mc kinsey on cooperatives how cooperatives grow

International Summit

of Cooperatives

Any use of this material without specific permission of McKinsey & Company is strictly prohibitedCopyright © 2012. All rights reserved

October 2012

How cooperatives grow

McKinsey & Company

Copyright © 2012. All rights reserved1|

Executive summary – cooperative growth strategies

▪ From 2005 to 2010, coops grew at nearly the same rate as their publicly held counterparts, but the way coops have grown is different

▪ Coops outperformed publicly listed companies on market share gains, underperformed on portfolio momentum (growth from operating in growing segments), and were roughly on par in M&A (with a focus on mergers rather than acquisitions)

▪ We see two primary opportunities for cooperatives

– Play to their natural strengths and further pursue market-share gains by offering value-added products and services that only a coop can deliver. Coops that have outperformed on market share

gains and have continued to win the loyalty of members have • Put members first. Coops place their members’ interests and needs ahead of short-term financial

gains to win their members’ loyalty and grow the customer base

• Used the proximity advantage. Coops can leverage their proximity with members – both physical proximity and close relationships – to tailor products, services, and operations to meet customer

needs• Broken down organizational silos. Coops can offer multiple products and services, allowing them to

serve more of their members’ needs and increase their members’ benefits and, therefore, grow more quickly. Various units in the organization need to work together to enable these opportunities

– Expand in attractive adjacent markets. Coops have a natural tendency to focus primarily on the

current interests of their existing members and, to a lesser extent, on expanding in attractive adjacent opportunities. Coops that are good at this do so by evaluating the broader needs of their members in attractive adjacent markets and by bringing targeted modifications to their business models to capitalize on these opportunities. They consistently renew their portfolio by• Understanding unmet needs. Coops must systematically research the unmet needs of their present

customer base to be able to effectively explore adjacent markets• Leveraging distinctive capabilities. When exploring adjacent markets, coops can leverage their

knowledge, experience, and/or unique expertise to address customer needs in these adjacent markets or new geographies

• Using formal mechanisms to finance new opportunities. Coops need to develop mechanisms to

ensure investment allocations are available to realize new opportunities

McKinsey & Company


Context and methodology

Cooperative growth strategies

Content

McKinsey & Company


We set out to answer three main questions

How important is growth?

How do coops grow?

How significant is growth?

McKinsey & Company


64 cooperatives in the 4 major sectors were included in our research

Insurance

Integrated financials

Retail

Food and Agriculture

▪ CoBank1

▪ Desjardins ▪ Vancity

▪ Agropur▪ American Crystal Sugar

Company1

▪ Farmers Cooperative Co.▪ La Coop fédérée

▪ Nationwide Mutual ▪ SSQ Financial Group1

▪ State Farm Mutual1

▪ The Co-operators ▪ Thrivent Lutherian

▪ Ace Hardware ▪ Mountain Equipment Co-op ▪ True Value Corporation1

▪ Unified Grocers1

▪ United Farmers of Alberta1

▪ Arabia1

▪ Co-operative Insurance Company of Kenya

▪ LARS▪ NTUC Income ▪ Zensorai

▪ Capricorn ▪ FairPrice1 ▪ CBH Group▪ Indian Farmers Fertiliser

Cooperative (IFFCO)

▪ Saraswat Bank1

▪ The Norinchukin Bank1

▪ Achmea ▪ Debeka1

▪ Folksam ▪ GEMA ▪ Groupama1

▪ MACIF ▪ R+V Versi-

cherung1

▪ Unipol

▪ Conad1

▪ Coop Estense1

▪ Coop Italia ▪ Co-op Schleswig-

Holstein1

▪ E. Leclerc1

▪ Edeka Zentrale AG1

▪ EMMI1

▪ HaGe Kiel1

▪ Südzucker1

▪ FrieslandCampina▪ Agravis Raiffeisen1

▪ BayWa AG1

▪ BPCE ▪ Crédit Agricole1

▪ Crédit Coopératif ▪ Crédit Mutuel1▪ DZ Bank Group1

▪ National Associaton of Cooperative Savings & Credit Unions (Poland)

▪ Rabobank ▪ RZB1

▪ SNS REAAL1

▪ The co-operative

▪ Lega Delle Cooperative▪ Migros1

▪ Mondragon ▪ NOWEDA eG1

▪ REWE Group1

▪ The co-operative

North AmericaEurope

Emerging markets and Asia

1 Quantitative analysis only

McKinsey & Company


To conduct our analysis, we leveraged an established McKinsey method, “The Granularity of Growth,” which explains the gap between coops and the market by deconstructing growth into its key drivers

Total growth

Organic growth

Growth drivers

Market share gain▪ Organic growth due to better

execution or a better value

proposition than competition

Portfolio momentum▪ Growth of segments and

geographical areas where

the company operates

Inorganic growth

Mergers and acquisitions▪ Growth relating to acquiring

other companies

McKinsey & Company


Context and methodology

Cooperative growth strategies

Content

McKinsey & Company


Our proprietary survey of coop leaders concluded that while coops are not subject to short-term market pressure, growth remains a priority to protect their members’ interests

20

27

53

60

Offering a range of

diversified services

Having a broader impact

on members and

their communities

Generating basic economies

of scale to remain competitive

Being a leader in the market

and able to protect members’

interests

Role of growth in realizing coop executives’mission and strategic objectives

Extremely important

92

Very

important

4

Not important,

not too important,

or important to

a degree

4

SOURCE: McKinsey survey and interviews (N=48 leaders – chairman, CEO, SVP – of coops)

Importance of growth to achieving coop executives’ strategic objectives

PercentPercent

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Cooperatives grow at nearly the same rate as the markets in which they operate, but important differences exist by geography and sector

Total8.7

7.9

Food and agriculture 6.4

7.7

Retail5.5

4.7

Integrated financials 11.7

11.2

Insurance10.5

9.1

Note: Considering sample size and availability of data, growth numbers within 1% confidence interval 75% of the time

1 Analysis based on 47 cooperatives and 54 publicly listed companies; data from 2005-10

Total8.7

7.9

Asia-Pacific and emergingcountries 12.3

11.4

Europe7.4

8.9

North America8.6

4.5

Sectors of activity Geographies

Market

Cooperatives

SOURCE: Annual reports; McKinsey analysis

Annual growth rate,1 2005-10Percent

McKinsey & Company


▪ Robust coop performance is driven by– A clear focus on current members/clients

due to membership structure– Proximity and knowledge of the market– Strong, widely appreciated social values

Cooperatives grow differently from the markets in which they operate, showing stronger market share gain but lower portfolio momentum

2.4

3.3

2.2

-0.2

1.1

-1.7

2.6

Portfolio momentum

5.0

Market share gain

1.1

Mergers andacquisitions

Spread Market Comments Cooperatives

Portfolio momentum and M&A are typically the 2 strongest growth drivers


Annualized growth 2005-10, percent

Note: Considering sample size and availability of data, growth numbers within 0.7% confidence interval 75% of the time

▪ The active search for new products and markets is not an explicit component of a cooperative’s mission

▪ Cooperatives are often less agile in execution and less prone to innovation

▪ Large variability of success against this lever between the various players and industrydue to– Difficulty in accessing capital– Cultural and structural issues limiting

integration capacity– Restrictive acts and regulations

McKinsey & Company


Insurance and integrated financial cooperatives slightly lag the market, mainly because of their presence in slower growth segments

1.1

4.3

4.8

2.1 3.3

2.9

7.6

3.6

3.0

3.3

5.0

1.4

11.7

11.2

10.5

9.1



Note: Considering sample size and availability of data, overall growth numbers for each sector is within 0.7% confidence interval 75% of the time;

growth numbers within each separate growth lever should be seen as illustrative

Diversified financials

Market share gains

Portfolio momentum

Mergers and acquisitions

Insurance

Total

Market

Cooperatives

McKinsey & Company


While retail cooperatives show mixed performance, food and agriculture coops lead their market



Note: Considering sample size and availability of data, overall growth numbers for each sector is within 0.7% confidence interval 75% of the time;

growth numbers within each separate growth lever should be seen as illustrative

4.7

5.5

6.4

7.7

0.2

3.1

1.3

2.0

3.7

3.3

4.8

3.2

2.5

1.4

-0.6

-0.5

Market

Cooperatives

Agri-food

Market share gains

Portfolio momentum

Mergers and acquisitions

Retail

Total

McKinsey & Company


Cooperatives have ventured less often beyond their borders, but those that did were able to achieve significant growth

21

28

4

18

10

54

29

35

Integrated financials

Insurance

Food and agriculture

Retail

Market

Cooperatives

7.6

1.4

1.3

6.1

1 International activities are those outside the country of origin

But the growth of international activities is superior to that of local activities

Absolute growth gap between international and local activities of cooperatives

Share of international activities in portfolio


Comments

▪ Geographical expansion remains limited, since it does not seem to always be aligned with the immediate interests of members

▪ Coops’ growth abroad is more often achieved through acquisitions, agrowth driver where cooperatives have structural difficulties (with the exception of several financials)

Cooperatives devote a smaller fraction of their activities outside their domestic market1


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Based on case examples of cooperatives with healthy growth, three opportunities emerge

Description Best practices

▪ The coop ownership model provides a competitive advantage as coops are better able to understand and

cater to the needs of their members

▪ Coops should play to their natural strengths and

further pursue market-share gains by putting members’

interests ahead of financial interests in product and

service design and delivery

Offer a value-add that only a coop can deliver in products and services

1. Put members first

2. Leverage the proximity advantage

3. Break down organizational silos

1

2

3

▪ Portfolio momentum is one of the strongest growth drivers for public companies, but it is a challenge for coops because of their emphasis on meeting the

immediate needs of existing members

▪ Coops must fight this natural tendency by putting in place

targeted modifications to their business model that enable growth in adjacent markets that are attractive to

their members and/or serve their long-term interests

▪ This strategy represents the most significant growth opportunity for coops

1. Understand unmet needs

2. Leverage distinctive capabilities

3. Use formal mechanisms to finance new opportunities

Organize to grow in attractive adjacent markets

1

2

3

▪ Coops perform similarly to the rest of the market in growth through mergers and acquisitions

▪ However, significant variability exists within this driver

given the difficulty in accessing capital, cultural and

structural issues, and restrictive regulations

Purchase a rival to gain market share

1. Seek out targets that match members’ needs

2. Assess cultural fit and future governance models

3. Form alliances

1

2

3

Growth driver

McKinsey & Company


Leverage the proximity advantage2

Offer a value-add that only a coop can deliver in products and services: cooperative case examples – 1/3

SOURCE: Interviews with coop leaders; annual reports

Examples of best practices

▪ In 2006, NTUC Income life insurance market share was 10.9%, in an industry with a reputation for opacity and substandard customer service

▪ In 2007, NTUC Income launched its Cultural Revolution and positioned itself as the “honest” insurer

▪ In 2011, NTUC Income launched its Orange Revolution, with a focus on removing customers’ pain and being a game changer in the insurance industry

▪ To enable its revolutions, NTUC Income focused on 3 key pillars

– Adopting a new set of values that encompasses the essence of

Dynamism, complementing existing Good Values

– Becoming a customer-centric organization through offering competitive premiums, managing claims effectively, keeping expenses low, andfocusing on customer satisfaction

– Mobilizing the organization through a comprehensive branding initiativethat includes a compelling transformation story with internal initiatives and external advertisements aligned with this story

▪ This strategy helped increase the insurer’s life insurance market share to 17.5% (up from 10.9%) and grow its total income annually by more than 14% since 2007

Put member interests ahead of short-term financial gains to win loyalty and grow the member base

Case example: NTUC Income

▪ Largest composite insurer in Singapore, active in life insurance and P&C insurance

▪ Revenues: USD 3.5 billion

Put members first 1

Break down organizational silos3

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Leverage proximity of members to develop a deeper understanding of customer needs and tailor products/services accordingly

▪ Proximity is achieved through dense presence in the field, both with multi-brand competition and an extensive network of branches

– Since the 2009 merger, BPCE has the largest network of branches in Europe

▪ BPCE put in place decision-making and performance management mechanisms that fostered local leadership while leveraging the strength of the group

– In the coop’s hiring processes, regional entities have the power to hire key executives but must do so from a pool of candidates that the central organization has qualified

– This ensures leaders’ qualities fit with the local members’ and customers’ needs, while group standards for the skill profile of the coop’s leaders are maintained

▪ From 2005 to 2010, BPCE generated an annualized organic growth of 10.8% over 5 years, two-thirds of which resulted from market share gain

Case example: BPCE

▪ Formed in July 2009 as an alliance of Banque Populaire and Caisse d’Épargne

▪ BPCE Group has 80,000 employees and generates revenues of EUR 23 billion

Put members first 1




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Break down silos to better serve members’needs and increase their benefits through multiple product offerings

▪ The co-operative launched a cross-selling and synergy effort to eliminate silos between divisions at first, and then extended it into a group-wide branding operation

▪ The organization launched a group-wide loyalty and branding effort to make customers more aware of all the different products and services it offers

▪ The co-operative’s branding initiative transformed the different logos of the various services into an integrated, recognizable brand

▪ The conversion of the membership card as a loyalty card increased customer benefits of doing more business across service lines

– 25% of profits are distributed as dividends to members in proportion to their overall spending

▪ This strategy boosted membership, bringing it to 7 million in 2012 from 800,000 in 2005 (36% CAGR)

▪ It also allowed the coop to drive member loyalty, deliver maximum value to its members across all product types, and generate a good deal of organic growth

Case example: The co-operative▪ The largest cooperative in the United Kingdom

with a strong presence in food retail, banking and insurance services, funeral services, pharmacies, and other services

▪ Revenues (2010): USD 22 billion




Put members first 1

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Organize to grow in attractive adjacent markets: cooperative case examples – 1/3


Systematically research unmet needs in the customer base to effectively explore adjacent markets

▪ E. Leclerc leveraged the entrepreneurial nature of its store owners to research the unmet needs of their customer base. Store owners are encouraged to seek out opportunities to make certain markets more accessible, for example by reducing prices or improving distribution

▪ When an opportunity explored by one of these store owners succeeds in providing value to members, it is rapidly scaled up throughout the group

▪ Following this model, E. Leclerc entered the gas distribution market to combat gasoline distribution cartels in the mid 1970s

▪ E. Leclerc focused on serving customers and combating high gas prices instead of exploiting short-term profit opportunities. It also entered jewellery retailing to make jewelry more affordable to its customer base (under the slogan “Gold for everyone”)

▪ Using this operational strategy, the company achieved sustained organic growth of 4.4% annually, and today is the largest jewelry retailers in France

Case example: E. Leclerc▪ E. Leclerc is a merchant cooperative and one of

the leading food companies in France


Understand unmet needs1

Leverage distinctive capabilities2

Use formal mechanisms to finance new opportunities

3


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3



Leverage knowledge, experience, and/or unique expertise to capitalize on opportunities in new markets/geographies

▪ Rabobank is a federation of 139 financial cooperatives whose roots are in the Dutch agricultural sector

▪ After an attempt at traditional investment banking in the 1990s, Rabobank made the strategic decision to become a financial leader in the international food and agricultural sector

▪ It achieved that goal by leveraging the expertise it had developed domestically with over 100 years’ presence in the Dutch food and agricultural sector, and by using its knowledge of the cooperative model

▪ Rabobank focused its international growth in cities where large agricultural members were already present and needed banking services, opening offices in those cities to offer banking to those clients and grow organically from there

▪ Rabobank leverages its cooperative nature to achieve its growth strategy

– Its focus on domestic retail banking enabled Rabobank to gain a domi-nant position through a dense network of high-quality points of services

– An entrepreneurial system leverages decentralization to foster new ideas from members, customers, employees, and the community

▪ 36% of Rabobank’s growth is now attributable to its international activities

Case example: Rabobank▪ Rabobank is an integrated financial institution in

the Netherlands



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Develop mechanisms to ensure necessary investment allocations for exploring new markets/geographies

▪ FrieslandCampina capital management reflects the long-term horizon that is specific to cooperatives. To ensure availability of capital to fuel its long-term growth, FrieslandCampina allocates 50% of its profits as retained earnings while another 20% of its earnings are kept within the organization as non-negotiable member bonds (see below)

▪ This strategy enables the company to have access to a major source of capital to finance its growth. In 2010, FrieslandCampina’s member bonds liability was worth EUR 1 billion

▪ To effective deploy this capital, FrieslandCampina keeps members’ interests at the centre and evaluates all potential investments against 2 metrics

– The promise of high profitability so that it can contribute to performance-premium payments for the coop’s member farmers

– The promise of higher sales of milk so that it will boost farmers’ income

Case example: FrieslandCampina▪ FrieslandCampina is a Dutch dairy

cooperative

▪ Revenues (2011): EUR 9.6 billion

Annual profits

Retained earnings Redistributed to members

60%

50% 50%

Cash dividends Member bonds

40%




3


McKinsey & Company


Additionally, our research revealed best practices for successful inorganic growth through M&A – 1/3

SOURCE: Interviews with coop leaders; annual reports, press releases

Seek out targets that create strong synergies with current activities and meet members’ needs

▪ In 2005, Rabobank bought ~25% of Eureko’s shares, of which Achmea is a subsidiary. In return, Rabobank transferred its Dutch insurance subsidiary, Interpolis, to Achmea, creating significant synergies for members

▪ The purpose of the merger was to leverage the strong portfolio of brands and excellent distribution power of the 2 companies, and to consolidate its position in the market in order to position the companies for growth while also better and more efficiently serving members’interests

▪ The new entity’s strategy was to offer targeted and tailored products to clients, in particular high-quality health insurance and P&C at good prices, while benefiting from economies of scale in shared back-office processes

▪ As a first step, Interpolis started offering Achmea’s complementary products– Health insurance products were sold through the local Rabobanks

starting after the merger in 2005

– Rabobank and Interpolis moved their personnel insurance sourcing to Achmea

▪ The merger created the largest insurance group in the Netherlands

Case example: Achmea▪ Dutch insurance cooperative

▪ Revenues (2010): USD 33.5 billion

Seek out targets that match members’needs

1

Assess cultural fit 2

Form innovative alliances 3


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1





Assess the cultural fit of candidates for potential mergers and evaluate future governance scenarios

▪ Friesland Foods and Campina had grown amidst the consolidation of local and regional dairy coops and no-payment mergers over the past century. In 2008, they used their experience of past mergers to form a single organization

▪ The final outcome, Royal FrieslandCampina, is considered a state-of-the-art merger, which has properly equipped the cooperative for the future, particularly the abolition of the quota system in Europe in 2015. This strategy created the 5th largest dairy organization in the world

▪ As key executives explain, 2 factors played key roles in the success of the merger– A clear mutual understanding of the future of key roles and

responsibilities in the new entities – A due diligence on the “fit” of the 2 institutions before the merger

▫ Business fit. The 2 companies had highly compatible business models with diversification across product groups and geographies, strong brands, and international scale in research, production, marketing, and sales

▫ Cultural fit. Both organizations shared common cooperative valuesand focused on maximizing the value of members’ milk

Case example: FrieslandCampina▪ Dutch dairy cooperative

▪ Revenues (2011): EUR 9.6 billion


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Form innovative alliances to take advantage of benefits of scale without sacrificing autonomy

▪ Insurers in small Latin American countries had to deal with difficult operating conditions, for example, a lack of statistics on risk and unusually high latent risks (e.g., homicide rate)

▪ In 2004, 5 mutuals (Columna, Compañía de Seguros, Guatemala; Coop-Seguros, Dominican Republic; Seguros Equidad, Honduras; Seguros Fedpa, Panama; and Seguros Futuro, El Salvador) formed a group to tackle difficulties in buying reinsurance individually. The group has grown to include 14 insurance cooperatives today

▪ LARG enables cooperatives to make collective reinsurance purchases, which reduces risk (and therefore cost to clients) and boosts sales

▪ The cost of reinsurance has declined by 20 to 30% for cooperatives in the alliance, and LARG is adopting a charter of rights and duties for each member in order to explore new forms of partnership

Case example: LARG▪ Alliance of 14 insurance cooperatives and

mutuals in Latin America

LARG’s missionTo acquire effective reinsurance and technical capacity in order to promote

the development and growth of mutual and cooperative insurers in Latin America through integration and Cooperative Principles


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mc kinsey on cooperatives how cooperatives grow

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