The Mission Versus the Bottom Line

HBR’s fictional case studies present dilemmas faced by real leaders and offer solutions from experts. This one is based on the HBS Case Study “Earthbound Farm” (case no. 807061), by William A. Sahlman and Alison Berkley Wagonfeld. It is available at hbr.org. “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 offset 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. WholeCo 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 WholeCo 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. “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.” “How long are we going to devote so much energy to a facility that’s hemorrhaging money?” Should Baldwin Farms close the Pottsville facility or reinvent it? What Would You Do? Some advice from the HBR.org community The ECDC accounts for 5% of $600 million in sales. Does $30 million in sales justify its own warehouse? Wouldn’t it be better to start with an outsourced facility, perhaps in a multiuser warehouse operated by a logistics service provider? Maybe Baldwin can find a logistics service provider to take over its lease and bring in other customers to take up the slack. Mark Foscoe, group logistics manager, Mitsubishi Electric Europe Gretchen should further explore setting up the ECDC as a hub for other West Coast organic farmers. This structure will allow other growers to tap into the huge East Coast market more cheaply than they could on their own. Baldwin could offer a stake in the hub to interested farmers or let a third party operate the facility as a cooperative to lend it credibility. V.P. Kochikar, associate vice president and principal consultant, Infosys Technologies Baldwin Farms needs to focus on its customers, both end users and retailers. It should develop relationships with enthusiastic consumers who can serve as advocates for its products. It can partner with retailers that can provide information about what matters to consumers and how to reach them through in-store promotions. This would result in higher sales and steadier demand and lay the groundwork for Baldwin’s future plans. Bill Self, president, The Leadership Factor The Experts Respond Charles Sweat is the CEO of Earthbound Farm. It’s clear that Wayne believes fully in Baldwin Farms, in the value of bringing organic produce to as many people as possible, and in the potential of the ECDC to help the company achieve its goals. His commitment is admirable. But for Wayne, the ECDC is his whole business. If he stepped back, it would be easier for him to see, as Gretchen does, that the ECDC is not autonomous. It’s an extension of Baldwin’s primary business and was intended to enhance profitability and develop customers. And, unfortunately, the facility is diverting resources from the primary business and taxing it financially, logistically, and emotionally. Gretchen clearly sees why the concept should work: In the fast-paced world of perishable produce, retailers are challenged to forecast their needs and order from the West Coast (where most of the country’s produce is grown) seven to 10 days out. As we know at Earthbound Farm, in a week major changes can take place that affect sales in an East Coast produce department. So retailers are understandably eager for a solution that could potentially reduce stock-outs, which result in eroded margins and lost sales at the store level. And the East Coast is one of the regions where sales of organic produce are strongest. However, because the incremental sales volume at the ECDC doesn’t cover expenses and has created inefficiencies such as half-filled trucks, the model isn’t working as planned. Gretchen may not have considered that there isn’t enough of an incentive for produce buyers to pay the higher cost of ordering from the ECDC, even though they appreciate the convenience of quick turnarounds for fill-in orders. And if customers won’t pay the higher price that covers freight costs, converting sales volume from the West Coast to the ECDC will only erode Baldwin Farms’ margins. This case study is based on Earthbound Farm’s experience with a distribution center in New Jersey. In 2006 we decided to close the center because of its poor performance in its initial year. To compensate for its closure, we helped our East Coast customers transition to purchasing through top-quality wholesale distributors. This allowed us to focus on our core strength—organic farming and salad production—and let the distribution experts handle the logistics. That strategy has paid off: We maintained great relationships with those customers. Today we’re taking another look at an East Coast facility, but from a very different angle. We’re looking at growing some organic fruits and vegetables (not lettuces) in the East, as well as importing off-season organic items from trusted partners in South America. Gretchen should advise the Baldwins to close the ECDC and continue to serve their East Coast customers from the West Coast. In the meantime, the business should invest in developing products that can be grown in the East or easily imported there. When those products are in place, the company will have a much stronger base from which to operate a distribution center. Baldwin Farms will then be able to transition its East Coast customers to an ECDC that has an economically viable plan and defends its market share. Gretchen should advise the Baldwins to close the ECDC and serve East Coast customers from the West Coast. T. Gary Rogers is the retired chairman and CEO of Dreyer’s Grand Ice Cream. Opening an East Coast distribution center is only the first step in implementing Baldwin Farms’ new strategy. The business is growing; it just can’t cover its fixed costs yet. But it’s way too soon to give up. The Baldwins have made a major investment that they can’t get back. Now they need to make it work. Gretchen should recommend that they keep the Pottsville facility but look at other ways to make it profitable. As Dreyer’s Grand Ice Cream expanded across the country from its West Coast base with a direct-store-delivery strategy, we opened distribution centers in every major midwestern and eastern city. Most of those centers generated losses for years, but over time the unique strategic competitive advantage of direct store delivery allowed us to transform ourselves into the nation’s largest ice cream company. Our competitors, who were unwilling to take such a risk and absorb the initial losses of this strategy, never enjoyed the benefits and ultimately fell behind. The Baldwins have many options they could pursue besides closing the Pottsville facility: find “partner brands” to share overhead, train their drivers to do in-store selling, pay slotting fees, or provide customers with additional benefits that support the whole produce category. Those were all strategies we successfully pursued at Dreyer’s. Gretchen’s idea of distributing for other California growers is worth exploring, but a better strategy would be to find one or two smaller companies that can’t afford their own distribution center to share costs. In our case, we began distributing Ben & Jerry’s ice cream when that company was just entering Boston, its first major market. As we began distributing nationally we helped Ben & Jerry’s do the same. The good margins we made on its products covered much of our logistics overhead as we grew. Baldwin Farms could also accelerate growth if it trained its drivers to become salespeople or replaced them with trained or experienced direct-sales-delivery people. In-store selling can be very effective, especially with perishable products. There is always space that hasn’t been merchandised, and overworked in-store personnel often welcome the help. An inch or two gain in shelf space on every trip will turn into feet very quickly. Many East Coast grocers make their profits selling shelf space instead of groceries. Baldwin might consider paying them slotting fees. Though this adds cost, it is often justified if it helps a company break into a new market. Baldwin could also offer customers many other benefits that would build loyalty to the brand. When we couldn’t crack the New York market, we gave grocers ideas for improving the very sterile ice cream aisle to boost sales of the whole category. They included better lighting and use of color, ways to defrost freezer doors, and optimizing temperatures, defrost cycles, and freezer maintenance. The relationships and credibility we built helped us get our products into the freezers without jeopardizing our values. In the end optimism and persistence are necessary for young growing businesses. You can’t achieve success by constantly second-guessing yourself. The Baldwins simply have to take the long-term view and make this strategy work. It’s way too soon to give up. The Baldwins have many options they could pursue besides closing the Pottsville facility.

The Mission Versus the Bottom Line

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