Expansion Update and F.A.Q.s

By: Steve McCargar, Board of Directors President

Earlier this summer, the Co-op Board of Directors voted on a motion to authorize the purchase of the Cutting Building next door to our current storefront. The Board voted unanimously on this motion and the Co-op will be owners of this property at the beginning of 2015. The building will be purchased on contract with the option of a complete pay-off after 6 years of monthly payments. Member-owners have had legitimate questions about the rationale, wisdom, financial implications and the process the board used to evaluate this opportunity. We have received several emails and have spoken with some members about their concerns. Here is a summary of some of those questions and issues raised:

BACKGROUND
Over its 40-year history, the Co-op has both rented (3 locations between 1974 and 1994) and owned its storefronts (current location from 2008-2014) and the Co-op has always met its debt obligations on time and has paid some loans off before they were due. For each building we have purchased, members have loaned substantial amounts to help finance the projects (almost $500,000 in total for the two stores combined). We currently owe members about $35,000 payable over the next three years. Buying the Cutting Building is qualitatively different from our first two purchases because it would not be a new primary site of our retail operations, but it would be key to our staying at the current location for the long-term.

QUESTIONS WE’VE BEEN ASKED
Why does the board think it’s a good idea to buy this building?
The Co-op Board is committed to our current store location and will be for decades to come. Because the City of Decorah owns and maintains the parking lot next to and behind the Co-op, there is only one possible way to physically expand the current space, by purchasing the Cutting Building immediately to the east. The board sees this option as a one-time-only opportunity because the building might not be for sale again in the foreseeable future.

What uses are envisioned for the building?
The building has the potential for several important uses. We expect the two buildings to be connected by opening the masonry walls between the two structures enabling us to expand several retail departments including meat and the deli, as well as the deli kitchen and seating area. It will also provide us with much needed office and meeting space as well as an enhanced classroom/kitchen. The basement has multi-use potential, including possible food production. Purchasing this building will also free up space in our current building for much needed walk-in refrigeration. ,Will the uses of the new building generate increased sales? We believe that expanding our deli and meat departments will significantly boost sales, increase traffic, and strengthen our net margin. Additionally, our classes are a key factor in attracting and keeping new member-owners and connecting them with the food we sell.

Can the Co-op afford to do this financially?
Yes, we can. The Co-op is in excellent financial condition and will finish paying off our secondary bank loan from our last expansion in March 2015. This will reduce our total monthly payment by about 60% and add $6000 per month to available cash. Our monthly payment for the contract to purchase will be about $1500.

Why expand in this way instead of opening a satellite store in Lanesboro?
In 2014, the Co-op Board considered a serious expansion proposal to open a second storefront in Lanesboro, MN. After careful consideration and consultation with several other Co-ops that have opened second stores, and knowing that the Cutting Building might soon be available, the Board declined the opportunity. If Oneota Co-op were in a position to undertake a major expansion project, we felt purchasing the Cutting Building was the best long-term match for our needs, Ends and resources.

How will we be able to afford the expansion renovation costs?
The Co-op is in a position to borrow up to $350,000 from a combination of members and a local bank. Servicing a debt of that size for six years would cost a little less than our current secondary loan payment. Keep in mind that since 2009, the Co-op has saved $200/day to build cash reserves to repay member loans. By continuing that practice we will retire the balance of our remaining member loans in three years and be in a position to pay off the building purchase in six years. We have the option of staging the renovation costs in such a way that rental income from 2 upstairs apartments can offset a portion of the total project cost.

What about store prices and profitability? Will they suffer?
Steady sales growth has strengthened our margin and reduced our cost of goods from UNFI, our major supplier (the more we buy, the lower our unit price). Our General Manager sees the potential for future cost reductions as our purchases from UNFI continue to go up-thereby protecting our shoppers from price increases due to expansion. Typically, in an expansion, profitability goes down in the first year or two. We do not expect our profitability in 2014 to be as high as last year, and there is a possibility we could lose money in the first year or two. Because we can stage renovation over time we’ll have some control of our debt load and debt service pressure.

Is it a good idea for the Co-op to be a landlord?
The Co-op does not intend to be a landlord in the long-term. Of the three rental spaces available, one will be vacated and available for us to use in July 2015. The other two (apartments upstairs) will be considered in the context of our space and financial needs.

Is the Cutting Building in good shape and a good value?
Yes, it is solidly built (according to an engineer’s report we commissioned), has a relatively new roof and no major structural issues. The purchase price is comparable to other similar buildings in downtown Decorah.

What could go wrong? Do we have contingency plans?
There are no sure things in the retail economy. Every business expansion proposal requires a balancing of potential risks and rewards. The board understands that the global, national, and local economies could collapse or suffer major crises. We believe that the Oneota Co-op weathered the economic turmoil of 2008 relatively well and could do so again. Losing our General Manager would be a major challenge for the Co-op, but we do have a succession plan in place with a capable replacement available. In addition, our General Manager has recently signed a five-year contract which gives us security. On balance we believe the potential rewards outweigh the potential risks.

Why was the decision made without input from the member-owners?
Negotiating the purchase of a new building with public participation by the membership proved problematic in 1994. At one point, one of the four co-owners of the building we eventually bought threatened to stop the process because of all the public discussion. The board is fully authorized and empowered to negotiate and commit the Co-op to purchasing property. We act on behalf of the member-owners. The board felt that keeping the negotiationsconfidential protected the current owners (the Cuttings), their tenants and the Co-op’s interests in the outcome of the process.

Look for future updates about the expansion project in this publication, COMMPOST updates, and in the store. This is an exciting project and we look forward to receiving input from the membership as we move forward.