co-ops with social and economic mandates.
Entrepreneurship & Innovation
When there was no fair trade certification for cocoa and sugar, La Siembra approached TransFair Canada to start the process, and subsequently became the first company to certify these two products. This is one example of how La Siembra has been entrepreneurial - the creation of new products, co-packing, new suppliers, and some of the risks the co-op has taken are other examples. Continually raising the bar, and maintaining a cutting edge position, are objectives of the organization that have required a "can-do" attitude, which must be backed by substance and a willingness of co-op members to take risks.
4.2 Key Issues
Access to Capital
Capitalization has been an ongoing issue for La Siembra as there is currently no source that could provide large blocks of equity or flexible financing to act like equity. As a result, debt-to-equity ratios may be stretched. Debt has been useful up to this point, with terms and interest rates secondary in importance to access. However, the co-op has now reached a point where it needs another mechanism for its capitalization.
A report issued in the fall of 2003 summarized the findings of the pilot project "Tenacity Works - The Worker Co-op Fund" which was carried out by the Canadian Worker Co-op Federation (CWCF) and funded by Human Resources Development Canada. The objective of the pilot project was to assess the viability of creating a permanent self-sustaining fund to support the development and expansion of worker co-operative enterprises in Canada.Footnote 18 Findings in the summary report indicated that the pilot project had enabled the CWCF to build capacity to develop and manage a fund with a sustainable capital base. The report also indicated that the infrastructure and potential for supporting the worker-co-op sector were in place. The total capital base required for the fund was identified as $21.5M or $20M in addition to the original capitalization amount of $1.5M. To date, such a fund has not been created.
La Siembra has been successful in raising equity through the sale of Class A Preference Shares. While this method has provided the means for reaching individual investors, the current structure does not appeal to organizational shareholders looking to make large sum investments in return for a role on the board and a higher rate of return. As board members of La Siembra must be both co-op members and full-time employees, there are restrictions in terms of how La Siembra can access larger pools of capital. A creative arrangement needs to be developed that would address the needs of larger investors and the co-op by providing an equitable balance between investment risk and organizational control.
Economic conditions are an important factor in the provision and sale of fair trade organic products. Given the diverse geographic nature of the supply chain, changes in transportation costs have the ability to substantially affect the margins of producers, processors, importers and retailers. In the case of La Siembra, cocoa raw materials are produced in South and Central America, shipped to points in Europe for processing, then imported into Canada for distribution across the country, and into the U.S. and Japan. With this level of transportation required, any increase in oil prices would have a significant impact on the co-op's gross margin. The risk could be reduced by means of establishing a processing facility in producer countries or in Canada, however, this step would require a substantial capital investment as well as access to specialized knowledge and expertise.
There are other risks beyond the control of the co-op that could also affect the cost and availability of supply. Severe weather conditions and disease, as well as political, social or economic disruption in producer countries could have an impact on producer output. A decrease in quantity or increase in the cost of supply has the potential to adversely affect organizations further along the supply chain, such as La Siembra.
La Siembra Co-operative Inc. is a young co-op that has shown significant progress since its establishment six years. Grounded in fair trade and co-op principles, the organization has grown from being a small supplier of hot chocolate to offering a full range of cocoa and sugar products under its Cocoa Camino brand name and private labeling arrangements. Financing this growth has forced the co-op to develop innovative means to raise debt and equity capital. A successful share offer and the ability to attract socially-minded investors in Ontario, Quebec and British Columbia has resulted in over $600K in equity investment. When combined with funds secured through debt sources, the total capital raised by La Siembra to date is over $1M. With a target of 40% growth in the long term, the co-op recognizes that it must continue to pursue creative solutions to address the ongoing challenge of capitalization.
Strong and evolving partnerships, as well as the recruitment of skilled members and staff, have also been key factors in the impressive growth of the co-operative. La Siembra has shown commitment to the democratic principles of the co-op model. As the organization moves forward, it will be critical to respond to growth in a way that reflects member values and translates into a successful worker-owned co-operative.
The goal of achieving a triple bottom line demands a balance between the social and economic missions of the co-op. Growing competition and production factors beyond the control of the co op may create new challenges in the future. La Siembra has achieved significant success on a number of levels in the past six years and is committed to being a leading fair trade organization in North America.
Hoffman, Ken; Social Enterprise Development, La Siembra Co-op: Evaluation of the Social Enterprise: June 15, 2005.
Canadian Worker Co-operative Federation; Tenacity Works, The Worker Co-op Fund, Fund Summary Information, Fall, 2003.
Hough, Peter; What is Sweat Equity? Canadian Worker Co-operative Federation; April 2003.
Stuart, Cynthia L; In Word and Deed: A Social / Economic Analysis of Ontario Worker Co-ops, prepared for the Ontario Worker Co-op Federation: 2003.
Canadian Worker Co-operative Federation; Preparing and Marketing your Financing Proposals: A Plain Language Guide for Worker Co-ops; Section 1: Preparing your Financing Strategy: February 2004.
Fairtrade Federation; 2003 Report on Fair Trade Trends in US, Canada and the Pacific Rim; Washington, D.C.; 2003.
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