Worker-First Restaurant Model Steals Ideas From Private Equity (And That’s Okay)
The Bottom LineThe Bottom Line

Worker-First Restaurant Model Steals Ideas From Private Equity (And That’s Okay)

With the restaurant industry in turmoil during the pandemic, worker-owned cooperatives have emerged as an alternative. But do they need to take a few pages from the private equity playbook?

Person ordering coffee from a barista

(Photo courtesy Griffin Coffee)

Many stories seem to get their start at the little Denver coffee shop where Reese Crawford started working as a barista in 2017. He notices a lot of first dates, as well as many young parents with strollers. Weekends are the busiest, he says, with parents stopping by on their way for a walk around Sloan Lake Park, right down the street.

The location seemed just right for Coda Coffee, a Denver-based sustainable coffee roasting company, to open its first retail location in 2015. They even installed espresso machine filters — those things you see baristas pounding coffee grinds into — as door handles. But the company sold the location in April 2019 to focus on its wholesale operations. The new owner renamed it the Griffin Coffee Shop.

Even if the roasting company didn’t sell it then, they might have a year later, after the COVID pandemic hit. Coffee roasters did very well during the pandemic, with online sales picking up, but coffee shops still face an uncertain future. U.S. Coffee shop revenues declined $11.5 billion because of the pandemic, according to London-based Allegra World Coffee Portal — that averages out to approximately $32,500 in lost revenue per coffee shop, per month.

At the Griffin Coffee Shop, Crawford has held on. The previous manager left during the pandemic, and he got promoted to the position. But the owner eventually bowed out. Two days before Thanksgiving this year, the owner sold the coffee shop.

But rather than an end, the sale marked the start of another story, and one that could eventually be much bigger than any one coffee shop.

The buyer was the Main Street Phoenix Workers Co-operative, a newly forming Denver-based restaurant group — a collection of individual restaurant, bar or cafe concepts owned under a single corporate entity. (The name refers to the mythical bird, not the Arizona city.) Unlike a chain, each restaurant group location has its own branding, menu, ambiance, everything you’d expect from an independently-owned establishment. But the group shares a corporate back office that handles payroll, benefits, legal, accounting, and suppliers.

Unlike any other restaurant group across the country, since Main Street Phoenix is set up as a worker-owned cooperative, workers from each establishment within the group can choose to become part owners of the group as a whole. Each group establishment essentially becomes a wholly-owned subsidiary of the cooperative, whether or not its workers ultimately decide to become owners of the cooperative.

Those workers who choose to become Main Street Phoenix Workers Co-operative owners will share in the collective profits of the group and elect a majority of the board members who will shape the group’s future, like which establishments to acquire, and also determine cross-establishment workplace policies like benefits, paid leave, pay scales and promotion policies. As the first-ever worker-owned restaurant group, it could help pave a new way forward for an industry that seems to be searching for one in the aftermath of the pandemic.

“It was cool to find out it was this collective, this co-op, with opportunities for employees as far as ownership goes,” Crawford says. “It will be interesting to see what businesses are going to look to this kind of ownership model, because I definitely think it should be more of a widespread thing.”

With their industry in turmoil, restaurant, bar and coffee shop owners and workers have done some serious soul-searching.

Many food and beverage service workers decided never to return to their old jobs, even as expanded unemployment benefits and eviction moratoria have ended or expired. They’ve grown tired of poor pay, poor working conditions, persistent racism or sexual harrasment from owners, management and co-workers.

Meanwhile, many long-time owners have called it quits. Nearly one in five restaurants had already closed by December 2020, according to the National Restaurant Association — some 110,000 establishments. The vultures are circling. Small business acquisition prices are usually tied to annual revenues, and with revenues down over the past year, private equity firms stand ready to acquire many restaurants at a pandemic-induced discount in cities across the country. So far, as in pretty much every sector it touches, the incursion of private equity into the restaurant business hasn’t turned out very well.

This past summer, the magazine Mother Jones wondered, “Can Co-ops Save Restaurants?” Worker-owned food cooperatives are “suddenly hot,” as the LAist recently wrote. Some establishments are turning to the model not only as a way to survive the loss of an owner but as part of building a new normal where workers have more dignity and a fair share of the profits from their labor.

Attorney Jason Wiener, founding board member of the Main Street Phoenix Workers Co-operative, and his law firm have helped dozens of businesses convert to some form of worker-ownership or cooperative ownership since launching in 2014. But reflecting on the challenge presented by the pandemic, he and a set of close advisors agreed that the existing pathways for converting existing businesses into worker-owned cooperatives weren’t adequate to meet that challenge – especially not with private equity standing ready to swoop in and expand its hold on the economy.

Up to this point, worker co-op conversions start with either the workers or a business owner showing some interest in converting an existing business into a worker-owned cooperative. They then turn to an entity with legal and management expertise as well as some financing to facilitate that conversion. While worker co-op conversion groups are growing in number across the country, Wiener argues each conversion remains an isolated transaction that takes a lot of time and effort.

“I believe that the movement’s technique of serially converting one business at a time was important, but it’s been resource-intensive and not scalable,” Wiener says.

Even more urgently, the existing pathways for worker-owned cooperative conversions aren’t moving fast enough for Wiener. A former resident of Washington Heights, the northern Manhattan neighborhood, Wiener points to the early pandemic closure of Coogan’s as a heartbreaking example. While the bar and restaurant had Irish roots, it was known for welcoming all of the neighborhood’s diverse cultures, as well as being a popular gathering spot for post-marathon celebrations.

“A 35-year tenure and they just shuttered their doors,” Wiener says. “There are other solutions, and it’s not to sell to the well-liquid private equity groups, it’s not to sell to your creditors, but rather we would do the work to form a turnkey holding company for a new asset class. We turn the private equity model upside down so we don’t have [financial partners], we have worker-owners who own the portfolio.”

Griffin Coffee's menu

(Photo courtesy Griffin Coffee)

The Main Street Phoenix Workers Co-operative takes a few pages right out of the private equity playbook. Instead of waiting for owners or workers to show interest in converting a business into a worker-owned co-op, it’s pro-actively going out during this period of turmoil to acquire a portfolio of coffee shops, bars and restaurants. Not every worker within each newly-acquired establishment may want to become a worker-owner of the restaurant group, but they would at least benefit from suddenly working at a subsidiary whose parent company is owned by and shaped by other workers within their industry.

Sellers, meanwhile, will have the benefit of the cash from the acquisition plus some peace of mind that they haven’t hung their workers out to dry.

“Our thesis was, every business we talk to, they’re going to be in distress, they’re going to be overwhelmed, they’re going to be emotional, and they’re going to need a solution ASAP,” Wiener says. “Our target market is business owners who care deeply about their workers, they know their workers are the lynchpin to their business success, and they don’t want their legacy to be they ran this business and then they threw in the towel.”

Part of the challenge was assembling a team with enough industry experience to convince owners and workers that their establishments wouldn’t be taken over by a bunch of totally neophyte investors with no knowledge of how to run a retail food business. The first full-time employee for the co-op was managing director Marisol Lazo-Flores, who has more than a decade in management experience in the hospitality industry and now specializes in teaching open-book management, a business practice in which every employee is fully aware of a businesses’ finances and their impact on the bottom line. She recently relocated from Boston to Denver to lead the co-op’s training and teaching of workers.

“There’s got to be more than the current model,” Lazo-Flores says. “These places and their workers are so essential to our communities. You have a favorite place you go to, your favorite bartender, your favorite server who always knows what your order is.”

Meanwhile, acquisitions manager Eric Byington is a co-founder of Denver’s Queen City Collective Coffee with his two brothers. Wiener says between the team, the co-op’s startup board and collective advisors, there’s at least 80 years of cumulative restaurant industry experience — that’s also a page out of the private equity playbook for making acquisitions at scale.

To get the ball rolling on acquisitions, over the past few months the Main Street Phoenix Workers Co-operative raised more than half a million dollars in seed capital from around 50 investors — the lead investor being Gary Community Ventures, a local family foundation in Denver (whose other investments include Elevation Community Land Trust). All the other investors are individuals, spread out across the country — and the restaurant group is still looking for more.

Finding investors has not been too difficult so far for the Main Street Phoenix Workers Co-operative. Prior to founding his law firm, Wiener was general counsel at Namaste Solar, an employee-owned residential and commercial solar power installation company in Boulder, Colorado. Namaste Solar raised some of its startup capital from outside investors, using terms that prioritize worker control. It learned how to do that from Equal Exchange, the worker-owned cooperative food wholesaler based outside of Boston. The networks of investors those businesses previously tapped have an appetite for similar investment opportunities.

Tapping into that experience and those networks, Wiener and the team of advisors came up with investor terms that prioritize workers. The Main Street Phoenix Workers Co-operative’s outside investors are limited to earning back up to twice whatever amount they’ve invested, with a minimum investment of $100. So if you invest the minimum amount, the most you can get back is $200 — your original investment plus $100 in cumulative dividends, and it may take as long as ten years for that amount to come back to you. Any profits generated beyond what’s owed to investors get invested back into the business or go to worker-owners.

So far, the Main Street Phoenix Workers Co-operative says it has made contact with 56 restaurant owners in the Denver region, and has made at least preliminary offers to acquire 10 of them, with Griffin Coffee being the first acquisition so far. It anticipates making four more acquisitions next year — one per quarter.

The biggest challenges lie ahead — the training and culture-building around worker-ownership and cooperative management.

Some awkwardness is to be expected. The Main Street Phoenix Workers Co-operative needs to walk into businesses it has just acquired, in an industry where workers have historically been treated poorly, and tell the workers in those businesses they can now choose to join the ownership structure of that business. It’s no giveaway either – workers who choose to become owners of the restaurant group must commit to buying shares themselves.

The model could be transformative, but it’s got a lot of proving to do — most importantly to the workers. Crawford and his colleagues at the Griffin are feeling positive about the new situation, but it’s all still very new, and they’re still waiting to see how the team will work with them before totally buying in as cooperative owners.

“My investment will kind of depend on what the team wants to do with the shop,” Crawford says. “As it is right now, with the current revenue numbers, it would be discouraging to just jump in and own the shop. I think I would want to get a pretty solid plan laid out and explore other revenue streams really for us going forward. I think that would create a bigger incentive. Right now I think it would be a little weird for me and other employees to jump in.”

This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi.

Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.

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Tags: denverworker cooperativesrestaurants

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