Additional Stores: Expanding "The Co-op"

Food co-ops expanding from one to two stores must navigate a challenging and perilous course. This article will explore those challenges and obstacles and suggest a course of planning and implementation that increases the likelihood of success.

Food co-ops historically have had limited (but increasing) success operating multiple stores. In 1997 there were just six surviving food co-ops operating more than one store. By 2007 there were 16 such food co-ops, and over that ten-year span those co-ops opened 19 new stores. One second store project opened and closed during that timeframe.

A series of cooperative store development forums organized by Cooperative Development Services (CDS) and hosted by PCC Natural Markets (1996, 1998, 1999) and Outpost Co-op (2002) addressed the challenges of expanding to multiple stores. Most of the food co-ops now operating multiple stores participated in those three-day learning forums and have contributed to this summary of multi-store development.

The traditional primary ingredients or “cornerstones” required for business development are talent and capital. As we assess the historical inability of the food co-ops to expand into second/multiple stores, we must add the additional cornerstones of vision and systems. While we have recognized that our limitations in talent and capital have inhibited cooperative development in general, limitations in vision and systems have more specifically contributed to there being only a small number of food co-ops that have successfully expanded into multiple store operations. We will explore these four cornerstones to see how they influence the success of a food co-op expanding from one store to two (or multiple) stores.

Vision

Our generation of food co-ops has been limited by a vision of “the co-op” being “the store” rather than the “the co-op” being “the members.” While a retail food store is the core service provided by the consumer-owned food cooperative, the store is not identical to the co-op.

The co-op is bigger, way bigger, than the store. The co-op could offer complementary services and products, or could provide multiple stores, as means towards its end or mission.

As locally owned, grassroots and parochial community organizations, we have been limited by this view of the co-op equaling the store. Consequently, when a food co-op attempts to entertain the vision of a second store as a means to serving its members better, co-op participants frequently fall into a comparison trap: the new store vs. the old store, the big store vs. the small store, the good store vs. the bad store. We do not easily have the ability to support and nourish the success of both stores, and resources are thus often allocated inappropriately.

Will co-op members support the opening of a second store even if it might not be in a location that they would shop at? Will they be willing to make member loans to support that second store? What happens when the second store loses money initially and lowers the overall profitability of the co-op for a period of one to five years and limits (or eliminates) the ability to offer a patronage dividend? What happens if one of the stores performs under projections and seriously weakens the co-op?

Over time, a shared vision that supports multiple stores has been built at the leadership and membership level in a number of our leading food cooperatives: PCC Natural Markets in Seattle (eight stores), Hanover Consumer Co-op in New Hampshire (three stores and a gas station), Outpost Natural Foods in Milwaukee (three stores), La Montañita Co-op in New Mexico (four stores), Weaver Street Market in Carrboro, North Carolina (two stores, a restaurant, and other ventures), Lakewinds Natural Foods in Minnesota (three stores), and Bloomingfoods in Bloomington, Indiana (three stores). These co-ops have successfully enacted a vision that cultivates the full co-op-not just “the store.”

Talent

In order to transition from a single store food co-op to a multiple store operation, talent needs to be stockpiled-recruited and retained-at all levels of the organization, from the board to management to staff to an engaged membership. The co-op also needs to partner with talent and expertise from outside the organization to support the development effort.

Management development and training can aid in the successful planning and implementation of a second store. A general manager without multiple store experience is advised to initiate pro-active learning over a one- to two-year period. This could include visits and job sharing with food co-ops that have two or more stores, as well as training in the skills of project management: organizing, developing, timeline management, cost containment, and systems development.

The management team will require its own preparation period, since the bar will be raised for teamwork, training, and communication skills as well as accountability and performance results. New members of the management team will need to be recruited, trained, and integrated into the co-op’s operation.

Management restructuring also is part of the planning process for transitioning to a new store. Some management positions will oversee both stores (e.g., merchandising, human resources, finance/accounting), but not all departments will have a manager who oversees both stores. For example, there might continue to be a produce manager at each store, one of whom might be designated the “lead” (but without supervisory responsibilities for the other store’s produce department).

The store manager position is most critical, and it has been shown to be a wise move to hire the store manager as much as a year (and at least six months) before opening a second store. The store manager for the new store can be integrated with parts of existing store operations and can provide project management support to the general manager. A store manager is needed for each store. Don’t make the mistake of having the general manager also be one of the store managers. Additionally, the general manager may choose to hire a project manager who is specifically focused on the design and construction of the second store.

Adding a second store, of course, requires adding an entire staff to operate that site, although some of the staff will come from the existing store. The staffing plan and organizational chart should be developed a full year in advance of opening a second store. The staffing plan will include timelines and work plans for hiring, recruitment, orientation, training, and supervision.

Along with these demands and the excitement of expanding the co-op, co-op staff will have added motivation to achieve personal growth. Expanding to a second store can enhance and create more meaningful jobs for management and staff-many with increased levels of responsibility.

Capital

The capital requirements for opening a second grocery store are intense and comprise at least a million dollars. Opening another store is not merely relocating, where the co-op will transfer some of its equipment and its existing inventory. A second store is more akin to a start-up and usually requires more capital than a relocation.

Depending on the financial strength of the co-op’s balance sheet from the existing store, the owners’ contribution (cash reserves, new member equity, and member loans) will need to be at least 25–35 percent of the total project costs. Depending again on the co-op’s balance sheet, and on whether the second store site is a lease or purchase, the bank debt might be as much as 45–60 percent of the total project cost, assuming the financial pro forma shows the co-op’s ability to adequately service the debt.

Much of the capital raised for the second store project will need to be “patient” or long-term capital. Payback of member capital should be delayed to provide a favorable window during at least the first three years of the second store.

The gap between the owners’ contribution and the bank debt (5–30 percent in the example above) needs to be filled with creative sources of capital, including landlord contribution, vendor credit and free fill, plus low-interest/long-term subordinate loans.

In lease situations, the total project cost for a second store, including an appropriate allowance of working capital, might be in the vicinity of $250 per square foot in 2007 dollars. The development costs will be higher in projects where the co-op is purchasing real estate or an existing business or where new construction is involved. Thus, a leased 12,000 square feet store could require roughly one million dollars or more as the co-op’s contribution to the total project budget of three million.

Capital planning and financial planning for a second store preferably should begin at least three years prior to the opening of a second store. Financial strength in the existing store operation is essential to supporting the startup of the second store. Planning of member equity drives and member loan drives as part of a second store expansion requires a balanced plan that will get appropriate levels of support from members located in the trade area of the proposed second store as well as from members who will continue to shop the existing store. Goals for member investment can be set as a threshold test for feasibility.

Systems

Systems development for multiple stores can be challenging for a food co-op sector that has been primarily single-store based for over thirty years. The growing wave of collaboration and cooperation experienced through the National Cooperative Grocers Association (NCGA) offers hope for systems building that can support the sustained development of multi-store cooperatives.

Are there efficiency gains and overhead sharing that are achieved by having two stores? One would think so, but in reality such savings aren’t often achieved until there are more than two stores, or until a certain level of maturity is reached with the second store. Any savings in efficiency or overhead in the first three years of a second store can be offset by additional expenses related to systems development, including communication and transportation between the stores as well as personnel changes.

Since it is a challenge to prepare operating systems for a multiple store environment prior to the opening of a second store, a food co-op would be well advised to begin planning and implementing systems redesign at least 12 to 18 months before the opening. Learning from other co-ops that have gone through this process is a good first step in selecting key operating systems for a two-store operation and developing workplans: point of sale system, accounting, human resources, merchandising, purchasing, customer service, branding, advertising and promotions.

The overall concept for a second store needs to be carefully and systematically thought out and based on market research and analysis. Will the second store have a concept similar to the existing store? If not, how and why will it differ? Will it be complementary? Will the needs of the community in the new trade area be addressed? Will the co-op identify those needs through surveys, focus groups and other forms of outreach? Will the pricing system be the same in both stores? Will the co-op be able to obtain an appropriate pricing structure from its suppliers, one that recognizes multi-store volume?

The site search process should be driven by the results of a professional market examination conducted by an experienced market analyst, and site negotiations should address all relevant issues related to the facility. Professional assistance should be obtained on real estate issues.

We recommend that existing co-ops not attempt to open a very small store (under 3,500 square feet) unless there are favorable special circumstances. Small stores present a variety of problems and will likely need to have a higher price structure than the larger original store.

If the second location is outside of the existing location’s trade area, will appropriate steps be taken in advance of opening to engage the community as stakeholders and secure appropriate member investment? Suburban locations and locations in new trade areas will take longer to build sales and reach a break-even point. Patience will be required by the investors and lenders of capital.

If a food co-op is considering a second store, it is important to think through an appropriate expansion strategy, again based on a professional market analysis. Does the existing store need to be renovated or relocated prior to opening a second store? Or will upgrades to the existing store happen after the opening of the second store? Beware of the dangers of falling into the new store/old store syndrome.

Finally, the entire development process for the second store needs to be approached systematically and with due diligence, first assessing feasibility for each of four primary components:

• market feasibility,
• internal readiness,
• financial feasibility, and
• design feasibility.

This assessment is the foundation for working through the four stages of an expansion project: feasibility, preparing for construction/renovation, construction, and preparing for opening. (See the “Expansion Toolbox” publication )

Benefits and risks

In conclusion, we can see that there is a risky and challenging route to navigate from a one-store cooperative to a two-store cooperative. A patient, entrepreneurial approach anchored in strong management skills, excellent customer service, inspiring governance and an engaged membership are required for success.

Outpost Natural Foods can be viewed as one of the models for transitioning to a multi-store cooperative. Outpost began its planning process for a second store in 1996 and opened it in 2000, and it took 18 months for the new store to become profitable. The original store then went through a major remodel in 2003, and Outpost opened its third store in 2005. They are on track to reach profitability in the third year for that store.

In this ten-year span, Outpost’s competition has greatly intensified, but the co-op is better positioned to compete than when it had only one store. Its exposure and visibility have been greatly enhanced, and its brand recognition has been elevated despite the increased competition in its trade area. While there have been some bumps in the road, the systematic and steady process Outpost used can be a model for other co-ops.

As a sector, we still have a lot to learn about operating in a multi-store environment. There are other options for transitioning into two stores. Green Fields Market in Greenfield, Mass. recently purchased an existing business in nearby Shelburne Falls and now operates it as the co-op’s second store. A number of existing food co-ops have been providing support to start-up efforts in nearby communities that desire to have a food co-op (see www.foodcoop500.coop ), helping to make the cooperative model available to more and more people.

Opening an additional store can be a leading strategic direction for sustainable food co-op development. Start planning now, if you haven’t already. Again, most co-ops should allow at least three years to plan and open a second store.

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Bill Gessner is a consulting working with CDS Consulting Co-op, specializing in retail expansion projects ([email protected]).