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Managing Expectations Related to Expansion

It was refreshing to receive correspondence recently from two owners concerned about the drawn out expansion to a second retail site and the perils associated with growth at another natural foods cooperative. It was a reminder, that while all 17,000 of you may not be directly communicating with us, a great many of you care deeply about what happens. I also believe that everyone on the Board feels a deep sense of responsibility to make decisions that are not just in the best interests of current owners. We want this cooperative to grow and thrive well into the next century. With that goal in mind, let’s talk in more detail about the concept of due diligence and what the Board is doing to ensure a successful outcome, in both the short and long term.

Due diligence

In the June Reader, my fellow Board member, Jay DeNovo, described due diligence in the following manner: “Due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party. In the case of the second store, the Board has shown due diligence by seeking legal advice, reviewing studies related to valuation, feasibility, site selection, competitive environment and expected sales plus examining many iterations of financial and cash flow models.” While his description is entirely accurate, I would like to expand and amplify his description to illustrate how committed the Board has been to the practice of due diligence to assist Willy Street Co-op owners in their expansion efforts.

Key questions

It all started in 2005 with a request for proposal process that allowed us to look at 28 sites. Each was measured against a set of objective criteria; finalists were chosen and then a market analysis was done on three sites to assess their feasibility related to two key questions: Could Willy Street Co-op be profitable at this site and will it release pressure on the 1221 Williamson Street store?

Metropolitan Place II (MPII) was clearly the best choice; and in spring of 2007 it was decided to proceed with locating a retail store at Metropolitan Place II (MPII). The Co-op entered into negotiations with the developer and despite extensive legal advice, countless meetings with contractors to understand our build-out costs and limitations, intense negotiations with the potential landlord to get the best possible lease terms, and many meetings with staff to examine cash flow models, problems with the developer surfaced and we were unable to complete the project. In January 2008, the Co-op learned the developer was unable to deliver on his financial commitments as outlined in the initial agreement. In February 2008 the Board decided to terminate the lease with the developer and pull back from our initial decision to proceed at this site. Our decision to pull back was not only prudent, it also provided a valuable breather for the staff and Board to regroup, learn from the experience, and move forward.

Outside professionals

Since that time a number of important things have taken place. We have used an outside accounting firm to assist us in calculating our losses and put together a plan to recapture taxes paid in prior years to offset current losses. When the opportunity arose to take another look at MPII, we again updated our market analysis (for the third time) to reassure ourselves that the site still had the economic feasibility that we were searching for in a second site. That hurdle cleared, we have engaged in conversation with the court appointed Receiver to discuss a renegotiated lease. We continue to use legal counsel to review all documents and advise us in matters of real estate law. Where it will lead to is not yet known, but I can assure you we are better prepared to see danger signs and have an experienced team of outside professionals looking at every aspect of our negotiations.

Project management

Internally, we asked management to engage in the painful process of staff cutbacks in order to return to profitability and ensure a strong financial foundation for eventual expansion. Once that was accomplished, management prepared a project management plan that will be used when we do finally have a deal. That plan calls for a hiring an internal project manager to help control costs and ensure deadlines are met and a construction manager to deal with the challenges and complexities that are inevitable with any large remodeling project.

Diligence and patience

I hope that you will maintain a perspective that sees the Cooperative as a highly successful natural foods grocery business. On the other hand, real estate development and large construction projects are not two of our core competencies. They may well be someday, but they are not yet. Hence we are relying on top quality professionals in key areas to help us out. Once we do have a second store, we know how to run a store, build a business from the ground up, and people like our mission and products. We just need the right opportunity to practice what we do best. All it takes is diligence and patience. The staff and Board are displaying both and we hope you will too.

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