Support of members,
employees and
suppliers vital to
Southern States’
turn-around effort

BACK FROM THE BRINK

By Jim Erickson

Editor’s note: Erickson recently retired as
communications director of Southern States
Cooperative, but not before writing this article about how
the co-op has righted its fiscal position in recent years.


he day in late September 2002 began routinely enough for Tom Scribner, then the executive vice president and chief merchandising officer at Southern States Cooperative. Directors of the regional farm supply co-op were at the corporate office in Richmond, Va., for a regular board meeting, one where Scribner had given a report at the board’s afternoon session the preceding day.

Before the new day in early fall ended, however, the board had asked him to take the helm as Southern States’ president and chief executive officer, and he was quickly immersed in efforts to turn around a co-op teetering on the financial brink.

The coming days would be a never-ending stream of meetings with bankers, consultants, the coop’s member-leaders, employees and other stakeholders. The decisions and recommendations he made to the Southern States board in the following weeks and months were rarely easy or painless. But now, some 60 months later, the co-op has just posted what Scribner views as a breakthrough year with profitable results exceeding its budget goals.

How did Southern States — which in its 76-year history prior to 1999 had never lost money on its own operations — come so close to financial disaster? And how was the co-op able to turn the situation around?

Learning lessons the hard way
Conversations with Scribner, the co-op’s Executive Vice President and Chief Financial Officer Leslie Newton, and Executive Vice President and Chief Operating Officer Wesley Wright, offer ample evidence of the roller-coaster ride Southern States has been on. Lessons learned often came the hard way, but they provide a checklist of pitfalls to avoid and management tools and practices needed to turn around a faltering business. Scribner firmly believes many of those tools and practices are just as vital for keeping a sound company moving forward and avoiding the problems that plagued Southern States.

Newton recalls that after joining the Southern States’ treasury department, the co-op was performing at record levels in the 1996 and 1997 fiscal years.

“Along with others in our industry, we developed quite a corporate ego, and beginning in 1998 the emphasis turned to growth and expansion into new business ventures,” she observes. “The prevailing view among many in agriculture at the time was that growth was the only way to keep from falling behind and eventually becoming irrelevant.”

Meanwhile, Scribner had come on board in 1998 as a vice president in information systems after some 20 years with the Landmark and Countrymark co-ops in the Midwest. Elevated included eliminating the negative cash flow before the co-op ran out of money, giving nervous bankers evidence the large sums they had loaned would be repaid and implementing a restructuring plan that gave the co-op a fighting chance to have a future.

Initial decisions came quickly and included: Evidence that the acquisitions weren’t working came early and continued to mount, but only after the growth spiral had caused the co-op’s debt level to balloon. At the same time, weather factors and weak commodity prices applied even greater pressure on Southern States’ operations. Ink on the bottom line turned red.

The chief restructuring officer said that the difference between companies
that succeed and those that fail could be found in their employees.

Feeling the squeeze
With banks demanding debt repayment and operations showing a loss, the co-op’s already-thin liquidity position was squeezed even further. Newton feared it was only a matter of time — a very short time — before the co-op would be unable to make its payroll.

Farmland Industries’ Chapter 11 bankruptcy filing in May 2002 and the fact Agway also was struggling for its survival had put cooperatives under the financial microscope. Rumors about the future of Southern States began to surface as well. (Editor’s note: Agway later filed for bankruptcy and both Agway and Farmland subsequently were liquidated.)

It was in this environment the Southern States board acted, entrusting Scribner with the huge task of turning around the business. His initial challenges were numerous, encompassing both short- and long-term priorities. These costs and improve service. After some initial resistance to the credit change, the new program through John Deere Credit has been well received. Equally important, creditrelated losses have dropped dramatically. In the last fiscal year, Southern States posted a net gain in the credit area due to recoveries on accounts earlier written off.

Fending off unsolicited buyouts
“The job cuts and selling-off of assets were especially tough,” Scribner notes. “But they were probably easier for me to deal with because being new in my position meant I didn’t have the emotional ties that others had. The reality was we had no choice; delays only would have made things worse.”

Scribner says another critical aspect was an early decision to separate ongoing, core business operations from restructuring activities such as closings and sales of real estate. Unencumbered by these issues and concerns, operating personnel were better able to focus on running the business.

While major changes — such as selling entire operating divisions — were never off the table, Southern States had analyzed its various activities and determined that its basic farm supply business model was viable. But it wasn’t long before the co-op received unsolicited offers to acquire its feed, petroleum and insurance operations.

“As we went through the due diligence process, one thing became clear,” Scribner recalls. “The Southern States name was quite valuable and that’s what the companies that approached us really wanted. We realized the value of our name, too, as well as the importance of these operations to offering a complete market basket of products and services. We ultimately opted not to sell any of the operations, even though the short-term financial benefits would have been substantial.”

Scribner, Newton and others from senior management also met with boards and managers of local co-ops Southern States manages under contract. Communications efforts also extended to Southern States lenders, with meetings and conference calls used for progress reports and responding to questions.

In addition, information provided to Southern States’ directors was expanded with interim board reports and by having all officers review their respective areas of responsibility at every board meeting.

“The only way to deal with the rumor mill was to lay all our cards
on the table whenever we met and talked with people.” — Tom Scribner

Easing cash-flow problems
To ease the pressure on cash flow, Southern States needed cooperation from its vendors and suppliers. After receiving candid information about the co-op’s situation and the steps being taken to deal with it, the vast majority of suppliers agreed to extend payment deadlines.

“We concluded the only way to deal with the rumor mill was to lay all our cards on the table whenever we met and talked with people,” Scribner says. “If people know you’re being open with them, they’re much more likely to maintain trust and confidence in what you’re doing.”

More tough decisions had to be made, however. An existing plan to grow Southern States’ farm and home products business with private dealers was scrapped due to capital constraints and because the effort detracted from serving the co-op’s core agriculture customers. In addition, the number of private dealers was reduced to those the co-op could economically serve. Minimum order requirements were instituted, credit was cut off to dealers whose accounts were delinquent and the number of different products in inventory was greatly reduced.

Another difficult, but financially important action, was freezing benefits in the co-op’s defined benefit pension plan.

“Our board of directors was directly involved in virtually all these decisions,” Scribner observes, adding that directors were also willing to make the tough calls.

Members show confidence
An early indicator the co-op had member support and confidence came soon after Scribner took the helm. The coop had a program that allowed members to pre-pay for inputs and other supplies they intended to purchase and take delivery on the following year. Depending on how long their money was in Southern States’ control, members earned credits that expanded their purchasing power.

For Southern States, the program was a major tool for financing the build-up in inventories needed for the spring season. Scribner and Newton concluded members would be reluctant to put money into the program for fear of its being caught up in bankruptcy, rumors of which were running rampant. Accordingly, a separate “bankruptcy-proof” account was established as an option for anyone with such concerns.

It was good news indeed when the pre-pay program subsequently neared its budget goal. But the most interesting and, for Southern States leaders, heartening aspect was that most participants eschewed the bankruptcy-proof account and put their funds in the regular program. Because there was no difference in the amount of credits that could be earned, it was a clear indication members were confident of the co-op’s ongoing viability and were willing to support the organization.

Evidence of lender confidence in Southern States’ progress came in October 2004 when a new financing package was successfully negotiated. The new plan provided for long-term and seasonal funding, as well as a tremendous increase in liquidity.

Both Scribner and Newton attribute much of the co-op’s turn-around success to its “rope holders” — employees at all levels whose loyalty to the organization and commitment to Southern States’ farmer-members never faltered. According to Newton, the chief restructuring officer (CRO) — a veteran of working with struggling businesses — told her when he first arrived that the difference between companies that succeed and those that fail could be found in their employees.

The CRO observed that Southern States employees exhibited a greater desire to have the co-op survive than those at any other company he had known.

Maintaining momentum
As Southern States’ position gradually improved, management moved to keep the momentum building. Drawing on earlier experience with a well known, major retailer, Wright took the lead in implementing a more disciplined approach for running the co-op’s various operations and for measuring virtually every important aspect of the business.

Under Wright’s direction, Southern States also gathered and analyzed demographic data on its retail locations to determine the best product mix for each and to establish a priority list for various types of store improvement efforts. Some two dozen such store development projects have been completed or are on the drawing board for the current fiscal year. In addition: Southern States’ historic mission — providing farmermembers with a complete line-up of products and related services for growing all types of crops and livestock — remains the same. But the co-op has changed in many other ways Scribner is convinced will serve the organization well in the future.

























September/October Table of Contents