Our Community Market - … Feasbility Study Prepared by: The ICA Group 1330 Beacon St., Suite 355 Brookline, MA 02446 . Our Community Market - Feasibility Study Page ii ...

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

Our Community Market - Feasibility Study Page ii

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

Our Community Market - Feasibility Study Page iii

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:

Our Community Market - Feasibility Study Page iv

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

fresh, local foods at prices that match or beat

conventional stores, while still offering great

service, a real commitment to the

community, and ensuring that people are

paid fairly throughout the supply chain.

While it requires rethinking many of the

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

How Our Community Market Will Compete

Offer high quality fresh and prepared products in a small format store

Match conventional stores on price

Make healthy foods more accessible through price and convenient locations

Our Community Market - Feasibility Study Page v

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.

Our Community Market - Feasibility Study Page vi

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.

Our Community Market - Feasibility Study Page vii

To achieve these cost savings and maintain high quality products and a fantastic customer

experience requires overhauling the following areas:

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.

Operations Merchandising Distribution

Store Development

Centralized process with a

dedicated team. Goal is to

open 3+ new stores / year.

Workforce Redesign

Share administration (HR, IT,

etc.) across a network of

stores. Cross trained staff.

Store Format

Small stores (around 6,000

ft2.) with a simple design. No

kitchen, service deli or

service meat.

Curated Selection

3,000 SKUs with a full array

of high quality produce and

prepared items. For the

center store, focus on high

turnover items.

Co-Branding

The Our Community Market

logo will appear on products

that share the core values of

locally and ethically sourced.

Co-branding will bring our

name into customers’

kitchens and minds.

Cross Dock Facility

Distribution designed to

meet the needs of farmers.

Serves a network of stores.

Mid-Sized Farms

Address supply issues,

reduce costs and increase

quality.

Commissary

Central kitchen at the cross

dock facility assures quality

and maximizes the use of

the facility and trucks.

Our Community Market - Feasibility Study Page viii

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.

Our Community Market - Feasibility Study Page ix

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.

Our Community Market - Feasibility Study Page x

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 1

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.


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.


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

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.

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.”

Number of ‘Channels’ Shopped

Source: SymphonyIRI


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.

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.

0%

10%

20%

30%

40%

50%

60%

QUAL I TY &

FRESHNESS

PR I CE VAR I ETY PROM OTIONS

Most important drivers of

shopper satisfaction for stores

with produce departments

Source: Oliver Wyman and Ipsos Interactive


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

unable to identify suitable locations. vi These two

factors, tied with the fact that most large operators

have yet to successfully implement a small format

store focused on fresh foods indicate that if the food

co-op sector can successfully implement a store like

Our Community Market, it will secure the first spot in

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

A simple “shrink to fit”

adaptation of the larger

store model is unlikely to

succeed.

- Booz & Co.


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.


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.


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.

Minimum Financial Sustainability 8 Stores

• 29% Gross Margin • 1.5% Net Income

• 3% Administrative Costs • Support a Regional

Distribution Center

$9.3 Million in Sales


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

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 Produce Prices


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.

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.

Farms Cross dock Facility Stores


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.

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.

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.


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.


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


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.


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.


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.

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.

0%

2%

4%

6%

8%

10%

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Admnistratvie Costs as a Percent of Sales


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


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


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.

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.

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

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

Grocery

Specialty

Produce&Meat

Deli

Wellness

Our Community Market

Trader Joe’s

Sample Food Co-op

Sample Food Co-op (SKUs

Accounting for 80% of Sales)

SKUs by Department


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.


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.


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.

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.

$8.33M$8.91M

$9.36M $9.36M

Year 1 Year 2 Year 3 Year 4

Store Sales


Average w/

Meat7

Average w/

Produce

Industry

Average

Co-op

Average

Average Basket Size $70 $548 $34 $26

Average Trips per Week to Our

Community Market if secondary store 0.43 0.43 0.43 0.43

Total Customers needed if Our

Community Market is secondary store 5,980 7,752 12,312 16,291

Total Customers needed if Our

Community Market customer shops

there once/week

2,571 3,333 5,294 7,005

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.


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

Average Trips Per

Week

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

0.60 15,000 12,000 10,000 8,571 7,500 6,667 6,000 5,455

0.80 11,250 9,000 7,500 6,429 5,625 5,000 4,500 4,091

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.

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

Total Customers per Week


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


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

network of stores. Given central

administrative costs of roughly $2 million

per year it takes eight stores to cover these

central costs.

Labor costs (excluding administrative costs)

are assumed to represent 16.6% of sales.

While most of the labor costs are variable,

there is some efficiency to be found in

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.

75%

80%

85%

90%

95%

100%


Break Even

Break Even Projected Revenue

COGS73.1%

Labor16.6% Occupancy &

Equipment5.4%

Marketing1.1%

Maintenance & Insurance

0.5%Other1.3%Interest

2.1%

Store Level Cost Structure


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.


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.


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?


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.


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


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.


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.


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


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.


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.


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.


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.


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.


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.


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%


Cross Dock Facility Profit & Loss Statement


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


Appendix C: Weekly Operational Data

DEPARTMENT SALES MARGIN PAYROLL $ PAYROLL HRS

Weekly Sales

% of Sales

Margin %

Margin Cont.

Payroll (w/ Benefits)

% of Sales

Hours SPLH #

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


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%


Appendix E: Consolidated Financial Projections

Income Statement


# 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


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


Cash Flow


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


Appendix F: Central Administrative Expenses

Personnel Expenses

Title # of Staff (Year 1)

Salary Fully Loaded

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


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


Appendix G: Typical Employees per Hour

6

8 8

10

13 13 13

10 10

13 13 13

98

7

4

7:00AM

8:00AM

9:00AM

10:00AM

11:00AM

12:00PM

1:00PM

2:00PM

3:00PM

4:00PM

5:00PM

6:00PM

7:00PM

8:00PM

9:00PM

10:00PM

Typical Employees per Hour


$157 $159

$161 $163

$164 $165

$167

0

400

800

1200

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

Sales per Labor Hour

Fixed Hours Variable Hours


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

generously support the trust through direct Kids Pick Truck, PCC Natural Markets


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

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.

Decorated bag from Outposts's “Buy a Bag for the Hungry” program


A more involved form of engagement is visible in

the member forums that the Lexington Co-

operative Market holds when the co-op is

considering major change and wants to facilitate

getting meaningful input in a manageable way. In

that situation, the co-op invites 200 of its most

engaged members to come and hear a proposal

and respond to it. Management and the board

take their input, refine the proposal, and

distribute it to the entire membership for

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.

I think it’s an old-fashioned view to think that voting for

people that you haven’t met and won’t hold accountable

is a successful measure of engagement or participation.

You need to use your resources more creatively. . . . If you

provide opportunities to have their say informally

through surveys, social campaigns, social media, that

will engage a whole different set of people.”

–Simon Plunkett, Regional Secretary for Membership,

North Midlands/North West Region, The Co-operative

Group


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


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


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


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


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


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


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


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.

http://www.symphonyiri.com/portals/0/articlePdfs/T_T%20August%202012_Presentation.pdf

http://www.smu.ca/webfiles/HybridCooperatives.pdf

http://www.blackstar.coop/about/workers-assembly/

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