What went wrong? What lessons can other co-ops contemplating expansion learn from Mississippi Market's experience?
By all accounts, Mississippi Market's second store expansion was a disaster.
In 1996 when this St. Paul, MN co-op set out to purchase land and build a second store, the $4.5 million expansion project looked like a winner. By the spring of 1999 when the store finally opened, cost overruns had reached massive proportions, the co-op had zero working capital, and occupancy costs hit of 11% of sales. Key personnel had quit, financial statements were months behind, and labor costs ran as high as 38%. Sales at the new store failed to meet projections, and the original Randolph Avenue store, long neglected, was rapidly losing sales.
The tide began to turn in October 1999, when the board terminated the contract of the general manager and a manager of another Twin Cities co-op stepped forward to salvage the situation. That fall the members showed a tremendous outpouring of support with member loans. From there Mississippi Market began its slow passage to recovery. Eventually, vendors, lenders and the city of St. Paul provided additional financing.
What went wrong? What lessons can other co-ops contemplating expansions learn from Mississippi Market's experience? This article is based on interviews with twelve participants and observers, all residents of the Twin Cities. The author, while gratefully acknowledging the wealth of information and insights they provided, takes sole responsibility for the conclusions drawn.
Was the co-op ready?
At its 5900 square foot Randolph location, the co-op successfully maintained sales of over $4 million for several years despite overcrowded conditions and competition from a nearby Whole Foods store. There had been an ongoing search for a larger store and when a new general manager was hired in 1996, it was with the understanding that he would lead the co-op through an expansion. Since viable sites near the Randolph store were scarce and the board felt a strong commitment to serve the co-op's core membership in that neighborhood, a second store seemed desirable.
A market study of two suburban and one inner city site made the latter look like the best option. The empty lot owned by the city at the intersection of Selby and Dale sat on the cusp of a poor and diverse community new to natural foods, and a wealthy neighborhood with a bloc of current co-op members. The general manager had a vision of a multi-cultural co-op that served a diverse customer base, a vision that appealed strongly to some staff and board members. However, some had concerns about whether the co-op would be accepted by the new neighborhood.
Although Mississippi Market seemed to be in a strong position to pursue a second store, there were warning signs of trouble ahead. Sales declined at the Randolph store between 1997 and 1999, perhaps due partly to a deteriorating physical plant that was not well maintained and partly to poor customer service from a staff that felt neglected. A union drive in early 1997 failed by a vote of two to one. However, that was not a vote of confidence in management, says one staff member now, but rather an acknowledgment that a union would only create more divisions.
Little effort went into rebuilding staff/management relations in the wake of the failed union drive. "We lost our cohesiveness as a staff after that," according to this employee, "a slow erosion." Moreover, the managers never truly functioned as a team, several surviving managers say, and management meetings never discussed co-op goals or how to achieve them.
What caused cost overruns?
"It started out as a beautiful deal," the former general manager reflects, "$300,000 in grants, $500,000 in loans with no strings attached." The city of St. Paul had tried unsuccessfully to develop the plot at Selby and Dale for years, and another proposal had recently fallen through. But once Mississippi Market was accepted as the developer, "it became a hot property," says an observer. "It went from, 'Will somebody please build something?' to "It has to be a cathedral."
The first plan for the store was a one-story building with 7500 square feet of retail space and a partial mezzanine for office space. Then a local credit union approached the co-op about leasing space. This called for a second story, which the city approved. Later the credit union withdrew from the deal when the co-op would not agree to several expensive design features. There was no contract to make the credit union pay the co-op for the considerable expenses incurred.
At the same time, another unforeseen obstacle emerged. As ground was broken in the fall of 1997, contractors discovered old foundations under the rubble on the lot. The city knew the foundations were there, claims the former manager, but did not inform Mississippi Market when selling the property. The store could no longer be built on a slab but now would require pilings, adding almost $200,000 to construction costs.
The co-op was forced to go back to the city for more money, eventually totaling $800,000 in loans and $300,000 in grants. However, the city denied the request to change the project back to one story. For the Department of Planning & Economic Development, the priority was the streetscape. "Ultimately this site demands a building of this height and mass. It's infinitely more valuable to the neighborhood than a single-story, single-purpose building would have been," remarks Mississippi Market's current GM. "But the financial burden was borne by the co-op alone, and it was more than the co-op could bear." Throughout construction the city continued to meddle with the building design. For example, at one point officials insisted on adding a corner tower at a cost of another $150,000. Even as construction proceeded, the city's demands led to expensive change orders for which the co-op had inadequate funds. In the end, the general contractor was forced to accept 80 cents on the dollar.
Although the co-op's treatment at the hands of the city seems outrageous, the story might have turned out differently. "People act shocked that the city got so invested in the design," says the current board president, "but we should have expected it. This was a huge symbolic project for the mayor running for re-election on his record of economic redevelopment, and it involved large public subsidies." Another co-op manager points out, "City officials are difficult to deal with, but it's the general manager's job to make it work. Hire a negotiator and step out of it if you don't have the right skills. It's not the job of a GM in an expansion to do everything, but to find the right people to do everything."
The consultant said, "Accountability will happen when board members put their own money on the line." Perhaps that contributed to the board's willingness to fire the general manager.
In desperation to find tenants for 6000 square feet of office space upstairs, the general manager negotiated a lease with a local nonprofit which insisted on state-of-the-art "green" design in every feature. Not only did this increase construction costs, the final lease was well below market rate, which eliminated the economic justification for a second story and impacted the appraised value of the building, a key consideration in seeking future financing.
Another factor escalating the cost of the project was inflation. During delays caused by discovery of the old foundations, changing tenants and changing design, construction costs shot up 15 to 20% in the Twin Cities area, while capital equipment costs grew 20 to 40%. Far beyond the rate of inflation in consumer goods, price increases in construction and equipment are more analogous to the trend we are experiencing in medical costs, says a local lender involved with the project. Mississippi Market was impacted by this inflation but didn't realize it til too late. "Their capitalization plan started out reasonable, but cost overruns sneaked up on them because there was no accountability for the project."
In addition, acceptance of city grants required the co-op to hire low-income residents from the neighborhood. The Selby Avenue Community Development Corporation pledged $50,000 in federal funds for training new hires in job readiness skills, but this organization folded before Mississippi Market could get the money. At its own expense, the co-op designed an innovative training program 4 hours a day for 6 weeks, including components on co-ops, customer service, natural foods, and personnel policies taught by staff, and on self-esteem and basic job skills taught by trainers from local organizations. (See Cooperative Grocer #83, July-August 1999.) Unfortunately, the turnover rate among trainees was high -- only 11 graduates out of 45 still work at the Selby store -- and the co-op lacked the time, funds or organizational preparedness to offer this training repeatedly.
Not all cost overruns were due to city interference. The general manager contracted with a national design services company that offered a "one-stop-shop" approach by providing architectural work, engineering, interior planning, project management and equipment procurement. But this company was geared for supermarket chains opening standardized stores in conventional settings, with no back-and-forth in the design process. Every time the building design changed, the costs escalated. Also the contract forced the co-op to go with only new equipment, allowing no savings on used. Finally, the co-op ended up with what some observers and current staff call an overbuilt store, with equipment, furniture and construction far beyond the demands of every day business. And in spite of the expense, some of the systems failed to work well, such as a phone system that cost over $30,000 yet didn't allow calls to be put on hold.
Could Mississippi Market have made a go of the site without city money? Several observers think so. At one point a private developer offered to take over the project, leasing the space to the co-op and building housing units above the store, parking below. While this might not have been an ideal outcome for the co-op, it does show that an entrepreneur thought the site could work. In any case, the general manager turned down the proposal outright.
Was the site a good choice? Under new management the Selby store has begun to make an operational profit and sales have increased steadily. That sales started out so far below projections may have been due to a lack of marketing. Efforts to reach out to the community were not sustained. For months after the store opened, passersby would wander in off the street and say, "I didn't know you were open," or "I didn't know you were a grocery store," according to one staffer. "The store was like a mausoleum, shiny and orderly and perfectly faced, but with no end caps, no sense of abundance. We couldn't afford to advertise or even put up a sign."
Where was the board?
In theory Mississippi Market's board operated by policy governance, but in reality the board failed to set policies or to monitor performance in relation to policies. Some board members actively disagreed with policy governance and its requirement that the board speak with one voice. A former board president remarks, "Policy governance is hard to hold to in stressful situations if the board has not 100% bought into it. People panic and pull the reins in. It really had to do with distrust of the manager."
The current board president agrees, but adds that certain board members by their behavior gave the manager reason to distrust the board. As the construction time line, finances and relations with the city slipped out of their control, the board focused on what they felt they could understand and control -- staff relations and operations. "The board was too hands-off in some ways, micro-managing in others," the former board president says now.
As the expansion hit one roadblock after another, the board got worn down. Quorums for meetings were hard to find. "There was the feeling that 'This was the manager's castle,'" says the former president. One director quit over lack of confidence in the manager. Others hung on in the belief that if they could just get the store open, they would be able to sort out the problems later.
Although the board sensed that things were going terribly wrong, they had less and less concrete information to go on. The financial statements they received in the fall quarter of 1998 showed the Randolph store losing money. After that, statements ran at least 4 months behind.
No one filled the role of financial manager. As a result, no projections were given to the city to show the effect of their design changes on project costs, and timely, accurate financial reports were not available. "The money will come from somewhere. We'll figure it out later," the general manager told the board. No steps were taken to set up accounting systems for two stores. In the summer of 1999, in despair and exhaustion, the bookkeeping staff gave notice. A consultant and some temps handled accounts payable. All financial systems collapsed, since their attention was going entirely into dealing with creditors.
When it came to raising member loans, it took three tries for the board to fulfill its responsibility. The first effort, run by a former board member, fell apart during the year before the new store opened. Then the board hired people with experience fundraising for political campaigns. However, their telemarketing approach went over poorly with the membership. On the third try, with the Selby store open and starving for working capital, the board worked with a local consultant. His message was, "No one else can do this for you," the president recalls.
At his urging that board members lend their own money as part of the loan drive, they set a goal of $100,000 with 10 to 15% coming from themselves. To their amazement and gratification, they raised $185,000 in October and November of 1999, with $20,000 from current and former board members. The consultant notes, "Accountability will happen when board members put their own money on the line." Perhaps that contributed to the board's willingness to fire the general manager in October.
With a new manager, the board is experiencing an entirely different leadership style. As the former president describes it, "She keeps us informed and lays it out straight for us -- here are the problems, here's what I'm doing, here's my vision of what things should look like." "It's the difference between giving us tools and letting us know what we need to do to be good board members, (versus) challenging us to find flaws in what the manager is doing," remarks the current president.
The board's leadership is changing, too. "We lost people as board members, but we needed a different kind of board," explains the president. "We instituted term limits. After all we've been through, we decided Mississippi Market would transform, and it didn't make sense to have people on the board who were still back in 1991."
Slowly Mississippi Market is recovering from the disaster of the expansion. The Selby store is experiencing steadily increasing sales with labor costs under control, although the Randolph store has not yet regained its former sales and profitability. Based on the strong show of support from the membership, the city, the primary vendors and the various lenders have been willing to provide additional financing. And in spite of all the heartache, the co-op has a beautiful new store.
• Decide your walkaway points in advance before your reason is clouded by the amount of energy and resources you've sunk into the project.
• Think carefully before taking significant quantities of city money. Expect meddling, politics and "strings attached"; have professionals help you.
• Don't get stuck in a contract for an over-designed building with all new equipment. A "one-stop-shop" design service company is probably not a good fit for your co-op.
• Don't assume the general manager will be the project manager. Find someone with expertise, and carefully check references to make sure s/he has a successful track record.
• Don't let your financial reporting fall behind. Put whatever human and financial resources are necessary into producing accurate, current reports.
• If you're going to share your space with other businesses, have a contract with them including penalty clauses for expenses incurred if they back out.
• Don't allow a lease so far below market rate that it impairs the appraisal value of your building, in the event that you need more financing.
• In general, get legal advice on any contracts and leases you may enter into.
• Don't neglect your current store: invest enough in staff and physical plant to keep it viable, especially if you plan to keep that store while open a second store.
• Build a strong management team and keep managers well informed. Set goals for sales and membership and let them know progress toward those goals.
• When hiring from a low income labor pool without previous work experience, be prepared for high attrition and the need to frequently repeat your original training program.
• Budget adequately for your marketing plan. Don't assume your new neighborhood will immediately embrace you -- tell them who you are and what you sell.
• Keep the board focused on regular monitoring of finances and progress of the expension, instead of micro-managing staff relations.
• Realize the co-op could be involved in an expansion for several years, and be willing to support it through the inevitable ups and downs.
• Start your member loan program early, expect the board to participate, and use outside help from people with co-op experience.