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Moving FoodAlong the Value Chain:

Innovations inRegional Food Distributio

ed Statesartment ofculture

culturalketingice

ch 2012


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Recommended citation format for this publication:Adam Diamond, James Barham. Moving Food Along the Value Chain: Innovations in Regional Food Distribution. U.S. Dept.of Agriculture, Agricultural Marketing Service. Washington, DC. March 2012.

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Trade and company names are used in this publication solely to provide specic information. Mention of a tradeor company name does not constitute a warranty or an endorsement by the U.S. Department of Agriculture to theexclusion of other products or organizations not mentioned.


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Adam Diamond, Agricultural Marketing Specialist

James Barham, Economist

Moving FoodAlong the Value Chain:

Innovations inRegional Food Distributio

Marketing Services DivisionAgricultural Marketing ServiceU.S. Department of Agriculture

March 2012


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Contents

Summary 1

Introduction 3

La Montanita Co-op: Retail-Driven Model #1 9

Co-op Partners Warehouse: Retail-Driven Model #2 18

Oklahoma Food Cooperative: Consumer-Driven Model 27

New North Florida Cooperative: Producer-Driven Model 39

Growers Collaborative/CAFF: Nonprot-Driven Model #1 47

Red Tomato: Nonprot-Driven Model #2 55

Minnesota Food Association and Big River Farms: Nonprot-Driven Model #3 66

Appalachian Harvest: Nonprot-Driven Model #4 73

Conclusion: Lessons Learned from Case Studies 86

References 94


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Acknowledgements

The authors would like to thank Debra Tropp for her invaluable support during the research and writing process, andWendy Wasserman for helping make this manuscript more accessible. Thanks to Ben Turner and Larry Laverentz for

their early collaboration in helping us dene the scope and intent of the study. Thanks to the value chain writeshopparticipants for serving as a sounding board for some of the ideas contained in this report. Thank you to Jessica Ladd,graphic designer, for her patience and creativity in assembling the words and images into a highly readable document,and to Michael Smith for his careful editing. Special gratitude to all of the organizations studied herein who gave sogenerously of their time in providing us invaluable information and contacts.


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Summary

This report examines the aggregation,distribution, and marketing of eightdiverse food value chains to gleanpractical lessons about how theyoperate, the challenges they face,

and how they take advantage ofemerging opportunities for marketingdifferentiated food products. A focuson the operational details of foodvalue chains—business networks thatrely on coordination between foodproducers, distributors, and sellers toachieve common nancial and socialgoals—demonstrates how to facilitatemoving differentiated products fromregional food suppliers and buyersto customers.

The key business practices of foodvalue chains include:

Recruiting producersand developingproducer networks

Identifying, branding, andmarketing differentiatedfarm products

Managing infrastructure to

transform, pack, and transportfarm products

Negotiating with buyersto secure a fair return forthe producers.

By analyzing what has and has notworked within food value chains, wehope to show organizations interestedin building local food systems lessonsto build on, blunders to avoid, andinspiration to draw from.

Our eight case studies were selectedto examine a variety of participatingfarmers, locations, product mixes,markets, and types of partnership orcollaboration. They are categorized bythe type of organization that drivesthe distribution operation.

Retail-Driven Models

La Montanita Co-op, based inAlbuquerque, NM, established itsRegional Foodshed Initiative in 2007to expand purchases by the Co-op’sfour stores of sustainably grownregional products and to assistregional producers in accessing otherwholesale market channels for itsproducts.

Co-op Partners Warehouse, locatedin St. Paul, MN, was started in 1999by the Wedge Cooperative to providehigh-quality organic produce to theCo-op, and now serves 200 consumer

cooperatives, health food stores,buying clubs, and restaurants in theUpper Midwest.

Nonproft-DrivenModels

Appalachian SustainableDevelopment’s Appalachian Harvest ,located in Abingdon, VA, has beenselling organic produce to regional

supermarket chains and specialtygrocery chains in the Southeast andMid-Atlantic regions for 10 years.

Minnesota Food Association’s BigRiver Farms, based near Stillwater,MN, has provided production trainingand distribution/marketing servicesto aspiring immigrant and refugeefarmers since 2007.

Growers Collaborative wasestablished by Community Alliancefor Family Farms (CAFF) in 2005 tooffer aggregation, distribution, marketpromotion, and education servicesto California family farms. In 2009CAFF went from being a full-servicedistribution company to playinga matchmaker role, transferringdistribution and marketing servicesto independent aggregatorsand distributors.

Red Tomato, founded in 1996 andbased in Canton, MA, arranges forthe aggregation, transportation, andsale of a wide variety of producesupplied by 35–40 farmers to grocery

stores and distributors throughoutthe Northeast. Its signature EcoAppleTM line of apples is grownusing advanced Integrated PestManagement methods subject tothird-party verication and accountsfor more than half of Red Tomato’ssales volume.

Producer-Driven

ModelNew North Florida Cooperative hasbeen aggregating, processing, andselling produce in the Southeast since1999. It sells primarily chopped freshcollard greens, sweet potatoes, andgreen beans from mainly small-scaleminority farmers to 60 independentgrocery stores and more than 30school districts in the Southeastserving more than 200,000 students.

Consumer-DrivenModels

The Oklahoma Food Cooperative has been operating an Internet-based buying club since 2003. It isa producer- and consumer-ownedcooperative in which 200 producermembers sell more than 4,000individual items, including meat,produce, milk, and value-added items,

to 3,800 Co-op members.


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As nonprots and cooperativesengage in value chain activities,they should consider what rolesare most suited to its capacitiesand recognize how its limitationscan be mitigated through buildingstrategic partnerships with othervalue chain actors. Cooperativesmay benet from partnering withnonprots for training, education,

and resource prospecting; nonprotsmay nd it worthwhile to partner withcooperatives or other business entitiesto provide infrastructure support orsupply chain management services.

and individual consumers. Whenthere is a great deal of preexistingtrust between consumers and theseller, there is less need to specifywhich farmer produced an item orto create a third-party certicationscheme. When there is less trust orsocial connection between consumersand sellers, identifying the farmer

on each produce package helpsestablish marketing claims and betterposition products in a competitiveselling environment.

While agricultural cooperativeshave played a major role in productaggregation and food marketing, newmodels of producer coordination areemerging that offer more exibilityto suppliers and buyers. Withmore informal supply networks,

farmers benet from a more diversemarket channel mix by balancingrisk and not “putting all its eggs inone basket,” and the distributionentities are under no obligation totake all of its members’ production.Informal farmer networks seemto be particularly appropriate formarketing diverse products likefruits and vegetables; more formalcooperative structures may be moreappropriate when dealing with single,uniform products. A diverse range of

products, each with its own separatecosts of production, processingrequirements, and prices, makes itdifcult to allocate costs and benetsto cooperative members.

Findings

Four themes that cut across the eightcase studies provide valuable insightsfor value chain practitioners:

How much and when an organizationinvests in infrastructure is vital to thesuccess and even the survival of the

enterprise. Whether it makes sensefor food value chain distributorsto invest heavily in infrastructuredepends on operational scale,proximity to customers, availability ofexisting distribution assets, nancialcapacity, and its ability to capturevalue throughout the supply chain.The four nonprot distributionmodels tended to overinvest ininfrastructure because of its abilityto solicit grants and donations andits tendency to focus on needs in

the community rather than assetsthat could be mobilized. The fourcooperative distribution models weremuch more conservative; they onlyinvested in infrastructure in tandemwith business growth and needs.

The type of identity preservationemployed by the various distributionmodels to differentiate its productswas largely dependent on itsrelationship with farmers, retailers,

The level of investmentin infrastructureshould match theorganization’s stage ofdevelopment andmarketing capacities.

Nonprots andcooperatives can playkey roles in valuechain developmentbut should recognizeits organizationalcompetencies and play

to its strengths.

Distribution entitiesusing informal producernetworks can adapt tothe constantly shiftingdemands of diversied,

niche food markets.

Value chain managersmust ensure identity preservation from farmto market as a way to

establish marketingclaims and improvenegotiating position with buyers.


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Introduction

The Changing AgriculturalLandscape

Agriculture in the United Statesis at a crossroads. It has madetremendous strides in improving laborproductivity with mechanization andland productivity through advances inplant and animal genetics, applicationof fertilizers, and myriad pest controltechnologies (Cochrane, 1993).With these technologies, the overallnumber of farms in the United Stateshas plummeted from over 6 millionin 1935 to around 2 million in 2007,

even as the population has increased140 percent from 127 million to308 million in this time period.Compounding this dramatic reductionin overall farm numbers, we haveseen intense concentration of farmownership to the point where 55,509farms—2.5 percent of all farms—accounted for 59 percent of total farmincome in 2007 (USDA, 2009). Neverhave so many been fed by so few.

Although this dramatic increase

in agricultural productivity hasbeen a triumph of technology andhas released millions of peoplefrom backbreaking work, it alsohas transformed the agriculturallandscape. The steady increasesin average farm size have made itincreasingly difcult for small andmidsized operators to competesuccessfully in the marketplace,especially in bulk commodity markets.In response to these prevailingtrends, many smaller and mid-scalefarmers have capitalized on growingconsumer interest in food provenanceto sell through direct-to-consumerfood markets such as farmers markets,community supported agriculture(CSAs), and farm stands. Accordingto the USDA National Agricultural

Statistics Service, direct marketingof all types was worth $1.2 billion in2007, having grown 105 percent invalue from 1997 to 2007, comparedto a 48-percent increase in total farm

sales for the same period (Diamond &Soto, 2009).

Direct-marketing outlets can increasereturns to farmers by allowing farmersto capture additional income streamsfrom traditionally off-farm foodsystem activities such as aggregation,processing, and marketing (Martinezet al., 2010). Nevertheless, direct-marketing channels alone are notequipped to accommodate the bulkof midsized agricultural producers—those earning between $50,000and $250,000 in gross farm income(Stevenson et al., 2008). More than270,000 farmers, with gross farmincome of $33 billion in 2007, belongto this “agriculture of the middle”category (USDA, 2009). Generallyspeaking, they are too big to relyprimarily on direct-to-consumermarketing channels to dispense oftheir output. Farms in this size rangeare likely to specialize in one or two

crops and be located far enoughfrom population centers to makedirect marketing impractical. Onthe other side of the coin, thesemidsize producers are often toosmall to compete on price with largecommodity producers (Stevenson &Pirog, 2008). Their larger competitorsare often more able to take advantageof economies of scale related tofarm machinery, farm management,and/or get better terms of tradein the marketplace due to their

large sales volume. “Agricultureof the middle” farmers are thuscaught short, having difcultycapitalizing on two simultaneous,if contradictory, developments incontemporary American agriculture—the growth of small-scale, niche, local

production alongside the continuedindustrialization of agriculture intoever larger production units. Thenumber of midsized farms declined 10percent just from 2002 to 2007, and

thirty six percent from 1987 to 2007.

In response to this conundrum,many midsized farmers are turningto a burgeoning array of alternativestrategies for wholesale foodaggregation and distribution, onesthat can broadly be characterized asless intermediated and more directsales from farm to institutions orretailers (Day-Farnsworth, L., McCown,B., Miller, M., & Pfeiffer, A., 2009; King,R., Hand, M., DiGiacomo, G., Clancy,K., Gomez, M., Hardesty, S., Lev, L., &McLaughlin, E., 2010). Such marketingstrategies usually involve somedegree of product differentiationbased on attributes such as placeof origin, production practices, andproduct quality, combined withproduct aggregation, to improveproducers’ bargaining positionrelative to buyers. These effortsto bypass both undifferentiatedcommodity markets and direct-to-

consumer market channels dependon the creation of new collaborativesupply chains and the marketing ofdifferentiated products.

Key to these new food marketingstrategies (King et al., 2010) is theestablishment of strong relationshipsbetween the different actors involvedin growing/raising crops; processingcrops; and marketing food to retailers,institutions, restaurants, and otherfood buyers. The phrases “values-

based value chains” and “foodvalue chains” refer to emergentsupply chains emphasizing verticalcoordination rather than integrationthroughout the supply chain(Stevenson & Pirog, 2008).


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These food value chains strive tocreate economic value throughproduct differentiation and advanceparticular social or environmentalvalues by espousing the concept ofsocial entrepreneurship, or doinggood works through good business(Barnes, 2006; Porter & Kramer, 2011).

Stevenson, as part of the Ag of theMiddle Project, has described in aseries of case studies how farmers,distributors, retailers, and foodprocessors coordinate their actionsfor mutual economic benet whileadvancing social and ethical valuessuch as agricultural sustainabilityand farm viability (Stevenson,2009). Others have built on thisframework to assess the effectivenessof conventional food distributors inbuilding up local food systems (Bloom

and Hinrichs, 2011) and the capacityof pasture-raised livestock productionto strengthen farm viability and ruralcommunities (Conner, Campbell-Arvai,and Hamm, 2008). These studieshave examined how the attitudes andbehaviors of food value chain actorsfacilitate the creation of regionallybased, sustainable food systems.Building on this body of work but alsooffering a new perspective, this reportfocuses on distribution mechanics

and operations within the food valuechain framework.

This focus on distribution is meantto address the oft-cited challengeto regional food marketing: farmersare willing to grow produce forlocal markets, and food buyers wantlocal food, but there is no practicalway to connect local demand withlocal supply (Day-Farnsworth et al.,2009; Zajfen, 2008). In focusingon the operational details of food

value chains, this report seeks toexplain how mission-oriented fooddistributors can facilitate connectionsbetween regional food suppliers andbuyers through appropriately scaledand designed business operations.

Research Inquiryand Methods

The following analysis focuseson the myriad ways that valuechain distributors:

Recruit producers and develop

producer networks.

Identify, brand, and marketdifferentiated farm products.

Manage infrastructure totransform, pack, and transportfarm products.

Negotiate with buyers to secure afair return for the producers.

By analyzing what has and has not

worked in regional food distributionenterprises, organizations interestedin building local food systemswill have lessons to build on,blunders to avoid, and inspirationto draw from. These factorsaffect value chain performance:

Organizational structure

Financing

Distribution logistics

Buyer-grower relationships

Price negotiation

Marketing/branding

In order to capture the level of detailand richness of various distributionmodels, a case study approach waschosen as the primary researchmethod. The themes described

in this paper emerged from ouranalysis of interview transcripts andnotes and other primary sources,such as organizational newsletters,websites, and journalistic accounts.Furthermore, given the dynamicnature of these alternative models oflocal food distribution, the study took

a longitudinal approach to examinehow these organizations have facedchallenges and seized opportunitiesto best advance their business goalsand social missions.

A baseline review of value chaindistribution models was rstconducted to ensure a diverse

representation of cases. An initiallist of around 25 cases was gatheredvia key informants involved with theregional food distribution sector tocreate a broad set of cases from whichto choose a diverse sample. Whilethis initial list was not exhaustive,it was sufciently diverse to formour sampling frame. Eight casestudies were chosen, considering thefollowing criteria:

Types of participating farmers

(e.g., minority, transitional,refugee/immigrants,new/beginning)

Geographic location

Agricultural products

Markets (e.g., institutional buyers,retail grocery stores, restaurants)

Types of collective producer

structures (e.g., cooperatives,farmer networks, associations)

Types of collaborations

The initial data-gathering periodoccurred with visits to each casestudy location, beginning in August2007 and concluding in June 2008.Each site visit lasted an average of 2days and included semi-structuredinterviews with distribution entitystaff, including general managers,

sales staff, and farmer-relationspersonnel. Our key informants atthe distribution entities providednames of buyers (customers) andsuppliers (farmers) who work withthem. Periodic follow-up interviewswere conducted either in person orby phone through February 2011to chart their progress. In total,this study captures a rich, evolvingnarrative of over 3 years in the life ofeach case study.


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Value Chain

Distribution Models

The nal selection of case studies isshown in Table 1, which indicates thetype of distribution model and stageof development for each case study.In this study, value chain distribution

models are classied by the type oforganization driving the process,in terms of both establishing andgrowing the distribution enterprise.

For example, in some cases anindividual producer or a group ofproducers claims greater ownershipover the supply chain by carrying outcertain aggregation and distribution

functions, instead of contractingthis out to a third party. We haveclassied this type of arrangement asa producer-driven distribution model.In a second classication, nonprotorganizations assist small-scaleproducers by providing distributionand marketing services to create newwholesale market opportunities forproducers. We classify them as a

Source: Designed by the USDA’s Agricultural Marketing Service and the Wallace Center at Winrock International for FoodValue Chains: Lessons Learned from Research and Practice

Figure 1: Food Value Chain


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nonprot-driven distribution model.The section on retail-driven modelsexamines how two food cooperativeshave assumed distribution functionsin order to maintain their competitiveadvantage and ensure that theycan meet their customers’ demandfor locally grown food. Lastly, theconsumer-driven model refers to new-

generation buying clubs that utilizeonline networking and transactionplatforms to link consumers withproducers. In this model, consumersthemselves are actively engaged inthe aggregation and distributionof farm products to buying-club members.

Along with providing an overviewof distribution model types, Table 1also shows the stage of development,which takes into consideration howlong the distribution enterprisehas been operating, the level ofprofessionalization regarding stafngand division of labor, and the overallscope and scale of the operation.

To show the range of case studiesanalyzed in the body of the report,we have included brief summariesof each case study below. Theyare categorized by model type,with the retail-driven, consumer-driven, and producer-driven modelsall representing different types ofcooperatives, as compared to the fourmodels driven by nonprots.

Retail-Driven Models

La Montanita Co-op is a retail-driven distribution model basedin Albuquerque, NM. It providesbusiness development, distribution,and marketing services for producerslocated within a regional foodshedencompassing the Rio Grande RiverValley Rift, about a 300-mile radiusfrom Albuquerque. La Montanita’sRegional Foodshed Initiative wasestablished in 2007 to expandpurchasing of sustainably grownregional products from small andmid-scale producers by the Co-op’sfour stores, and to assist regionalproducers in accessing otherwholesale market channels for their

Table 1: Value Chain Distribution Models and Stages of Development

DistributionModel

Stage of Development

Start-up/Nascent Developing/Emerging Mature/Developed

Retail-DrivenLa Montanita Co-op,

New Mexico

The Wedge/ Co-op Partners Warehouse,

Minnesota

Nonprot-DrivenMFA/Big River Farms,

MinnesotaGrowers Collaborative/CAFF,

California

Red Tomato, Massachusetts

ASD/ Appalachian Harvest,

Virginia

Producer-DrivenNew North Florida

Cooperative,Florida

Consumer-DrivenOklahoma Food Cooperative,

Oklahoma


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products. The Co-op’s distributionbusiness has been operated andfunded largely from Co-op revenues.It currently stocks and sells more than1,500 products purchased from nearly900 growers and producers within itsregional foodshed.

Co-op Partners Warehouse, located

in St. Paul, MN, is a retail-drivendistribution model started in 1999 bythe Wedge Cooperative, which has14,000 member households. Using itsown eet of trucks as well as contracttrucking companies, it primarilysells organic produce supplied bya network of 30 or so farmers inMinnesota and Wisconsin during thegrowing season, and from West Coastsources the rest of the year, to 200consumer cooperatives, health foodstores, buying clubs, and restaurants

in the Upper Midwest. Annual salesfor Co-op Partners are $16.8 million,with about one quarter of its salesaccounted for by the Wedge. Thisorganization is unique in its focus onselling primarily to retail cooperativesand in its commitment to being a full-service organic produce distributorwith a regional focus.

Consumer-DrivenModels

The Oklahoma Food Cooperative is a consumer-driven distributionmodel based in Oklahoma City, OK,that has been running an Internet-based buying club since 2003. It isa producer- and consumer-ownedcooperative in which 200 producermembers sell more than 4,000individual items, including meat,produce, milk, and value-added items,

to the 3,800 co-op members usingan Internet ordering portal and 48member-operated distribution routesthat reach cities, towns, and hamletsacross Oklahoma each month.Members always know which farmerproduced their food and even havethe opportunity to meet their farmer

on delivery day. Farmers bring theirmerchandise to a central drop-offlocation, where it is assembled intomember orders and then routedby a crew of volunteers, who arecompensated for their time with workcredits redeemable for goods soldthrough the cooperative. All productssold through the cooperative must be

made in Oklahoma.

Producer-DrivenModels

New North Florida Cooperative is aproducer-driven distribution modelbased in the Florida panhandle thathas been aggregating, processing,and selling produce in the Southeastsince 1999. It sells primarily

chopped fresh collard greens, sweetpotatoes, and green beans frommostly small-scale minority farmersto 60 independent grocery stores andmore than 30 school districts in theSoutheast that serve morethan 200,000 students. Thecooperative is one of the oldestfarm-to-school programs inthe country and has achievedconsiderable success by focusing onsupplying a handful of food items

that are culturally appropriate, easilyaccommodated into school menus,competitively priced, and requireminimal preparation.

Nonproft-DrivenModels

Appalachian SustainableDevelopment’s Appalachian Harvest is a nonprot-driven distribution

model located in Abingdon, VA, thathas been selling organic produceto regional supermarket chainsand specialty grocery chains in theSoutheast and Mid-Atlantic regionsfor 10 years. This organization workswith more than 50 farmers, rangingfrom market gardeners with less

than an acre to commercial farmerswith 200+ acres, providing technicalassistance, farmer mentoring, andaggregation services. AppalachianHarvest distinguishes itself fromCalifornia organic produce with itslocal origin and short eld-to-shelftime: “48 hours fresh.”

Minnesota Food Association’s BigRiver Farms is a nonprot distributionmodel based near Stillwater, MN,that provides production andmarketing services to aspiringimmigrant and refugee farmers.Big River Farms (formerly Big RiverFoods) was established in 2007 as a“training distribution company” thatcombines brokering functions andtransportation logistics with on-farmproduction and postharvest handlingtraining. In any given year, Big

River Farms works with 8 to 10 farmenterprises in its training program tobroker and distribute certied organicfruits and vegetables to supermarkets,food co-ops, and restaurants.

Growers Collaborative is a LimitedLiability Corporation establishedin 2005 to offer aggregation,distribution, market promotion,and education services to Californiafamily farms. As a nonprot-

driven distribution model, GrowersCollaborative is wholly owned bythe nonprot organization CaliforniaAlliance with Family Farms, whosemission is to promote small andmedium-sized family farmersthroughout California with sustainableeducation, public advocacy, andmarket development. GrowersCollaborative works with a network ofover 70 fruit and vegetable producersto increase its access to institutionalmarkets in both southern and

northern California. In 2009, GrowersCollaborative transitioned from beinga full-service distribution company toplaying more of a matchmaker roleby connecting farmers, aggregators,distributors, and institutional foodservice operators, and focusing itsefforts on providing support servicesthrough market promotion andeducation to local supply chain actors.


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Red Tomato, founded in 1996, is anonprot distribution model basedin Canton, MA. It arranges for theaggregation, transportation, and saleof a wide variety of produce suppliedby 35–40 farmers to grocery storesand distributors in the Northeastprimarily. Relying on farmers andcontract trucking rms to provide

aggregation and transportationservices, it never physically handlesthe product sold under its name. Itssignature Eco AppleTM line of applesis grown using advanced IntegratedPest Management methods subject tothird-party verication, and accountsfor more than half of Red Tomato’ssales volume. During the growingseason, each tote of Eco Applescontains fruit grown by one farm,which is named and described onevery package.

Although there are many differencesin both structure and function fromretail- to producer-driven models, andfrom nonprot- to consumer-drivenmodels, all the case studies selectedfor this study have several featuresin common:

They all seek to improve theeconomic welfare of small-scalefarmers and ranchers withinspecic geographic regions.

They combine traditional businessstrategies with social missions.

They all move beyond direct-to-consumer marketing activities yetincorporate the basic principleof building more directconnections between producersand consumers.

The next eight chapters examine howa diverse range of distributors havesought to build these connections,the challenges they have faced, andthe opportunities they have seized.The concluding chapter looks at howfour themes cut across the eight casestudies and provide valuable insightsfor value chain practitioners:

The level of investment ininfrastructure should matchthe organization’s stageof development andmarketing capacities.

Identity preservation is a criticalmarket differentiation strategy.

Distribution entities utilizinginformal producer networks arewell suited to meet the constantly

shifting demands of diversied,niche food markets.

Nonprots can play key rolesin value chain developmentbut should recognize theirorganizational competencies andplay to their strengths.


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La Montanita Co-op is a retail-driven distribution model based in Albuquerque, NM. It provides business development,distribution, and marketing services for producers located in a regional foodshed encompassing the Rio Grande RiverValley Rift (about a 300-mile radius from Albuquerque). La Montanita’s Regional Foodshed Initiative was establishedin 2007 to expand purchasing of sustainably grown regional products from small and mid-scale producers by the

Co-op’s four stores, and to assist regional producers in accessing other wholesale market channels for their products.The Co-op’s distribution business has been operated and funded largely from Co-op revenues. It currently stocks andsells more than 1,500 products purchased from nearly 900 growers and producers within its regional foodshed.

La Montanita Co-op:Retail-Driven Model #1

History La Montanita Co-op NaturalFood Market is a community-owned consumer cooperativethat rst opened its doors in 1976in Albuquerque. Since then, LaMontanita has opened three moreretail stores in New Mexico, addinga second store in Albuquerque in1999 and third and fourth stores

in Santa Fe and Gallup in 2005. La

Montanita is also scheduled to opena new location in University of NewMexico’s bookstore building. TheCo-op is overseen by a membership-elected, nine-person Board ofDirectors. It employs more than 200full- and part-time staff. All storesoffer a wide variety of natural andorganic groceries, freshly prepareddelicatessen foods, natural body-

care products, and vitamins andnutritional supplements. The Co-opcurrently stocks and sells more than1,500 products purchased from nearly900 local growers and producers.La Montanita denes “local” as anyproducts grown or produced withina 300-mile radius of Albuquerque.

Even in the highly competitiveenvironment of food retail, the Co-ophas seen tremendous growth in itssales and membership. From 2004to the present, La Montanita hasseen its sales more than double from$12 million to $28 million, and seenits membership grow from 10,000to almost 17,000 members. Muchof the Co-op’s continued successhas resulted from the organization’s

strong commitment to its coreprinciple: offering products to itsconsumer members (and the generalpublic) that are “fresh, fair, and local.”

La Montanita’s dedication tosatisfying the needs and preferencesof its members is best exemplied byits creation of the Regional FoodshedInitiative, an initiative to bolster thesupply and demand for regionallygrown products through the creationof an alternative food-distribution

model. The initial impetus for thisinitiative and La Montanita’s entry intothe distribution business emergedafter the organization’s managementteam analyzed responses from itsannual member survey. As far backas 2002, Co-op members increasinglyidentied the availability of localfoods at the Co-op as one of itstop priorities.

La Montanita is committed to offering products that are “fresh, fair, and local.”


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Bolstered by these ndings, andcoupled with the ever-growingpresence of natural and organicproducts in mainstream supermarkets,La Montanita’s board realized that theonly way it could satisfy the demandsof its members and maintain acompetitive advantage in the foodretail marketplace was to focus its

energies on local products. As C.E.Pugh, former general manager of LaMontanita, points out, “We beganto look out and say, okay what arewe going to do, how are we goingto maintain our position in themarketplace 10 years from now, 15years from now, 20 years from now?It just seemed clear that the supportof local products made a lot of sense.”

La Montanita’s rst step inbroadening its range of local product

offerings was to take a closer look atits current procurement strategies.La Montanita found that in 2003, 16

percent of its sales revenues camefrom local products. In an effort to

boost these sales, La Montanita’smanagement began to activelypromote the company’s local productofferings through in-store signage,educational articles in its monthlynewsletter, and other events. Thesepromotions had the desired effectof boosting sales from 16 percent in2003 to more than 20 percent of thestores’ sales totals by 2006.

Concurrent with these promotionefforts, La Montanita began

to examine each departmentsystematically to see how to beststrengthen existing relationships with

top local producers, as well as tosee how it could attract more local

producers as vendors. In the processof doing this, a disturbing trendbegan to emerge, as Robin Seydel,La Montanita’s Membership Director,recalls: “We kept seeing producersgoing out of business, farmers notbeing able to do their deliveries, thelocal bagel man went out of business,Sunrise Juice, our local juice company,went out of business. We beganto see all this falling apart on theproducer end, and at the same time,we’re hearing the members say we

want more local: how are we goingto meet this demand if we keeplosing producers?”

After speaking to a number oflocal producers, what La Montanitafound was that over the previous15 years, many of the smallerindependent retail food stores inthe area had closed, partially due tocompetition from larger chain stores.Consequently, many smaller scaleproducers lost their wholesalemarket outlets, and either wentout of business or scaled backproduction and turned to directmarketing venues, such as selling atfarmers markets.

As Pugh points out, “It got to thepoint that it was more economical forthem to cut back their production, just go to the farmers market and getthe [premium] price . . . And so itconcerned me that these guys were

probably more important to us longterm than we are to each of them. Ifthe local producers go away, whereare we in the market? Where is ourcompetitive advantage? If we don’thave a key point of differentiation inthe marketplace, we’ve lost.”

How are we going to meet this demand if wekeep losing producers?

Many of the products that are part of La Montanita’s Foodshed Initiative arebranded with the Co-op Trade logo.


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Starting the RegionalFoodshed Initiative

It became clear to La Montanita’smanagement team that the onlyway to keep many of these localproducers in business was to helpthem expand their wholesale market

opportunities. Even as demand forlocal foods was beginning to takehold in the early 2000s, the ability ofmany of these local producers to tapinto these markets was impeded byhigh transportation and storage coststhat effectively stymied their abilityto grow their businesses. In 2006,La Montanita’s management teampresented a strategic plan to its Boardof Directors that proposed investing$150,000 of the Co-op members’contributions over a 3-year period

in setting up the Regional FoodshedInitiative. The basic goals of theRegional Foodshed Initiative wereto “increase the quantity, diversity,and availability of local foods and toprovide support for producers andvalue for consumers.”

As presented to the Board ofDirectors, the strategic planenvisioned the “creation andexpansion of a wholesale-based

income stream for farmers andproducers, the development of adistribution network for pick-up ofproduct and delivery of farm inputs(livestock feed, packing boxes, etc.)and the opening of additional Co-oplocations throughout the foodshedregion that would serve both asgrocery stores for underservedcommunities and as drop-off andpick-up depots for the distributionnetwork.” To create the properframework for discussion, the concept

of a “foodshed,” akin to a watershed,was used as the anchor of theproposal’s vision statement:

The concept of a regionalfoodshed is a naturaloutgrowth of the conceptof a watershed. Just as awatershed provides for faunaand ora in its eco-region, aregional foodshed based onthat watershed provides food

for the region’s inhabitants.We have dened our Co-opfoodshed region as just beyondthe area that spans the wholeRio Grande River Valley Rift;about a 300-mile radius fromAlbuquerque. (Citation— La Montanita website).

Upon receiving board approval,La Montanita began to developdistribution routes to serve the

regional foodshed. An early keypartner in its efforts was BenecialFarm and Ranch Collaborative(BFRC), a group of 14 northern NewMexico farmers who sold productunder a regional eco-label thatcertied the sustainable productionpractices of its members. BFRCassisted La Montanita with its earlydistribution planning and connectedLa Montanita with several producerswho potentially could be part of

the Co-op’s distribution network.Shortly after partnering, La Montanitaand BFRC decided to bring theBenecial Farms eco-label under theCo-op umbrella, which meant thatproducers could sell to La Montanitaunder this label (once inspected byBFRC), as well as use this marketingclaim when selling to other marketoutlets. With many local producersnot certied organic, having thisadditional marketing claim wasimportant to command a higher price

point (and thus a willingness to sellto La Montanita or other wholesalemarket channels), and was essentialfor assuring Co-op shoppers, as wellas other wholesale buyers, that theselocal products were produced in amanner consistent with sustainablefarming practices.

Business Structureand Operations

In the spring of 2006, La Montanitabegan distribution of regionallyproduced products with 1 leasedrefrigerated truck and 2 driversdelivering more than $100,000 of

meat, eggs, milk, and fresh producefrom about 30 producers. InJanuary 2007, it formally openedits Cooperative DistributionCenter (CDC) in Albuquerque. Theleased warehouse facility providesapproximately 1,500 square feet ofrefrigerated storage, 500 square feetof frozen storage, and over 4,000square feet of dry storage. The CDCalso houses the main administrativeofce for La Montanita. Initial capitalexpenditures were roughly $100,000

to renovate the warehouse, installthe coolers and purchase otherwarehouse equipment essentials (e.g.,pallet jacks, scales, etc.). The CDC ismanaged by Michelle Franklin, whooversees all distribution logisticsand internal and external storeaccounts. The CDC is the center ofLa Montanita’s Foodshed Initiative,providing pick-up, supply, andstorage services for producers anddistribution of regional products to

its four retail stores and other retailoutlets. The CDC also obtainedliability insurance for products thatwould pass through its warehouseand had the facility certied to handleorganic products.

Moving boxes at the CooperativeDistribution Center.


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By operating the CDC, La Montanitais attempting to contribute toenvironmental sustainability acrossseveral measures. The organizationseeks to reduce food miles by usingthe CDC to consolidate truckingroutes and coordinate the pick-upof product with delivery of farmsupplies, including animal feed, egg

cartons, and produce packing boxes.The CDC also serves as a recyclingcenter for farm inputs, as appropriate,and provides postharvest refrigeratedspace for smaller scale local producerswho lack sufcient storage capacity intheir own operations.

Pricing/Marketing

By entering into the distribution

business, La Montanita knew fullwell that the Co-op’s FoodshedInitiative was not going to succeedunless it served a wider market than just the Co-op’s own locations.As Steve Warshawer, CDC’sEnterprise DevelopmentCoordinator, emphasized:

The Co-op by itself isn’t bigenough to impact any markets,so we’re immediately out into

bigger markets. So the realconundrum of the FoodshedInitiative is to build sufcientstrategic partnership for thedelivery side so that you canget the farmers who are bigenough to need and wantdistribution and make amarriage. Our Co-op couldown a 10-acre farm or oneor two smaller farms on eachend of the State, manage itwith Co-op employees and

have all the produce it needsand not even do this andprobably have better results.But the Foodshed Initiative is acommitment to local economy,business building, andcommunity, etc.—it’s not justgetting what our store needs.

One of the rst steps the CDC tookwas to obtain vendor status withWhole Foods, Sysco, Raley’s (nowAlbertsons), and a wide variety ofsmall and medium-sized grocerystores. There was some initialpushback from some of the Co-op members who did not quiteunderstand how the Co-op wouldbenet from partnering with whatmany saw as its competitors. ButPugh was clear in the CDC’s purpose:“People say, ‘why are you selling to

Whole Foods, why are you sellingto Raley’s?’ Well, if we are reallyserious about building into a moresustainable food system, it’s goingto take more than our four storesto do it. We can put up some capitalto get the thing going, but it’sgoing to take all of us to move theneedle meaningfully.”

During the course of 2007, the CDCmore fully developed its distributionroutes, delivering product to a

number of chain and independentgrocery stores, including weeklydeliveries to New Mexico’s otherco-ops: Mountain View in Las Cruces,the Dixon Co-op, and the SilverCity Co-op. The CDC also broughtlocal products into cafes, colleges,universities, and small businessesthroughout the state.

Not only did La Montanita’smanagement recognize theimportance of expanding the reach

of the CDC beyond its four stores tomake the operation economicallyviable, but they also recognized theimportance of expanding the rangeof its product offerings beyondlocally produced food items in orderto utilize its warehouse capacity andgenerate revenue on a year-round

basis. As Franklin explains, the CDCis “really a hybrid model. We use thedistribution system to support localproducers but cover our overheadcosts by distributing nationalproducts [along with local ones].”

A key element of the CDC’s successwas the ability of La Montanita tostrike a deal with Organic Valleyto become one of its regionaldistributors in the Southwest.Offering products with year-round

availability, such as dairy, meat, andnon-perishables, allows the CDC tostay in constant contact with its retailbuyers—a vital part in building strongand lasting customer relations thatwould not occur if the company wererestricted to distributing seasonalproduce. As Franklin says, “It’shard to recreate a relationship everyyear when suddenly peaches areready. . . Now I can woo a customerbecause every week I can bring [thecustomer’s] milk, eggs, and butter.

Some weeks, you know, the produceitems are extremely seasonal in thispart of the world.”

ProducerRelationships

Just as it was important to buildlasting relationships with othernearby retail outlets to support localproducers, it was also clear fromthe onset that local producers weregoing to need help strengtheningand expanding their enterprises ifthey hoped to take advantage ofthe emerging market opportunitiesoffered by La Montanita. To helpfacilitate this process, La Montanitahired Steve Warshawer, the founder

W e can put up some capital to get the thinggoing, but it’s going to take all of us to movethe needle meaningfully.


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Products being unloaded at La Montanita’s Cooperative Distribution Center.

of Benecial Farm and RanchCollaborative and a long-time NewMexico farmer with the oldestCommunity Supported Agriculture(CSA) enterprise in the State, to bethe Co-op’s Enterprise DevelopmentCoordinator. In this role, Warshawerprovides business developmentservices to local producers, in suchareas as crop planning, marketing,business planning, and goal setting.The idea behind this is not just

providing distribution services forproducers, but working with themactively to grow their businesses.As Warshawer says, “My job isto make the network, make theconnection . . . I help them makebasic business decisions, help themwith marketing decisions, [and] helpthem with on-the-ground farmingpractice. Because of my backgroundin different jobs, I can go in and prettywell assess their situation and if theywant help, I can either give it or help

them nd the person who can.”

Along with providing enterprisedevelopment services, La Montanitamore recently has set up a PreferredVendor Pre-pay Program. Throughthis program, the CDC advances fundsto vendors, which are recovered bydeducting the advance from future

invoices. This program has alloweda number of smaller producers toovercome early season cashowconstraints and enabled them toexpand the wholesale portion of theirbusinesses. Anywhere from 8 to 10producers take advantage of CDC’spre-pay program each year. Alongwith this program, the Co-op has alsostarted the La Montanita Fund—agrassroots investing program thatallows Co-op members to pool

investments to collateralize micro-loans to regional food producersat affordable rates. In the rst yearof its operation, the La MontanitaFund has raised $97,000 and will bemaking loans from $250 to $5,000 toa number of farmers, ranchers, andvalue-added food producers in itsfoodshed network.

Challenges and

SolutionsWhile La Montanita’s FoodshedInitiative has shown remarkablesuccess, this doesn’t mean everythinghas gone smoothly. Shortly after CDCbecame operational, internal tensionsbegan to emerge between the retailstorefront management and CDC

management. Prior to the CDC, allfresh produce was delivered directlyto the store; produce managerswere the primary decisionmakers onprocurement. With the shift of someof this decisionmaking to the CDC,as well as procurement priority onlocal purchases, produce managerswere understandably upset by this

loss of autonomy. Produce managersprided themselves for having thebest organic produce in town, andthe shift to more local procurementmeant accepting produce that mayhave been lower than their usualquality standards, as well as gettingproduce that did not always arrive ina consistent and timely matter.

Fortunately, over time, much ofthis tension has been alleviated.Warshawer, as the enterprise

development ofcer, has beenworking with local producers toimprove the quality and consistencyof its produce to meet the standardsnot only of La Montanita, but of otherbuyers as well. Additionally, througha series of team meetings betweenCDC and retail store management in2008, La Montanita identied whichproducts should come through theCDC, and which products are betterserved through direct store delivery.

As a result of these meetings, it wasagreed that high-moisture items withspecic cooling needs, such as leafygreens, would be delivered directlyto the store and large-harvest crops(such as peaches, apples, root crops,and other less perishable produce)and value-added products would gothrough the distribution center.

Another challenge that La Montanitadid not predict was the difculty ofacquiring national brands to cover its

overhead costs. In its initial strategy,La Montanita put far greater focuson the local procurement piece,assuming that much of its operationaldifculty would be found there, andthat securing national brands wouldbe a far easier task. Reecting on itsoriginal plan, Pugh says:


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I would have put morework and emphasis oncommodities—the nationalcommodity items necessaryto cover the overhead. That isthe area that’s running woefullybehind plan. It has provenmuch more difcult to buildthat aspect of the businessthan I thought. The localpiece is actually at on plan.There’s a national—probablya worldwide—shortage oforganic supply, so most ofthese manufacturers are[working very hard] to meetthe current demand. Thereis no mandate to go out andnd new distributors. Sowhen I call these people totalk to them about buyingdirect, most of them don’teven want to talk to me. So, Iwas wrong about the focus.

Fortunately, as mentioned earlier, LaMontanita was able to establish apartnership with Organic Valley to beone of its New Mexico distributors,which allowed them to start coveringthe overhead costs as well as buildingongoing relationships with otherretail stores.

There has also been some confusionby consumers over the Co-op’sBenecial eco-label. While it made

strategic sense to bring this labelin-house to bring attention to thoselocal producers using sustainable (butnot USDA organic certied) practices,the label was not being as readilyconnected to the Co-op as theyenvisioned. In order to alleviate thisconfusion, La Montanita has droppedthe Benecial eco-label and insteadrelies on in-store signage and productlabeling to designate regionally grownproducts supplied by the Foodshed

Initiative, and it takes advantage ofits newsletter and other media toprole the farms and producers in itsnetwork. La Montanita also carriesout periodic farm visits to ensurethat Foodshed Initiative products areproduced using sustainable farmingpractices. By continually providinginformation about its products, LaMontanita believes that when theCo-op members see a particular“Foodshed Initiative” product, theycan be assured that the stated values

of the Initiative—such as agriculturalsustainability, promoting healthfulfood, supporting local economies,and enhancing small farm viability—are being upheld.

Successes andNew Directions

By all accounts, the Foodshed

Initiative has exceeded the Co-op’sexpectations. In 2010, the CDCpurchased more than $2.15 million inproducts, with over $865,000 of thisin “local” products. In 2010, CDC hadoverall sales of nearly $2.7 million—$1.6 million in sales to the LaMontanita stores, and the remaining$1.1 million to external accounts,with foodservice and retail buyersaccounting for most of this (almost$1 million). As a result of theseefforts, La Montanita currently stocks

and sells more than 1,500 productspurchased from nearly 900 growersand producers within its regionalfoodshed. The current generalmanager of La Montanita, TerryBowling, has overseen the FoodshedInitiative for the past 3 years andthrough his leadership has taken theInitiative and CDC operations fromtheir early stage of growth to theirpresent stage of maturity.

Although the CDC originally onlypurchased food from farmers andproducers for resale, it now alsooffers local vendors the option ofmaking deliveries to their customersunder their own invoice for a fee. Tomove all this product, La Montanitanow leases two 36-foot refrigeratedbox trucks, which run 5 days a week.Because of the quick trajectory ofproducts moving through the CDC,as well as the projected opening ofa new La Montanita location, the

warehouse is quickly exceeding itscapacity and CDC is looking for alarger facility. The CDC has alsoexpanded its approved vendorstatus with many chain storesand large distributors, includingWhole Foods, SYSCO, ARAMARK,Sodexo, and Bon Appétit.

Even with this remarkable growth,the CDC is still seeking nancialself-sufciency. When La Montanita

wrote its initial strategic plan thatwould invest $150,000 of the Co-op’s money to start the FoodshedInitiative, the goal was to have thedistribution operation break even in3 years. In its 4th year of operation,the break-even point still eludes CDC.Further investments are still neededto maintain CDC’s current operations,which amount to roughly $80,000–$100,000 annually. Nonetheless,this is a small price to pay given thescope of services offered by the CDC

to regional producers and the widercommunity. Both the healthy growthin Co-op membership (from 10,000 to17,000 members from 2004 to 2010)and continued double-digit salesgrowth at La Montanita’s storefronts(from $12 million to $28 millionfrom 2004 to 2010) can be partiallyattributed to the CDC’s ability to bringin more local products as well asnational brands at discounted prices.

La Montanita currently stocks and sells more than 1,500 productspurchased from nearly 900 growers and producers within itsregional foodshed.


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Have the Capacity To Absorb Short-Term Losses for Long-Term Gains

Among the pieces of advice fromPugh to other co-ops interesting inentering the distribution business wasto make sure you:

. . . have the tolerance forsignicant operating losses forseveral years. If you don’t thinkyou can, then I wouldn’t do itbecause there’s going to be aramp-up time to any effort likethis. There’s so much inherenttension—long learning curves,tension with the new systems—that you need to recognize. It’sprobably going to be 3 years

before you’re going to get thething halfway gured out.

From the very start, La Montanita fullyrealized that starting this businesswould require not only a substantialinitial investment but also that it couldbe several years before it reacheda break-even point. By laying out astrategic plan that considered theserealities, La Montanita managementwas able to avoid any heightened

expectations from the board and theCo-op members of what the CDCwould be capable of doing in theshort term, and substituting it witha worthy vision of what it would becapable of achieving in the longerterm if given the right amount ofcondence and nancial backing.

Never Lose Sight of YourCore Mission

There is no question that the coremission of the La Montanita is thelong-term viability and protabilityof its storefront locations. Whilethe objectives of Foodshed Initiativereach far beyond La Montanitaalone and into the realm of foodsystem transformation, La Montanitamanagement has never lost sight ofits core mission. As Pugh says, “If westarted getting in trouble in the retailstores, we’d shut this thing downbecause that’s what makes it possible

Lessons Learned

Use Existing Assets andBuild Relationships in theWider Community

One of the key advantages thatLa Montanita had when starting

a distribution entity was strongcommunity backing, both internally aswell as in the wider community.

Internally, the board of La Montanitafully supported the strategic decisionto start the Foodshed Initiative. Byproviding the Co-op’s managementwith the requisite start-up capital, theinitiative was fully realized withouthaving to depend on outside fundingand externally imposed timelines.

Further, by establishing the FoodshedInitiative, the Co-op managementwas responding to its membersby developing the local economyand ensuring that its members hadaccess to products that embodiedthe qualities of “fresh, fair, and local.”As Warshawer says, “This is what’sfun about working for a co-op—themembers are saying to management,invest our money in building a localeconomy. We want local businessesand we want more local products.”

Externally, La Montanita already hada reputation as a “farmer’s friend”—willing to buy local when possible.Given its longstanding relationshipwith the local farming community,La Montanita was already wellpositioned to collaborate with localfarmers to expand its businessesand take advantage of new marketopportunities. A great deal of trustis required to be an effective andsuccessful intermediary between

producers and buyers, and LaMontanita was fortunate to havethis initial base of trust on which tobuild. As Warshawer reects, “We’rebuilding trust and credibility, andthose are the keys in most businesses.When you have those things, youcan make deals because you’re goodand you can make deals becausethey’re protable, and you have toalways be willing to do both. That’s just my opinion of what makesbusiness works.”

until this thing gets to a break-even.So if we started seeing decliningprotability, I wouldn’t hesitate to pullthe plug on this thing to protect theCo-op as a whole. I wouldn’t let thisthing drag the Co-op down.”

Fortunately for La Montanita, theCDC has brought immediate added

value to its storefronts. After therst full year of operation, Pugh andthe management were surprised tond La Montanita’s year-to-date netincome higher than the previousyear—quite astonishing consideringthe start-up costs of the CDC: morethan $100,000. As Pugh happilypoints out, “As a result of this workand this effort, our retail sales havebeen supercharged. We’ve seensustained double-digit growth whenthe industry as a whole has dropped

to single digits.” But, he also clearlywarns, “I don’t think anybody shouldgo out and just throw money atsomething. It ought to add value tothe organization, and that’s the waywe set this thing up and that’s what Ibelieved when we looked at it.”

Think Beyond Localand Be Pragmatic inYour Approach

La Montanita entered the distributionbusiness to support local producers,but they also knew that being adistributor of only locally grownproducts would not, at least initially,be a viable business model. Being adistributor of national brands, suchas Organic Valley, allows the CDC topay the freight and cover its overheadcosts, when as Pugh says, “We driveout to the hinterlands to pick up twobuckets of garlic.” The lesson here

is not to be driven, or even blinded,by a certain ideological fervor thatcould ultimately undermine the wholeenterprise. Instead, balance yourcore values with a healthy dose ofpragmatism that will still allow you toreach your ultimate goals.

As Pugh says, “I don’t really want tobe a full-out distribution business.This whole thing is really to supportthe local effort, but to help coveroverhead I need to nd a few things


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We’ll broker, we’ll aggregate,we’ll do whatever it takes. I’llhand them [retail buyers ordistributors] names and say,“Call this guy. You don’t needme in the business. I don’t seea role for the Co-op in this.Make sure you take care of

us on the stuff we are doing.”He goes, “Fine I understandthat.” I’m not going to messthe deal up for him. It doesn’tdo us any good. The growerdoesn’t succeed if we take anexclusive and mismanage it. IfI strengthen a grower so thathe stays around for the next 10years, and I only use 5 percentof his production now and hegets bigger and bigger andthen all I use is 1 percent of his

production but he gets biggerand healthier. Have I hurt mybusiness or have I helped mybusiness by helping him?

Have the RightPeople in Place

A large measure of La Montanita’ssuccess with the Foodshed Initiativestems from a core group of people

with the right combinations of skillsand experiences to manage the CDCand the broader goals of the Initiative.Former general manager C. E. Pughcame to La Montanita with more than30 years of conventional grocery retailexperience, with extensive knowledgeof distribution and warehousemanagement and operations. Pughwas well aware of the dangers ofentering into the distribution businessbut also had enough exposure towhat works to get behind a strategic

plan and vision to make the Initiativea reality. Similarly, people likeMichelle Franklin, the CDC manager,bring more than 20 years of localexperience in managing foodcooperatives, and Steve Warshawer,

that’ll help pay the freight. I’d loveto get to the point where I don’tneed Organic Valley and [non-fooditems like toilet paper and soap]because they’re not local.” However,La Montanita thinks that over time,as the local market develops, theycan begin displacing these non-localproducts with more products grown

or produced locally.

Make Your CompetitorsYour Partners

Just as La Montanita needed toexpand the distribution productlines beyond local, it was also vitalto expand the buyer base beyondthe retail storefronts. La Montanitaunderstood that the only way to

develop a strong network of localsuppliers meant partnering with itscompetitors, such as Whole Foods. LaMontanita tries to maintain open andtransparent lines of communicationwith other retail buyers so that theycan work in partnership to meettheir ordering needs. La Montanitaoften refers its producers to other

retail buyers and, in most cases,the other buyers reciprocate inkind. What La Montanita has triedto instill in other retail buyers, aswell as in other distributors, is thatcompetition in the food businessdoes not have to be a zero-sumgame, that at some point it makesmore sense to cooperate to growthe whole pie of local supply, ratherthan compete over existing pieces ofthe pie. As Warshawer emphasizes,

Through its Foodshed Initiative La Montanita sources product from a diverse arrayof New Mexico farmers and ranchers.


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La Montanita food market logo. La Montanita trade logo. La Montanita distribution center logo.

the enterprise developmentcoordinator, brings more than 25years of experience as a farmer, directmarketer, and local foods advocate.Beyond their specic skill sets thatmake them well-suited for their jobs, their longstanding relationshipwith the wider community brings animmediate level of local legitimacy

and strong dose of the realities on theground. And nally, La Montanita hasRobin Seydel to head its consumereducation and community outreachcomponent, which ensures that LaMontanita’s customers, as well as thewider community, understand theimportance of supporting their localeconomy by buying local.

Ultimately, the development of anysuccessful local food system relieson consumers driving the process.

Robin and others at La Montanitahave succeeded in raising consumer

consciousness by telling a compellingstory (through newsletters, in-storesignage, and other outreach activities)that connects what co-op customersconsume to larger principles ofsustainability, local development,and fairness. In an increasinglycompetitive retail environment,connecting these principles/attributes

to what the co-op sells is a crucialcomponent to maintaining itscompetitive advantage.

The bottom line is that any mission-driven distribution entity with theultimate goal of building sustainablelocal food systems will need severalpeople that can take on the functionsmentioned above: A visionary, asavvy businessperson, an operationsand logistics person, a farmer liaison,and an educational/marketing person

to tell the story. In rare cases, oneperson can embody many of these

qualities, but in most successful cases,several people fulll these capacitiesthat allow a distribution system to beultimately successful. Or, put moresuccinctly by Warshawer, reecting onthe key components of a successfuldistribution entity: “Multi-yearcommitment, the resources to back itup, the willingness to learn on the job,

and some dedicated people with theparticular skill sets, that’s about it. Imean, there is no roadmap really.”


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Co-op Partners Warehouse:Retail-Driven Model #2

Co-op Partners Warehouse, located in St. Paul, MN, is a retail-driven distribution model started in 1999 by theWedge Cooperative, which has 14,000 member households. Using its own eet of trucks as well as contract truckingcompanies, it sells primarily organic produce supplied by a network of 30 or so farmers in Minnesota and Wisconsinduring the growing season and from West Coast sources the rest of the year. Its customers are 200 consumer

cooperatives, health food stores, buying clubs, and restaurants in the Upper Midwest. Annual sales for Co-op Partnersare $16.8 million, with about one-quarter of its sales accounted for by the Wedge. This organization is unique inits focus on selling primarily to retail cooperatives and in its commitment to being a full-service organic producedistributor with a regional focus.

History

The Wedge Community Cooperativeopened in 1974 in Minneapolis asa small store operating out of abasement apartment. One move andthree expansions later, the Wedge

has more than 14,000 members andmore than $40 million in annual salesfrom its retail store; Co-op PartnersWarehouse (CPW), its distributionarm; and Gardens of Eagen Farm, anorganic farm on the outskirts of theTwin Cities, purchased in 2006 by theWedge. The Wedge is one of thehighest grossing grocery cooperativesin the country. In addition to its retail

operation, with CPW the Wedgehas developed one of the largestcooperatively owned distributors inthe country. It serves its own storeand dozens of other retail outletsthroughout a ve-State region in theUpper Midwest.

In 1995, the Wedge started a direct-buying program from organic farmersin the Midwest, the West Coast,Florida, and elsewhere. EdwardBrown, the Wedge’s head producebuyer at the time, visited farmers andbought directly from them for theWedge, earning a good reputationfor prompt payment. Laurel Zastrow,a Wedge produce buyer, remembers

that this direct-buying programoriginally emerged out of a desire toprovide a leg up on the competition.At the time, direct farm-to-retail wasunusual in the food retail sector.

. . . the Wedge produce

department [wanted] to setitself apart from privatelyowned competitors. It [needed]to ensure the availability,quality, and fair prices of ahuge variety of both locallyand nationally grown organicproduce. What [could] it doto set itself apart? He (Brown)slowly established long-termrelationships with organic

The Wedge Natural Foods Co-op, circa 1974 The Wedge Natural Foods Co-op, 2010


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Trucks loading up at Co-op Partners Warehouse.

growers. He [bought] theirproduce directly—with neitherthe volume purchasing powernor the credibility that backingfrom a chain could give him.Over the years, the producepurchased through our “DirectBuying Program,” housed ina number of independently

owned warehouses, [was]delivered to our store on a dailybasis as needed.1

From 1995–1999, the Wedgecontracted with a regional distributorto inspect, grade, and deliver producepurchased directly from farmers,2 which worked reasonably well but washampered by the Wedge’s not havingits own warehouse. With the supportof the Wedge’s general manager and

board of the directors, the DirectBuying Program was renamed CPW in1999 and opened a single warehouserun by Wedge personnel.

A permanent warehouse runby Wedge staff increasedstorage capacity and facilitatedmore local food purchasing bythe store. Lori Zuidema, thecurrent business operationsmanager for CPW, explains:

Owning a warehouse providedthe rapidly growing co-op withseveral conveniences: bulkyoverstock items, such as water,pet food and our for the in-store bakery, could be storedoffsite and delivered daily asneeded. Contracts with localgrowers were forged that notonly guaranteed the Wedge’spurchase of their productbut provided storage and

delivery for the growers’ othercustomers as well. (Zuidema,August 2007)

In its early days, CPW primarily servedas the Wedge’s “back ofce” and, assuch, greatly expanded the Wedge’sselling capacity, providing membersaccess to a greater variety of productsthan would be the case if the Wedge’sretail store had to physically store itsentire product inventory.

As CPW developed and morewarehouse staff were hired, theWedge leased two refrigerated trucksand started making deliveries to othercooperative groceries in the area.Quickly it became clear that what

began as an effort to obtain higherquality produce for the Wedge wasbecoming a vehicle for regional foodsystem development.

The rst few years of CPW were roughand sales were stagnant. However,a combination of favorable marketconditions, new infrastructureinvestments, and key personnelchanges contributed to rapid salesgrowth in the mid-2000s. A keyturning point was the purchase ofRoots and Fruits—a worker-ownedorganic distributor in Minneapolisthat had been the primary sourceof organic produce for food storesin the area—by Albert’s Organics.3 In the wake of the buyout, turmoilensued at Roots and Fruits, leading

many customers to switch to CPWfor their organic produce. As thenew ownership brought in newmanagement, several experiencedstaff people left the company and

1 Laurel Zastrow. “Introducing Co-op Partners Warehouse.” The Wedge Natural Foods Co-Op Newsletter, October/November 1999.2 Lindsey Day-Farnsworth, Brent McCown, Michelle Miller, Anne Pfeiffer (2009) “Scaling Up: Meeting the Demand for Local Food,” University of Wisconsin-Extension andCenter for Integrated Agricultural Systems, December.3 Albert’s Organics is now a division of UNFI, the largest natural and organic foods distributor in the United States.


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you’re committed to local (Zuidema,August 2007).’” CPW was well suitedto serve these types of customerswith its extensive base of localsuppliers, daily delivery schedule, andits willingness to create custom packssmaller than cases.

Business Structure

CPW is a wholly owned subsidiary ofthe Wedge Cooperative, a retail foodcooperative owned by its consumermembers. Consumer cooperatives,like all cooperatives, are controlled bytheir members and are obligated toserve them.4 As stated in its missionstatement, the Wedge’s mission is:

. . . to provide a diverseselection of highest quality,fairly priced products and adeepening understandingof their importance to ourmembers, employees, andcommunity. To achieve this,we will 1) Earn the loyalty ofour member-owners throughan ongoing commitment toservice, 2) Forge a deepeningbond between sustainablelocal producers and the co-op

community, and 3) Buildupon Cooperative Principlesand Values.

This organizational mission directlysupports the development ofCPW as a vehicle for providing thekind of food members want, andfor supporting local agriculturalproducers and sustainable agriculture.

The members of the cooperative

vote for a board of directors, whichhires a general manager for thecooperative and authorizes him orher to hire additional staff to runstore operations and the warehouse.The warehouse manager at CPWreports directly to the Wedge’sgeneral manager, and all theother employees of CPW reportto the warehouse manager.

were hired by CPW, including aproduce buyer with 21 years ofexperience and an experiencedwarehouse manager. This inuxof experienced personnel helpedprofessionalize what had been a fairlyinformal operation at CPW, and thesenew employees drew on their skillsand industry relationships to bring

new business to the rm (Zuidema,August 2007). In the 3 monthsfollowing the sale of Roots and Fruitsto Albert’s Organics, business atCPW increased by 60 percent. Thismeteoric sales growth meant thatmore warehouse space would beneeded before too long.

CPW management discussed differentoptions with its landlord as well aswith Wedge management, and thentripled its warehouse space to 45,000

square feet in 2005. The existingspace was getting tight becausesales had grown after the Roots andFruits sale. The 30,000 additionalsquare feet were more than wasneeded to handle CPW’s immediateneeds, but the rental rates were lowenough to make it affordable. CPWand Wedge management decidedto secure this additional space toensure that future growth would notbe hindered by space constraints and

that the business would not haveto move to expand. Expanding thewarehouse allowed CPW to vastlyincrease its ability to serve farmersin the region and to increase itscustomer base far beyond the Wedge.In 2003, sales were $2 million, and80 percent of this was to the Wedge;in 2010, sales were up to $16.8million, with only 23 percent of salesto the Wedge. Sales growth wasparticularly rapid from the period just prior to expansion and a couple

years after, increasing 300 percentto $13 million from 2004 to 2007.

At the same time, consumer demandfor locally produced food wasincreasing and many restaurantswanted to buy local food. LoriZuidema, CPW Business OperationsManager explains, “And so a lot ofrestaurant clients were saying ‘wereally want to buy from you because

CPW has 32 employees, including7 drivers, 10 order llers, 3 buyers,9 sales associates, 1 bookkeeper,1 quality control manager, and 1manager. Prots earned by thecooperative, including the store andthe warehouse, range from 1 to 4percent, and are distributed in one ofthree ways: one portion is reinvested

in the business for maintenance andexpansion, another portion is returnedas patronage dividends to the 14,000members of the cooperative, andthe third portion is distributed tothe Wedge’s 262 employees as partof a prot-sharing plan that canamount to as much as $2 extra perhour worked during the previousquarter (Zuidema, August 2007).

Top: Co-op Partners Warehouse staffchecking in produce for drop-shipprogram.

Bottom: Organic produce beingstacked in Co-op Partners Warehouse,St. Paul, Minnesota.

4 www.lakewinds.com/store/About-CO-OPS-W18C0.aspx, accessed January 4, 2011..


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The warehouse is self-supporting,with operating revenue covering itsexpenses. It has been able to draw onthe Wedge for capital infusions, bothwhen it initially started and when ithas needed to purchase equipment.

Business OperationsCPW performs two distinct productsourcing and distribution functionsfor produce buyers and sellers in theupper Midwest: distributing produceand drop-shipping food products.

The vast majority of its sales comefrom distributing produce; the rmdistributes weekly price books tocustomers, takes orders, makesdeliveries, and bills customers,

charging its customer 16–25percent above farmgate prices,depending on the perishability ofthe commodity. 5 To satisfy year-round customer demand for freshproduce, the rm buys locally andregionally grown produce frommore than 30 farmers in Minnesota,Wisconsin, and other parts of theUpper Midwest in season whenavailable, but relies on Californiaproducers for the bulk of its freshproduce supplies. Retail grocery

cooperatives account for 88percent of sales within this businesssegment, followed by restaurants,independent natural food retailers,buying clubs, CSAs, and foodmanufacturers. Within this standarddistribution segment, CPW is involvedin two distinct market channelsthat underscore the company’scommitment to supporting alternativechannels of food distribution. Oneof these includes supplying non-localorganic fruit as a supplement to CSAsin the region that want to offer amore diverse market basket to theirmembers6 and providing monthlydeliveries of frozen and shelf-stableproduce items to seven local buying

clubs, each of which has around adozen members. These buying clubsare able to take advantage of CPW’sbuying power and pass on the savingsto their members.

The second distribution functionperformed by CPW is an unusualdrop-ship program for farmers andother value-added food producersin Minnesota and Wisconsin. Thisservice allows smaller producers to

take advantage of CPW’s superiorlogistical capabilities on a fee-for-service basis. This program facilitatesdirect producer-to-retailer sales andpreserves producer identity and

visibility in supply chains by allowingfarmers to handle the sales andmarketing aspects of their businesstransactions directly with their clients,but entrusting CPW to handle the

logistics portion of each transactionbased on a per-case fee. The farmerdrops off product to CPW’s St. Paulfacility with a packing list showingwhat each customer is supposedto receive. CPW then delivers thefarmer’s product to area stores. Theproducers pay CPW $20 for eachdrop-shipment and invoice thebuyers directly. The arrangement isadvantageous for many small andmidsized farmers and food producers

who do not wish to invest in trucks orwarehouse space to transport or holdtheir goods but still want to maintaindirect relationships with their retailcustomers. Producers handle all sales,

ordering, and invoicing, while CPW isresponsible for storing and deliveringthe orders to customers. About24 farmers or value-added foodproducer companies are currentlyusing the drop-ship program. This

5 Lindsey Day-Farnsworth, Brent McCown, Michelle Miller, Anne Pfeiffer (2009) “Scaling Up: Meeting the Demand for Local Food,” University of Wisconsin-Madison Centerfor Integrated Agricultural Systems, December.6 Ibid

The Wedge’s produce displays incorporate local farmers’ stories.

Producers handle all sales, ordering, andinvoicing, while CPW is responsible for storingand delivering the orders to customers.


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program is also helpful for co-opstores that want to buy product fromlocal producers but would rathernot have a dozen different truckscoming with small deliveries. CPW’sdrop-ship service saves stores thetrouble of having to deal with manysmall deliveries. Since CPW does notinvoice for its drop-ship sales, it does

not keep track of the total volumeaccounted for by this program, but itis a small fraction of its total business.

All produce distribution is servedfrom CPW’s 45,000 square footwarehouse, which contains separatesections for refrigerated, frozen, anddry goods, with the refrigeratedsection being the largest. Thewarehouse is co-located with theMidwest ofce of Equal Exchange,a fair-trade coffee company that

imports coffee from Central Americaand distributes it throughout theUnited States. CPW has a subleaseagreement with Equal Exchangeto rent space that is not currentlyneeded for CPW’s operations.

CPW transports products fromits Minneapolis warehouse toits customers in two ways. Forcustomers in Minnesota andWisconsin, CPW relies on its own eetof seven refrigerated trucks, rangingfrom 22 to 24 feet long, each of whichcan hold about 33,000 pounds. Fiveof the trucks are owned by CPW,and one is leased. The leased truckis used for daily (7 days a week)deliveries to the Wedge, which stillaccounts for 23 percent of CPW’sbusiness and is by far its biggestcustomer. Leasing a truck for theWedge acts as insurance; the leasingcompany is obligated to providea replacement truck if mechanical

problems occur, ensuring that thiscritical route is always covered. Thiseet of 6 owned and leased trucksaccounts for 35 weekly truckloads.

For 25 truckloads of deliveries tocustomers located in the upperpeninsula of Michigan, North Dakota,and Iowa, CPW relies on EdinaCouriers, a trucking and warehousingcompany based in Eden Prairie, MN, just outside the Twin Cities. Through

Edina, CPW uses one tractor-trailerand three 24-foot straight trucks ona full-time basis. CPW also contractswith Winona Fruit to ship apples andother fruit to southeast Minnesotaand La Crosse, WI. Originally, it mademore sense to contract out this longerdistance shipping because it savedCPW the cost of buying trucks and

paying driver salaries and insurance.Instead, they contract shippingon a piecemeal basis (personalcommunication, Zuidema 2007). Nowthat the business has grown to thepoint where its shipments with Edinaoccupy four trucks on a full-timebasis, CPW management is weighingwhether it makes more sense forCPW buy more of its own trucks, hiremore drivers, and reduce or eliminatecontracting trucking services.These practical considerations are

compounded by the fact that CPW’skey contact at Edina plans to retiresoon, which may weaken the tiesbetween the two businesses (personalcommunication, Rodymre 2010).

ProducerRelationships

CPW operates like a traditionalproduce distributor, restricting itscore business activity to distributionand logistics. It does not provide thetechnical assistance and planning

services so often associated withalternative marketing entities. It is notsupplied by a network of farmers; itssuppliers are spread out around thecountry, and there is little interactionbetween them. Rather, as much aspossible, CPW’s buyers seek out small,organic farmers that are not hookedinto the mainstream distributionsystem. Buyers work to establish andmaintain long-term relationships withindividual farmers based on theirability to supply needed volumes

of high-quality organically grownproduce and other farm products.However, even as it targets smallergrowers, it is often necessary to buyfrom large growers to secure sufcientquantities for its customers’ needs.

Pallet of organic produce wrapped and ready to be loaded in truck.


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Although technical assistance andplanning support may not be partof CPW’s mission and businessoperations, the company is committedto building strong relationships withits producers. As the Wedge’s generalmanager Lindy Bannister recentlywrote in the store’s newsletter:

Dean (the Wedge’s producebuyer) and Rick at Co-opPartners Warehouse signcontracts to ensure our farmersreceive a fair price for theirproduct and that we have areliable supply of vegetablesand fruit to adorn your tables.Dean and Rick visit the farms,watch the production methodsand get to know the families.As we like to say, “we have

smelled the dirt.”7

In general, CPW aims to set pricesthat enable farmers to cover theircosts and are fairly predictable,with minimal variation throughoutthe season. Lori Zuidema, theWarehouse’s business operationsmanager, clearly articulates howvalues of fairness to farmersare embedded in CPW’s pricenegotiations with farmers.

A lot of people think it’sthe California market thatinuences it [prices], but it’smore production-cost related.They [farmers] gure out howmuch it’s going to cost them . .. . And you know we want theirproduct. We want to be able to

present it to our customers. Wewant them to be in business.We don’t want . . . them to sellto us so cheap that they can’tmake a living and then theyhave to fold in 2 years . . . Sothat’s our incentive for payingthem a fair price.

Fair pricing becomes not onlya point of principle but also apragmatic strategy for ensuring

a stable supply of high-qualityorganic produce for CPW and itscustomers. Dean Schladweiler, theWedge’s produce manager, hasmade a point of working with smalland new organic farmers to helpthem price themselves competitivelyand realistically. Sometimes he hasactually had to negotiate priceshigher with farmers because he knewthey were underpricing themselvesand they could charge a higher price.Farmers told Schladweiler they were

basing their prices on the Californiaorganic price; he told them theywere not in California, and they hadto consider their own productioncosts and price their merchandiseaccordingly. He believes that farmersneed to understand their market andstand rm on their pricing, or theywill not be able to stay in business(Schladweiler, August 2007).

CPW also has a strong commitment

to facilitating direct farmer-to-retail relationships as a means ofenhancing farmer returns from retailbusiness transactions. This guiding

principle led CPW to adopt its drop-ship program for food producersand processors in Minnesota andWisconsin, enabling producers tomaintain their direct connectionsand brand visibility with retail buyers,while reducing their transportationand logistical burdens.

A key indicator of CPW’s commitmentto local agriculture is that its overallvolume actually drops 14 percentduring the growing season, when itsvolume could be expected to increasebecause of the increased availabilityof local fruits and vegetables. In thesummer, when there is an abundanceof local organic produce availablein the Minnesota and Wisconsinregion, much of it is sold directlyfrom farms to cooperatives, whooften have a strong commitment to

promoting local food. These farm-to-retail sales displace sales fromCalifornia, which constitute the vastmajority of produce sales the rest ofthe year. CPW prefers to encouragethese relationships between farmersand cooperatives instead of trying tocapture more of this seasonal, localproduce business, which would becounterproductive because it wouldalienate farmers. Additionally, themarket for local

whole foods value chain

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