Cambridge Central Square Saga

Don't expect your trip to a new store to exactly follow your best laid plans. You will experience some detours and surprises.

We've just completed the expansion and relocation ofthe Cambridge Food Cooperative from a 5,000 square foot basement space to a new 16,000 sq. ft. (10,500 retail) street level site. While we used many consultants, including myself, and did extensive planning for the move, we had to be very creative and flexible all along the way in order to make the project a reality.

Getting left behind

Cambridge Food Cooperative has been in Central Square since 1974, located in a deteriorating historic shopping district for the city. After starting with a small grant from the city of Cambridge and locating temporarily in an available basement, the co-op remained there for 16 years! In its early years, the co-op excluded non-member shoppers and experienced waiting lists for membership.

But in Cambridge as elsewhere, the natural foods industry developed beyond from the momentum built by the cooperatives. In the late l970s the co-op lost over half its members when Bread and Circus opened at street level only four blocks away. They presented a natural foods supermarket, high standards of service and quality, cleanliness and upscale marketing. Bread and Circus also had what the co-op didn't: capital.

Just prior to this, the co-op had passed up the opportunity to move to the Bread and Circus location. A decision was made that it was too risky for the co-op. I imagine people didn't realize the vulnerability of the co-op's basement location.

When sales dropped dramatically, the store faced closure; action was taken to open the co-op to everyone. The co-op somehow kept afloat without regaining the sales volume of its early years. By the mid-1980s it became apparent that a move was needed for long term survival. But the search seemed in vain. Prices for retail space were high, in spite of many vacancies in Central Square. Lacking cash and capital, the co-op took another five years before finding its way out.

The turning point occurred in 1987, when the co-op instituted an equity requirement for membership. The $150 in equity, payable over a period of time, created an unfortunate drop in memberships. Soon more non-member shoppers than members were using the co-op. But members did provide the minimal capital base necessary to permit planning a move.

I was hired in the fall of 1988 to assist in a management transition for the cooperative and to assist in the development of a new site. The then current manager, Eliza Strode, had already located a possible site, a building for lease six blocks from the store but not on the main shopping street. The owner was not interested in major renovation but was interested in offering a good deal if the entire 42,000 sq. ft. building could be leased as is. After looking for several years, the co-op had found its most viable site yet.

Rex Stewart of Renovations Consulting was invited to undertake a marketing study and site assessment. Rex's report was very favorable, and he suggested that Recreational Equipment Inc. (REI), a cooperative outdoor retailer based in Seattle, which earlier had wanted to open a Cambridge store, might go for the project. If REI could get a low enough rent from the landlord, it could handle leasehold improvements on its own, a common store development format for them, and lease part of the space to the food co-op. A symbiotic relationship could help both operations. REI proved to be interested, and a year of negotiations ensued, a year in which REI staff pursued the project with vigor.

Deal undone

Between Renovations (Chris Quinn and Rex), myself and Eliza Strode until her departure, we developed proformas, store plans, and financing plans. We also elicited interest from the National Cooperative Bank Development Corporation. But as we moved along, the Massachusetts economy went into a tailspin. REI reassessed its interest in the location, six blocks from the main shopping area, and, after negotiations stalled with the owner, decided not to undertake the project.

One year of hard work had gone by, one year of money spent that the co-op didn't have. The co-op had just recently made its first profits in years, and with increased member equity had its first positive nest egg. The co-op stood to lose over $30,000 invested in the move at a time during which more people had stopped going down the basement stairs into our aging location.

All the work, however, was not lost. The co-op had done extensive planning, lining up forces of support. The NCB Development Corporation still had interest. The Co-op Fund of New England had loaned $25,000 to the co-op for development work. The board of directors of the co-op had reaffirmed the necessity of the move, and we were all a lot wiser. What we did have was the preparedness and posture to seize an opportunity. We were determined, disheartened for the moment, but armed to the teeth. All we needed was an opportunity.

The Massachusetts downturn had hurt us in our first bid for new space, but this darkness resulted in a new opportunity, itself pitted with dangers. A retailer across the street from the co-op was working on a deal to purchase additional retail space on the block, but needed tenants to swing the financing. All efforts to find tenants had been fruitless. The retailer, however seemed driven to purchase the property in some quest for a manifest destiny to control the block, and the co-op was approached. The landlord had a tenant for more than half the space, but needed a cotenant. The asking rental price had dropped to an affordable level, and the landlord recognized the benefit of a food retailer and long term community business.

We quickly responded, stating that we were ready to move on the deal. Our previous work made this position a reality. In fact we were to open our store in November 1990, in a space that was totally gutted and then rebuilt, only 11 months after being approached by the retailer.

We negotiated with the landlord for the perfect deal: 14,000 square feet of space on Massachusetts Avenue with 19 feet of frontage and surrounded in the rear by two municipal parking lots. The subway, taxis and buses were at the front door. And we were to move directly across the street, guaranteeing that we would not lose a single current shopper. The landlord agreed to leasehold improvements including new HVAC, lights, floor, etc., all for just $9.59/sq. ft. with 10 percent escalators every two years on a ten-year lease. The deal seemed too good to be true in the center of Cambridge. It was almost just a dream, except for much creativity in solving the many problems that lay ahead.

Cloud in the silver lining

The seeds ofmuch of the difficulty were sowed in the deal itself. The landlord was too committed to getting this property at any cost. But the economic realities in Massachusetts were fast changing.

We signed the lease in February, and the landlord was able to purchase the building in March. What the co-op was not aware of was that the landlord's financial backing was eroding rapidly. Because he did not move fast enough in acquiring the building, the deteriorating economy caused the banks to back off of commitments upon expiration dates of the yet undone deal. But the landlord, a retailer for 30 years in Central Square, borrowed on existing property, and along with friendly investors managed to buy the building.

What the co-op also didn't know was that the landlord had not secured a construction loan for leasehold improvements and buildout. Problems began to surface with the completion of internal demolition and no subsequent construction. The landlords work shifted toward the co-tenant, a well financed art supply and crafts operation needing only the most basic buildout, in order to achieve the quickest rental income from that tenant.

We were forced into a defensive posture as the landlord laid blame on the co-op for delaying the project and questioned our ability to do the work. In fact the co-op was rapidly moving to secure financing from the NCB Development Corporation and its own members; the landlord himself was the one falling into a dark hole.

Another milestone was crossed by the co-op when it achieved its goal of $60,000 in member loans in early summer 1990. By mid-summer the co-op had surpassed this goal and had over $100,000 in loans. Membership commitment in subordinate financing convinced the bank that we were serious, and the loan was signed by the end of summer. Without this outpouring of member faith the landlord's lack of faith might have been right. But the coop seemed to have a momentum that no one could stop.

Back in the basement, the troops were getting increasingly restless. We had lucked out in hiring Paula Gilbertson from Powderhorn Co-op in Minneapolis to be store manager. Paula had experienced a difficult year, including increased deterioration of the physical plant. The basement experienced frequent flooding from stopped up roof drains, broken tenant plumbing upstairs, sewage backflows and vermin in the building: a nightmare hard to imagine unless you worked there. Staff morale had sunk upon the failure of the first site negotiation. We continued to lose customers in spite of improvements in store layout, merchandising and product offerings.

Could we really move under these circumstances? We had high staff turnover, few long-termers remaining, no one with experience running as large a store as planned. We had little money, little time and a short fuse. Our new landlord was treating us as a second class citizen, yet things needed to fall into place quickly. Our strengths were organizational commitment, brains, and a crafty ability to size up each situation and move forward. We also had great consultation from Renovations.

The signing of our $310,000 loan with the NCB Development Corporation enabled us to begin our part of the work in August. We invested money in the space to allow the landlord to do his part, but he didn't respond. Our worst fears were being confirmed. The economics of the project were not in his favor, the economy was against him, and he didn't have enough financing.

The landlord struck a deal with his contractor to move along and get most payments after final financing. The contractors, having no work at all, took the risk. They moved along at a brisk pace until the landlord started missing some early payments due them. By mid-October work was almost at a standstill.

Time was against both landlord and the co-op. We decided to step in and provided some of the critical financing to finish the job. The coop received almost six months' rent credit from the landlord in exchange for providing $58,000 in much needed cash for contractors to complete their work.

Every day became fraught with peril as we moved closer to opening. Contractors already were placing liens on the landlord's property. But this acted in our favor. The contractors hurried to finish their work in order to activate liens which required completion of the job!

In order to open for the holiday season we had floors laid, coolers erected, and shelving set as the store was finished around us. Our November 14 opening date had to be abandoned. With opening set for noon on the 28th, we were ready! The city was not. The flow of inspectors and inspections seemed insurmountable. It took several well placed calls to the city, the appearance of the vice mayor and some sharp commands from the head of inspectional services to get us open four hours late: we had built our ties with the city way in advance.

We continued to work on the store details over the next months. But during all this excitement the costs of the project escalated. From a $450,000 project we had grown to an $800,000 project. Costs overran estimates, and the landlord failed to pay his share as originally agreed. We knew we needed more funds.

We devised a financing package that local banks seldom had seen before. We took a big piece of financing and combined it with lots of little pieces. Our members so far have given $128,000 in loans plus over $30,000 in increased equity. The Boston Food Co-op loaned us $15,000. Two suppliers, Northeast Cooperatives and Cornucopia Natural Foods, financed opening orders and significant levels of inventory. The NCB Development Corporation raised its loan by $90,000 and extended the term of its new $400,000 loan to ten years.

Today we are a bustling store. A year ago we had sales of $1,400,000 and no idea whether we would move. Today we are averaging sales annualized to $4,250,000. The response has been tremendous. Our margins are coming into line, and we are fast approaching breakeven as costs are trimmed and sales volumes bring economies of scale.

The story is not over yet. Our landlord is in serious trouble and has yet to resolve his long term financing. Cultural changes in our organization have fueled staff anxiety and concern. And we still have a huge debt, but there are hints of better times to come.

It appears that right now we are the price leader in our community, not the natural foods supermarket or conventional grocery supermarket nearby: this is an enormous change in less than a year. We've left our basement mentality behind and now stand proudly on ground level, once again an innovative leader -- a place where co-ops should be.