OrganicCSEOUL2012OrganicCSEOUL2012OrganicCSEOUL2012OrganicCSEOUL2012

Sep. 27. 2012Sep. 27. 2012Sep. 27. 2012Sep. 27. 2012

Eun-Mee Jeong

KREI(Korea Rural Economic Institute))))

iCOOP KOREA’s Sales Business and Strategy

Characteristics of Consumer Co-ops in KOREA

Introduction

iCOOP KOREA’s Purchase Business and Strategy

iCOOP KOREA’s Sales Business and Strategy

Conclusion

1. Introduction

>> Activities of Consumer Co-ops(=CC) in KOREA

□ Consumer co-ops were started from the organic farm products direct-deal movement .

among farmers and consumers in the late 1980s.

ㆍEconomic activity to provide reliable food to their members

□ Two Activities of Consumer Co-ops

ㆍ Today, consumer co-ops cover about 20% of the EFA market.

3

ㆍEconomic activity to provide reliable food to their members

- groceries accounts for more than 90% of their business

ㆍOrganizational activity to promote the consumption of reliable food

□ The consumer co-ops have built a self-sufficient economic system and vertically

integrated production, distribution, and consumption through an efficient

distribution system as well as co-operation between farmers and consumers .

ㆍEnvironment-conscious consumers supported sustainable production and consumption,

producer's economic efficiency and consumer's reliability.

1. Introduction

>> for reference: Distribution Channel of EFA Products in KOREA

Production Wholesale retail sale consumptionM_S

(approximate)

Producer(A)

①Producer(Organization)

5~8%

② Agricultural

cooperative 8~12%

Producer

Consumer

Consumer

Consumer

Producer

Large Retail Outlet

Retailer ShopDistributors

Agri-Coops Shop

Agri-

Cooperative

ConsumerMail Order Sale

4

cooperative

Consumer CoConsumer Co--opsops(B)

15∼∼∼∼20%

Distributor(C)

50~60%

Member

Consumer

Consumer

Consumer

Producer

Producer

Distributors Large Retail Outlet

Union

of Co-opsCo-ops Shop

Specialty Retailer Shop

Agri-Coops Shop

(ex: HANARO Market)

Cooperative

Member

Direct management

Shop of the Distributior

MemberCo-ops

1. Introduction

>> Overcome the Limitation of the Small Local Co-ops

□ Until the mid 1990s, small local co-ops were in charge of all aspects of distribution of

EFA products, from collection of the products to the delivery of the products.

� The distribution structure of small local co-ops was based on a high-cost, inefficient

system, and as a result product prices were high and remained in a vicious cycle.

5

� Local co-ops began to form business union along with ones have similar policies.

� The business unions then combined only the economic activities of the local co-ops.

□ A movement arose in the mid-1990s … the business union

□ This study is to introduce the business operations of iCOOP Consumers’ Co-operative

Group(= iCOOP KOREA).

2. Characteristics of Consumer Co-ops in KOREA

□ In the 1980s, consumer co-ops in urban areas, began to appear.

for reference

Rural-Farmers Movement Civil MovementFarmers Movement Cooperative Movement Religious Organizations(direct transaction of agricultural products)Realization of various values of civil societyRural co-ops Women's Movement People Movement (workers, teachers, etc.)②②②② HansalimHansalimHansalimHansalim ①①①① Local CoLocal CoLocal CoLocal Co----opsopsopsops((((BarunBarunBarunBarun CoCoCoCo----op)op)op)op) ③③③③ WomenlinkWomenlinkWomenlinkWomenlink cocococo----opsopsopsops1970s1980s (1st half)1980s (2nd half)

6

③③③③ Civil Civil Civil Civil OrganizationOrganizationOrganizationOrganization----affiliated Coaffiliated Coaffiliated Coaffiliated Co----opsopsopsops ③③③③ WomenlinkWomenlinkWomenlinkWomenlink cocococo----opsopsopsops ④④④④ Local CoLocal CoLocal CoLocal Co----opsopsopsopsCentral Association Of Co-opsNational Co-opsAssociationSeoul Metropolitan Co-ops Solidarity of Co-ops

Hansalim Co-op Dure Co-op WomenlinkCo-op iCOOPLocal Co-opsRural Renewal MovementCivil Organization affiliated Co-ops1990 (1st half)1990 (2nd half)2000s ~Note 1) local coop, association2) Rural Renewal Movement, which is led by Korean Catholic Farmers Association and churches in urban areas, is a movement pursued within religious organizations (without organizational form including Coop) for direct transaction of organic agricultural products. Source: EunMee, Jeong (2006)

2. Characteristics of Consumer Co-ops in KOREA

>> Consumer Co-ops’ Differentiating System in Market ①□ Systematization of mutual-trust in EFA trade

a. consumers and farmers participate in

setting standards for reviewing and

selecting the products to be handled

b. CC gain the trust of members by opening

7

b. CC gain the trust of members by opening

up the products information and the

essence of managing and inspecting the

products is to open up the results to the

public.

c. iCOOP KOREA, has a unique certification

system, which is a product-tracking system

2. Characteristics of Consumer Co-ops in KOREA

>> Consumer Co-ops’ Differentiating System in Market ②

□ National Wide Logistics System

a. iCOOP combined the operations of

local CC that were carried out

separately, such as order placement,

purchase and supply of products,

financing, accounting, and producer

8

financing, accounting, and producer

management.

b. Local CC were able to cut their

workload drastically, and primary co-

ops in iCOOP KOREA were able to

specialize in the distribution of

agricultural products and achieve

economy of scale.

3. iCOOP KOREA’s Sales Business and Strategy

>> Organization Chart of iCOOP KOREA

□ iCOOP was established by 6 small local CC in 1997.

a. iCOOP is a consumer association that integrated the six small local CC’ business of

distributing EFA products.

b. By joining iCOOP, small local consumer co-ops entrust the business operations to

iCOOP and were able to focus on their respective organizational activities only.

9

iCOOP and were able to focus on their respective organizational activities only.

Farmer

Farmer

Farmer

Farmer

iCOOP

Business

Association

(Business Operations)

iCOOP

Association

(Supporting Organization)

Order/Supply

Member

Member

Member

Member

local co-op

local co-op

local co-op

Edu/PR

Order/Supply

Edu/PR

Stores

Stores

Stores

Order/Supply

Sale

3. iCOOP KOREA’s Sales Business and Strategy

>> Organization Chart of iCOOP KOREA

□ The other associative union

a. iCOOP Association assists organizational activities of small local CC and provides

assistance in the fields of education and planning to reinforce the activity of members.

b. Mutual Aid Society for Enhancing Korean Agruculture that provides mutual aid

between farmers and co-op members.

iCOOPBusiness Association

SubsidiariesFarmers

10

Finance Support for Education/Exchanges

iCOOPBusiness Association

(business operations)

Subsidiaries

iCOOP CSCOOP StoreiCOOP Food SystemiCOOP BakeryiCOOP School LunchEco-Friendly ClusteriCOOP Certification Center

iCOOP Cooperative Institute

Local co-op

iCOOP Association(supporting organization)

Farmers

Member(consumer)

Mutual Aid Society (mutual aid business)

Investment/Membership Fee

Investment0.5% of monthly membership fee

Order/Supply

Exchanges

Order/Supply

Stores

Supply Investment

Invest

-ment

Production Stabilization Fund

1.1% of selling price Education

/Exchanges

3. iCOOP KOREA’s Sales Business and Strategy

>> Trends of iCOOP KOREA’s Sales

□ The growth rate of the co-ops’ business was high especially after the year 2000

a. During the recent 10-year, co-op individual members and sales volume have increased

annually by 46% and 49% on average respectively

b. iCOOP’s Number of Local CC : 6 CCs (1998) � 75 CCs (2011)

c. iCOOP’s Number of Store : 6 stores (2006) � 110 stores (2011)

� Number of Local Co-ops and Stores� Number of Members and Turnover

11

8

17 22

56

85

110

34

79

119

156

15 53 165

494

755

1302

2062

2633

3002

0

500

1000

1500

2000

2500

3000

3500

-

50

100

150

200

250

300

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

sales volume

(100mil, won)

members

(thousand)

monthly fee-

member

members

total sales

volume

6 7

15

26

35

46

5862 62

6570

73 7575

6

25

38

66

96

110

0

20

40

60

80

100

120

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

members

affiliated local co-ops

Stores

� Number of Local Co-ops and Stores� Number of Members and Turnover

3. iCOOP KOREA’s Sales Business and Strategy

>> Sales Strategy of iCOOP KOREA

□ Monthly Membership Fee Scheme

a. Members purchase EFA products and share the operation cost of local co-ops

b. iCOOP provides the distribution service by taking only the logistics cost.

Membership due = (operation cost/number of members) – Refund

* Refund: distribution cost saved through the use of Internet and CMS

* Revenue of local coop: distribution margin rate → fixed monthly due

12

Local Co-op

Local Co-op

Local Co-op

MemberOrder

* Distribution margin: 20~25%* Revenue of local coop: distribution margin

iCOOP

Local Co-op

Local Co-op

Local Co-op

Membershipdue

* Distribution cost: 7~8%* Revenue of local coop: fixed monthly membership due

Member

Member

Member

Member

Member

Supply

Order

Supply

Order

Supply

Order

Supply

Order

Supply

Order

Supply

Membershipdue

Membershipdue

3. iCOOP KOREA’s Sales Business and Strategy

□ This scheme began simultaneously with the construction of a national wide logistics

system which was entrusted by local co-ops to iCOOP.

a. iCOOP directly handles distribution from farmers to local co-op members so that the

local co-ops are not involved in logistics business.

b. iCOOP earns revenue from the distribution fee

c. Local co-ops earn income from the monthly membership fee

13

□ The membership dues is spent for the management of local co-ops and the operation of

iCOOP for its national activities.

� These activities promote the production and consumption of EFA products.

□ Under the monthly membership fee scheme, local CC have an incentive to increase

their members

� Because the amount of fees decreases as the members increase.

3. iCOOP KOREA’s Sales Business and Strategy

Business Activities

(iCOOP)

Membership Due

System

Concentration of

Organization Activities

(local Co-ops)

Vitalization of

Management Committee

Specialization of

Management stabilization of local co-ops through stable revenue system

□ The Goal of Activities

a. iCOOP takes full charge of logistics (in pursuit of distribution efficiency)

b. Local Co-ops focus on increasing members (to promote the consumption of EFA products)

14

Concentration of

Business Operation

Expansion of National

Distribution System

(15 distribution centers)

Establishment of Subsidiaries

(iCOOP CS, S& D, etc.)

Pursuit of

Distribution Efficiency

Specialization of

Organization

Support for establishment of

new local coops(1,000 activsts in 75 member co-ops)

Operation of sale stores in local co-ops(specializing in eco-friendly agricultural

products)

Promotion of environment-friendly agriculture, protection and support of domestic agriculture

Consumer Movement for

Eco-Friendly Agricultural

Products

4. iCOOP KOREA’s Purchase Business and Strategy

>> iCOOP’s Basic Understanding of Agriculture

□ iCOOP considers today's agricultural problem as farmers’ poverty rather than decline

in agriculture.

� iCOOP’s business scope expands to domestic agricultural products

even though its primary concern is EFA products

15

□ iCOOP is intended to secure stable markets and increase farmers' income

a. iCOOP subsidiaries(invested by the co-op and farmers) are intended to create added

values for farmers by the processing of agricultural products.

b. Farmers supply raw ingredients to the processing companies and the companies

return the added value to farmers.

4. iCOOP KOREA’s Purchase Business and Strategy

>> Purchase Strategy of iCOOP KOREA Production Contract

□ Production Contract

a. The production contracts ensure stable production of farmers and make them not only

worry about the sales but concentrate on production

b. iCOOP receives a prepayment from members and pays it to the producers as a

farming capital to obtain their promise to deliver the contracted products

16

□ In the recent 5 years, iCOOP’s sales increased by 40% on average annually and,

as a result, the EFA products were in short supply

a. iCOOP had to seek a transformation of its relationship with farmers

b. from an intermediary status linking farmers with consumers to a partnership status

with farmers

4. iCOOP KOREA’s Purchase Business and Strategy

□ proxy sales system

a. iCOOP does not buy the required volume but accepts total volume of farmers’

products. It is means that iCOOP takes full responsibility of selling the farmers’

entire products as their agent and partner.

b. The reason iCOOP introduced the ‘proxy sales’ is that iCOOP directly involved in

food processing by leading the development of processed foods and by providing

17

raw ingredients for processing.

ProducerCo-ops

Association

• Role of Co-ops Association: distribution

(intermediary for purchase and sale)

• Association income: distribution margin

Member

Order

Supply

Order

Supply

ProduceriCOOPBusiness

Association

• Role of iCOOP: purchase and sale agent

(in charge of production and consumption)

• Association income: distribution fee

Member

ProxyOrder

Supply

Order

ProxySupply

4. iCOOP KOREA’s Purchase Business and Strategy

□ flexible pricing system

It consists of basis price, target price and price stabilization fund

a. Basis price is the cost of cash to put into production

…is fixed regardless of uncertainty of production and consumption

b. Target price is the standard price for iCOOP KOREA's sales in progress.

… is set at about 10~15% lower than consumer price

c. This target price becomes the standard for saving and spending of the price

18

c. This target price becomes the standard for saving and spending of the price

stabilization fund.

a. It ensures a basis price even when there is a big risk in production

b. When products are sold at below the target price, the farmer can minimize the loss as

iCOOP compensates the loss to a certain level with the price stabilization fund

c. iCOOP has a flexibility in finding customers and suppliers of raw ingredients for

processing

□ The advantage of iCOOP's pricing method

5. Conclusion

>> iCOOP’s business implies…

□ What is agriculture's competitiveness ?

a. … is production of commodities satisfying consumers’ needs, rather than expansion of

markets for agricultural products.

b. iCOOP focuses on consumers’ needs for reliable food and farmers’ stable production.

□ The relationship between agricultural production and consumption is…

19

□ The relationship between agricultural production and consumption is…

a. Exchanges are made between safe EFA products and reciprocal payment for

sustainable production and life for all.

b. Consumers care for sustainable agricultural production and farmers’ livelihood, and

farmers try best to supply safe EFA products to protect the life of consumers.

c. This is the principle of coexistence between farmers and consumers, and it is

especially the basic condition to ensure the continuity of the human race and

community.