The project has been in the works for over a year, and was inspired in part by the connections to food production and distribution and the community that I’ve come to know since working at Open Produce. As the Yogurt Pedaler, I’m biking from my home in Hyde Park, Chicago, to Ohio, making yogurt from milk from local dairy farms and teaching people along the way how to make their own. It’s about encouraging people to take an active role in making their own food and knowing their local community, and about inspiring street life and a more active lifestyle.

It’s been a crazy couple of weeks, but ready or not, I’ll be inaugurating the Yogurt Pedaler at the 61st Street Farmers Market tomorrow, Saturday, August 14, from 10 a.m. to 1 p.m. The market is fantastic - it’s on the street by Experimental Station, at E 61st and S Dorchester, and it’s well worth a visit at any time. But it’s especially worth a visit tomorrow, when I’ll be out there teaching yogurt-making, so if you find yourself on the South Side, stop by and say hi! I’m hitting the road on Sunday, so this is your last chance to see the Yogurt Pedaler in action in Chicago until September…at which point I may be so tired of yogurt that I’ll refuse to make it ever again.

While I’m gone, keep up with my adventures on my website at yogurtpedaler.com, where you can already find all of my worrisome yogurt-making experiments in excruciating detail.

In particular, I’ve been looking at some metrics for how efficiently we turn money into inventory and back into money. If you look at the amount of money we made (our SALES) and divide by the amount of money we spent on inventory and related expenses (COGS, or Cost Of Goods Sold), you get our SALES/COGS ratio, which was 1.21 for 2009. This is also called a “markup” of 21%. That means for every $1.00 we spent on inventory, we sold that inventory for $1.21.

To look at it a different way, for every $1.00 we earn in sales, we get keep $0.17, which is known as a 17% “margin”. Markup and margin are related, but different, and it’s easy to get them confused. For item we sell for $1.00, for instance, a markup of 100% means we paid $0.50 for it. A 100% margin on the same item would mean that we got it for free. Confused yet? Great. I’ll stick with markup, or SALES/COGS, for the rest of this post.

As I said, for 2009 our SALES/COGS was 1.21. Our target has been 1.5, so this is a little lower than we were aiming for. However, it fluctuated month to month — in July, for instance, it was 0.98, meaning we actually spent more on inventory than we sold. This is because we grew our inventory selection massively over the summer, and we didn’t see the jump in sales until later in the autumn, when our SALES/COGS went up to 1.35.

Our monthly expenses — everything that is not an inventory expense — hover around $10,000. This includes payroll, rent, utilities, insurance, repairs, and taxes. To break even, we need to cover this — and hopefully make some extra to cover slow months like December, finance growth, and pay back our loans.

At a SALES/COGS ratio of 1.21, we need to sell about $58,000 per month, or $1,960 per day, to break even. This is much higher than we are doing right now — for instance, in May 2010 we averaged just over $1,500 per day, and June has been lower. If SALES/COGS was 1.3 instead of 1.21, we would only have to average $1,444 per day, and we would be officially in the black.

We’re not sure what our SALES/COGS is for 2010 yet. We are still crunching the numbers on the first 6 months. But it looks like it’s going to be higher than 1.21 — maybe 1.3 or 1.35. Here is a chart showing how much we would have to sell every day for each value of SALES/COGS.

As you can see, if our sales numbers stay flat over the summer then we need to be in the 1.3 range to break even, and 1.4 would mean we’re solidly in the black.

There are lots of ways for us to try to nudge our SALES/COGS up. The most obvious way is to raise prices, but we’d like to avoid doing that as much as possible (and our customers would like us to avoid that, too)! Other methods include finding better sources for our products, seeking out special promotional deals with manufacturers, and reducing “shrinkage” due to spoilage. Especially with produce and fresh bread, there is a very fine line between buying to little and running out, and buying too much and facing spoilage. Tweaking our ordering could help raise our markup to a healthier level without raising prices.

The heat was also bad for our equipment — high temperatures and bad luck meant we had a freezer technician out three separate times over the last month. One time, we acted quickly enough that our frozen inventory was fine. Once, we frantically packed our frozen goods into crates and drove them over to Hyde Park Produce, where they friendly folks there lent us some freezer space for a few days while we waited for a compressor part. And a third time, a failure at 11pm on a Friday night, everything thawed and became unsellable. A huge cost for the store, sure, but it means I’ve been enjoying organic pork sausages every night for two weeks. Unfortunately the lost inventory rang in at a little bit under our $1000 deductible for our inventory-lost-due-to-equipment-failure insurance.

But our freezer and air conditioner woes are under control for now (a cool 68 in the shop tonight), and I’ve been playing around with some data with the help of a University of Chicago student who is our data analysis intern.

Head on over to our new data page for a look at how our sales have been doing, from opening day up to the present (the graph updates every night with the latest data). Notice the perilous Decembers, the small dips for U of C spring breaks (look at 3/17 - 3/27 of this year, for example), and how our battered hopes in March ‘09 fell away with the May ‘09 warm weather.

We’ll be adding things to that page as we prepare them, including more detailed sales data, inventory insights, and financial statements. Explanatory blog posts will keep you in the loop.

Here it is:

Walking into Open Produce is like giving yourself a present. From the great
lighting, to the friendly staff, to the shelves stacked high with ethnic and
organic stock, the experience is pure pleasure. You can find all sorts of
amazing treasures here for your home-cooked Mexican feast, fresh salad, or
sugary study break.

But Open Produce is also about giving the community and the Earth a
present. And the present is delicious.

I came to this Hyde Park gem the week after organizing and attending Social
Venture Network’s Annual Member Gathering (http://www.svn.org/),
where we convened more than 200 socially- and environmentally-minded business
leaders. These innovators value both profit and mission, ensuring that
they’ll be in business for a long time to do work for the public benefit. It
also means that most profiteers think they’re crazy (for aligning business
decisions with the common good), and most do-gooders think they’re crazy
(for trying to make money).

“You two would have fit right in at the conference I was just at!” I told
Steven.

I was delighted to spot a number of brands on the shelf whose leaders I’ve
met through work, like Annie’s Mac & Cheese, Stonyfield Farm, and Seventh
Generation. But not only does Open Produce stock nationally-known organic
and sustainable brands led by cool people, they also support small local
companies that sell ethnic food not available anywhere else in the area,
including products from all over the world. They invest in the local
community, whether it’s when Steven and Andrew are chatting with the truck
drivers, or on the phone with Nancy from Nancy’s Organic Yogurt, or
gossiping with their regulars or the guys at the dollar store one door down.
And their low prices mean they can bring affordable, whole, fresh food to
their neighbors.

“This is it, this is the real deal,” I thought. This is about a commitment
to building local, sustainable communities. This is about people and
companies working together to build a new kind of capitalism, one that puts
energy back into the planet, and brings whole and delicious things to our
lives and our dinner plates.

So give yourself a present, Hyde Park, and stop by Open Produce today!

Erica Dreisbach was, at the time of her visit, an art and techmancer for Social Venture Network, a national network of nearly 500 socially responsible business leaders who are working for a just and sustainable economy. Read more at www.socialventurenetwork.wordpress.com.

But since a lot of folks have been probing for more details lately, I thought I would give an honest and thorough answer, as best as I am able anyway.

The short answer is that small businesses are unbelievably complicated, but from the information I have, I think the business is doing ok. Our growth slowed through the first half of December, which looked about like October, and I’m guessing the second half of December will look a bit worse than September. We’re hoping that growth will pick up again after the holidays.

Here are some charts showing daily gross sales relative to our current financial goal since August, and also all the data I have about how many conventional bananas we’ve sold per day over the last year. (You can click the pictures for bigger versions.)

To explain these charts, unfortunately, I will need to bore you with another long post which is after this link.

Let’s cover some basics first. Here’s approximately how our monthly operating expenses break down.

A few costs, such as sales tax, inventory loss (theft, produce that goes bad, and expired or damaged items we don’t get distributor credit for), and some credit-card processing fees scale with our gross income, so they effectively reduce our gross margin (% of gross that is profit).

Say we realize a gross margin of 30%, which would be pretty good for a produce store. Then to be a viable business we must gross G per month, where 0.3*G > 8336. That means we need to gross $27786 or $926 per day. This is really an optimistic estimate though, because

• Our gross margin probably isn’t 30% (but it is still hard to say what it is!).
• We need to grow inventory. Over the long run inventory costs are built into gross margin, but when you initially grow inventory, it costs cash to do it. That money can come from distributor credit or investors, but if not it has to come from the gross.
• We need to make improvements. The store needs an awning, a display fridge, and probably a 3-compartment dishwashing sink or commercial dishwasher to make the most of its present space. Again, this can come from credit (loans) or investors, but if not it’s got to come from the gross.
• Our actual liability for debt is higher, and we are just addressing what we are able to deal with at the moment.
• We have serious incidental expenses (stuff breaks sometimes).

So our current stake in the ground goal is to average closer to $1000 gross per day. As you saw in my first chart, we got close to that goal in September, then met it for the first time in October and November. December has slowed down a bit.

I believe the key factor is customer growth. According to this fascinating article in the riveting Produce Merchandising magazine, a sure centerpiece for any empty coffee table or bathroom rack, bananas are the most popular kind of produce with steady year-round sales, though demand tends to fall in the summer as more summer fruit becomes available. Look at what’s happened to banana sales at Open Produce over the last year.

Things were pretty messy in 2008, but then we picked up again with the start of 2009 and started growing slowly and steadily. We made a bunch of improvements in July and August which saw a slight increase in growth, but these improvements included better point-of-sale data collecting so I can’t be sure this isn’t just noise. Bananas took a nosedive between summer and fall quarter at the University, then shot up with the return of students.

I suppose any given person may suddenly decide to start eating more bananas, but it seems likelier to me that the number of bananas we sell is proportional to our total customer count. So if the number trends up, it probably means we’re getting and retaining more customers. What this means to me is that our hard work is finally starting to pay off, we are adding new customers and are on a good growth track.

Certain things that “go together” frequently get bought on the same ticket. If you look back over tickets and count up how many times each pair of items is bought together, you can get a sense of how related any two items we sell are. Mathematically you can look at this as a weighted graph. For example, here is a picture of one such graph (circles correspond to items, and the closer two circles are, the more frequently those items are bought together.)

(Click image for larger size; other formats: [svg] [graphviz])

Corn tortillas are a daily staple for many Mexicans and Latin Americans. We sell the best fresh corn tortillas in Chicago, El Milagro brand, for a good price in packs of 12. They’re good, so many people buy a single pack now and again, even if they’re not staple eaters. However, we also have a discount for people who buy 3 packs at a time, and many staple eaters purchase as many as 9 or 12 packs per day.

This graph shows some interesting patterns. Both 1-pack and 3-pack buyers also frequently buy produce that makes sense with tortillas, such as tomatoes, avocados, jalapeños, and limes—guacamole fixings—and 3-pack buyers occasionally go for bargain produce. However, 3-pack buyers also frequently buy well-known Mexican products such as the medio litro size of Mexican coke and de la Rosa peanut candy, while 1-pack buyers do so less. Also, 1-pack buyers buy slightly more canned beans than 3-pack buyers. In particular 1-pack buyers purchase canned refried beans while 3-pack buyers rarely do. Finally note that 1-pack buyers sometimes purchase prepared foods such as mtr meals and clif bars, while 3-pack buyers generally don’t.

My reading of this is that staple tortilla eaters mostly buy fresh produce and a couple Mexican products, while non-staple eaters buy slightly more prepared food, less produce, and fewer Mexican products. If you’re a Mexican immigrant who eats refried beans every day, maybe you feel weirder about seeing them in a can and make them better, for cheaper, at home; if you’re a grad student on taco night, maybe you grab the can. Or maybe we just don’t carry the right kind of refried beans—La Preferida makes about a dozen kinds, and we carry only one size of the vegetarian kind. Staple tortilla eaters almost certainly have more specific bean preferences!

What’s clear is that there are two distinct categories of customers here who interact with one item we sell in very different ways. Tortillas are a crucial crossover point for staple eaters and exotic eaters to try new things. How can we get 1-pack buyers to buy avocados as frequently as 3-pack buyers? It’s a shocking thought, but do 1-pack buyers perhaps not know how awesome avocados are? And what other products do 3-pack buyers want—better beans, or something else like the de la Rosa candy?

Here’s another long post about the business. Today I thought I would write a bit about inventory, a subject which is so fascinating to me that I could rant about it for pages. Instead I will put a little link here, so you only have to read this if football and leftovers aren’t enough to put you to sleep.

Handling the store’s day-to-day logistical issues is pretty tricky, but to succeed as a business we also need to manage a huge long term logistical issue, inventory. Inventory is theoretically an asset, but in many ways it’s our biggest liability, too.

We can’t pay our rent in apples. Once we turn dollars into apples, we have to sell some apples to get dollars again. If apples were all we sold and it took more than a month to make back the rent in apples, we’d be out on the street with a bunch of apples pretty soon.

We have a lot of dollars tied up in inventory. To stay in business, we need to sell a certain amount of that inventory every 30 days. If we don’t, we need more cash, and it’d better not be in apple form when we need it. Really, we’ve tried depositing apples in our checking account, but they don’t fit in the little envelopes. So that’s the challenge, balancing inventory and cash.

The obvious reasons inventory builds up are unpredictable demand and long distributor lead times on orders. But more subtly, we have to sell a variety of products to run an appealing store. Greater variety both attracts more customers and makes items much more attractive to buy.

We sometimes have to buy ten different things before we can sell any of them. People are going to want pasta for their pasta sauce, for example. We also need to carry more than one type of pasta sauce. Context matters a lot. We may end up buying ten items in cases of ten before we sell one item. We’ll sell it all eventually, but we’re still out the cost of one hundred items up front, hence inventory.

Also there need to be a certain number of something on the shelf to sell. One jar of delicious jam doesn’t sell. Nobody will buy it. Five jars of the same jam, placed next to six other kinds of jam, sell great. I don’t understand this at all, but it’s an empirical fact. I think it’s some sort of guilt complex, like where nobody wants the last spring roll from an appetizer plate. Me, I think the one jar of jam looks weak and vulnerable, like the gazelle with a limp at the back of the herd. But I digress.

Inventory from smaller distributors we pay for by cash or check on delivery, but a lot of inventory we buy on net 7 or net 30 days credit terms, which means we must pay for it within 30 days of buying it. This is great if we sell “enough” in 30 days to cover its cost, and is a major part of how we build up new dry goods inventory. The catch is that if sales decline over a period, as they might for some weeks of December, we could be left footing a pretty large bill for inventory on top of other expenses. We can’t pay that one with apples, either.

So we just have to get exactly enough of a wide variety of stuff. Easy, right? There are a couple more snags.

Most distributors have a minimum order size for delivery to cover their costs. That means we have to want enough stuff from the same distributor to get something we really need from them. Lead times are anywhere from one day to weeks. When we don’t need enough stuff to meet a minimum, we have to guess and order more of something to make an order deadline. That’s partly why we’re the only produce store in Hyde Park that sells individually wrapped fortune cookies. (The other reason is because we think that’s awesome.)

Even if we manage to reorder something on time, distributors frequently short us items they’re low on (they deliver them to other customers who want them because we’re small potatoes). There are a couple strategies for dealing with this. We can order five kinds of an item and hope to receive one, or we can order the same thing from an alternative distributor, or we can be out of something.

When all is said and done, it’s pretty amazing the store is as well stocked as it is. But that occasionally comes at the cost of some extra inventory.

Produce is a completely different type of inventory challenge. It doesn’t really build up and threaten to crush us like dry goods. Quite the opposite, actually, it goes bad so quickly we can barely stock it. We may throw as much as half a case of some things away. If we buy from CIPM (the Produce Market), we get big cases that we end up throwing half away. If we buy wholesale from Hyde Park Produce, they’ll split cases with us, which works much better for some things but is sometimes more expensive. Also things come in and out of season all the time, and wholesale prices change daily; it can be challenging to make sure we’re not selling things at a loss!

So with dry goods, we need to get a good variety and then closely match our supply to volume so we don’t tie up too much cash. We also need to be very careful about net 30 credit, using it to grow but avoiding getting crunched due to seasonal volume changes. And with produce, actually, we need more of it and better variety, particularly fresh greens—but this will require better refrigeration and will have to wait until the new year.

We’re still figuring out how to do all this, but we are getting good at it. We’ve just got to keep it up through next year.

In upcoming posts, I’d like to talk through some numbers and logistics, which are what I (Jered) know best. But right now I want to relate some personal experience of “Open” Produce and address what the “open” part means to me. First the news.

The store has come a long way since March. Foremost, it’s stayed open. But it’s also grown up a lot. Through spring and early summer, we expanded our hours, increased our dry goods selection and continued to refine our eclectic merchandise mix. Through the summer into fall, we tore out the stage at the front and moved the till there, added and re-planned a lot of shelves, completely changed the layout to open up the center of the store, and built our own point-of-sale system with a barcode scanner so we can gather accurate sales data. Recently, a local carpenter rebuilt our stock room shelving to accommodate our expanding inventory. We’ve gotten much better at ordering, and have begun to connect with other local businesses, small distributors and farms. We’re also working on case ordering and gift basket programs which we’re hoping will take off.

Now back to my story.

Just after his last post in March, Open Produce co-founder Steven joined me and some other friends in Rocky Mountain national park for a couple of days’ well-deserved rest. As we hiked through the spring melt, Steven told us about the daily challenges facing the store. We listened in fascination and sometimes horror as he talked through a dizzying litany of permits and regulations, distributors and wholesalers, credit terms, unexpected setbacks and improvements he knew he had to make. All the while, I kept thinking to myself I could hardly believe he was actually doing this.

You know that phase where your friends start to pair off or get married? Or how it feels when the first friend’s kid pops out, or someone buys the first house? It feels like a page turning somewhere on a giant calendar. This is it: this is Real Life. We’ve Grown Up. My crazy friend opened a small storefront grocery store, and half a year in, was stressed out and knee deep in debt… why?

“It’s so close,” he told us. “And I have so many ideas. If I had no ideas left, I’d give up. But it’s so close!”

Now that I’ve been living in Hyde Park and helping with the store directly for a while (since July), I want Open Produce to work because I think it’s a great thing for the neighborhood. Many loyal customers seem to feel the same way, as they’ve dealt with our mistakes and growing pains and keep coming back; I’ve actually seen people change their meal plans to buy something in stock when we’ve messed up and run out of something else. And as a business, it is tough, but the numbers do look viable.

Even though we no longer put wholesale costs on index cards we constantly have to change, I think the “open” part of Open Produce is what I and many customers like so much about it. I see the store as a conversation within Hyde Park. People walk in and know they can talk with us. Mostly we talk about what to eat, but also we talk about how much to pay for it, what kind of transportation to use, and what hours are reasonable to walk around at. The idea of being “open”, to me, is that a business can and should conduct this kind of dialogue directly, honestly, and responsively.

For example, should we sell animal products? Personally, I’m vegan–the kind of vegan who likes to eat plants. But then a lot of vegans in Hyde Park want alternative animal products, so we carry Tofurky, Tofutti, temptation ice cream and so on. Most people want milk and eggs, so we carry the best local, humanely grown milk and eggs we can find for the right price. Some people don’t have much to live on and need cheap options, so we try to carry cheap things that aren’t vile. And many, many people have asked us, time and again, for meat products like tuna fish or deli sliced lunch meat. So sure, we’ll find the best stuff we can get for the right price, and we’ll sell it.

I guess in doing this, we compromise somewhat, but only so far. We’re not proposing to sell Oscar Meyer baloney or Smithfield ham–or at least, I find those revolting and would loudly object. But the dialogue exists.

Personally, my goal as an outside consultant and friend of the business is to help make it sustainable. At the moment, what’s keeping it together is a lot of hard work which frankly deserves more than the business can pay, and that’s not sustainable. Our ordering manager Becca juggles all the requests and ideas, and deals with dozens of distributors to get us the right products and set the right prices. Owner Steven lines up the store’s very complicated finances and operations and also helps with ordering and improvements. Owner Andrew is currently working to reduce some of our debt faster. And clerks Mark, Annie, and David put up with days that are alternately boring and unreasonably chaotic. We all stock a lot of shelves.

I’d like to help get the store to a place where it’s financially more stable by helping it to grow, and to help smooth out some of the operational chaos by building better IT and practical solutions. Hopefully we will get a chance to talk more about it!

http://www.nytimes.com/2009/01/22/business/22pepsi.htm

It outlines some of the difficulties associated with trying to determine the carbon footprint (or, in fact, any other environmental footprint) of consumer products. One problem is that a lot of that data is hidden or not easily accessible (how many pounds did the truck haul, how many gallons of gas did it use, how many miles out of its way did it go to deliver to your store, etc.). Another problem is to know where to stop: Do we count fuel used by farmers to power their tractors? How about the fuel used to operate tanker trucks to deliver the fuel to the farmers? What about the fuel used to fly an oil company executive to the Middle East to secure a contract for more oil, which was then used to make the gasoline? In what could be described as the reverse corollary to the Butterfly Effect, an unimaginable tree of events transpired to bring any product to any particular storefront. Even the environmental cost of preparing such a report should theoretically be considered in the report itself.

The market is supposed to collapse all of this complexity and history into a single number: the price. But the problem is that, with conflicting moral views and priorities, some consumers inevitably won’t agree with the way in which the complexities were collapsed (e.g. Should pollution be taxed? Should the government subsidize oil drilling?), and will demand more information about the history of their product. But exactly how much information the bulk of consumers want — and are willing to pay for — has not exactly been settled. I fear that catch-all, broad labels such as “organic” and “local” will suffer the same fate as price — just as suppliers often sacrifice the environment or human welfare to drive down price, they could just as easily (and often do) sacrifice the environment or human welfare to satisfy requirements for labeling their products “local” or “organic”. At the same time, metrics complex enough to provide the information necessary to make informed decisions remain elusive. It’s a difficult problem, and one I don’t think is going to be solved quickly or easily.