Our Community Market: A New Kind of Food Store

A Feasbility Study Prepared by:

The ICA Group 1330 Beacon St., Suite 355 Brookline, MA 02446 www.ica-group.org TABLE OF CONTENTS

Acknowledgements ...... iii Executive Summary ...... iv Our Community Market: A New Kind of Food Store ...... 1 Introduction ...... 1 Store Overview ...... 3 Value Proposition ...... 3 Competitive Landscape ...... 5 Cost Structure ...... 6 Distribution ...... 9 Our Community Market Produce Prices ...... 9 Cross Dock Facility ...... 10 Cross Dock Facility Costs ...... 12 Operations ...... 13 Annual Store Costs ...... 13 Store Labor ...... 13 Administration ...... 15 Merchandising ...... 17 Limited Selection...... 17 Limited Selection: Chicken Example...... 18 Store Format ...... 18 Co-Branding ...... 20 Financial Feasibility ...... 22 Sales Projections ...... 22 Basket Size & Customer Visits ...... 22 Gross Margin ...... 25 Cost Structure ...... 26 Participation & Governance ...... 27 Multi-Stakeholder Cooperatives ...... 27 Development ...... 31 Capitalization Strategies ...... 31 Market Analysis ...... 35 Appendix A: Pricing Strategies ...... 38 Appendix B: Distribution ...... 39 Appendix C: Weekly Operational Data ...... 43 Appendix D: Annual Store Operations Costs at Maturity ...... 44 Appendix E: Consolidated Financial Projections ...... 45 Appendix F: Central Administrative Expenses ...... 47 Appendix G: Typical Employees per Hour ...... 49 Appendix H: Community Engagement Strategies ...... 51 Appendix I: Employee Engagement Costs ...... 54 Appendix J: Governance Models ...... 55 Appendix K: The Cooperative Think Tank...... 58

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Acknowledgements We want to acknowledge the groups that helped make this work possible with their generous donations, the Eastern Corridor of the National Cooperative Grocers Association, NCB, and Capital Impact Partners, as well as cooperatives that provided funds: Seward Co-op, Mississippi Market, New Pioneer Food Co-op, Outpost Natural Foods, and Equal Exchange.

We would also like to acknowledge the many groups and organizations that helped work on this project. Our thinking on the difficult questions around distribution was headed by a team that included Michael Rozyne, Jesse Singerman and Sue Futrell from Red Tomato, while the work on governance and consumer participation was led by Mark Goehring and Leslie Watson from the CDS consulting cooperative. Finally, we would like to thank the members of the think tank for their willingness to share information and provide feedback on this highly collaborative project.

We would also like to thank Cabot for generously allowing us to use their “Our Community” name and logo, which was designed in house, but never commercially used. And finally, we would like to thank Ruffin Slater of Weaver Street Market and Walden Swanson of CoopMetrics for generously giving of their time and expertise on every aspect of this project.

About the ICA Group The ICA Group is a national not-for-profit consultancy whose mission over that last 36 years has been to promote human and economic development through the creation of employee-owned businesses and community-based projects that save and create jobs for low-income people. ICA believes that all people should enjoy economic self-determination as a means to foster an environment where workers’ livelihoods and the communities where they live are stable and secure. We strive to facilitate such a society by acting as a catalyst for groups working to ensure workers have a meaningful say in their own economic future and through the development of firms that put these ideals into practice. www.ica-group.org

This Project was made possible by the generous donations of the following organizations:

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Executive Summary Despite increased consumer demand, not enough people have regular access to locally sourced, high quality natural foods at their local grocery store. The problem is two-fold. On the one hand, most grocery stores stock very little local food because they are unable, or unwilling, to deal with the limited volumes and less predictable supply from local producers. On the other, many low income consumers live in areas with limited grocery options and where local products are available, they are usually priced beyond reach.

To address these challenges, we need a store that provides year round access to high quality, healthy produce and prepared foods at a reasonable price. This requires the purchasing power that comes with economies of scale, but also a structure that aligns the interests of the firm with those of the communities in which it operates. Food coops, with their commitment to health education, locally sourced fresh produce, and support of small farmers and producers are already part of the solution. However, new food coop development isn’t keeping pace with the grocery sector overall and the cost structures of stand-alone co-ops create price barriers for many consumers – a new kind of food store is necessary.

Our goal was to assess the feasibility of a cooperative grocery store that features How Our Community Market fresh, local foods at prices that match or beat Will Compete conventional stores, while still offering great  Offer high quality fresh and prepared service, a real commitment to the products in a small format store community, and ensuring that people are  Match conventional stores on price paid fairly throughout the supply chain.  Make healthy foods more accessible While it requires rethinking many of the through price and convenient locations aspects of the traditional food cooperative, including scale and product selection, to the question of whether these stores offer something missing in today’s marketplace and are financially sustainable, the answer is a resounding yes – and we believe this finding can be the foundation for growing the cooperative sector to new heights.

This new store, Our Community Market, is a practical business solution to the societal imperatives of health, the environment, community, and the livelihood of the people who produce our food. The most delicious foods can also be the most healthful, sustainable, and affordable; the highest paid employees can also be the most productive; producers who earn a true livelihood can also sustain their communities; and the most successful businesses can also be the ones that achieve

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efficiencies, while engaging their community in a truly meaningful way. Our Community Market will catapult forward the local food system by concentrating retail demand, integrating local distribution, and partnering with small, local, and cooperative producers.

Upon entering an Our Community Market,i customers will be greeted with a burst of enticing produce and delicious grab n’ go options. As they navigate through the store, they will find the perimeter lined with a great cheese section, excellent baked goods, self- service meat, and a fantastic selection of beer and wine. ii For everyday needs, the center store will carry a limited selection of packaged groceries and prepackaged bulk, dotted with specialty local items.

The stores will be located in densely populated residential areas near commuter hubs. They will be small but full service with a focus on high quality produce and prepared items. They will carry the products customers want most in a format that makes it quick to shop, allowing people to pop in more frequently. At 6,000 to 8,000 square feet, the stores will be the same size as a modern drug store and carry roughly 3,000 items or SKUs.

Why it Matters

Over the last 10 years, existing coops and grassroots groups have opened 5 to 10 new stores a year. Yet Whole Foods, between 2008 and 2012 opened an average of 19 stores per year, each with 2 to three times the sales of the typical co-op, and in 2012 had 79 stores under development. Other stores focusing on natural foods including Trader Joe’s, The Fresh Market, and Sprouts also have an aggressive growth strategy. Simply put, if cooperatives are to be a sizable part of the food retail economy, a new approach is necessary.

On a societal level, many people are looking beyond their individual interests toward their communities. Historically, these “we cycles” have been the most opportune moments for developing cooperatives. Our Community Market is inspired by the Blueprint for a Cooperative Decade: Over the next ten years, Our Community Market aims to become the leader in social and environmental sustainability, the preferred business model, and the fastest growing food retailer in the country.

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How We Grow the Co-op Sector

Shopping patterns have changed in response to the recession, as well as demographic shifts and health and environmental concerns. The top four factors affecting which store consumers select as their primary store are: price (97%), cleanliness (97%), high quality produce (97%), and great selection of items, esp. produce, meat, and frozen/prepared items (95%).iii Co-ops lead the field in these last three, but due to a higher costs, they often struggle with price. By doggedly focusing on eliminating inefficiencies that don’t deliver value, Our Community Market will set itself apart as the market leader for fresh products.

More people shop at Publix and Safeway than at Whole Foods because these conventional stores have lower prices. The average 6% to 7% gap between the gross margins of these stores and Whole Foods, is about accessibility. Our Community Market will bring better food to more people by competing on price.

At the heart of the business model are the benefits of scale, we need to capitalize on consumer demand, increase the pace at which we open new stores and establish a cost structure that can push down prices. Unlike Whole Foods and many food cooperatives, Our Community Market will have a cost structure more in line with conventional stores, operating at a 29% gross margin.

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To achieve these cost savings and maintain high quality products and a fantastic customer experience requires overhauling the following areas:

Operations Merchandising Distribution

Store Development Curated Selection Cross Dock Facility Centralized process with a 3,000 SKUs with a full array Distribution designed to dedicated team. Goal is to of high quality produce and meet the needs of farmers. open 3+ new stores / year. prepared items. For the Serves a network of stores. Workforce Redesign center store, focus on high Mid-Sized Farms Share administration (HR, IT, turnover items. Address supply issues, etc.) across a network of Co-Branding reduce costs and increase stores. Cross trained staff. The Our Community Market quality. Store Format logo will appear on products Commissary Small stores (around 6,000 that share the core values of Central kitchen at the cross ft2.) with a simple design. No locally and ethically sourced. dock facility assures quality kitchen, service deli or Co-branding will bring our and maximizes the use of service meat. name into customers’ the facility and trucks. kitchens and minds.

Scaling Co-op Values Our Community Market will be a multi-stakeholder cooperative that includes consumers, workers, and potentially farmers and producers. The ultimate design will be determined by the stakeholders themselves, but understanding potential stakeholders’ needs and interests from the beginning is critical.

 For consumers, to truly reflect the values of the communities in which the stores are located, local customers must have an element of control. Furthermore, this project requires significant capital and consumer owners will be a critical source.  The model also asks workers to approach work in a very different way to achieve the efficiencies necessary to bring down prices. Workers’ contributions need to be recognized and systems built to ensure critical feedback is properly communicated.  Finally, the local distribution system relies on trust between producers, farmers and the firm. The best way to achieve the requisite level of trust is to build real partnerships, potentially through ownership that properly aligns both groups’ long term interests.

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While there is a logic to creating a multi-stakeholder cooperative, it is still unclear whether producers would be interested in owning a network of retail locations, or whether consumers are interested in owning a distribution center. Worker interests at the retail locations and distribution center are more closely aligned, but balancing the need for an entrepreneurial culture with coordinating the needs of three stakeholders is a formidable task. If, however, we are looking to create a co-op that can grow beyond one test site and become a firm with hundreds of locations and a network of regional distribution centers, careful consideration of the interests of each party must be given full weight at the outset of the process.

Careful consideration must be given to uphold cooperative principles and truly engage consumers, workers, producers, and the community in a meaningful way. Many other countries have succeeded in growing the co-op sector and we believe it is possible in the US as well.

Market Potential

To be successful requires locating in densely populated areas with a lot of potential customers. Using the locations of other natural food retailers as a guide, we developed a demographic profile to identify ZIP codes where a store would likely succeed. Based upon this screen, we identified ZIP codes with more than 30,000 people and a median household income of $51,000 or more as potentially viable location. Applying this screen identified 1,685 ZIP codes where it is possible to set up a store. When ZIP codes that already have a natural food retailer in them are excluded, the list only drops to 1,300.

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However, for our model to work, we need clusters of stores to support centralized administration and regional distribution systems. By mapping the screened ZIP codes by county, we can identify clusters where a network of Our Community Stores will work.

We found that the market potential is enormous, even when being conservative with our estimates. Our demographic profile reflects the potential for a typical Whole Foods with sales of $30 to $40 million per year, but each Our Community Market only needs to reach $9.3 million in sales. Also, by focusing on driving down prices, the potential customer base for these stores is greater than other natural food retailers. This base would be even larger if the center store items were not exclusively natural and organic products.

Financial Projections

It is expected that by year 3 each location of Our Community Market will generate $9.36 million in sales, or roughly $1,400 per square foot of retail space. This high level of productivity is achieved through a combination of limited selection and the elimination of the kitchen, service deli and service meat.

Starting with three stores, and opening three additional stores each year, sales are expected to begin at $24 million and rise to $135 million in year 5 when 15 stores are operational. These projections are dependent upon an aggressive and successful store development strategy.

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Year 1 Year 2 Year 3 Year 4 Year 5 Stores 3 6 9 12 15 Sales And Returns 24,993,324 51,736,182 79,816,182 107,896,182 135,976,182 Cost of Goods 17,683,384 36,604,605 56,471,888 76,339,170 96,206,452 Gross Profit Total 7,309,940 15,131,576 23,344,294 31,557,012 39,769,730 Store Labor 4,500,690 9,001,379 13,502,069 18,002,759 22,503,448 Store Operations 2,243,512 4,487,023 6,730,535 8,974,047 11,217,559 Total Central Admin 2,175,009 2,361,900 2,549,025 2,732,517 2,919,642 Depreciation 465,571 465,571 729,143 992,714 1,256,286 Total Operating Expenses 9,384,781 16,315,874 23,510,772 30,702,037 37,896,935 Interest Expense 420,289 644,003 846,411 1,026,237 1,182,123 Net Income (2,495,131) (1,828,301) (1,012,890) (171,261) 690,671

Capitalization Strategy

With development cost for each store estimated at $1.9 million, total capital needs for the first five years, which include the development of a commissary and working capital, are anticipated to be $34 million. To raise this amount of money is a serious undertaking and while equity raised from the membership will play an important role, it is not sufficient. Additional efforts, including seeking philanthropic support, attracting patient equity, conducting a direct public offering and establishing a real estate cooperative to move much of the development costs off the firm’s balance sheet must be pursued.

Next Steps

This feasibility study has determined that given the right leadership, it is possible for Our Community Market to succeed and become a leader in the food retail marketplace. While we have presented this model as one built from scratch, the pros and cons of partnering with an existing co-op warrants further research. Some advantages may be in access to capital and experience, but inefficiencies may arise due to differences in store format, product line, and various operating issues. Additionally, the location will in large part determine the eventual form for the distribution center. The research used to develop this report is based upon the network of farms in New England, but other areas may have very different needs and capacities.

In the coming weeks, a Board of Directors will be formed to take this project to the next phase of development, including attracting leadership, establishing the location of the first stores, and developing a detailed business plan. Our Community Market - Feasibility Study Page x

Our Community Market: A New Kind of Food Store

Introduction Despite increased consumer demand, not enough people have regular access to locally sourced, high quality natural foods through their local grocery store. The problem is two-fold. On the one hand, most grocery stores stock very little local food because they are unable, or unwilling, to deal with the limited volumes and less predictable supply from local producers. On the other, many low income and rural consumers live in food deserts where there is an absence of local supermarket and grocery options.

Unhealthy eating habits are a key component of the challenges facing the health of people in the US. According to a 2012 report from the Robert Wood Johnson Foundation, by 2030 the obesity rates for adults could reach or exceed 44% in every state and exceed 60% in thirteen states. Currently 35% of adults are considered obese. Furthermore, it is estimated that the number of new cases of type 2 diabetes, coronary heart disease, stroke, hypertension, and arthritis could increase ten times between 2010 and 2020 – and then double again by 2030.

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Food co-ops, with their commitment to health education, locally sourced fresh produce, and support of small farmers and producers are already part of the solution. Unlike conventional groceries, which purchase only 6% of their inventory locally, food co-ops source almost 20% locally, working with an average of 150 local farmers and producers. Food co-ops are the best way for communities to effectively engage with their local food system and provide year round access to high quality, healthy produce, sustainably raised meats and other natural and organic products. Unfortunately, only around 300 communities across the country have access to a food co-op.

While there are currently more than 140 groups working to start a food co-op, each of these projects begins from scratch, often led by people with a commitment to local, natural food, but no experience in running a grocery store. Furthermore, despite the assistance from the co-op community, most grass roots initiated projects, because they lack financial resources, have an extremely long incubation period. Consequently, cooperative groceries, with their ownership rooted in the community, account for less than 0.4% of the total US grocery market, while in European and Asian markets, co-ops capture between 5% and 35% of the market.

Over the last two years alone, Whole Foods Market opened 51 new stores, representing $1.9 billion in annual sales, which almost equals annual sales for the entire cooperative grocery sector. Even with renewed interest in cooperatives, the sector will continue to lose market share to more aggressive competitors who are opening more stores at a faster rate. A new approach is necessary.

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Store Overview Entering Our Community Marketiv, customers will be greeted with a burst of enticing produce and delicious grab n’ go options. As they move around the store, they will find the perimeter lined with a great cheese section, excellent baked goods, self-service meat, frozen seafood, and where possible a fantastic selection of beer and wine. For their everyday needs, the center store will carry a limited selection of packaged groceries and prepackaged bulk, dotted with specialty local items.

The stores will be located in densely populated residential areas and near commuter hubs. The stores will be small but full service, carrying the products customers want most with a format that makes it quick to shop, allowing customers to pop in more frequently. At 5,000 to 8,000 square feet, the stores will be roughly the same size as a modern drug store and carry roughly 3,000 items or SKUs. Value Proposition Three factors are driving The Cooperative’s value proposition:

 Consumers no longer expect to find everything they need at only one store, meaning our store doesn’t have to carry everything  Main driver for food store selection is produce and other fresh items  Small format stores are in high demand given location constraints and consumer preferences and conventional stores don’t have this format mastered.

Shopping patterns have changed in response to the Number of ‘Channels’ Shopped recession, as well as demographic shifts and health and environmental concerns. The top four factors affecting which store consumers select as their primary store are: price (97%), cleanliness (97%), high quality produce (97%), and great selection of items, esp. produce, meat, and frozen/prepared items (95%).v Co-ops already lead the field in these last three, but due to a higher cost structure, often struggle with price. By doggedly focusing on eliminating inefficiencies that don’t deliver value, Our Community Market will set itself apart as the market leader for fresh products. Source: SymphonyIRI

More and more people are also looking for high quality produce and locally produced goods. When people shop for groceries, they are making more frequent trips, buying more prepared food, and shopping at more stores, with the average consumer now purchasing groceries from five different “channels.”

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This channel shopping opens up huge opportunities for a new kind of co-op food store because customers do not expect a store to be everything. Our Community Market will excel at offering fresh prepared food and produce, but only carry center store items with very high turnover.

Fresh food is particularly favorable for our small format, because while price is the most important consideration for food shopping in general, studies have found that when it comes to produce, freshness is even more important to consumers than price, variety or promotions.

60%

50% Most important drivers of 40% shopper satisfaction for stores 30% with produce departments

20%

10%

0% QUALI TY & PRICE VARIETY PROMOTIONS FRESHNESS

Source: Oliver Wyman and Ipsos Interactive

Despite these findings, grocery and specialty stores are still failing to deliver on freshness. A recent survey found that more than 80% of consumers have noticed bad produce where they shop. It has been bad enough to make nearly two-thirds of these customers either buy less produce on their next trip, or change stores completely. While this situation is bad news for consumers, it opens up a market opportunity.

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The small format store itself offers up another market opportunity. While price is still the most important consideration for most shoppers, people also rank convenience and easy in and out among the top reasons for choosing a store. Furthermore, while the total square footage devoted to supermarkets has begun to level off, this is in large part due to the fact that large format stores are A simple “shrink to fit” unable to identify suitable locations. vi These two factors, tied with the fact that most large operators adaptation of the larger have yet to successfully implement a small format store model is unlikely to store focused on fresh foods indicate that if the food succeed. co-op sector can successfully implement a store like Our Community Market, it will secure the first spot in - Booz & Co. a market that is poised for significant growth. Competitive Landscape Looking at the marketplace, we see companies such as Sprouts and Whole Foods, Trader Joe’s, as well as Farmer’s Markets and CSAs, especially for produce. While this is a very competitive field, we will fill a market gap: high quality, local, affordable food available in an easy to shop store. This combination is currently not present in the marketplace.

Competitive Price    High Quality Produce    Locally Sourced    Community Owned / Engaged   Convenient Location   

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 Whole Foods is promoting local food, but it is having trouble shedding its “Whole Paycheck” reputation. Our Community Market’s produce and other goods will be less expensive from the start so that customers associate the store with fresh produce, not high prices.  Trader Joe’s does not feature local products and even loyal fans say the produce and prepared foods are not what draws them to the store. Trader Joe’s contracts with different regional vendors for bakery and other fresh products, leading to very uneven quality across stores. Our Community Market will focus on fresh food, including prepared fresh food, and our distribution network will ensure quality and freshness.  Farmers markets and Community Supported Agriculture (CSAs) are a great way to get local produce, but for many people, they are inconvenient, are not available year round, and in many cases, as expensive as conventional grocery stores.

While Our Community Market occupies a unique position in today’s market, the reality is that the phenomenon of small format stores focused on fresh hasn’t gone unnoticed. Numerous firms, including startups such as Green Zebra in Portland, OR and Fresh Thyme in the Midwest are looking to open up networks of small format stores focused on fresh. Furthermore, Trader Joe’s continues to open up stores at an accelerating rate and Whole Foods is both focusing on price and has opened an 8,000 square foot store in the Boston market. While this in some ways is confirmation of the findings in this report, it also highlights the need to move quickly.

Cost Structure The key differentiating factor for Our Community Market will be its high quality fresh foods that sell for an affordable price. To accomplish this requires both a cost structure that allows for lower markups, and a scale that provides the economies of both volume purchasing and shared administrative costs.

Comparing the gross margins among major food retailers provide some insight into how the cost structure can impact price. Whole Foods gross margin is around 35%, while Safeway and Publix come in between 26% and 29%.1 On the low end sits Costco at 12%. While many businesses focus on raising the margin as a means to increase profitability, Our Community Market will take the same approach the buying club cooperatives and Costco do – keep margins as low as possible and pass that savings onto community owners or members through low prices.

1 Unlike most grocery stores, which calculate their gross margin only taking into account the cost of the products, Whole Foods includes occupancy costs in its gross margin.

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This average 6% to 7% gap between the gross margins of conventional stores and that of Whole Foods, is about accessibility; more people will come to our stores if we can compete on price. By figuring out how to run a cooperative on a lower margin, we will be able to make cooperatives the most successful, fastest growing sector of the economy.

While Whole Foods is the largest natural foods retailer, its 367 stores are dwarfed by Safeway and Publix’s combined total of 2,800 locations. There are simply more customers that can afford Publix and Safeway – partially because they sell lower cost conventional foods, but also because they mark up their products less. While the objective would be to achieve a margin as low as Costco, after rigorous testing of the financial model, the actual margin that is expected is 29%, significantly lower than most cooperatives and other natural foods retailers.

To successfully operate with a 29% margin, however, requires the advantages of scale. While the long term objective of this project is to eventually capture a significant portion of a regions market share, establishing the minimum scale necessary to support the given cost structure was a critical task. We found that with 8 stores, each with $9.3 million in sales, administrative costs kept to 3% of sales, and a net income of 1.5%, we could reach financial sustainability with a 29% margin. Our task was then to work backwards to see what was necessary to go from start up to these 8 stores.

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Minimum Financial Sustainability 8 Stores

$9.3 Million in Sales

• 29% Gross Margin • 1.5% Net Income • 3% Administrative Costs • Support a Regional Distribution Center

The number of stores, 8, is merely a threshold number that allows us to identify potential markets that can support financially stable stores and a distribution center. We assume that in densely populated areas, we would have more stores. While firmly rooted in a detailed financial model, these numbers are also aspirational. Many think tank members have said, constrain your costs and figure out how you will do it. Otherwise, if you budget for it, you will absolutely spend it.

We have built our model around a blended gross margin of 29%,2 which will be achieved through a combination of cost savings in three key areas: distribution, operations, and merchandizing.

 Distribution: a cross dock facility designed around the needs of regional farmers that will also reduce transportation costs  Operations: shared administrative costs and simplified stores will increase efficiencies without sacrificing wages  Merchandizing: small format stores will carry a full range of products, but save costs by offering a limited selection in most categories

Our goal is to be known from the beginning for our competitive prices. We cannot lower prices later, or we will face the fate of “Whole Paycheck.” To reach this price point and achieve financial stability relatively quickly, we need to keep our margins in the 29% range from day one.

2 For gross margins by product category, see Appendix D.

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Our approach to cost savings in every area is motivated by the prime objective and mission we have set out to accomplish: to provide affordable, ethically produced, high quality fresh food to as many people as possible. Every decision from branding to product selection to participation stems from this core commitment. From the start, Our Community Market needs to be known for affordable prices and we believe there are enough patient investors out there who share these values and want to help a store like this succeed.

Distribution One of the keys to cost savings is a regional distribution center or cross-dock facility that will handle locally sourced produce, commissary items, some dairy and other locally source specialty items. When it comes to distribution, the optimal strategy is to rely on external systems when those systems are superior and only build when there is an explicit need. The key differentiating product for Our Community Market is produce and local/regional is the key to the produce department. Freshness and flavor considerations drive Our Community Market Produce Prices all decisions about distribution and logistics. Yet, to effectively bring local produce to consumers at a competitive price, a new system that is responsive to the regional food shed’s needs must be developed.

A 10% target gross margin for the distribution center, would translate into an average of $1.50‐$3.00 per case for produce. At this margin, Our Community Market can offer prices on fresh items that are competitive with conventional supermarkets like Stop and Shop and even Trader Joe’s, and certainly less expensive than Whole Foods. As you can see from this chart, on many items we are at or below competitors’ prices on produce, and ours will be fresher.

To ensure the needs of customers are met, Our Community Market must have vendors with consistent supply, and excellent quality control. Ideally they should already be wholesaling into the retail market. A closer than usual relationship with preferred vendors such as farmers and processors, and a high degree of trust throughout the supply chain, will be hallmarks of the Our Community Market - Feasibility Study Page 9

procurement process. Mid-sized working farms are central to this system because they are small enough to still engage in sustainable growing practices, but large enough to provide high quality produce and meat at more competitive prices. A small number of mid‐size vendors with infrastructure will be needed. Our Community Market will buy from these suppliers first, and whenever suitable product is available, even as prices fluctuate.

Close relationships and partnering with vendors can not only ensure a consistent source of supply but can eliminate certain costs from the system. In produce, for instance, redundant systems such as quality control inspections at the farm, followed by quality control inspections on the dock of the distribution facility can be replaced by up‐front agreements about how to handle damage and disputes. The need to hold inventory can be reduced or eliminated by pursuing a cross‐dock delivery system in which the produce is sold before it is harvested.

Cross Dock Facility

The cross dock facility is designed with the needs of farmers, customers and producers in mind.3 This system leverages the skills, scale and diversity of products found on midsized farms, to remove redundancies and pass cost savings onto farmers and consumers by operating to cover costs, which can be done at a 10% margin.

Farms Cross dock Facility Stores

To maximize efficiency, in addition to regional food, other product will move through the distribution center, including non-local produce, local dairy, meat, and commissary items. Items are then palletized for each store and delivered the same day.

Local and regional produce is ordered two days in advance and products are harvested, graded and packed to order. Each area will have a central grower, with adequate infrastructure for loading, packing, and storage, where produce from smaller farms will be consolidated before being

3 Our model is based on farms in the Northeast and their product offerings, and while the concept can certainly work elsewhere, we want to acknowledge that the relationship between different sized farms will vary.

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delivered to the distribution center. These central farms would be trusted partners in the area of quality control. This trust reduces the need for dock inspections on every delivery and allows for credit requests to be processed automatically, all of which leads to lower costs.

Midsized farms will aggregate food from smaller farms and then move product to the distribution center. Trucks leave the farms in the late afternoon and arrive in the evening at the distribution center, which will be located in areas between the farms and urban centers to reduce real estate costs. Truck efficiency can be maximized by buying all non‐regional produce directly from the produce terminal and delivering these items together with the regional loads.

The Importance of Mid-Size Farms

Rethinking distribution also offers us the opportunity to address a major social problem: the decline of mid- sized farms who want to sell a wide range of products to an interested public. These mid-sized farms are large enough to provide a sustainable source of income for their owners, but are quickly disappearing because they are too small to be served well by commodity markets and too large to be served well by direct sales.

While these farms offer a host of environmental and social goods, such as economic sustainability for rural areas, transparency, and agricultural and wildlife diversity, they lack an efficient way for their products to reach consumers. With so much demand for local and regional food, there should be a retail market for their products. For more information on this important issue, visit www.afogthemiddle.org.

After food is palletized for each store at the distribution center, it is then trucked to the markets between the hours of midnight and 4am. This allows for shorter time to market and reduces fuel and labor costs because there is less traffic. Deliveries to stores are designed to maximize efficiency by filling trucks. Also, since goods are palletized by store, unloading times are minimized.

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The commissary will be near or co-located with the distribution center and make grab n’ go, salad bar items, soup, and some bakery goods. The importance of fresh prepared foods to the stores’ success makes it essential to have high quality commissary items. These items will be made from regional produce when possible and will be priced to provide stores with a 33% margin after shrink.

Cross Dock Facility Costs

We estimate that the cross-dock facility will have an annual operating budget of between $2.5 and $3 million. Given an assumed gross margin of 10%, to cover these costs, the facility needs to move between $25 and $30 million in product each year. As you can see from the chart below, around 50% of the stores’ purchases need to move through the cross dock facility to break even.

To reach this break-even point, the commissary will be co-located with the cross dock facility to ensure we have a high enough volume to cover costs. However, as the number of stores increases over time, the cross dock facility becomes a profit center, providing more opportunity to reduce prices and/or increase wages.

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Operations Store operations will be another area of cost savings, achieved through efficiencies in store labor and administrative costs (for a breakdown of store operations costs, see Appendix C.)

Annual Store Costs

Our Community Market’s cost structure will be in line with a typical conventional grocery store. Currently, most food co-ops and natural food stores have a cost structure similar to Whole Foods. In the chart below, we see that store labor and administration are the two areas where we will be able to increase efficiency and thereby reduce costs.

It’s important to stress here, however, that we will not accomplish these cost savings by lowering wages or increasing hours. Instead, we have redesigned the way the work is done to capture efficiencies at multiple levels.

Store Labor

On the staffing side, a typical store with $180,000 in weekly sales will have roughly 32 employees with 13 staff on the floor during the peak hours between 11 to 2 and 4 to 7 (for employee schedule, see Appendix G). A key component to reducing labor costs is to simplify store operations, which provides greater flexibility because staff can be cross-trained. Workers stuck behind a meat or deli counter cannot help customers in produce, or stock product, or work a register when a line

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suddenly appears. In contrast, cross-trained staff can move about the store in response to customer needs. Fewer SKUs also make inventory easier and allow staff to be more knowledgeable about products, which in turn, enhances the customer service experience.

Each store will have one store manager, three co-managers, and one marketing manager who will also be responsible for coordinating community and member engagement activities. Additionally, there are two categories of hourly workers:

 Store-wide specialists are team leaders, who assist with merchandising and sales strategy. Store wide specialists are paid $21.50 an hour which is the median wage for a 1st line supervisor of grocery store staff in the Metro Washington DC area – a good wage, but not out of line for the markets we imagine we will be entering.

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 Customer service staff will be less experienced and paid $13 an hour, which is about $1.50 more than the median wage for a cashier in the Metro Washington DC market.

Additionally, all staff receive health insurance, paid time off and a matching contribution to a 401(k) plan.

Weekly sales per labor hour, which does not include central administration hours, will be higher than most cooperatives at $167. However, a combination of simplified store operations and employee ownership support this number. Smaller stores and limited selection mean that almost all staff are on the floor stocking or checking and can more easily see and interact with customers. Because staff will be cross- trained, they can also be more responsive to immediate customer needs because they will have knowledge of all departments. We also expect higher sales per labor hour because of employee ownership. As numerous studies have shown, companies with ESOPs are more productive than their non-ESOP competitors and Our Community Market will benefit from its workers stake in its success.

Administration

Cost savings will also be achieved through sharing administrative functions across a network of stores. One central office will handle administrative functions, including HR, accounts payable, and IT. Based on numerous conversations with co-op general managers and others in the industry, we feel that this administrative team will be able to handle the operations and estimate that by year 3 or 4, administration costs will be at 3% of sales.

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Administration will include a CEO to coordinate both operations and new store development, and a team that works on finance, HR, and IT. Initially this team will require eight staff, including the CEO, and will grow by two or three people for every three stores that are opened.

In addition to the eight person administrative team, we will also have a two person marketing team that will work closely with the marketing managers at the store level. Six people will coordinate new product development, purchasing and managing logistics. Finally, we have four dedicated new store development staff that will be in charge of identifying and opening new stores, as well as on- the-ground organizing to engage the community and help raise capital.

Admnistratvie Costs as a Percent of Sales

10%

8%

6%

4%

2%

0% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

When we talk about centralizing administration, we are not talking about a command and control environment. To give an example of how store level staff will be empowered within this structure, we can return to our variable pricing strategy. Berkshire Market co-op in Western Massachusetts tasks each department with making a basket of goods that matches or beats their conventional competitors’ prices each week. They do this so that lower income shoppers always have an affordable way to buy a week’s worth of groceries at the co-op. The cost difference of this basket has to be made up with other products so that the department meets its overall sales and margin objectives. Instead of having the general manager make these decisions, Berkshire has its staff decide, tapping into their expertise and showing them how their actions contribute to the financial success of the organization.

At Our Community Market, we will centralize functions that do not rely on store level knowledge, and empower employees that have contact with customers to figure out how to best meet those customers’ needs. We will also capture data about these staff-level innovations so that best practices can be replicated across the entire network of stores.

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Merchandising We have looked at how we can reduce costs around logistics and operations, and will now turn to how merchandizing, including limited selection, small store format and co-branding, will contribute to these reductions, as well as make Our Community Market a favorite among shoppers.

Limited Selection

Our Community Market will offer products in the full range of categories, but limited assortment in grocery with a focus on locally sourced produce, meat, cheeses, beer & wine and specialty products. Along with a robust produce selection, Our Community Market will focus its center store purchases on the single best producer in a given category – for instance, carrying only one brand and one size of peanut butter – reducing the SKU count from as many as 14 to 18 down to just 4 or 6. Furthermore, brands that share our values such as Fair Trade coffee from worker-owned Equal Exchange will be featured.

The reality is that in conventional supermarkets, which typically carry more than 38,000 SKUs, 75% of products sell less than three units per week. Among cooperatives, a similar pattern emerges; in one sample co-op, 44% of SKUs accounted for 80% of sales. Members are paying for shelf space to hold inventory that most members are not actually interested in buying.

For consumers, unlimited selection may sound enticing, but retailers like Trader Joe’s have demonstrated that a highly curated selection not only builds intense customer loyalty, but one of the highest sales per square foot in the industry. Furthermore, consumer research shows that when faced with too many choices, people are less satisfied with their final decision. Therefore, limiting product selection is a strategy that maximizes selling space and actually improves the customer experience.vii

Along with simplifying the shopping experience for customers, limited selection will also simplify inventory management, increase employees’ product knowledge, and capture discounts from volume purchasing.

Stores are responding to data about limited selection, with 70% planning to shrink center store offerings. However, Our Community Market has a tremendous advantage over established stores

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on this front. We are not fighting customer expectations about what should be offered because of past offerings. JCPenny’s found out that when customers expect one thing, like promos and specials, and you give them something else, like everyday low prices, they are not happy and they stop shopping at your store. Whole Foods is struggling to show consumers that they can value shop what has become known as “Whole Paycheck.” However, Our Community Market will, from the start, be providing something that its members want and cannot get elsewhere: high quality produce and a limited selection of center store items at an affordable price point.

Limited Selection: Chicken Example

An example of how limited selection would work in a department can be seen with chicken products. In a sample coop, eighteen chicken items are carried, but a single product, boneless chicken breasts, accounts for 44% of sales. The next five products combined account for 38% of sales, meaning only six out of eighteen chicken items account for 82% of sales.

A great deal of food waste can be eliminated without diminishing customer experience by offering only the top 6 or 8 sellers. Those who want specialty chicken items will find another source, but all of the store’s members will benefit from a lower price point due to limited selection.

Store Format

Limited selection goes hand in hand with smaller format store design as a way to respond to consumer behavior and reduce operating costs. While retailers from Whole Foods to Walmart are experimenting with smaller format stores, none of them are fundamentally changing their product offerings. Top reasons for choosing a store include price, convenience, and easy in and out. While these other stores are trying to squeeze a 35,000 square foot store into 8,000 square feet, Our Community Market will leverage its limited selection to create a store that provides a simple

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shopping experience. As one food retail executive noted: “We operate smaller stores about the same way we operate larger stores, which may be why we aren’t successful with them.”

A comparison of SKUs by department can help illustrate the relationship between limited selection, store format and cost savings. In the chart below, we see that Our Community Market will carry roughly the same number of SKUs in most departments as Trader Joe’s. This SKU count is quite a bit lower than our sample co-op, especially in grocery, wellness and deli.

- 500 1,000 1,500 2,000 2,500 3,000 3,500 SKUs by Department Wellness

Deli Our Community Market Produce&Meat Trader Joe’s Sample Food Co-op Specialty Sample Food Co-op (SKUs Accounting for 80% of Sales)

Grocery

- 500 1,000 1,500 2,000 2,500 3,000 3,500

However, an analysis of this same sample co-op showed that 80% of sales could be accounted for by very few SKUS. In the chart below, we can see that Our Community Market can strategically limit its SKU count without cutting into sales.

In every grocery store, there is a little “Trader Joe’s” that represents the fastest moving products. While it is difficult for stores that already carry many SKUs to eliminate products because of customer expectations, Our Community Market will from the start be known for its limited selection of high quality, affordable priced options.

Store size will influence every aspect of Our Community Market from the start, including layout, product selection and distribution. Customers will not feel like they are crammed into what should be a larger store, but rather experience a simple and quick shopping experience.

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Co-Branding

Our Community Market’s mission is to provide affordable, ethically produced, high quality food to as many people as possible. Our branding will also grow out of this commitment by employing an innovative co-branding strategy, much like that of P6, that will reflect the store’s community values, while also extending the brand into shoppers’ kitchen cabinets. We will select a number of products from across departments to co-brand with the “Our Community”4 logo,5 which will be placed on packaging, without obscuring a brand’s label. This branding strategy also provides us with a seamless way to introduce private label items at a later date, when our scale makes private label goods a potential area of cost savings.

This co-branding strategy has the following advantages:

 The “Our Community” logo signals to customers that these products are ethically sourced and locally produced. Products that meet a set number of the following criteria will be eligible to be an “Our Community” product: Locally Sourced; Cooperatively Produced; Small Producer; Corporate Accountability; Ingredient Profile; Environmental Impact, etc.6  Co-branding allows Our Community Market to tell the unique story of a producer/farmer, while also associating that story and product with the store itself. When customers open

4 “Our Community” is a copyrighted brand created by Cabot Creamery and is being used with their permission. 5 “Our Community” is being used for demonstration purposes only and final names and logos would be test marketed as part of a branding strategy. 6 Adopted from the criteria employed by P6.

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their refrigerator or kitchen cabinet, they will see “Our Community” on their favorite items, building store loyalty.  Co-branding creates a coherent product story across departments, as the stickers can be placed on produce, meat packaging, dairy, and grocery. This cross-department coherence builds brand recognition (e.g. Trader Joe’s).  Co-branding can be easily expanded to new products at a lower cost than private label, as stickers can be affixed on items at the store. Producing private label good at low volumes is cost prohibitive due to high distribution and warehousing costs. Additionally, starting a private label requires a huge investment in marketing in order to build recognition of the brand.  As Our Community Market increases volume and private label becomes cost effective, the stores have already built a trusted “brand” through co-branding that can then be used for private label.  The “Our Community” co-branding strategy addresses the problem of a national store communicating its commitment to local products and farms. Co-branding unique local products and produce signals Our Community Market’s community focus, even when the ownership structure includes a number of stores in different national markets.

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Financial Feasibility

Sales Projections While the market conditions of each store will vary, it is expected that each location of Our Community Market will generate, after a 3 year startup period, $9.36 million in sales, or roughly $1,400 per square foot of retail space. This high level of productivity is achieved through a combination of limited selection and the elimination of the kitchen and service deli and meat departments. While across the grocery industry this is considered high, it is lower than the estimated sales per square foot of Trader Joe’s and other retailers such as The Fairway.

Store Sales

$9.36M $9.36M $8.91M $8.33M

Year 1 Year 2 Year 3 Year 4

Basket Size & Customer Visits

With its focus on locally sourced produce and meats, but a more competitive price, it is expected that the average basket size for a shopper at Our Community Market will be higher than the typical food coop. However, this will be offset by the fact that for many customers, Our Community Market will not be their main store and that some will only be purchasing a lunch or dinner deli item.

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Average w/ Average w/ Industry Co-op Meat7 Produce Average Average Average Basket Size $70 $548 $34 $26

Average Trips per Week to Our 0.43 0.43 0.43 0.43 Community Market if secondary store

Total Customers needed if Our 5,980 7,752 12,312 16,291 Community Market is secondary store

Total Customers needed if Our Community Market customer shops 2,571 3,333 5,294 7,005 there once/week

Note: Assume $180,000 sales/week In order to be successful, Our Community Market will either have to increase the basket size of its typical customer or attract more customers per week than the typical co-op. Our Community Market’s sales strategy addresses both of these issues:

 The stores will be located in densely populated areas which will increase the number of potential customers. Based upon the results of a typical coop, the trade area for Our Community Market would need to have approximately 159,000 people. Given the price strategy and focus on a broader customer base, however, we expect that the sales per capita to exceed the typical coop.  The store’s main product draw will be produce, prepared foods, and meat, all of which increase average basket size. While being located in a densely populated area will increase the number of customers that pop in and out, which in turn reduces basket size, it is expected that Our Community Market will be able to achieve an average basket size of approximately $30.

7 “Average basket size with meat” indicates the average basket size when meat is in basket. “Average basket size with produce” indicates average basket size when produce is in basket. These data categories and data is from Nielsen Homescan 2011.

8 Over 60% of Whole Foods offerings are in fresh departments and their average basket size is $67.

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As the chart below demonstrates, however, the number of regular customers each store requires is highly dependent upon the average basket size and the frequency they shop at the store. At the low end, if the typical customer shops at the store 0.2 times per week (less than once a month) and spends only $20, each store would require 45,000 customers to generate $9.3 million in sales. If, however, shoppers spend $30 per trip and go to Our Community Market 0.4 per week (roughly twice a month and in line with the frequency for customers typical secondary store) each store would require 15,000 customers. If the typical basket size was only $25, each store would require 18,000 total customers.

Total Customers Required Based on Basket Size and Frequency of Shopping Trip

Average Basket Size $20 $25 $30 $35 $40 $45 $50 $55 0.20 45,000 36,000 30,000 25,714 22,500 20,000 18,000 16,364 0.40 22,500 18,000 15,000 12,857 11,250 10,000 9,000 8,182 Average 0.60 15,000 12,000 10,000 8,571 7,500 6,667 6,000 5,455 Trips Per 0.80 11,250 9,000 7,500 6,429 5,625 5,000 4,500 4,091 Week 1.00 9,000 7,200 6,000 5,143 4,500 4,000 3,600 3,273 1.20 7,500 6,000 5,000 4,286 3,750 3,333 3,000 2,727 1.40 6,429 5,143 4,286 3,673 3,214 2,857 2,571 2,338

While without a specific location, it is difficult to determine whether these are reasonable projections, on a weekly basis, a $30 average basket would require 6,000 customers per week – which is right in line with what coops attract today.

Total Customers per Week

9,000

7,200 6,000 5,143 4,500 4,000 3,600 3,273

$20 $25 $30 $35 $40 $45 $50 $55 Average Basket Size

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Gross Margin

While overall, stores will work towards achieving a 29% gross margin, as the chart below demonstrates this will vary widely by department and by product within each department. This is to allow for the prices to reflect the realities of the market. At the store level, staff will have some flexibility in setting prices in order to address local market conditions, but will be expected to meet department and store level objectives. Each store will be expected to contribute their portion of overhead, and while for simplicity sake this will be judged as a percentage of sales, best practices around driving up margins of certain products, and in driving up volume at the expense of margin will be studied and where appropriate replicated. In the chart below, the deli gross margin includes shrink.

Percent of Sales

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Cost Structure

Assuming $9.3 million in sales, each store will have costs, excluding depreciation, of $9.06 million and contribute approximately

$296,500 towards the overhead of the Labor network of stores. Given central 16.6% Occupancy & Equipment administrative costs of roughly $2 million Store Level 5.4% per year it takes eight stores to cover these COGS Cost Structure Marketing central costs. 73.1% 1.1% Maintenance Labor costs (excluding administrative costs) & Insurance 0.5% are assumed to represent 16.6% of sales. Other While most of the labor costs are variable, Interest 1.3% there is some efficiency to be found in 2.1% raising sales levels. The store manager, assistant manager and marketing managers time is fixed. At $180,000 in weekly sales, they represent 28% of total store level labor costs, if however sales could be increased to $200,000 per week, they would represent only 26% of labor costs.

It is expected that the business will break even in year 4 of operations, when we anticipate there will be 12 stores, and total sales will be $108 million.

Break Even

100%

95%

90%

85%

80%

75% Year 1 Year 2 Year 3 Year 4 Year 5

Break Even Projected Revenue

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Participation & Governance Our Community Market is envisioned as a multi-stakeholder cooperative that includes both consumer-owners and worker-owners. The Board of Directors will be composed of consumer owners, management, and worker owners and modeled after such successful cooperatives as Weaver Street and EROSKI. The objectives Our Community Market hopes to achieve include:

1. Link all the stakeholders of a food system together; consumers, workers, and producers, in a way that utilizes cooperation and transparency to produce sustainably produced food that is affordable, accessible and can support high quality jobs throughout the food system. 2. Increase access to locally sourced, high quality natural foods both through the creation of a new network of retail locations, but also through the development of an efficient distribution system designed to bring maximum value to both farmers and producers, but also consumers. 3. Create high quality jobs that provide a living wage, access to real asset accumulation, participatory management structures, and career ladder opportunities. 4. Root ownership locally, but engage the entire regional food system so that the benefits of both access to lower cost natural foods and high quality jobs can be extended beyond the socio-economic regions food cooperatives have historically reached.

Multi-Stakeholder Cooperatives In our model for Our Community Market, we have two distinct entities that we are looking to create: a network of stores and a regional distribution center and commissary. We also have three broad categories of stakeholders: consumers, workers, and producers.

While this project was initially conceived of as a consumer cooperative, the reworking of the store led us to see the value of involving workers as owners. We see a natural relationship between consumers and the place they shop, as well as workers and the place they work. However, when we added the distribution center, the question of whether or not producers/farmers should also be stakeholders came into play.

We do not have a definitive answer, but rather stress the need to understand potential stakeholders needs and interests from the beginning, as expanding ownership at a future date is much more difficult.

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Consumer Owners

Our Community Market’s consumer-owner participation and community engagement program and activities will be different from a traditional independent co-op, but appropriate for this type of cooperative and its members’ needs including: providing a desirable product/service in a way that is socially responsible in multiple key ways (local, fresh & healthy); sustaining a meaningful connection with the local community; and ensuring economic equity for all stakeholders (consumers, workers, and producers/farmers).

Our model of engagement is based on the work of Ruffin Slater and Mark Goerhing and will offer the following ways for community members to participate in Our Community Market:

 Economically, members will engage as informed consumers who understand Our Community Market’s policies on things like pricing and products carried.

 As owners, through the purchase of voting shares and additional capitalization, shoppers and employees will receive an economic and social return on their investments.

 Members will participate through engagement by embracing shared goals of Our Community Market and aligning their behavior and choices accordingly.

 Members will engage as volunteers, both on behalf of the co-op and within the broader community.

Worker Owners

Worker owners will participate in governance through the election of their representatives to the board of directors, as well as through a participatory, open book management system. Worker owners will be actively engaged in store level operational decisions tied to their activities and expected to participate in regional level decisions.

Utilizing the top methods from the worker cooperatives and democratic ESOPs, worker owners will be engaged in both the risks and rewards, and rights and responsibilities of ownership. It is expected that in addition to store level trainings, 50% of all staff will participate annually in a two- day seminar on democratic management.

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As Virginia Vanderslice and Alexander Moss explain in their report: “Building Long-Term Value: Developing a High-Performance Ownership Culture,” for ownership to be a motivational force, the link between an individual actions and the company’s performance must be clearly understood. Within their model, there are four factors necessary to create a true ownership culture: communication & education, which are both cognitive in nature, and participation & rewards, which are structural in nature. viii

Communication is central to creating an ownership culture. Employees need regular updates on both the store level and department performance and the performance of the company overall. Information needs to be treated as a resource to be shared, rather than doled out on a need to know basis. This allows facts to replace rumors and misunderstandings.

Education is necessary so employees truly understand the nature of the information that is being communicated. Employees must understand both the structure of the business and their role within it, but also have the business literacy to assist in improving performance. Ongoing skills training allows staff to continually improve their performance, and leadership and supervisory development training ensures that leadership occurs at every level of the organization. While some trainings are designed for all employees to go through in a classroom type setting, trainings at the point of need are of equal if not greater importance.

Participation serves two main purposes, first it fits within the employee owners’ expectation as having a say in how things operate as owners, but it also generates a higher level of productivity and profitability for the business. Through participation, employees take their skills and knowledge to actually improve performance – sharing knowledge is only as helpful as the firm’s ability to turn that information into actionable tasks. People have to want to participate – Some forms of participation are informal, asking employees for feedback on a regular basis. This requires supervisory staff to have a participatory mindset, when faced with a challenge, managers must as a matter of course consider who will be impacted and actively consider the following questions:

 Who is likely to have knowledge about some aspect of the issue?

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 Who will have to implement any part of whatever decision is made?  Who will be affected by it?  Who will be held accountable for the effectiveness of this decision?  How quickly must the decision really be made?

This can present significant challenges for many supervisors and support systems to encourage and train people in this type of thinking is a necessary component of an effective engagement strategy. In addition, formal structures such as employee representation on the board (along with appropriate training to ensure they can be a full participant) and standing and ad-hoc committees with representation and influence from all types of employees are critical.

Rewards are essential to align day to day employee behavior with increasing the long term value of the firm. Therefore, in addition to long term benefits such as accruing equity in the cooperative, it is necessary to develop short term incentives that immediately and tangibly reward staff for behavior that contributes to the long term success of the cooperative. This can take the form of cash bonuses based on performance measures (although the closer the payout is to the behavior the more likely staff will see the connection), or patronage dividends.

Producer Owners

Many of the most successful produce distribution companies, especially those that benefit small and mid-sized farms, are structured as cooperatives. This allows for lower administrative costs in exchange for a dedicated supply of product. For Our Community Market to succeed, a similar level of participation is necessary. The benefit and feasibility of developing such a relationship will be determined by the eventual location of the stores, however. Therefore, the final decision of whether and how farmers and producers can participate as owners will have to be addressed during the business planning phase.

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Development Built into this model is the assumption of rapid new store development. It is expected that the total development cost per store, including inventory and working capital will be $1.9 million (excluding land).

Our model requires the benefits of scale to succeed, so for co-ops to be the fastest growing sector of the economy, we need to figure out how to capitalize on consumer demand and increase the pace at which we open new stores. Employee owned Harps opens up one store per quarter with a team of four people and one maintenance person. While this may seem extremely fast to many coops, the reality is that Whole Foods and Trader Joe’s are opening up fifteen to twenty-five stores every year and continuing to increase this pace.

If the objective is to open three new stores per year, by the end of year 5 we expect to be operating fifteen locations. With this many stores it will be necessary to raise a total of $34 million: $20.7 million for the development of the stores, including build out and equipment costs, and $16 million in working capital. By year 6, it is expected that Our Community Market will be generating enough cash to finance the equity necessary for new store expansion with its operating income. Capitalization Strategies The capitalization of Our Community Market is one of its most daunting challenges. While we are confident that we have identified a market opportunity that will be able to attract capital, given the cooperative structure of the business, it is essential that the influence of outside capital not overshadow the roles of the core stakeholders.

Each store is estimated to cost $1.9 million to develop. Even assuming significant debt financing, it is not feasible to raise this from the potential consumer owners on a timeframe that allows for the rapid development necessary in our model. Therefore, some form of outside capital will be necessary.

Consumer Owners

With a dedicated organizer on the ground working to develop community support for the store, it is reasonable to assume that each store will be able to attract some form of member capital. This will be tempered by the fact that the group will have less control over the development of the store

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than they would if they were doing it on their own. Assuming 15,000 customers and a membership fee of $50, however, even if only 50% of the customers became members, each store would generate $375,000 in member equity. If 60% of the staff were to join at a membership fee of $500, this would generate an additional $9,600 in equity, for a total of $384,000 of member equity per store

Direct Public Offering

A strategy that many food coops utilize now to fund the expansion of their stores is to offer preferred shares to existing members, raising upwards of $1 million in a very short period of time. This exact strategy is not an option for Our Community Market – even if coops invest in the company, the SEC exemption for coops will not apply to their members. However, many community oriented businesses have had success in making a direct public offering. While the offering is limited by geography and often capped at raising $1 million, it is possible that with the appropriate legal structure such an option is possible. In other community oriented public offerings, preferred shareholders are paid a 5% dividend with a 5 year no call period.

Non Profit Support

With its focus on supporting at risk mid-sized farms and the local food system, many philanthropic organizations may see the efforts Our Community Market is undertaking as worthy of support.

One strategy would be to incorporate the cross dock facility as a non-profit whose mission is to support and strengthen the local food system. This would allow for foundations to subsidize the capitalization and operating costs of the distribution system until it achieved financial self- sufficiency.

Another strategy is to develop more stores in low and moderate income areas. While affordability is a significant issue, and therefore the focus on natural, organic packaged items would likely have to be rethought, the reality is that if Our Community Market were able to secure conventional foods at reasonable prices, the firms cost structure would allow it to compete on price for both produce and packaged goods in lower income markets.

Outside Investors

There are many wealthy individuals who support the local food system and are willing to make patient capital available for projects like Our Community Market. Food cooperatives are solid investments with positive cash flow. Furthermore, the size of the capital investment a network of stores requires may make it a more attractive investment vehicle for investors interested in large scale projects.

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A Real Estate Cooperative

Here we have outlined one possibility in the form of a Real Estate Cooperative, in which several organizations in the cooperative sector have showed interest. The specifics of a Real Estate Cooperative will vary, but the following gives a sense of the general concept as it relates to Our Community Market.

The Real Estate Coop would buy back properties and/or leases from interested existing coops, as well as provide the build out and equipment purchases and/or leases for cooperative start-up stores. Lease payments are then paid to the Real Estate Cooperative as a percentage of store sales. Stores would pay less in monthly rent (likely below market) in the early years, and then increase their payments as they grow and become sustainable. This arrangement allows a fixed cost to be converted into a variable cost for the stores. The Real Estate Coop would also provide legal and development services to negotiate leases and build outs.

The Real Estate Cooperative may be structured as a 308B, with several membership classes that could include: existing cooperatives (that are not necessarily using services), members of cooperatives, consuming cooperatives (those using real estate and legal services), and private investors.

Benefits  One of the main benefits to Our Community Market of a Real Estate Coop is the reduction in development costs (see chart below). The Real Estate Coop would be capitalized enough to absorb the early losses Our Community Market would incur.  Faster expansion and reduction in risk associated with remodels/new stores for cooperative boards: The consuming cooperative’s balance sheet would be smaller since the assets would be in the Real Estate Coop. Stores wouldn’t have to wait as long between projects to build up the balance sheet.  Valued created through increased competency in negotiations: The lease expertise would reduce risk, decrease cycle time, and bring credibility to the table.  During an expansion, this arrangement allows managers to focus on planning operations rather than lease negotiations, which can be extremely time consuming.  More freedom to manage cash flow from consuming cooperatives: If well capitalized, the Real Estate Cooperative could adjust the lease payment percentage for new startups or large expansions and recapture losses later. Store income statements in early years would be strengthened due to reduced lease payments.  A mechanism for capturing part of the excess liquidity in the cooperative sector by providing a way for cooperatives to invest in a diversified portfolio of established and start-up coops.

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Development Costs with Real Estate Coop Build Out 0 Equipment 0 Inventory 370,000 Working Capital 330,000 Total Dev. Cost (excluding land) $700,000 Difference in Development Costs with Real Estate Coop -$1,200,000

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Market Analysis Key to the success of Our Community Market is choosing a geographic market that can support a network of stores. While there is a proven demand for this type of store, and plenty of good news when it comes to the growth in organic and local sales, financial sustainability is more likely if stores are located in dense areas that can support eight to fifteen stores, each earning $9 million in sales per year.

On the anecdotal level, Whole Foods, Sprouts, and the Fresh Market in total, claim that they can develop an additional 3,000 stores, but even if each of them is ignoring the others’ claims, that still suggests that an additional 1,000 stores is possible.

When we model the potential market, it is helpful to look at the characteristics of the locations of the leading competitors. The demographic profile of these locations is remarkably similar. Looking at the ZIP codes where these stores are located, we see that they have a population of around 30,000 people, tend to have a median income of around $71,000, and a little more than a quarter of the population holds a bachelor’s degree.

However, among the independent natural food retailer (INFRA) and National Cooperative Grocers Association (NCGA) members, the median income is quite a bit lower, as is educational attainment. While it is difficult to gauge why this is the case, one possible explanation is that co-ops are more responsive to the needs of communities and that they are setting up stores in locations, including communities with a large student population, that the competition does not consider. Given the success of these co-op stores, we can safely say that the larger retailers are missing market opportunities.

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Taking into consideration these demographics, we developed a minimum screening criteria to identify viable locations. This screen is very conservative and if we are able to lower the store’s prices—a main goal of Our Community Market—many more locations become viable options.

We know we need a lot of people, so we used the median population for the natural foods sector overall, which is 30,000 people living in a ZIP code. Taking a lesson from other co-ops, we used the 25th percentile for income – ZIP codes with a median income of $51,000 or more, which is higher than the median for co-ops overall.

When we run this screen it turns up 1,685 ZIP codes where it is possible to set up a store. When you exclude the ZIP codes that already have a natural food retailer in them, the list only drops to 1,300. However, for our model to work, we need clusters of stores to support centralized administration and regional distribution systems. By mapping the screened ZIP codes by county, we can identify clusters where a network of Our Community Stores will work (aqua clusters on map below).

When we look at the Northeast alone, we can see that several major metropolitan areas could support a network of stores.

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These are conservative estimates, as we think Our Community Market could easily succeed in many secondary markets, defined as densely populated suburbs located close to major cities. The stores would remain the same in concept, but with added parking. These secondary markets would also allow regional administrative and distribution centers to serve more stores, lowering fixed costs across a network of locations.

There is a huge market potential for Our Community Market on a national level. In large part the challenge will be to identify areas with the right demographics, but which are also home to farms that want to partner to ensure adequate supply.

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Appendix A: Pricing Strategies

Every Day Low Pricing (EDLP)

We investigated the potential of an EDLP pricing strategy for Our Community Market due to the success of Trader Joe’s, but have determined that it is not an optimal strategy for two reasons:

 EDLP works well when prices are below the competitions’ prices, which would not be the case for Our Community Market. Our products will be reasonably priced, but because of our focus on local and ethically produced items, prices will not be below competitors’.  Specials and promotions play an important role in communicating with customers. Specials are central to the marketing strategies of coops we interviewed, allowing the stores to feature higher margin items such as perishables, which increase basket size. Advertising promotions or deals through social media is also a way to stay connected with customers and bring them into the store more often.

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Appendix B: Distribution

Produce

Local and regional produce is ordered two days in advance and products are harvested, graded and packed to order. Each area will have a central grower, with adequate infrastructure for loading, packing, and storage, where produce from smaller farms will be consolidated before being delivered to the distribution center. These central farms would be trusted partners in the area of quality control. This trust reduces the need for dock inspections on every delivery and allows for credit requests to be processed automatically, all of which leads to lower costs.

Midsized farms will aggregate food from smaller farms and then move product to the distribution center. Trucks leave the farms in the late afternoon and arrive in the evening at the distribution center, which will be located in areas between the farms and urban centers to reduce real estate costs. Truck efficiency can be maximized by buying all non‐regional produce directly from the produce terminal and delivering these items together with the regional loads.

Meat, fish and poultry

Sustainably grown, ethically sourced, local and regional proteins are very important and a crucial area for development by the chain. Local meat is really hard to do, but if done well, can be a major competitive advantage for the stores for years to come.

Local and regionally sourced proteins with adequate supply, satisfactory quality and pricing suitable for sale through retail outlets are in an early stage of development in the Northeast. Supply chains, producers and processing capabilities are in formative stages now. The potential for local and regional meats to be a competitive advantage for Our Community Market is huge, but it may be more costly and require more space and service than planned.

One model that should be investigated further is a centralized meat cutting facility, servicing the stores with case ready items, sold in self‐serve cases. Product, including value‐added items like sausage, could be delivered from a central distribution facility and shipped with local produce and dairy on the same truck, although it is unclear whether the delivery cycle and centralized cutting facility would meet the needs of the stores for quality and merchandising.

Seafood, is an important part of the picture for East Coast stores. Innovative and sustainable fisheries on the East Coast can be leveraged into important partnerships for the stores. However, many food co-op managers reported that dealing with fresh seafood was more trouble than it was worth. A sustainable seafood program should be a focus of store procurement and merchandising.

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Dairy

Local dairy offers the same opportunity for the stores to stand out as produce and meat. Most regions now have locally‐ produced dairy basics like milk and cream. The Cooperative will want to identify a dairy partner, using much the same approach that is outlined for produce and meat. Local dairy is very compatible with produce in terms of order cycles, temperature needs, and delivery. Our model proposes one pallet of local dairy on each of the three weekly deliveries, via a cross‐dock order cycle similar to that used for produce.

The Cooperative will also want to offer an organic dairy line, likely a national brand such as Organic Valley or Horizon. We’ve outlined two options for organic dairy‐‐ supply by the primary natural/organic distributor, or self‐distribution via the CDF. Both options appear to result in similar pricing, and we recommend our ‘rule of thumb’ here—if a good efficient option already exists, don’t reinvent it.

Conventional dairy may also be part of The Cooperative dairy mix in order to offer lowest prices on key items. If so, options for supply are similar to those for organic dairy. We find in the Northeast, local dairy prices are consistently lower than organic, and higher than conventional.

Grocery

It does not appear that there is a financial advantage in buying direct from leading vendors. Although the situation varies somewhat from vendor to vendor, the numbers suggest that in most cases UNFI’s cost will be the same or better than can be achieved by going direct. This assumes that The Cooperative can achieve pricing consistent with that of a member of NCGA.

Going direct might make sense in some cases. There may be some product lines manufactured on the East Coast that would be worth warehousing and distributing from the CDF. On occasion it may also make sense to bring in large volume deals and ship to the stores over time. However, for the majority of grocery items needed for the day to day business, including center store, frozen, refrigerated and wellness, The Cooperative will find a distributor partner, most likely UNFI, to be the best solution.

Costs of the CDF

We set out to actually design a model facility so we could size it and cost out rental/lease rates, etc., but there are too many unknowns to make such an exercise worthwhile at this stage. Form must follow function, and the functions at the CDF beyond produce are yet to be determined. More work is needed in order to accurately predict the costs of the facility.

We have determined, however, that when the chain reaches 10 stores, grossing $10M each, produce transfers alone from the CDF would total $15.6 million a year. At a 10% gross margin this would generate approximately $1,560,000 a year toward the operation of the CDF. We believe the CDF can function very successfully at this level.

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To put these numbers in more context sales numbers from other distribution facilities similar to the proposed CDF are listed below:

 La Montanita’s Cooperative Distribution Center in Albuquerque NM transferred or sold roughly $4M of product to La Montanitia stores and other customers in FY13.  Co‐op Partners in St. Paul MN recorded $21.8M in sales to Wedge Co‐op and other customers at year end June 2013.  Landisville Produce Co‐op in Landisville, NJ, a produce aggregator and marketer for 70 grower‐owners, did $7M in gross sales in FY 12. They operate on a 5% gross margin and have been in business for over 100 years.

Further comparison can be made to a network of food hubs operating around the country. A food hub is “a business or organization that actively manages the aggregation, distribution, and marketing of source‐ identified local and regional food products primarily from small to mid‐sized producers to wholesalers, retailers, and/or institutional accounts.” The National Food Hub Collaboration, in conjunction with the USDA reported findings from a survey conducted in 2013 of 125 food hubs. Most of these businesses were small and very new; 62% percent of them had been in business for 5 years or less. The average food hub barely breaks even, although hubs with longer operating histories or what were cooperatively structured performed better. Their annual gross sales ranged from $1,500 to $75M, with median annual sales of $450,000 and an average of $3.2M.

More work needs to be done to validate our proposal but there is good reason to believe that the CDF can work, and will provide Our Community Market with a steady supply of local and regional product that can serve as a competitive advantage and market differentiator to the stores.

% of Department Sales Going Through CDF Deli 100% Produce / Meat 82% Specialty 64% Grocery 2% Wellness 0% Total 52%

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Cross Dock Facility Profit & Loss Statement

Year 1 Year 2 Year 3 Year 4 Year 5 Number of Stores 3 6 9 12 15

Total CDF Revenue 9,174,024 18,990,229 29,297,245 39,604,261 49,911,277 CDF Cost @10% GM 8,256,622 17,091,207 26,367,521 35,643,835 44,920,149 CDF Income 917,402 1,899,023 2,929,725 3,960,426 4,991,128

Total Deliveries / Week 12 24 36 48 60 Deliveries / Day 2 4 6 8 10 Trucks / Day 1.00 2.00 3.00 4.00 5.00

CDF Expenses Real Estate 450,000 450,000 450,000 450,000 450,000 Purchasing Coordinator 108,288 108,288 108,288 108,288 108,288 CDF Management 181,280 181,280 181,280 181,280 181,280 Truck Costs 45,841 91,682 137,523 183,365 229,206 Driver Costs 74,863 149,725 224,588 299,450 374,313 Warehouse Staff 561,469 1,122,938 1,684,407 2,245,876 2,807,345 Actual CDF Cost 1,421,740 2,103,913 2,786,086 3,468,258 4,150,431 Net Income (504,338) (204,890) 143,639 492,168 840,697

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Appendix C: Weekly Operational Data

DEPARTMENT SALES MARGIN PAYROLL $ PAYROLL HRS Weekly % of Margin Margin % of # Payroll Hours SPLH Sales Sales % Cont. (w/ Benefits) Sales SKUs Bulk $10,800 6.0% 31.9% 1.9% * Refrigerated $14,400 8.0% 23.7% 1.9% 175 Packaged $31,500 17.5% 31.9% 5.6% 1,200 Frozen $6,300 3.5% 31.8% 1.1% 200 Grocery $63,000 35.0% 10.5% $3,473 5.5% 127 $496 1,575 Body Care $3,600 2.0% 40.7% 0.8% 50 Supplements $7,200 4.0% 40.7% 1.6% 100 Wellness $10,800 6.0% 2.4% $710 6.6% 26 $416 150 Meat/Seafood $11,700 6.5% 23.2% 1.5% 100 Produce/Floral $34,200 19.0% 27.4% 5.2% 275 Produce & Meat $45,900 25.5% 6.7% $3,380 7.4% 124 $371 375 Beer/Wine $10,800 6.0% 12.6% 0.8% 520 Cheese $9,000 5.0% 28.0% 1.4% 140 Specialty $19,800 11.0% 2.2% $1,960 9.9% 72 $276 690 Grab & Go $13,500 7.5% 33.0% 2.5% 80 Food Bar $12,600 7.0% 33.0% 2.3% 25 Bakery $10,800 6.0% 33.0% 2.0% 125 Coffee Bar $3,600 2.0% 33.0% 0.7% 10 Deli $40,500 22.5% 7.4% $5,958 14.7% 218 $186 240 Subtotal $180,000 100.0% 29.2% $15,481 8.6% 566 $318 3,000 Front End $5,187 2.9% 190 Marketing $1,592 0.9% 40 Co-Manager $4,777 2.7% 120 Store Manager $1,813 1.0% 40 Store Total $180,000 100.0% 28.5% $26,435 14.7% 956 $188 *Included in Packaged

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Appendix D: Annual Store Operations Costs at Maturity

Dollars % of Sales Store Sales $9,360,000 100%

Operational Costs Distribution Costs $603,758 6.5% Cost of Goods Sold $6,018,670 64.3% COGS $6,622,427 70.8% Labor Costs $1,500,230 16.0% Total Operational Cost $8,122,657 86.8%

Physical Plant / Store Costs Lease $360,000 3.8% Repairs & Register Maintenance $30,000 0.3% Utilities $75,000 0.8% General Liability Insurance $10,000 0.1% Depreciation $127,857 1.4% Cleaning & Refuse $34,000 0.4% Store Supplies $80,570 0.9% Credit Card Fees $99,216 1.1% License Expense $1,500 0.0% Office Supplies / Printing / Postage $18,381 0.2% Equipment Rental / Lease $22,000 0.2% Misc. (2%) $17,170 0.2% Total Per Store Plant Costs $875,694 9.4%

Total Costs Store $8,998,352 96.1%

Store Contribution to Overhead $361,648 3.9%

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Appendix E: Consolidated Financial Projections

Income Statement Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

# of Stores 3 3 6 9 12 15 Sales And Returns - 24,993,324 51,736,182 79,816,182 107,896,182 135,976,182 Cost of Goods - 17,683,384 36,604,605 56,471,888 76,339,170 96,206,452 Gross Profit Total - 7,309,940 15,131,576 23,344,294 31,557,012 39,769,730 Store Labor - 4,500,690 9,001,379 13,502,069 18,002,759 22,503,448 Store Operations - 2,243,512 4,487,023 6,730,535 8,974,047 11,217,559 Total Central Admin 1,104,825 2,175,009 2,361,900 2,549,025 2,732,517 2,919,642 Depreciation - 465,571 465,571 729,143 992,714 1,256,286 Total Operating Expenses 1,104,825 9,384,781 16,315,874 23,510,772 30,702,037 37,896,935 Interest Expense 420,289 644,003 846,411 1,026,237 926,523 Net Income (1,104,825) (2,495,131) (1,828,301) (1,012,890) (171,261) 946,271

Balance Sheet Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Assets Cash 2,053,536 5,285,540 5,578,312 6,597,474 4,062,864 2,809,645 Other Assets 7,256,464 7,818,015 12,867,929 17,709,222 22,286,944 26,601,095 Assets Total 9,310,000 13,103,555 18,446,241 24,306,697 26,349,808 29,410,739 Liabilities and Equity Liabilities Other Liabilities 0 2,560,128 4,918,840 7,356,301 9,793,761 12,231,221 Current portion LT debt 531,442 886,526 1,262,915 1,661,887 1,761,600 1,867,296 Long Term Liabilities 6,473,383 9,846,857 12,843,942 15,442,055 13,680,455 11,813,158 Liabilities Total 7,004,825 13,293,511 19,025,698 24,460,243 25,235,816 25,911,676 Equity Stockholders’ Equity 1,410,000 1,410,000 2,820,000 4,230,000 5,640,000 7,050,000 Other Equity 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 Retained Earnings (1,104,825) (3,599,955) (5,428,256) (6,441,146) (6,612,408) (5,666,136) Equity Total 2,305,175 (189,955) (579,456) (153,546) 1,113,992 3,499,064 Liabilities and Equity Total 9,310,000 13,103,555 18,446,241 24,306,697 26,349,808 29,410,739

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Cash Flow Year 1 Year 2 Year 3 Year 4 Year 5 Net Income (2,495,131) (1,828,301) (1,012,890) (171,261) 946,271 Add Back Depreciation 465,571 465,571 729,143 992,714 1,256,286 Changes in Working Capital 1,533,005 443,227 467,024 467,024 467,024 Cash From Operations (496,554) (919,502) 183,277 1,288,477 2,669,581 Cash From Investments 0 (3,600,000) (3,600,000) (3,600,000) (3,600,000) Cash From Financing 0 1,438,800 1,438,800 1,438,800 1,438,800 Change in Debt 3,728,558 3,373,474 2,997,085 (1,661,887) (1,761,600)

Beginning Cash 2,053,536 5,285,540 5,578,312 6,597,474 4,062,864 Change 3,232,004 292,772 1,019,162 (2,534,610) (1,253,219) Ending Cash 5,285,540 5,578,312 6,597,474 4,062,864 2,809,645

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Appendix F: Central Administrative Expenses

Personnel Expenses # of Staff Fully Loaded Salary Title (Year 1) Salary Store Operations CEO 1.00 $120,000 $149,465 New store development coordinator 2.00 $85,000 $209,490 Purchasing Coordinator 1.00 $85,000 $108,288 Product development staff (local) 1.00 $85,000 $108,288 Product development staff (non-local) 1.00 $85,000 $108,288 Store Development Team 2.00 $75,000 $186,760 Finance CFO 1.00 $95,000 $120,053 Finance Manager 0.00 $75,000 $0 Accounts Payable Clerk 2.00 $65,000 $164,030 Marketing Marketing Director 1.00 $85,000 $108,288 Publications Manager 0.00 $65,000 $0 Member Services Manager 1.00 $65,000 $84,758 Human Resources Human Resource Manager 1.00 $85,000 $108,288 Payroll Clerk (# per store???) 2.00 $60,000 $152,665 Information Technology IT Director 1.00 $85,000 $108,288 Point of Sale Coordinator 1.00 $70,000 $90,640 Cross Dock Facility Purchasing Coordinator 1.00 $85,000 $108,288 General Manager 1.00 $75,000 $96,523 Warehouse manager 1.00 $65,000 $84,758 Store Level Staff Store Wide Specialist 1.00 $44,720 $62,385 Customer Service Agents 1.00 $27,040 $38,927 General Manager 1.00 $75,000 $94,273 Co-Manager 1.00 $65,000 $82,808 Marketing Manager 1.00 $65,000 $82,808

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Administrative Costs Year 1 Year 2 Year 3 Year 4 Year 5 Total Personnel $1,807,585 $1,971,615 $2,135,645 $2,299,675 $2,463,705

Administrative Costs Telephone $7,500 $7,500 $7,500 $7,500 $7,500 Office $150,000 $150,000 $150,000 $150,000 $150,000 Meeting / Travel $60,000 $60,000 $60,000 $60,000 $60,000 Professional Services $50,000 $50,000 $50,000 $50,000 $50,000 Office Supplies $40,000 $40,000 $40,000 $40,000 $40,000 Dues & Subscriptions $15,000 $15,000 $15,000 $15,000 $15,000 NCGA $52,736 $80,816 $108,896 $136,976 $165,056 Depreciation $5,000 $5,000 $5,000 $5,000 $5,000 Miscellaneous $21,828 $23,749 $25,670 $27,592 $29,513 Total Central Admin $402,064 $432,065 $462,067 $492,068 $522,069

Total Admin $2,209,649 $2,403,680 $2,597,712 $2,791,743 $2,985,774

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Appendix G: Typical Employees per Hour

Typical Employees per Hour

13 13 13 13 13 13

10 10 10 9 8 8 8 7 6

4

7:00 8:00 9:00 10:0011:0012:00 1:00 2:00 3:00 4:00 5:00 6:00 7:00 8:00 9:00 10:00 AM AM AM AM AM PM PM PM PM PM PM PM PM PM PM PM

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Sales per Labor Hour

$167 $165 $164 1200 $163 $161 $159 $157

800

400

0 $150,000 $160,000 $170,000 $180,000 $190,000 $200,000 $210,000

Fixed Hours Variable Hours

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Appendix H: Community Engagement Strategies Our Community Market aspires to be a community hub, where shoppers know one another and the staff, where they can learn about co-ops and the food system, and where they can make a socially responsible investment that benefits their community. Below are suggestions about how to achieve these community connections.

(1) Engaging in the store: The role of staff. A physical sense of community in the stores can be cultivated through the staff, who will be at the forefront of creating a sense of both welcome and continuity for shoppers. A welcoming and friendly environment is part of good customer service, of course, but it is important to recognize that the environment staff creates will contribute to member-owners’ sense of belonging.

(2) Engaging on the road: Kids Picks, PCC Natural Markets. Engaging the community outreach program that combines visibility, mobility, and great food. Inspiration for such a program can be found in the Kid Picks program at PCC, which for 10 years has operated a 28-foot, brightly painted retooled RV as a mobile tasting kitchen for kids. The truck travels to schools, parks, community events and festivals, and introduces new foods to kids, who then vote on whether they like it. Products that receive a two-thirds approval rating are marked with a “Kids Pick” sign in the store, nicely completing the loop and reconnecting the program back to member-owners’ shopping experience. PCC –which also operates an extraordinarily successful cooking class program out of facilities in its stores—is currently building out a second RV that will have a full kitchen and allow the co-op to bring its wildly popular cooking classes to the community. CFO Randy Lee explains that, while the trucks are expensive, PCC believes the programs generate both enough business and good will to be worthwhile.

(3) Engaging on issues: PCC Natural Markets. Co-ops like PCC demonstrate how members can participate by exercising their collective political capital to advocate on issues that the co-op has identified as critical. In the current election year, for instance, PCC has devoted significant staff and funding and successfully rallied its members’ support for placing a GMO labeling law on the Washington State ballot. PCC also played an instrumental role in forming the Farmland Trust, a nonprofit whose mission is to preserve threatened farmland in the co-op’s region. While it is a legally separate entity from the co-op, PCC members Kids Pick Truck, PCC Natural Markets generously support the trust through direct

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donations. Even though both initiatives take place outside the store, they involve issues that align directly with PCC’s long-term strategic goals of food security. Members get that and support it fully, which is another form of participation.

(4) Engaging through community partnerships: Outpost Natural Foods.

Throw a rock at any co-op and you’re sure to hit an inspiring approach to strengthening the community, in the form of financial and other kinds of robust support that generally exceeds what many normal businesses do. The design of one such program at Outpost Natural Foods in Milwaukee reflects the kind of approach that might align with The Cooperative’s capacity and priorities, as it establishes itself in different communities. The program involves a decade-plus partnership with the Hunger Task Force, an emergency food pantry in the Milwaukee area. During the holidays, Outpost arrange for discount purchasing of natural and organic foods and then invites members purchase bags for $20 at the register. Outpost also collects bags decorated by local Decorated bag from Outposts's “Buy a Bag for the Hungry” program schoolchildren to package the food. Members respond generously to the drive, which delivered $104,000 in natural and organic foods contributions in 2012. Outpost also has a second, summertime drive for Hunger Task Force, which solicits food donations to feed kids who are out of school and so can’t rely on school lunches. For this effort, co-op members and staff travel to the Hunger Task Force facility to package food.

For Our Community Market, this program is instructive because it meets the criteria for high impact, high participation, and efficient use of resources in several ways. First, it clearly aligns with Outpost’s mission, and so reflects the co-op’s shared purpose. It supports the work of a trusted, credible partner already doing vital important work in that particular community. Outpost’s contribution requires little cash outlay, other than support from staff to coordinate delivery and solicit donations. Finally, the program provides a chance for members to participate at different levels, including as donors and/or active volunteers.

(5) Engaging through listening, or, beyond one member, one vote. Strategies for gathering member input can be as simple as an electronic survey, or as complex as the online regional member meetings and local area meetings that The Co-operative group holds twice yearly. The important thing is to pick a strategy that achieves what the co-op needs, and make clear to members the value and impact of their input.

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A more involved form of engagement is visible in I think it’s an old-fashioned view to think that voting for the member forums that the Lexington Co- people that you haven’t met and won’t hold accountable operative Market holds when the co-op is is a successful measure of engagement or participation. considering major change and wants to facilitate You need to use your resources more creatively. . . . If you getting meaningful input in a manageable way. In provide opportunities to have their say informally that situation, the co-op invites 200 of its most through surveys, social campaigns, social media, that engaged members to come and hear a proposal will engage a whole different set of people.” and respond to it. Management and the board –Simon Plunkett, Regional Secretary for Membership, take their input, refine the proposal, and North Midlands/North West Region, The Co-operative distribute it to the entire membership for Group additional feedback. This process intentionally engages all owners. For a diagram of Lexington’s Change Management model, see figure 2, p 21.

(6) Engaging through Incentives. The Cooperative plan raises the possibility of using rewards programs such as Reward Volunteers app from the Cabot Creamery or a version of the UK’s SuperDivi to incentivize or rewards its member-owners who volunteer in the community or serve the co-op.

The “super-divi” rewards member-owners with a small patronage or dividend bonus for things like engaging voting in elections or attending member meetings. Simon Pluckett of The Co- operative Group says that his co-op still has the program but to his knowledge has not formally analyzed its impact, although he suspects it somewhat nominal. Puckett believes that expanded member engagement in the co-op’s democratic process can be traced just as much to its efforts work to make meetings more engaging and meaningful. Mindful of the economic challenges that this cooperative currently faces, Pluckett points out that tying loyalty or rewards programs also has an inherent risk in those inevitable years when profits are reduced. PCC’s Janice Parker similarly notes that member attendance at annual meetings began to rise when the co-op started offering meaningful educational programming, suggesting that good programming may be the best draw.

The Reward Volunteers program (formerly Cabot App) was launched by Cabot Creamery Co-op and is now supported by numerous sponsoring organizations. Currently in its fourth round, It uses an iPhone and Facebook-based tracking system for volunteer hours worked, and each month the program selects recipients who receive rewards based on the number and “reach” of their volunteer hours. The volunteer work must be for an eligible 501(c)(3) organization.

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Appendix I: Employee Engagement Costs Ensuring staff are prepared to take on the role of worker-owners requires specialized training. While self-management techniques and other employee engagement strategies that may carry with them an upfront cost will be implemented, we have not attempted to model these costs into the store operations, assuming that they will be done during currently scheduled time. However, off-site training will be necessary to ensure a cooperative culture is achieved. To estimate the costs, we have assumed that each year, 50% of the staff will attend a two day paid training session. In year one, these courses are estimated to cost $23,000 the majority of which is related to paying staff to attend. By year 5, the cost of this training is expected to rise to $111,600 – this is a very aggressive and expensive approach, actual costs are likely to be lower.

Consultant Daily Rate $1,700 Length of Training (days) 2 Length of Training (hours) 6 Employees Per Class 30

Year 1 Year 2 Year 3 Year 4 Year 5 30 30 30 30 30 Total # EE's 96 192 288 384 480 Percent of EE's attending 50% 50% 50% 50% 50% CDF Specialists 9 18 27 36 45 CDF Drivers 1 1 4 5 6 CDF Managers 2 2 2 2 2 SW Specialists 18 36 54 72 90 Customer Service 23 45 68 90 113 Managers 15 30 45 60 75 EE's receive training 56 111 167 222 278 Central Admin Classes / Year 2.0 4.0 6.0 7.0 9.0 CDF Labor $3,947 $7,895 $11,842 $15,790 $19,737 SW Specialists Labor $6,966 $13,932 $20,898 $27,864 $34,830 Customer Service Labor $5,382 $10,530 $15,912 $21,060 $26,442 Total Variable Labor $16,295 $32,357 $48,652 $64,714 $81,009 Consultant Cost $6,800 $13,600 $20,400 $23,800 $30,600 Total Cost $23,095 $45,957 $69,052 $88,514 $111,609

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Appendix J: Governance Models Our Community Market will launch not as a multi-stakeholder co-op with at least two classes of members—relatively rare in the U.S.—but simultaneously as a multi-site cooperative, requiring centralized administration over disparate locations, that still aspire to forge meaningful connections to local communities. We are aware of no prototypes for a startup of this complexity, but a brief review of different models offers a starting point for discussion:

PCC Markets

In its size and scale, PCC offers perhaps the closest existing parallel in the U.S. to the regional grocery chain that Our Community Market envisions as its initial iteration. Its nine stores are located throughout the Seattle region and draw primarily middle-income or affluent neighborhoods (although its next store will be located in a much more diverse and mixed income neighborhood). All board members are elected at large; there is no representation specific to a single store, and no store-specific advisory committees. In recent years, in response to members’ feedback that they did not feel good about voting in elections where they didn’t know the candidates, PCC has put effort to into elevating candidates through video interviews and store meet-and-greets. The PCC board is a Policy Governance board with a long history of making clear distinctions between management of the store operations, de-emphasizing any perception that the board “runs” the co- op.

REI, Inc.

REI has essentially a self-perpetuating board, with essentially no pathway for a member to be involved in governance, beyond voting for a predetermined slate of director candidates. No provision exists in the bylaws for members to put themselves forward as candidates, and members can only have others matters placed on a ballot and acted on at a meeting if they present sufficient signatures and at least 1/3 of the board approves.ix The only way for members to call a special meeting is through a statutorily mandated process. But member-owners can choose to become involved in their local stores through multiple community volunteer opportunities, classes and events, and REI is certainly a well-respected company that delivers solid member value and reliably pays patronage dividends. But the co-op offers no direct pathway for member-owners to become actively involved in governance, and offers no way for members to contribute additional capital beyond a nominal membership fee.

The Co-operative Group, UK.

TCG’s approach is nearly the opposite of REI’s, assigning significant control and influence on the local level and the opportunity for members to advance through every level of the hierarchy. Its 71.6 million members have significant opportunities for input, engagement, and decision-making at the local, regional and national levels. The Co-operative organizes its trade area into 50 Local Our Community Market - Feasibility Study Page 55

Area Committees, 12 Regional Boards and a single National Board. Members have an opportunity for different kinds of participation and decision-making at each level, and the co-op provides extensive training to develop leadership from below and within. Any member is eligible to run for local elections and to progress through the governance structure, all the way to the national board of directors. Regional boards have delegated authority to make operational recommendations for their region around things like store closing or new locations. Local Committees consistently have contested elections as well.

In The Co-operative Group, the local advisory committee is elected by the membership, and forms the pool from which regional council and national board members are drawn. The local committee has a well-defined role that includes decision-making authority over a limited budget to administer its community action fund in support of local organizations. It also plays an explicit role in providing feedback and input on co-op matters.

Weavers Street Market, Hillsboro, NC.

Weavers Street is a multi-stakeholder cooperative with two owner classes: workers and consumers. Each elects two members to the seven-member Board of Directors; two positions are appointed by the board, and the general manager holds the seventh position.

Weaver Street has over 11,000 consumer owners and 90 worker owners. The financial return for those owners has been high. In 2007 consumer owners received an investment of close to $400,000 on an investment of $1 million, or 39%, while worker owners received a patronage dividend based on hours worked of $1.01 for every hour worked during the year. Based on a total worker share investment of $406,048, this represented a return on share investment of 37%.x

Black Star Co-op Brewery & Pub, Austin, TX.

Opened in 2010 as a multi-stakeholder cooperative, Black Star has one membership class with three subsets of decision makers: consumers; the workers assembly; and supporters, which include other cooperatives and nonprofits. The workers assembly can hold as many as three seats on the nine-person board, but all of those seats must be elected by the membership at large. Consumer- owners and worker-owners have one share and one vote in elections; co-op and nonprofit members have two shares and two votes. Only individual members can be elected to the board.xi The Workers Assembly manages the operations of the co-op, which is a democratic, self-managed workplace. The workers are divided into separate teams; each team elects a leader to oversee performance and be a point of connection with other teams. Teams have autonomous authority over team-specific functions, while operational decisions that affect all workers are voted upon by the entire Workers Assembly.xii

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Eroski, Spain.

Eroski is a multistakeholder co-op in the Mondragon system. It owns a distribution system that operates its own chain of 1,000+ supermarkets, hypermarkets, travel agencies, and outlet stores (excluding franchises). It has over 40,000 employees (12,000 of them worker-owners) and over a half million consumer members. Consumer members pay $75 per year to join, while a worker owner’s equity stake costs $6500 and is typically financed through payroll deduction over several years. Consumer members receive a discounts, while worker-members receive distributions of surplus.xiii

At a local level the worker and consumer classes each elect 250 delegates to the general assembly. The general assembly elects six workers and six consumers to the board of directors, which in turn elects the general managers who oversee operations. The general assembly also elects the members of various other oversight and supervisory councils, and all of these participatory bodies share decision-making power in various ways, together comprising a form of network governance.xiv Eroski’s governance system, with its careful and broad stakeholder engagement, division of decision-making processes, and multiple oversight mechanisms, appears to successfully decentralize and balance power, and avoid or reduce opportunistic behavior by management.xv Challenges to this kind of system include managing its organizational complexity, the risk that an insufficient number of members from all classes will have the right skills or be sufficiently incentivized to participate.xvi

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Appendix K: The Cooperative Think Tank The work presented in this document was only possible from the support and guidance of the Think Tank Walden Swanson and Ruffin Slater assembled to lead the process. The members of the Think Tank were incredibly generous with their time and assistance.

The Cooperative Think Tank

Sean Doyle, Seward

Terry Appleby, Hanover

Terry Bowling, La Montanita

Tim Bartlett, Lexington

Mead Stone, River Market in Minn.

Jacki Arthur, Three Rivers Market

Dan Gillotte,,Wheatsville

Gail Graham, Mississippi Market

Michael Rozyne, Red Tomato

Rink Dickinson, Equal Exchange

Roberta MacDonald, Cabot

C.E. Pugh, NCGA

Robynn Shrader, NCGA

Ben Nauman, NCGA

Dave Blackburn, Development Cooperative

P. J. Hoffman, Development Cooperative

Barry Silver, NCBCI/NCB

Chuck Snyder, NCBCI/NCB

Terry Simonette, NCBCI/NCB

Ann Fedorchak, NCBCI/NCB

Bill Gessner, CDS

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Kate Sumberg, CDS

Marilyn Scholl, CDS

Mark Goehring, CDS

Walden Swanson, CoopMetrics

Rosemary Mahoney, CoopMetrics

Kate Sumberg, CoopMetrics

Doug Wille, Wakefern

Al Plamann, Unified Western

Bob Schall, Self Help

Doug Rauch, Trader Joes/Harvard

Fred Stapenhorst, Consultant

Howard Brodsky, CCA Global

Martin Lowery, NRECA

Newell Lessell, Chroma Technology

Paul Hazen, OCDC

Ray Moncrief, Kentucky Highlands

Stuart Reid, Food Co-op Initiative

Roger Collins, Harps

Dana Pancrazii, Heron Foundation

Bob Burlton, Retired from MidCounties Co-op in UK

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i The store is currently being called Our Community Market, although the name and logo used in this report is likely to change as part of the overall marketing and branding strategy that would be completed during the business planning process. ii Beer and wine selection will be dependent on location, as state laws differ. iii Booz and Co. data. iv The store is currently being called Our Community Market, although the name and logo used in this report is likely to change as part of the overall marketing and branding strategy that would be completed during the business planning process. v Booz and Co. data. vihttp://www.symphonyiri.com/portals/0/articlePdfs/T_T%20August%202012_Presentation.pdf vii http://www.nytimes.com/2010/02/27/your-money/27shortcuts.html?_r=0 viii http://www.praxiscg.com/sites/praxiscg.com/files/Building_longterm_value.pdf ix REI Bylaws, Article II.5. Available online at http://www.rei.com/content/dam/documents/pdf/REI%20Bylaws/REI%20Bylaws.pdf x http://www.smu.ca/webfiles/HybridCo-operatives.pdf xi Source: Lund, Margaret. (2010). Solidarity as a Business Model: A Multistakeholder Cooperatives Manual. Cooperative Development Center, Kent State University: 44. Available online at http://www.uwcc.wisc.edu/pdf/multistakeholder%20coop%20manual.pdf. xii Source: Black Star Co-op website, http://www.blackstar.coop/about/workers-assembly/ xiii Lund, p. 35. xiv Manetti, Giacomo & Simone Toccafondi. (2012). The contribution of network governance to preventing opportunistic behavior by managers and to increasing stakeholder involvement: the Eroski case. International Journal of Business Governance & Ethics 7(3): 252-278. xv Ibid, p. 270. xvi Ibid. p. 271.

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