How Employee Ownership Helped Phoenix Coffee Survive Covid-19

click to enlarge How Employee Ownership Helped Phoenix Coffee Survive Covid-19
Photo Courtesy The Land

Stephen Shaum has been biking quite a lot lately.

Since March, he’s been cycling hundreds of miles a day, pedaling from the emptier streets of Mayfield Heights, to the quiet suburbs of Westlake. Just before December’s recent snowfall, Shaum had spent hundreds of dollars winterizing his bike, slapping on new tires and affording a new weather-proof outfit to brace the Lake Effect cold.

At 38, Shaum is the sole bike courier at Phoenix Coffee, a Cleveland company with five locations and one roastery, assigned 8 to 12 deliveries a day—in rain, sleet, snow—dropping off pearl-hued bags of Columbian decaf or the popular Firebird House Blend. Although Shaum no longer slugs through the 18-hour work days of April, he’s adapted well to Phoenix Coffee’s calmer pandemic life, making a comfy living despite massive restaurant closures throughout the city.

“Personally, it’s allowed my finances to break even,” he says, during a delivery one day in November. “Everything now is pretty steady.”
Bike courier Stephen Shaum outside of Phoenix Coffee in Ohio City.
Bike courier Stephen Shaum outside of Phoenix Coffee in Ohio City.
Shaum is one of Phoenix Coffee’s 37 employees, those who have been with the company, as baristas or managers, without much hesitancy or financial dread. Despite a loss of the comfy cafe atmosphere, Shaum is a part of a like-minded staff emboldened by a mid-Covid change in business structure, one that has calmed any worries that he’ll still be riding for the company in 2021.

The reason: Next year, Shaum will be an official employee-owner.

Although the employee-owned model has been a staple for small, usually progressive Coastal businesses — a third of all co-ops today are in California— its format is increasingly appealing to small companies praying to come out of 2020 alive. There are new converts like the Newark Paper Co. in New Jersey, or idealistic Memphis logistics companies and New Mexican farms—organizations with fewer than 50 workers that, by going co-op, are fending off shutting their doors. The question for Cleveland, a city with only five registered co-ops, is whether or not 2020’s recession will be spark more co-op conversion in years to come. A shop like Phoenix could very much be its kindling.

click to enlarge How Employee Ownership Helped Phoenix Coffee Survive Covid-19
Photo Courtesy The Land

Dealing with the shutdown

Like every other restaurant chief in the city, Christopher Feran’s modus operandi was altered by force on March 11, when the World Health Organization deemed the coronavirus a global pandemic.

Four days later, following Gov. Mike DeWine’s statewide shutdown, Feran, co-director of Phoenix since 2016, eliminated all in-person dining for carry-out and an “Amazon-like delivery service” vis-à-vis Shaum. After a four-week, company-wide furlough, and a loss of four employees, Phoenix’s revenues plummeted by a staggering 35 percent. They trimmed daily operations from 12 hours down to seven, and reduced worker hours by a fifth (most were baristas making $10 an hour plus tips).

“We were relying on January numbers, pretty much limping along,” Feran recalls. “We all were super stressed.”

Like others, Phoenix jumped on the federal Paycheck Protection Plan (P.P.P.) loans as baristas subsisted on Pandemic Unemployment Assistance. In an April meeting with co-director Shane Hinde and majority-owner Sarah Belzile, Phoenix’s leaders knew that rather than scramble for bank loans (even more unlikely during Covid), they should finalize a deal with Evergreen Cooperatives, a group of employee-owned companies, that had been a year and a half in the making.

This wasn’t a typical merger. According to the terms, by the end of 2020, Evergreen’s Fund for Employee Ownership would “buy out” Phoenix Coffee in the form of private equity and investment debt, and from the ground up, convert the entire chain into a worker-owned business. In return, Evergreen would earn a seat on a brand-new board and a vote on its operations, with the ability to guide the coffee company through the hazy waters of post-Covid Cleveland.

Feran knew this was their Hail Mary. “We thought, ‘No one in their right mind would buy Phoenix’” during a pandemic, he said. “We were looking at a very scary, uncertain 13 months if we didn’t do something. It was a total roll of the dice.”

To newcomers of the employee co-op model, the process may seem simple, yet it is rife with complications and possible mishaps. For starters, a company itching for co-op conversion must first prove its worth with a feasibility study. If the numbers line up, a massive vote is taken, employees invest their own cash, a new co-op board is created and the structure is effectively born. If the planning was right, rewards abound for workers: more bargaining power, fewer supply costs and increased earnings. That is, if the conversion succeeds.

And recent research says that is pretty likely.

A 2016 report from the Surdna Foundation found that employee-owned companies (mostly in logging and manufacturing) were “significantly less likely to go out of business during the Great Recession” due to the psychological perks of high worker inclusiveness, despite employees “trying to set their own schedule.” 2020’s financial crisis isn’t too far off. In October, the Rutgers University’s Employee Ownership Foundation found that out of 747 U.S. companies, the worker-owned firms were four times more likely to retain staff during Covid—vital for the high-turnover food service industry.

The study, citing a “culture of teamwork” as a central co-op asset, doesn’t shy away from the ultimate point. “Especially in a pandemic,” it reads, “the loss of health benefits could cause employees and their families to experience health and financial catastrophes.”

Even though most worker-owned conversions aren’t sourced by outside funds, the ones that have a backer like Evergreen bear a similar payoff: Give all employees, new and old, the opportunity to sit on a legislative board, have a say in new bylaws and day-to-day decisions, like open mic dates or cleaning regiments, and keep the books wide open. That way, as Feran puts it, “Everyone knows, ‘I understand the decisions we’re making, I know why I’m paid the way I am.’” And as far as big bonuses go, Feran predicts Class A employees—all those with a stake in Phoenix—making “anywhere from $500 to a couple thousand bucks” at year end.

The caveat: “That all depends on when the economy normalizes,” Feran says.

Embracing risks

At the same time Phoenix Coffee was undergoing its identity crisis, John McMicken, the CEO of Evergreen since 2017, was having his own troubles.

Though McMicken wasn’t a stranger to financial crisis—he had been a pro-worker president for ImageNet after the 2008-2009 recession—the 65-year-old cooperative guru knew that restructuring any business during a global health crisis would not only be challenging, but full of secondary risks.

For an 11-year-old co-op incubator founded on a promise to save local jobs, McMicken’s Evergreen faced its own possible collapse at the onset of the pandemic. In the three co-ops under the Evergreen umbrella—not including its most recent conversion client, Berry Insulation on East 25th St.—McMicken saw up to an 80 percent revenue decline, especially in their Green City Growers, a greenhouse-to-restaurant service that “nearly collapsed” due to DeWine’s shutdown. Then, in April, five of Evergreen’s employees tested Covid-positive. Safety protocol at Evergreen’s Cooperative Laundry was ramped up because of possible Personal Protective Equipment infection from their hospital clientele.

“You could feel the spirit in the facility,” McMicken recalls. “‘Hey man! Pull your mask up above your nose! We have to protect each other!’”

It was in such a climate that McMicken viewed the precariousness of the Phoenix deal: Should he and his crew go ahead and secure loans to acquire a coffee bar that may not be able to pay them back in 2-3 years? Other than the reputational risk for himself and his employees—a potential “black eye,” he says, for the Evergreen model—McMicken trudged through spring debating if the Phoenix deal’s upside outweighed the energy already being exhausted in their current co-ops.

“Our Fund team and Board thought, ‘My gosh, what if anything are we able to do, if anything?’” McMicken says. “‘Do we mothball this thing? Go in another direction?’” After numerous Zoom meetings, McMicken had his lightbulb moment. “In the beginning, we set out to preserve jobs,” he says. “So, what better time to do that than now?”

On October 1, McMicken and Feran consummated the deal. Feran and Hinde (Belzile had left the company by that point) would receive the funds to start a lengthy conversion process that wouldn’t show great profits until 2023. But McMicken, who previously led startups and technology companies, knew he was on the right side of history. Besides Phoenix’s widening 2018 and 2019 profit margins—Evergreen ignored their pandemic crash—McMicken said most of Evergreen’s due diligence depended on a preexisting familial vibe that capital couldn’t touch.

“If they were looking for a big, grand slam payday, looking to cash out?” McMicken says. “I don’t think this would’ve worked.”

Too big to fail?

If you hawked grapes or walnuts in 1970s San Francisco, there’s a good chance you were a food conspiracy.

Under a countercultural movement centered in the Haight-Ashbury district, a plethora of 200-plus produce sellers sought to fight the “new wave” of wholesale supply by banding together, calling themselves the San Francisco People’s Food System. Before merging, they were “food conspiracies”—from Oh’s Fine Foods to the Alemany Farmers Market—selling cheese and apples out of corner bodegas or the trunks of 1975 Volkswagen Bugs. Not only did the entities of the Food System fight Nixon-era economic strife by morphing into a national coalition, but they battled endlessly against the racism and feminist issues of the day. They even had their own monthly newsletter, Turnover.

The only problem? The Food System grew too big, and couldn’t withstand becoming the “managerial bureaucracy” it feared. In 1976, it disbanded.

In the sweeping history of the worker battling capitalism (from Civil War-era San Francisco shoemakers to Fresno produce farmers during the Great Depression) a co-op’s failure can stem from a variety of unforeseen forces. With workers’ even control of their company, many might voluntarily show up late; those with three-year seniority could balk at fresh hires receiving equal year-end bonuses; a consolidated board may decide it wants to once again retain all power. And so forth.

A 2015 report called “When Big Co-ops Fail” argued that most worker-owned endeavors fail precisely because of this lack of evolutionary foresight, from not just the co-op’s founders but the entire crew racked into restructuring.

“Some [cooperatives] collapse completely, some are demutualised, whilst others survive in a reduced form,” the authors Peter Couchman and Murray Fulton write. “In most cases their collapse results in a massive loss of member assets, and the loss of employment of a large number of people.”

The question is relevant in many ways to the McMicken model. Could any of Evergreen’s co-op children ever get that big?

Since pandemic’s beginning, there’s been no such warning signs at Berry Insulation, a 12-staff home weatherization firm in Cleveland that converted with McMicken’s help in February.

Using Evergreen’s co-op conversion to simmer into retirement, 61-year-old owner Martin Berry observed the cultural perks co-ops offer, as he watched as competitors, like R-Tek Insulation in Barberton, threw in the towel and shuttered (and subsequently be accumulated by Berry). Even though three of Berry’s long-time employees left (to stay home with their kids, mostly), those who stayed did so not because of wondrous profits—there was a global pandemic happening—but more so out of an internalized assumption of, as McMicken puts it, “I’ve got your back, you’ve got mine.”

“And our revenue remained stable,” Berry says. “Rather than just have this let’s-just-see-what-comes-in-the-door type attitude, our guys were more like, ‘This is our company together. We’re going to keep this thing going.’”

Kavya Puvvada, Berry’s director of Energy Services who manages 95 LEED-certified projects, felt a similar pull. It’s not the patronage, she says, as any results of profit-sharing won’t show until late 2021. It’s a feeling, she says, something more psychological.

“I don’t know if it’s just Covid or the employee-owned thing,” Puvvada says. “Either way, it’s this feeling that I’m fortunate I can still work without the ongoing fear of being laid off. We’re in a really good place.”

Looking past a slow brew

Nine months into the Covid-19 pandemic, Feran still longs for the days of S.M.H. Or, for those not versed in M.B.A. patois, “Something Might Happen.”

In crisper terms, that’s the future couple waiting for their macchiatos to brew counter-side. The two jazz guitarists convening at Monday’s open mic. The designer meeting a new anchor client. That “magical dynamism that we fully base ourselves on,” Feran says, “and for now, it’s all gone.”

But until when, Feran isn’t sure. Although he is welcoming with open arms having co-op expert McMicken help guide them through 2021, he asserts that Evergreen won’t be able to modify the latte-and-laptop vibe that Phoenix mastered pre-2020.

As for Shaum, Phoenix’s lone courier says he’s enamored way more with the idea of more transparency, having a say in hourly matters—more excited for a heard voice than, say, an extra $500. But beyond that, he’s not well educated on the co-op model, a structure of rethinking that McMicken admits will take “a year to fully teach.” (“How do I calculate my profit sharing?” is a January training seminar on Evergreen’s 2021 calendar.)

“I guess whatever can happen to promote a healthy work environment,” Shaum says, en route. He laughs: “Hey, a lot of us here aren’t in coffee for the money.”

Feran isn’t afraid of the co-op model’s slow brew—that many employees won’t see a gigantic patronage bonus for years, most won’t have a say in life-altering decisions and many may quit Phoenix before any of this is relevant.

But many will stay, he believes, which will encourage new hires (and increase Phoenix’s average tenure of three-and-a-half years) further down the road. A 2,100-percent increase in web orders, and a 58 percent jump in delivery suggest that, with its kumbaya makeover, Phoenix in 2021 will look and may act a lot differently than in 2019.

Just like, he says, the entire Cleveland restaurant operation.

“I’m not expecting consumer behavior to return to the ways it was last year,” Feran says, wistfully. “In the end, it’ll be up to Phoenix to inspire a return to normalcy.” He laughs, “Whatever that is going to be.”

Mark Oprea is a Cleveland-based writer who has written for National Public Radio, Pacific Standard, and many others. This story is sponsored by the Northeast Ohio Solutions Journalism Collaborative, which is composed of 20-plus Northeast Ohio news outlets, including The Land.