Closing Mountain Warehouse

Mountain Warehouse was a cooperatively owned distributor of natural foods, with 1990 sales of $2.2 million. Located in Durham, North Carolina, it serviced accounts throughout North Carolina and Virginia, as well as parts of West Virginia, Tennessee, South Carolina, and Georgia. In May of 1991, after 14 years of existence, Mountain Warehouse closed.

Mountain started out with a primary goal of providing basic foods to buying clubs at prices lower than what they could otherwise obtain; indeed, for many buying clubs Mountain was their only source for natural foods. Servicing these groups efficiently had a built-in challenge: they tended to be small accounts spread far apart, a distributor's dread. This problem became exacerbated in recent years as more natural food retail outlets in the more densely populated areas resulted in the weakening or dissolution of many buying clubs.

While buying clubs provided the base of Mountain's business, it also served storefronts. This was another challenge: storefronts have needs very different from buying clubs, in product selection, terms of payment, frequency of delivery, volume discounts, and so forth. A policy that was good for one group often seemed unfair to the other. And in servicing retail accounts, Mountain faced stiff competition from the large distributors in our area, Tree of Life and Cornucopia.

Most of the people closely involved with Mountain's history agree that the major turning point in Mountain's decline was the attempt several years ago to undertake a major expansion. Mountain had outside management at the time as part of an attempt to consolidate the economic power of several co-op warehouses. The business was positioned for expansion by moving to a facility over twice the size of what was needed at the time; a larger truck was leased; and the product line greatly expanded. These all were part of a bid to gain more of the storefront market, which is where the greatest potential growth was. The outside management then withdrew its involvement in the midst of the relocation and product line expansion, leaving Mountain with excessive overhead and no manager. In the process of unsuccessfully courting the retails, it had also alienated many of its buying clubs.

Last year, the board of directors attempted to refocus on serving its buying club constituency; that was our strength, and we did not have the resources to compete for the retail market. However, by last winter we had hardly any resources at all. On the positive side, we had some excellent new personnel, an active new marketing program getting under way, and a dedicated general manager who was optimistic that we were about to turn the corner into profitability. On the negative side, we had used up the last of our members' equity and were incurring monthly losses averaging about $15,000. The board decided to turn to our member/owners and see how important it was to them to keep Mountain open. We would assess each member a one-time fee, ranging from $60 to $160; we calculated that if we received about 80 percent compliance, plus an extension on a line of credit from the National Cooperative Bank, we would have the funds needed to get us to a period of profitability.

In late December of 1990 we drafted a letter explaining the assessment and our financial condition; in early January we mailed this letter to all members. When the board met in late January, our major agenda item was whether to do the billing or close the doors. At this meeting it became clear that we did not have a viable 1991 budget. Our general manager had calculated it would take 29 percent growth to keep the business afloat. We felt this level of growth was clearly unattainable. We put off our decision for two more weeks pending review of additional budget proposals. Right at this time we learned that another small distributor that had shared much of our territory, Hatch Natural Foods, had gone out of business. We decided to go ahead with the assessment billing and to accept the extension of our line of credit with NCB.

To our shock and dismay, the next three months had continued losses of up to $20,000 per month, far above the most pessimistic projections we had seen. The board also became aware of severe internal tensions between staff and management. We decided that we were not in a position to effectively respond to the opportunity opened up by Hatch's closure and that the business was no longer viable. The longer we continued to operate, the more debts we would incur that we would be unable to pay back. The National Cooperative Bank had become increasingly wary of Mountain's situation, and was pressing the board for our assessment. When we informed the Bank that we did not foresee an end to the losses, they called for immediate payment ofour $75K note. Since we were unable to find a new investor, our only way to raise this money was by liquidating the business, and thus we did.

There is no pleasant way of closing an insolvent business. People lose jobs, customers lose a source of food, owners lose their investment, and vendors lose money owed them. It's understandable for people to be angry, particularly when, as in our case, there has been limited communication and understanding. We were concerned for the jobs of our dedicated staff, and for providing continued service to our customers, particularly those in remote areas with no alternative source for natural foods. However, as board members, we were legally and morally responsible for overseeing the business' assets and liabilities, and obligated not to continue incurring debt that we believed we would be unable to pay.

Lessons?

What lessons do I see for other co-ops? Frankly, I can readily identify various problem areas, but the solutions are not as clear. In our case, having an out of town board was a structural problem. Our board members were spread out across Mountain's territory. Being a largely absentee board, we were unaware of certain critical problems that staff might have alerted us to. By the time we learned the depth of certain problems it was too late for correction. There's a fine balance between a board getting direct input from staff (input that could be highly useful and important) vs. giving your general manager full support and not allowing staff to use the board to bypass or block management. In retrospect we leaned the wrong way in not sufficiently soliciting staff input. Each co-op has its own dynamics, and each board needs to ensure that their staffs input is utilized, and in a way that doesn't undermine their manager's authority.

Decision-making: the nobody's land of many co-ops. In Mountain's case, whereas it was clear to us board members that we were responsible, both legally and according to our bylaws, for deciding whether to close the business, some members were angrily offended that we made this decision without a member vote. Co-op members need to realize that managing a business is a complex process that, to be done effectively, requires ongoing involvement. Everyone's input is desired and welcome, but if you want to share in the decision-making authority, you need to share the responsibility of actively and regularly participating in meetings and keeping up with month to month developments and discussions.

Another problem area is the member--customer/owner dichotomy. Our members own our business and are also our customers. While these dual roles are a major strength of co-ops, they can also create confusion. A member-customer tends to look at how the business serves their particular needs; a member-owner needs to consider how the business is serving its entire market. A member-owner needs to look at their equity as an investment to be nourished and protected. Member-customers tend to look at their equity as a joining fee to give them access to the services, much like paying a fee to join a local club. Members need to be aware of these different roles and integrate them in the way they relate to their co-op. As a co-op manager myself, I view members as customers I need to please, but I want the members to view themselves as owners with a proprietary concern for their co-op. Interestingly, the Rochdale Principles of Cooperation make no mention of "lower prices" as a goal or basis of cooperativism. Co-ops need to appeal to their members for other reasons; someone who joins solely to get a break on prices is not likely to be a loyal, or involved, member.

Joel Landau served on the final board of directors of Mountain Warehouse, along with Joy Farrell, Alan Mathewson, Will Cardwell, and Cheryl Marschak. Joel served as manager of Deep Roots Co-op in Greensboro, North Carolina, for over eight years. What appears here is an edited version of his original article.