We have a challenge this afternoon to keep you all awake and excited. This is a little like the Saturday Night Live sketch of "what if." What if we were to do our business differently?

Why is it is so hard to change? The answer was an industrial thing. Change is also a personal matter. There was a person charged to develop a new program for farmers. Potatoes used to be a mainstay of the economy of Maine. There were higher quality cheaper potatoes coming from New Brunswick. The Maine farmers weren't able to sell their potatoes even though they were growing them.

There was a presentation made to the farmers about how to make them profitable. It was well done and professional. They showed a chart of how the potato is going down and broccoli up. They showed how it was a profitable venture and the way to remain a farmer. At the end of the presentation, they asked if there were any questions. There were few. I asked the guy next to me what he thought of it. He said, "If I won a million dollars in the lottery, I'd keep growing potatoes until I ran out of money."

Change is difficult because we don't like to do things differently than we have. This is sometimes how we try to operate our CDFIs.

In a business world which is characterized by consolidation, how can local businesses be profitable? We have a great panel today. Howard Brodsky from CCA Global Partners. They are a fascinating organization. All the stores are a member of a cooperative. We'll also have Livingston Parsons from ACCION, and Christine Neal, and Robert Ling, Jr. from Unified Western Grocers.

I learned a lot from these experiences. I saw that the floor covering industry did not have a trade association. The industry wanted to promote themselves and came to us to do marketing. After 4 1/2 months, we only raised a small percentage of what we were supposed to sell. We did the biggest carpet sales pitch. We signed up 11,000 companies to do advertising. The only thing we spent nationally was some giveaways.

We did $10billion worth of business with only $400K that we were supposed to do with 10 times that amount. It gave me the realization that we could do a lot with some national innovation.

Let's move into the slide slow: Here are a few quotes that I think are key for what I'm talking about.

Here is our sales figures

We have 74 quarters of profitability. We are a co-op and we operate to be profitable. We have no debt and high liquidity.

We run this as a private company and we don't think like a nonprofit.

We have a business model for success.

From day one, we believed strongly that if you only did buying you weren't going to help anybody. If all we did was management, then we couldn't get the margins we wanted. We knew that we had to leverage all three including marketing, of these together. All three simultaneously had to be working together

In this system, here are the most important things on the left. We find, train and keep good people. Our membership services division focus just on what they do. We take over where the local entrepreneurs could never negotiate. We beat out Home Depot for some jobs. We do the real estate site selection. We give tools to the local entrepreneurs that they don't have access to in other ways. We believe that the culture of who we recruit is intimately tied to who we want to work with.

For the first 14 years, there wasn't anyone we didn't take in personally. A larger dealer in Atlanta came in after listening to us after an hour and a half and gave us a check for $50k. After the euphoria died down, we thought about whether we really wanted him to be a part of our co-op and we decided no, so we sent the check back. This was a very key turning point for us. It is so important that we're close to these people. This is not just about the money and the numbers. It's about the personal relationships.

I like to talk about creating the magic zone. You need to have a passion for the business and be good at what you do. You need to combine what the owners and the CCA do well and when you put them together, that's where the magic is.

We've taken the franchise market and brought them into our model We've created these in order to build new business models so that our existing models could take advantage of them. This is some of what we do for our members. We do a lot of research.

We compete against the giants, Home Depot, Lowe's, and we're in businesses that are threatened. We do not take a defensive posture. We go into business as the aggressor. We do not want to be a trade association. It is a shame for entrepreneurs not be able to grow their businesses. We want people who have children who want to come into the family business.

Here are the companies: CarpetOne, International Design Guild, Stone Mountain, Rug Decor, Home Solutions, ProSource.

We bought the brands, Liz Claiborne, LEES for Living.

In the center of our offices, we have a room called The Idea Room. We see presentations about other businesses and idea generation.

We are also playing in the global market. We are in Australia, New Zealand and the U. K.

We also have a mortgage company cooperative called Lenders One.

We have Savvi Formalwear for men with many locations across the country. The Biking Solution is also taking off.

Our growth strategy is to grow at about 20% annually. We have deep resources. Scale is having people who are incredible. We have never hired people from cooperatives. Scale gives us world class talent. At a certain size level you're not going to save more on volume or telephone rates. It's the people which is the benefit.

When you go into new ventures, you need to be able to lose sight of the shore. You got to have the courage to not see where you're going. The greatest risk is to not risk. No one can stay where they are. I'm a great believer that you can design life the way you want it to be.

A couple of things about Lenders One. We've developed national discounts and relationships with different aspects of the lending process which really serves our customers.

Click on the thumbnail below to see a larger version of it in a new window

I would like to cover some insight about Unified Western Grocers. We are honored to be here. We got a call about a year ago asking us about our business models and it's great to be able to bring them to the table here.

We distribute to the independent grocers. If we were a publicly company, we would be nestled in there with the Fortune 500. There are 3 national grocery chains, Krogers, Safeway, and Albertson's.

We started in 1925 when merchants in L. A. got together and bought a carload of soap. That's exactly what we still do today, even if we're trading more in truckloads now.

It's expensive to get into the cooperative and not easy to get out. Our members come in all sizes and shapes. We have single-store operators as well as some who have up to 50 stores. We have a wide variety of formats that are often sensitive to the cultural identifies of the neighborhoods.

We see ourselves as a virtual chain. We want to enable independent grocers to take on the big chains.

A bit of insight to how we operate. We bring economies of scale to this venture. We partner with the retailers to identify opportunities and threats. Ten or 15 years ago, the low end income Hispanic population was not being served by grocers. Some grocers saw this as an opportunity but they needed help, such as the right products and financing.

We measure scale by market share. If you look at southern California, we are ahead of the other 3 big chains.

Walmart currently has 3 superstores now in southern California. When they go into communities, they hurt the small independent businesses.

We operate by buying truckloads from our vendors and then we sell to our members by the case. In a typical grocery store, most of the inventory is on the shelves. It's important to have them there. We're able to predict the demand by our stores. Some of our retailers get delivery every day.

Technology is now important to us today. To run the fleet we have, we need this. We have a large IT department and we make it available to our retailers. If you're a single store operator, you still need to have registers and make the service available.

These other services we provide are not the focus of our business, but they are necessary for running the business, such as dairies and retail marketing. There was the Lowe's card craze recently. Sometimes it is holiday related, such as keeping candy on the aisles when it is Halloween. We also have our own insurance company, real estate services, and member financial support. We've taken a chunk of the capital to invest in these retailers. If we think of ourselves as a virtual chain, we want to make these investments. We make loans, will guarantee loans and leases.

We don't put restrictions on our membership. We don't restrict who becomes a member. It is not uncommon for our members to compete with each other. We have no input on the name of the store.

There are a couple of different models for running the finances. We try to run at a break-even point and not work at an overcharge model. We want our members to become competitive during the year. The capital can be better used in their stores than our business.

Robert Ling for Unified Western Grocers

Behind all these slides were fancy graphics. Christine set the groundwork and now I'd like to talk about the lessons we've learned over the 8 years we've been in business. The most important aspect of our success is our members.

Having the right infrastructure in place is critical. We also need financial discipline, having the right people in place, and focus on governance.

We are an infrastructure company. This is a big operation and operating that in an efficient manner is important to our retailers because it will get reflected in the cost of goods. We have micro-markets across several states, so we need to be able to provide access to a variety of items which seems like a contradiction to being efficient, but we find the balance between these competing means.

The cousin to infrastructure is governance. The sense of community is strong between the independents where they band together to have an "us vs. them" attitude where the "them" is the big companies. Our success depends on a broad and diverse membership, not only of format but also of geographic diversity. This helps mitigate what happens in the marketplace on a daily basis. .

Our marketplace intelligence gives us an advantage. Because we have a sense of the pulse in a variety of geographic regions, we are in a position to quickly change and differentiate ourselves from other operators.

Mike Provenzano is a guy who worked for a large regional chain for 20 years. He reached the limit of advancement in the company and opened his own store. About 10 years into it, we had some success early and the store maintained itself. He woke up one day and found his customers had changed and he wasn't adapting as quickly as he needed to. His current livelihood and dream was at risk. He wanted to have a business to hand down to his sons. He drove around southern California to see what was going on and to learn what consumers wanted. He realized there was a huge growth in the Hispanic community and felt that no one was serving this segment of the population.

Utilizing our real estate services, he was able to buy 3 stores that a larger chain was abandoning. He learned how to treat his customers and to provide what they wanted. Now let me know show you some pictures of his success today.

Here is another example of what we do: Our dairies. We aggregated the volume of our stores and the retailers set the prices.

We're out of time but here are a few slides left in our presentation. The importance of management is key especially in a complex market. We need to find the right expertise for the right processes. The focus on governance and process is key to providing loyalty.

Click on the thumbnail below to see a larger version of it in a new window

I feel like a peanut between two big elephants.

ACCION is a multi-national affiliation of networked organizations. We're a group of mission-driven operations. We've always been mission-driven. We have four criterion to meet in order to be successful: massive reach, financial viability, access to capital markets and social impact.

Everything we've done in Latin America is to improve the lives of low and moderate income people through financial services. We want to leap the chasm. We want to also expand who we serve right now.

We have 28 partners in 21 countries. There are multiple programs with different structures and needs. Each of these organizations is national in scope except in the U.S.

We've had a lot of success with the micro-entrepreneurs. You can see this curve that matches the other curves you've seen earlier. I can match Howard's claim of always being profitable with saying we've had an unbroken chain of quarters in which we've never been profitable. (laughter)

Here is the methodology for our products and services. We have a lot of opportunity in more markets than ever before, including in the U.S. where the gap between the financial basis for individuals is greater than it ever has been.

Here are some of the milestones in our timeline. We've learned a little bit over this time and still have a lot more to learn. There are a lot of limitations, geography, regulations. In the 60s, we were the peace corp before the Peace Corp. In the 70s, we tried to create local institutions. As you may know, this was an era of "yankee go home." So we tried to learn from that as we moved into the 80s. We wanted to make sure we were going to survive and started building local boards with local members. We went from about 6 institutions to 14. In the 90s our network had a lot of limitations. Different services were needed. We created or worked with financial institutions so that they could become a local organization that would serve the community. We didn't have that much voice and it was hard to get everyone to move in unison. In the late 90s we created an investment vehicle that would solve some of these problems. This is a bank in Brazil which is one of the most profitable in terms of ROE.

Internationally, ACCION does not lend. We don't have large amounts of capital to invest. We've looked to develop our network, such as commercial banks. We've provided consulting services. We've done client service training and sharing of best practices.

Our members pay $3500 a year. Now, we provide services on a cost-sharing basis. In the early 90s, we decided to come to the U.S. There were a lot of job losses and no solutions in sight. We set up an office in New York and were approached by many locales across the country. We brought the process of micro-lending we did in South America. From a lawyers perspective it was a great idea, but not from a business perspective.

ACCION provided development, training and investment to build an online software system to track applications and loans. It was great but only about half of the people wanted to use it. We started looking at the future. The challenge is to answer whether we're going to go bricks and mortar which would take about a year or not. It depended on the actual market. L. A. may make sense, but Dubuque may not. We want to serve all these communities. We want to have local partners who serve as brokers. We want to provide the systems without having to create something from scratch.

We're approaching banks and corporations. We're working with a major computer company so that we can take some financing that they will not do themselves. Some say low income do not use the internet. We've spent the last 6 months looking at what clients want. Over 2/3 of our client use the internet as the second source of information.

This allows us to create a network that is a hybrid. We still have the associates being licensees. To manage this type of situation has its challenges. This is a neat model that handles a lot of these challenges and we think it is posed to develop as a model of offering services, that are consonant with what the cooperatives do.

Click on the thumbnail below to see a larger version of it in a new window

We had a conference call a week ago and were introduced to CCA and Unified Western Grocers. It was a privilege to have my eyes opened to these options.

As I listened to them today, the idea of individual entrepreneur is making the decision to buy in to having access to scale, so they can profitably run a business they love.

A colleague said to me she has 3 tests to see if a process will be successful:

• will it increase impact
• will it serve the mission
• will it support long term sustainability

The buy in is to buy in to the dream. If you don't make the leap emotionally the analytical doesn't make much difference.

We free them up to do what they do best.

One of the reasons we went into direct lending is that it made sense to centralize services. We did studies and realized that people spent 65% of their time doing day-to-day stuff. You'll never reach your market at that level.

in the value proposition in each of the models, there is an equivalent and fair appraisal. You make a decision to buy in to a set of services. In return you get to make a decision to continue every year. I wondered if we could create something like this with the network of services that support the CDFI. How do your members make a decision if they think something you're doing isn't adding value?

There are two models: conversion and from scratch. In a conversion, we're like a great buffet. There will be some who are vegetarians and some are meat eaters. We want uniformity, not sameness. People are going to take pieces of what you offer.Here is an example: Financing is a huge element in retail. There was bike deal that came up who said he was philosophically against financing. And we said fine. He doesn't have to offer that. He can still be a part of the co-op. Other people say that it's the financing that keeps them in business. I always say I hope there's never a rule that I can't break.

I would like to pose the what if question. What would you tell us about the applicability to the CDFIs, which are small, vertically integrated, decentralized, with trade associations but no where with the structure of either of your coops?

The back room is easy to create, such as the technology. But it is the dream end of it is where the greatest potential is.

What struck me in the presentations is that what drives us is the market. Supply and demand is what moves our business. I don't see that driving the CDFIs.

From the perspective of the internal operations and the CDFIs, It's not bad to have different goals and objectives. It's in the quality of services that you provide. You need to have standards. We will have no bombs going off that will damage our brands.

Any of these organizations you've just heard about do not have survival strategies. They are proactive. They have the belief that David can beat Goliath. What if CDFI had the courage to go out there and provide options for low income people to get funding beyond the suboptimal lenders or check cashing places? We need this kind of courage. But not just courage alone. Courage without capacity is called butt whipping.

Courage is the first C we need. Capacity is another. You need the infrastructure, processes and technology in place, which requires you to have the resources.

The last C is capital. This group also talks about internally generated capital. In community developed field, profit is equated with exploitation. But in my mind, it also equals success and allows organizations to build capacity. To hire the right people, to provide better products and services.

Also, what we have is patience capital. We get money to start something. The CDFI funding We have to think about we can take advantage.

Click on the thumbnail below to see a larger version of it in a new window

I want to encourage you to think about some questions for tomorrow. How many times did we hear about having the right people? What would it mean for a CDFI system that ensured the training and management of local organizations?

Thanks for your participation today. We'll have a great lineup tomorrow. See you then.