Why member benefit models can deliver better returns

Dairy group Murray Goulburn and the RACV motoring organisation are proof that member benefit structures can work very well, delivering both high returns and profits to owners.

For those used to share investments the idea of running a commercial enterprise for “member benefit” rather than profit seems a total contradiction.

Yet two of Australia’s larger commercial enterprises have orientated their businesses away from profit to “member benefit” and they are setting a new trend, which may be embraced by others.

The first is, of course, Australia’s largest dairy operation, Murray Goulburn, where the group's profit is an academic calculation and the real aim is to gain as high a milk price for farmers as it can. This philosophy has caught Canada's Saputo (which bought Warrnambool Butter and Cheese) on the wrong foot, and it did not match Murray Goulburn on milk prices in the early months of 2014-15.

Murray Goulburn is preparing to issue ASX-listed securities next year where the dividend will be linked to the milk price, so share owners’ rewards will be linked to the member benefit criteria for farmers.

The second member benefit organisation is the RACV, which on market values has an equity value north of $3 billion. If listed this would make RACV a top 100 company in Australia. There is no debt apart from deposits taken by RACV Finance. Managing director Colin Jordan starts his message to members saying that the overall member benefit in 2013-14 reached $170 million, including $142m in the membership benefit loyalty program, $11m on discounts on accommodation, and $13m through discounts offered by RACV’s various partners. In addition, the group made a $117m conventional profit -- a total return of $287m.

Traditional farm co-operatives have failed because, in their quest for member benefit, they did not set aside enough cash to invest in modern plant. The Murray Goulburn equity plan is designed to help overcome this.

The RACV has overcome the traditional capital shortage that limits the development of similar organisations, because it owns 30 per cent of the home and motor insurance manufacturing business of IAG in NSW and Victoria. This stake produces, in a good year, around $100m in after-tax profit and the RACV has used the dividends to set up a unique network of resorts around the country to offer members lower-priced first-class accommodation and to undertake regular updates of existing facilities. It also is extending its motor servicing into home servicing for members.

RACV Finance is one of Australia’s largest funders of motor vehicles and it is one of the largest providers of general salary packaging, particularly for car leasing. RACV’s deposit rates are higher than the banks.

RACV also has a hi-tech venture, Intelematics, providing connected vehicle and real-time traffic information. Interest from major motor makers may result in Intelematics going international.

Management education in Australia is designed to boost profits rather than promote the concept of member benefit. The long-term prosperity of both the RACV and Murray Goulburn will depend on Murray Goulburn’s CEO Gary Helou, and RACV’s Colin Jordan, continuing to attract top executives that can adapt to this very different concept of running a business.

RACV’s NSW equivalent NRMA gave members an entitlement to the float off its insurance company IAG. RACV held onto its insurance assets and members have been the great beneficiary.

Strangely, one the biggest beneficiaries from the RACV decision to retain its insurance stake were the shareholders of IAG. When IAG had its back to the wall some years ago the company would have been taken over at low prices but for the fact that RACV had the rights to acquire IAG’s 70 per cent of the joint insurance operations. This would have destroyed the value of any bid for IAG.

RACV was ready and able to buy out IAG should control of the insurer change at low prices, and that ability was the perfect ‘poison pill’ which prevented an IAG takeover bid. IAG shares are now much higher.

Robert Gottliebsen is a member of the RACV.

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