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Outside the box: community-owned department stores an alternative to big-box chain stores.

Across the United States, residents of many rural towns have to travel 20 miles or more to buy underwear, jeans, sneakers, a toaster, towels or an inexpensive watch. Their locally owned department stores closed years ago, unable to compete with chain stores. Then, many of the chains faltered and faded as out-migration cut the customer base while regional "big-box" superstores kept pulling people farther away from home town Main Streets.

In other cases, communities with no place left to buy everyday clothing and small appliances have tried to attract a big-box retail store to locate in their town, but lack the population base to lure one. This was the case in Powell, Wyo. With a population of 5,500, the community--located 20 miles north of Cody, Wyo., and 90 miles south of Billings, Mont.--simply did not offer the economy of scale sought by a big-box retail chain.

Sharon Earhart, director of the Powell Chamber of Commerce, can laugh now as she remembers the situation. "I'm so glad that when we asked the big stores to come open up in our town, they said, 'Are you kidding? Get a life.' So we did! And a much better one. I'm grateful to them that they all said no, or we never would have started down the road of this great adventure."

Powell takes the plunge

That adventure began five years ago, when some local business people and other Powell residents incorporated as The Mercantile and began selling $500 shares in the company to their neighbors. Within months, they had raised $400,000 in start-up capital.

They opened the door of their new store in the summer of 2002. Community response was enthusiastic. Residents with special expertise stepped forward to help when asked. "Nobody ever turned us down," Earhart says. They were fortunate to have a retired department store buyer and manager, Mike Reile, in their midst. His willingness to work pro bono until the company was formed enabled them to move ahead and begin buying inventory sooner than they had planned to do.

"He's very bold," she says. "You have to be that way because the rag industry is tough and very fiche. You can't let your feelings get hurt, or buy just what you like."

The three or four potential competitors already established in Powell were very supportive of the project and all have benefited from The Merc's presence. Earhart notes that the town had a precedent for this sort of commercial cooperation. When one of Powell's two car dealers closed, the remaining dealer was the strongest advocate for attracting another one. "His business fell off because people perceived that without competition the prices would go up. When the original dealer who'd closed re-opened, both businesses did better right away."

Earhart says people come from as far as Billings, Mont., a city of 95,000 people nearly 100 miles away. "All the malls are like cookie cutters, they all sell the same thing," she explains. "Here, you don't know what you're going to find, but it will be something you won't find at the mall. People like that."

Five consecutive profitable years

A good merchandise buyer is key to a store's success, Earhart stresses. Powell was prepared to mount a national search until they found Mike Reile. But, she adds, a community may not have to look that far. While meeting with a group in Upstate New York, a steering committee member recalled that her employer's wife was a buyer. "When the idea gets to the point where it becomes real and people see its validity," she notes, "people step forward."

And step forward they did, in Powell. Within months of selling the first $500 shares to local residents in early 2002, The Mercantile raised $400,000 in start-up capital. They opened the door of their new store that summer. They have had five straight profitable years, and in 2006 they purchased the store next door in order to double their size. "We've become a tourist destination, who'd have thought it!" Earhart exclaims.

Similar efforts have started in a number of rural communities in Wyoming and Montana, and are now sprouting in the Northeast. One of the first towns to take a hard look at community ownership of a retail department store is Greenfield, Mass. A group of Greenfield citizens have been pursuing the idea of starting such a store for two years. This past November, in partnership with the Cooperative Development Institute (CDI), they invited Earhart to share her town's story. As of this writing, they were awaiting state approval to launch their stock sale.

Co-op oriented town

Greenfield has more than three times the population of Powell, but--sitting halfway between the thriving Hampshire County college area of Northampton-Amherst, Mass., and the popular tourist destination of Brattleboro, Vt.--competition for retail dollars is fierce. There's even a department store on Main Street already, but it deals mostly in more upscale, pricier products.

Greenfield also has certain advantages. It is the county seat of rural Franklin County and received national attention about 12 years ago when it mounted a successful referendum campaign that prevented a big-box chain store from opening there. Three years ago when an Ames department chain store closed, the strong undercurrent of loyalty to local businesses remained undiminished.

Despite Greenfield Mayor Christine Forgey openly courting a big-box store, the "buy local" sentiment keeps growing, as witnessed by the farmers markets and community-supported farmers' associations that dot the county. The town supports several thriving retail grocery stores that include--in addition to a multinational-owned chain store--a well-established, family-owned store and Green Fields Market, a natural products cooperative on Main Street owned by its 1,400 consumer-members.

There's also a Greenfield Co-op Bank, a farmers' cooperative exchange, several worker-owned co-ops and some cooperative housing in this town. So when the idea of a community-owned, retail department store began to surface in Greenfield, many people were quick to see the possibilities.

Seminar plants seed

The idea for a community-owned store was planted when Bob Rottenberg, a local business development consultant, attended a cooperative-business-development training institute in 2003, where a Montana retail store was presented as a case study. The training was conducted by CooperationWorks!, a national network of cooperative development centers. Rottenberg was on the staff of CDI at the time. CDI, the Northeast region's development center for cooperative enterprise, is a founding member of CooperationWorks!

So it was only natural that when a local resident came to Rottenberg and asked what could be done to prevent the big-box stores from becoming established in their town, he suggested they look into a group-based business. A small group of active citizens began working together. The group included a couple of city council members, the executive director of the county community development corporation, a bank president, a carpenter, an insurance adjuster, a filmmaker and one clothing retailer.

"Most of us were not experienced in the retail business, and none of us had ever been involved in selling stock," Rottenberg notes. But they had been unsuccessful in attracting private entrepreneurs who might back their endeavor, so they were faced with creating their own business.

The first step was to review the options for incorporation. While many were drawn to the co-op model, the steering committee ultimately chose the community ownership path. Their reasoning, after many hours of discussion and a considerable amount of research, was that they needed to acquire start-up capital within a set timeframe to get the business off the ground.

Establishing the appropriate price for a share was a challenge. The "one member, one vote" principle of cooperatives was seen as too restrictive, because group members felt they would need many people to buy more than one share.

As a compromise, shares were priced at $100, but were initially offered only in blocks of five. Initial investors can buy between $500 and $10,000 worth of stock. If, and when, enough equity is raised to open the store, they hope to offer individual shares of stock, instead of a five-share minimum investment. In the meantime, the group is exploring ways that local banks might use the Community Reinvestment Act to set up low-interest loans or outright grants to help less-affluent residents become co-owners of Greenfield Mercantile.

Most dollars leave town

The Mercantile business plan lays out key market numbers: of the $50 million local residents spend on these types of retail items every year, $40 million is spent outside of Greenfield. If the Mercantile can attract only 3 percent of this trade, it can be profitable, the plan says.

Once the state approves the stock sale (which was expected by about Jan. 1), the biggest challenges will be to select the right store site and manager. Two sites are under serious consideration: a former bank in the center of town and a nearby furniture store. Rottenberg says the manager search involves looking for a "rare bird": someone who can serve not only as a buyer of many types of merchandise, but who is also a good operations manager.

A number of factors have kept the project moving forward. "We drew a lot on Powell's experience," he says, commending their generosity in how much and how readily they shared important information. "But," he adds, "ultimately, our circumstances are very different, and we had to do our own homework."

Help came early from a board member contact at Suffolk University, who provided them with valuable input for their business plan. They applied for, and received, a Rural Business Enterprise Grant (RBEG) for $23,000 from USDA Rural Development. The grant was matched by a $7,000 contribution from board members to help with the early business development.

The key role played by Franklin County Community Development Corporation's (CDC) executive director John Waite was critical, as was the willingness of both his organization and CDI to allocate some of his and Bob Rottenberg's time and expertise to the effort.

The steering committee and, subsequently, the board of directors worked tirelessly, meeting weekly in the early months, forming subcommittees that focused on location, market research, a business plan, and other details. While some were motivated by their opposition to big-box stores, others simply wanted to find a way to revitalize the town center.

Membership open statewide

"It was important from the beginning that the community-ownership aspect not be obliterated by people being able to amass major blocks of shares," Rottenberg explains. "So we established a cap that says no one can own more than 3 percent of the outstanding stock. To amass anything like control, or an influencing share, you'd have to put together a lot of people." The business has also been structured with a clause that required approval by a super-majority for a proposed sale or change in the bylaws.

After much discussion, it was decided to open membership to any resident of Massachusetts. As Rottenberg recounts, "We thought there would be people interested in this idea who might want to invest in it, but who wouldn't necessarily ever shop there. They just might want to support what we're doing.

"We originally restricted it to western Massachusetts, but later realized that the odds of people from eastern Massachusetts taking control of our store were pretty slim.

"And if people in the Boston area want to support this 'buy local' effort with their dollars," he says, "We'll take 'em?"

Editor's note: Livingston is a freelance writer based in Maine with extensive experience writing about cooperatives
COPYRIGHT 2007 U.S. Department of Agriculture, Rural Business - Cooperative Service
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Author:Livingston, Jane
Publication:Rural Cooperatives
Date:Jan 1, 2007
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