Anatomy of a Recovery
Financial problems are not uncommon among co-ops. Many have fought through severe crises that threatened their survival. Frontier Natural Products Co-op survived such a crisis recently, regaining financial footing after devastating losses two years ago. Grandly ambitious strategies to simultaneously crossover into conventional grocery with both natural food and personal care products, invest in developing a new grinding technology, and aggressively seek acquisitions fell appallingly short of projected revenues, resulting in a single-year loss that totaled almost $10 million and saddling Frontier with high inventories, high debt, a ballooning out-of-stock rate, overdue payments, frustrated customers and demoralized employees.
To turn things around, Frontier put in place new management, a new board and a new goal—the co-op’s survival. Two years later, things are back to normal at Frontier: operating income is up, debt is down, and all performance indicators are good. Remaining income tax losses will prevent Frontier from allocating patronage dividends for the next couple of years, but in December 2003 the co-op began paying out deferred patronage again.
The first and most crucial step in Frontier’s recovery was finding people who had the skills and, just as important, the commitment to see Frontier through the difficult struggle we were facing. We drew our new management team and other key positions largely from previous Frontier employees—people with proven product and industry expertise who had helped manage the co-op during the time of its greatest prosperity and achievement. We also tapped the reservoir of talent within Frontier, giving promotions and new responsibilities to proven employees.
As we quickly brought people back on board, we matched responsibilities with individual strengths, but our priority was to build a team that could work together and support one another. At this point, all individual responsibilities were secondary to our one common goal—to save the co-op. Amid all the fire-fighting, the management team met regularly to review progress and discuss general strategies based on reestablishing the values and priorities that had brought us success in the past. These would be the foundation of Frontier’s future innovation and creativity.
One of the values that received a lot of attention from the beginning was honest communication. Having a management team that respected and worked well, not only with each other but also with the entire workforce, gave us a head start on internal communication. We brought management and operations geographically together by closing the offices in Boulder, Colorado, and managing solely from our Norway, Iowa location. We had an established relationship of trust and shared enthusiasm with the employees in Norway that we were able to readily build upon. The employee newsletter was expanded and came out more often, there were quarterly meetings with all employees to review financial results, and managers met one-on-one with employees frequently to discuss how the changes affected them individually. We were honest about the situation, shared the financial information and got the support we needed.
We also worked hard to communicate with our members, being open about the bad news but also sharing our genuine optimism about the future and keeping them updated on everything that went well. We prepared frequent reports for Customer Service so they could give customers accurate, up-to-date information about our circumstances. We called customers driven away by out-of-stocks and other inconveniences, explained our situation, and asked for their patience. Each management team member called two dozen of our most frustrated customers and asked them to stick with us—most of them did. We also used newsletters, letters, and other member communications to make sure our progress in areas like the out-of-stock rate didn’t go unnoticed.
Vendors were, of course, a key focus of communication. Our inability to pay them on time resulted in stopped shipments, which in turn lowered our revenues and our ability to pay—a potentially fatal cycle that had to be broken. We sent all our vendors a letter laying out the situation and how, with their help, we intended to change it. We followed the letters up with phone calls to negotiate payment plans and ask for patience. These efforts, and the fact that we had established many good long-term relationships, resulted in critical support from our vendors.
We talked to our bank early and often. We wanted them to get to know us, realize our commitment and competence, and have enough confidence in our relationship to give us a little breathing room when we needed it and trust us for the long term. We presented detailed financial and marketing plans specifying the actions we were taking to turn the company around.
Keeping our word
The best way—the only way—to build the trust of the bank (or for that matter, the vendors, members or employees) was to keep our word. We were very conservative with our projections for the bank. No matter how optimistic we were internally, we gave them only numbers we were absolutely sure could be achieved. Using this approach, we were able to reestablish our strong relationship with the bank. We didn’t have room for a false step in rebuilding our credibility, and we knew the bank was more interested in progress toward a sustainable recovery than in an impressive, but temporary, overnight fix.
Our strategy was similar with vendors, members, and employees: to rebuild their trust, we were careful to promise only what we could deliver. At first we could make only small promises—meeting our payment plans with vendors, making steady improvement in our out-of-stock rate and service, and not cutting employee wages, for example. As we kept those promises, the confidence and commitment of these groups grew, and our recovery gained momentum.
Simpler is better
When you’re in the situation we were in, you have to change things. It was obvious that our problem resulted from trying to do too much, so we had to do less. We looked at everything that we had going on and divided it into two groups—what we knew we could do well and what wasn’t working. We knew how to be a successful cooperative, so we quickly reopened our co-op to new members. Working with co-packers and mainstream personal care sales were expensive struggles, so we phased out co-packers and exited underperforming Aura Cacia product lines. The side business of developing new grinding technology was clearly not within the co-op’s core capabilities, so we got out of it. The boxed dinner portion of Simply Organic was growing, but it was significantly different than our staple lines of herbs, spices, and aromatherapy. We made the decision to sell the side dish and boxed dinner lines and focused on the seasonings and spices, which are compatible with Frontier’s core competencies.
The overall strategy behind these and many similar decisions was to refocus on the traditional businesses of herbs, spices and aromatherapy that had been the basis of Frontier’s success for almost 25 years. We knew we could do those things well because we had done them well before. But to do them at all, we had to find ways to undo—quickly—the damage caused by losing $9.8 million in the previous year.
By the numbers
Our most pressing need in the first days of the recovery was to reduce expenses. There were dramatic staff reductions as we instituted a leaner management team and pulled back from mainstream introductions. In the end, salary and benefit costs were reduced by $4.7 million, almost entirely from management and marketing positions and without cutting pay rates.
Policy changes were instituted to reduce staff spending—cell phone users were cut from 42 to 10, and the travel policy was made stricter, for example. There were travel budget and lease savings from the closing of the Boulder offices. We swallowed some unfavorable financing terms to buy machinery to reduce our co-packer costs (and dependence). We negotiated out of long-term contracts whenever possible and reduced our inventory from $13 million to $8 million over a year’s time. Simplifying operations also saved significant amounts of money by reducing our need for professional, legal and consulting services.
Even with these efforts, cash flow was still in critical condition, and strict, daily cash monitoring was necessary. Allocating our meager resources—and dealing with frustrated creditors—demanded the attention of not just the finance staff, but top management as well. All new spending and previously budgeted discretionary spending had to be pre-approved by the CEO and Vice President of Finance, a level of control that was inconvenient but necessary.
Even our absolutely essential expenditures couldn’t always be made. We formed a cross-functional vendor payment team, with representatives from purchasing, finance, operations and executive management, to prioritize vendor payments and other allocations of our scarce funds. With out-of-stocks at more than 30%, it was crucial that we stretch the amounts available for vendors as far as possible. Some especially supportive vendors allowed credit when they logically shouldn’t have—but their confidence was justified when we reduced past due invoices from $4 million to zero a year later.
As our situation improved, we continuously renegotiated with the bank for better rates and more flexible terms. We were able to generate $1.5 million in cash by carrying back our losses for tax purposes. We were even able to convince the bank to make a separate loan advance in anticipation of the tax refund.
We still had to scrape up every cent of cash we could. As long-time investors in Northcountry Cooperative Development Fund (NCDF), we asked for and got that investment back. NCDF then worked with us to secure additional funding in a three-way arrangement with the NCB Development Corporation, NCDF, and us. This additional funding allowed our primary lender the flexibility to ease some of our borrowing restrictions with them and made even more cash available. In this case, cooperative spirit paid big dividends—although the NCDF investment itself didn’t meet all our needs, their help set off a significant chain reaction.
Always looking ahead
After the frantic responses necessary to simply stay afloat during the most severe days of the crisis, we consciously increased the timeframes of our management decisions and, while still exercising extreme caution and recognizing our vulnerability, began to think strategically again instead of reactively. We forced ourselves to develop a three-year strategic plan even though there was really no time to do it. We knew we had to keep the company growing, even though it had to be slow, careful growth.
This forward-looking mindset built confidence internally and showed vendors, lenders, and members that we were headed in the right direction. Our planning set in motion the preparation for expanding the distribution of other manufacturer’s products so it could be implemented quickly when the money became available. It also helped us clarify our goals for the Simply Organic line and allowed us to more quickly roll out new products.
The actions we’ve outlined here worked! Operating income for fiscal 2004 is on track to equal or exceed our average for the five years prior to fiscal 2002, and all other performance measures, including our out-of-stock rate, are strong. But in the end, the most important lesson we’ve learned is to devote ourselves to running Frontier so that we never have to face this kind of crisis again. Carefully selected board and management is a key component of success, but their interaction with the co-op members is even more crucial. The board and management must listen to the members—and the members must pay vigilant attention to what their co-op is doing.
The management techniques of success are, for the most part, simply less desperate versions of the ones we used to regain our financial footing. Whether recovering from or avoiding a crisis, certain fundamentals provide results: proper staffing, honest communication, trustworthiness, resolute focus, financial responsibility, and vision. It’s always about basic good business—but a financial crisis requires finding new, creative solutions at warp speed. We’ve learned a lot during our recovery. And we plan to use everything we learned to stay out of situations that would require us to need another recovery. We will be aggressive and creative, but never take any action that, if not successful, could risk the existence of the co-op.