Tucson Co-ops Recover
After fifteen months of debt-heavy operations, Tucson's Food Conspiracy Cooperative closed its 24,000 square foot natural foods supermarket in mid-December. Hoping to save its original store, now twenty years old, Food Conspiracy declared bankruptcy and filed for Chapter 11 (reorganization) protection.
The previous month had seen the resignation of Vince Ciccarelli of Tucson Cooperative Warehouse (TCW), who had overseen the development of the new store. TCW had extended a half million dollars in credit to Food Conspiracy, and in addition had guaranteed Food Conspiracy loans totaling $600,000. Ciccarelli's resignation was followed a few days later by the TCW board of directors hiring as his replacement the former Food Conspiracy manager, Jim Tompkins.
This section of Cooperative Grocer looks at the Tucson events from three angles:
- First is a summary of the recent history of the principals -- a story both complicated and controversial.
- Secondly, we interview a major personality in the events, Vince Ciccarelli.
- Finally, Jim Tompkins, now heading Tucson Cooperative Warehouse, describes the store's demise and his prognosis for the distributor.
Over the past several years, three forces entwined to launch a high risk attempt to capture co-op market share in Tucson, ending in the recent closing and major losses:
- Food Conspiracy: Then a 5000 square foot retail co-op with annual sales of roughly $2 million, in 1987 Food Conspiracy saw 16 years of growth reversed and began losing money when a competitor natural foods store was opened in Tucson.
- Tucson Cooperative Warehouse (TCW): The regional distributor serving co-op retails and buying clubs, and whose largest customer had been Food Conspiracy, TCW also faced declining market share.
- Vince Ciccarelli: He entered the scene in 1984, his first position with a food cooperative, when he was hired to turn around a declining TCW.
After initial success at TCW, where he was the first general manager, Ciccarelli's began planning for TCW's relocation to a new warehouse facility. In addition, Ciccarelli expanded his activities during 1986 and 1987 to become chief executive officer of most of the coop distributors in the country. At the time, several of these regional cooperatives were in decline, and most of them were in need of stronger management resources. Their local boards and management signed agreements with Ciccarelli through Central States Cooperatives, the warehouses' national organization, which he headed until January 1988.
In reality, the fortunes of Vince Ciccarelli, at least in co-ops, also peaked in 1987, although on the local level the denoument was not to take place until 1991. The management agreements Ciccarelli engineered through Central States Cooperatives had been terminated by most of the other co-op warehouses by January 1988, leaving only the four smallest distributors still paying for his services. These ties dwindled over the next couple years to Ciccarelli's only remaining contract, with the Federation of Ohio River Cooperatives (FORC) in Columbus, Ohio.
Back to Tucson
Ciccarelli's success in turning around a losing operation at TCW was sustained through several years of sales growth and profitability, and relocation in 1988 to a newly built 44,000 square foot warehouse. But the major financial commitment represented by the new building reinforced pressure to accelerate sales growth at a time when Food Conspiracy was hurting, and as another major retail co-op customer, Gentle Strength, began buying more from Food For Health, the private distributor in nearby Phoenix.
Food Conspiracy hired Michael Copley in 1987 to help it deal with the threat to the co-op from the entrance into the local natural foods market of a major new store, Reay's Ranch Market. This competition was also a threat to TCW, since Reay's Ranch Market purchased primarily from Food For Health. Copley and the Food Conspiracy board of directors agreed that their best response would be to actively seek greater co-op market share through the launching of a new, larger store. While making plans for Food Conspiracy #2, the co-op also made operating changes at Food Conspiracy #1 to reduce expenses, maintain sales, and improve margin, including changing the pricing structure from surcharges for non-members to discounts for members.
Copley had managed New Life Co-op Warehouse in Santa Fe, New Mexico, prior to its closing in 1985. He and others in Tucson could take inspiration from another major TCW customer, La Montanita Co-op Supermarket, which in late 1987 had opened a new 9000 square foot facility in Albuquerque, and from Gentle Strength Co-op, which had opened its 12,000 square foot store in 1985. Copley's site analysis, particularly on rental costs and capital investment requirements, showed that at this scale it was less expensive for Food Conspiracy to operate a remodeled older "conventional" supermarket than to build a new but smaller facility.
In late 1988, when Michael Copley first approached the National Cooperative Bank on behalf of Food Conspiracy for financing a second store, the Bank rejected the application and suggested that they work through Ciccarelli. Financing construction of the new TCW facility, as well as Ciccarelli's activities on behalf of the other co-op warehouses during 1986 and 1987, had led him to extensive dealings with the National Cooperative Bank and its affiliate NCB Development Corporation. That original Food Conspiracy proposal was based on a 16,000 square foot facility. NCB subsequently provided $600,000 for a 24,000 square foot Food Conspiracy store, financing guaranteed by TCW. Food Conspiracy's equity contribution to the package was $40,000 in member loans and a net worth of $250,000.
The initial management services agreement between Food Conspiracy and Tucson Cooperative Warehouse was made in December 1988. Vince Ciccarelli, while continuing as head of TCW, became chief executive officer of Food Conspiracy. This agreement also involved other TCW staff members, who provided training and assistance to Food Conspiracy manager Michael Copley and other retail staff. In late 1989, the TCW board of directors agreed to guarantee the Food Conspiracy loan for a new store. By then, the target site for FC#2 had shifted to a former Safeway facility only two miles from the existing Food Conspiracy store. Copley and Ciccarelli set an opening date of February. But not until that month, and then only after Ciccarelli threatened to leave Food Conspiracy, did he and the retail board of directors reach an agreement leading to the new store. For the delays prior to that agreement, Ciccarelli points the finger at the Food Conspiracy board, and for those in the months which followed, at the National Cooperative Bank. FC#2 didn't open until September 1990.
Given the delays, one could say that the venture began losing money even before the opening date. At 24,000 square feet, the store was huge, especially for an organization and personnel that had no experience with that scale of retail natural foods operations. The key staff at the new store had not previously worked as a team and, except for a few such as Copley and the original finance manager, had no co-op experience. The store also was seriously undercapitalized from the beginning, according to all accounts. As the store struggled with these operating handicaps, TCW kept extending more trade credit to a cash poor Food Conspiracy -- a half million dollars' worth in the first year.
Copley left in January 1991. Ciccarelli continued as head of both TCW and Food Conspiracy until March 1991, when he left his Food Conspiracy position. A four-person management team replaced him, but he soon came back in an advisory role, then again in July as CEO for over two months while Food Conspiracy searched for a store manager. Also in July, although TCW members weren't told about it until a few months later, one of TCW's five directors resigned in protest of actions by Ciccarelli.
Ciccarelli left Food Conspiracy after Jim Tompkins was hired in mid-September. Within two months, Tompkins concluded that the store could not be saved, and he resigned. During a dramatic TCW membership meeting weekend in early November, the depth of financial problems at Food Conspiracy, and of TCW's obligations, was fully revealed. Ciccarelli resigned, offering to stay until a successor had been found; the TCW board of directors responded by hiring Jim Tompkins within one week. A few weeks later, in mid-December, Food Conspiracy closed the new store and then filed reorganization papers with the bankruptcy court.
For Cooperative Grocer, I interviewed Vince Ciccarelli and Jim Tompkins in January.
Exit Vince Ciccarelli: Interview
Cooperative Grocer: Are you lining up other work for yourself?
Vince Ciccarelli: I'm still working for FORC. We are working on opening a store in Cincinatti. Also, since Mountain Warehouse closed down, our business has increased substantially there. We tried to have the Cincinatti store open in early 1992, but we couldn't get all the pieces together in time, so we postponed the opening until fall. I'm still working with them on a daily basis and probably will concentrate on inventory control with their purchasing department, for the next couple months. In the meantime, I have sent out resumes, I've gotten some calls, and a couple of opportunities have arisen. [Later that month, Ciccarelli took a position as sales manager with Food For Health, the Phoenix distributor. - Editor]
Cooperative Grocer: Let's review the background to the Food Conspiracy story, starting when you joined TCW.
Vince Ciccarelli: I joined TCW in October 1984. At that time, TCW was in bad shape. They had lost about $120,000 in their preceding fiscal year, ending in June. And during the next twelve weeks, they had lost an additional $60,000. Their line of credit from a local bank was expiring soon, and the bank had already told them they would not renew it.
With the board and management team, we turned that around and started making money. We ended up that first year recapturing most of that $60,000 loss, although we did lose a little. From them on, we had a pretty successful string. While we were building up our reserves and getting ourselves in shape to look for a better location, the state of Arizona decided to build a highway through where the old TCW building was. We were forced to move about a year or a year and a half sooner than we would have liked to. The board made a pretty gutsy decision to allow us to move into a facility that was large enough to let us grow over the next several years. It was a 44,000 square foot warehouse that we had built for us, and it turned out to be a pretty good move.
Toward the end of 1988, we started running into some problems. Food Conspiracy, which had been our number one account, slipped down to number three or four because of Reay's Ranch Market moving into Tucson and really beating the heck out of them. Food Conspiracy started looking for a new location, but when they went to the bank, they were told that their financial strength and management strength were such that the bank wasn't interested. They couldn't get a local bank or the Co-op Bank to fund it, or reach agreement with a landlord. By the time they came to TCW, they had already looked at a couple locations. Food Conspiracy's volume with TCW was slipping dramatically. Reay's Ranch Market was dealing with TCW's competitor, Food For Health, so we were losing a good portion of the market in our home city of Tucson.
Cooperative Grocer: You moved into the new warehouse in 1988. What effect did moving earlier than you wanted to have on TCW?
Vince Ciccarelli: We would have had to do it eventually. But it forced us to use our capital sooner than we were comfortable with. The move really didn't become a problem until we saw our sales decline. Two things happened: the decline from Food Conspiracy, and Gentle Strength Co-op decided to move most of their business to Food For Health in Phoenix. TCW was really showing a weakness in the retail sales area. We had to do something to ensure having the retail sales needed to balance buying club business, which was doing well.
We could either open up our own retail, which would have been the ideal solution; or face the prospect of losing Food Conspiracy business if Reay's Ranch Market expanded and really dominated this market. And without the support of Gentle Strength, we were looking at not having a major retail customer in the entire state of Arizona. I proposed that TCW open up a TCW owned and operated store. Our cash and carry, which was a small part of the TCW building, was a service that we did not promote and that was very low key so that we would not compete with Food Conspiracy. It was doing well, around $300400,000 in yearly sales just by word of mouth. With that kind of base, if we opened up our own retail, we wouldn't have to worry about competition coming in and taking away business that we had built up.
However, we had one member of the TCW board, a buying club person not really into retailing, who was very opposed to TCW opening up its own store. The feeling, which I never did understand, was that such a store would not become a cooperative venture. I can remember meeting after meeting where we discussed this. Because of that opposition and the other board members not wanting to fight it, TCW needed to find another way to ensure that we would be able to get the retail sales volume we needed. I remember discussions about whether we should pursue sales to conventional stores. We decided we wanted to help support the co-op growth.
When Food Conspiracy came to TCW, we decided we would work with them and help them open another store. The initial deal was that we were just going to provide management services and management expertise. We signed an agreement in December 1988. Michael Copley was their manager. I worked with him and reviewed the lease on a store they were planning to get. But we found that they could not get the funding to open the store without the support of TCW. Then, in late 1989, we decided at TCW that we would guarantee the loan from the Co-op Bank so that Food Conspiracy could open up a new store. The idea was that this store would serve as a model to show that natural foods cooperative wholesalers could work with the retailers to help them to compete in the market, to expand, to take on financial burdens they wouldn't be able to handle by themselves.
We worked out an agreement whereby, to safeguard TCW's interests, we added two members to the Food Conspiracy board of directors. We would supply them with management services until they were able to take over the total responsibilities of the loan and the lease. The CEO would be someone recommended by the TCW board and approved by the Food Conspiracy board.
Early on, the budget projections that Michael Copley and I put together showed that we needed $750,000 to open up Food Conspiracy #2. The Co-op Bank said the maximum they would lend was $540,000 plus a $60,000 line of credit based on the amount of financing we could get from member loans. Michael and I estimated that we could get no more than $50,000 from the members. That meant that we were going to start off somewhere between $100,000 and $150,000 less than we really felt we needed. We went back and looked over everything and started making cuts; we made cuts we didn't want to make but felt we could get by with, for example not having scanners at the checkouts. The revised business plan called for $300,000 in inventory, $127,500 in working capital, $99,000 in leasehold improvements, and $2 5,00 for equipment and fixtures.
In late 1989, the TCW board approved the loan agreement, and the Food Conspiracy board approved the lease. We were going to go for an opening by February 1990. The loan package had been sent to the Co-op Bank, and they were in their final stages of review. The only piece that was not ready that the Bank wanted was an agreement between TCW and Food Conspiracy spelling out the terms of the loan guarantee and the management services agreement.
"This store would serve as a model to show that natural foods cooperative wholesalers could work with the retailers to help them to expand, to take on financial burdens they wouldn't be able to handle by themselves."
But as the board started changing, as pressures were brought to bear on different members, they began requestioning a lot of past decisions. It seemed like every meeting we had to go through the question of whether to have a natural meats section, which we needed to compete with Reay's Ranch Market, and which the majority of our members wanted. It was not just the meat issue; it was very wearing to be constantly bogged down in small issues. By changing board members, we kept changing the direction. One of the quotes I liked best, and it was not original to me, described Food Conspiracy as a group in a vessel that was taking on water and in danger of capsizing, while the crew wanted to debate the color of the lifeboats.
We were ready to sign the agreement between Food Conspiracy and TCW for the management services contract, but then a hitch developed. There were questions about parts of the agreement, "This store would serve as a model to show that natural foods cooperative wholesalers could work with the retailers to help them to expand, to take on financial burdens they wouldn't be able to handle by themselves."
and there was an attempt to disengage our legal counsel with a different legal counsel for Food Conspiracy. It started a whole chain of events that kept delaying, at each board meeting, the finalization of that agreement, which was needed for the Co-op Bank to process the loan. This went on until February 1990, when, at a Food Conspiracy meeting, I announced my resignation from the management services program for Food Conspiracy. I informed the board that because of their delays, from November to February, it was my opinion that they had jeopardized the ability of Food Conspiracy to be successful.
I left that February meeting feeling that TCW would have to act on its own. The next day, a Food Conspiracy director came to TCW with a signed agreement from the Food Conspiracy board concerning the management services contract. I then made what was probably my biggest mistake, going against my instinct and better judgement, and signed it. We then processed the agreement with the Co-op Bank. But TCW was going through a slow period, and the Co-op Bank was hesitant. They also sent the agreement to new legal counsel and things dragged on and on. The store opening ended up being delayed until September, so late that we were paying rent for three months before opening.
Cooperative Grocer: It sounds like the delays were really a different factor than the inadequate loan capital.
Vince Ciccarelli: There really were three reasons why Food Conspiracy II didn't make it: Number one was a lack of capital. With another $100,000 or $150,000, it might have been able to make it, but I'm not sure even that would have done it.
The second one was the delays, and there were two: the management contract, which eventually got signed with very minor changes; and a delay with some renovations just before opening. But the delay on signing the management agreement was the major one.
The third reason was the lack of consistency in vision and continuity in what we hoped to do.
The store was extremely busy during the opening period. But sales hit a level, and we had been unable to get the capital we needed to really stock the shelves, to get the promotional advertising and merchandising that would bring the sales up. But from when we opened until March, when I left, the losses were reduced each month. So, while the store was losing money, it was gradually reducing the loss. The biggest thing was that we had a tremendous startup expense that we were carrying through.
Later, however, we found out we had a security problem - a cashier was siphoning off considerable dollars. But without scanners and some other things we needed, we didn't have as much potential to keep on top of the numbers.
In January 1991, Food Conspiracy had its annual meeting and directors elections. Of well over 3000 members, about 200 voted. By a couple votes, the board president was not re-elected, and two new board members were elected. In the next few weeks it became obvious that the new directors and I would not be able to work effectively. The board and what I can only call its nonsense was becoming a constant irritation to me. It affected my health, my blood pressure started to rise.
We also began running into real problems with the finance department. The numbers were faulty and not timely; the inventory was wrong. The most frustrating part of this whole time was my inability to get numbers that would stay. We replaced the finance manager with what was unfortunately probably the worst hire in my entire career, someone recommended to me by people I respected. But he was much worse, and within six weeks we terminated that person.
In March, concerned over my health, and to find someone more in agreement with the board, I resigned from Food Conspiracy. The management agreement with TCW remained, however. The store already was delinquent in payments to TCW. Although they could have done so, the TCW board did not want to take over operations of the store. Food Conspiracy and TCW replaced me with a management team of four people; two members of this team, the TCW finance and purchasing managers, were also the appointees to the Food Conspiracy board under the management services agreement; the others on the team were the store managers from the two Food Conspiracy stores.
Around the end of April, the management team asked me to help them prepare a new business plan and loan proposal for Food Conspiracy to submit to the Co-op Bank for additional funding. I would have no authority, just be advisory. In May I started doing number crunching for them.
In the meantime, the numbers indicated that we had severe problems. The earlier decline in losses was no longer seen. The loss went up in April, and in May went up even more. In mid-June, I went to the TCW board and to the Food Conspiracy management team. I told them I thought the store's management team approach was not working and that a new CEO was needed. Out of pure desperation, they turned to me to take over while they found a new CEO. I agreed to go back effective July 5 for not more than 90 days. On September 14, they hired Jim Tompkins, and I left soon after.
Cooperative Grocer: Looking at the personnel side, was the experience needed to run a natural foods supermarket there? In retrospect, was that a weakness in the whole operation?
Vince Ciccareli: I think it definitely was. When we could not get the capital we needed, one consequence was that we were unable to attract the qualified, experienced retail people. There was also a problem with that in the board's reluctance, which they eventually had to overcome, in hiring people who didn't necessarily have a cooperative background. It's very difficult, as you well know when you see all the co-op stores looking for qualified personnel, to find the kind of people who have natural foods cooperative background and to attract them with the kind of salary co-ops are able or willing to pay. We ran into the same situation. Also, we wanted to try to utilize as many of the staff at Food Conspiracy as we could, giving them the opportunity for advancement. As for the management team, they were qualified individuals who I had respect for. I had more of a problem with the team approach, especially for a store that was having serious problems. With four individuals, each with a perspective based on their area, plus two store managers, it's hard to get the big picture. And with a board as divided and inexperienced as the Food Conspiracy board was, the management team doesn't get the kind of guidance it needs.
A co-op needs consistent, firm board and management agreement on goals. I see as a real weakness of co-ops that the board changes yearly. Also, good people are not necessarily good for the business. Co-ops seem to say, "If you want to run, you can be a director."
Enter Jim Tompkins: Interview
Cooperative Grocer: Jim, give us a little background about your experience prior to being hired by Food Conspiracy.
Jim Tompkins: I had been in the food industry since 1951. I had department manager experience in all major departments of a large supermarket, with Red Owl Stores Inc., a large Midwestern grocery chain, up to 1963. I then spent four years in store management with the Kroger Company. In 1967 I started at wholesale with Super Value Stores Inc. I worked for six years as a retail counselor, providing supervision to supermarket owners, and one year in direct supervision of corporate stores.
"A lot of basic mistakes were being made.... The store still would have worked had sales projections been anywhere near accurate."
I then went to a retailer owned co-op in Little Chute, Wisconsin, called the United Grocers Cooperative Association. I started as a retail counselor, then spent three years as director of sales and merchandising, then was promoted to director of retail development. I was in charge of all phases of new business. This included conducting market surveys, site selection, and supervision of the engineering and construction department. The new management team took the warehouse from approximately $30 million in 1973 up to around $100 million in 1981, when it merged with Roundy's Inc. I left shortly after the merger with Roundy's. I took a position again with Red Owl Stores Inc. and was manager of Red Owl's Green Bay division. Red Owl sold out to Super Value in early 1989 and ceased to exist. I then went to work for Scrivner Inc., the nation's third largest grocery wholesaler, in their Iowa Division, and was promoted in 6 months to director of sales and development. I left rather than move to an Iowa town of 1800 where the warehouse is located. So that's how I came to good old Tucson -- to quickly cover forty years! I've had extensive experience in supervising retail stores, nine years with a progressive cooperative, and extensive management experience in all phases of wholesale operations. The natural foods aspect is my learning curve right now. The operating principles are very similar.
Cooperative Grocer: You answered an ad for the Food Conspiracy position. What was your assessment when you first came on?
Jim Tompkins: What I saw was ample opportunity to show improvement. There were a lot of basic mistakes being made there, and I could see that I could improve it relatively quickly. I felt the single biggest obstacle or question was whether we would be able to maintain adequate capitalization.
There were several areas to tackle. Number one by far was analyzing the departments and controlling expenses. Management standards and disciplines were not very strong at all - as far as performance, cleanliness, product appearance. It was a poorly run store. The smaller Food Conspiracy store was fairly well run but did not really have any expense controls. We turned it around, and it was making money at the time we closed the second store.
What I found at Food Conspiracy #2, analyzing it in my first week there, was a labor expense of 28-30 percent: way out of line. The food service area was big enough to handle the deli/restaurant or a properly designed bakery, but not both. The bakery ovens were pizza ovens and were never meant for high production. With the space and oven limitations, they were spending close to $800 per week to produce $700 worth of product. It didn't make a lot of sense, and I was surprised no one had noticed that. Sales didn't even cover labor, much less any gross profit. As soon as I got that measured, I closed the bakery and had those items shipped in. I also took the food service area and expanded it a bit and taught them a bit about pricing - they were woefully underpriced and had no portion control. And since they were only serving lunch and dinner, when historically in supermarket sit-down delis, breakfast is the second largest period, we were starting a breakfast program at the time it became necessary to close the store.
The whole service area was way too labor intensive. The meat department had 7 percent of sales from 48 feet of service case to staff, and labor was 40-45 percent of sales; it should have been converted early on to self service. It would have cost about $15,000 to convert to self service, but by the time I got there that $15,000 wasn't available except by taking it out of merchandise. Not converting the meat department probably cost a minimum of $150,000 in losses.
Also, in the design of the store, there was a separate customer information station for vitamins and herbs, another one for general information way at the end of the store, and the chief cashier who supervised the front end was isolated from the front end in an office away from it -- all of which resulted in too much labor being allocated to those areas and not enough supervision in the front end. I had to build an old fashioned store office and consolidated those duties and actually gave out better information by having it staffed all the time, and at less than 25 percent of the labor expense that it had been. And there were things like teaching the head cashier how to schedule hours on a spreadsheet; we pulled probably another 100 hours out of the front end. They also had two fulltime maintenance people, yet the store was dirty. I never did figure out for sure what those fellows did! We got in a cleaning service for a tiny fraction of the cost, had department heads spot mop their own, and saved about $800 per week there in maintenance. Overall, by the time it became obvious that we were not going to get additional financing, between the two stores I had pulled out close to $3200 per week in excess labor costs. We were streamlining our operations. The larger store had between 300 and 400 vendors, which made it very labor intensive; I consolidated that to about 25 vendors and put good receiving policies in place.
When I came on the store had already posted most of its eventual losses. A couple weeks after I was hired I had a conference call with the TCW board of directors, in which they approved my request for an additional $60,000 in short-term credit for merchandise. My eventual goal was to recapitalize the store through what is known as the U-7 provision of the securities code. This is a law in effect in 17 states that provides a simplified way of recapitalizing a business without full Securities and Exchange Commission disclosures and avoiding a lot of the time and legal expense otherwise needed to recapitalize. It was designed by the SEC for capital issues under $1,000,000. The state securities commission supervises it. I went up to Phoenix with the Food Conspiracy accountant to investigate this.
Taking the losses already experienced and putting those debts on an amortization schedule, even at nominal interest rates, things were very marginal. But getting, say, a $1,000,000 issue of preferred stock at a reasonable rate of interest and paying off vendors in preferred stock, the business could very well have done that. But it would have taken probably until April to get that done, and there was just no more short-term money to be had before the debt burden closed it down. The National Cooperative Bank turned down additional short term money that I had applied for, and at that point the future of Food Conspiracy #2 was pretty much sealed; there was no other place to go.
Cooperative Grocer: You decided to leave at that point
Jim Tompkins: Yes, I resigned three or four days before the TCW membership meeting in early November. I would have stayed if the short-term capitalization and my new business plan could have been used. But it all would have had to happen without too many hitches. Grocer's Supply in Houston, where I had been negotiating prior to the Food Conspiracy opportunity, recontacted me in late October. I accepted a position with them and gave my notice to Food Conspiracy, simply because I felt that the obstacles did not make for a good long term prognosis for me. But I decided to let that go when the TCW board asked me to take my present position. I was with Food Conspiracy a total of 8 weeks.
Cooperative Grocer: What was the history of sales and operating losses at Food Conspiracy #2?
Jim Tompkins: The store ended up losing over $850,000. In the initial period, October through January 1991, they really did not have reliable financial information, because they did not have a reliable accountant - they went through two of them. By that time losses amounted to about $500,000. The losses were intensified during the summer months, then were reduced slightly heading into the fall. The lowest loss, a negative $23,000, was in October, my first full month.
Sales had started in the mid-$50,000 per week range. In the summer this dropped to the mid-$40,000 range. Sales in the high $40,OOOs seemed to be about the maintainable level, given that the store was not properly inventoried. After the summer, which is a slow time in Tucson, the sales never did really jump back.
I had put together a comprehensive business plan for the recapitalization proposal. I had an advertising plan ready; there had been basically no advertising since the store opened. The weekly sales level needed to be in the mid-$60,OOOs. And that would have been on a U-7 basis, because there really wasn't any other way to amortize the debt appropriately or realistically.
In the store's first year, that sales level could have been achieved with adequate management training. The problems would have to have been addressed early on. There wasn't any effort taken to control costs and address what turned out to be design errors. The store still would have worked had the sales projections been anywhere near accurate. Only about 55 percent of the projected $5.4 million in sales were available to start.
Cooperative Grocer: You're saying that, operating performance aside, the original estimates were badly inflated?
Jim Tompkins: That's right. A good portion of the losses could have been prevented. Had the sales estimates been realistic, had the meat department situation been addressed, had people been properly supervised, all by early 1991, in my opinion at least 70 percent of the losses could have been avoided.
Cooperative Grocer: What did you find at TCW when you began there in November?
Jim Tompkins: TCW's operations are very well run. It is well capitalized by the members, and it has an excellent management staff in place. Its biggest problem, obviously, is the Food Conspiracy situation. TCW had guaranteed Food Conspiracy's loan from the Co-op Bank. TCW had also extended a massive amount of unsecured short term credit to Food Conspiracy. The Co-op Bank, which also had a line of credit out to TCW, was not allowing TCW to advance any further trade credit to Food Conspiracy. Unfortunately I arrived on the scene about two or three months too late to achieve a successful turnaround.
Since I came on board as TCW's general manager, we have done a number of things to assimilate the obligations we have assumed as a result of the Food Conspiracy expenses:
- Following Food Conspiracy's bankruptcy filing, which we recommended, we have negotiated favorable extended terms and interest rates to assume their note from the Co-op Bank.
- We rebudgeted the last half of our fiscal year (which ends June 30) to remove all discretionary spending possible.
- We have consolidated some functions to reduce our payroll.
TCW negotiated a plan whereby Food Conspiracy would participate in repayment of the NCB note as payment for inventory and fixtures at Food Conspiracy #1. At this writing, this looks like a positive step for both parties. Sales at Food Conspiracy #1 have increased over 50 percent since FC #2 closed.
TCW has taken on a great deal of additional debt, but we have planned and negotiated to assume it in a manner that we can handle. I have been refocusing a lot of our efforts on increasing our marketing thrust. We will more aggressively be seeking new business and new accounts to insure that TCW continues to grow and prosper.
Tucson Followup: More Development Lessons
I would like to thank you for your descriptive and judicious treatment of the Food Conspiracy article and corresponding interviews in your March-April issue of Cooperative Grocer.
Having resigned my position as Chief Operating Officer of the co-op, hardly three months after the opening of the store, doesn't mean that I had not realized the probable outcome before my departure.
Now, more than a year removed from this unfortunate personal episode and still reluctant to criticize those in final decision making positions, I simply wish to impart from my experience a few critical reminders in hopes that similar co-op catastrophes may be diverted in the future.
1. Business plans are conceived, among other things, as an aid in identifying market opportunities, not as a result of them.
2. Market realities are to be observed, measured, weighed and even judged, but they are never simply proclaimed.
3. Natural foods markets are measured accurately by a close examination of populations, demographics and a sensitivity to the cultural aspects of this marketing phenomena, as was done at Food Conspiracy. An analysis which does not present the desired picture does not in itself give license to alter its underlying assumptions.
4. Capital budgets are prepared after careful examination of all the facts regarding store concept, design, layout, equipment and installation costs, not before.
5. Recognition of insufficient capital does provide sufficient cause to abort the risk.
6. Managements which understand and nurture co-op business cultures have a greater chance to succeed than those which attempt to ignore, control, or deny them.
7. Business opportunities are available to those who exercise a reasonable amount of caution. A gamble is not the same as a calculated risk.
I thought these considerations to be reasonably self-evident before and even during my experience with Food Conspiracy. Having expressed similar concerns at times along the way, I have criticized myself too long now for accepting illustrations or illusions to the contrary. Should I have one final reminder to be imprinted in the minds of future co-op leaders, it would be:
8. If something doesn't feel quite right about the project, something probably isn't quite right about the project. Trust your own knowledge, experience and intuition.
To those who aided me along the way, and to those who may have known my doubts as events unfolded, I can only give my deepest regrets for its outcome, my hopes for their future success, and my deepest appreciation for knowing the true colors of this story.
Sante Fe, New Me