Sunday, October 14, 2007

Keystone Co-Op #2: Extent of Financial Disaster Revealed (Again)

posted by chicago pop with deep throat

By the end of Sunday afternoon's Annual Meeting of the Hyde Park Co-Op Society, the membership had started to get it: they may lose their money. And the Co-Op as an ongoing business. And the community that bought into it. All of it. Because, if the Co-Op declares bankruptcy -- which could happen as soon as any of its many creditors smells blood in the water -- they're out of luck. The only thing keeping the doors open at this shop is a set of very lenient vendors and landlords.

Several members wondered why it had taken this long for a Co-Op Board to outline the gravity of the situation in plain terms, suggesting that previous Boards had been less than forthcoming. A few of them even chided the Board for not publicly putting all options -- including bankruptcy -- on the table. Some of their current accounting practices strike us here at HPP as "aggressive," as we'll explain below -- meaning that they put the best legally possible face on what seems to be a very tenuous financial situation.

Optimists will argue that the 55th Street store just needs to be made to sing, and then the Co-Op will pay down its obligations. Take one look at the magnitude of the abyss that has opened up on 55th Street, however, and you may change your mind:

$3,900,000 Negative Equity

This is the amount the Co-Op is in the hole. Between interest payments and rent expense, the Co-Op is in an extremely precarious situation. If vendors or big landlords demand payment, the Co-Op could hit a liquidity crisis. In other words, they wouldn't be able to pay their bills. Unless someone fronts them money, the only alternative at that point would be bankruptcy.

$18,000,000 [estimated] future obligation on 47th Street rent to 2025 that does not show up on the Co-Op balance sheet

As with a lot of information pertaining to the financial health of the Co-Op, this number is nowhere plainly indicated. We've had to get at it from nuggets buried in different issues of the Evergreen -- another reason why some shareholders are upset with what they feel is a lack of forthrightness and transparency.

This number represents our estimate of the 25-year lease (there are 3 different sources suggesting the lease ends in 2023, 2025, and 2029), assuming a start-date of 2000 for the 47th Street store, and that the Co-Op owes Certified Grocers a rent of $1,000,000/year.

Generally Accepted Accounting Principles do not require that this not-so-hidden liability show up on the balance sheet. As it is, the Co-Op only shows one year of rent as its liability at 47th Street, each year. If the Co-Op is serious about transparency, the total amount of this liability ought to be clearly visible in its financial statements.

How long are members willing to wait while management tries to lease out the 47th Street location? They've been trying for 2 years now. Membership is starting to get a clue, and is rushing to cash out shares. The Co-Op currently owes more to members withdrawing shares than it is taking in from new shareholders. From September, 2006 through to June, 2007, Co-Op members withdrew $39,710.41 worth of shares. For that same time period, net membership transactions -- new shares bought versus old shares cashed out -- ran to -$30,286.27.

This is a rush on the bank. A new tenant for 47th Street is nowhere in sight. Operations at the 55th Street store are a black hole. The Co-Op is a store that can no longer, despite the belief of some of its remaining members, function as a true cooperative buying in bulk and selling at a discount. The organization owes it to Hyde Parkers to make all the numbers public and put all the options on the table.


Famac said...

Great post! And thanks for attending. I would have rather cut off a leg than go. (And you probably would have found it being billed as leg of lamb the next day at the Co-Op.)

Elizabeth Fama said...

Yes, the Co-Op is having trouble keeping up with the "run on the bank." As I mentioned in a previous comment, it took 18 months for them to send me a check for my $300 worth of shares after I requested it. The customer service person warned me it might take that long, because of insufficient funds.

Peter Rossi said...

I will look forward to reading the Herald's coverage of this. It will be buried on page 10 and will not contain the relevant facts. I wonder if the Herald reports got out of their bed early enough to go the meeting

chicago pop said...

Elizabeth notes: "As I mentioned in a previous comment, it took 18 months for them to send me a check for my $300 worth of shares after I requested it."

I remember that lead well, it was indicative of a larger trend indeed. Turns out you got out while the getting was good; the Co-Op has stopped redeeming shares and essentially frozen the assets of all remaining members. A clause in their By-Laws prohibits them from redeeming if their liabilities hit a certain level, I believe.

J/tati said...

C-pop, I too would like to see the Herald really dig in due to the Co-ops seeming lack of transparency (or perhaps it's just typical poor corporate communications or a lack of clean reporting mechanisms?). As you've pointed out elsewhere, this blog is a mixture of opinion, facts, rumor, and inside baseball... and it's really difficult to discern reality based on what's written and commented here.

That said, call me an optimist, or delusional, but some of what James has posted here makes sense to me. And the numbers posted here, although they are grave, do not point to an intractable financial problem. I am new to Chicago and Hyde Park, but the thing is that medium footprint co-ops elsewhere in the midwest are thriving.

The Wedge in Minneapolis is amazing, and the Outpost in Milwaukee is thriving, despite being virtually across the street from both a Walmart that sells groceries and a Whole Foods down the block! Both of these operations really have soul, and it while I agree that most Hyde Parkers might at this point prefer a generic chain to a poorly run co-op, a well run co-op would be preferred over all I would hope.

chicago pop said...

Skepticism is of course everyone's right. I haven't given direct sources to each issue of the Evergreen, or the audited balance sheet for 2006, or other numbers cited here, but if you want them you've got them, because that's where it's all coming from. The number are all real, and I'll back that 100%.

I doubt you are delusional, but I do have a hard time not seeing the Co-Op's financial situation as anything but grave, and would suggest that many members, even old-timers who are sentimental about it, unlike me, are coming around to this point of view. Right now the Co-op can't redeem it's members shares, and it might not ever be able to. That's grave. It was a shareholder, not a board member, who brought up bankruptcy at the meeting, and a shareholder -- an elderly, lifelong Hyde Parker -- who wrapped it up near the end with the observation that "all good things come to an end." They're going to have to sell a lot of asparagus to climb out of a $4 million hole.

I've been told that all it takes is 1 mistake in the grocery business and your operation can tank in a few quarters. Period. The Co-Op has had much more than a few quarters and has made more than 1 mistake, although they made a very, very, very big one. Given it's small scale and inability to distribute costs across an entire fleet of stores, that makes a big difference.

To me, what is revealing in the examples you cite is that in neither case is the Co-Op the only game in town. That makes a big difference, both in the willingness of people to support "soul" and "community" over "food", but also in other dynamic ways that have to do with competition, specialization, etc, and probably derive from market size. Wouldn't it be nice if we could support BOTH a Whole Foods and a co-op, or any other combination of outlets that the trading area could support.

J/tati said...

Naturally we'd all like more local options. I personally subscribe to a CSA and make bicycle runs regularly to Korean and Vietnamese markets on the northside, the Evanston farmer's market, and (!) Trader Joe's.

What I meant about the problem not being intractable relates to James' (implied) comments about how the Co-op's closure/bankruptcy could actually make matters far worse for Hyde Parkers for several years. It's a big if, I know, but if the Co-op can resolve the 47th street lease, things do look a whole heck of a lot better, precisely because of its local monopoly status. And I just don't believe that any amount of Whole Foods bussing and Pea Podding will ever shift enough business away from the operation's core.

I'm not so sure member frustration can accomplish much, but a strong board and a solid management team should be able to capitalize on the operation's pole position... what I mean by "soul" is a difficult metric. At Outpost, I guess it's best reflected through the incredible customer service (far above and beyond even a Whole Foods -- the staff is very engaged. You sense that they are both owner/members and foodie nuts.) and a kind of posh merchandising without being overpriced... very Gourmet Ghetto: super clean, super fresh dairy/meats/produce; huge bulk/naturals; smartly merchandised conventional grocery with an emphasis on healthier options and local/independent companies.

I realize how overly optimistic this might seem, but I just really fear a rush to judgment, which could lead to an even drier food desert around these parts.

Elizabeth Fama said...

J/Tati, why would you think we'd get a "generic chain" in place of the Co-Op? It seems like Hyde Parkers themselves are so depressed about our grocery choices that we think the best we could ever hope for is a lower-tier Jewel or something horrific like Big Lots.

It got lost in another thread, but I'd like to repeat my observation that Whole Foods -- which many people think of as too snooty for less affluent Hyde Parkers -- tailors its stores to each location. The prices and stock would be TAILORED to our neighborhood.

That said, I don't think the square footage or the parking are adequate for Whole Foods to bite, either at 55th Street or at 47th Street (unless they could expand into some of the other shops).

Now I'll go out on a limb and say that it's really strange to me that the U of C is propping up the Co-Op up, given the scenario Chicago Pop and Deep Throat have painted in this post. Either they suffer from the same depressed expectations that Hyde Parkers feel ("sigh, no good store will want to take its place, I just know it,"), or they're somehow afraid of community uproar. Perhaps the resigned attitudes of longtime shareholders at this last meeting will persuade them that community members won't chain themselves to the store if the Co-Op gets booted.

We need a post in which we interview Hank Webber and ask, "Just what is the U of C thinking?"

Peter Rossi said...


actually, this blog is the ONLY source of information on the Co-op's condition. The Herald won't report it becasue they know that the Co-op is on it's way out. The Co-op itself hides numbers from the public.

Chicago pop is the only person I know that is actually interested in reporting the truth.

Much of what James said (the million dollar store etc.) turns out to be wrong.

What is the point of a badly run supermarket. there is nothing unique or special about the Co-op. The variety is better at even the low end chain stores in Chicago. Prices are high, service is bad.

The folks who used to meet in church basements to divide the cooperatives haul from wholesale markets (yes, I was one) have all grown up and go to Trader Joes or Whole Foods. There is no Co-op in the world that can compete with the scale and quality of these operations. I have many friends in Minneapolis, Ann Arbor and Madision and they all USED to go to Coops but now go to Whole Foods is cheaper and better.

deep throat said...

The future of the Co-Op really does hinge on whether it can successfully find a sub-subletter for the 47th Street store. From all the data points I've gathered, it looks like the board has already been searching for a suitable sub-subletter for over two years, and it's not clear how promising the prospects are at this point because the board is being very close-mouthed. Now, there may be some very good reasons for the board to keep quiet on this front until they've got signed leases in hand.

On the other hand, it was at the 2006 annual meeting that former GM Carl Waggoner stated to the attendees that they "would be very happy" and "you will be pleased" when you see who the new tenant is. (Evergreen December 2006).

Fast forward one year, whichever tenant Waggoner was referring to has not been revealed and is likely long gone (maybe scared off???), and President Poueymirou admitted that he wished he had good news about potential renters for 47th Street, but he just wasn't in a position to deliver anything like that at this point.

I'd be very interested in knowing more, in general terms, about what sort of issues or obstacles prevented the Co-Op from renting out 47th Street to other parties. And how many potential tenants have they already held discussions with?

Elizabeth Fama said...

Welcome, Deep Throat!

In January of 2005 I made calls to Toni Preckwinkle's office and Hank Webber's office about the 47th Street location (I was trying to be a one-woman lobby for Trader Joe's). Unfortunately I didn't record who said the following, but my scribbled notes include these thoughts:

1) The lease at 47th Street is held by Certified. They are responsible for finding a new tenant (this means it's unlikely they'd want to rent to a non-certified grocer).

2) At the time, they were courting Staples and Starbucks (just what we need, another office supply store)

3) (Perhaps at the University's urging? My notes are unclear...) Trader Joe's looked at the space, hired out a market survey of the area in some radius around the store, and decided the area was the wrong profile for their company.

chicago pop said...

From deep throat: if the Co-Op filed for bankruptcy, it wouldn't necessarily close or cease operations. Apparently, this is rather rare in retail, including department stores or groceries. Enough assets would be sold off to pay back senior creditors (including major liabilities like 47th St.) Shareholders and junior creditors could take a major loss. The store could then either be restructured and start with a clean slate, or it could be sold to a "white night" who wold assume ownership. Who the latter might be is anyone's guess, other than the University.

We're not sure how the restructuring would occur, how it is handled by the courts, etc. It would relieve the Co-Op of some major burdens, but there would definitely be some losers. Their number will only increase the longer the Co-Op continues to operate at a loss, as they have been doing for 5 years.

A five year run of losses is not a rush to judgement. In the real world, the Co-Op would be dead. If anything, judgement has been indefinitely delayed.

Famac said...

The Co-Op should declare bankruptcy as soon as possible. It’s their most logical avenue to re-negotiate that terrible lease they got themselves into. It’s exactly for reasons like this that bankruptcy law exists.

Assuming the University wouldn't jump in for a chunk of assets, that would leave the Co-Op on the mercy of the courts to help out with 47th Street -- its largest creditor, I'm sure.

If the case was handled properly, it’s easy to imagine a lenient judge completely changing the Co-Ops prospects.

Didn't Montgomery Place go into bankruptcy, and now they are expanding!

chicago pop said...

About that $1,000,000 in profits.

It's important to realize that this number does not represent a pile of cash that is sitting around at the end of the year, allowing the Co-Op to pay off what and who it wills. In fact, it never materializes at all because most of it gets sucked away immediately.

Quite the contrary. Though we don't know exactly what the precise obligations are on the $1,000,000 -- due largely to opaque accounting of operational costs and obligations such as debts, interest, rents, labor, just about everything having to do with running the inside of 55th Street -- we do know that the actual cash that the Co-Op had in hand in 2006 -- what it could use if needed to pay the delivery guy, or the landlord -- was just under $300,000. This is money actually in the cash register that you can use to buy stuff without interest or debt.

The negative equity number is an abstract measure of the money owed versus the value of the Co-Op's assets. It's a measure of how far behind the Co-Op is in paying its obligations -- across the board, not just the rent on 47th St, but everything else, including its vendors, the landlord at 55th St.,etc.

The $1,000,000 in profits therefore cannot be put towards the $3.9 million in neg. equity, because the latter is an abstraction; but what it does indicate is that the obligations of the Co-Op are far larger than its ability to meet them -- and not just because of 47th St; we have no idea as of yet of how much debt and interest the Co-Op has accumulated from vendors or anyone else to allow it to continue daily operations in the absence of sufficient liquidity.

J/tati said...

One thing that's difficult about this debate is that the taxonomy is kind of imprecise. When I referenced good examples of modern co-op groceries in MN and WI, I am not referring to buying clubs, owner-operated stores, or worker collectives. These are simply privately held corporations that have open memberships that elect a functional board. They're very profitable, stable and mature operations.

I don't know enough about Chicago to predict what type of operation would find HP appealing (the "generic grocery" comment) but as others have pointed out, the spaces at 47th and 55th are not only too small, but would require major renovation to attract someone like Whole Foods (take a look at the 55th Street basement freezers!)... and then of course there's the parking issue...

Specifically in regards to Whole Foods, a former coworker does GIS analysis consulting for their real estate operation -- and their expansion plans are not only designed years in advance, but they take into account demographic shifts and wealth density. You'd have to really have ground-level understanding of this neighborhood to believe that it could work. Mapping data show otherwise. Also in regards to WF, the Wild Oats merger has temporarily put a damper on expansion plans of course.

Mapping based analysis does cast an unfair bias against the south side of Chicago despite its gentle gentrification. Well, that, and the fact that the commercial real estate stock isn't that dynamic.

I've sit in on some of the co-op board and operational meetings, and these folks are totally aware of these issues and talk about them with candor.

And since this is a blog, we can deal in rumor, right? I always thought the 47th St tenant they'd been talking with was Marshalls or TJ Maxx or somesuch. Isn't that why the they spent all that time investigating a split of the space last autumn?

J/tati said...

And while I really welcome and relish the co-op dialog here, it does sometimes seem trifling compared to the woes of our immediate neighbors. I was telling a friend from the west side about the rancor and hysteria here over things foodie and he just about punched me in the face. "All we've got are food & liquor bodegas for a 5 mile radius..." Yup.

J/tati said...

"The Co-Op is a store that can no longer, despite the belief of some of its remaining members, function as a true cooperative buying in bulk and selling at a discount."

That's a valid point. I'm new here, so I never understood this co-op to operate in this way. But I can see that others would view this disconnect as a problem. The thing is, for those that really want it, you can buy anything from the entire United catalog (the largest midwestern distributor of bulk, natural, and organic foods) basically at cost if you join the Woodlawn Buying Club run by the Experimental Station.

chicago pop said...

J/Tati is right that other neighborhoods have bigger food desert problems. I Hate My Developer pointed out how bad it was just south of here herself some time back in a comment, and I blogged about it here:

Unfortunately, though, favorable comparisons with ghetto neighborhoods don't give us much to work with in terms of positive agendas for change.

I'm pasting a comment from a post earlier in August, that gets to this point of comparative deprivation:

""If HPP were content to compare Hyde Park to a "ghetto" neighborhood, there wouldn't be much to say, and we would sign on with the Establishment folks who think that our shabby mix of failed Utopian institutions is just fine.

That, however, is not the point here. The point is that there is potential for growth in and around Hyde Park (including "ghetto" neighborhoods)that is being stifled locally. One outcome of this is limited choice in grocery shopping. There are some people who want a Whole Foods; others a Trader Joe's; others a Jewel. The point is that none of them have the option due to limited trading area.

Hyde Park lacks a modern, economical, and efficient grocer on the order of Jewel or Dominicks. HP Produce, CSA's, Village Foods help fill in day-to-day shopping needs, but obviously do not compensate for this lack, either for lower-income households or for middle class families. Which is why an enormous amount of consumer spending from households of a wide range of incomes is taken outside HP and surrounding neighborhoods. If HP's shopping institutions were sufficient, they would be attracting all this South Side spending. There are not.""

It seems that there are 2 ways to look at the issue of relative deprivation vis a vis grocery, retail, or anything else in the neighborhood: 1) we are lucky to have it better than folks in the ghetto; or, 2)by improving things in Hyde Park, we can stimulate improvement here and in the surrounding neighborhoods. The people that work to block development, change, or improvement because they are afraid of congestion or any other bogey are doing more to hold back the entire South Side than they think.

chicago pop said...

J/Tati, it would be really cool to know more about your colleague's mapping data:
"Mapping based analysis does cast an unfair bias against the south side of Chicago despite its gentle gentrification. Well, that, and the fact that the commercial real estate stock isn't that dynamic."

Famac said...

C-Pop said "There are some people who want a Whole Foods; others a Trader Joe's; others a Jewel."

And then there's me. I think the stores at Roosevelt Road are close enough, certainly as close as many suburban folks drive to shop. I can pick up staples like eggs and milk almost anywhere, like the UM for example.

Ite very clear from these discussions that no large grocer wants to move to Hyde Park. Its also clear the Co-Op will fail.

So rather than trying to fit a circle into a square hole, I say; give up on the idea and let the market sort it out.

For Hyde Park to expand, it core needs to be strengthened. Our shrinking neighborhood needs a jolt of quality home building.

Now might not be the time, but that's the first step towards building a sucessful shopping area - a successful neighborhood.

Elizabeth Fama said...


One of my best friends doesn't have a car, and she relies on local grocers pretty much exclusively (unless she borrows someone's car). Without the Co-Op, she'd have to order Peapod, but since she lives alone she'd have to save up for a big order (minimum order is $50), and she'd balk at the delivery charge, which is $9.95 if your order is less than $75, and goes down to $6.95 only after your order tops $100.

C-Pop and Deep Throat, I wonder if you can argue from the annual report that the absolute dollars being spent by customers at the Co-Op -- even in its current shape, with people like me buying NOTHING there -- could sustain a good quality, well-managed grocery store on that site? Or is that completely unknowable?

Famac said...

Beth said: "Since she lives alone she'd have to save up for a big order (minimum order is $50), and she'd balk at the delivery charge, which is $9.95."

Its been a while since I shopped at the Co-Op, but I seem to remember easily spending that amount on light shopping. (I generally eat out of cans and bottles).

I would imagine you would be saving money using Peapod once you factor in quality, time saved and even simply the cost of the groceries.