Models of Local Ownership

One of the key messages of this report is that CFEs are a lot more common than most people think and are more critical to an economy’s well being than most economic developers appreciate. Common statistics about food can be misleading. In the United States, for example, many economists trivialize the role of agriculture by pointing out that less than 1% of the workforce is involved in agriculture. In fact, a better sense of the role of food in the economy comes from looking at consumer expenditures. The typical American family spends 10% of its budget on food.[2] Many other expenditures not in this category also are tied to food, such as purchases of refrigerators and microwaves, college tuition payments that include room and board, and retirement savings that contain allocations for future food expenditures. And then there are the many indirect benefits that good local food systems can contribute to an economy, including less sickness, more productive working lives, more tourism, and more productive ecological resources. A fair accounting of these factors could reasonably conclude that one fifth or more of the U.S. economy was tied, directly or indirectly, to food. In the developing world, where far more of the people live closer to the land and are growing their own food, the percentage of the economy tied to food is far greater.

 

Most food businesses right now are actually small and local. Again, start with the developed economy of the United States. Roughly half of the private economy, by jobs and output, rests in small businesses according to the U.S. Small Business Administration, which defines a business as “small” if it has fewer than 500 employees. Drill deeper into the data about food businesses and the presence of local ownership gets larger still. For example, the North American Industrial Classification System contains 1,100 categories, roughly 100 of which relate to food.[3] In most of these categories, most employees work for local businesses. All agriculture services provisions are dominated by local business. Two thirds of the food wholesale categories are local. The only one of a dozen food retail categories dominated by chains is supermarkets (like Kroger or Safeway). All food services are local, except cafeterias and food service contractors (like the Compass Group or Sodexo). Even in the 53 categories of food manufacturing, which one would expect to be made up of large companies, at least 40% are small and local. Again, in developing countries, the greater presence of subsistence and family farming would suggest their food sectors have a higher percentage of CFEs than the United States does.

 

Local ownership is the norm in almost every legal form of business organization. The exact contours of business organization depend on the laws of the country or of a sub national unit of government (for example, in the United States each state has its own laws on creating businesses). Worldwide there are probably thousands of such forms. But under closer scrutiny, nearly all these structures fall into five broad categories:

• Proprietorships: Sole proprietorships and partnerships are for profit enterprises typically governed by people who actually run the business. These are the most basic forms of local enterprise. Typically one person, a family, several friends, or a small number of individuals are the owners. They choose these business forms because they are the simplest ones available for starting, reporting, and filing taxes. Many represent hobbies, experiments, or second jobs, but that does not mean they are unprofitable. In fact, in the United States, sole-proprietorships are three times more profitable than C-Corporations.[4]
  
  

• Limited Liability Companies: As entrepreneurs become more successful and serious, they seek more formal structures. Many become corporations to legally shield themselves, and outside investors, from liability, and the vast majority are privately held by a small number of shareholders who elect an overseeing board. Blends of partnerships and corporations can be found in limited liability corporations (LLCs) and limited liability partnerships (LLPs).
  
  

• Nonprofits: While many nonprofits do not qualify under our definition of “enterprise,” a growing number have sought to escape their dependency on gifts and grants by launching “social enterprises.” These businesses must remain consistent with the social mission of the nonprofit. Their surplus revenue is reinvested in other mission-related activities of the nonprofit. Because nonprofits are technically owned by no one—even membership nonprofits must be careful not to funnel gains to their members—a “local” nonprofit is defined instead by those who control it. If the majority of members and board members of a nonprofit reside in the community in which a nonprofit operates, we consider it local.
  
  

• Public-Private Enterprises: As the book Reinventing Government underscored, governments increasingly are launching enterprises that they own themselves or co¬own in public-private partnerships.[5] If the governmental entity is local, we consider the enterprise locally owned. In the United States, for example, the state of North Dakota runs its own network of savings banks.
  
  

• Cooperatives: Cooperatives are essentially voluntary associations that engage in business for the benefit of their members. The members can be consumers, workers, businesses (“producer co-ops”), or a combination of all three. Unlike for-profits, where control is usually based on the principle of “one-dollar-one-vote,” cooperatives are based on the principle of “one-member¬one-vote.”[6] Surplus revenue is distributed to members as “patronage” payments based on how actively each member uses the cooperative business.
  

 

While there are examples of businesses in the five categories above that are not locally owned, probably 99% are. The only corporate form that is inherently not local is a publicly traded corporation. A company that “goes public,” where millions of tiny shares are dispersed globally and can move thousands of miles instantly at the click of mouse, is the antithesis of local ownership. But even among publicly traded companies, there are intriguing models for some localization. In the United States, when Ben & Jerry’s Ice Cream Company first went public, investors had to be residents of Vermont to buy the shares, and the stocks further bore the stipulation that they could only be sold to residents of Vermont or back to the company itself. These so-called “direct public offerings,” which typically involve small companies traded intrastate, are possible in every one of America’s 50 states. Generally, however, small public offerings are expensive and complicated, and the absence of any local stock exchanges means that local securities are hard to sell and therefore relatively unattractive to investors.

 

Although they may be out there, we were unable to find examples of food business in the United States or abroad that employ a local stock model (Ben & Jerry’s ultimately became a globally traded company that was taken over by another public company, Unilever). One company we studied, Cargills in Sri Lanka, had two tiers of ownership, one of which was publicly traded. Because the publicly traded tier was only 10% of the shares of the company (the founding family holds the rest), the company remains locally owned.

 

Not surprisingly, the founders of each CFE we studied thought the business model they selected was the best. Why else, of course, would they have chosen it? And over time many became evangelists for their model. Sole proprietors love the simplicity and flexibility of their companies. The captains of corporations cannot imagine any other way of preserving their independence while limiting their liability. Nonprofit leaders see their enterprises as the only kind that can pursue true social missions and the public interest. And cooperative managers are convinced that their model engages shareholders in the most democratic way possible.

 

Significantly, however, we could find no compelling evidence that any one model is absolutely superior to another either in its financial or social performance.[7] Far more decisive to the success of a business are critical choices about products, scale, markets, and management. If anything, the choice of business model really reflects two factors: the underlying philosophy of the founders, and their hard-nosed calculation about where sufficient initial capital can come from. If the founders believe their best source of capital will be themselves, they will form a sole proprietorship or a partnership. If funds are coming from foundations or wealthy contributors, they will form a nonprofit. If the most promising capital source is public money, they will become a public-private partnership. If they see funds coming from committed consumers, they will form a consumer cooperative. In most other instances, they will form some kind of company in which they can limit their liability.

 

The Case Study Overview Table breaks down our examples by corporate categories. We had no difficulty finding thriving CFEs in all but two of the business model categories. Given that every country’s food sectors, as noted above, are primarily made up of CFEs, their ubiquity was to be expected.

 

One exception was public private partnerships. Except for the CFE example from Malawi, we could not find good examples of public investment. Governmental involvement in CFEs tends to be through subsidies, loans, guarantees, and regulation rather than direct enterprise participation.

 

The other exception was sole proprietorships. Plenty of CFEs are sole proprietorships, and many were brought to our attention. But in formulating the criteria for which enterprises to study (elaborated below), we decided only to include CFEs that were prepared to share three years of financials with us. Within three years, most sole proprietorships go out of business, and by then the few that are successful usually seize the advantages of incorporation. Nevertheless, we do include one case study of a sole proprietorship, Akiwenzie’s Fish, in which the founders, a Native American couple in Ontario, Canada, have decided to keep their CFE small and informal.