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Fast Rising
 

Profile and analysis of an employee-founded bakery: the struggles to gain financing and customers.
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Pittsburgh's City Pride Bakery relied heavily on the appeal of civic allegiance to lure its investors as well as its customers. But the long-term future of the employee-founded company will depend on executing the basics better than the competition.

On a saturday morning in late may 1989, scores of angry bakers and depressed machine operators gathered at their local union hall to figure out what to do next. They were out of work: two weeks earlier Continental Baking Co. had shut down its Braun Bakery plant, after 100 years in Pittsburgh, leaving 110 people unemployed.

Many of them had spent 10 or 20 years at Braun, and even if there had been other jobs beckoning in the city -- which there weren't -- they weren't about to change careers. The union and the city had offered Continental an array of concessions to entice it to stay; three years earlier a similar package of wage cuts, tax credits, and help building a new facility had kept the Clark Candy Co. from exiting Pittsburgh, which lost a dizzying 100,000 jobs in the 1980s. But Continental chose to consolidate operations at a more efficient plant in Philadelphia. In the process, Pittsburgh lost its last major bakery.

We'll start our own, people grumbled. Hell if we're going to move to Philadelphia. (Continental had offered positions to anyone who'd go with it.) If a major company won't locate here, we'll just start our own.

That morning, 67 people kicked in $50 each, talked about a boycott on Continental's products, and began calculating who would approach the mayor's office for help and how to start gathering market research.

Three years later, with the active efforts of more than 100 people and investment from 23 sources -- including five venture-capital groups, four banks, nine government agencies, and a battery of religious organizations -- City Pride Bakery has become a reality. If it succeeds, it will be a shining example of public-private partnership at its best. Housed along the Allegheny River in a spanking new building that, at 650 feet, is almost two football fields long, City Pride is scheduled to churn out its first loaves of bread for customers this summer. Year-one sales projection: a profitable $26.2 million.

Just about everyone involved with the enterprise voices a bit of amazement that it has really come together. "Who would have thought a group of workers could take a dream and transfer it to all of these people and make it materialize?" muses Evan Bergwall, City Pride's director of human resources. "What are the chances of that happening?"

* * *

The Story
Part of the appeal of starting a large bakery was simply intuitive. Pittsburgh is the only metropolitan area in the country without a major wholesale bakery; its major brands of bread are produced in places such as Philadelphia, Buffalo, and the Akron, Ohio, area, and trucked in. Surely, figured the group, they could create a wedge in the local market for a product as dependent upon freshness as bread is. Part of the appeal, too, was revenge: "People had a burning anger to get back at Continental, to some degree, for screwing up their lives," says Tom Croft, executive director of the Steel Valley Authority (SVA), a regional economic-development group.

Pittsburgh is a city of mills, of unions, and of neighborhoods; many people have traditionally stayed in the area and worked where their parents worked, and the determination among locals to kick-start job creation is fierce. As the unemployed bakers began drawing on their savings, across town a collection of steelworkers, community groups, and elected officials was working to pull together a new steel minimill. While that effort ultimately didn't work out, a coalition involving many of the same partners began forming around the bakery project.

"A lot of people who worked at Braun were telling us we were crazy for trying this," says Joe Zajac, who had been assistant production superintendent at Braun and was elected chairman of the newly created workers' committee. But others thought the idea had merit enough, and the SVA located $100,000 from the Pennsylvania Department of Commerce to do a prefeasibility study and work on a business plan.

The workers hired a consultant, contracted out market research to the University of Pittsburgh, and by the fall of 1989 were conducting focus groups on the viability of introducing a new brand of bread to the Pittsburgh market. In November the consultant brought in another adviser, Daniel Curtis. And Curtis had completely different ideas about what the group should be doing.

Curtis had grown up in the bread business and was developing the frozen-products division of a bakery in San Diego when the Pittsburgh project called. He'd made his name at the Gold Medal Bakery, in Fall River, Mass., where revenues rose from $4 million to $20 million in his first two years there; it's now a $75-million company. Gold Medal distinguished itself in its handling of private-label production -- making bread that carries stores' own labels -- for many of the supermarkets in New England.

Forget about trying to create a new brand, Curtis advised the Pittsburgh workers -- going head-to-head with the Pepperidge Farms of the world takes millions of dollars in advertising alone and is an extraordinarily risky venture. Instead, he encouraged, look to private labeling: supermarket chains generally have in-house breads produced by outside bakers who also make their own brand-name products. Those bakers consider the private-label breads less of a priority because they don't make as much money on them, said Curtis; you can compete on that ground. His arguments and savvy made sense to the fledgling group. "I saw how Dan talked to the store managers, the questions he asked," remembers Zajac. "I went back to our group and said, 'This is the SOB we need.' "

In February 1990 there was a huge blowup. The consultant who'd been leading the expedition quit when people began leaning toward Curtis's strategy. With the seed money already spent, the workers were devastated, says Curtis. "They asked me, 'Will you do this?' And I said no." But he agreed to talk to supermarkets and to continue his formidable commute between California and Pennsylvania to help the group develop a business plan.

Besides, as if to underscore the opportunity available in particularly Capra-esque fashion, a major snowstorm had blanketed the area a few months earlier and closed the highways. Out-of-state bread producers had had a difficult time supplying the city, and for much of the Christmas season bread shelves had been bare.

* * *

The Industry
"This is the dumbest industry," says Curtis. "Bakers produce a perishable product, and if it's not sold, they take it back." Moreover, despite an explosion of in-store bakery sales over the last decade, merchandising of house brands, he says, is done haphazardly at best.

The Gold Medal model, Curtis attests, is to teach stores how to better manage, market, and make money from their bakery departments. Bakery employees help stores merchandise the product -- setting up point-of-purchase displays, rotating day-old bread to the front of the racks, ordering different amounts for different days of the week. That kind of service may seem basic, but Gold Medal president John LaComte says he doesn't know of other bakeries providing merchandisers. The approach proved effective in New England. "With Dan's aggressive approach and knowledge, I would say, our bakery sales doubled during his involvement," says C. Lee Gibson Sr., former president at Valueland Foods, in Canton, Mass., and now executive vice-president of its parent company. "When he left the area, a lot of people were disappointed, including myself."

Curtis believes merchandising can be just as effective in Pittsburgh. "Consumption of store-brand bread by customers who already buy it can increase by 50%," he says, if a store pays attention to its house brands, pricing them well and displaying them prominently. "People will eat three pieces instead of two." Lofty claims, but ones that can be tempting to supermarket execs, who tend not to get wowed very often by bakers. "My enthusiasm is rare in this industry," admits Curtis, 58, who moved to Pittsburgh and formally took the CEO position in October 1990.

* * *

The Marketing
Given a private-labeling strategy, the key to the project became clear early on: the primary customers for City Pride Bakery, as workers had named it, would be supermarkets, not individual consumers, and those supermarkets had to be signed on before anything else could proceed. A plant as big as the one the organizers were imagining had to hit the ground running just to pay overhead. More to the point, banks and private investors told Curtis flat out they wouldn't play without customer commitments.

City Pride's first target was the Giant Eagle Markets Co. supermarket chain. "Giant Eagle has a 46% market share in Pittsburgh," says Curtis, "and its private-label bread is a $13.5-million business." At the time that Curtis approached the supermarket chain, it was working with three out-of-state bakers. "When I asked Giant Eagle, 'Are you happy?' they said, 'Not necessarily.' "

Giant Eagle executives visited the Gold Medal operation in the summer of 1990 and came back impressed. And the package City Pride was offering was attractive. It promised not just a product that shoppers would choose but prices and services to woo the supermarket from established bakers. Starting that summer, this is the pitch potential customers, including Giant Eagle, got:

* Fresher product: City Pride won't use emulsifiers to preserve shelf life, thereby, says Curtis, eliminating a gummy taste; the bakery's "sponge and dough" method is designed to enhance flavor and improve color and appearance. More bakers are going back to that method, he says, but none of the bakers supplying Pittsburgh offers it. The breads will be delivered the day they're baked (versus a two-day to three-day wait from competitors), and, Curtis maintains, "customers will taste the difference." City Pride also will pick up the expense of redesigning packaging and using bags that cost a penny more to bolster appearance.

* In-store merchandising: City Pride will have a drop-ship merchandising program. Other bakers either drop off their product and leave store staff to stock and market it (at a price that gives stores 35% to 40% margins) or deliver direct to the shelves (allowing a 20% to 25% margin). City Pride will employ the former method -- but claims that stores will have 35% to 55% margins -- plus provide in-store merchandisers to visit stores daily and help with displays, product rotation, and ordering. Employing one merchandiser for every six stores and training customers' personnel will increase City Pride's costs, but the company expects to make it up by needing fewer truckers, since it's located closer to the stores than competing bakeries are.

* Higher customer profits: While its prices are comparable with the competition's, City Pride maintains that with better marketing, more store-brand bakery items, and a reduction of markdowns through better ordering (like most private labelers, City Pride won't take returns, because the bread will be owned by the supermarkets), stores will see a minimum 10% increase in gross profit. City Pride also will produce higher-end store brands to be sold next to regular store brands for better margins.

* Points for civic duty: A large part of City Pride's pitch has been for players to do the right thing for their Pittsburgh community. Participants would reap a public-relations dividend by supporting the worker-led manufacturing venture -- of some value in a union industry where anticorporate sentiment can run deep. For added leverage, Pittsburgh mayor Sophie Masloff used her considerable influence on behalf of the project, leaning on, among others, her personal friends in Giant Eagle management.

In September 1990 Giant Eagle signed a letter of intent to buy from City Pride, and in a July 1991 letter said it would enter a contract once City Pride is open and shows it can produce quality products. Is the supermarket skittish about working with a start-up? Perhaps; Joseph Faccenda, Giant Eagle's senior vice-president for buying and merchandising, declined to talk to Inc. about the relationship.

City Pride also pitched itself to other supermarkets, and by April 1992 was expecting an agreement with Riverside/ BiLo, a chain of 90 stores. Major chains Foodland and Shop 'n Save also have expressed interest.

* * *

The Financing

At the apartment curtis had taken in the downtown Hyatt Hotel, an interim board met weekly to talk about progress in finding financing and customers. From the windows board members could see all the local banks. They joked about using BB guns to get the bankers moving faster.

"This is the crab gumbo method of financing," says the SVA's Croft. "It takes a ton of ingredients, but you need the big pieces most of all." Because the company would be partially owned by employees through an employee stock ownership plan -- 10% in year one, 30% by 1996 -- a state ESOP fund had lent City Pride $100,000 in 1989 to write a business plan, while city and county programs kicked in $10,000 each. But by the fall of 1990 the project was essentially broke again and had been rejected by all the banks.

In November 1990 Curtis called on Ned Randall, the executive vice-president for retail banking at the Pittsburgh National Bank and one of the most well-connected people in the city. "It was 4:30, it was cold, the streets were covered with ice, and I asked if he'd take a look at the business plan," remembers Curtis. "He asked me to leave it, and I walked out extremely discouraged." That night, though, Randall called Curtis at home. "The project made sense to me," says Randall, who also headed up the Pittsburgh Partnership for Neighborhood Development at the time. "It was going to save some jobs and bring something good to the city."

With arm-twisting by a number of people, including Mayor Masloff, four banks came together at the end of December to pledge loans and a line of credit if City Pride came up with $2.1 million in equity. ("Did we threaten blackmail?" says Masloff slyly. "Of course we call on that frequently.") Supported by $35,000 in loans from several Catholic orders in late 1990, the project struggled along in early 1991, constantly on the verge of running out of money as the banks and venture-capital firms that were sniffing around did exhaustive due diligence. "I quit mentally many times," concedes Curtis. In May 1991 the project was "founded" yet again with a $200,000 round of equity financing from the company's managers and two venture-capital firms; those actively working on City Pride had grown to include outside financiers, the bakers' union, and various government and community agencies.

The project ticked along that summer: the factory, which was being built to spec, began to take shape (City Pride will rent the space, which is located in an enterprise zone), and all the players gathered for a picnic at the site in late June. The major financing package finally jelled in September 1991, when an opportunity arose to buy the perfect used equipment before it went to auction -- if City Pride acted quickly. "Without that kind of critical deadline, it might have been very hard to persuade everybody to act," says Derek Minno, general partner at Point Venture Partners, which has invested a little more than $1 million for a 45% share in the company. The closing -- when the four banks locked in on their $2.8-million loan -- was a two-day marathon involving 25 people.

In all, City Pride has raised about $8.5 million: $3.2 million in equity, $5 million in debt, and the balance in grants. The equity sources included Curtis, his friends, and some of the employees for about $1 million, and several venture-capital groups. The gas company lent money to build the freezer and also took an equity position. The Lawrenceville Development Authority became part owner through a half-million-dollar grant for job training from the federal Department of Health and Human Services. Almost $400,000 in loans came from local and national religious groups drawn to the project's goal of putting unemployed people to work, and the city pledged a $360,000 grant for training. The state kicked in $1.1 million in low-interest loans, and the county government and city Urban Redevelopment Authority both added loans of $200,000. Several foundations, along with the bakery union, guaranteed the promises of the charitable organizations. Says Luc Beaubien of Zero Stage Capital, another investor, "This is the most complicated capital structure I've run across."

About $1.6 million went to buy two used ovens and other equipment, which were hauled from San Jose, Calif., to Pittsburgh in 55 trucks; another $2 million was spent to refurbish them. In December 1991 City Pride began staffing up, taking the cost-cutting -- and unusual -- step of having bakers come in and work under contractors to put together the guts of the bakery operation. Lawyers cost another $380,000.

The project is again operating without a safety net: managers expected that by the time the plant started producing, the company would have spent all its money and drawn out its line of credit to the $600,000 limit. As of June the company was looking for another $500,000 in equity, which Curtis calls "not crucial, but nice for an extra cash cushion." He's hoping City Pride will be an exception to the start-up rule and run at break-even from the word go.

* * *

The Operations
Hundreds of people lined up for seven blocks when City Pride announced its job openings. The letters kept coming: by last April the company had received more than 3,500 applications for its 120 positions. City Pride will pay an hourly rate $3 to $4 less than Nabisco up the road -- through their union, the bakers have agreed to work for pay 28% below the regional wage scale in return for a piece of the ownership -- but will offer classes in reading and nutrition, in addition to the basic union benefits. There are plans for an on-site day-care center.

"This will feel different from a union shop," says Joe Zajac, "not so much because of the ESOP as because the group that started this didn't have jobs, and they did this, they own this." Thirty to 40 people from the original ex-Braun group are expected to work at City Pride, and, says Zajac, "we're going to set the pace, which new people will pick up."

The company's main oven is one of the biggest producers in the country, with the capacity to make 9,800 loaves an hour, versus a standard 7,600. High production will allow City Pride to offer competitive prices. Curtis puts the best light on the fact that the equipment is used, calling it a plus that the people running it will have assembled it and know every screw in its belly.

City Pride managers will have to be good gamblers: Gold Medal's LaComte likens the commodity business of baking -- with fluctuating costs of flour, sugar, and soybean oil -- to a crapshoot at times. But City Pride has inherited considerable organizational and floor experience from Braun and has gone out and bought management as well. Planning for numerous baked-good line extensions for customers, City Pride expects profitable sales of $26.2 million for its first 12 months of production and $31.4 million for its second year. Capacity should top out, say managers, at $53 million in sales, probably by year three. By then they hope to be less dependent on Giant Eagle, which will make up the bulk of sales for the first year.

* * *

The Risks
Curtis sees three main vulnerabilities for the company as it prepares to open. First, again, the equipment is used; downtime if there's a problem threatens the daily-delivery strategy. Second, three unions are involved -- bakers, engineers, and, for delivery, teamsters. While Curtis praises them all for not being adversarial, he says candidly that negotiating is draining and if he'd known there'd be three unions involved, he might not have signed on. Further, having these unions in an ESOP environment may have unexpected effects. Third, City Pride's actual implementation has to work smoothly, on budget, and on time; "the danger is that we may stub our toe on service." Another risk: a large number of the workers will be new to the industry.

Giant Eagle will test the breads and require them to be of quality equivalent to that of Thomas' or Pepperidge Farm. Until they pass muster, a lot of people will be holding their breath. "I believe in it; I know it's going to go," says Mayor Masloff. "Of course, it'll be my neck if it doesn't." Moreover, the projections City Pride is ramping up for are only guesstimates; the mix of bread and other products the customer supermarkets actually purchase will be at their discretion.

Still, at this point the participants in the venture are lined up to take credit. "A lot of people claim ownership of City Pride," says Point Venture's Minno. "Politicians, government groups that gave funding, social investors [like churches and so-called social-justice funds], the labor component, private investors." A lot of people also have their necks on the line: Curtis, for one, who rises at 4 a.m., walks for several miles, goes to church at 6 and has breakfast at the Hyatt at 7 each day like clockwork. In addition to investing two years' time, working a year out of pocket, and putting $200,000 cash into City Pride, he brought along one of his three daughters and her family when he moved to Pittsburgh, and he has hired his son and son-in-law. To better his odds, Curtis carries a lucky rock given to him by a nun investor at City Pride's ground breaking. "It never leaves my pocket."

"This really isn't that big a project," says Pittsburgh National Bank's Ned Randall, referring to the funding in the scheme of the city's economy. "What makes it unique is the situation. And maybe what it tells us is that it doesn't have to be a big project to make an impact, and that we should seek out more small projects for our neighborhoods."

Impact? Look no farther than the factory floor and the people who believed from the beginning. "I've been working two jobs to make ends meet," says Pearl Alexandre, who was in the shipping department at Braun for 23 years. "I'm looking forward to our working for ourselves, being a part owner. I think we'll give people a hell of a loaf of bread."


EXECUTIVE SUMMARY

Company: City Pride Bakery, Pittsburgh

Concept: To produce private-label breads for regional supermarkets and to provide merchandising help as a way to boost sales and distinguish the company from competitors, all while saving jobs in a shrinking industry

Projections: Year-one (ending June 1993) sales of $26.2 million with a $1.3-million pretax profit; year-two sales of $31.4 million with a $3.1-million pretax profit

Hurdles: Generating profit quickly enough to make further financing optional; executing large-scale production with no time to ramp up; keeping primary customer satisfied while bringing on others; remaining competitively priced if other bakers cut their prices

The Founders
City Pride was conceived of three years ago by a group of unemployed bakers, who worked with economic-development and government agencies to pursue the idea. Ten percent of the bakery is employee-owned, and 30% will be by 1996. CEO Daniel Curtis was hired by the workers in October 1990 to pull together financing and help secure customers; he most recently was director of frozen products for Fornaca Family Bakery, in San Diego, and before that was with Gold Medal Bakery, Uddenberg's supermarkets, Country Home Bakeries, and ITT Continental Baking Co. Curtis was a POW in Korea and has a master's in marketing from Syracuse University

Financials
City Pride Bakery Projected Operating Statement ($ in thousands)

Year One Year Two

(7/92-6/93) (7/93-6/94)

Sales $26,200 $31,400 (Giant Eagle, Riverside/BiLo)

Cost of sales $16,400 $18,800 (Materials, direct labor, building rent and utilities, depreciation)

Gross profit $9,800 $12,600

Gross margin 37% 40%

Expenses $8,500 $9,400 related; tractor-trailer leases; professional services; insurance; debt service)

Pretax profit $1,300 $3,100

Pretax margin 5% 10%


WHAT THE EXPERTS SAY

Observer
Ray Lahvic, editor, Bakery Production and Marketing Magazine, Chicago

There are three or four other bakers currently serving Pittsburgh, and they're not going to roll over and play dead. That's too much business. The United States today has too much baking production capacity, and what's been happening over the years has been attrition, with the little guys being squeezed out by the major bakers who invest in capital improvements that make them more efficient and larger. And those guys are rough competitors: they have to keep their plants full and want to run two and a half shifts.

They're going to be highly competitive, which translates into cutting prices. That's where Curtis is vulnerable. Supermarkets can be fickle; chains change their minds, especially if someone comes along with a lower bid. The buyers City Pride is talking to now might go along for nine months or a year, but if they are offered lower costs to produce their private labels -- a quarter of a cent, half a cent -- they're going to be pressured by their management. Giant Eagle has gotten good publicity from this and would have a hell of a time walking away, but supermarket profits are very slender.

There's a price for the merchandising help City Pride offers -- a competitor might say, "We don't do that, but we'll give you a quarter of a cent off in return." Customers may like the merchandising, but I don't know if that will offset the price competition.

Efficiency is a combination of equipment and trained personnel, and that's what City Pride will be competing against. Its equipment is used, and while there's nothing wrong with that, it is not a highly automated plant. Which means that Dan's costs are OK, but they're only average. And while I think it's really great that he's going to have all these programs -- day care, education development, stock ownership -- they cost money and are an added expense. I guess they're meant to stimulate productivity. If City Pride is going to compete in the long term, they'll have to.

Potential Customer
Bill Shaner, director of marketing, Charley Brothers, a division of Super Valu Stores Inc. in New Stanton, Pa., and a wholesale supplier for 90 Shop 'n Save stores and 15 County Markets

I'm as impressed with Dan Curtis as with anyone in quite some time. In his presentation to us, there was a room of probably 12 people, and there is absolutely no question that he knew more about the bakery business than all of us put together. People like me, in charge of buying and merchandising, are cynical because there are so many ill-prepared salespeople. But his credibility and real commitment are impressive.

Price will be very important in our ultimate decision, particularly if some of the stores we compete against have a better price. Everybody in the world is going to want to help City Pride for about six months, but ultimately, people are interested in the things that affect their pocketbooks. If we become a customer and another bakery offers us a much better price, I'd certainly have to tell Dan he needs to be at that price; there would be ongoing negotiations about those things. We'd have a contract, but contracts are somewhat loose because regardless of what you sign, if the quality and dependability aren't there, that contract goes right out the window.

The market is ripe for City Pride because I think the quality of our private-label baked goods right now is not as strong as it could be. In going after only private-label work, City Pride really has found a very special niche. The idea of its people in stores fighting for shelf space for the private-label product -- that's appealing.

The fact that City Pride is working with Giant Eagle, by the way, is a plus and a minus. It helps make the bakery stable, and we would need it to be stable. But I hate Giant Eagle, and I don't like anything that has to do with Giant Eagle. There's always a voice in the back of your mind saying, Is he giving them better service or better prices? Time will tell. I would have to trust Dan, and right now I do.

Financier
Thomas Smith, principal in Edison Ventures of Lawrenceville, N.J., a $100-million venture firm that reviewed, then declined, involvement in City Pride

There are three critical factors for City Pride's success, and I think the company can meet them all: producing a quality product, which I don't think will be that big a chore for Dan; having a large-enough market opportunity -- I think he's got that; and being a low-cost producer.

The company has started with a low cost of capital -- there are certainly more subsidized loans and loan guarantees from different government organizations than I've ever seen come together in one project. Couple that with a below-market cost of assets, a below-market lease, tax subsidies on the property, wage concessions from the union in return for the ESOP, and the savings on transporting bread mostly within a small radius, and the company should be a low-cost producer with a substantial margin.

I wouldn't be surprised to see the company lose some money the first year and have to give up some of its margin for market share. But you don't need to earn 10% pretax for this to be successful. We didn't invest because there wasn't a clear exit strategy, and I don't know if the business would ever get beyond $50 million to $60 million.

One final risk is Dan. He's been the key to the success so far. The loss of him would potentially mean the difference between success and failure. He's an exceptional person.

Last updated: Aug 1, 1992




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