Saturday, April 30, 2011

thundering hooves postmortem

"Thundering Hooves, the pasture-finished, organic beef operation that became a model of sustainability and staple of the Walla Walla locavore movement, has closed amid financial tumult " - Seattle Times,  March 16th, 2011

I first met Joel Huesby at the Farmer/Chef connection event a few years back, where he, and I, and several other farmers sat at a table with a sign labeled "meat" (as i recall, might have said "meats") and waited for chefs to come over to see us.  For me it was a bust -- chefs want a particular cut, and in quantity, and on a schedule that I can't make.  If I could grow a pig that was all bacon, I'd be set, but that's another topic. 

I'd seen Joel speak earlier in the day about his USDA butcher shop and operation, and the impression I took away that day was that he had a nice operation and was making a go of it.  He had several revenue streams, was producing what he sold, and had a nice marketing effort.

To be blunt:  Hearing that thundering hooves was closing its doors came as a shock to me, and I wondered why.  So I've spent the last three weeks interviewing everyone that would talk to me, and reading all of the things that were written about Thundering Hooves over the past 10 years.

Thundering hooves timeline

The start of Thundering Hooves is really the story of a small farming operation that was initially started by Joel and his wife Cynthia.  As with most farming families, Joel has a job off the farm installing phones and did farm in a conventional way, growing crops under contract to a cannery and alfalfa for animal forage.

Around 1994, Joel apparently became disenchanted with the life of a contract farmer, and let his fields go fallow for a few years.   Here's Joel:  "...During the initial period of withdrawal and rehabilitation, weeds grew. The soil lashed out. It got ugly. When someone asked me what I was growing, I said, "Dirt"..."

As Joel Salatin does on his farm, Joel Huesby sought out organic material to add to his soil, finding a cheap source in the form of wood pulp from a now-bankrupt paper mill, ponderosa fibers, eventually spreading 34,000 tons of it over 215 acres of his 225 acres total. 
It's not clear how this production gap was paid for; perhaps the mill paid enough to dump the pulp that it made up for crops that had been produced, or savings, or debt.  Joel considered this to be successful and has told this story many times.
Initially it was Joels wife Cynthia who started raising chickens for sale starting small (the first batch for sale was just 15 birds.)  Cynthia:  "...It just exploded from there", reaching a production level of 7500 birds a year in 2004.  Although they started producing chickens, they eventually dropped chickes from their product line. 

At first the idea was to have a small operation, but it rapidly became clear that no matter how much profit you made on 15 birds that it wouldn't pay the bills, and that the operation needed to grow to provide a living for the Huesby family.  So thundering hooves started to appear at farmers markets, first in Walla Walla, the largest population center closest to the farm, and then in Pasco, Washington and finally in Seattle.  This was a way to broaden the sales, and eventually this became a series of dropoff points in Portland, Seattle and other communities.     

The chicken business grew rapidly, but interestingly, Cynthia is on record as resisting fast growth of the business.  "...I’m the one who doesn’t want a lot of growth...", which seems prophetic, given that rapid growth is one of the primary reasons for the failure of Thundering Hooves by Joel Huesby. 

"We must grow to support our families, part 1"
The basic calculation was that the operation needed to be scaled up enough to produce enough profit to support the families of the people involved;  in this case, more chickens, and then even more chickens.  This basic decision was repeated several times with several different products, and with the slaughter facility that Thundering hooves eventually purchased. 

By 2005 thundering hooves had accumulated $800,000 in debt.  Initially this was in the form of bank loans, but as the business grew they were able to get capital from customers, and the percentage owed to banks decreased from 2005 to the shuttering of the business in March of 2011.  
This debt was initial purchase of livestock, equipment, fencing, trucks and other assorted equipment; moving from a crop-oriented farm to a livestock-oriented farm required quite a bit of investment. The meat shop was a big part of this initial debt.   As they added each different type of product there was a substantial investment in the equipment, facilities and learning curve required for each one.  Chickens, Turkeys, Cattle, Lamb. 

Eventually it became clear that they couldn't pay that debt on the proceeds of the animals that they raised themselves; they needed larger volume, or larger margins, or both, and the direction they chose was to sell products from other farms. 

Along the way other products were added; beef, turkey and lamb. In 2004 they were still discussing adding pork to their own operation. By 2005 Thundering hooves was selling products from [at least 5 ] other farms, and had crossed the line from being a farm that sold just its own products to being a distributor of farm products.

Throughout this period there were many media contacts; lots of interviews by Joel, public speaking engagements and farm tours, and the business grew itself on this grass roots advertising, with close to zero marketing budget, and sales grew by 30 to 50% each year through 2005.  With that sort of growth, things were looking pretty good at Thundering Hooves, but servicing the debt started to become a problem.  Prices were too low, costs of unconventional farming too high, squeezing the margins.  Here Joel speaks about his beef and practices

One example of this was their handling of beef cattle:  The beef that they would slaughter would be as much as 18 months older than typical slaughter beef.  This meant that the return on the money invested in cattle came back much more slowly than with a typical beef operation, and from an investment point of view the return was lower. 

   The equipment purchased was not new, or top of the line, and this meant that there was a large amount of maintenance associated with it; there were breakdowns of equipment at crucial times.  In addition to equipment problems there were continuing problems with wells and irrigation, and tens of thousands of dollars were spent on this infrastructure to support farm operations. 

Despite the growth of the chicken business, Thundering Hooves wanted to outsource it to some other farmer who to produce the birds, and then sell them Thundering Hooves brand name.   I asked several people why this change was made, and it was economics:    The profit margin from 30 beef was the same as the profit from 5,000 chickens.  With cattle, for the most part, you put them out to pasture;  with good fences and forage, you really don't have much labor.  With 5,000 chickens there is daily maintenance and feeding chores, and the slaughter/package/delivery made the margins very small.   Very labor intensive, small sale price, thin margins.

In 2007 they started looking for someone to outsource their turkey production to. 

Sales between 2005 and 2008 grew rapidly; typically at 30-50% a year.  At the end of 2008 the infrastructure was fraying and it was clear that the business was going further into debt.  At this point the sales were $1 million a year.   Thundering hooves recognized this trouble and brought in a business consultant, who advised them to raise their prices by an average of 20% to allow them to have sufficient margin to sustain their business and service their debt. 

Between 2005 and the close of the business in 2011, the debt owed by thundering hooves swelled from $800k to somewhere north of $2 million. 

In 2008 the consultant advised them to raise their prices by 20% and gave them tools to better analyze their costs.  With the price increase came the biggest recession in the last 40 years, and a drop in demand by consumers.  Sales remained at the 2008 levels through 2009, and at the end of 2009, despite the price increase, it was clear that something had to change.  The challenge in 2009 was just to maintain sales; growth was out of the question. 


In 2009, Joel started a related company, Modular Food Systems. I can't help but wonder if this distracted Joel from the problems at Thundering Hooves. In this video he's pitching people to give him $600,000 to build what sounds like mobile slaughter units to me.   It's not clear what the funding or status of this new venture is. 

"We must grow bigger to feed our families, part 2"
In 2010 the decision was made to increase the volume of goods sold; wholesale agreements were reached and sales responded, growing from $1 million in 2008 and 2009, to $2.4 million in 2010.   The goal of this growth was to make larger amount of money on increased volume.

This increased volume strained the capacity of every part of the system; all of the employees were working as hard as they could to produce the goods, but the margins that they were producing were smaller than direct-to-consumer sales had been.  

In January of 2011 talks between the management and the creditors of Thunder Hooves broke down, and the assets were seized by the creditors in March, resulting in the shuttering of the business. 


Farmers and Distributors
I'll make a distinction here:  Someone who sells someone else's products isn't a farmer, they're a distributor, a middleman.  A good distributor in my mind does several things; they select suppliers that have quality products; they ensure timely delivery, and in the event of a problem with a particular vendor (farmer) they find another source.  They manage the relationship with the vendor (farmer) and they're aware of problems (like a crop failure) in time to make a change so that their customers can get the products that they need. 

Thundering hooves was operating as a farmer (selling their own products direct to consumers and wholesalers) a distributor (selling other farms products to consumers and wholesalers), and as a retailer at their meat shop.   At their peak they had  21 Employees to cover these three very different business models.

As an aside, Corfini Gourmet one of the distributors who purchased meat wholesale from Thundering hooves did what a good distributor does, according to Daniel Newell, a local chef.  "[corfini gourmet]...had a sense something was going to happen, so they started to talk to other ranchers," explains Newell. Those ranchers had been breeding cattle sold to Thundering Hooves, who'd "raise and graze them," Newell says.

The turkey failure points out to me that they weren't handling their role as a distributor well.  It's a pretty fundamental mistake.

Wholesale market
Thundering hooves sold meat to other distributors (wholesalers), one of which was Corfini Gourmet.  Margins for this business are often thin, and distributors can switch to another vendor fairly quickly.  This lack of margin, concentration of a lot of sales into the hands of one distributor (wholesaler) combined with the inability to guarantee a steady supply was a contributing factor to the eventual closing of the business.   Having a number of customers is generally considered more stable than having several, or just a single, large customer. 

Want to know what I consider to be a sustainable farm?  Very simple:  One that stays in business.   It's fine and good to be for the environment, and all farmers I know  care very much about their land, but you can't save the world unless you're a going concern.   If you, dear reader, are interested in farming to improve the environment, please do consider this point carefully.  Whatever good practices Thundering Hooves had been promoting are now moot.   It makes great public relations, and newspapers love writing feel-good stories about it, but the bottom line is...  well, the bottom line.  Make a profit.  Keep going.

By this measure, Thundering Hooves was not a sustainable farm.

Reasons for the demise

Joel Huesby:   "...said the operation's demise came ironically as a result of massive growth and demand. Between last spring and fall, he said, demand for Thundering Hooves beef, chicken, pork and other products grew more than 350 percent. But with commodity prices at their highest rate in history, Huesby said, Thundering Hooves got behind on payments to creditors. "

Huesby said the company's original vision became obscured when demand exploded. "It got away from that, in part, because you get dollar signs in your eyes and, in part, you get massive demand."

I've spoken to several people and I've gotten different answers.  Here's a couple that I found interesting:
In a comment made to a local news story, a user named "David_the_Gourmet" made the following comment: 

"Actually, the reason Thundering Hooves sought to grow its sales to more restaurants and grocery stores in 2010 was because it was riddled with debt and had been living on the brink of bankruptcy for a few years. They had been living on borrowed money, and their hope was to grow quickly in 2010 and find new investors to help with the cost of growth by converting debt into equity, but the majority owners couldn't resign themselves to giving up control of the company and turned down the offers that might have saved the company. As I understand it from those who were involved, they would have been unable to survive as a small company given the position they were in. Growing quickly was their last hope, which fell short when they alienated their major creditors. There was also in-fighting among the family, which had a lot to do with differences of opinions as to whether or not to let their creditors take control, which probably wouldn't have been so bad because all of the creditors were either Thundering Hooves customers or fans of local, grass fed meats. It's a shame."

HDBright offers this
"It sounds to me like the managers (family business) needed a consultant. According to this article, the demand is still there. I don't understand why a 1 or 2 year plan to regain control of the business couldn't be financed to get out of the hole and back into the red. [black]"

What actually closed when thundering hooves shut their doors?

The farmers who supplied products to Thundering Hooves are still there.  The customers are still there.  In fact, several members of the thundering hooves staff are trying to start a successor business, careful to note that "...Blue Valley Meats has no affiliation with Thundering Hooves, nor the debt that ultimately led to the company's closure."


Joanne Rigutto said...

Fascinating and this should be a strong cautionary tale to all of us in the farming industry. Two of the most common reasons for businesses to go out of business - too fast growth and undercapitalization (or in this case, capitalization through borrowing without enough sales/margin to service the debt properly).

I'm poised on the brink of a rapid growth sprut in my own farm business. I'm very cautious about growing the business. Only doing it with my own capiatl, no borrowing, and only to the point that I have customers, know the margin, etc. Growth is a double edge sword. Can be exciting and heady, and it can lop your head off so fast it'll leave you sitting there saying "What just happened to me?"

Anonymous said...

This is very boring stuff. More of Bruce King blowing his horn about profitability when he himself will never make a profit on his own farm. I bet Bruce will be able to farm until his money runs out. Bruce doesn't offer any suggestions on how these folks could become profitable, because he doesn't know. Hindsight is twenty-twenty.
The folks at Thundering Hooves paved the way for a lot of folks. The food and farming scene is way better off for their efforts.

Bruce King said...

Joanne: what's really interesting to me about this venture is how close they got to making a go of it. I think that your point about keeping debt in line with revenues is excellent.

Bruce King said...

Anon-- I'm not their business consultant, and I'm not going to speculate more than I have about how they might have done things differently.

My point is to talk about what happened in this organization. I'll leave it to the readers to draw their own conclusions about what might have been done differently by the folks at Thundering Hooves.

Anonymous said...

I was sure surprised too, I met some of them at a farmers' market years ago and was impressed by what they had going. They had a great story, a beautifully done website, what seemed like a sweet distribution system, and good product. My parents bought Thanksgiving turkeys from them, and paid a mint for them, but they were good. It's a shame, but shoot, farming is tough business, and it's going through a lot of change that everyone is trying to navigate. I feel badly for them, but it's helpful for the rest of us to try to understand what went wrong so we can hopefully avoid the same demise.

Craig said...

I think the key to survive in the farming business large or small is to grow your own feed.Having to purchase feed for hogs,chickens and cattle is starting to take it's toll. said...

We continue to struggle along with minimal debt, allowing the growth of flour sales to drive any further expenditures in infrastructure. We use older, used equipment and spend a good deal of time maintaining it which is far cheaper than financing new. It used to be that people would save their money to purchase things...where did that process go? One point of contention I have with your post is that there are lots of conventional farmers going broke too...this has NOTHING WHATSOEVER to do with whether or not they were farming from an environmentally sustainable framework. I know of several organic farmers making it work....Joel Salatin being one that you mentioned. Great post though...interesting to learn from others mistakes.

Rebecca T. said...

Glad you laid off your opinions, for the most part, on why this company went out of business. However, you declare that they were not sustainable because they went out of business. How brilliant of you to see that! Thundering Hooves pretty much followed the business school tactics to improve their profitability (increase prices, increase volume, vertically integrate, diversify, share the risk with other producers, negotiate credit with their customers, bring on a biz consultant, etc.) I wonder what else they could have done Bruce to become profitable, especially in an economy that was slaying nearly everyone? What are your gems of business wisdom Bruce?

Bruce King said...

John -- the business climate has been grim for the last couple of years, but farms in particular seem to be doing better, at least around here, this year. Environmentally sustainable isn't if they're out of business. They touted that they were the first "salmon safe" beef farm, and I have to wonder whether pursuing this sort of certification distracted them from the main business of... being in business.

Bruce King said...

Rebecca, glad you asked. First, what you do to keep a small business in business (and at a few million dollars a year sales, TH was a very small business) is whatever it takes.

I'm not privvy to their entire picture -- but a debt load that is somewhere around double to quadruple their average yearly gross sales seems like a very high hill to climb, and it was the creditors that eventually shut them down.

What they didn't do, apparently, is successfully negotiate a debt-for-equity swap. I've already pointed out that they struggled with their role as distributor; which interestingly enough, blue valley meats, the successor organization, is focusing on.

what would I have done differently? I can't say for sure. I wonder if purchasing the meat shop was a good idea in hindsight? There is USDA slaughter available; I don't think that the meat shop was on the critical path for them. I think that the wholesale business was too big and too low margin; the basic business of selling direct to customers had better margins. The emphasis on growing the business to support families is a nice idea, but most farmers now have an off-farm job that provides an income cushion for the farming operation. Like you did, when you were farming. As I do. As other farmers do.

There's more, but I think that I answered your question.

tim said...

I like the *idea* behind Thundering Hooves - sustainable, high-quality grass-fed meats but in my dealings with them, I'm not sure they were really delivering that expeirence to customers.

I bought half a pig from them once. It was cool that I got to talk to the butcher, but the process was not very customer-friendly. They wanted to slaughter the pig just like you would find at a safeway. They provided very little guidance for somebody not in the industry, which I think is a mistake since they were trying to appeal to the gourmet foodie who is willing to pay more for their meat.

I also could never figure out how these drop-off points around the city were either convienant or efficient. How does it make sense to meet maybe 4 people on top of Queen Anne on a friday morning at 9am with a big truck and sell maybe $200 worth of product? I can't imagine that scales very well and once I did it twice, I realized that I couldn't continue to arrange my work schedule around meeting my butcher.

Farm Equipment said...

this is a great and detailed blog, thank you for all the information said...

Certification costs and the attention to detail that it takes to achieve any environmental certification is not a big deal to a farm with a couple million dollars in sales. The amount of time and energy I spend with organic certification is significant, but is not negatively affecting our bottom line one iota. I strongly suspect from reading your post that being responsible to the environment in their farm operations is the one thing that kept them going as long as they did. They may have gone a little overboard with their initial exuberance but they no doubt achieved higher margins because of it.

Anonymous said...

Blue Mountain Meats is hardly a successor — they are just buying meat and selling it to buying clubs. No farm, no farmer, no livestock, no abattoir, no meat shop, no wholesale or traditional retail, no organic or grass-fed — and no relationship to Thundering Hooves, as they say.

Bruce King said...

Good points, Anon. Blue mountain is strictly a distributor, not a farmer. I'm not sure what value they add to the mix -- if they're offering local meats produced by local farmers, why not just skip them and buy from the farmer, direct?

Bruce King said...

John, Regarding certification -- if they're not making money, and are borrowing to meet their costs, any amount of time, money or effort spent on certifications is a waste.

They can do the great stuff, just wait until you're profitable to make it official.

Here's the results from a survey they did in 2009, listing what customers said about their business. At the end is how customers felt about various certifications.

Keith Swanson said...

This is a pretty thorough job of describing the evolution and ultimate demise of Thundering Hooves. There are a variety of opinions out there about why Thundering Hooves failed, which is fine, and some of the comments here have been pretty astute. However, one "anonymous" comment was made about Blue Valley Meats that not only gets the name wrong, but just about everything else too. As a former co-owner of Thundering Hooves and a current partner in Blue Valley Meats, I just want to set the record straight.

The comment reads: "Blue Mountain Meats is hardly a successor — they are just buying meat and selling it to buying clubs. No farm, no farmer, no livestock, no abattoir, no meat shop, no wholesale or traditional retail, no organic or grass-fed."

There is a lot to correct here … as in almost everything. For the record, the focus of Phase I of Blue Valley Meats is, indeed, to sell off the remaining Thundering Hooves meats, which were purchased from a TH creditor...and which are grass-fed. Phase I began a few weeks ago and concludes in the next few weeks. Its purpose was simply to re-connect us to our customers, while allowing us to earn enough money to launch the real business without much debt. It has been a great success thus far. Phase II - which is the "real" business model - includes building an abattoir for on-farm slaughter, and building an old-fashioned butcher shop, where we will process meats and conduct retail sales of a variety of products, including 100% grass-fed beef. The butcher shop is almost finished and will be awesome. Retail sales and a limited amount of wholesale sales of new product will also begin within the next few weeks. A few select restaurants are lined up and over 1,200 retail customers have already signed up to join the mailing list.

Most of this information about Blue Valley is readily available on the Blue Valley website, so I'm not sure how much research "anonymous" did...or why he commented with such authority while not knowing much about us.

As Phase II begins, this is what Blue Valley Meats will do: 1) partner with the very best producers of beef, lamb, pork, poultry, dairy, and eggs in Eastern Washington (and be transparent about it); 2) slaughter and process the meat under USDA inspection; and 3) make these meats available direct to the consumer through its Walla Walla butcher shop and its 50 neighborhood delivery sites from Seattle to Portland.

As for farming, yes, Thundering Hooves had a lot more farm acreage than Blue Valley probably ever will, but the high cost and low productivity on the farm was a major cause of the downfall of Thundering Hooves. So, we are making a deliberate decision not to follow this model.

Furthermore, the vast majority of meats sold by Thundering Hooves over the last five years were raised on other farms. This is also what Blue Valley Meats will do...but without the cost of managing a big farm.

Is Blue Valley Meats the "successor" to Thundering Hooves? In some ways, yes, because we have the same employees, a similar philosophy, and the same customers, but the significant differences will include: 1) improved transparency about where the meat is coming from, 2) far less debt, 3) a mostly different ownership group, and 4) a better business model where the folks who excel at raising the livestock will do what they do best. And those of us who know how to do processing, sales and distribution will focus on making direct and transparent connections between the farms that produce the meats and the customers who consume them. Just setting the record straight....

Keith Swanson

Keith Swanson said...

Regarding your question, Bruce, about what value Blue Valley brings to the mix, and “why not just skip (Blue Valley) and buy from the farmer, direct?” here is a paraphrase of what I have heard from literally dozens of former Thundering Hooves customers over the past few weeks:

"We were so upset when Thundering Hooves failed. We looked for a new source of meats, but were asked to buy half-hogs and quarter beefs when we tried to buy direct from farmers … and the quality of what we found at the grocery stores was awful. And no one had the variety of meats or the service that you offer. We are SO GLAD you are back!"

I have heard this over and over again via email, in person and on our Facebook page.
So, what we do for people is, first, to build trusting relationships with them where they look to us to source and produce the kind of high-quality, grass-fed, locally-raised meats that they struggle to find elsewhere. And second, we make it relatively easy through our butcher shop and through our website for them to access over 100 different cuts of steaks, burger, chops, sausages, bacon, jerky, roasts, pet food, liver, bones, and so on – in whatever large or small quantities they need. In terms of variety, if you go to a grocery store looking for steaks, they typically only stock 3 or 4 kinds. We offer 12-15 kinds of steaks because we control our own processing and have access to the whole animal.

And while we can't wait for our butcher shop to open in Walla Walla, the buying club model works great for us, as we are able to meet a large number of customers in a single day with relatively low overhead and no middle-men. Much of the transportation costs are covered by a small delivery fee. Some buying club locations have up to 30 customers who show up, while others, like our Queen Anne location mentioned in a comment above, typically have just a few orders. Some folks place orders every week, and others just once or twice each year. Taken as a whole, the delivery routes allow us to do up to ten times the volume in a day that we used to do setting up a tent at farmers markets. It’s not for everyone, but a lot of people seem to like it just fine. So, in my opinion, that’s what we bring to the mix.