Mc kinsey on cooperatives how cooperatives grow

International Summit
of Cooperatives
How cooperatives grow

October 2012
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Copyright © 2012. All rights reserved

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

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| 1

Content

Context and methodology

Cooperative growth strategies

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| 2

We set out to answer three main questions

How important is growth?

How significant is growth?

How do coops grow?

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64 cooperatives in the 4 major sectors were included in our research
Europe
North America ▪ Achmea ▪ MACIF ▪ BPCE ▪ Rabobank
▪ Debeka1 ▪ R+V Versi- ▪ Crédit Agricole1 ▪ RZB1
▪ Nationwide Mutual ▪ CoBank1 ▪ Folksam cherung1 ▪ Crédit Coopératif ▪ SNS REAAL1
▪ SSQ Financial Group1 ▪ Desjardins ▪ GEMA ▪ Unipol ▪ Crédit Mutuel1 ▪ The co-operative
▪ State Farm Mutual1 ▪ Vancity ▪ DZ Bank Group1
▪ Groupama1 ▪ National Associaton of Cooperative
▪ The Co-operators
▪ Thrivent Lutherian Savings & Credit Unions (Poland)

Ace Hardware Agropur ▪ Conad1 ▪ Lega Delle
▪ ▪ ▪ EMMI1
Mountain Equipment Co-op American Crystal Sugar ▪ Coop Estense1 Cooperative
▪ ▪ ▪ HaGe Kiel1
True Value Corporation1 Company1 ▪ Coop Italia ▪ Migros1
▪ ▪ Südzucker1
Unified Grocers1 Farmers Cooperative Co. ▪ Co-op Schleswig- ▪ Mondragon
▪ ▪ ▪ FrieslandCampina
United Farmers of Alberta1 La Coop fédérée Holstein1 ▪ NOWEDA eG1
▪ ▪ ▪ Agravis Raiffeisen1
▪ E. Leclerc1 ▪ REWE Group1
▪ BayWa AG1
▪ Edeka Zentrale AG1 ▪ The co-operative

Insurance
Retail
Integrated financials

Emerging markets Food and Agriculture
and Asia
▪ Arabia1 ▪ LARS
▪ Saraswat Bank1
▪ Co-operative Insurance ▪ NTUC Income
▪ The Norinchukin Bank1
Company of Kenya ▪ Zensorai
▪ Indian Farmers Fertiliser
▪ Capricorn ▪ FairPrice1 ▪ CBH Group
Cooperative (IFFCO)

1 Quantitative analysis only

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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

Growth drivers
Market share gain
▪ Organic growth due to better
execution or a better value
proposition than competition
Organic
growth
Portfolio momentum
▪ Growth of segments and
Total geographical areas where
growth the company operates

Mergers and acquisitions
Inorganic
growth
▪ Growth relating to acquiring
other companies

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| 5

Content

Context and methodology

Cooperative growth strategies

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| 6

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

Importance of growth to achieving Role of growth in realizing coop executives’
coop executives’ strategic objectives mission and strategic objectives
Percent Not important, Percent
not too important,
Being a leader in the market
or important to Very 60
and able to protect members’
a degree important interests
4 4
Generating basic economies
53
of scale to remain competitive

Having a broader impact
on members and 27
their communities

92 Offering a range of
Extremely 20
diversified services
important

McKinsey & Company
SOURCE: McKinsey survey and interviews (N=48 leaders – chairman, CEO, SVP – of coops) | 7

Cooperatives grow at nearly the same rate as the markets in which they
operate, but important differences exist by geography and sector
Annual growth rate,1 2005-10 Cooperatives
Percent Market

Sectors of activity Geographies

9.1 4.5
Insurance North America
10.5
8.6
Integrated 11.2
financials 11.7 8.9
Europe
7.4
4.7
Retail
5.5
Asia-Pacific 11.4
and emerging
Food and 7.7 12.3
countries
agriculture 6.4
7.9
7.9 Total
Total
8.7 8.7

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

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SOURCE: Annual reports; McKinsey analysis | 8

Cooperatives grow differently from the markets in which they operate,
showing stronger market share gain but lower portfolio momentum
Annualized growth 2005-10, percent

Market Cooperatives Spread Comments
▪ Robust coop performance is driven by
– A clear focus on current members/clients
Market share due to membership structure
1.1 2.2 1.1
gain – Proximity and knowledge of the market
– Strong, widely appreciated social values

▪ The active search for new products and
Portfolio markets is not an explicit component of a
5.0 3.3 -1.7 cooperative’s mission
momentum
▪ Cooperatives are often less agile in execution
and less prone to innovation

▪ Large variability of success against this lever
Mergers and between the various players and industry
2.6 2.4 -0.2
acquisitions due to
– Difficulty in accessing capital
– Cultural and structural issues limiting
Portfolio momentum and M&A are integration capacity
typically the 2 strongest growth drivers – Restrictive acts and regulations

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

McKinsey & Company

Insurance and integrated financial cooperatives slightly lag the market,
mainly because of their presence in slower growth segments
Annualized growth 2005-10, percent Cooperatives
Market

Market share Portfolio Mergers and
gains momentum acquisitions Total

4.8 2.9 1.4 9.1
Insurance
2.1 3.3 5.0 10.5

4.3 3.6 3.3 11.2
Diversified
financials
1.1 7.6 3.0 11.7

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

McKinsey & Company

While retail cooperatives show mixed performance, food and agriculture
coops lead their market
Annualized growth 2005-10, percent Cooperatives
Market

Market share Portfolio Mergers and
gains momentum acquisitions Total

-0.5 3.2 2.0 4.7
Retail
-0.6 4.8 1.3 5.5

1.4 3.3 3.1 7.7
Agri-food
2.5 3.7 0.2 6.4

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

McKinsey & Company

Cooperatives have ventured less often beyond their borders, but those
that did were able to achieve significant growth
Annualized growth 2005-10, percent

Cooperatives devote a smaller But the growth of international
fraction of their activities outside activities is superior to that of local
their domestic market1 activities Comments
Share of international activities in Absolute growth gap between ▪ Geographical
portfolio international and local activities of expansion remains
Cooperatives cooperatives limited, since it does
not seem to always
10 Market
be aligned with the
Insurance 7.6
35 immediate interests
of members
Integrated 18 ▪ Coops’ growth abroad
6.1
financials 29 is more often
achieved through
4 acquisitions, a
Retail 1.4 growth driver where
21
cooperatives have
28 structural difficulties
Food and
1.3 (with the exception of
agriculture 54 several financials)

1 International activities are those outside the country of origin

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Based on case examples of cooperatives with healthy growth,
three opportunities emerge
Growth driver Description Best practices
▪ The coop ownership model provides a competitive 1. Put members first
1
Offer a value-add advantage as coops are better able to understand and 2. Leverage the proximity
2
that only a coop cater to the needs of their members advantage
can deliver in ▪ Coops should play to their natural strengths and 3
3. Break down organizational
products and further pursue market-share gains by putting members’ silos
services interests ahead of financial interests in product and
service design and delivery
▪ Portfolio momentum is one of the strongest growth 1. Understand unmet needs
1
drivers for public companies, but it is a challenge for 2. Leverage distinctive
2
Organize to grow coops because of their emphasis on meeting the capabilities
in attractive immediate needs of existing members
3
3. Use formal mechanisms to
adjacent markets ▪ Coops must fight this natural tendency by putting in place finance new opportunities
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
▪ Coops perform similarly to the rest of the market in 1
1. Seek out targets that
growth through mergers and acquisitions match members’ needs
Purchase a rival
to gain market ▪ However, significant variability exists within this driver 2. Assess cultural fit and
2
share given the difficulty in accessing capital, cultural and future governance models
structural issues, and restrictive regulations
3. Form alliances
3

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

Examples of best practices 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
1 Put members first
insurance and P&C insurance
▪ Revenues: USD 3.5 billion
▪ 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
Leverage the ▪ In 2011, NTUC Income launched its Orange Revolution, with a focus on
2
proximity advantage 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, and
focusing on customer satisfaction
Break down
3 – Mobilizing the organization through a comprehensive branding initiative
organizational silos
that 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
McKinsey & Company
SOURCE: Interviews with coop leaders; annual reports | 14


Examples of best practices Leverage proximity of members to develop a
deeper understanding of customer needs and
tailor products/services accordingly
Case example: BPCE
1 Put members first
▪ 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

▪ Proximity is achieved through dense presence in the field, both with
multi-brand competition and an extensive network of branches
Leverage the – Since the 2009 merger, BPCE has the largest network of branches in
2 Europe
proximity advantage
▪ 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
Break down – This ensures leaders’ qualities fit with the local members’ and
3
organizational silos 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

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

Case example: The co-operative
1 Put members first ▪ 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
▪ 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
Leverage the
2 ▪ The organization launched a group-wide loyalty and branding effort to make
proximity advantage
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
Break down their overall spending
3
organizational silos ▪ 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

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Organize to grow in attractive adjacent markets: cooperative case
examples – 1/3
Examples of best practices Systematically research unmet needs in the
customer base to effectively explore adjacent
markets

Understand unmet Case example: E. Leclerc
1
needs ▪ E. Leclerc is a merchant cooperative and one of
the leading food companies in France

▪ 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
Leverage distinctive accessible, for example by reducing prices or improving distribution
2
capabilities
▪ 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
Use formal instead of exploiting short-term profit opportunities. It also entered
mechanisms to jewellery retailing to make jewelry more affordable to its customer base
3
finance new (under the slogan “Gold for everyone”)
opportunities
▪ Using this operational strategy, the company achieved sustained organic
growth of 4.4% annually, and today is the largest jewelry retailers in
France

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examples – 2/3
Leverage knowledge, experience, and/or unique
Examples of best practices expertise to capitalize on opportunities in new
markets/geographies

Case example: Rabobank
Understand unmet
1 ▪ Rabobank is an integrated financial institution in
needs
the Netherlands
▪ 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
Leverage distinctive food and agricultural sector
2 It achieved that goal by leveraging the expertise it had developed
capabilities ▪
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
Use formal ▪ Rabobank leverages its cooperative nature to achieve its growth strategy
mechanisms to
3 – Its focus on domestic retail banking enabled Rabobank to gain a domi-
finance new
nant position through a dense network of high-quality points of services
opportunities
– 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
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examples – 3/3
Develop mechanisms to ensure necessary
investment allocations for exploring new
Examples of best practices markets/geographies
Case example: FrieslandCampina
▪ FrieslandCampina is a Dutch dairy
Understand unmet cooperative
1
needs ▪ Revenues (2011): EUR 9.6 billion
▪ 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
Leverage distinctive capital to finance its growth. In 2010, FrieslandCampina’s member bonds
2
capabilities 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
Annual profits
Use formal
mechanisms to 50% 50%
3
finance new
opportunities Retained earnings Redistributed to members
60% 40%

Cash dividends Member bonds
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Additionally, our research revealed best practices for successful inorganic
growth through M&A – 1/3
Seek out targets that create strong
Examples of best practices synergies with current activities and
meet members’ needs

Seek out targets that Case example: Achmea
1 match members’ ▪ Dutch insurance cooperative
needs ▪ Revenues (2010): USD 33.5 billion

▪ 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
2 Assess cultural fit 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
Form innovative products
3
alliances – 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
McKinsey & Company
SOURCE: Interviews with coop leaders; annual reports, press releases | 20


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

Seek out targets that
Case example: FrieslandCampina
1 match members’
needs ▪ Dutch dairy cooperative
▪ Revenues (2011): EUR 9.6 billion

▪ 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-
2 Assess cultural fit 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
Form innovative ▫ Business fit. The 2 companies had highly compatible business
3 models with diversification across product groups and
alliances
geographies, strong brands, and international scale in research,
production, marketing, and sales
▫ Cultural fit. Both organizations shared common cooperative values
and focused on maximizing the value of members’ milk
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Form innovative alliances to take
Examples of best practices advantage of benefits of scale without
sacrificing autonomy

Seek out targets that Case example: LARG
1 match members’ ▪ Alliance of 14 insurance cooperatives and
needs mutuals in Latin America

▪ 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
2 Assess cultural fit 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
Form innovative
3 LARG’s mission
alliances
To 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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