Preparing For Expansion

Losing Market Share?

Many of today's retail food cooperatives now have a history of ten to twenty years. Meanwhile, the natural foods industry and the natural foods market that co-ops helped developed has grown dramatically. In many regions of the country, the coops have lost a large share of the natural foods market to privately owned stores, partly due to a failure to respond in a timely way to growth opportunities. Entrepreneurial spirit, management skills, capital, commitment, and planned decisive action, while present in some co-ops, often have been lacking. Many cooperatives are in poor locations with inadequate facilities and equipment. While sales may be healthy or even growing, the cooperative may be losing market share, and its own market may be eroding.

Along with such weaknesses in some natural foods co-ops, it is important to recognize the strengths that underlie them. The co-ops were founded in response to con~nunity needs. Each co-op has learned the meaning of survival over time and through a number of crises. Co-ops have taken responsibility for strengthening themselves and improving management and business performance. The loyal membership base that has been built is a strength and resource for cooperatives. All of this translates into a collective foundation of strength and potential that often is underutilized.


Cooperatives, individually and together, are unique social organisms that present their own set of challenges for an expansion! relocation project. Those challenges center around process, partners, and preparation. This article will focus on those challenges and also will examine a typical "sources and uses" development budget" to illustrate components and costs.

Process

It is important to recognize that for a co-op to carry out a successful expansion, a process that builds energy, excitement, and commitment is needed. A project that involves coop members and staff, draws on available community resources, and concludes within budget and timeline will make a strong contribution toward eventual success.

The board, management, and staff cannot neglect their basic duties needed to maintain the stability of the current operation. Therefore, it is often helpful to organize a special task force or steering committee charged with carrying out the relocation project. This group must have energy, time, commitment, a balance of skills, clear and effective roles, and strong leadership. The group can be composed of board, management, staff, and members; but each participant must have the commitment and ability to do their normal job for the co-op as well as this special task. The group can be set up to report to the board (or management) prior to critical decision points.

Every successful expansion project will need someone to champion the cause through thick and thin. The "champion" role is an important component that shapes the project, building excitement, ownership, and credibility. As part of this process, assumptions and options should be critically reviewed by those within the co-op as well as the outside community. Going back to the drawing board can be both necessary and important.

Management's role in an expansion project is critical. The new store will present significant challenges in terms of building sales, new operational systems, and an expanded workforce. It is essential to have management actively involved in planning for the new store; when feasible, management should be a driving force in the project.

Managing the timeline for a development project requires managing dual or multiple focuses. Many of the steps on a timeline are not cleanly sequential, as might be desired. There are three distinct but related major areas of focus during an expansion project:

1) managing the current store and maintaining profitability;
2) planning for the new store and its operations; and
3) managing the relocation project, including timeline and budget.

It is quite a challenge for a store manager to assume responsibility for all three areas, especially if it is a new experience, as it is for most coop managers. It is important to utilize and work effectively with outside expertise where feasible, and to structure internal management so that these three major areas can be successfully managed. It is often helpful to hire a project manager from outside or within the co-op to manage the actual relocation. Outside assistance should be provided to a first-time project manager within the co-op.

Build a support base for your project. Alone, an individual co-op or manager will not be able to achieve expansion goals. In the grocery industry, the array of services provided by the wholesaler is essential for retail development, whether or not the retail is owned by the wholesale. The independent operator is at a disadvantage when developing a market and leveraging capital. Your cooperative should build a development team, whether formal or informal, that includes the primary (hopefully co-op) wholesaler, the local development organization, a co-op lender or regional loan fund, the city or community development office, and other appropriate community resources. This network can be invaluable. It is the co-op's responsibility to manage these resources so that they work effectively for the co-op's goals.

The partners that you develop translate over time into stakeholders whose commitment and support are critical for the success of your project. The co-op wholesaler and the city are perhaps the two most important of these.

Developing an effective and supportive wholesale-retail relationship has its challenges, since each side has a different perspective. Yet it is extremely important for the shortand long-term success of the co-op's expansion that the retail and wholesale work well together and are invested as partners.

Working effectively with the city has its own set of challenges, many of which are educational and imagerelated. Project a positive and visible image of your co-op. Keep the city informed of your plans, and look for ways the city can help your project. Identify potential sources of support and build on those. Your co-op is a valuable community resource: an important message to convey to your local government.

The co-op's potential new landlord is also a valuable participant and stakeholder. This relationship is more separate from your other "partners" and requires consistency and professionalism during negotiations and ongoing relations.


Six-Month Development Budget:
Hometown Natural Foods Co-op

3500 sq. ft. total, 2600 sq. ft. retail

SOURCES:

Co-op savings $18,000
New member equity 8,000
Member loans (or stock or other subordinated equity) 35,000
      subtotal: owners' contribution 61,000
Vendor credit (75% of additional inventory) 24,000
Landlord contribution (33-50% of leasehold improvements) 17,000
City/community/donations/sale of equipment 14,000
Bank financing (co-op lender, local bank) 84,000
 
Total development sources 200,000

USES:

Leasehold improvements (up to $25/sq. ft. of total space)42,000
Equipment (up to $25/sq. ft. plus deli)70,000
Inventory, additional ($20-30/sq. ft. retail, less current)32,000
Project management and fees (6-8% of total development cost)12,000
Working capital, (to cover first year losses)20,000
Loss from operations during move (during closing, etc.)3,000
10% contingency18,000
 
Total development uses200,000

Notes:

1. Development cost/sq. ft. = $57.14 ($200,000 + 3500).

2. A new store that is leased and set up properly from the beginning will usually require in the range of $45-$55/sq. ft. for total development costs, depending on a number of variables. Of course, you can do it for less or much more, but be prepared to pay within that range.

3. The best use of a co-op's limited capital is to lease an existing building. However, there are certain situations where the best option involves purchasing an existing building, or even new construction.

4. Gradual or phased expansions and relocations present their own set of problems, especially if they aren't thoroughly planned. If possible, do it all and do it right the first time around.


Preparing

Preparing for expansion involves many components, including commitment, strengthening the co-op's management and board, formation of capital and financial resources, planning and timeline development, site search, and site/market analysis. Sometimes expansions become lost in the planning or the futures committee. Preparing for expansion is a more active process than planning. Planning is an important part of preparing.

The first essential step in preparing for expansion is commitment. Is your co-op ready to commit to the goal of expansion, or are you uncertain? Do you want to provide better service to more people, or are you at an appropriate size for your market? Clearly committing to expansion is an important step that will give credence and momentum to your project. This will not be an irreversible decision, since you are not considering a specific site. But a clear commitment clarifies intent.

In preparing for expansion, your co-op will have from several months to two years or more in your current operation prior to actual relocation. This is a very valuable period in which to improve the organization in priority areas. Strengthening management and board cannot be emphasized enough. They are responsible for profitability in the current operations, which is important for financing as well as in building confidence and support. Developing a team that can handle the challenge of a new store should begin at least six months prior to opening.

Strengthening the co-op's member-owner base is a top priority, since the membership must provide the base capital and support for the new store. The project shouldn't proceed without member support; it is the job of board and management to develop it. That support is better shown through equity building than a vote on a specific project.

The formation of capital and financial resources takes time and has many steps and components (see "sources and uses"). Be creative and attentive to all potential sources of financing. The co-op's contribution to the total development cost should be at least 20-25 percent, and higher if possible. The co-op's cash reserve, new member equity, member loans, and other sources of subordinated debt are needed to leverage the primarank financing. Participation loans involving a co-op lender (such as the NCB Development Corporation) and the co-op's local lender are an effective way to assemble a financing package and spread the risk. Planning, as mentioned earlier, is another important part of expansion preparation You need to go through a planning process that clarifies the co-op's mission and specific goals for the new store. Such planning should identify areas that need further work, and those areas should be integrated into the timeline for the project.

After the total development costs have been sketched out, construct a pro forma operating statement and balance sheet to see if your new store will have the capacity (including a reserve) to support the debt load. What will the required sales growth be in the first three years? The lower the required sales growth, the easier it will be to attain financing, all other factors being equal. Regardless of the increased size, required first year growth that is higher than 35 percent significantly increases the risk and the the difficulty of attaining financing. Projects that require 100 percent first year growth may be fmanceable, but do present a definite challenge. In certain instances, it is realistic to predict greater than 100 percent first year growth, but such projections make lenders quite nervous.

A site search can be a challenging and frustrating process. Yet you need to stay on a steady course. Being ready to respond in a timely way when the right opportunity presents itself requires a great deal ofpreparation. Remember, your negotiating opportunity begins with your earliest contact and extends to the lease signing (and even beyond). It is definitely worth the investment to have a professional market and site analysis done to verify the assumptions behind your preferred site and market.

With the current climate of recession and war, the favorable conditions for expansion have narrowed, and the risks have increased. However, excellent opportunities for expansion may appear. Opportunities for cooperative growth also exist in difficult times. It is a good time in which to begin preparation, aiming for readiness to respond to the appropriate opportunity. Keep your eye on the local real estate market, and build your membership base.

Preparing to expand and relocate is a special challenge that is a form of community organizing. Remember to blend the growing cooperative elements with the growing business. Through all the hard work, don't lose sight of the special opportunities for good energy and having fun. You will need them.

See other articles from this issue: #033 March - April - 1991