Magic Mill Gains Co-op Market Share

Editor's Note: In recent years, there has been much growth in existing food co-ops, but only a few new retails. In some of these startup ventures, leadership by the regional coop distributor has been essential. The interview below is the first in a series of Cooperative Grocer articles that will look at new store development involving co-op wholesales.

Soon celebrating its second full year of operations, Magic Mill is a 6000 square foot (4500 selling) natural foods store in Madison, Wisconsin. The store is a result of the understanding and vision of management and board at North Farm Cooperative, achieving cooperative growth in a market not otherwise captured by co-op stores and buying clubs in the Madison area. And those who have run the store, bringing it to profitability by the end of its first year, can also take credit for the store's success.

There is an unusual subtheme to the story: an element that didn't work, described in the interview below with manager Mel Braverman, was a management agreement with a worker cooperative that was running two other stores.

Not heard from directly here, but deserving particular recognition for the launching of Magic Mill, is Michael Schachter. This past fall, he left his position as North Farm Cooperative general manager after being with the company since its founding over twenty years ago as Intra-Community Cooperative. (D.G.)

Cooperative Grocer: Could you first describe the Madison market as it pertains to Magic Mill?

Mel Braverman: Madison is a city of about 180,000, with another 50-60,000 in the surrounding suburbs. In 1988, there were three natural foods co-op stores in Madison: Willy Street [Williamson Street] Co-op, doing $1.8 million in sales per year; Whole Earth, a collective store doing $250,000 per year; and Mifflin Street Co-op, doing about $600,000 per year. These three stores are all situated from the center city east, which is somewhat a transitional neighborhood, with many students and young families.

The side of town from the capitol and University area west is the fastest growing area of Madison, both economically and developmentally; many professionals live there. Over the years, the center of population has moved three or four miles west from the original center of town. There were no natural foods stores on that side of town.

Cooperative Grocer: What lead North Farm Cooperative into this retail development venture?

Mel Braverman: North Farm, a wholesale co-op, supplies the region with a full natural foods line and also has a national cheese distribution. They served the three stores just mentioned plus sold small amounts to other stores in Madison, along with many buying clubs and customers elsewhere. North Farm and general manager Michael Schachter recognized that the west side was ripe for a store. In terms of demographics, it fit the traditional optimum profile for natural foods customers. And that community was tremendously underserved by existing natural foods stores.

Michael Schachter saw that sooner or later someone was going to open up a natural foods store on the west side of Madison -- it was obvious. If you look at other cities, these more upscale neighborhoods and university areas are where new stores are going in. His major concern was that such a new store should use North Farm as its main distributor. He could not be assured of this if it were a privately owned store, or even if it were a cooperative store, if North Farm had no involvement in the beginning of the store.

How to bring this about? He looked at three factors in planning a new store.

First, store management: At this time, I was part of a worker co-op, Community Management Group (CMG), that ran two natural foods stores, Willy Street Co-op in Madison and Basics, a small store in Janesville (south of Madison). Michael Schachter approached CMG about running another store.

Secondly, a feasibility study needed to be conducted for a west side store.

Thirdly, there was the ‘political atmosphere' of a wholesale, owned by its retails and customers, opening up a store that some retail members could see as competition with them. Dealing with that issue was a very difficult and time consuming part of the store development. The process had to be a slow and careful one, to make sure it included input from all concerned parties -- certainly all the owners of North Farm. A series of meetings was held which took almost a year, open to anyone but attended mainly by North Farm retail customers in the Madison area, addressingtheir concerns. The store was structured and planned in a way that tried to address these concerns.

One, sales competition: would dollars be lost to the new store?

Two, staff competition: would staff be lost to the new store?

Three, would a new store owned by North Farm get preferential treatment, putting the other stores on a second level? This was a a very real concern, because many retails already viewed North Farm as not serving them as well as they would like. (Maybe that will go on forever: that is, all retailers, and not speaking negatively but as a positive move, can always talk about better services we could use.) So this was certainly brought up in the context of the discussion about a new store in Madison. Why would North Farm put energy into a new store when we could use better services that North Farm could put energy into?

The competition issue was addressed by the feasibility study. The feasibility study normally would not have included the east side stores in it because they were not in the market area. But North Farm asked to have them included so North Farm could have documented numbers about how it would affect the other stores. The feasibility study showed a minimal effect on the existing stores. For Willy Street, it was in the neighborhood of $500 per week-- for a store doing over $40,000 per week. Similarly for the other stores, the feasibility study numbers showed the impact to be fairly insignificant.

"I think North Farm services have gotten better because they have had a direct line to a retailer telling them what is needed. Before Magic Mill, there was more friction between your needs and our needs."

I was Willy Street manager at the time. I and the other store managers did not want to give up a buck to anybody; we didn't want to give up anything. The counter point to that was that as natural foods co-ops we all are interested in supporting and spreading the cooperative economic structure, and interested in spreading access to good food and good food information to as many people as possible. To deny a new store because it would take $10-$20,000 from a store that was doing $2,000,000 in business was a pretty small argument when the new store probably could do $2,000,000 in business on the west side of town. And I think this had an effect on the participants in the discussion on the sales competition issue.

Also concerned with this issue was Eagle Heights Co-op, a very small Madison store serving University people near the new store, with about $50,000 in annual sales; even losing $5,000 in business could be very detrimental to their health. North Farm worked out an agreement with them whereby Eagle Heights would be reimbursed, during the first year of operation of the new store, for gross margin dollars lost, if Eagle Heights could track that loss.

North Farm addressed the staffing loss issue by having CMG contract for management services. This way, overall expertise would still be available to Willy Street Co-op as well as at the new store.

At this time, I was being offered the position of CEO of the worker coop, CMG, and with the consent of the Willy Street board planned to hire a manager for that store. For a period of nine months to a year, I would manage the new store and oversee the other stores managed by CMG. In order to get this contract, CMG also made a commitment to bring in greater financial management expertise. CMG hoped that by taking on a third store we would have the added income needed to afford better salaries for store managers and to bring in more quality people, one of whom was to be this new financial manager.

Cooperative Grocer: How many people were members of Community Management Group at this point?

Mel Braverman: CMG had 15 or 16 members from Willy Street and the Janesville store, out of a combined total staff of 48-50 at the two stores. Most management staff were included in CMG.

CMG's contract with North Farm began in January 1990; Magic Mill opened in March. We hired a financial manager from out of town. The plan worked on some levels, didn't on others. In July 1990 the contract with North Farm was voided because I quit CMG, and part of the contract with North Farm said that I was to manage Magic Mill. After I left 0MG, North Farm hired me to manage Magic Mill.

Cooperative Grocer: Why did you leave CMG?

Mel Braverman: A number of reasons. I didn't feel supported by my management team for the growth that CMG was undertaking. I also felt we still didn't have the quality needed to manage three stores.

The biggest difficulty was in Willy Street Co-op. We were to negotiate a contract with them, but a contract agreement could not be reached. CMG and Willy Street were fairly far apart in their negotiations, and the attitudes were more antagonistic than cooperative. I think the Willy Street board's attitude refiected the concerns mentioned earlier: loss of sales, loss of staff. The ironic thing about it was that CMG had consistently made money for Willy Street. Willy Street wanted to keep lowering the labor expense, which was the amount CMG contracted for. CMG wanted to maintain the labor expense while still bringing in a profit, because we needed the income to expand our services. This was one of the big sticking points. And there were personality differences. Mistakes were made by both CMG and Willy Street.

Two or three months later, CMG folded. At that point Willy Street hired the CMG people who had been running that store, as did the Janesville store for their managers.

Cooperative Grocer: What about the fears of Magic Mill receiving preferential treatment from North Farm?

Mel Braverman: I think there may still be a perception out there that preferential treatment is happening. But as manager of the store I know in fact it's not. Michael Schachter worked hard to see that that didn't happen. The whole point was to increase sales, not to gain in one site while losing from others. North Farm treated and treats Magic Mill as a customer.

One possible difference is that Magic Mill has more of a commitment to North Farm -- we are committed to purchasing everything possible from them. We are more actively involved in North Farm, in seeing what changes North Farm needs to make to meet retail needs and in advocating for services.

There also was some resentment from North Farm staff, who were afraid of preferential treatment for Magic Mill compared to their existing co-op customers, or who thought I got this job because I knew Michael -- he and I go back a while. I think I got it because I'm a qualified manager!

Operation of the store has enabled North Farm to increase its services, and I'll advocate to get as much as I can get. I don't feel that I get more than anybody else because I'm from Magic Mill.

I think North Farm services have gotten better not because of preferential treatment but because they have had a direct line to a retailer telling them what is needed. Before Magic Mill, there was more of a separate mentality, friction between your needs and our needs. Now they understand retails better. They've gotten electronic ordering, they've added a sales rep, they contact the store buyers for new product meetings, they have product sales reports on a quarterly basis (or monthly if I want). All these are necessary in this industry. Maybe North Farm was lagging behind in providing them, but now they are happening. These things are positive with respect to the marriage -- or let's say the birth! -- of the store.

Cooperative Grocer: Has Magic Mill met its operating goals?

Mel Braverman: We opened in March 1990. The feasibility study said we should hit sales of $35,000 per week at the end of our first year. In the last couple weeks of the first year, we hit just a little over $35,000. But we lost a significant amount of money the first year, because we didn't make our margin, which I think had a lot to do with sales taking longer than we expected to climb. So there were a lot of losses; fixed expenses were fixed, and labor expenses were high relative to sales. But by the eleventh month, we started making money.

This year we expect to earn between 1 and 1.5 percent profit. This holiday season, our sales went over $40,000 per week for the first time. We're continually doing better, are above sales goals for this year. We've done some things to improve our margin and are meeting margin goals: emphasized different product, done some better buying, have better controls on ordering in terms of spoilage and loss. For the first nine months of 1991, anyway, we've met our margin goals and we've exceeded our profitability goal. So we feel confident we're on the right track. But we don't feel relaxed!

Cooperative Grocer: Could you explain the store's governance structure?

Mel Braverman: Some co-ops and customers thought our goal should be to create more co-ops, and that Magic Mill should become a co-op. In defining the governance structure, North Farm became the general partner; the operating partner is a co-op, with North Farm holding five seats on the board; two seats were filled by consumer co-ops, one from North Farm's Madison district and one from a co-op investors district. Two additional seats are available to consumers, who gain membership and voting rights by making a $10 investment. At the end of our first year, we added two community members to fill the consumer seats on the board.

We have a commitment to explore consumer ownership. But in launching the store, it would have taken too long to achieve consumer ownership immediately upon opening. If the community wants it, the store can move more in that direction.

Cooperative Grocer: What was North Farm's financial investment in Magic Mill?

Mel Braverman: They made a $45,000 capital investment and also guaranteed a $220,000 loan provided by the NCB Development Corporation.

As I see it, in establishing Magic Mill, North Farm met its goals:

• One, it gained a new, loyal retail customer.
• Two, North Farm sales were increased.
• Three, the needs and concerns of current customers were taken into account.
• Fourth, the base of cooperative economics was increased.