What We All Can Do Better

Recent issues of this magazine have carried articles detailing the failure of expansions in several cooperative food stores. Not suprisingly, given the National Cooperative Bank's commitment to this industry, we have been involved in virtually all of them. This article is about some of the mistakes we have all made, and what we all can do better. There are clear reasons why some expansions succeed and some fail, and the best sources of information for future expansions are the examples of past expansions. In looking back, it is clear to us at NCB that one of our major problems has been trying too hard to make expansions work.

Trying too hard

As the bank created especially to finance consumer co-ops, we at the National Cooperative Bank pride ourselves on being more flexible than most other financing sources. While we think that this flexibility is appropriate and necessary, it is also true, as Jim Ashby indicated in his article in the previous issue, that too much of a good thing may be detrimental. (See ‘Moving Down the Development Road," CG #40.)

I want to thank Jim for his comments about the NCB Development Corporation. His point about the Bank being too flexible and trying to be too accommodating was very insightful, and we are already incorporating this positive feedback into our lending practices. This is not to say that we will become completely inflexible, however. What it means is that we will more clearly outline what we expect from co-ops interested in expanding, and what we are willing to consider.

Know what we can do

One of the most important things both the National Cooperative Bank (NCB) and co-ops that are looking to expand can do is to recognize what we are good at and where our limitations are. Co-ops may do a great job selling food, but that does not mean they can plan for, or manage, an expansion.

In the same light, while we think NCB is pretty good at financing coops, we cannot manage an expansion process. Fortunately for both the bank and co-ops, there are plenty of professionals out there who are very capable of helping all of us understand and manage the expansion process better. These sources include this magazine, other co-ops, wholesalers, consultants, professionals in your community, and others.

The day the co-op board decides to seriously consider an expansion is the day you should focus on raising your equity levels.

We believe the way to overcome any issues created by our flexibility is to be very clear about what we are willing to do, and what hurdles will have to be cleared for us to participate. Most important, though, is the need for food co-ops to raise and retain more equity in the two to four years prior to planning a move -- equity is flexibility.


Given all the costs associated with an expansion, and the troubles each co-op is bound to have both before and after they do expand, it is virtually impossible for you to have too much equity.

As soon as you make the decision, before you decide where or how to move or what the new store will look like, work on raising and retaining equity. At a minimum we would like to see a 2:1 debt to equity ratio post expansion. This means that a co-op should only have two dollars of debt for each dollar of equity, the day the doors open at the expanded site. We also would rather provide no more than 50 percent of the total debt required. This ratio is just a target; for more aggressive expansions, greater equity may be required.

There are two keys to increasing equity in a co-op: retaining it and raising it. Don't wait until you've located a site and set an expansion date. The day the board of your co-op decides to seriously consider an expansion is the day you should focus on raising your equity levels. You need to focus on increasing your net income by one to two percent above its current level, and your member equity program should be closely reviewed and amended as necessary. After all, if you don't raise the money from your member owners, you're going to have to borrow it, and in the long run it will cost them more. Furthermore, if you can't convince your members that your expansion is a worthwhile investment, it is unlikely you will be able to convince others.

Betting the store

Increased equity will also help limit the risk of overleveraging an expansion. Due to the fact that most retail food co-op expansions are very highly leveraged, the decision to undertake these expansions is usually, literally, a decision to bet the store. Fortunately the majority of these bets turn out to be very good risks and result in a larger and stronger co-op. Unfortunately, on several occasions these expansions have not been successful, and as a result the co-op has lost the store.

There is a three-way symbiotic relationship between the retailer, the wholesaler, and the bank: all rely on each other for their continued success. Retail co-ops need to realize that in spite of this close relationship, if they expand aggressively, they are most at risk. Both the bank and your wholesalers will be hurt by the failure of an expansion, but the retailer may cease to exist.

One way co-ops have lost the store is by misjudging the market for an expanded format, or mismerchandising a larger format. Just because a co-op has 40 percent more space doesn't automatically mean that they will be able to sell 40 percent more food. This is one area where professional, objective advice and information are very important. Seek professional help, don't assume that the success of the current store will translate into success in the expanded store. There is no pat answer to the problem of betting the store -- virtually any meaningful expansion will put the co-op at significant financial risk. What we all need to do is closely examine each decision and option, and ask ourselves: "Is this increasing our risk? Is this risk unacceptably high? Can we do something else that might reduce our risk?"

Lease don't buy

One major risk that can and should be avoided is the risk of purchasing or building your site rather than leasing it. When possible, retail co-ops should not own bricks and mortar! You have more important and better things to invest in.

It is pretty clear that the appreciation of real estate seen in the late 1970s and 1980s is over -- and will remain over for some time to come. Virtually every developed market in the country is overbuilt, and leases are very attractive.

There are several things that motivate retailers to own buildings: location and availability, security, and belief in the value of the property as an investment. On the other side of the fence is the flexibility leasing provides, and the opportunity to invest in other assets that provide service and value to your customer.

Clearly, it is sometimes impossible to lease adequate space in a good location at an attractive rate. The nature and location of many coop retailers make it difficult to find the proper space. Despite these difficulties, we believe that co-ops should make every effort to find leasable space, or to find a landlord! developer who can bear the cost of the conversions or construction.

Renovation and construction

As some of you know, NCB has changed its lending practices and now treats expansion loans as construction credits first, and then as term loans to be amortized through operating income. This change in practice means that we want more control in the construction period of your project in order to minimize losses (and sometimes outright failure) associated with poorly planned andlor managed expansion projects.

The more expensive or more complicated your expansion is, the greater the need for strong construction underwriting and competent construction loan management. The best and ultimately cheapest way to accomplish this objective is to retain a local bank as a construction lender. The worst and most expensive way to go is to ask the NCB Development Corporation to act as your construction lender. Only in situations where the construction portion of your project is a relatively small one (under $200,000), and where you literally have no alternatives, will we even consider doing a construction loan. If your project is particularly complicated, and even if it is relatively small, we still may not want to do it. Where we can't or won't act as your construction lender, we are willing to buy partial participations from local construction lenders (to induce them to lend), or will be a take-out source for the construction lender at the point at which construction is complete and a certificate of occupancy is issued.


The importance of planning for your expansion cannot be overstated -- even though nothing ever goes as planned. As the caterpillar said to Alice, ‘If you don't know where you're going, any path will get you there."

Planning for an expansion is very difficult, so don't be afraid to ask or buy help.

It's amazing how many co-ops come to us having made many of the same mistakes. One common mistake is for a co-op to make decisions about an expansion, site, equipment needs, etc., and then determine what sales levels will be necessary to support these costs. In fact, the process of determining what revenues will be generated should be determined first; that way, we all know what a co-op can afford and what return can be expected, for costs incurred.

One of the first steps in the planning process should be the development of a business plan. In the January-February 1992 issue of this magazine there was an excellent article on business plans taken from the workbook, Business Planning Guide For Cooperatives. The process of writing a business plan while you are considering an expansion will identify key issues you need to address and help you develop a road map for solving problems as they arise.

Plan to talk to us early. Give us as much information as you can, and we will give you as much feedback and direction as we can. Starting a dialogue early should help us all avoid disappointments and frustrations later.

Talk to your wholesaler

Here's a plug for wholesalers: we should all be utilizing them as much as we can in the expansion process. Wholesalers have a ton of information about the retail co-ops they serve, what is selling, what isn't, food lines that are growing, who is doing a goodjob and who isn't. This information is valuable to all of us, and we have to be better about sharing it.

As I stated before, there is a symbiotic relationship between a wholesaler, a retailer, and a financial institution. We all benefit from the strong continued success of each other. With this in mind, it is clear that we all are very interested in the continued successful expansions of retail food co-ops, and that one of the ways to ensure this success is to get better about sharing information and supporting one another.

Ideally, wholesalers will be able to provide retailers with assistance with store layout, merchandising, and leasing terms and conditions (for both equipment and site).

Financial information

Current and accurate financial information may be the most important information an expansion project can have. The only way you can be sure if you are on track, or react in a timely manner if you are off track, is to know exactly what is going on financially. In our experience some of the more successful expansions have developed a list of key financial statistics and ratios available on a weekly and monthly basis. This information has enabled them to pinpoint problem areas, and take corrective measures before the costs/losses have grown too great. Conversely, some of the most rapid and spectacular failures have occurred in co-ops that have not had adequate financial information, or have been unable or unwilling to take positive corrective steps when faced with problems.

Sources of financial support

By now it should be clear that NCB Development Corporation is still trying to be an instrumental source, but not the only source, of capital in getting your expansion done. In order to manage our exposure as a lender, we need you to expand and diversify your sources of capital. Here are some ideas. We realize that they will not be practical in all situations:

1. Wholesalers are obviously good sources for capital. The size and relative strength of the wholesaler is a good place to start in evaluating what kind of request might be reasonable. Assessing what your wholesaler has to gain in additional business/profit is a good place to end up in evaluating the realism of your request and the strength of your negotiating positon. At a minimum, ask your wholesaler to improve your credit terms. Better yet is getting them to provide term credit for your opening order, with a minimum of a 36-month term. This kind of participation from your wholesaler greatly strengthens your loan request.

2. There has been some reasonable level of success in going after the local unit of government for grants or soft loans. We would suggest that everyone pursue this possibility. Clearly, a very long lead time will be required here.

3. In leasehold situations, the landlord is always a good source for tenant improvement capital, either in the form of an outright contribution to induce you to lease, or often in the form of credit. Our general experience is that many expansion proposals come to us with co-ops paying higher rent than the market and/or the condition of the space would warrant. Usually, the desired building is in a "strategic location" or the cooperative has very few leasing options. We recommend where possible that you forego these expensive rents and keep looking for landlords who are more reasonable and whose rents are closer to what the market should be providing in your expansion.

4. Leasing equipment is always a good way to diversify your credit sources by shifting part of the financing load in an expansion from your lender (us or a local bank) to a leasing company.

5. Member loans have become an important source for expansion capital. Every well organized expansion project we have seen in the last two years included a strong member loan component. This loan capital will be subordinate to your major lender with respect to both payment and collateral. Although raising member loans takes lots of lead time and a good deal of energy by the cooperative, it can often be the difference between a good idea and an expansion that gets done.

We at NCB are very interested in the continued growth and expansion of cooperative food stores. We also want to play an active role in facilitating this growthwhenever possible. This article is an attempt to share some of what we have learned from our successes and failures. We hope this information will help your co-op avoid some of the mistakes others have experienced. The most important thing that we have learned is that we all need to cooperate and share both information and resources.

See other articles from this issue: #041 July - August - 1992