Most small businesses fail within a few years and CFEs are no exception. A balanced picture of the prospects for CFEs must account not only for the strategies they are using to succeed, but also the enormous daily challenges they must surmount. Below we review 16 challenges most CFEs encounter and intriguing ways they are meeting them.
| Bottom Line | Multiple Bottom Lines | Pricing | Competition | Maintaining the Niche | Quality Assurance | Technology | Leadership | Succession | Labor Force | Accounting | Capital | Scaling Up | Decision Making | Lack of Market Infrastructure | Public Policy |
The first imperative for a CFE is to have a healthy bottom line. Most of the businesses we examined did, but not all. Anna Marie Seafood, for example, posted net losses in three of the last four years. Its loss in 2007 was especially significant, though it occurred because of the purchase of an onboard flash freezer that the company argues will sharpen its competitive edge in the years ahead. Sales are growing, but costs are growing faster still. With total liabilities exceeding assets, the company will have to dramatically expand sales or cut costs in the very near future. Finding the right rate of expansion and investment is a tricky challenge for CFEs.
Another CFE financially struggling is the Appalachian Harvest Network (AHN). Its sales cannot currently cover its operating expenses, so the company, a nonprofit, has turned to supplemental grants and individual donations. The outgoing head of the parent nonprofit overseeing the business, Anthony Flaccavento, dreams of reaching the financial break even point by 2011, but admits that “becoming financially viable after ten years seems to me awfully slow.” He argues that his imitators won’t have it so bad. “When we started, there weren’t national debates or the market there is today. We were far enough ahead of the curve that we had to create all these things.”
A weak bottom line, of course, can threaten food businesses at any scale. Yet the small size of CFEs, which usually means a lack of a financial cushion and little business diversification, also means that the failure of a single part of the business can easily bring down the entire enterprise. That’s part of the explanation of AHN’s predicament, ever since a fire destroyed its processing facility in 2008 and burned a hole in AHN’s infrastructure and budget. But adversity also contains seeds of opportunity. The fire allowed AHN to upgrade to a new facility more in line with its commitment to the environment.
Some of our international CFEs were weakened by depending on the export of a single crop. Sunstar Overseas Limited, a basmati rice company in India, grew 25% in its first three years. But then, in 2007, the price for basmati fell dramatically, the company couldn’t sell half the harvest, and expansion plans were shelved. Kuapa Kokoo, a cocoa producer cooperative in Ghana, had strong balance sheets until 2007, when Ghana’s local currency, the cedi, was radically revalued.
The finances of Kasinthula Cane Growers Limited in Malawi are “very shaky,” according to Brian Namata, the general manager, ever since the national currency collapsed and its foreign loans (denominated in foreign currencies) ballooned. When the Philippines joined the World Trade Organization in the mid 1990s, the national onion importation ban that NOGROCOMA’s founder helped to craft was repealed, opening local markets to increasingly tough competition from China and forcing NOGROCOMA to overhaul its business model. Each of these export oriented CFEs has decided to diversify its products and to focus increasingly on domestic markets.
Every one of the CFEs now agonizes over how the current financial crisis and global recession will affect its business. Judy Wicks worried enough about the future of the White Dog Café that she decided to sell it. “Popular restaurants come and go in cities,” Judy observes, “and not many are around for a long time. We’re 25 years old, and there are so many new restaurants in town with flashy new decors and new ideas.”
Even though CFEs struggle to compete with mainstream food businesses, nearly every one studied chose to take on the additional challenges of meeting the bottom lines of other stakeholders like workers, consumers, and members of the community. Most saw this as a moral imperative, but over time they also saw their stance bringing financial advantages as well. Higher labor standards improve employee morale and performance. “Community engagement” on popular social issues is a powerful form of marketing.
We found plenty of examples of CFEs that were able to improve all their bottom lines simultaneously. Jim Cochran at Swanton Berry Farm is reducing costs by tracking and reducing fossil fuel use, and would like to begin doing this for water. Cargills in Sri Lanka is actively helping its farmers and suppliers adopt energy efficiency and water recycling technologies. The Ajddigue Women’s Argan Cooperative now uses the shells of argan nuts, which used to be thrown away, for cooking. Andrew Akiwenzie feeds his fish bones and heads to the birds, and minimizes his carbon footprint through a small boat and small car. Cabbages & Condom’s resort in Pattaya recycles wastewater and uses recycled materials. Fundación Paraguaya introduces its Farm School students to solar energy, vermiculture, and composting. The Mavrovic Eco Center has a composting program that incorporates wood leftovers from a local furniture maker, manure from a local dairy, and processing waste from the bakery. All these actions save CFEs money.
But many other improvements in labor and environmental performance cost more and therefore pose dilemmas for CFE proprietors. Even at the financially successful Zingerman’s Community of Businesses, the managing partners are constantly struggling over how to maintain the slim margins in their businesses yet honor their commitments to provide employees with decent wages and benefits, to support local producers, to green the business, and to give back to the community.
During successful years CFE entrepreneurs often channel their profits into expanding their social commitments. Judy Wicks of the White Dog Café reports, “In 2007 we made $250,000 and I gave out bonuses, so the employees were happy.” She also was able to invest in building improvements like a $50,000 solar hot water heater. But attention to people and planet means that the White Dog periodically skirts on the financial edge. Investments in 2007 in the social mission meant there was less of a rainy-day fund to help during the tougher years of 2008 and 2009.
When Weaver Street Market in North Carolina decided to engage in local sourcing, it found that the presence of many other cooperatives and local food businesses in the Carrboro area made the first phase easy. The next phases will be tougher. Even though there’s a clear demand by Weaver Street members for local meat, for example, meat processing plants are notoriously capital intensive. Developing an expanded supply of other local processed foods will be equally difficult.
Focusing on multiple bottom lines, as CFEs do, places higher demands on CFEs and brings new risks. One of the most painful experiences Judy Wicks had in the history of the White Dog involved a labor dispute during a sabbatical she had taken to write a book. “While I was gone, the servers organized because they felt the person I hired was really corporate, and they were afraid they would lose their benefits, which are unheard of in this business.” Pickets appeared, rumors flew, and adverse press appeared. Ultimately, the staff decided not to unionize, but the fight was emotionally devastating to her.
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As CFEs strive to improve their bottom lines, they realize that one of the few choices available is to raise prices. The Indian Springs Farmers Association in rural Mississippi is now responding to higher production costs at its processing facility by charging higher fees to non¬members. Whether this will improve or hurt its bottom line is unclear. Economists would note that the answer depends on the “elasticity of the demand curve,” but an operation like Indian Springs, with one full-time staff member, cannot possibly perform a market analysis before it tinkers with its prices.
Will consumers pay more for greater social commitments? Perhaps, but the reality appears to be that consumers are only willing to pay for better social performance when it’s accompanied by higher quality. Zingerman’s deli charges substantially more for its sandwiches than other delis in Ann Arbor do. While its customers are excited about the social missions of the company, Paul Saginaw believes that they return because his sandwiches taste better.
Every CFE entrepreneur also knows that prices cannot be raised indefinitely. Even as her food costs rise, Judy Wicks worries about her mid-scale clientele: “Our prices are now up to twenty or twenty-five dollars an entrée, and we can’t really go any higher.” The other alternative is to cut prices. It bothers Mechai Viravaidya, the founder of Cabbages &Condoms in Thailand, that some locals can’t afford to eat at most of his restaurants and resorts. He is now toying with the idea of a C&C Express at every location that would charge prices the average Thai consumer could afford.
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Most CFEs these days must struggle against nonlocal competition. NOGROCOMA, based in the Philippines, sold onions to domestic and export markets successfully for several decades. When the Philippines joined the World Trade Organization, the cooperative was less able to compete against cheap, imported onions. Shifting with the winds, NOGROCOMA has now modified its business model to also sell imported produce.
Sunstar Overseas Limited in India built a global niche in organic basmati rice, but is now facing growing competition from abroad. Market demand for Indian organic basmati continues to grow in Europe, but so do the number of rice exporters. In the United States, which Sunstar has targeting for increased sales, it has run into competition from a Texas-based firm, RiceTec, which markets a new type of basmati, called Kasmati, adapted to grow in American environmental conditions.
For producer cooperatives, strong competition can pull away existing members. While the government is the only authorized purchaser of bulk cocoa in Ghana, there is still stiff competition among intermediaries for the premium cocoa produced by Kuapa Kokoo. If there is a delay in cooperative members getting their premiums and dividends, they are increasingly tempted to sell their cocoa to another intermediary, thereby weakening the cooperative.
Another form of competition comes from mainstream food businesses that deliberately incorporate community friendly features of CFEs. Sometimes these programs amount to “local wash.” In Morocco the Ajddigue Women’s Argan Cooperative complains about dishonest competitors that have set up women’s cooperatives that in fact neither are cooperatives nor give women real power. They are simply set up to ensnare gullible tourists. But more common are competitors who are sincerely learning how to tap local markets. Because CFE innovations are low cost, low tech, and transparent, it’s easy for larger companies with financial resources to adopt them.
Regional copycats pose one of the biggest threats facing Zingerman’s Community of Businesses. Co founder Paul Saginaw admits, “We got complacent, thought we owned the market, but people aren’t stupid and understand what parts of your biz are successful. Competitors come along and offer fifty percent of your quality at seventy five percent of the price, embarrass you, and make you look like you’re robbing the public.” The answer for Zingerman’s has been to focus relentlessly on improving the quality of products and excellent service. Lance Nacio worries about “purist” consumers who believe that frozen shrimp, his product at Anna Marie Seafood, is inherently inferior.
Lance counters that “the reality is, it’s only as fresh as you can get it to the customer, and you’re out on the water for days at a time.” But other shrimpers might someday undercut Lance by making more frequent, shorter hauls. CFEs must continue to innovate. In the meantime Lance struggles to enforce his standards. His longest standing client, Rouses grocery stores, recently grew to 34 locations, with the result that “they are kind of acting like a Walmart, trying to dictate prices.” Moreover, the chain has been labeling some farmed shrimp as wild shrimp. Lance is working with Rouses to prevent any weakening of its standards.
A related threat to CFEs comes from the difficulty of protecting their intellectual property. The competitive threat Sunstar faces from RiceTec has led to a dispute within courtrooms and the World Trade Organization about who owns basmati rice. Indian scientists are now mapping the DNA of basmati rice, and together the Indian and Pakistani governments are seeking to legally protect basmati with “geographical identification” status. This recognizes the regional genesis and authenticity of a product, and prevents producers in other areas, like RiceTec, from using the same marketing name a status that French champagne enjoys, for example. Sunstar is lucky that it’s a big enough CFE to hire good attorneys and that it has the full backing of the Indian government in this dispute. Other CFEs with more meager resources have fewer ways to protect their niche. Many turn to international certifications.
The Panchakanya Agriculture Cooperative has benefited by working with OneCert, Inc USA, an organic certification organization. With support from the Winrock International Farmer to Farmer Program and OneCert, the cooperative is well versed in the global requirements for organic certification. It has set up the necessary tracking systems but, lacking even a single dedicated computer, the CFE is having difficulty communicating with the certification agencies. It’s now seeking NGO partners to help.
The importance of certifications has not escaped the attention of Sunstar. A central part of its strategy has been to obtain as many certifications kosher, organic, fair trade as possible. Since 2001, the company has partnered with thousands of small scale farmers in northern India to create a group certification for organic basmati. To overcome farmers’ initial skepticism about converting to organic production, Sunstar contracted to buy 100% of any rice they grew in the first few years after conversion. It initiated a group organic certification in 2001 through ECOCERT . Using an increasingly common process called an Internal Control System (ICS), Sunstar takes responsibility for inspecting its farmers rather than requiring each to get certified an expensive and onerous process. The ECOCERT certification rests with Sunstar.
The most common way CFEs compete against mass producing food enterprises is through quality, and CFE operators are almost maniacal about it. Andrew and Natasha Akiwenzie are continually tasting and testing their own fish. Mechai Viravaidya insists that the bathrooms in the dozen Cabbages & Condoms restaurants and resorts in Thailand be as beautiful as the dining rooms. Not all CFEs are capable of such intensive, hands-on involvement. The low-budget Oklahoma Food Coop, still in its first decade of operations, has erred on the side of less quality control. It has a Producer Care Committee, but it doesn’t perform inspections—it just responds to complaints.
In Zambia, Sylvia Banda, founder of Sylva Professional Catering Services Ltd., has struggled to ensure that her small-scale farmers produce a steady supply of foods that meet her exacting standards, driven in part by export markets, for food production and handling. She now trains farmers herself and, wisely, puts her training into a fee-for-service business model (like Zingerman’s ZingTrain).
Most CFEs, being small and lightly capitalized, often find themselves at a technological disadvantage vis-à-vis nonlocal competitors. This is especially true for CFEs in developing countries. In the Philippines, NOGROCOMA is trying to help its onion farmers improve their irrigation infrastructure and cold-storage capacity. The Panchakanya Agriculture Cooperative in Nepal lacks even one dedicated computer that it can use to comply with global organic certification programs. In Paraguay, the training school run by Fundación Paraguaya has computers, Internet access, and training software, but lacks a supply of pencils and paper.
Our case studies contain extraordinary stories of CFE leadership. Implicit is how difficult these leaders are to find and, once gone, to replace. A top student of business is usually drawn to a global company, where the salary and status are high. CFE leaders, in contrast, are driven more by passion and community values. Many begin with no business experience whatsoever.
This was true in Croatia, where Zeljko Mavrovic’s fame as a professional boxer gave his farm and bakery businesses a strong brand name. Starting a food enterprise nevertheless required his ascending a steep learning curve. “I needed to learn a lot of technology new to me in a short period of time. While already producing organic grain, I had to pick up a tremendous amount of knowledge about production, processing, sales, education, branding, and everything else necessary for a successful business. But my philosophy of being able to do anything with a lot of hard work, dedication, courage, and self-motivation helped me to overcome the challenges, just like it once helped me as a boxer. Having a clear vision and working toward that vision allowed me to create a product quality that people recognize and in which they trust.”
Judy Wicks wound up selling the White Dog Café rather than groom a successor (though she was able to lock in guarantees about some of the restaurant’s triple bottom line features). When the founder of the Intervale Center, Will Raap, decided to move into other projects, the business went through wrenching changes, including multiple executive directors and high staff turnover.
Scale seems to matter here. Larger CFEs, like Zingerman’s, Weaver Street, and Cabbages & Condoms, have been able to cultivate and promote new leaders. Smaller CFEs can’t.
Related to the problem of leadership is that of succession. Unless a CFE can find a good new leader, its founder inevitably will need to sell the business when he or she retires, loses interest, or moves on to another enterprise. Here is where the type of business structure chosen seems to matter.
Nonprofit assets, by law, must remain in the universe of other nonprofits, and good social enterprise managers are harder to find than good for-profit managers. One implication is that when a nonprofit CFE leader leaves, the nonprofit might well never find another decent successor. At the Appalachian Harvest Network, it’s not at all clear how the enterprise will fare now that its founder and director, Anthony Flaccavento, recently decided to become an independent consultant.
A for-profit CFE can find another manager, but succession is a key moment when its community roots can be easily ripped out. Judy Wicks was absolutely committed to not selling the White Dog, but it took her years to find a like-minded local buyer. At Zingerman’s, Paul Saginaw is not satisfied with his formulas governing what a partner must pay to buy into a business (or what he or she must pay to exit). He believes there needs to be greater incentives for a partner to remain a long-term owner committed to steadily increasing the value of the enterprise.
Cooperatives may well be the structure with the smoothest record of succession, since they are formed from the outset with a collective mindset. Zeljko Mavrovic dreams of transitioning the ownership of his farms in Croatia into a cooperative model where employees are also co-owners (though to do so, he has to overcome the bad reputation cooperatives acquired during the Communist regime).
Skilling up the labor force is another challenge for CFEs. Unlike their larger competitors, CFEs lack budgets and programs to recruit skilled workers. The Oklahoma Food Coop still largely runs on volunteer labor, but the founder, Robert Waldrop, concedes this is unsustainable. “At the beginning, you need a few people who can invest a lot of sweat equity above the call of duty. But eventually we need some full time people.”
When CFEs originate in economically distressed areas, recruitment challenges can be particularly tough. Andrew and Natasha Akiwenzie are frustrated about the difficulty in finding good fisherman for their sole proprietorship, Akiwenzie’s Fish, and blame the reservation’s weak work ethic.
Many years of civil war in Croatia have left a weak workforce too. “In starting a business in such an area, it was challenging to find motivated workers among the people who lost a sense of life,” Zeljko Mavrovic notes. “It was also challenging to find people with certain skills, who are available in larger urban centers, and bring them into an area where life is very simple and the consequences of the war are still present.”
Training is essential for CFEs but costly. At Cabbages & Condoms in Thailand, one of the managers, Tittaya Metha, calls its policy of hiring local, non professionals a “trial and error process.” Were she starting over, she says, she might hire department heads with at least formal training in the hospitality industry. “We have now sent some of our staff at the Pattaya branch to study in certain areas and the results are excellent.” At Fundación Paraguaya, the food business teachers are hired from the surrounding communities with a good understanding of rural, agricultural Paraguay. Still, they must be trained by the foundation in how to best use experiential learning to develop students’ entrepreneurial skills. “Before you can educate the children, you need to start educating the teachers,” notes Nik Kafka, director of Teach A Man To Fish, the foundation’s sister organization.
At the Intervale in Burlington, Vermont, the managers are realizing that to meet the region’s growing demand for local food, they need to focus their business incubator on training more farmers. The difficulty in recruiting new farmers is a formidable one for CFEs. In the United States the average age of a farmer is now nearing 60 and very few young people are entering the profession.
The Indian Springs Farmers Association in Mississippi acutely feels the need not just to replace its members nearing retirement but also to bring many more farmers into the cooperative. More members are necessary to achieve greater economies of scale, to compete more effectively against mainstream suppliers, and to keep the struggling counties in rural Mississippi alive. “At this point,” argues Ben Burkett, “we’ve got more marketing than we do production. We’ve got to build our production base to meet our demand.”
Producer cooperatives face special training challenges, since they often require farmers to take on new roles with which they are not familiar. Brian Namata, one of the organizers of the Kasinthula Cane Growers Limited (KCGL) in Malawi, remains concerned that his farmers do not have enough business skills or acumen: “Many from the rural areas think that all the money they are paid is profit for them, without understanding the costs that need to be covered hauling, processing, machinery, and repairs.”
In the Philippines the big problem is attrition. In recent years the NOGROCOMA cooperative has lost 75% of its membership. When a member leaves the cooperative, his or her annual contribution of 500 pesos (US $10.50) must be returned. When markets are tough and many members leave at once, the cooperative suffers a huge financial blow. It can no longer provide many services such as affordable credit. Fewer members also have a harder time producing enough to consistently meet buyers’ demands.
For some CFEs the problem is not hiring workers but retaining them. Ten years after operating with little turnover, Zingerman’s Deli ran out of good opportunities for its staff.Managers felt stifled and left. Mid level employees were waiting for people to retire or leave. Observes co founder Paul Saginaw, “We had spend enormous amounts of time and resources training staff, but now we were losing them to competitors.” The solution was to expand the community of businesses.
Another labor issue that has challenged Zingerman’s is balancing workplace democracy with efficiency. A tour of Zingerman’s Deli quickly reveals many innovations that were actually the result of suggestions by lower level employees. Most CFEs try to involve their employees, but the challenge remains that in any organization someone needs to say yes or no at end of day. The proprietors at Zingerman’s have struggled to define decision making procedures that involve everyone.
A skill deficit that deserves special mention is accounting. Without good books, a CFE can fall into legal jeopardy, make poor business decisions, and fail to attract capital.
Some of the smaller and newer CFEs we studied had poor financial records. Akiwenzie’s Fish in Canada had very little formal bookkeeping. The founder of Indian Springs in Mississippi admits that he and his colleagues need to “tighten up on our record systems. We own a computer but we ain’t utilizing it.” Appalachian Harvest Network’s limited budget has meant primitive accounting.For example, all of AHN’s financial data is still initially recorded by hand. When it secures more resources, AHN plans to buy a fully computerized system to assemble, track, monitor, and analyze its business data.
At the Oklahoma Food Coop, the original books were a mess, and a board treasurer invested “tons of hours” to clean them up. Says founder Robert Waldrop, “If you’re going to spend money, the very first thing you do should be to ask for accounting help (unless you can get a volunteer CPA). Budget for a real accountant. A member can do payment posting, but you need adequate financial statements to know if your organization is gaining or losing.”
Standing in the way of CFEs meeting their goals is the very limited supply of local capital. For Akiwenzie’s Fish, operating on a native people’s reservation has meant no access to banks or other sources of capital. Luckier CFEs have had more options, but not many. Almost every company profiled endured a capital challenge at some point in its lifetime.
There are many consequences of lacking capital. For Sylva Catering, the absence of capital has kept the business at the University of Zambia, on a site with limited space and visibility. For Kuapa Kokoo it has meant loans with unfavorable terms that must be repaid in increasingly expensive foreign currencies For Kasinthula Cane Growers Limited in Malawi, being unable to refinance a huge loan has meant its farmers must work harder. For Lance Nacio at Anna Marie Seafood, the absence of capital means being unable to purchase another boat to meet new contracts. For NOGROCOMA, the inability to invest in cold storage facilities is responsible for the loss of about ten percent of members’ onion crops each year.
All kinds of small and family-run businesses face capitalization challenges, but they are especially severe for women-run enterprises. Sylvia Banda, for example, must contend with cultural norms that make it difficult for a Zambian woman—even a proven entrepreneur like herself—to receive loans. The solution for Sylvia was to name her husband as chairman of her company.
Yet the absence of capital also has arguably made CFEs more independent and entrepreneurial. For the Ajddigue Women’s Argan Cooperative in Morocco, limited access to loans has resulted in limited debt. The same is true for Akiwenzie’s Fish. To help capitalize expansions, both companies turned instead to modest grants.
We were struck by how many of the CFEs we studied obtained grants or low-interest loans at one point or another. Fundación Paraguaya has received international support for its Farm School. Many northern charities, companies, and agencies have helped Kuapa Kokoo establish a fair trade manufacturing company in the United Kingdom called Day Chocolate Company, including The Body Shop, Twin Trading, Comic Relief London, and Christian Aid. The Body Shop ultimately donated its stock shares to Kuapa Kokoo. The Panchakanya Agriculture Cooperative has enjoyed several helpful grants from various Nepali government agencies. In 2001 the Philippines’ Department of Agriculture gave a grant of 8 million pesos (US $170,000) to NOGROCOMA to underwrite technical assistance for branding and marketing, to incorporate new onion production technologies in member farms, and to construct a nursery.
It’s worth underscoring that our CFEs were all smart enough not to become dependent on grants. Instead, they used these gifts to address one-time needs. They understood that charitable funds ought to be, as President Bill Clinton once said about welfare in the United States, “a second chance, not a way of life.” For Cabbages & Condoms, its limited access to commercial capital markets has made it all the more important to build its restaurants and hotels on land it owns or has been given. “Our major investments are just initial building construction,” says the director of the Population and Community Development Association, the nonprofit recipient of C&C profits. “We run the business the Chinese way, by starting small and growing as we can.”
The challenges of obtaining private capital is one reason some CFEs turn to cooperatives, since they provide a ready-made way of combining many small membership fees into a significant capital base. As Cooperative Regions of Organic Producer Pools (CROPP), expanded, it also took advantage of a recent law in the state of Wisconsin, its home base, that allows a cooperative to bring in private investors as nonvoting shareholders.
Sunstar Overseas Limited considered solving its capital needs by going public—a process that in most countries is expensive and obliterates local control. But nervous that they wouldn’t find enough investors to support their work, Sunstar’s managers ultimately put a halt to the effort. Still, for any CFE needing more capital, such a change in corporate structure remains a potential solution—and a dangerous one from the home community’s perspective.
Another recurrent theme in the CFEs studied is the challenge of scaling up. Being small, CFEs only have two choices staying still or growing. Staying still is really off the table. All CFE entrepreneurs are visionaries who fundamentally wish to do more and do better. Even the smallest CFEs have understandable ambitions for expansion. Andrew Akiwenzie can no longer meet his customers’ orders for smoked fish and would like to get a bigger boat, a new processing facility, and more staff. At Anna Marie Seafood, Lance Nacio is discussing new, expanded contracts with Rouses, Whole Foods Market, and FedEx, knowing full well that to deliver more product he will need more boats and crew. In Croatia, Zeljko Mavrovic wants all his baked products to be 100% organic, but his own farm must expand to meet his organic grain requirements.
Even our most successful CFEs see room for improvement. Commenting on the virtues of having its members involved in every aspect of its decision making, Jerry McGeorge of CROPP says, “We know where our owners want to be in twenty years. We will be ‘wildly successful’ when we have created a sustainable business model that allows farmers to stay on their farms, make a living, and raise their families a living that is sustainable both financially and environmentally.”
Sometimes, of course, expansion is driven by the need to achieve higher economies of scale. To take full advantage of the capacity of its packing facility, for example, the Indian Springs Farmers Association in Mississippi must ramp up production year round. Some of the cooperative’s farmers have winter grow houses now, but most do not. That’s why the cooperative is building a demonstration grow house and plans to build many more.
In Nepal, keenly aware that the market demands quality product and regularity of supply, the Panchakanya Agriculture Cooperative is striving to go beyond its small yields and inconsistent volumes. Right now, the enterprise is at a competitive disadvantage against larger, nonorganic farms in the region that can fulfill bigger contracts. On any delivery day most members of the cooperative can produce only a basket or two of a particular food item. Even with a village collection center to aggregate their output, the total amounts are so small that it has been hard to convince traditional supermarkets or natural food stores to hassle with purchasing from Panchakanya. At one point, the cooperative hired a bicyclist to make multiple deliveries each day to a department store, but the deal fell apart when they couldn’t grow enough to ensure a steady volume of supply.
For CFEs that already have achieved a profitable scale, the temptation to expand into other lines of business poses another dilemma. For some, like Zingerman’s Community of Businesses, expansion is essential to providing its employees with upward mobility within the company. For others, like Akiwenzie’s Fish, creation of a side business a truck selling fish and chips on their home property during the tourist season proved to be a distraction and a bust.
Most of our CFEs grew slowly. The Ajddigue Women’s Argan Cooperative in Morocco credits its own survival with the decision to grow slowly, increasing its original membership by only 40 women in 15 years. Greenmarket in New York City has opened and closed many sites over the past three decades, in the process learning valuable lessons about how to appropriately allocate resources, evaluate success, and prepare for the future. “Don’t grow too fast, and invest in the markets that you have,” cautions Michael Hurwitz, the director of Greenmarket. “When you open a new market, do it deliberately and slowly. If it takes longer than you hoped for, that’s okay. You have to do it on a timeline that makes sense for you, not on the timelines you may be pressured to use. Even if someone is pushing and pushing, if it doesn’t work once you start, that won’t help anybody.”
In Nepal the leadership of the Panchakanya Agriculture Cooperative is wary of signing up new members without assurances that they are completely committed to organic production. Two hundred farmers are now interested in joining, but the cooperative wants newcomers to know that the first few years in organic farming may bring decreased yields and decreased profits. The cooperative needs new members to stick with the program, to prevent sudden drops in production and to avoid the consequences of any products failing to meet organic standards.
Some CFEs decide to scale out by diversifying their clients. Mike Lorentz is aware that many local foodies are skeptical about meat in general, about slaughterhouses of any scale, and about regional-scale businesses like Lorentz Meats. But he believes that the key to “good food” succeeding is a flexible definition of it. He employs the “80/20 rule” – 80% of his business is with a couple of large-scale customers, while 20% is with 300-400 local farmers that sell directly to consumers. The large-scale customers ensure that the plant operates near capacity, while the small-scale customers, who pay more for smaller batches, generate most of the profits. With Organic Prairie and Thousand Hills Cattle, Lorentz Meats has the 80% nailed for the moment, but Mike recognizes the need to diversify his larger customer base.
It’s also worth noting that CFEs sometimes realize that scaling down may be the right business move. The Intervale’s municipal composting program in Burlington, Vermont, consumed so much time and energy that it threatened to overwhelm all of its other enterprises. The decision was made to spin the program off, and now the Intervale is looking to spin off other programs as well.
A growing pain of CFEs that deserves special mention concerns picking the right structure of the enterprise. The original choice about who makes what decisions, and when, is often made hastily and instinctively, and months or years later the founders realize the structure is no longer viable.
The problem seems especially keen for cooperatives, since the enthusiasts see their business structure not just as a choice but as a philosophy. The Oklahoma Food Coop initially tried to democratize everything, with a hands-on board that discussed operational issues at every meeting. Decision making ultimately moved too slowly. Now there’s a separate operations committee, and a floor manager who reports to the committee. As a $500 million company, CROPP needs to constantly balance its economic identity with its basic cooperative principles. Keeping channels open to receive member’s complaints, concerns, and ideas is critical.
The Zingerman’s Community of Businesses is an informal federation of collaborating partnerships. This has worked reasonably well, though occasionally the interests of one business are at odds with another. Paul Saginaw explains one such incident: “We have the deli, and a bakehouse that sells to deli. The bakehouse also sells to a lot of other wholesale customers; seventy percent of its business is outside of the Zingerman’s community. Yet the deli sees the bakehouse as its partner, but it’s a partner who is selling to its competitor. If each owned some portion of the other’s businesses, then the sale of bread would be the sale of bread for Zingerman’s no matter which business it’s happening out of.”
CFEs have little control over the structure of the overall market for local food. Even though the economics of local food have been steadily improving, capital moves slowly to meet even the best investment opportunities. CFEs face a landscape where global food businesses have made significant inroads over the last generation and where the local food infrastructure, such as wholesalers, regional distribution, and even local retailers, has been systematically dismantled. Putting the pieces back together again will take time.
The Panchakanya Agriculture Cooperative is hampered by the lack of an organic sales infrastructure in Kathmandu. Although demand for organic and natural foods is steadily rising, there are only a few dedicated shops in all of Nepal selling organic vegetables. “The member-farmers are mostly selling in regular vegetable markets and are unable to obtain a premium price,” says the cooperative’s head, Uddav Adhikari. “Currently, only four out of thirty-five farmers are supplying about a hundred kilos per day to the organic shops at premium price.”
A final obstacle facing CFEs, largely beyond their control, is public policy. A whole slew of obsolete public policies, from local to global, now stand in the way of small business.
In the United States, a number of CFEs, like Greenmarket in New York City, have thrived because they’ve been able to accept food stamps from low-income residents. But the Oklahoma Food Cooperative has not been so fortunate, according to its founder, Robert Waldrop: “One of the failures is we haven’t been able to accept food stamps. We’ve written letters and met with senators. But our state legislation doesn’t have a category that fits what we’re doing. What we’d have to do to qualify is to open a brick and mortar store and have it open three days a week for eight hours a day with a certain specified amount of product. We may do this with our existing warehouse space, but the real goal is to allow food stamp customers access to all our products.”
Canada’s laws concerning native people’s rights have created problems for Akiwenzie’s Fish. The national government limits the Chippewa to fishing out 90,000 pounds annually, which places severe constraints on the long-term growth of the company. Restrictions on reservation businesses also prevent the Akiwenzies from buying insurance, which means they have no protection against accidents or lawsuits.
As the global trading system has eliminated various agricultural subsidies, the prices of food commodities have fallen. For instance, at the request of the World Trade Organization, the European Community recently eliminated sugar subsidies, and by 2012 the price of sugar is predicted to fall nearly 30%, which will significantly affect the bottom line of the Kasinthula Cane Growers Limited. In Zambia, Sylvia Banda complains that she is unable to export “as much as I thought I would due to many limitations both locally and internationally. International sanitary and phyto sanitary measures are a barrier to trade.”
Jim Cochran of Swanton Berry Farm would like to take on the rules of the entire U.S. food system, and wants other small operators to join him. “Unless someone does, it won’t happen, and we’ll stay islands of good food and good community in a sea of bad news….I am really interested in moving beyond tying together little islands. There is not enough solid ground there to make a continent. We need to start from scratch making a new infrastructure, including things like local stock exchanges and community development banks.”
Accomplishing the daunting innovations envisioned by Jim Cochran will require an overhaul of all kinds of local, national, and global laws, including those governing corporations, insurance, securities, cooperatives, banking, trade, environmental protection, labor, and so forth. Ultimately, this is where an organization like BALLE becomes important. No one CFE can possibly exert very much influence over public policy, and existing business organizations such as Chambers of Commerce have too many large and nonlocal members to represent adequately the views of smaller businesses. BALLE is providing a platform for small businesses to articulate policy reforms with one, powerful voice. It’s hardly surprising that CFE leaders like Judy Wicks and Paul Saginaw have devoted so much time to organizing BALLE. They realize that only by teaming up with other local enterprises, including those that have nothing to do with food, can they possibly create a better policy environment for their own CFEs.
Many economists and economic developers are resolute about helping companies in their jurisdictions “go to scale.” They are impressed by the ways bigness can solve many of the challenges above. But what our case studies reveal, and is not well appreciated, is that local businesses actually are “going to scale.” They are diversifying their businesses, entering export markets, vertically integrating, and adding new products, but using strategies that respect and deepen their community character. What many CFEs are missing to compete more effectively is not scale but the ability to tap into the accumulated wisdom of similar scale enterprises elsewhere. If a low cost, low tech software is developed by one CFE for basic accounting, for example, how can it be made available to other CFEs with similar accounting needs? This is why building a global network for sharing CFE innovation is so important.
Emerging networks that spread local innovation are critical. One of the missions of BALLE is to help local businesses in North America share best practices in technology, business design, evaluation, procurement, investment, marketing, and so forth. BALLE now has 20,000 members in more than 70 communities, and the movement is fast expanding to other communities and other countries like France, Australia, and Brazil. Similarly, the National Good Food Network, created and managed by the Wallace Center at Winrock International, is focused on a regional food systems strategy and transitioning from traditional supply chain management to value chain management. The network is a connector and resource for numerous enterprises and nonprofits across the United States. Organizations worldwide, such as Slow Food International and Transition Towns, are putting in place global frameworks for community to community and business to business collaboration. Nurturing and expanding these networks, we believe, is the most important strategy for CFEs to flourish.
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