Start-Up Tools and Challenges for Food Co-ops

Interview with Ben Sandel, Part 1

[Editor's Note: This interview with Ben Sandel of CDS Consulting Co-op was recorded in November of 2013.  CDS provides consulting and resources for start-up food co-ops across the country.  Ben was also involved in starting the Friendly City Food Co-op in Harrisonburg VA.  Ben was interviewed by GEO Collective and Democracy At Work Network member, Jim Johnson.  Parts two and three of this interview can be found here and here. Thanks to Rob Brown for providing the transcription.]

 

Jim Johnson: Could you just give me the 30-second elevator speech on who you are, or the 60-second elevator speech?

Ben Sandel: Sure. I am Ben Sandel. I am a consultant with CDS Consulting Co-op working primarily--well, almost completely--on leadership development, governance and capital, capital campaigns--helping co-ops find the capital that they need [...] to start new co-ops or to expand their current co-ops. I have not done that full-time terribly long, but I have been doing it part-time for about a year and a half working [...] in part of the CBLD program, the Cooperative Board Leadership Development Program at CDS Consulting Co-op, and also on the capital side working in the expansion, growth, and improving performance area. [...] Those are the two sides, basically, of CDS Consulting Co-op.

Before that, I was the board president of the Friendly City Food Co-op from incorporation until November of 2011. We opened in June, 2011 and I was part of the forming, the founding team prior to that from the very beginning of the process. So what would that have been? 2006, I guess, early 2006. I was part of that.

Prior to that, I have a background in conventional business in a variety of capacities, often dealing with [...] small and startup businesses. [I] grew up in a family business, was on the board of another food co-op through a somewhat tumultuous period of expansion and of recovery from financial difficulties and then expansion, and have been involved with food co-ops in one way or another for 25 or so years from, you now, being a tofu rinser and on. So that’s kind of where I come from, and [...] besides that, I enjoy working with groups who are starting co-ops and are working on co-ops. I enjoy working with them very much.

Personally, I feel like the cooperative business structure and the role the cooperatives play in society, as social institutions that are also businesses, is really critical and it’s really essential to a more peaceful, just society. So that’s kind of my personal motivation for working in this field.

Jim Johnson: Excellent. I do want to get to the meat of the interview in a minute here, but I want to sort of start off by asking you a little more about your Friendly City experience in particular. Five years to start up?

Ben Sandel: Yes. Five and a half.

Jim Johnson: Five and a half years. Any reflections on that, like how typical it is or how appropriate it was?

Ben Sandel: [...] [B]ecause it was 2006 through 2011, you know, we had a major financial meltdown in the country in that period, which I think probably delayed us somewhat, but - and you know - at the time we started, and there was not as much - not nearly as much activity at that time in co-op development, and they were saying [...] 18 to 24, maybe 36 months should be plenty to start a new co-op. I don’t see it. You would have to have a very particular set of circumstances that would be highly favorable to do it in that amount of time.

I think the amount of time we took is probably a little too long. We were very lucky and worked very hard to maintain focus, energy, community engagement. I think, you know, we definitely did hear various grumblings about “You guys are never going to get this open; we’re losing confidence.” So it was a little too long in my opinion, but, on the other hand, [...] the climate had to take for us in our particular situation to get all the pieces together and to do it to the quality level that we were shooting for.

So I can look at various aspects of the process and say we might have been able to go faster here, or maybe we could have done that differently, and it would have happened sooner. But on the other hand, there’s nothing--there’s no part of the outcome that I can say [...] “We overdid that,” or “I wish we had not gone as far.”

So in terms of the amount of money we raised, the strength and quality of the organization we created, the general manager that we hired, [...] there’s no place that [...] we could have [...] cut a corner there. So it was the amount of time it had to take. Typical? Still unclear. I do think we could get it--You know, I think 36 to 48 months is much more--is achievable and is more mindful to the fact that [...] these are generally volunteer efforts that take a lot of people. So it’s very hard to sustain a volunteer effort for that long period.

Jim Johnson: That’s very much why I ask, yeah.

Ben Sandel: Yeah, so three to four years is what I would think is more reasonable. And in that time, there’s going to be turnover of people, turnover of volunteers.

Now, again, our group happened to be rather cohesive, and we concentrated [...] on all the nuts and bolts of opening a co-op while also, maybe not always consciously, but we were never the less always also developing a cooperative culture. And by that, I mean [...] working together, asking for help, getting people engaged so that they would take part--beyond simply paying their money--and having fun.

You know, seeing this as a community building effort, as a social effort that meant that [...] if we were getting to a point where it was not fun, we had to look at that a little bit and say, well, [...] is this just a temporary thing we need to get through in order to fulfill whatever is the current goal? Or are we off track and we need to get back on track at making this a fun process so that people want to still be involved with it? [...] [W]e definitely did not want- and I think we were actively working against the maybe outdated stereotype of co-ops being full of sour-puss vegans who [...] don’t believe in fun.

Jim Johnson: [laughing]

Ben Sandel: We wanted to make sure that we really projected... You know, it was not by chance that we chose a name that has “friendly” right in the name. Besides that, it’s the nickname for our community, too. The “Friendly City”. But we also just wanted to stress that. You know, one of our other nicknames is “Rocktown”, and when we thought about what is the message you send with “Rocktown” and what is the message you send with “Friendly City”, you know? We liked the softer, friendlier - what I felt was a more inviting name. Anyways, so you know we wanted to be sure that there was fun and openness and friendliness involved in the whole process. So, five and a half years, a little long.

Jim Johnson: Well, it’s alright. Just a couple more questions about startup... I’m realizing we might have a nice sidebar maybe about your startup in particular or something like that because, you know, you wouldn’t say that you’re in a major metropolitan area.

Ben Sandel: No.

Jim Johnson: Right.

Ben Sandel: We have about 40,000 people. We have maybe a little more than that now in our city. And if you include the county, I think [...] maybe it’s a little more than double that or our trade-area is a little more than double that size.

Jim Johnson: Yeah. I’m on Wikipedia right now. 2010 census: 40,914 [...] for Harrisonburg and for the Harrisonburg, Virginia metropolitan statistical area which [...] includes the county, I think is 126,562.

Ben Sandel: That may be then. Our trade area, as defined in our market study, may have been slightly smaller than that simply because [...] our county is very large geographically and includes a couple areas that [...] they’re folks that don’t come over here to shop or they do very, very, very rarely. So they’re [...] geographically possibly closer to Charlottesville than to Harrisonburg [...] So yes, but those numbers are basically correct.

Jim Johnson: I would point out that, you know, I’m looking also at the historical population, and it’s been growing very quickly since its founding, really.

Ben Sandel: Mhm.

Jim Johnson: And it grew 20% since 2000, 31% between 1990 and 2000, 56% between 1980 and 1990. So I guess that’s helpful, too. I was going to ask you generally whether you thought being in a town like Harrisonburg, as opposed to being in a major metropolitan area, would be easier or harder. Is it easier or harder to start in Harrisonburg as opposed to a big city?

Ben Sandel: There [are] real pluses and minuses, and on the one hand we were able to find a downtown location with parking at a rate per square foot that might not be as low as you might think for a community like ours. But it’s certainly lower than it would be in a real metropolitan area.

The other side of the coin is you get population density and you get median income that are generally, well, potentially higher in urban areas than in our somewhat agricultural area. So our median income is about [$]44,000, and we’re generally looking at or thinking about [...] [$]50,000 to [$]150,000 as the prime median income for a population to support a food co-op.

Jim Johnson: Ok.

Ben Sandel: But I think it [...] is a handleable size for us in that we could reach out to a lot of people across a lot of different [...] socioeconomic strata because [...] we only have one newspaper and [...] our message wasn’t drowning in the noise that you might have in a major metropolitan area. So those challenges were slightly, slightly less I suppose.

And I think that it’s less a question of urban versus either smaller urban or agrarian. It really is more the makeup of the group of the community and what approach you’re going to take, because you know it could be that a community like ours depending on... You know, it happens to be that [...] we did not have a lot of intense competition here, but that’s mostly because the chains that are in our area are [...] somewhat lackluster, and one in particular had closed a few different locations in the last few years because [of] their own financial reasons.

Jim Johnson: Conventional stores you’re talking about, right?

Ben Sandel: Yeah, conventional grocery stores. Right. So on the other hand, [...] I think if you compare us to, like, an Ithaca, New York or Burlington, Vermont, [...] they have a much better median income and education level and [...] what you might consider the more traditional co-op shopper. But they have more [...] competition, too. They’ve got more health food stores. I don’t know if they have the big chains, Whole Foods and Trader Joe’s and things like that but [...] we don’t have many of those here. We do have them over the mountain in Charlottesville.

Jim Johnson: Right. Right there in Harrisonburg you don’t have any competition essentially?

Ben Sandel: Well, [...] we analyze our competition in detail, and we have two what would be called natural food stores potentially. They’re both a little more towards the vitamins and supplements than they are food, and certainly they’re not much on fresh food, but we do have two thriving stores like that.

We also have [...] all the conventional grocery stores have natural and organic in their stores, some better than others. We have two super Walmarts in our city proper. [...] And Walmart [is] the largest organic retailer in the country.  Although that’s a little bit misleading because it’s primarily based on soy milk, but nevertheless there are options here.
But it’s true there is not the kind of [...] super-attractive, Whole Foods style or kind of funky, alternative, Trader Joe’s style. There was nothing quite like that present in our market.

Jim Johnson: So people who are eating substantially natural or organic [...] It’s fair to say you guys are the only one-stop, right?

Ben Sandel: Yes, that’s correct. I would say that, yes.

Jim Johnson: Yeah, and a couple things... Since you’re providing with a nice segue into the more general industry-wide issues, but I want to clarify one thing first. Your exact relationship with CDSCC... Again, you’re not speaking for CDSCC, you’re speaking as an individual. But are you a full member?

Ben Sandel: I am a full member. We’re a shared services cooperative, so each member, each owner, is an independent consultant. So I have my practice that I do through them but [...] I’m not employed by them. I am self-employed, but I am a full member of CDS Consulting Co-op, yes.

Jim Johnson: Ok. So you provided me with a couple of nice segues here. Part of it was competition and small town versus big town, because most of our readers, most of the population is going to be in a big town, but to me that’s an interesting story. Certainly bigger cities, lots of zoning, lots of regulation, higher real estate prices, things like that.

Ben Sandel: I would not say any of our zoning or code practices were any less onerous than in a big city. That in that regard, you know, we have sprinklers in our walk-in freezer, our walk in cooler, and outside.

Jim Johnson: [laughing]

Ben Sandel: So in that regard we didn’t save any money on code.

Jim Johnson: [laughing] The thing that comes to mind, though, is D.C. where it seems like it’s almost impossible to start a co-op in downtown D.C. now.  And that we have more co-ops in the suburbs, basically.

Ben Sandel: The challenge is very different. I mean, I agree it would be very, very- It is a lot harder, but then again, you know, Whole Foods has a store at - what is there - don’t they have one that’s like-

Jim Johnson: 15th and P. They have one at 15th and P.

[...]

Ben Sandel: So [...] they’re obviously finding a [...] financial model that works for having those stores in urban areas. Co-ops can, too. But it is harder, definitely.

Jim Johnson: Well, [...]s they need really deep pockets from what I understand. Correct me if I’m wrong, it still takes them years to break even and get their money back, right?

Ben Sandel: I would imagine so. I don’t have any data on them, but I would imagine that’s the case. [...] I mean, when we do our financial projections for food co-ops.  We’re doing 10 years of projections, and some co-ops need all 10 years in order to achieve profitability, which also means you need substantial startup capital to take you through that time period.

And, you know, in that regard, yes, an urban co-op is going to be more challenging for that. It also may be that the model will be less conventional [for] what you try to open for an urban co-op and [...] that’s something, that’s a question that’s still very, very much wide open. We don’t really know what that model looks like exactly but-

Jim Johnson: Name the model you’re describing now. We’re talking about a successful urban startup in the big city nowadays?

Ben Sandel: Correct. [...] That’s what I’m talking about. And what that successful urban startup might look like compared to even one that - Takoma Park [Maryland] is not exactly suburban, but it’s more of what we’ve seen as the conventional successful co-op model where you have parking right next to the store, you have enough square footage that you can have a fairly full featured store, you have access for delivery trucks that’s not always just parking out front on the street.

So, you know, with an urban market those are some of the key challenges. How can you support the cost per square foot? Especially, how can you have a large enough store to be anything more than a convenience store, and especially if you’re not necessarily focusing on the conventional convenience store profit-makers of, you know, malt liquor and cigarettes and snack foods?

Jim Johnson: Right. [laughter]

Ben Sandel: [...] I mean, that’s where a lot of corner stores make a substantial amount of profit, and it brings people in regularly. And how do you do it with little or no parking and with little or no access to trucks? We don’t know the answer to that yet.

Jim Johnson: Let’s just go back to Friendly City just for a second and think how is Friendly City doing on startup? [...] [H]ow are your projections on break even? Is that information you can share?

Ben Sandel: Yeah. Oh absolutely, it’s doing great.

Interestingly, or--to me, it’s all interesting--but what I find significant about the financial performance of Friendly City is that through our planning - we were we were very conservative and we tried to be very conservative in our financial planning - and what has happened especially [...] after the first full year of operations, our sales were slightly lower than we had forecast and we had budgeted for that period.

Jim Johnson: Wow. That’s interesting.

Ben Sandel: So we had budgeted, like, I think 2.2 million and we were right around 2 million for that first full year.

Jim Johnson: Wow. Ok.

Ben Sandel: But our margin was slightly better and our labor costs were slightly lower and we had started with slightly less debt than we originally had in our pro forma projections. So primarily because of the great work of the GM maintaining margin and being very careful with labor cost, we ended up losing substantially less than we forecast.

And so we were bracing ourselves for losses in the $400,000 range, and we actually ended up, on paper, losing maybe 100K but actually in reality our cash situation was very, very good. And, in fact, our [...] first fiscal year, fourth quarter we actually made a little money--which was somewhat of an anomaly because there were a few good things had happened that aren’t necessarily repeatable. But nevertheless, it was certainly great to actually show a profit that early in the process, which is still, you know, years before we forecasted we would be turning a profit.

[F]inancially we’re doing great. Our growth is better than we had originally forecast. Our growth - that is, the percentage of growth year over year - is better so far. And the consumers, [...] our community seems to really like the store a lot. Certainly it’s got areas that need to be improved, but all stores do. But it’s functioning pretty well. [...] [T]here has certainly been some staff turnover, but generally it’s been a good, stable staff. Yeah, so [...] we’re very, very happy with the performance of it.

Jim Johnson: I wanted to touch on something to generalize a little into a startup 101 question that I think still might come [...] as a surprise to a lot of people who are not in the business. And that is that, you know, you’re talking about a food co-op, relatively successful startup food co-op, one of the reasons I’m interviewing you because you’ve been in the trenches of a startup-

Ben Sandel: True.

Jim Johnson: ...in the last few years.

Ben Sandel: Yep.

Jim Johnson: And so that’s the angle - or one of the angles that [...] makes this very strong is I’m talking to somebody who’s done it [...] recently [...] but one thing a lot of the readers might not know is that you have to expect food co-ops to lose money for years-

Ben Sandel: Yeah. Absolutely.

Jim Johnson: ...when you start up in this environment. I think that might shock a lot of people. Can you share a little bit of information or general data, if you can, about what the expectation should be if you’re starting up a food co-op now and how many years should you expect to lose money, so to speak, and related topics? Yeah, go ahead.

Ben Sandel: Absolutely. And you know any new business from scratch is going to lose money. I think one of the conceptual differences with conventional businesses versus the cooperative model is that if you are an owner or a partner in a business, there is often the understanding or the expectation that you will be working in that business concertedly and with very little financial return initially.

Jim Johnson: Sweat equity.

Ben Sandel: Sweat equity. So you may have a couple people - maybe more than a couple  - who are putting in an enormous amount of time and effort, potentially an unsustainable amount, and are doing that at minimal or zero compensation, which can make those types of businesses achieve profitability sooner. But with a cooperative business, where even if you are - Well... Let’s not even go down the path yet of talking about volunteer labor, which doesn’t save any money we’ve found.

Jim Johnson: Right.

Ben Sandel: You’re paying for management and staff, and you are in an industry that [...] has very low margins and has a high cost of admission, or that is that the startup costs are substantial when you look at the infrastructure that you need to have. The freezers, the coolers, the plumbing, the electrical, the backend, the point of sale, alarms, you know, fire suppression. All the pieces, the HVAC that’s required. All of those are - You know, none of it is cheap, and it’s very, very hard to do that [...] kind of, like, seat of the pants...

Jim Johnson: Right.

Ben Sandel: I mean, yes you can buy used coolers, but they very well may be, ultimately, [...] a much more expensive choice than buying a brand new cooler or freezer for a variety of reasons. So it’s [...] not at all unusual to see a co-op take five to eight years to achieve profitability.

Jim Johnson: Wow, ok.

Ben Sandel: And certainly we’re seeing some that the pro formas simply don’t work, that [...] ten years out, they’re still losing money and may not be moving in the right direction. You know, it may not appear that at that point they’re going to - You know, the numbers might just not work for them.

Jim Johnson: And the things that - a lot of what changes across that five to eight years when the co-op crosses that threshold from losing money to not losing money, [...] which you mean by “profitability”, is actually you’re actually making more than you’re spending in a quarter, right?

Ben Sandel: Right. You become sustainable. Self-sustaining.

Jim Johnson: Yeah. And the difference there is - correct me if i’m wrong - they’re paying down loans; their revenues generally are increasing; their internal processes generally are becoming more efficient as the staff becomes more experienced… Am I hitting all the points here? What is it that makes the difference there?

Ben Sandel: Yes, absolutely. That is what’s happening, and the real biggies are your sales are growing and your debt is dropping. Yes, you are achieving some - your staff is getting better and better, your inventory is getting better and better, but those are somewhat [...] [T]hey’re very incremental because the amount of change they make is relatively small.

Certainly staff is a big deal because [...] you can eat up a lot of money in the staff costs--but I think the biggest things we’re seeing with startups are that initially you have to be able to raise enough money to have that working capital to get you to that point. And then you have to be able to have suitable cashflow to pay off the debt.

I mean, ideally, like in our case, partly because [...] I guess just because a combination of the way our [...] financial projections looked, we would actually be able to achieve profitability while still paying down debt. So we’ll be sustainable even with a debt load, which is a nice position to have.  If you have to wait til you’ve actually retired all of your initial debt, which is usually 10 years, you know that can be very challenging. That’s going to mean a lot of working capital up front to sustain you through that time period, and it may also restrict the ability of your general manager and staff in that time period.

I mean, like one scenario might be that you’re growing well and you’re serving your community well, but additional space in your building opens up and you’d like to expand. Well, you may have working capital, but if you have not achieved sustainability/self-sustainability yet and you still have substantial debt, you might not be able to take advantage of that opportunity to grow your business and serve your owners better.

Jim Johnson: I just wanted to touch on the harsh realities of startup and to make sure that people realize that losing money for five to eight years is typical.  In a successful startup.  Yeah, so that’s very helpful.

Ben Sandel: I don’t have comparative data with, like, Whole Foods.  But I’m sure, if anything, their stores are substantially more expensive than your typical co-op startup just in terms of [...] they are pretty first rate stores.  And not that our’s aren’t, but I think we can make up with our unique design and local flavor.

We can make our stores present very similarly in quality but at slightly less money, slightly less startup cost.  And also because, generally, it may be--this is not a generalization that I can back up--but my feeling is that people who are the management and staff of food co-ops are highly dedicated people who really want this to be a great thing and who are dedicated to their co-op and their community, which is a little different than, you know, “You’re our highest performing manager in the Whole Foods system so we want to move you to our new startup in Dubuque, Iowa, and we’re going to pay all your moving costs and we’re going to pay you substantially to be there and you may or may not love Dubuque, but you’ll be there until the next startup needs you.” Which is a different financial set of circumstances.

Jim Johnson: Ok, I want to go off on a tangent about that for a second.  Because that’s a little bit of a deep point, but it’s something I want to cover for at least a couple minutes.

Ben Sandel: Ok.

Jim Johnson: The concept of a startup team--which, when Whole Foods moved to Silver Spring [Maryland], that was something that I became aware of for the first time.

Ben Sandel: Yeah.  They have a team that’s dedicated to getting stores started.

Jim Johnson: And it’s like experienced people who go from startup to startup to startup. Correct me if I’m wrong.

Ben Sandel: Correct.

Jim Johnson: I think the advantages of that are obvious and [they’re] critical advantages. Is there any chance that the food co-op sector could do the same thing? What do you think?

Ben Sandel: Well, there is somewhat of that in the NCGA [National Cooperative Grocers Association] Development Co-op. The NCGA has their DC [Development Co-op] which [...] in some ways it does that. It doesn’t actually bring in a manager, but in terms of the support they provide pre- and post-opening, it’s really extraordinary.

And, certainly, in our situation it was. [W]e were coming into it with not just an experienced cooperative manager, but someone who had also had experience opening a Whole Foods. So this guy knows a lot about opening a store, our GM, and it was still hugely, massively helpful to him and to his staff to have the NCGA DC support in that timeframe because, you know, there are a million questions that have to be answered as part of leading a co-op process. And as the general manager who’s now the head of the buildout, he or she is interacting with the contractors, and the designers, and the architect, and the store planner, and the interior designer, and most likely also having contact with the city or county with code and regulations, and dealing with the board, and, you know, [it’s a] huge, massive amount of work.

So by having the NCGA DC team that came and helped set shelves, and helped advise, helped train the staff, helped [...] make sure that throughout the store, departmentally the displays were as good as they could possibly be so that the initial impression people got when the doors opened was really, really good--really positive. It was just hugely--you know, it’s like the cavalry riding in when the rest of the troops are exhausted and out of ammunition, you know? It really was great.

Jim Johnson: Wow, amazing. Ok, that segues nicely into this: NCGA’s development cooperative. That’s interesting.

Ben Sandel: Yeah, and let me add one other piece to that.

That startup team--the other thing too that is a unique aspect of the cooperative industry is that we had managers from other co-ops who also came and spent two weeks straight at our co-op working every day next to our management team, just helping make it happen, sharing their experience. And then, at the same time also we would have team leaders from our co-op going to Roanoke [Virginia], going to other co-ops to spend a week with them to learn how they do it and to meet people, [...] suppliers in the industry, and just to learn and get that confidence-building perspective of having someone who has done this before saying, “Yep, that’s the way you do it,” or, “Well, here- Let me give you a suggestion.” 

So that was another piece of it that even for the co-ops that will not have access to the NCGA DC capabilities, there’s also a lot of amazing help that [...] you may need to ask for it. It’s not like they’re going to just show up without that relationship being created, but if you’re to the point of opening the doors, hopefully you’ve already gotten very good at building relationships.

Jim Johnson: That’s an extraordinary example of principle six-

Ben Sandel: Absolutely, absolutely.

Jim Johnson: ...that I was not fully aware that it was that extensive both in the NCGA Development Cooperative and also the help you got from the managers. What did Friendly City have to do, as an example, to qualify for that - to get that kind of attention from NCGA?

Ben Sandel: Well [...] I can tell you what we did. I certainly cannot speak at all for NCGA, but my experience has been that the criteria is still under--they’re still looking at what works, so the criteria we met might not be today’s criteria.

Jim Johnson: Right. And sounds like the standard is maybe in a bit of flux--they’re still being developed.

Ben Sandel: And also, you know, they’re looking at how best--I mean, it worked well for us but I can imagine situations where that might not have been as effective, but-

Jim Johnson: Well, it’s an extraordinary investment of resources, and so naturally they’re going to be looking at the risk involved and trying to make sure that they’re putting those resources in a place where it’s best to actually, like, bring a new co-op into being.

Ben Sandel: Right. And as far as I know, these arrangements were made between the NCGA DC and our general manager.  So, as the board leader, I was not necessarily seeing a lot of the details. I did look over the contract at the request of the general manager.  But from what I remember and understood, ideally they would have liked our first year sales to be higher in order to qualify for the program. Our projected sales of whatever they were--2.2, 2.3 [million]--were probably still a little low for them, but we were above 2 million, so that was - I think - one piece of it.

I don’t think this was stated, but we had used a documented process throughout. So we had followed the four cornerstones and three stages, we had used quite a bit of professional consulting--high quality consulting in the cooperative world.  So they were able to look at that and say, you know, “Have these people [that have] gotten the professional help to ensure that, as much as we can ensure, that they’re going to have a high quality outcome?”

Jim Johnson: You had been using a development model in which they had confidence.

Ben Sandel: Absolutely. Yeah.

Jim Johnson: Yeah. Ok.

Ben Sandel: We signed a purchasing agreement to be part of their group-purchasing program.

Jim Johnson: You’re doing CAP. Is it still called CAP?

Ben Sandel: I’m not sure if that’s what it’s called or not, but I think if it’s not, it’s the offshoot of that. So  we’ve agreed to put a substantial amount of our purchasing in that program. We also put, I believe, a $42,000 or $43,000 bond up. So we took $42,000 of our initial startup capital and gave it to them to hold onto as security that, if we were unable to pay our bills, that they would then be able to use that to pay us off and then they would move us to COD.

So that was a painful moment, but I understand it from their perspective, too.  They have all these agreements with suppliers and put a lot of resources into marketing, into the development help that they provide. They want to make sure that we’re not going to fill our store and then go bust and not be able to pay the bills.

And they did--after a year of good payment--they have refunded us half of that deposit. Half still remains on account with them. But anyways, that was part of the process for us was putting that upfront. And then, as part of--you know, when you became a NCGA co-op, [...] you have your annual dues or however you want to look at--I’m not even sure whether they call them dues or fees or membership cost--but it’s based on a percentage of your sales.  And all NCGA co-ops do that. That’s what funds their operation.

So [...] I guess the key qualification components were having followed that plan, signing the purchasing agreement, being able to put up the initial deposit money. Those were probably the main pieces.

Jim Johnson: Joining the aggregate distribution effort, the aggregate purchasing and distribution project--I can see that was a key part of it because, with a successful co-op, then all of the co-ops in this CAP program--or whatever it’s called these days--would increase their buying strength, basically.

Ben Sandel: Correct, correct. Chances are there’s some understanding between NCGA and the vendors that, “Hey, we’re gonna work hard to increase sales for you, and in return you’re going to give us these very favorable prices, you’re going to give us special sales that you will not be extending to your noncooperative customers.”

So yeah, NCGA needs more co-ops involved and they need growth in the co-ops they have, but they also want to be very careful that these co-ops are not going to create a financial burden on the current members of the NCGA and the vendors who [...] generally have good, favorable relationships with them.

Jim Johnson: This segues nicely into one section of our meat here, if you’ll pardon the expression, which is upsides and downsides of the CAP program. It sounds like it’s a critical strategic advantage, but it’s also a major commitment.

Ben Sandel: It’s a major commitment. Certainly, for us, we had not budgeted that money, so we had to figure out where it was going to come from and add it to our pro forma. And, yes, it’s a commitment, although--I’ll not speak for our general manager--but my feeling is that he was glad to do this and to be a part of it. That, from his perspective, it only helps him because he’s getting the assistance that otherwise he would have had to pay additionally for or would have just found hard to come by, in terms of having this direct line to the NCGA to say, “Hey, I have a question,” or, “I need help.”

And the purchasing agreement means that we have the nice circular in the store, the advertising materials, the co-op advantage pricing, and marketing aids. You know, it’s a plus for him because that’s stuff that otherwise he either would have no access to or would be trying to figure out himself with his staff. “What are we going to put on sale? Are we just going to eat our margin on it, or are we actually going to get a consideration from a vendor? Who’s going to do the negotiations with the vendor?” et cetera.

And frankly, you know, what vendor--we’re a $2 million, moving toward $2 and a half million a year co-op. We don’t have a lot of bargaining to talk about, “Hey, you know, could you cut us a deal on 20 cases of juice?” Well, we’d rather, then, be a part of the NCGA.

So there were some challenges, and I think that one of the major challenges for co-ops looking at this program is that if they’re not planning on achieving that level of sales either first year or very, very soon thereafter, then they may not even be considered for the program. And that is, I think, a big challenge, you know? What you do about that? Do you, if you’re a developer, do you move forward with your plan as is? You look to see what it would require for you to be able to open at that size?

And you know the numbers they’re looking at are not entirely arbitrary. They’re looking at the history and what succeeded and what’s not, and it’s, you know, the rate of success of smaller co-ops is much, much lower.

Jim Johnson: Right. Right, I hear that. I’m going to touch more on the smaller co-ops in a few minutes, but I wanted to stay on the CAP program specifically.

I’ve heard from smaller co-ops that CAP can constrain co-ops that want to buy more local, that there’s a minimum threshold that a co-op needs to be from CAP as part of--to call it the CAP program for the time being--but there’s a minimum amount that a co-op has to buy. They can’t just buy as much or as little as they want to buy into this program--they have to commit to buying a certain amount of their goods, a certain percentage of their inventory. Am I wrong about that?

Ben Sandel: I don’t know. I mean, my sense would be you are probably right. I don’t have that--I don’t have the exact figures on that.  In our case, I do not believe it was any constraint on our general manager and his team leaders who were doing the buying, because in order to have a full service grocery store, we’re buying plenty from them. They’re great. You know, they are a high quality supplier for us.

By sales volume for dollars, I think we hit about about 25% of our business local in that year, which is quite good. I think that compares to a national average for conventional grocery stores of about 6% local.

Jim Johnson: You’re saying it’s 25% overall or 25% produce?

Ben Sandel: No, 25% of our total sales for the store, or 25% of the cost of goods spent went to local suppliers.

Jim Johnson: Wow. That is great.

Ben Sandel: Yeah, it was a strong focus. Our general manager was dedicated to that. That’s a passion of his. One of our first employees was--their title was “food forager”--who traveled the backroads talking to everybody.  Old order farmers with no phones in their house, about whether they might be interested in being a supplier and what they produce and how much of it and to what standard. So, you know, we put a lot of effort into cultivating that. You know, there are also some huge challenges with local: especially supply, steady supply, pricing...

Jim Johnson: Oh yeah.

Ben Sandel: So local is great, and I think everybody, all co-ops, are looking at it, and it’s a place that you can really distinguish yourself competitively against corporate and conventional grocery, even corporate natural and organic, but it is really challenging. I’m not really sure if the NCGA program would in practice actually limit it. In theory, maybe, but I think the reality is you need all that stuff to have a 12 month a year store.

Jim Johnson: Well 25% of your cost of goods is local. It can’t be constraining you very much, right?

Ben Sandel: I don’t think so. And again, like I said, our staff has really worked ultra-hard. So we’ve got two or three different hot sauces that are [local].  And, you know, the definition of local changes depending on what it is. So within Virginia, [...] in some cases that’s local. Many of our eggs come from, like, eight miles away, so that’s also local. [...] But yeah, our general manager’s worked very hard on that.

According to the annual report, 25% of our expenses, or $325,250, was spent locally compared to a conventional grocery 6% average. So that may be both a combination of inventory and other expenses. I’m not sure exactly how he breaks that down, but nevertheless it’s 25% compared to conventional 6%.

Jim Johnson: Ok, excellent. Beautiful. Ok, well that’s very very helpful.

[Part Two]  [Part Three]

 

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