THE NEW NORMAL

GROWING OUR CO-OPS AND THRIVING

IN A COMPETITIVE LANDSCAPE

NFCA FALL MEETING,

HANOVER, NH

SEPTEMBER 27, 2014

Market Context

$0

$2,000,000,000

$4,000,000,000

$6,000,000,000

$8,000,000,000

$10,000,000,000

$12,000,000,000

$14,000,000,000

Whole Foods Trader Joe's Sprouts Fresh Market NCGA Natural Grocers Earth Fare

Major Natural Food Competitors

Increasingly Competitive

Landscape

The New “Supernaturals”

Sprouts

• Founded 2001:

– 2011 merged with Henry’s & Sun Harvest

– 2012 acquired Sunflower

• Chain of 165 stores, based in Phoenix, AZ

– Southwest U.S. and now KS, MO, GA, AL

• IPO in 2013, traded on NASDAQ

• $2.7 B/year, 27% gross, 3% net

• “Healthy living for less” & “Responsible Retailing”

– Produce=25% of store sales

Lucky’s

• Founded in 2002 by Bo Sharon

– Lots of former Oats & Sunflower talent

• Chain of 13 stores, based in Boulder, CO

– CO, MT, WY plus FL, IN, IA, MI, MO, OH, & KY

– MW focus

• “Good food for all”

• Intersection between Sprouts and Food Co-ops– More natural than a Sprouts

– More price-competitive than a food co-op

Natural Grocers

• Founded in 1955 in Golden, CO

– History as Vitamin Cottage, 2012 IPO

• Chain of 84 stores, based in Lakewood, CO

– Rockies, Southwest, Pac NW, pushing into MW

• $500 M/year, 25% gross, 2.5% net

– 5-16k sq. ft., 1/3 of mix and ¼ of space to Wellness

• “What we won’t sell and why”

– Strict product guidelines standards, only Organic Produce

Earth Fare

• Founded in 1975

• Chain of 33 stores, based in Asheville, NC

– Southeast U.S. plus IN, OH, and now MI

• “Connect communities and improve lives through

food”

– Company has a “Food Philosophy” of “selling food as close

to the ground as it gets.”

– “Boot List” of banned ingredients, particularly HFCS &

artificial ingredients

Effective competitors

• Know the consumers in my market – not just

the ones in my store

• Know that demographics are changing

• See mid-level shopper sales as the opportunity

• Know today’s mid-level shopper could be

tomorrows core shopper

• Set goals to attract more mid-level shoppers

Case Studies

• Existing Co-op acquires conventional store

• Existing Co-op merges with another co-op (&

opens a beautiful new store)

• Existing Co-op partners with a start-up group

Existing Co-op acquires

conventional store

Opportunity in White River Junction

>> Collaboration & Cooperation

>> Transformation

>> Results

• Increased sales from $100k to $180k per week

• Profitable within first three months of operations

• Increase in memberships

• Increase in staff morale – better pay, benefits

• Expansion of the cooperative model with no impact on our friends at Upper Valley Co-op

CO-OPERATIVE MERGER: STRENGTHENING TWO

COMMUNITIES

Testing our Values

People’s Food Co-op La Crosse:

Established as a buying club in 1973.

FY2010 Sales: $10.9 Million

FY2010 Members: 4124

Rochester Good Food Store

Established as a buying club in 1975.

FY2010 Sales: $3.4 Million

FY2010 Members: Annual dues paying members ~ < 500

La Crosse,

WI

Rochester,

MN

Bachelor's degree or higher 24.1% 38.1%

Married residents 39.1% 57.6%

Family households

48.4%

(WI 66.5%)

63.0%

(MN 66.2%)

% Ethnically white 91.1% 82.0%

% Living in poverty 25.2% 8.8%

July 2011 unemployment rate

7.6%

(WI 7.8%)

5.8%

(MN 7.2%)

Daytime population change

(commuters) 19,395 27,477

Household income

$37,476

(WI

$49,993)

$62,420

(MN

$55,616)

Some statistics of interest to the People’s

Food Co-op (these are 2012 stats):

There are always a lot of good reasons NOT

to do something.

Our challenge is to weigh the COSTS vs

BENEFITS of any given strategy.

Being a good manager is as much about

knowing what NOT TO DO as it is about

knowing WHAT TO DO.

Start with a gut check. List the obvious

benefits versus challenges.

ARE THERE ANY DEAL BREAKERS ON THIS LIST?

We dug in and tried to approach this opportunity

systematically –

First we created an “OPPORTUNITIES & CHALLENGES”

assessment

Then a “GOALS” sheet

From there the board asked me to layout a “MODEL

TIMELINE” based upon the development limitations

we were operating under.

Once the board had a chance to review those

items they asked me to generate a “MEMBER

ENGAGEMENT TIMELINE” that included a “DRAFT

LETTER” that would go to all members explaining

the opportunity, the actions taken to date, as

well as what we saw as the benefits and

challenges

At the same time I was working on an “EXPANSION

PLAN” that included market research conducted by two

outside consulting firms. A “SOURCES & USES BUDGET”

was drawn up that was used to create a set of “FIVE

YEAR PRO FORMA BUDGETS” to demonstrate the financial

feasibility of the plan.

Discussions began between the Rochester and La Crosse

BODs in early February 2011. By mid-July I had to

present a well formulated case demonstrating a solid

plan for the merger AND expansion.

Process Successes:

The La Crosse store was operating at a high level so

that when my attention was turned to focusing 90% on the

merger and expansion planning the co-op didn’t suffer.

(I eventually hired a store manager for La Crosse, but

not until 18 months in to the project.)

The boards of both organizations found trust in one

another and didn’t turn on one another during times that

were difficult.

We over-communicated. We took our lumps and found

comfort with open disagreement and hostility toward the

proposal. (It was small but very loud.)

The board and management expressed our support and

belief in the proposal, but we didn’t do the hard sell.

The vast majority of members saw the benefits clearly.

Process Successes, continued:

We did our homework. We anticipated to the best of our

ability what the questions would be and worked to find

answers to them wherever we could. We did not however

make promises we couldn’t keep, and we were comfortable

saying, “We don’t know.”

When the first vote in Rochester failed to reach the

required threshold for passage (it passed with 66.2% in

favor – MN statute requires a 67% threshold) the

Rochester board conducted a listening tour, called every

member, and investigated and decided that there were

enough “anomalies” to warrant another vote.

Once the decision was made to move forward those who

were opposed got behind the co-op to help us find

success.

Process successes, continued:

PFC La Crosse has built a culture of cooperation among co-ops for many

years. Our management team got behind the merger proposal and helped

wherever they could. Our members also got it – the merger proposal passed

in La Crosse by 83%.

When the first vote missed the threshold (by 11 votes!) the board parted

ways with their GM. I worked with them to find an interim GM who I hoped to

eventually hire as Rochester Store Manager should the merger become a

reality. She was key to building bridges with staff and members.

PFC La Crosse provided operational assistance throughout the merger

period when GFS was financially struggling, continuing a history of 5 years of

outreach with that co-op during a time of great leadership turnover and

upheaval. It was also a time when the co-op emerged from decades of

stagnation.

Process Weaknesses:

GFS had a GM who was at odds with his Board prior to the

merger proposal and expansion opportunity. The inability

of his Board to manage his performance along with my

failure at managing his ego led to his undermining of much

of the process with staff.

We did not anticipate the level of paranoia that would

evolve among the GFS staff. The GFS Board and I met with

them on multiple occasions to keep them informed of the

process and the plan, but we couldn’t counteract what was

going on between visits. We saw everything from a Front

End Manager who quit to picket against the merger outside

of the store, to ballot tampering during the voting period.

GFS was an annual fee co-op rather than equity based.

Determining a member joining date for vote eligibility and

finding a way to allocate equity to a loosely defined

membership was a challenge.

Process Weaknesses, continued:

As a fee-based co-op that had for nearly 25 years been

run as a privately controlled business, there was not a

strong tradition of member participation and investment.

Our collective balloting systems were loose and did

not provide for adequate security during high stakes

election. We have since revamped – we no longer collect

ballots in the stores for any election. All election

counts are now conducted by our auditor. We are moving

toward electronic balloting within the next two years.

Cooperative mergers are relatively common, but not in

the food co-op world. We were lucky in that we were

able to find attorneys with experience in ag co-op

mergers, but sadly, the way many ag co-op mergers are

handled aren’t necessarily the ones we wanted to

emulate.

At the end of September when FY2014 ends for PFC and the NEW

Rochester People’s Food Co-op celebrates its first

anniversary:

FY2014 Consolidated La Crosse Rochester

Sales $23.0 M $13.0 M $10.0 M

Sales Growth 33.28% 4.00% 90.00%

Total Members 7603 5180 2423

Total Employees 210 119 86

FY2011 Pre-Merger Consolidated La Crosse Rochester

Sales $15.6 M $11.5 M $4.1 M

Sales Growth 8.94% 5.72% 18.98%

Total Members 5118 4364 754

Total Employees 156 120 36

Existing Co-op & Start-up

Partnership

• Case Study: Gateway start-up group dissolves

& members join Mississippi Market. MM opens

store in start-up community.

• Much quicker to open

• Significantly easier to get financing

• Stronger balance sheet & cash flow

• Strong operations from day 1

What does this mean for my Co-op

Questions & Discussion

Thank you

Dave Blackburn: dave.blackburn@ncga.coop

Michelle Schry: michelle.schry@pfc.coop

Terry Appleby: terry@coopfoodstore.com