Having built up a thriving eco-food business during the boom, Sarah Flanagan is now finding the costs overwhelming. Must she move away from organic production to save her business?

SARAH FLANAGAN inherited her mother’s excellent cooking skills as well as her interest in self sufficiency and organic food. In her early teens, she was keen on a career in the food industry but subsequently changed her mind and studied law instead. Following stints in legal practices in Dublin and London she moved to the US to join the legal department of a large food ingredients company.

She got married and settled in the States. However, following the break up of her marriage she decided to come home. Her parents had always wanted to retire to the sun and, when Flanagan was planning to come back, they were on the brink of moving abroad. They sold their home at the height of the boom and, on the basis that “shrouds don’t have pockets”, they offered Flanagan an early slice of her inheritance. Her parents assumed she would use the money to buy a property. To their complete surprise she announced her intention to give up the law and start her own organic food business.

Her father was against the idea. He argued that a complete career change for someone in their 40s was risky, particularly when they had no experience of the food industry. But Flanagan persisted and he gave in gracefully, offering his services as a retired accountant to help draw up her business plan. She aimed to produce a range of premium quality organic baked goods for prestige hotels and gourmet shops.

Flanagan always had eco leanings, so her parents were not surprised that she wanted to have a “green” business from the outset. She believed it would be a strong differentiator in the marketplace, although she acknowledged that inputs would be more expensive and prices higher as a consequence. Based on talking to potential customers, she felt it was a risk worth taking. She was also well aware that consumers see through so-called “green washing” and that going green meant not only having a green product but also an eco-friendly manufacturing process to support it based around local, seasonal Irish ingredients produced in a sustainable way.

Finding a suitable premises was a major challenge as Flanagan wanted a modern, well insulated building with plenty of natural light. She also had a long list of other “wants”, from the installation of solar panels to heat water, to LED lights, energy efficient appliances and water saving devices. She set up a full recycling/composting area, sourced reusable/biodegradable packaging and used labels made from recycled paper printed with environmentally-friendly inks. With refrigeration a major cost in any food business, she also tried to keep the volume of ingredients requiring refrigeration to a minimum.

Carbon footprint aware, Flanagan decided on an electric delivery vehicle as her clients were all city based. She imported one of the earliest small electric vans available on the market and, although it cost more than a conventional van with the same load capacity, she reckoned its low running costs would compensate for this. It was also tangible proof to her customers of her commitment to the green agenda.

In many respects Flanagan’s timing was perfect. Six years ago, people had money in their pockets and she soon had a list of outlets throughout south Dublin and the city centre. The bakery, with a staff of six, was working flat out to meet demand and Flanagan found herself pulled in every direction trying to manage the growth of her business.

It was her father who first signalled a warning. The business was flourishing but he felt she was too wrapped up in its day-to-day activities: in meetings with customers one minute, chasing up missing invoices the next, and developing new product ideas in the evenings.

What was lacking, he said, was a development strategy that would bring the business, safely and sustainably, to the next level. In her heart Flanagan knew he was right, but she also felt enormously challenged by this. She knew she could not keep working at such a frenetic pace, but she liked the security of knowing she was dealing directly with all aspects of the business.

However, with her father’s help she prepared a new business plan which involved expanding the bakery, recruiting an experienced office manager and putting a sales person on the road to build volume. All of this was going to require fresh capital and, while the company had built up reserves, there was still a need for significant borrowings.

Flanagan was pleasantly surprised by the positive reception she got from her bank manager, who encouraged her to borrow as much as she needed. One of her father’s former colleagues was also willing to make a “sleeping” investment which would give him a 15 per cent stake in the expanded business. This also helped to keep the balance sheet in order.

Things went well initially, albeit with one or two hitches. The expansion of the bakery took longer than expected and developing sales into new geographic areas was proving to be a bigger challenge than Flanagan had anticipated.

One of the first problems she encountered was distribution. The electric van had been an attractive flagship for the bakery but its battery range was now being severely tested. Two new delivery vans were required and with the distances to be covered, electric vehicles were problematic. Even with the promised introduction of public recharging points, Flanagan’s father pointed out, the business couldn’t afford the down time needed to top up.

The decision to expand coincided with the first signs of the downturn. Like everyone else at the time, Flanagan had expected it to be short-lived. But soon enough the recession began to bite in earnest. Sales held up reasonably in well established outlets, with little need for discounting, but the same was not true in new outlets. In order to get a foot in the door she found herself under greater pressure on pricing than ever before. Furthermore, sales in the new outlets were growing more slowly than previous experience would have led her to expect. The net result was that the expansion in sales was proving to be less profitable than had been anticipated.

Flanagan was also encountering problems on the cost side of the business. The price of wheat and other ingredients had increased sharply, her landlord had imposed a rent hike and the cost of her bank borrowings had also been rising.

Flanagan’s father has told her bluntly that if she wants to survive she needs to rethink the business model. His argument is that dropping out of organic production will have a limited impact on sales. Most people, he argues, buy her products because they are premium quality, not necessarily because they are organic. Good quality non-organic ingredients will still produce a premium product but at a significantly lower cost.

Flanagan’s heart says that this would undermine the very basis of her business. Her head says he may be right. She knows from one of her outlets that organic sales accounted for 2 per cent of their total sales five years ago. They had expected this to have grown tenfold by now but it has stayed exactly the same.

She has considered running an organic and a non-organic range side-by-side, but all advice is against this. She would face logistical problems in separating organic form non-organic production. The pressures are mounting and Flanagan is facing her first loss this year. Like many other business owners at the moment, she knows that time is running out. Flanagan now has to decide whether to stick to her principles and try to weather the storm or to sacrifice them in order to survive.

THE EXPERTS’ ADVICE

SARAH FLANAGAN does not do things by halves. She reinvented herself from being a lawyer and used her commitment to the environment to create an innovative, quality business. A large part of her initial success was certainly down to her diligence and passion and she did use the green ideas to create a “differentiator” for the business.

The firm’s expansion exposed some of the challenges that all growing businesses experience. She scaled up, put in place new people and structures, and added to her physical and manufacturing capacities. She has discovered that this increased capacity is less profitable than the initial scale of operations. Her analysis suggests that this is down to the recession. But were there warning signs there even if the recession had never happened?

Flanagan’s market is in prestige hotels and gourmet outlets. These outlets stock her products because they satisfy the end users’ desire to eat quality foods that are that little bit different. The outlets make the stocking decision but it is the end user who determines how many products are consumed and at what point they are an unaffordable indulgence.

The green credentials assist the stocking and support decisions but are probably lost on the end consumer. Most end users will probably select or reject the products without examining whether they are organic and will not care a fig for their mode of transport. Many probably pick her products because they are there on the counter or on the shelf. Some will assume they are baked in-store.

The recession has not helped. All food on the move has suffered and people are much tighter with their purses. Luxuries are now subject to more scrutiny and it takes a strong believer to hold fast to what one should do when it comes to green and organic choices.

Flanagan has made very definite choices to date. She is strongly committed to green beliefs and practices. She will not lightly move away from these business principles. However it is a core principle for all businesses to survive. For her business to survive she needs to clarify what her end users want – not what she thinks they should want.

If the people and structures she put in place for a growing business are now too costly, she may have to scale back. She will also have to make some difficult adjustments, offering products that are not organic in order to remain ahead of competitors while retaining her reputation for high quality goods.

Her first commitment to herself, her staff and her market must be to stay in the game. – Willie Maxwell

FLANAGAN’S ORGANIC business raises a number of fascinating issues around sustainability, product positioning and business model reconfiguration. For most businesses, there is a strong case for pursuing a sustainability agenda: trying to balance the so-called triple bottom line of economic, environmental and social objectives. Sustainability offers benefits in cost savings, in product reputation and in new business opportunity. Flanagan’s initial investment in clean-tech, green production facilities is likely to be yielding useful operational cost savings. Her organic products provide her with differentiation in a crowded bakery market.

However, her love affair with electric vans should be postponed until this technology becomes more established. This would not be a ‘sacrifice’, but rather a savvy compromise to underpin a longer term sustainable business. It is also something a key stakeholder in her business, her father, would much appreciate.

Remember, the consumers of her premium products do not know, nor probably care, that current delivery is by electric van. All of which brings us to Flanagan’s competitive positioning of her products. Her father is right: she makes a range of premium quality baked produce that happens to be organic. It is the quality premium positioning that will guarantee her firm a long life in the market. The organic dimension is a plus that continues to surprise and be appreciated by many buyers. Tip: it is often wise to undersell your green credentials!

As Flanagan realises, the market for ‘pure’ organic produce is very limited and probably static in these recessionary times. But there is a significant niche for quality baked products where suppliers can enjoy a premium price and minimise the need for price discounting. It makes sense for Flanagan to stick exclusively to organic production. Running an organic and non-organic operation side-by-side would add cost and possible buyer confusion. In the bakery business, the real cost of being organic is not so much the raw materials as the ongoing accreditation/certification procedures. And this process does ensure high quality.

Flanagan needs to market more aggressively, and towards retail outlets beyond hotels and gourmet shops. Putting a well-incentivised salesperson on the road to push her products is an excellent idea, enabling her to grow the business in the medium term. I would suggest she fund this initiative by a moderate increase in bank borrowings. But her business model, like her green commitment, must remain lean. She should consider postponing the recruitment of an office manager until sales grow further.

Flanagan has carved a solid space, after six years, in the not-insignificant, if competitive, premium bakery foods sector. With this modest reshaping of her operations, she will continue to have a profitable, sustainable business. – Aidan O'Driscoll

SARAH FLANAGAN has but little time to make fundamental decisions about the direction of her business. Her costs are rising, growth is stalling and she has posted a loss for the first time in six years. At a time when key strategic decisions are required, she is being pulled in different directions by her heart and her head. I would rather she was being led by her customers instead.

Flanagan needs to fully accept and internalise the fact that a business exists to find and keep customers. You will have to accept sub-optimal business performance as the quid pro quo for a decision to operate the business for someone other than your customer. In other words, you cannot be in organic production because you like it, but because your customer likes it – and pays for it. Flanagan’s preference for organic production, if not endorsed by the customer, could cost her the business.

This is not to say that she should not be emotionally invested in the business. A business needs emotional energy to provide its spark, and to get customers excited about it. But there is a need for a dispassionate market analysis. For example, Flanagan has already received information from one of her outlets that organic sales are stuck on 2 per cent. The overall case for investing in organic has not been made and this decision cannot be safely taken without further data. Flanagan doesn’t have to spend big money on research, she just needs to have an understanding of the purchase drivers. What is in the customers’ mind when they make the decision to buy? How might they be encouraged to buy more at that point? It would be a good use of Flanagan’s time to get personally involved, observing and speaking with customers. In this way, the customers themselves will in effect decide the organic-versus-premium quality, or the electric-versus-diesel issues.

There is now a risk that the bank will compound the problems by withdrawing or reducing credit. With costs rising, and the economic squeeze set to last into the medium term, it is essential to watch cashflow. Therefore it may be worthwhile staying with the more price-sensitive outlets, although it is better to agree volume deals rather than price cuts.

Flanagan fears that the very basis of her business may be undermined. But the only basis that a business may have is providing customers with stuff they'll buy. As Willie Sutton said when asked why he robbed banks, "That's where the money is!" – Tom Trainor