Anyone could see it. Over the past decade, profits and patronage payments had become sporadic at United Farmers of Alberta Co-operative Ltd. (UFA). The organization that had been spawned in a moment of political fervour in 1909 had now become the home of empty shelves and poor customer service at the local level.
At the head office, critics assailed its seemingly random investments and the lack of focus that got in the way of strategy.
Then, this past spring, the retail co-operative announced a patronage dividend to its membership of $12.5 million. Gross revenues for the fiscal year had risen seven per cent to $1.5 billion, with $47.3 million in EBITDA (earnings before interest, taxes, depreciation and amortization, a common indicator of a company’s financial performance).
You could hear the question in boardrooms and coffee shops not only in Alberta, but across the country. What is going on at UFA?
It turns out the dust has been blown off one of Canada’s oldest co-operatives by a new leadership team led by president and chief executive officer Carol Kitchen.
The UFA had hired the Illinois farm-raised Kitchen in 2015 to lead change, and under her tough love its balance sheet has become black again, even after the collapse of the oil market in 2016 and the recent retraction in farm margins.
“We (UFA) were playing from behind the net,” says Kitchen. “Now we are more competitive, we have better pricing and better service.”
The last few years have been transformative as the co-operative became more focused on their customers, offered new technology and products, shed non-core businesses, cut expenses and grew with business alliances.
“We are turning a corner,” says Kitchen. “While we still have more work to do, the work that we have done is starting to pay off.”
The UFA leadership team dug deep into the financials to find and solve weaknesses and to strengthen its core. “To be a good co-operative, first it has to be a good business,” says Kitchen, who is educated as an accountant and has her MBA.
Her three key matrixes are cash flow, working capital and gross margins. One of the main contributors to the turnaround was $100 million in expense reductions since 2015. Expenses had been draining working capital. Even with low interest rates, Kitchen knew they couldn’t keep operating that way, especially if rates did rise.
Kitchen says it took a shift in thinking and everyone understanding the positive intent behind some pretty tough decisions. “Everyone knew I wanted to help make it better,” says Kitchen. “Good value propositions make more money. We are running a business, not a charity.”
Since she started with UFA the co-operative has decreased employees from 1,400 to 950. “As hard as it was, we had to let the 450 employees go so we had jobs for the other 900,” says Kitchen.
The other major expense reductions were found in managing inventory better. Kitchen says that’s a challenging part of the agricultural retail environment. For example, with a delayed spring, they had to think about the costs of sitting on inventory for an extra month and ways to move it faster when the weather did warm up. They also needed to carefully look at the cost of inventory carryover from farmers cutting back on product use last year and how it tied up working capital.
Kitchen keeps a keen eye on gross margins, which last year were up eight per cent. “Increasing revenues doesn’t pay the bills, gross margins do,” she says.
The goal was to increase profits enough to consistently pay back and engage their membership. The UFA restructured and simplified its patronage dividend structure last year. The organization is now driven to achieve a level of profitability that would allow it to pay a patronage dividend. It’s a clear goal tied to numbers.
“All of our balance sheet metrics are the best they have been in over a decade,” says Kitchen.
Back to the core
The employee cuts were only part of a structural reorganization orchestrated by Kitchen’s team over the last few years. In 2017, UFA closed its Wholesale Sports Canada business. It had been trying to compete with big box stores, such as American outdoor sports store giant ProBass Shops, and the future did not look profitable.
However, before doing that Kitchen looked at the wholesale sports division and saw the staff’s retail skills as an asset. So they restructured the business to be split along retail and commercial lines instead of by enterprise, and they moved some talent from Wholesale Sports into leadership roles for retail.
This talent applied their knowledge about acquiring new products, inventory management, and marketing to the whole retail division, and are still within the agriculture retail division today.
Kitchen basically skimmed the cream and sold the fluid milk and made butter. “We needed a lot more supply chain and retail expertise in our UFA retail business,” she admits. “… And we had that in our Wholesale Sports business.”
UFA reinvested the resulting capital in its core businesses by acquiring full ownership of a recently built fertilizer plant. The co-operative also built a new cardlock in Beaverlodge, with another cardlock investment planned for the Fort MacLeod area in 2018. “The co-operative now has the capacity to grow and invest in the business,” says Kitchen.
Now with 111 cardlock locations, the UFA has the biggest fuel card business in the province providing fuels, lubricants, diesel exhaust fluids and coolants, and it delivers bulk fuel to both agricultural and commercial accounts. Fuel is UFA’s largest revenue generator.
Collaborate with like-minded businesses
In January 2016, UFA and CHS Inc. — a Fortune 100 company traded on the NASDAQ and the U.S.’s largest co-operative — formed a partnership to build a new fertilizer facility in the Peace Country, creating Bridgeport with its ability to handle anhydrous ammonia.
Then last fall, UFA acquired CHS’s interest in Bridgeport.
This jostling and splicing of assets between co-operatives is similar to what has been happening in the U.S. between CHS and another major co-operative, Land O’Lakes Inc.
Kitchen was a senior vice-president and general manager of a global dairy ingredients business unit with $2 billion in annual revenue for Land O’Lakes. During her 16 years at Land O’Lakes, she held several positions including senior vice-president of corporate strategy and business development, vice-president responsible for international growth and business controller.
“I flew over a million air miles in five years,” she says, talking about how Land O’Lakes expanded into China with powdered milk after it was discovered that baby formula had been tampered with there.
This May UFA announced a partnership with another of Kitchen’s former employers, Illinois-based co-operative GrowMark. UFA is now the exclusive marketer in Alberta of GrowMark’s Dieselex Gold, a premium diesel fuel that cleans injectors for better fuel efficiency, with faster engine starts. It also prevents internal injector deposits, extends fuel storage life and protects the fuel system. (Growmark is a wholesale supplier for co-operatives in the eastern U.S. and Ontario, and early in her career Kitchen worked in Ontario for them for several years.)
Serve your customers
Maybe even more important and difficult than strategic business positioning or cutting costs, in three years Kitchen’s management team has shifted the culture of UFA, making it more customer-centric.
When she first arrived in Alberta, Kitchen drove almost 8,000 km, visiting the farm and ranch supply stores and cardlock and bulk fuel locations spread across Alberta. At every stop she talked to employees but also directly to customers and asked them about how UFA was serving them.
“It’s not rocket science, I just listened to our customers,” she says.
The message was loud and clear. UFA had to serve its customers better. Even co-op members were driving by instead of buying from their own stores. “The UFA had somehow lost how it related to customers,” she said.
“Communication skills are my strength, whether it’s chatting with a farmer about the weather or the guy at Shell’s head office in Calgary. I just put myself in the other person’s situation,” says Kitchen.
At the locations she also discovered antiquated check outs and a matching lack of online sales, while on the floor employees were unmotivated to help customers. She knew that had to change. “It’s so easy to say, ‘No, we can’t do that’… we needed to find a way to say ‘yes’ to our customers,” says Kitchen.
By sharing the co-operative’s new vision of better customer service, more new products, more advertising and better stores, she gave staff something solid to build their optimism on.
“You need to engage your employees to engage your customers,” says Kitchen paraphrasing her friend, AdFarm founder Kim McConnell.
More from the same wallet
Agricultural retail has been evolving rapidly in the last five years with many mergers and acquisitions, especially in the fertilizer business in Western Canada but also among chemical and seed suppliers.
Many rural co-ops have been focused on attracting the larger farm businesses and are confronting major competition with multinationals in the farm supply business. UFA stores have been able to thrive through all this change by improved retail operations and expanded livestock production lines. Instead of focusing on commodities, UFA has focused their attention on sourcing new products and innovative technology for their customers, such as Automed, an automatic weight dosage system for livestock developed in Australia.
It also advertised these new products and sales items and started sending out print flyers. “We (UFA) had stopped promoting the stores and now we’re back actively promoting them,” says Kitchen. “And that’s driving foot traffic.”
The UFA’s marketing plan is to grow the co-operative’s share of the members’ spending, so instead of buying only fuel, farmers will buy other farm supplies from them. “We’ve got over 100,000 members, including 60,000 from farms and ranches. We need to extend our products. After all, we sell everything from fuel to feed to fence posts and we even have financing,” says Kitchen.
As well, UFA has developed an online sales presence and now has over 5,000 products available to purchase on their website. Also, members can now view their accounts, print off statements, fuel tickets and invoices so those tickets don’t need to be chased down.
Kitchen doesn’t think online retail will ever fully replace stores, especially with many bulky items. Besides having a widespread brick and mortar footprint might be something UFA can leverage in the future.
Lead with vision and facts
Now that UFA’s financial performance has turned around, the leadership team needs the right strategy and the discipline to figure out where to invest next. With a few cardlock locations in B.C. and Saskatchewan, Kitchen says they’re more likely continue to expand laterally, rather than south into the U.S.
“We will continue to look for efficiencies in our operations. The difference now is that we will also look for growth opportunities,” she says.
As always in her career, Kitchen’s focus is on continuous improvement. “If you think you know everything, you assume you know every possible situation. It’s a very dangerous mindset,” she says.
As she moved to higher and higher executive roles she found it imperative to be able to step up and speak her mind confidently. “When I was younger I’d say, ‘I don’t really know but…’ However, I was always the most over-prepared at every meeting. Then I figured out that I did have the right to ask the tough questions,” she says. “But you’ve got to do your homework.”