Mississippi Market Manages Changes

039 March - April - 1992

Mississippi Market operated for twelve years out of a rented building with 1,200 square feet of retail and 1,500 square feet of basement and backroom storage. We ultimately did $1,890,000 in annual business there, and by the end of our stay the staff and customers were exhausted.

In February 1991, we closed the old facility and opened a new store, one mile away, with 5900 square feet in total and 4800 square feet in selling space. Our relocation planning, site search, and store development was a process that took about three years of concentrated work. We hired consultants, an architect, changed our management structure and pricing structure, tripled our staff size, changed our job descriptions and our membership equity requirements, reduced our board size and educated our members. For a business with a cultural bias against change, we've asked a lot!

Groundwork for change

The store is one of sixteen cooperative groceries in the Twin Cities of St. Paul and Minneapolis and surrounding metropolitan area. The natural foods image of the co-ops has secured our niche until recently. Our major competition is two warehouse format chains whose natural foods sections are bigger than most area co-ops.

The internal changes that we made prior to our move were essential to the success of the venture. The decision to expand the business was not a shared vision. Efforts to find a site, develop our own site, and even expand product selection were ideas that were often met with resistance by key people. Until board and management actually spent time creating strategic statements, we did not achieve consensus about the need to expand.

Mississippi Market had been collectively managed until the fall of 1989. By this time we had experienced several years of strong sales growth and were feeling limited by inadequate job descriptions and cloudy expectations. We hired personnel consultant Carolee Colter to help us define tasks and responsibilities. Her observation that we had a good staff that just needed some shuffling around was empowering to some of us. However, all but one of those who had been in the management collective decided to leave the co-op. The board hired a three-member management team from the remaining staff. With the holidays three weeks away, a management team that had no training and recordkeeping that was unorganized or nonexistent, our only goal was, "don't lose too much money, and we'll reevaluate next quarter."

We immediately hired management consultant Rex Stewart and changed from mark-up to margin pricing, began to create ordering systems, and shifted some major responsibilities to the line staff.

Our next quarter was the most profitable ever in the history of the store. While management continued to learn their jobs and define the new employee roles, the board began considering the expense of a relocation or expansion.

Member capital

Our debt was nearly non-existent, and we had healthy cash reserves built up as a result of conservative management over the years. While we realized that any expansion would require bank loans, the board preferred to encourage true ownership by increasing member equity in the business.

Our membership requirement had been $6. Our membership stood at about 3600, of which roughly 2000 were considered active. After talking with many co-op managers and board members around the country, and surveying our shoppers, we decided to raise our onetime equity requirement to $90.

The board decided to put this proposal to a member vote, and we spent a year educating the members about it. When the vote came in, we had the largest voter turnout in our histoy and a mandate, almost 80 percent, to raise the requirement. Within one year, our membership had grown to about 900.

At the same time, we also began to formulate a member loan program. Cooperative Grocer articles were an important source of information and helped us with our research into state and federal laws. We developed a brochure and began to promote the sale of class B stock to the membership.

When we finally did find a project site to develop, all the footwork that we had done was critical. Increased member equity, the vote of confidence that members showed by their commitment of $50,000 in loans, the years of strong sales, and the solid management structure were the evidence bankers needed to commit money to a commercial development.

Second chance site

We employed a local developer and a local consultant to help us either find a site or develop our present location, which had come up for sale. We also worked with a financial consultant who helped us organize our books and taught us how to do the projections that the banks required for a loan.

The investigation into developing our existing site -- recommended by the developer and consultant -- was a costly dead-end. However, the process of site review, interviewing architects, examining and manipulating financial projections, and discussing plans with bankers was an invaluable education. By late fall of 1990, we were somewhat discouraged and disillusioned with "consultants." The structure of a three-member management team enabled one of us to devote full-time work to coordinating site development. This is a job that a consultant usually does, but we decided, after two years of false starts and failed attempts, that we could do it as well and for less money.

Three years earlier we had identified a piece of property that we wanted. But our offer of the time was twelve hours late, and a convenience store moved in and did extensive remodeling. It took a year for that owner to open. He had been in business there for less than one year when we decided to aggressively pursue a purchase. He had to be losing a lot of money: we observed that his business was very low, and we had a very good idea of what his costs were. It took nine months before he would talk to us, but he began negotiations after we persuaded him that he had an party ready to buy a small, neighborhood grocery store and that it wouldn't even cost him realtor fees.

We submitted our project to several bank and development funds. But loans to businesses had tightened up with the recession and the S&L scandal, and we found that project cost was too high to get the loan that we needed. By this time the former owner had begun to sell down his stock and lay off personnel. We came back with an offer considerably lower and it was accepted. We decided on the National Cooperative Bank for our major lender.

We became property owners in mid-December; hired contractors and purchased equipment; hired and trained a deli manager and co-manager; worked closely with sales reps from Blooming Prairie, our co-op distributor, on store layout and shelf sets; and worked our last and biggest holiday in our old store.

We opened on February 12, 1991. An extremely tight two-month timeline took flawless coordination and execution. Total project costs were $660,500: $470,000 for acquiring the store, $23,500 for our realtor fees, $22,000 in renovations, $30,000 for inventory, $15,000 in closing costs, and $100,000 for equipment. In retrospect, ours was an easy project, facilitated by an excellent and committed staff and a supportive membership and board. We had an essential strong foundation of cash because of low operating costs and conservative managment. We were able to prove to lenders that our management was stable and sound and that the market area could support the business.

Mississippi Market

St. Paul, Minnesota

Size:total 5900 sq. ft.retail 4800 sq. ft.office 130 sq. ft. on-site, 250 sq. ft. off-siteSales: (1992 projected) $3,051,000Gross margin: 31%Payroll percent of sales:19% staff labor2.6% member laborTransactions per day: 500Average transaction: $16.50Annual inventory turns: 25Inventory: $85,000Member owners: 1210

Managing Margin and Labor

In a retail setting, managing the margin and labor are two key factors in success or failure. They are especially important in an expansion project, where maintaining a healthy cash flow is a prime financial goal.

The chart [NOT SHOWN] is a condensed version of a weekly management tool that we have developed to monitor sales, labor and margin. We have 6 department managers; some of these departments have sub-sales departments. (Also not shown are figures for labor percent of total sales and total sales per person hour for the additional staff categories of cashiers, floor, management, and administration. Total sales per person hour was $56.)

Margin:

The overall target is 31.5, including about .75 percent in discounts that are not attributed to individual departments. The strengths of our current margin are in grocery, produce, and bulk, which also are our highest sales departments. While dairy, bakery and cheese need some work, our primary margin concerns are in the deli and Haba.

In evaluating margin problems we first look to bookkeeping for problems in invoice cutoffs and coding problems. In the deli, where we want a 50-55 percent margin, it appears that the primary problems involve excessive shrink and products that are underpriced in relation to their labor costs.

Haba, which should be running close to a 40 percent margin, is more perplexing. Areas to examine: receiving problems, pricing strategy, mispricing, misringing and theft. Our first steps are to tighten receiving practices, minimize backstock and make it more secure, evaluate pricing strategy, reset shelves to improve security on high theft items, and eliminate slow selling, high theft items.

Monthly inventories (more frequent for perishable items) are essential until there are consistent acceptable margins.

Labor:

In managing labor, it is important to involve staff in decisions that affect their jobs, and it is equally important to make the hard decisions to ensure the longterm financial success of the co-op.

In setting standards for productivity, it is common to look to industry standards for comparisons. While these are a useful tool, it is questionable how pertinent they are, even when comparing co-ops. While size is an obvious consideration, different practices of allocating certain costs or revenues to different store areas can skew figures for individual stores. My advice is to use available figures (Cooperative Grocer, Natural Foods Merchandiser, and other trade publications) as a reference point. Then create your own standards by tracking labor's percent of sales figures and sales per person hour figures on a weekly basis. Do this until you arrive at productivity figures that allow the necessary store work and are also financially viable.

Our labor figures for December were very accceptable. But previous months' total labor has been running high, in part from move-related expenses. In order to maintain a competitive price image, our goal is to reach 21 percent labor expense (staff plus members) and $55 in sales per person hour for this year and 20 percent and $58 for next year. Our strategy for achieving these goals is to track labor on a weekly basis and involve department managers in the creation of productivity standards that meet our labor goals.

One year into our new building, we find that some of our projections have to be altered:

Sales seem to have stabilized at a moderate growth; we mistakenly budgeted too high for the second year. Our margin is slightly less than we had hoped but is showing corrections as we identify problem areas.
We are running at a higher labor cost than we want, a concern for the long term health of the business. We have experienced no turnover of our original staff, and many employees are at the top of their pay scale.
We are still projecting a loss for this fiscal year of about $24,000 (.8% of sales). On the positive side, our renovation costs came in under budget and first year sales were higher than our conservative projections of a 35% increase.
We have found that our inventory can be considerably less than projections indicated. We have increased deliveries and tightened up buying. We carry very little backstock and have shaved almost $50,000 off our short term liabilities. Instead of having to get credit from distributors, we pay cash for deliveries and thus qualify for additional discounts.

Our operating results, combined with member investment, mean that we will generate a positive cash flow for the year -- a key measure in the success of this project.

An important problem has been our deli. When we bought the building it had a very large deli and was fully equipped. We had no experience in running this type of a department, but survey results and national trends persuaded us to give it a try. We hired Rochelle Prunty from New Pioneer Co-op to help us hire and train a manager and key staff. We decided to subsidize the deli for a full year while it became profitable or at least hit break-even. The department has experienced a great deal of turnover and until recently was losing a significant amount of money. Presently, it appears that the department is achieving margin goals and is getting closer to an acceptable labor percent.

We have developed a number of tools that can help all of the departments and the business as a whole. We are generating weekly sales/labor/margin reports and have income statements per department. Until we created these reports, the impact of underperforming departments was not fully appreciated. (See below.)

The importance of doing monthly inventories after a major change for the whole store, and weekly or biweekly inventories for problem departments, cannot be understated. We contract with a service to do all of the priced products and do our own produce, deli and bulk products. We have noticed cut-off errors, coding problems, and pricing errors that confuse key data. We have become much quicker at correcting problems because we are only a couple of weeks away from the data instead of almost a whole quarter.

Pricing and image

One of the major concerns heard from members was that we would have to raise our prices in order to do this project. We have indeed raised some after surveying our competition. We found that some of our products were underpriced for the whole department (cheese) and that other departments could benefit by reexamining pricing for volume sellers. In some cases we have managed to lower prices on popular items and make up the difference on others that have a pricier image.

In general, however, our greatest gain has come by actively pursuing discounts and deals from our distributors. We now qualify for one whole percent on the margin for discounts based on volume and cash payments. This represents about $30,000 annually that the customer does not have to pay on purchases.

The impact of an expansion on the culture and operations of the business must not be minimized. When staff size increases quickly, physical surroundings change and the customer base shifts, often the first thing to suffer is customer service. Many co-ops that have been in business since the 1960s and ‘70s retain a "private club" mentality that discourages potential new customers. Old employees may resent having to dress differently and work differently and find the discussions about debt and "money' to be politically incorrect. Member-owners who willingly gave money to the business become concerned that their complaints and wishes will not be heard amid the anxiety about remaining solvent. And new employees are not always eased into the operations.

Many of these issues can be avoided, or dealt with more easily, if the business has current, well written personnel policies, job descriptions and timely evaluations. A consensus about customer service standards, an accessible and responsive member relations committee, and more communication than you think necessary, both with the staff and your members, can ease the transition.

At Mississippi Market, the board of directors decided in late 1991 to change the management structure to a general manager appointed from the management team. Personnel has not changed in terms of tasks. This move was the final stage of evolution recommended by Carolee Colter two years earlier. Culturally, we maintain a strong preference for team management; the general manager, ideally, serves as a facilitator.

Second thoughts

We decided to begin a long range planning session in the summer of 1991 as a result of the move, the psychological impact of the new decade, and the reality that we now owe major debt. We have come to realize that, while we have been successful as sellers of natural foods, we have not done a very good job of educating our member owners about cooperatives. The planning process, in examining our mission statement and questioning values we perhaps thought were shared ones, has revealed significant differences within the co-op.

In selling our equity requirement, we offer a benefit package that includes an automatic 2 percent purchase discount. We have a large working member program that offers up to a 20 percent purchase discount. Calculating discounts allowed working members on their purchases, and comparing that figure with the total cost of staffing that would be needed to replace working members (and assuming that the member work performance is the same as that provided by professional staff), the cost to the co-op of the working member program is about $25,000. We also publish a member newsletter with coupons bringing a quarterly discount on up to $50 in purchases. The cost of these benefits to the business is running about $100,000 annually. We have taught our membership that the reason to join the co-op is to get a discount on their food. The fact that we nevertheless plan on being profitable soon indicates two things: good management and low wages.

If we are to remain secure as an alternative business we must reexamine some benefits and reeducate our membership. The main benefit to members is a healthy, responsive business that serves as an employer in the community and is able to return a portion of the profits in order to stimulate the local economy. We shouldn't have to bribe customers to shop us with a discount structure that reduces profit in an unequal manner.

New wave co-ops have served as training grounds for management, and because of low wages often experience the loss of the best employees. Once again, in order to remain competitive and secure in our place in the market, we must examine our priorities and reward good employees with a livable wage and benefits. The ultimate benefit to members, the tangible result of their investment, is a business that provides the goods that they want and a high measure of customer service from employees who are able to chose a career in cooperative businesses.