Co-op Devolution: Blooming Prairie, Frontier, North Farm
Food co-op trends reached a remarkable turning point this summer in scenarios that accelerated the decline of cooperatively owned distributors and underscored the crucial role that boards of directors play in cooperatives. In the space available, I will offer background and summary views of these organizations and their recent changes. (See also the articles by Robynn Shrader and Marilyn Scholl in this edition.)
Frontier Natural Products Co-op in the past year undertook a major restructuring that gave significant control to a new management/investor group, then found itself overextended financially. The board responded by accepting the resignation of the CEO responsible for launching the new subsidiary, Frontier Natural Brands; its new line, Simply Organic, continues to grow.
North Farm Co-op announced a long-predicted bankruptcy (Chapter 7) on August 5, following years of decline. Early this year, maneuvers to stave off the inevitable included obtaining credit extensions from a number of vendors and cash payments from member customers. North Farm members will meet October 12 to formalize its dissolution.
Remarkably also announced on August 5, the board of directors of Blooming Prairie Cooperative Warehouse proposed selling Blooming Prairie (BP) to United Natural Foods Inc., a leading national distributor and a privately owned corporation. Under the proposal, all BP member investments would be returned plus a bonus and all member services are projected to continue. After a purchase agreement is written, BP members will receive a ballot with a late September or October date to be announced.
Each of these three cooperatives was established in the 1970s by co-op buying clubs and storefronts as a member-owned distributor that became the local groups' primary supplier -- for herbs and spices in the case of Frontier, for natural/organic groceries from North Farm and BP. Each of the three secondary cooperatives (owned by member co-ops) grew strongly from that member base during their earlier years. But by the 1990s each of them also attempted major changes that reflected market pressures for distributors that their co-op members often didn't recognize. That many of the member co-ops still don't grasp those larger dynamics is relevant to the recent fate of Frontier, North Farm, and BP.
For years, many buying clubs and retail co-ops have faced little competition. Yet their distributors were seeing increasing competition alongside diminished loyalty from member-owners who had access to other sources of product. Better service -- i.e., price, selection, terms -- from other suppliers leads co-ops and other stores to buy elsewhere. From the distributors' perspective the key to improved services is greater economies of scale. Consequently, each of the secondary cooperatives has sought acquisition, mergers, and other new ventures -- but with widely varied results.
North Farm's cheese division had revenues equal to its regional sales in its first decade but a declining proportion of total sales in later years. In 1990 North Farm attempted to strengthen its retail sales base by opening a small corporate store in Madison named Magic Mill. Already at that point in decline, North Farm merged with smaller co-op distributors -- Common Health in 1992 and Michigan Federation in 1994 -- that had rejected merger with Blooming Prairie. North Farm sales peaked at over $30 million in the mid-1990s.
Magic Mill temporarily helped produce a positive consolidated net income for North Farm, but this disguised a weakening distributor operation based primarily on buying clubs -- few large customers but thousands of small orders and deliveries. When a 10,000 square foot second Magic Mill store was opened in 1997 (over the objections of local retail members) and lost money badly, North Farm's decline accelerated.
Several opportunities and proposals to merge with BP were rejected. Hemorrhaging cash for years and losing co-op retail sales to BP, North Farm had at least five managers in its last ten years. The cooperative was governed by a board of directors dominated by buying club members with inadequate professionalism or industry knowledge. The organization's leaders suffered from an excess of identity pride, despite having come from merged co-ops themselves. The board's failure to merge with BP accompanied the deterioration of several million dollars in member equity, which declined by last year to zero. Many small vendors undoubtedly also were hurt by North Farm's delayed closing and ultimate collapse.
Initially growing out of BP and located less than an hour's drive away in Norway, Iowa, Frontier Natural Products Co-op thrived in a high margin niche. During the 1980s it expanded into lines such as packaged herbs and spices, extracts, body care, aromatherapy, organic coffee, even beer. Frontier was unusual in being both a co-op distributor and a manufacturer. Growing beyond the buying clubs, retails, and distributors that built its initial success, Frontier's national member/customer base grew to several thousand businesses, small and large, private as well as co-op. Strong growth, profitability, and customer loyalty were reinforced by high quality goods and services, management stability, and annual patronage rebates.
But changes in the natural/organic market were accelerating in Frontier's niche also. Along with increasing competitive pressure on the various company departments, there was opportunity to capture rapidly growing natural/organic sales in mainstream stores. Desiring a board of directors that was professional and supportive of company expansion, co-founder and CEO Rick Stewart instituted a practice of hand-picking the board candidates -- but the board received little training or orientation about cooperatives. When Stewart left under surprising circumstances at the end of 1999, the board of directors, lacking an obvious internal candidate, chose Steve Hughes, formerly with Celestial Seasonings, as the new CEO.
Hughes brought in several industry managers and, with support from the board, proposed a restructuring of the company accompanied by an infusion of capital. Frontier's members were presented in late 2001 with a board- sanctioned proposal to create a subsidiary, Frontier Natural Brands, to which Frontier Co-op assets would be transferred. The restructuring was approved by member vote, despite some misgivings. Frontier Natural Brands launched Simply Organic, a certified organic line intended for penetration of the mass market with culinary spices and inexpensive add-meat entrees. Ominously, Frontier's herb research plots and garden were mowed to make way for warehouse expansion, and herb researchers were laid off.
The Simply Organic line appears to have been launched without adequate planning and execution. When the cash flow dried up recently, the board apparently realized the depth of its problems. Hughes and several others left this summer, and the Boulder, Colorado office is being reorganized. Board president and interim CEO Andy Pauley has promised a statement for our next edition.
On the same date as North Farm's declaration of bankruptcy, by amazing contrast Blooming Prairie announced that it had signed a Letter of Intent to sell the assets to United Natural Foods Inc. (UNFI). Members and others were taken by surprise, for BP has been consistently profitable. Management has been stable also; CEO Jesse Singerman has been with the company for twenty years.
Blooming Prairie has expanded rapidly in recent years. It added its Twin Cities facility and co-op members through an acquisition in 1988, and in the mid-1990s enlarged its customer base by selling to regional supermarket chains and becoming the primary supplier of Whole Foods' Midwest division. Fiscal year 2001-2002 sales were $127 million, and a patronage rebate of 1.2% will be returned early next year.
BP, originally an Iowa nonprofit, reincorporated in 1996 as a cooperative. But governance on a one member/one vote basis eventually was felt to be unfair; weighted voting in secondary cooperatives allows greater influence to large members who often represent many times the sales volume of small members. Vote restructuring was also intended to assist in possible future mergers. Consequently, in 1999 the board proposed and BP members approved reincorporation in Ohio, with votes from larger members limited to 35 percent of the total. Since that time, retail sales trends have continued, and today 5% of BP customers command 80% of total sales. This imbalance led management and board to feel vulnerable to potential loss of patronage from larger retail accounts -- such as Whole Foods or even Cooperative Grocers Associations.
UNFI has nearly ten times BP's sales, about one-third of it to Whole Foods and Wild Oats. Its CEO, Michael Funk, founded Mountain People's Warehouse in northern California in the 1970s, distributing to buying clubs, co-ops, and private stores. In the early 1990s Mountain People's acquired WholeFood Express (North Coast Co-op) and NutraSource (Puget Consumers Co-op) distribution and assumed services to more co-ops on the West Coast. More recently it merged with several other regional distributors to form UNFI.
On August 9-10, a few days after announcing the proposal to sell its assets to UNFI, BP held its annual vendor show and member meeting. The BP board, CEO Jesse Singerman, and Michael Funk were on hand to address co-op members. Since that time, extensive information and proposal comments have been posted to the BP website: http://www.bpco-op.com.
If BP is sold, the members will receive all of their equity and buying deposits plus a substantial bonus, with only the added portion subject to capital gains taxation. This will produce a major infusion of capital for the retail co-ops.
In addition, making a $35 million deal more palatable to shocked BP member-owners, $3 million will be used to establish a new foundation promoting sustainable agriculture and co-op development, and $3 million will be used for employee retention bonuses paid out over 18 months following the sale. Sale of the Co-op Label, owned by BP, was specifically excluded. (Regrettably, director bonuses were not discussed.)
In proposing to sell while Blooming Prairie is strong and profitable, the board addressed their foremost responsiblity: protecting members' investments. They pursued for years, but without results, mergers that would have preserved co-op investments and services. Though hard to swallow, proposing to sell before a probable decline took foresight and courage.
The fate of other co-op distributors is uncertain. Retails and especially retail associations now are the heart of the food cooperative network and its strongest segment.