A conversation with Craig Cole

On the pain of bankruptcy, Wal-Mart, and the demise of the American worker

Four months after filing for Chapter 11 bankruptcy protection for his company, Brown & Cole, Craig Cole said that if all goes well, the local grocer will emerge from reorganization as a leaner, more efficient company.

Heidi Schiller
   If Wal-Mart had been Craig Cole’s only concern, his 97-year-old company, Brown & Cole stores, may have been able to avoid filing for bankruptcy protection.
   But the combination of several other factors made for a perfect storm of financial struggles that led to the company’s Chapter 11 filing in November.
   Cole’s grandfather started the grocery company in 1909 in Lynden. When Cole climbed onboard in 1979, Brown & Cole owned two stores in Lynden and Ferndale, but grew rapidly after that, becoming one of the state’s largest privately held companies with 27 stores and 1,290 employees.
   Then, in 2000, the company ran aground, encountering financial difficulties from primarily external factors, according to Cole.
   The Bellingham Business Journal recently sat down with Cole to discuss what went wrong, and how the company is moving forward with reorganization.

BBJ: When and why did the company begin struggling?
   CC: “There were basically three things: health care costs, Wal-Mart’s entry into the marketplace in Washington, and a non-performing investment in a wholesale distribution company, Wholesale Grocers. It was the accumulation of those things. It created kind of a perfect storm, and we just simply were knocked off our game feet and were unable to recover without resorting to the Chapter 11 reorganization process.”

BBJ: Which city or area did you find your stores particularly struggling in?
   CC: “I’d say the most difficult market for us has been in Eastern Washington, probably because of the over saturation of Wal-Marts in those markets. And to a certain extent in Snohomish County.
   “Wal-Mart has come through Eastern Washington, putting super centers up every 30 miles. This is too much square footage in the market for the population to support (multiple stores), and that’s also true in Snohomish County.

BBJ: Can you describe the experience of making the decision to file for chapter 11?
   CC: “It’s extremely difficult and humbling. It’s something we had worked for years to try to avoid, but we simply couldn’t. It’s very stressful.”

BBJ: Can you elaborate on what happened with the company’s investment in Associated Grocers?
   CC: “We have, over many years, acquired stock in Associated Grocers — a cooperative that is retailer owned. It has revenues of over a billion dollars a year. And throughout the ‘90s, when we acquired other retailers, we often acquired their shares of Associated Grocers stock as well.
   “Associated Grocers had a near financial collapse in the year 2000. I was asked by the board of directors to chair the board in 1998. The board said they felt something was wrong, but they couldn’t get their fingers on it. So, I brought in people to examine the company and initiated a governance reform process, and discovered the company had serious financial and accounting problems. It was a mess.
   “What happened is that Associated Grocers, which had been distributing regular dividends to its members based on their amount of purchases — Brown & Cole was receiving $2.5 million a year, approximately — stopped the dividends. It has not issued dividends since 1999. And that was a major investment that became a non-performing asset for us.
   “Our investment in the company could not be liquefied, because it’s a privately owned company and there’s no market, especially to buy shares in a stock that was on the verge of financial collapse.
   “Since then it has been restructured, and has gotten somewhat better. It’s now in the process of probably being sold, which is fine with us because we’d like to get our money out of it.”

BBJ: You have also mentioned spiraling health care costs as another reason for the company’s struggles. What happened there?
   CC: “Over a period of two or three years in the early part of the decade, they doubled. So the increased carrying cost, which is only the increase, was about $4 million a year. That’s about one percent of total sales.
   “We’re in a business where a penny on a dollar is considered a normal profit, so that penny went to health care.
   “So, you take the $4 million in additional health care costs, and you add to it the $2.5 million in dividends we weren’t getting any longer, and that’s $6.5 million a year in earnings that disappeared.”

BBJ: What are your company’s health benefits like?
   CC: “They’re good. Most of the employees in the company have better coverage than I have. We pay on almost every hour that’s worked, and then employees earn eligibility to receive those benefits based on how many hours they have worked, and I think it starts at about 20 hours a week.”

BBJ: Did you ever consider just cutting benefits or not providing them?
   CC: “In general our approach has been that we do not want to solve the company’s financial problems on the backs of our employees. We are willing to ask our employees to work with us on areas of cost saving. That needs to happen. But in general, our approach has been that we don’t want to jam our employees.”

BBJ: Wal-Mart’s increased grocery presence is another factor you’ve cited for the company’s struggles. How has their presence affected your stores?
   CC: “It’s primarily the oversaturation of markets by Wal-Mart. With their super centers, they will tend to place more square footage in a market than the market can support, with the assumption that somebody is going to go out of business. That’s really been their strategy — it’s based on displacing competitors.
   “Fortunately, a lot of communities have woken up to this and said, ‘Hey, wait a minute, what does this mean for the character of our community, our business infrastructure and the future of the American worker?’”

BBJ: Once you knew that the Wal-Marts were coming and posing a challenge, how could you have adapted differently to be more competitive?
   CC: “We have adapted in many markets. We’re offering a different kind of shopping experience with better, more intimate service. We’re also offering better perishables and produce, fresh foods, and more neighborhood-specific products. We are localizing offerings to our customers to tailor them to specific neighborhoods. For example, in a market where you have different ethnic populations we serve them with a different product mix. It’s a concept called local customization.”

BBJ: You have also mentioned costs associated with closures of four stores in Pasco, Richland, Kennewick and Smokey Point. Why did those stores close and how did the costs affect the company?
   CC: “Wal-Mart. And we were carrying rent on those stores — on some of them a million a year — but not receiving any income. We tried very hard to get other users to occupy those stores with the hope that we could backfill them and avoid some of the rent costs, but weren’t able to. We’re still working on it. And meanwhile, the court has allowed us to reject those leases, which means you can give them back to the landlord and then the landlord then has a claim for a certain amount of money. One of the reasons for the filing was to get out of those leases because they were strangling us.”

BBJ: It has been almost four months since you filed for Chapter 11, what is the reorganization process like?
   CC: “When we’re ready, we’ll present a plan of reorganization (to the U.S. Bankruptcy Court in Seattle). This is a very complicated process. It involves several banks, lenders, a number of suppliers and creditors. It’s very costly, and I would say also a somewhat wasteful process, with a lot of lawyers and consultants that get a lot of money that, frankly, I would rather see go to suppliers and employees and others. The process will cost us millions in lawyers and consultants.
   “The reason for a bankruptcy is to allow companies the opportunity to pause, take a breath and regroup, because what happens is that once you start getting into trouble, everybody starts swarming in on you, like sharks. In fact, I’ve got a pirate hat over here that I can put on because I feel like I’m with a bunch of pirates.
   “My main concern is for the employees and the local suppliers. It’s a pretty brutal process. It’s all about money. For me, the disheartening thing is that there isn’t enough thought — I’m not talking about the court here, I’m talking about the players — given to how employees or their families are affected, and how local communities and suppliers are affected.
   “The financial interests start tugging away at the company to try to get priority… it becomes a big tug of war. I call it feeding off the carcass. It’s as if you have a wounded animal and everybody wants to come in and take their bite before the animal perishes. So our job is to get the bankruptcy court to say, ‘Hey, everybody get off for awhile and give this animal a chance to heal.’”

BBJ: When will you present the plan to the U.S. Bankruptcy Court?
   CC: “I can’t give you a date right now, we’re still in the process of doing it. We’d like to have a good sense of direction by this summer. There are timelines (given by the court) and they can be extended.”

BBJ: Do you anticipate having to lay off any employees as part of the reorganization?
   CC: “I don’t know that yet. We have already reduced staffing at headquarters. We have been doing that for years — tightening our belt. We have been trying to protect store-level employees, that’s where we need to deliver the customer service that’s expected of us.”

BBJ: You have closed four stores in Lynden, Yakima, Sunnyside and Sedro-Woolley since the filing. Do you foresee closing and/or selling any stores?
   CC: “Probably two or three more, outside of this market.”

BBJ: What have been the major challenges in the last four months?
   CC: “Greed. You get surrounded by a lot people who want to profit off of your problems. Not everybody, by the way. But you really get the sense that there’s a whole bankruptcy industry that has figured out how to make a lot of money off companies that are in trouble.
   “Also, the hardest part for me is to try to have people keep people in mind. It’s very easy for a banker on the other side of the continent to say, ‘Well, you ought to just reduce wages or benefits for your workers.’ Well, that’s easy for you to say, you may work for a bank that’s making millions or billions, but that affects real people and their lives. That, to me, is very important. Keeping our focus on how to protect our employees and customers is something we have to be ever vigilant about.”

BBJ: Do you think your company will be able to survive through this reorganization?
   CC: “I think there’s a good chance. You know, I’ve never done this before; I never wanted to do this. In fact there have been a lot of times over the past few years when I’ve felt like it would sure be nice to walk away, but I can’t do that.
   “I think we’ve got a good shot at it, but it is somewhat of an unpredictable process. It’s an everyday, ongoing, intense process. It’s like running two businesses.”

BBJ: If the company does survive the reorganization, how will it be different than the Brown & Cole of five years ago?
   CC: “We’ll be a little smaller, and we’ll be more strategically focused. We’ll be in markets where there is a strong community identity. If you’re in a market where there isn’t a strong community identity, it’s harder to engage with customers in a way where there is an emotional connection.”

BBJ: Has anything positive come from the process?
   CC: “Sales have been very strong. Customer support has been fabulous and employee support has been excellent. Our labor unions have been very intelligent in their approach in both protecting the employees and trying to help us preserve the company. So the core of the business has been doing well.”

BBJ: How has this process affected you personally?
   CC: “First of all, it’s always a test of one’s integrity. There are different forks in the road that people can take when they face difficulties. For me, it’s really intensified my sense of personal values and integrity. I think I’ve become somewhat fanatical about making sure that we do this the right way and that we look out for our employees and our local suppliers.
   “Also, we have put a lot of personal money in this business to prop it up, so that people could get paid, and we’ll never see that money again. But we thought it was the right thing to do.
   “And you know, where was it written that I was never supposed to face any problem in my life like this? The humbling and humanizing effect of this is that it reminds you of the kind of financial stress and uncertainty that people face every day. Hardworking and honest people that just face life circumstances that are sometimes unfavorable.
   “It also makes me more committed to try to do something constructive for the plight of American workers, because the American worker is really being degraded. It makes me realize that whatever problems I face, many, many others face more problems.
   “I’ve been surprised at how supportive and understanding people have been. You have this fear that, oh my gosh, it’s going to be so shameful, I can’t show my face anymore, but mostly what you get from people is ‘Yeah, hey, stuff happens.’ And some of the most supportive people have been other businesspeople who are very successful, who have had times in their lives where things haven’t worked well.
   “One person said to me, this is the idea of risk in a business. And business is really a roller coaster ride. Sometimes the ride stops at the top and sometimes it stops at the bottom. Most times you don’t wind up having to file Chapter 11, but it’s part of life.”

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