Reference no: EM133085923

Should an organic lettuce farm close a distribution center that is reaching customers but losing money?

Pottsville, Pennsylvania, is not known for its lovely winters," Wayne Moriarty said as he pulled his car into a space in the lot outside the East Coast distribution center of Baldwin Farms.

Gretchen Cussler, the company's COO, looked up at the massive snowbank next to the car.

"So what exactly is it known for?" she teased.

She knew that Wayne had moved up from North Carolina to manage the facility. Pottsville wasn't a bad place to live, but it wasn't home for either of them. She'd arrived in Pittsburgh that morning on a flight from Sacramento, where Baldwin Farms had its headquarters. Now she was wrapped in a parka she used only for skiing trips. Even so, she shivered as she and Wayne walked to the warehouse's front door.

Inside, workers were readying pallets of organic bagged lettuce for delivery. She was happy to see the place looking so busy. The East Coast distribution center, or ECDC, had been weighing on her mind lately. Troy and Shawn, the brothers who had started Baldwin Farms in 1993 and now served as co-CEOs, wanted to further penetrate the East Coast organics market and, with Gretchen's guidance, had opened the facility two years ago. One of their primary goals was to help regional customers avoid stock-outs of the company's most successful product: organic prewashed lettuce. Typically, after East Coast retailers placed an order, it took 10 to 15 days for the lettuce to make its way from California to their stores. The time lag made accurate forecasting tricky for customers. Most wouldn't realize they needed to restock until about five days before they ran out of product. But they ended up leaving their shelves empty because they wanted to avoid overordering and having to throw lettuce out.

Baldwin stored enough lettuce at the ECDC that customers could place small orders and keep their shelves full while waiting for large orders to arrive from California. For a premium, the customers could even get next-day delivery from the ECDC, instead of sending their own trucks to pick up the lettuce, as they typically did with their West Coast orders.

But the ECDC was not meeting its original performance targets. In fact, it was losing money. The previous year it had operated at a loss of $1.7 million. Gretchen's team had predicted that the operating costs would be off set by increased sales volume, but it seemed that customers weren't ordering more. Instead they were reducing their orders from the West Coast by the amount they ordered from the ECDC. And because the ECDC orders tended to be small, Baldwin Farms' trucks were often going out from Pottsville half empty.

Wayne walked Gretchen around, showing her some of the updates to the refrigeration system.

"Are the brothers still talking about closing us down?" he asked, trying to seem nonchalant. Still, Gretchen could see that he was nervous. He had agreed to work for the Baldwin brothers because he believed in the organic label and knew how big the opportunity was on the East Coast. But his reputation in the small world of food distributors was on the line. He didn't want to be linked to a failed venture any more than she did.

"It's been discussed, but I don't think either of them is there yet," she said.

"We just need more time. Two years is not long enough to change customers' buying behavior. You know that."

Gretchen nodded.

"And we're still working out the kinks operationally," he said. Transportation was a particular sore spot; between half-full trucks and the dedicated trips they had to make to more-remote customers, the fuel costs were killing the ECDC.

"Shawn and Troy should come out, do some deliveries, talk with some of our customers," Wayne suggested. "They'll see what's not reflected on the balance sheet--that we're building strong relationships."

"They're already spending way too much time on this. Shawn especially," she said. This was what bothered Gretchen most. The ECDC represented less than 5% of the company's $600 million in sales the previous year. She understood that it was an investment that needed tending, but it was distracting the brothers from more important things.

"You should at least talk with Kurt at Better Food. He's caught wind that we're having trouble," Wayne said.

"I've been playing phone tag with him all week," Gretchen said. Better Food was one of their largest East Coast customers. Kurt Conway, the grocery chain's produce buyer, had been a main proponent of the ECDC and lobbied the brothers heavily on the benefits it would bring both the customers and Baldwin Farms.

"If we don't figure out how to help our East Coast customers, they're going to turn to our competitors, whether they're organic or not," Wayne said. He had a point. Although Baldwin Farms' market share was larger than 50% in the organic lettuce category, the company couldn't afford to cede any shelf space. Once a retailer like Better Food turned to another, more available brand, it would be nearly impossible to get the business back. And because Baldwin Farms wanted to introduce new organic products, such as sliced apples, to its East Coast customers, it needed to maintain a strong reputation for helping stores keep their shelves stocked.

"I'll give Kurt a call from the airport," Gretchen promised.

A New Direction

Back in California, Gretchen looked out on the fields. It had been a good growing season, the first in a while. The company was hoping to make $750 million in sales this year, a target that seemed doable. But it needed to get costs under control. Gretchen watched the field workers and thought about how many people relied on Baldwin Farms. If she allowed profit margins to slip, a lot of people could lose their jobs.

Shawn Baldwin knocked lightly on the door. "What are you daydreaming about?" he asked.

Gretchen turned around. She hadn't seen Shawn since she'd left for Pennsylvania. He asked how Wayne was doing.

"OK. He's nervous we're going to pull the plug. He wants more time to prove the ECDC's worth."

"We know it's valuable. It's just not making money," Shawn said. "I was thinking over the weekend that we may need to take it in a new direction. Even with Wayne at the helm, we're struggling with the logistics. We should look into partnering with someone who's better at that stuff."

"That's not a new direction," Gretchen said. The first iteration of the ECDC had involved a partnership with a wholesaler in Connecticut. The company had let Baldwin Farms piggyback on its refrigerated space, tracking systems, and trucking network. But the two companies had mismatched inventory systems and approaches to customer service.

"But we'd do it differently this time. What happened to the conversations with WholeCo?" Shawn asked. WholeCo was a large grocery packager and distributor in New Jersey that was known for its massive truck fleet and logistics expertise.

"I'm still in touch with them, but you know they run a very different company than we do," Gretchen said.

Shawn and Troy had started Baldwin Farms 18 years ago by growing their own lettuce and selling it out of their pickup truck. Organic food was a niche market back then, but it did well in the San Francisco area and soon started catching on elsewhere. Now it was a huge growth market.

"But that's OK," Shawn said. "We know lettuce and growing. They know transportation and logistics."

"But a partnership raises our risks of contamination and spoilage. That's one of the reasons we opened the ECDC: control. We wanted fewer hands on our product," Gretchen reminded him.

"We could handle those risks. Besides, we've learned from our mistakes. Whole Co could work," Shawn said.

"You know your brother will disagree," Gretchen countered.

"He always does," Shawn replied.

Shut It Down

Gretchen sat down on the leather couch in Shawn and Troy's office. The brothers had shared a workspace since the beginning. In the early years, it was because they had to--back then, the entire headquarters was not even 300 square feet. But now it was more out of habit.

"Shawn already told me about the Whole Co idea," Troy said, cutting to the chase. He was less patient than his brother, although both often acted in haste." I think it's time to cut our losses. The ECDC just didn't catch on like we thought it would."

"Gretchen's done the analysis," Shawn said, jumping in. "We'll recoup only 25% of our initial investment if we close it now. That's assuming we can get out of the five-year lease we signed."

Gretchen nodded. "Plus we'll annoy all of our customers who are using the ECDC," she said. "I talked to Kurt Conway on my trip back. He made a good case for keeping it open. He says Better Food is still figuring out their forecasting and that growth is making it hard to predict demand, which is why they're placing only small orders now. But that will change--not the least because we have our sales guys out there telling them how to make the most of the ECDC. And when demand picks up, we need to still be there. Wayne says he's heard the same from other customers."

Troy shook his head. "But can Kurt or Wayne or anyone else tell us when that's going to happen? How long are we going to devote so much energy to a facility that's hemorrhaging money?"

Shawn laughed at his brother's propensity to exaggerate. "We got into this business to bring organic to as many people as possible. As long as we can break even, the investment is worth it."

Gretchen knew this was a point on which they all agreed. Although a profitable distribution center would be ideal, the brothers just wanted to keep their customers happy and get more organic product out there. Still, the ECDC wasn't close to breaking even.

"I'm just not sure this model is working," Troy said.

Both brothers turned to Gretchen. She was used to playing referee and typically enjoyed it.

"What do you say?" Troy asked. "Do you have an answer for us?"

"Not right now," Gretchen said.

"So when can you give us one?" they asked, nearly in unison.

She knew the reply they wanted: "I'll have a proposal to you by tomorrow morning."

The Baldwins liked to move quickly, even on big decisions.

Time to Decide

On her way home that evening, Gretchen replayed the meeting in her head. She was used to helping Shawn and Troy sort out their differences, but this time she was stuck. In Pottsville, Wayne had been persuasive. He explained that the ECDC was putting them in close contact with customers and that could only be good in the long run. Kurt had driven that point home. Still, logistics were not the company's strength.

As she turned onto Route 88, she wondered if the company had moved too fast with the ECDC. She loved the entrepreneurial pace the brothers set at Baldwin Farms--it was one of the reasons she'd taken her job--but sometimes it resulted in rash decisions. Between low gross margins, overhead, and fuel expenses, the center was unlikely to be profitable anytime soon.

Gretchen drove by a sign for another new organic farm, which had opened in the past month, and was reminded of an idea that had come up in her discussions with Wayne. They'd talked about making the center a hub for other organic growers in California. By helping them reach the big East Coast retailers too, the company could fill its trucks and get more organic food to more people. But developing a hub like that could take years. She wasn't sure Shawn and Troy could be patient enough.

After putting her kids to bed that night, Gretchen turned on her computer and started a new e-mail. She addressed it to Shawn and Troy and wrote "ECDC" in the subject line. If she knew the Baldwin brothers at all, they'd be checking for her answer tonight.

Q Should Baldwin Farms close the Pottsville facility or reinvent it? Give your reasons with supportive evidence?