Expansions During Challenging Economic Times

steam-engine_coopWhen economists start to talk about a recession, your first impulse may be to put a halt to any expansion plans and wait it out. However, most experts advise that staying the course is your best strategy, even when financing and real estate markets tighten up. It’s also notable that, historically, food co-ops are resilient, surviving challenging economic times just fine. On the expansion front, during what may seem like fruitless weeks or months waiting for things to move forward, savvy entrepreneurs use the time to become prepared for when good opportunities reemerge.

“This is not the time to hold back and wait,” said expansion planning and business development consultant Bill Gessner. “When we refer to past challenging economic times and look at the expansions that persisted, those co-ops are stronger for it.”

Gessner said, “My general advice is to keep going ahead with expansion planning. The time between now and when you open is a valuable time to strengthen your organization. You can be better prepared.” The planning and implementation of expansion projects often takes a significant time period (two to three years on average) to become manifest, and economic conditions will change one way or the other over the course of the life of the expansion’s phases.

If you’re managing a current store in addition to expansion planning, Gessner said it’s important to continue to focus on the basics, like continued growth and profitability, an assessment of management and staff readiness, and operating procedures. “In a more rushed expansion project these are often things managers find they don’t have time to do adequately before opening,” Gessner said.

An economic downturn may also tempt you to look at ways to cut corners on a project in order to make it happen faster. “If you’ve built a shared vision with sound market and financial feasibility, don’t feel like you necessarily need to scale back,” Gessner said. Cost containment, without compromising the integrity of the project, is always a goal.

While there are some prudent ways to cut costs, taking the cheap way out on real estate acquisition or delaying market research is probably not the way to do this. Location and site analysis research consultant Debbie Suassuna said that no matter the shape of the economy it still makes sense to research possibilities. “In difficult times you want to make the best decisions. Get good research and wait for the opportunity to act on it.”

For example, she argues that if you wait until next summer to do market research, the economy may improve, but then the delay might add yet another year to the project. Even if you choose not to do site and location analysis this year, she suggested consumer research. “For instance, why is Whole Foods seeing a decline when food co-ops are generally holding steady? Find out what consumers are thinking and why,” Suassuna said. “Now is a good time to strengthen your membership base and build loyalty. Food co-ops can be expanding in a marketplace where Whole Foods is backing off.”

Nearly everyone agrees that ultimately what’s fueling anxiety about the economy and expansions is financing a project. If all you hear is no, no, no, Gessner said it’s vital to be creative and continue your efforts to raise capital. “Sources of funds will emerge and be more available in economic recovery times,” he said. Meanwhile, cooperators can do some things to make a stronger case for getting expansion loans.

One of those things, Gessner said, is to keep the bank’s financing portion at 45 percent of the total project budget, or less. If the co-op plans to own the real estate for the new site, bank financing may be able to exceed 45 percent of the total project. He suggested cooperators look to their members to raise more money or find other sources of subordinated debt, particularly low-interest long term loans. He noted that startups will certainly experience more difficulty getting financing in a tough economy, and that’s why it’s especially important to demonstrate member financial support of the project.

The good news is that people may be more inclined to invest in co-ops during economic downturns because their money may feel more secure. Reports from both a startup and an established retail say the cooperative way of doing business has been a very persuasive reason for member investment.

Startup co-op Harvest Moon in Long Lake, Minn., will be embarking on a plan to raise up to $2 million in member loans for what is projected to be a $2.5 million project. In addition, Long Lake offers a strong demographic and already has over 450 members who have joined with a $175 stock investment. Project manager Paula Gilbertson is optimistic they will be able to raise the money for a number of reasons.

“It’s compelling because it’s the opportunity to invest locally and have the money do something people want. You can walk down the street and check on it, reach out and touch it,” Gilbertson said, as opposed to putting your money somewhere far away and not knowing exactly what it’s doing.

The co-op is at the center of the city’s downtown revitalization plans and received a favorable lease on a 9,000-square-foot retail facility. “Because we’re not buying a building or land, it’s more affordable,” Gilbertson said. All these things will help the co-op’s cause with lenders.

As for the rest of what they need, Gilbertson expects a local bank, or an institution with ties to cooperatives, would be most open to understanding and supporting the startup. “It’s worrisome when people say it’s not a good time. We know things will be tighter, but this is an investment with a return. Co-ops have a way of being very resilient,” she added.

A similar project is in the works for St. Peter Food Co-op, an existing co-op with a long history in its community of St. Peter, Minn. According to general manager Margo O’Brien, the city of St. Peter wants to develop an empty parking lot that’s been a downtown eyesore for years. The city has a vision of a multiuse site with the food co-op as its centerpiece. It’s an opportunity to double the size of the co-op to 10,000 square feet and build from the ground up with a lot of community support. A final budget for the project has not yet been solidified.

As for the economy, it’s not the food co-op’s top concern right now. O’Brien said that the time it has taken to negotiate with the city has allowed her to work on the food co-op systems that she says they’ll need to grow, including more intensive customer service and developing their management team.

Both the Harvest Moon and St. Peter Food Co-op development circumstances offer a very positive message about the power of cooperation. “The city sees the co-op’s value to the community,” O’Brien said. “It’s the ideal scenario. Being able to grow and develop something for the city of St. Peter that represents a partnership that would be a total improvement to our community is very exciting.” That’s the kind of thing that goes beyond dollars and sense to quality of life, and it’s much harder to put a price tag on that, at any time. “Co-ops are alive and thriving in the community. It’s proven the whole structure,” O’Brien said. “A democratically owned, homegrown business is a wonderful platform for selling an investment in a project.”

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By |November 30th, 2008|Categories: Solutions|Tags: |

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