Co-op: shopping where you own the place

Co-ops, credit unions, and mutual firms can offer good deals because they have no outside investors to please. Prices may not be as low at a co-op as a wholesale club, but you reap its profits, sometimes in the form of coupons.

If you buy products – from a bunch of carrots to a car loan – why not buy from a company you own?

That logic is helping boost consumer-owned cooperatives, or for-profit companies that share profits either directly or indirectly with members. Though co-ops date back more than 100 years, they've seen a surge of interest recently. Grocery co-ops, with 1.3 million members in the United States, have grown memberships and rev-enues to the tune of 10 percent annually over the past decade. Member-owned credit unions added nearly 2 million customers in 2012 as Americans continue to switch from banks.

"People are seeking out maybe a little more community, a little more in their lives of what co-ops offer," says C.E. Pugh, chief operating officer of the National Co-operative Grocers Association, which has 134 members in 36 states. "You don't invest [in a co-op] to get rich. You invest to be part of a community, to support an enterprise ... that you find value in."

Overall, co-ops enjoy a natural advantage when it comes to satisfying customers because they don't have anyone else to please, such as investors. There can be risks, but these can be managed with a little homework.

Here's a look at member-owned companies in three sectors: groceries, financial services, and insurance.

In St. Paul, Minn., 35-year-old Mississippi Market has about 12,000 member-owners, who pay $90 each, sometimes in installments, to join. They buy groceries at the co-op's two locations. By specializing in natural foods, Mississippi Market is popular with health-conscious shoppers as well as those keen to keep proceeds recirculating locally.

Members don't save a bundle as they might at wholesale clubs, but they share in profits returned to them in member-only coupons good for anything in the store. They also enjoy discounts on classes such as nutrition and canning, as well as occasional opportunities to buy bonds that pay 1 to 6 percent, as when the co-op was raising funds in 2008 to open a second store.

In financial services, the customer-owned credit union can offer some advantages to banks. "Commercial banks, while subjected sometimes to fiercely competitive marketplace pressures, basically have two masters: their customers on the one hand and investors on the other," says Stephen Brobeck, executive director of the Consumer Federation of America, a Washington-based group of nearly 300 consumer advocacy organizations. "Banks are able to get away with favoring the investors, who tend to be more sophisticated and demanding."

Consider the 400,000 members who pay $1 each to join the Pennsylvania State Employees Credit Union, an online credit union with $4 billion in assets. They're employees of state, county, and municipal governments, as well as graduates of affiliated universities. PSECU members receive a free credit score report each month. ATM surcharges are reimbursed up to $20 per month. In January, PSECU shared $10 million in surplus capital from 2012 among 234,000 members who have strong relationships with PSECU.

The average beneficiary received $42; top users of the credit union's services received more than $3,000.

But be careful if federal deposit insurance is important to you. While most of the nation's 7,000 credit unions have it, about 150 of them rely on private insurance instead. Check before joining.

Mutual insurance companies are owned by policyholders who share in profits, either through direct payouts or indirectly through premiums that are kept relatively low. Policyholders often don't have as much say in mutuals' governance as, say, members of a grocery co-op do, Mr. Brobeck says.

Like other insurers, mutuals rely on premiums, investment growth, and reinsurance to ensure they're able to pay claims. Yet because they don't need to generate profits for shareholders, they can take fewer risks, says Herman Bontrager, president and chief executive officer of Goodville Mutual Casualty Co. in New Holland, Pa. The firm doesn't invest in weapons or tobacco companies, preferring instead eco-friendly and worker-friendly firms. Its top-paid employee earns no more than 10 times as much as the lowest earner.

Also, Goodville approaches claims differently from a traditional firm.

"When a claim comes in, we look for a way to pay it," Mr. Bontrager says. "At a mutual [firm], you have a tendency to believe your policyholder."