Bike Co-op Goes Flat
Difficulties faced by worker-owned bike co-op
offer lessons for others of potential business pitfalls
By Stephen Thompson,
Assistant Editor
n the fitness-oriented town of Eugene, Ore.,
a different kind of cooperative struggled with
many of the problems familiar to modern agricultural,
value-added co-ops. In the end, the
difficulties inherent in the worker-owned cooperative
model forced Burley Design Cooperative, a manufacturer
of much-sought-after premium bicycles and bike accessories
for 28 years, to sell out to a private investor.
Burley built high-end bicycles, including tandems and
recumbent bikes, on which the rider reclines as if in a chair.
It originated the child-carrying bicycle trailer and produced a
line of outdoor clothing and rain gear. The new owner has
announced that the bicycles and clothing will be dropped;
only the trailers, Burley’s strongest product line, will continue
in production.
The products had a reputation both in the United States
and overseas for high quality, durability and affordability. The
bike co-op competed in a market in which competition is
fierce from China and other countries with much lower production
costs. Burley child trailers, which can be converted to
athletic strollers, retail from about $240 to more than $400.
Its tandem bicycles ranged in price from about $1,000 to
more than $5,000.
Burley had no problem selling its wares — in fact, its main
dilemma was the opposite: it couldn’t make enough product
to meet demand. Further, as the new millennium began, inefficiencies
ate away at its bottom line and it began having
trouble meeting its delivery obligations. After more than two
profitable decades, the cooperative began losing money in the
early 2000s. By 2005, it was losing $1.5 million a year.
Production limitation hurt co-op
Cary Lieberman was the marketing manager for the coop,
and has been retained by the new owner. He says the coop’s
inability to expand production was rooted in the cooperative
structure itself.
Part of the problem is one with which many co-ops are
familiar. When members can’t provide enough capital on
their own, the only alternative is to borrow. However, says
Lieberman, “Raising capital is a nightmare. Banks don’t
understand the co-op model.”
Another part of Burley’s struggle was the tension between its tradition as an
egalitarian worker cooperative, in which all members originally
had equal authority, and the need for employees who
specialize in management and have the knowledge, experience
and authority to make decisions. Throughout its existence,
the co-op’s structure evolved as it attempted to be true
to its roots and competitive at the same time.
The production problem was complicated by the fact that
Burley products, while not cheap, were priced lower than
competing products of the same quality. Lieberman names a
competitor that sells “virtually identical bikes” for $2,000
more. The easy solution might seem to be to increase prices
until demand and supply even out.
But Burley was wary about raising prices: “We don’t want
to alienate our loyal customer base, and we don’t want to
hurt our reputation for great quality at reasonable prices,”
Lieberman told Rural Cooperatives.
Reluctance to charge more when turning customers away
might seem odd to some, but Burley was not a typical manufacturer.
It was founded as a private business in 1969 by Alan
Scholz, who owned a bicycle shop in Fargo, N.D., when he
started selling bike bags sewn by his girlfriend, Beverly
Anderson, to other bike shops. In 1974, Scholz and Anderson
moved to the small Oregon town of Cottage Grove, and their
product line expanded to include bike shorts, backpacks, rainwear
and ski clothing. The sewing was done by a small group
of people working in their homes and paid by the piece.
Employees form co-op
In 1978, Scholz and Anderson decided they didn’t want to
be bosses. They sold their business to their employees, after
having cooperative bylaws drawn up by a local attorney,
remaining on as co-op members.
In the beginning, all members received the same wages,
a practice that was to continue until only a few years ago.
Production of trailers began at about the same time. After a
difficult period during the recession of 1982 — during which
a number of members, including the founders, left the cooperative
— business expanded dramatically as the fitness craze
took hold of newly affluent baby boomers.
Burley moved to the larger town of Eugene to take advantage
of a bigger labor force and better logistics.
Eugene is an outdoorsman’s
delight,
with mild weather
year-round and
easy access to
the spectacular
Oregon
coast,
year-round skiing and breathtaking
rock-climbing, hiking and
mountain-biking venues nearby.
“Very few places in the country would
compare,” says Lieberman.
In the 1980s, it was also a good place to get a bike
business off the ground. A Sony manufacturing plant provided
good income to a relatively young and athletic population,
a good local market for the co-op.
Eugene, a university town, is known for a strong sense
of community, which fit well with the public-spirited
nature of the co-op and also contributed to the firm’s continuing
commitment to quality. “If you’re going to see the people
you sell to on the street, you want to be sure that your
products don’t disappoint them,” says Lieberman.
By December 1985, the cooperative had 15 members.
They were paid an hourly wage that varied by the month, as
determined by expected profits. The co-op restructured its
bylaws and established a regular payroll. All the members
were made employees and were paid consistent wages. A portion
of the profits were set aside to fund capital improvements
and meet other expenses.
While the changes improved the firm’s efficiency, other
ways of doing business left over from the early days of the coop
remained. All members, regardless of their position,
received the same wage. Governing the co-op remained simple
in concept: all members were directors. Acquiring new
skills and training was left up to individual members.
Business expertise needed
Elliot Gehr, the last president of the co-op, was with
Burley for 18 years. “We’d always been amateurs,” he says,
“But we needed the expertise of business professionals.” As
the cooperative began a move to expand into the national
marketplace, its egalitarian informality became more of a
handicap.
Having all members on the board is democratic, but as a
cooperative grows, decision-making becomes more cumbersome
and conflicts can cause delays. The U.S. market for
bicycles is subject to fads and rapidly changing styles and
trends, making such a management model a serious liability.
In 1987, founder Alan Scholz, by then no longer a member,
proposed a partnership to build tandem bicycles. At the
time, the only high-performance tandems available were
very expensive. Scholz saw an opportunity in a
growing trend of couples engaging in fitness
activities together.
In a joint venture with Scholz’s
company, Advanced Training Products,
Burley began manufacturing tandems, further
contributing to business growth.
Burley and Scholz later ended the joint
venture, and the co-op began producing
bicycles entirely in-house.
By 1989, membership had grown to
39, and it was clear that things had
to change. Management of the
firm was still by consensus.
The workforce was divided
into teams, each with
a leader. However, the
team leaders were only
first among equals; they
were not given effective
authority over their
team members.
Management was
becoming increasingly
unwieldy, and decision-making
was handicapped by the necessity to get
a large number of people to agree on
the smallest details. “People would
waste time arguing where to put the hot
plate,” one member told me. “They’d
waste $300 worth of time arguing over
the color to paint a bike.”
Restructuring improves productivity
The co-op appointed a committee to
study restructuring. After much debate
and controversy, it was decided to elect
an eight-member board of directors and
to give team leaders the status of managers
with the ultimate responsibility
for the performance of the people they
supervised.
Gehr saw the elected board as a
mixed blessing. While it streamlined
decision-making, it also made many of
the workers feel insulated from running
of the co-op. “Some people choose not
to participate in our outer democracy
(government),” he says. “And now,
some chose not to participate here.”
The new structure made for muchimproved
efficiency. Production and
sales continued to grow. By 1992, it was
clear that top-level management expertise
had to come from outside. “We realized
we had to import talent,” says
Gehr. For the first time, a new general
manager was brought in from outside as
an employee.
Also in 1992, the cooperative found
itself caught short, swamped by a wave
of unanticipated orders. In response, it
hired about 20 seasonal non-member
workers. After that, many more workers
were hired as non-members. The quick
expansion of employment resulted in
some problems, including what Gehr
says were some mistakes in hiring.
In 2003, membership in the cooperative
was closed, with all further hires
being employees only. In retrospect,
Gehr thinks that was a bad idea. “We
got bad advice,” he says. “Instead, we
should have hired more members.”
Gehr believes that membership encourages
badly needed responsibility and
creativity. By the time the co-op converted,
only 55 percent of the workers
were members.
Differential pay introduced
Another innovation made at the
same time showed more promise. For
the first time, differential pay was introduced.
While pay levels were still lower
than average in most areas, paying more
for greater expertise or productivity
allowed Burley much greater flexibility
in hiring and retaining needed talent.
Lieberman says that the shift to differential
pay “shook things up.” As with
any innovation, it had its bad effects as
well as good. “Some people lost enthusiasm
because they felt it was a betrayal
of cooperative principles.”
Gehr maintains that other bad advice
hampered the co-op’s efforts to grow.
“The trouble is, most accountants just
aren’t familiar with the cooperative
model,” he says. “As a result, we didn’t
take advantage of opportunities to plow
profits back into the business, as we
should have.”
Gehr is especially troubled by the
co-op’s past ignorance of the use of
non-qualified dividends. “If you’re
growing, qualified dividends are the
easy answer. But in a less profitable
year, if you give out all of your profits
as dividend payments to members, you
have to borrow. The use of non-qualified
dividends allows you to build up a
financial cushion.”
Lieberman says that in the past, the
cooperative was “property-focused” at
the expense of investing in machinery.
It moved into its present facility in
1996, a spacious, modern “green” building
constructed with the help of the
members. But while the facility had
ample room, the use of the space available
was not as efficient as it could be.
After taking advantage of a state
grant for training in manufacturing efficiency,
co-op managers and board
members realized that the various
stages of production were scattered
haphazardly. Machines and work stations
had remained where they were
originally put, and new elements were
stuck wherever they would fit.
Using what they had learned, they
were able to rationalize the set-up so
that each workstation required the same
amount of time. The trailer shop
showed an 18-percent improvement in
productivity, Gehr says, and nobody
had to work any harder.
The changes ran into resistance from
some members, however. Once the
machines were put into their new, more
efficient positions, workers returning
after the weekend found everything
moved back to its original place.
Parts standardized
Other measures were put into the
works to improve efficiency. The co-op
began working to standardize the parts
that make up its various bicycle trailer
models, which are now the largest selling
brand in Germany (they meet stringent
German safety codes) and continue
to expand sales in North America.
Burley saved not only time and
money, but cut back on greenhouse-gas
emissions through the use of powder
coating for bike finishes. Powder coating
is more environmentally friendly
than “wet spray” paint, because it doesn’t
use volatile solvents. It also takes
less skill and less time to apply. Wet
spraying demands care and skill to
apply the coat properly — applying it
too wet results in runs and sags; not
wet enough results in a dull or
“orange-peeled” finish.
Powder coating works by spraying a
dry, electrically charged polymer powder
onto the metal surface. The bike
frame is then placed in a large oven and
heated. The powder melts and forms a
hard, glossy protective finish. Besides
being more efficient to apply, powder
also gives a much tougher and more
durable coat. The disadvantage of powder
coating is the sizeable capital expenditure
required for the large oven to
heat the painted items.
Other upgrades included automation
of various tasks, including wheel building
and truing and the production of
small parts. According to Gehr, the
automation reduced risk in comparison
to using outside suppliers: “By producing
parts in-house, we’re not beholden
to others for delivery.”
In any case, the bike shop worked, as
Gehr put it, like a “cottage industry,”
with a huge number of different parts
for the various models and a great deal
of hand work. This doubtless contributed
to a decision by the new owner
to close down production of all bicycles.
When interviewed last summer
(prior to the conversion), Lieberman
and Gehr both said that the Burley
board and management were well aware
of these and other stumbling blocks to
greater efficiency. “We’re making
investments now that we should have
made 5 years ago,” said Lieberman.
Need for credit heralds change
The need for credit for upgrades led
to the cooperative’s conversion. The
firm’s CEO, Char Ellingsworth, had
been brought in from outside as the
chief financial officer. She was promoted
when her predecessor left to use
experience he gained at the cooperative
to engage in “lean manufacturing”
training.
One of Ellingsworth’s recommendations
was a change in status to a worker-
owned corporation. At the time, the
move was seen as solution to remaining
true to the cooperative spirit. The
intent was not to issue stock to raise
money, but to make the firm more
attractive to lenders.
Cooperative shares were to be converted
proportionately to stock shares.
Current workers were to be issued common
stock, and former workers who
still held membership were given preferred
stock. There was to be no controlling
interest.
The board voted unanimously in
favor of the move. When the vote was
put to the membership, a significant
minority opposed it, seeing it as a
betrayal of the cooperative tradition.
“There were definitely a lot of unhappy
people,” says Lieberman. Nevertheless,
on June 23, 2006, the co-op voted to
convert.
The change apparently came too late
to save worker ownership of the firm.
By September, Burley had a huge backlog
of orders — including more than
3,000 trailer orders — which it was
unable to fill because of a lack of cash
to pay suppliers. A search for emergency
funding resulted in an offer by a
local businessman, Michael Coughlin,
to purchase the company’s assets and
liabilities. The purchase went through
on Sept. 8.
Coughlin says he wants to keep
Burley production in Eugene, unlike
other producers in the market that have
switched production overseas. However,
while 53 jobs were retained, the rest of
Burley’s 109 workers were laid off.
Production will concentrate on the coop’s
core business: trailers, which
account for 80 percent of revenues.
Despite setbacks, Burley trailers still
command 50 percent of the market.
Production of the fabric covers of
the trailers will be contracted out. The
other lines have been discontinued.
According to Lieberman, when the
product line is expanded again, it will
be with products “more closely aligned
with the trailers.”
Members will be paid off through
the sale of real estate owned by the coop
that has been deeded to them.
Shares of the sale will be assigned based
on length of membership.
Growth accelerated problems
In retrospect, Burley’s fortunes were
shaped by its growth. As a small, worker-
run cooperative in a growing market,
it did well. Expansion, however,
changed its internal dynamic. “At the
point where membership broke 40, size
became a problem,” Lieberman says.
The co-op was no longer as close-knit.
It also appears that expanding into
different lines, which seemed logical at
the time, contributed to an operation
that was too diversified to be properly
managed or capitalized under the coop’s
management culture. Instead of
rationalizing the manufacture of existing
products, the co-op added new
ones, in part because the membership
wanted to do so.
“We build the things we’d like to
ride,” is the way one member put it.
Tardiness in bringing in outside management
expertise contributed to this
problem. An expanding market masked
problems that might otherwise have
been noticed sooner by management
and membership.
Both Lieberman and Gehr agree that,
although the change to an elected board
was necessary for effective management,
it also changed the atmosphere of participation
that members had enjoyed. “At
some point, for a lot of people, it became
just a paycheck,” says Lieberman. Gehr
says electing the board “gave people permission
to go to sleep.”
Lieberman says that founding members
moved on or died, taking with
them the passion that had motivated the
firm in its earlier years. Meanwhile, says
Gehr, quick expansion resulted in the
hiring of people who did not share the
“cooperative spirit,” or in some cases
were just bad workers.
In addition, the fitness and mountain-
biking crazes of the 1980s and
early 90s have died down as baby
boomers get older. That, coupled with
increasing pressure from low-wage
overseas producers, has resulted in
much more difficult markets for
Burley’s products.
“In a worker-owned co-op, the owners
need to be cognizant not only of
their jobs, but business management
issues as well,” says Paul Hazen, president
and CEO of the National Cooperative Business Association. “It's
a complex business model, because in
times of change, the situation can
become “personal” for employee-owners,
when objective decision-making is
needed to grow the business and see to
its survival and continued success. The
business model is also empowering,
because it gives “employees” the same
rights and responsibilities as “owners.”
Hence more pride, better product, fairer
wage scale.”
“Due diligence must be a constant.
A strong management team is critical, a
capital reserve is a must, even if it
means no dividends to the owners during
lean times, open communications of
business issues and continual co-op
education can prevent complacency,”
Hazen continues. He also notes that
seeking expertise from outside the coop
can be invaluable.
Gehr also believes that the co-op
suffered from inherent conservatism
and resistance to change, coupled with a
sense of being shielded from the problems
of private businesses. Another
member puts it this way: “People
thought, hey, we’re Burley. Things will
work themselves out.”
Lieberman believes that the loss of
the cooperative was not inevitable.
“Unfortunately, what was needed was
just more than members were willing to
give,” he says. He’s philosophical about
the loss, however. “Most companies
don’t stay under the same ownership for
30 years.”
