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Co-op Grocer Chooses Financial Path

Posted by tbaker |

Photo By Terrah Baker
Ozark Natural Foods Board President Joshua Youngblood announces the mortgage payoff in front of their store Dec. 5.

By Terrah Baker

It’s not easy to determine what a good profit margin is for a cooperative business model, because every co-op is different, and financial circumstances change each year, said Dan Nordley, executive director and business manager for Cooperative Grocer Network.

He also serves on a board in Michigan for the Seward Co-op Grocery and Deli with 10,000 owner-members and $28 million in revenue each year. He said, on average, co-ops run a 2 to 3 percent profit margin but when a co-op is trying to pay off capitol, make internal improvements or just keep the place afloat, the margins can increase to higher numbers  — ONF has been running on 6 – 8 percent — and in his experience profit in a co-op isn’t necessarilly a negative thing.

Profits Stay Within

The beauty of the co-op business structure, he said, is in the end the profit is meant to go directly back into the business and in turn the community.

“The money never goes anywhere, even if it’s high-profit, it’s not going anywhere,” Nordley said. “It’s not going to an outside contractor to extract the money for something else.”

In the case of Ozark Natural Foods in Fayetteville, much of their profit that has gone to savings in the last several years was used Monday to pay off the $1.2 million remaining on their 20-year mortgage, plus an early pay-off fee of $500,000, bringing the total payment to $1.6 million.

Although some owners found the pay-off fee steep, ONF Board President Joshua Youngblood stated at a press conference Dec. 5 that by paying the $2.5 million mortgage off early, ONF will be saving about $400,000. They had been paying on the mortgage for three years when the decision to become “debt-free” was made. It wasn’t, however, when the co-op began saving money.

“I went through the time that we did not have enough money to go bankrupt, I told myself we would never do that again,” said Alysen Land, general manager at the co-op for over 20 years. “Once we started making money, we started separating a savings account. I wanted to insure the safety of the co-op.”

Reality Of Competition

When The Fresh Market moved in to Rogers in July, Land said ONF lost 10 percent of their sales. Nordley agrees competition with other grocers, particularly in prices, is always an issue for co-ops because they’re offering organic and local foods in smaller quantities.

“That’s always going to be a classic problem for a natural foods co-op because they’re dealing with a market supply that isn’t geared towards mass commodity like most grocery stores,” Nordley said. “That’s why co-ops are never going to be able to compete.”

But if you want to follow the money in a co-op, he said, no one is getting rich. While the general manager and other staff may be paid six times as much as the lowest paid employee in some co-ops, it’s nowhere near the separation seen at a normal corporate grocer.

A Fair Wage

According to third-party staff surveys, ONF’s employee satisfaction placed ONF in the top five co-ops nationally, with currently more than 90 employees on the payroll receiving above minimum wage and a comprehensive benefits package.

Since, as Nordley explained, fair and living wages with benefits are important in a co-op business model, moving money from that pot is not a good option. Which is why many of the businesses — including one co-op in Spain — that Land and finance managerGary Cook studied had worked to become debt-free; in order to maintain financial flexibility and stability.

At ONF, Land explained if prices come down on the products they sell, the money has to come from somewhere, and it will be one of the two things a business can control.

“At this point we have to start looking at ‘at what cost,’ and in this case it would probably be employee benefits; because you basically have two things you can control and that’s margin and labor,” Land said.

Taking Down Prices

With no $15,000 mortgage payment, Cook said the co-op would only be able to lower profit margins by at most 1.5 percentage points.

“Another way to look at it is we’re a $12 million a year store — $1 million a month,” Cook said. “The $15,000 (mortgage payment) is only 1.5 percent of that. At the very most, with the mortgage paid off, that would only give us 1.5 percent we could lower and that’s maximum.”

The co-op has taken the profit margins down 2 percentage points in the last three years, said Land, and were able to do so with cost-cutting measures like cutting programs, staff benefits and other small expenses.

Choosing A Direction

Cook explained that he was surprised by the strong dissent heard in recent months, considering the board had made the decision to pay off the mortgage over 18 months ago with two votes in favor, hosted a financial forum and held an equity drive where 1,291 owners put money towards being debt-free.

Although it looks unlikely all of ONF’s more than 9,800 owners will agree on the direction of the business structure, Land, Cook and the board members who voted for the pay-off say they’re working towards making ONF an even more successful business, an advocate of sustainable foods and steward to the community.

In fact, Land said, ONF has looked at being more than just a grocery store. She said they’ve looked at having a small educational farm, an apartment complex and with the additional $15,000 staying inside the co-op, they hope to begin even more programs, as well as complete construction projects at their current location — like completing the unfinished basement.

“With the pay-off, projects like installing solar panels are nowhere near done — we’ve just begun,” she said. Overall, many agree that ONF’s move to become debt-free was one option among many, but the one they think is the right direction for the co-op to remain a strong, viable business.

“As much as you can pay down your debt, especially in these times when there’s nothing to invest in, it’s one way you can decrease the expenses that your membership is paying as well,” Nordley said. “The less interest you’re paying, the more money that goes back to owners.”

9 Comments

Oh, you know me December 17, 2012 at 4:45 pm

“The money never goes anywhere, even if it’s high-profit, it’s not going anywhere,” Nordley said. “It’s not going to an outside contractor to extract the money for something else.”

But in ONF’s case, yes it does. It goes to whatever contractor is in Ally’s current favor to put some overpriced add-on to our beloved co-op, while people who know better stand on the sidelines with valid petitions being ignored by a board who simply no longer cares about the owners community.

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Paid off December 17, 2012 at 8:11 pm

“On average co-ops run a 2 to 3 percent profit margin,” according to TFW’s expert. Ozark Natural Foods has been enjoying a 6 to 8 percent profit margin by their own admission. With the building paid for, ONF will still have a profit margin of 4.5 to 6.5 percent according to their statements. You say “the less interest you’re paying the more money that goes back to owners.” So if ONF’s not paying interest any more, why are owners still paying more than double the average for co-ops? Your article might have pointed out that “cooperative” ONF does not poll its owners for any decisions except elections to the board. For the next election the ONF board has approved two candidates for two positions. Consumers don’t need this kind of “cooperative” and we don’t need “more than just a grocery store”. We need a truly organic food store with fair prices.

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Owner Input December 18, 2012 at 12:16 pm

This was a letter sent to the ONF board by a member.

ONF Board,

After learning from the NWAR Times article that other owners with financial backgrounds have reviewed this issue and agree that paying off this debt early is beneficial, our group would like to have these owners identified and provide us with some answers on the following analytical questions. These questions represent impacts, consequences, and alternatives.

RE: Time value of money
• What is the net result of the future value of money analysis over the 15 yr life of the mortgage. As inflation is low, the impact might be less than in the past, but I’m sure current analysis still uses a small net inflation annually implying payment is still more costly now than in the future.
• What are the tax implications of losing our mortgage interest deduction for the next 15 years. Using a conservative non-member sales ratio and the rental mortgage deduction allocation (with the assumption we would be renting for the next 15 years) an amount of additional taxes can be calculated decreasing the value of our interest savings.
RE: Cooperative Tax Status
• What is the net result of analysis of our overaccumulation of profits in relation to our choices for using the excess cash in the past and for the debt payoff.
As the IRS mandate for the cooperative exemption for member profits indicates:
The IRS considers member profits as overcharges to be returned to the members.
What are the risks and consequences of not returning overcharges and instead using our funds for an elective (rather than mandatory) payoff? Would such a usage threaten our cooperative Subchapter T status? What would be the consequences of an IRS (and of course subsequent state of AR) audit if our non-taxable member sales deduction were disallowed for current year? Past 3 open years? Future years? And what would it take to reorganize without cooperative structure?
• What is the balance of patronage retainage for each year still outstanding 2005-2011, members and former members? How many years could be refunded with full amount of retained cash for the payoff. Or in analyzing alternative plans for funds, how many years could we satisfy with 1/2 the funds? 1/3? 1/4?

RE: Opportunity Costs
One option – Expansion into next door
• What is the current sales per square foot amount?
• Taking a conservative increase of square footage, say one third of the upstairs space, leaving the balance for a more efficient eating area, offices and meeting spaces and storage potential (aiding in purchase discount levels), what would be the potential for increased gross profit from increased sales say over 10 years (to get up to full speed rather than the full 15) with of course the reduction for loss of net rental income (after the 30 -40% taxes paid)?
How does that profit potential compare to the net interest savings determined after the time value of money and tax analysis above?
• Given that store expansion would render the current deli reset moot – since the deli shares a wall with the expansion area, another $225K is available for a wider store expansion plan. Have any preliminary plans been cost analyzed for planning and construction. Can the project be done conservatively with the $2.25million available, or possibly much less leaving funds to be returned to members?

What other opportunities are lost without this $2Million.

As the Board has, up to this point, determined there is no need for further analysis for this decision, I am assured these questions can be answered adequately.

Peggy LaMendola
ONF Owners Group

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Owner Input December 18, 2012 at 12:39 pm

Results from the closed board meeting December 7th…

The following decisions were made:

1) Because our petition did not specifically call for a special meeting, and without regard to the fact that such a special meeting was discussed when Peggy and Scot presented the petitions to Joshua, the board determined that the petitions were simply a call for more information. While ignoring their unanimous decision from June 2012 to “hold an owners forum after the contract negotiations” (but before the payoff), they decided to provide more information at a forum sometime in January, 2013.

2) The second request on the petition, asking for a vote of the owners, was determined to be beyond the rights of the owners. Only the board has the right to allocate funds on such matters.

3) The nearly $2,000,000 payoff will be completed on Monday, December 10, 2012, without analysis or advice from a professional asset manager as requested in our petition.

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Peggy La December 18, 2012 at 3:19 pm

A footnote to my letter to the Board that was posted. The Board declared that they had ‘expert’ owners analyzing the debt payoff. Their expert was an Arvest commercial loan officer that came to a board meeting and told them what the approximate interest savings was (something anyone with an amortization schedule could figure) and the comment that it’s good to get liabilities off the balance sheet. This expert had no cooperative accounting and tax skills and did not understand that member equity (the patronage not returned to members) is, for tax purposes, also a liability (to the members). So we paid off Bank of America, who REALLY needed it, instead of paying off our members we’ve been overcharging for the past 4 years.

Now, why did I write such a high-falutin’ letter to the Board. I just wanted to give them a taste of what they should have found out (and trust me, it’s partial) before the note payoff. And if they answer my questions for the January 2013 rationalization forum, trust me they will be obtaining the answers after they wrote the check because there were no answers beforehand, because none of them knew any of the questions.

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Owner Input December 19, 2012 at 12:03 am

instead of paying off our members we’ve been overcharging for the past 4 years.
~
Well longer than that but why quibble over excessive profits right? Reassuring to know that the excessive profits won’t go away any time soon or ever. Maybe those will go to the apt complex? What the heck is that all about? Is it in our bylaws that we can forgo best food at lowest price for real estate ventures? We all know how stable the real estate market is. Hope we can tie that into Libor which has served the owners so well. And certainly Fay needs more apts or are the plans to buy a standing unit?

Hope staff (the worker bees) don’t count on a decent living wage anytime soon. Not to worry about management however. Many would like to see the accounting for personal use of the store credit card too. Not saying anything one way or the other, just that owners are not privy to those records. All the owners do know for a fact is the card (owners funds) is used for personal expenditures. Is the store account reimbursed…owners have no way of knowing. One does wonder however why the necessity for using the store card when it would seem logical that upper management would have their own personal cards. Puzzling…

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Naked ONF December 19, 2012 at 10:32 am

Most of the folks I know who sweated over researching & trying to communicate with our utterly dysfunctional Board of mis-Directors over the past year are so flabbergasted by the number of outright errors not to mention the obfuscating context of the entire article (more professionals enabling bad behavior, for one)–that they are speechless.
History will show this to be the absurdly bad decision that it is. But more damaging is the completely, utterly vacuous process employed to reach such a pass.
Due Diligence? Fiduciary responsibility? One might as well be speaking Elvish (which does not translate in Wonderland, trust me!)
Just to prove I’ve been listening all along, here is the message received:
WE ARE PAYING OFF THE MORTGAGE BECAUSE I SAY SO
AND FURTHERMORE IT IS NONE OF YOU BUSINESS IN THE FIRST F’ING PLACE.
NOW JUST GO AWAY…
which most of us are.
And if anyone, even those in possession of intimate facts, thinks a lawsuit will resolve this mess,
think again.
Sorry. Would have believed none of this if I hadn’t seen it with my own two eyes.

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Numbers geek December 19, 2012 at 1:19 pm

Did you notice the pie chart is from 2003? None of that is accurate now.

“The co-op has taken the profit margins down 2 percentage points in the last three years, said Land, and were able to do so with cost-cutting measures like cutting programs, staff benefits and other small expenses.” That does not make a lick of sense–if you lower expenses you increase profit. And if you lower prices and lower expenses, you can have the same profit–WHICH IS ALREADY ESTABLISHED AS TOO HIGH.

Basic staff makes $8+ – $10 per hour plus benefits. Is it fair for staff to take the hit to keep the profits too high?

We’ve tried to tell them over and over that the bldg is not protected in bankruptcy, but it does not fit in with the fear-factor narrative that the Gen Mgr keeps spouting to justify ‘owning the building’. I just love how Board and Mgmt brag and brag about the success of ONF until they have to use bankruptcy fears to justify accumulating member’s money to ‘protect us’.

And that huge count of people that supported debt payoff–most just paid off their $140 early instead of $20/yr. Not the sacrificial ringing endorsement they make it out to be. Once members really understand that ONF accumulated so much cash because the prices were too high, their vote preference is for lower prices and their over-charges returned.

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Owner Input December 19, 2012 at 4:02 pm

We’ve tried to tell them over and over that the bldg is not protected in bankruptcy

In fact it makes the building SUBJECT to bankruptcy bc it becomes an asset that can be sold to satisfy debts.

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