icoop korea’s pricing system for sustainable food production and distribution

iCOOP KOREA’s pricing system for

sustainable food production and distribution

A3 – BUILDING SUSTAINABLE SUPPLY CHAINS

A CO-OPERATIVE DECADE IN ACTION

ICA General Assembly, Cape Town, 3 November 2013

KIM, Hyungmi

Managing Director, iCOOP Co-operative Institute

Overview of iCOOP KOREA(1998~)

Outlook for 2013

Turnover

USD 420million.

Membership

200,000

:189,589

individual

members

With 2,909

producers and

1,468 employees

in Sept.

As of 2012

fiscal year..

We have 25 corporations

The Consumer’s

invested part

The Producer’s invested

part

iCOOP KOREA

• iCOOP UNION

• iCOOP Consumer Activities

• iCOOP CDC

• iCOOP Co-operative

Institute

• COOP Store

• COOP SERVICE

• KCOD

• iCOOP Seed Foundation …

Total 12

Invested and operated by 75

nation-wide member co-

ops and members

• iCOOP Association of

Producer Groups

• iCOOP Agricultural

Production

• iCOOP Fruits & Vegetable

• iCOOP Organic Food Supply

• iCOOP Ramen

• iCOOP Livestock Products

• COOP Bakery…

Total 13

Led by iCOOP Association of Producer Groups

A co-operative

group based on

consumer co-

operation

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Our Growth has been constantly continued since 1998

Red bar number of members (unit in thousands)

Blue Line rate of increase

Global

financial Crisis

Business of iCOOP KOREA- Store(70%) & Home delivery(30%)

Names of members who invested

Our store & premium brand are Natural Dream

Natural Dream Store is operated by iCOOP KOREA members’ joint investment. :

Number of stores: 135(as of July 2013)

The number of sale items : about 2,000

Categories : organic foods, bakery/pizza, fair trade products , café, daily necessities

Average store size: 193m2 (The biggest: 495m2, The smallest :50m2)

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iCOOP’s Development Strategies:

Concentration in Business, Division in Organization

iCOOP KOREA adopted a policy of gradually dividing the primary co-op to be closer

to local communities while carrying out businesses collectively to take advantage of

economies of scale.

Each cooperative has thousands of members and its operations are centered on their

respective board of directors elected by their members. As results, members’

participation and social interaction in local co-op is enhanced, co-ops spread more

locally.

5 co-ops &2

quasi co-ops

in Seoul

18 co-ops in

Gyeonggi Province

8 co-ops in South

Gyeonsang

province

75 member

co-ops in

iCOOP

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Membership dues system

iCOOP KOREA member cooperatives’ basic operation budgets are derived from monthly

membership dues not from business profits. This is founded on the belief that members

should be directly involved in their co-ops’ operations.

Democracy is enacted in the cooperative by directly involving members in drawing up and in

paying for operation costs. iCOOP, in exchange, does not charge a service fee for supplying

its products to members; thus, the more goods members consume the greater benefits come

from their membership dues.

As a result, more money is spent at iCOOP by its members than that spent at other consumer

cooperatives in Korea by their members.

USD9.2million membership dues from individual

members allocated to union activities , donation to the

Co-op Institute, a mutual fund, store fund, price

stabilization fund in 2012 .

Each member co-op decides own amount of member dues autonomically, but allocation

rate to union level is decided in the Annual meeting of representatives of iCOOP member

co-ops.

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Building iCOOP KOREA food clusters called Natural Dream Park

The concept behind iCOOP KOREA’s PB products is “ethical consumerism:” products are

locally grown, environmentally friendly, fair traded, and in solidarity with the social economy.

To create competitiveness of Natural Dream brand,

we plan to establish a food industrial cluster for manufacturing and producing the iCOOP

brand of processed goods and an eco village, “the Natural Dream Park” in Gurye, South Jeolla

Province and Goesan,North Chungcheong Province.

The Gurye Natural Dream Park(149,335 ㎡ )is set to complete March 2014; 16 companies’

food processing factories and a distribution center will be constructed.

Goesan Natural Dream Park (628,497㎡))will be completed in 2017.

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Starting its construction in May 2011, Gurye Natural

Dream Park will completed in May 2014.

Chicken processing plant

Dormitory

Support facilities Cold storage warehouses Milling factory

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A Unique Price system of agricultural products composed by 3

elements

Basic idea

• Agricultural products in iCOOP are cultivated in small scale farms (average of

1.5 hectares) and in a manner as to lessen the burden on the environment.

• Our context: productive capacity of organic farming is not high, the cost is high,

rapidly aging farmers in production site vs. consumers experience price

fluctuations of environmentally friendly and organic agricultural products

brought upon by climate change, natural disasters, and a complex distribution

structure.

• iCOOP KOREA’s solution to both these problems is production and

consumption based on a long term relationship with producers

• through its “sales agency- flexible pricing system + price stabilization fund + the

pre-purchase of domestic grain fund.”

• This guarantees a reasonable rural household income for producers – thus

retaining current farmers and attracting a new generation of them – and makes

available environmentally friendly and organic agricultural products for

consumers at a stable and reasonable price.

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iCOOP’s Price system of agricultural products:

Sales agency-Flexible pricing system

• iCOOP ’s partner producers (there are required to be a member of iCOOP

Association of Producer Groups) commit to providing an agreed upon amount.

• iCOOP is responsible for selling the full amount, iCOOP has the freedom to set

the price consumer’s pay.

• iCOOP determines the price based on the harvest, changes in consumer demand,

and fluctuating market prices.

The three elements of the sales agency-flexible pricing system

• Advance payment: At the beginning of production, iCOOP KOREA pays 10-

15% of the basic price within the sale agency system to the producers.

• Producer’s income formula = [selling price – production cost (i.e. the

producer’s commission)] ±± (price stabilization fund saving or payment)

• Flexible pricing system: A basic and target price are set; when the selling price

drops and the basic income of producers isn’t secured, iCOOP KOREA injects

the price stabilization fund and deposits the damage.

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Basic price 2

Target price 1

Situation A: Selling price A

Situation B: Selling price B

PSF

20~30% of difference A-1 goes to PSF

Injection of PSF, secure basic price to farmers(2=B+PSF)

Farmers

income

level

Basic price: is the sum of the cash costs of production

– such as the cost of seeds, labor (excluding the

farmer’s own labor), and other inputs, and an

additional 10~20%. iCOOP KOREA guarantees this

price whether or not the sales target is achieved

Target price: a standard price used to decide administration of price stabilization fund.

When a product is sold at higher than this price, 20~30% of the difference is placed into

the price stabilization fund. The target and basic price are decided every year by

iCOOP’s Association of Producer Groups.

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Sales agency-Flexible pricing system

The impact of the sales agency-flexible pricing system

When we surveyed iCOOP’s 25 partner producers, the

money they received after the implementation of the sale

agency-flexible pricing system was 66~73% of the selling

price to consumers. This was higher than the money

received by the typical farmer, 60% of the selling price to

consumers.

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iCOOP Price Stabilization Fund(PSF)

iCOOP operates PSF to guarantee a producer’s income when the market price of

agricultural products falls sharply. Producers, processing producers, and consumers

join to raise funds as follows:

• Producers: saving 20~30% of the difference when an agricultural product is sold

at higher than the target price

• Processing producers (food manufacturer): saving 0.9% of total delivery price

• Consumers: saving 500 won (0.5 dollar)/month per person

This fund stabilizes prices for consumers and producers when the price of

agricultural products increase sharply – as with the 2010 cabbage crisis – or when

they plummet – as with the 2011 foot and mouth disease outbreak. Thus, both

consumers and producers are guaranteed a stable, just, and sustainable price. The

benefits of this mechanism have attracted great attention especially from the

government and media.

In 2012, the fund raised 5 billion won (5 million dollars) and spent 2.5 billion won

(2.5 million dollars). An increase in 23% (compared to 2011) used to help producers

secure a reasonable income.

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Pre-purchase of domestic grain fund

A member-consumer pays for a product before receiving it. This system makes

production to be stabilized and needed money(farming fund) is available for

producers when beginning cultivation or harvesting.

This mechanism reduces the amount of outstanding on-line accounts and also

reduces credit card fees since it bypasses the use of a credit card.

As of Dec.31 2012, the amounts of the fund reached 25 billion won (25 million

dollars), total number of participants are 122,079.

Pre-purchase fund campaign posted

at back of the cashier in Natural

Dream store.

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A impact of iCOOP’s Price system of agricultural products

The price fluctuation of iCOOP KOREA’s environmentally friendly cabbage (in

green), the market’s environmentally-friendly cabbage (in red), and ordinary

cabbage (in blue)

Source: LEE, Geumno(2013), “Characteristics and Accomplishment of Price Decision

in Consumer Cooperatives – A focus on iCOOP KOREA” ,Consumer Research 2013,

Korea Consumer Agency

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Conclusions

• iCOOP KOREA’s PB products is “ethical consumerism:” products are locally

grown, environmentally friendly, fair traded, and in solidarity with the social

economy.

• The purpose of the pricing system of agricultural products – sales agency (or

consignment sales), the flexible pricing system, Price Stabilization Fund, and the

pre-purchase of domestic grain fund – is to build sustainable structure of food

production and consumption in the context of ethical consumerism.

• This is achieved by transforming a market based antagonistic relationship

between producers (seeking to sell at the highest price possible) and consumers

(seeking to buy at the lowest price possible) to a win-win cooperative price

system based on mutual trust and cooperation with common interests.

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Thank you for your attentions!

For details,

[email protected]

www.icoopkorea.coop

mailto:[email protected]

http://www.icoopkorea.coop/