Explaining Fedco’s ‘Nonprofit’ Ways

Question: As a longtime reader of The Times’ advertising pages, something has baffled me for years, and I hope you can straighten me out on it. What does Fedco mean in its advertising when it says it is “A California Non-Profit Organization” and “A Full-Line Membership Department Store”? How can a retail store be “nonprofit?”

Also, just who isn’t eligible to be a member of Fedco? The ads always say you can “join” Fedco if you are active or retired federal, state or local government employees; active, retired or active-reserve members of the military; employees of hospitals, schools or colleges; full-time students over 18; recipients of Social Security or disability payments; employees of companies regulated by the Public Utilities Commission; employees of firms that do their primary business with federal, state or local governments; employees of banks, savings & loan associations and insurance companies; employees of nonprofit corporations, and members of approved credit unions.

A friend who belongs to Fedco tells me that they are very strict about not letting you in without a membership card.

But who wouldn’t be eligible, and what kind of a deal is this?--B.G.

Answer: Granted, at first blush--looking over the “who is eligible” list--it would seem that everyone in the state of California, except for a few transient circus roustabouts, would be entitled to Fedco membership ($2 a shot for life).

Taking a closer look, though, you’ll find that it’s not really all that broad. You will find almost none of the professions (such as doctors, dentists or lawyers) qualifying, for instance. And what seems like a catch-all category, “members of approved credit unions,” is a whale of a lot more restrictive than it sounds. The key is “approved,” and most credit unions, alas, don’t meet Fedco’s approval.

“I won’t say that we turn down more membership applications than we approve,” Edward Butterworth, president of the 36-year-old firm, says, “but it’s pretty close. We turn down thousands every month.”

As a true “nonprofit” membership corporation, Fedco is unusual--bordering on unique.

“There are really only three of us of any size in the state that are nonprofit without being strictly philanthropic,” Butterworth adds. “They are Fedco, the Automobile Club of Southern California and the Triple-A in San Francisco. We’re the only ones incorporated under Section 5,000 of the Nonprofit Corporation Law.”

There are other “membership” stores, of course, such as Gemco, but there the similarity ends. Gemco, for instance, is a subsidiary of Lucky Discount Supermarkets, definitely not a nonprofit operation.

The curious structure of Fedco, Butterworth continues, goes back to its founding in 1949, when 800 Post Office workers got together, chipped in $2 apiece and raised the founding capital of $1,600.

“It was right after the war, the government had slapped a wage freeze on government workers,” Butterworth says, “and inflation was first making itself felt. Government workers were between a rock and a hard place, and so the idea of Fedco as a self-help organization was born.

“At that time they had a little store down on South Broadway, and postal workers would come in, order their merchandise and then come back a couple of weeks later and pick it up.”

And the bias toward government employees is still very much in place at the chain’s eight locations (on South La Cienega Boulevard, two stores in Pasadena and one each in Cerritos, Costa Mesa, Ontario, San Bernardino and Van Nuys).

“Of our 2.6 million members, about 2.1 million of them are active,” Butterworth adds. “A good 60% to 70% are still local, state or federal employes, and the next biggest group is probably Social Security recipients.”

The principal difference between a conventional department store and the nonprofit Fedco, Butterworth continues, “is that, under the law, we can’t distribute gains, profits or dividends--the members own it, lock, stock and barrel.”

This has a couple of distinct advantages. “For one thing, we don’t have the dividend nut to crack to get the maximum return on every dollar of invested capital. And the other advantage,” Butterworth adds, “is that we can’t be taken over by a bigger company, which is all the rage today. If it weren’t for this, we would have gone down the drain 10 years ago.”

But there’s a whopping disadvantage too, he concedes.

“We obviously don’t have any access to the capital markets, which makes it very rough for us to raise capital. We desperately need four more stores right now to maintain our share of the market.

“If we borrow the money, I’m going to have to pay a little over 12%, and I simply can’t cut it doing that,” Butterworth complains. “And so we have to go the piggy-bank route--saving it up until we’ve got enough to build another one.”

The chain, with a sales volume of about $550 million a year, opened its last store in Ontario, “but it was nine years between that one and the one before in Costa Mesa.”

Technically, Butterworth concedes, there’s really no such thing as a strictly nonprofit store. “You either make money or you lose it, obviously.”

But, without dividends to worry about, the line can be cut a lot closer.

“A lot of people,” Butterworth adds, “say, ‘oh, of course, you can price things lower because you don’t have taxes to worry about.’ But that’s not true, of course. We pay both state and federal taxes the same way Neiman-Marcus does. Being nonprofit doesn’t save us a penny there.”

“As a nonprofit corporation,” according to Herschel Elkins, of the California Attorney General’s office, “salaries and overhead are naturally paid out of the proceeds, but the members all receive an annual report and have full voting rights in the corporation.

“And, even though it is nonprofit,” he adds, “it doesn’t necessarily mean that other stores are necessarily higher on all items all the time. Everybody discounts prices at one time or another.

“There’s a lot of psychological as well as practical advantages in the membership approach,” Elkins adds. “You do have the feeling that you’re a member, not just another customer. As a matter of fact, they’ll not let you in without your card--and, because it is a membership arrangement with your identity already established, it’s normally easier to cash a check than it is in a conventional store.”

Just how thick the membership bind can be, Elkins said, was demonstrated “about 10 or more years ago when a dispute sprang up between Fedco and the state over whether the $2 membership fee was taxable.”

The state took the position that the fees constituted income and should be taxed. Fedco insisted that it was an investment in capital and shouldn’t be taxed.

“So, we went to assign the state’s case to one of our local deputy attorneys general and found out that we couldn’t--everyone in the Los Angeles office was a Fedco member, which automatically made it a conflict of interest. We had to assign it to the Sacramento office--out of Fedco’s area.”

Don G. Campbell cannot answer mail personally but will respond in this column to consumer questions of general interest. Write to Consumer VIEWS, You section, The Times, Times Mirror Square, Los Angeles 90053.