How restaurants in Portland, Oregon, are thriving on Conscious Capitalism

In the late 1990s a group of Pacific Northwest wheat farmers took stock of a bitter reality. They were shipping product to far off, overseas commodity markets, where they had no control over falling prices. And the demands of that market forced them to overtax their fields; they were losing topsoil at an alarming rate. Their families had farmed those Northwest fields for generations, but they realized they could be the last.

They turned to Hot Lips Pizza and Grand Central Baking Company, two Portland chains, for help.

What resulted was a business relationship that provided unique, superior products to the chains, a sustainable wage for the farmers and breathing room to give the fields the care they needed to remain productive.

It is the kind of business relationship central to the ideals of Conscious Capitalism, and it is, for whatever reason, the kind of thing that’s really popular among a cluster of Portland, Oregon, restaurants. If you want to know what Conscious Capitalism looks like in real life, the Rose City is a good place to start.

The conscious supply chain
The wheat farmers, under the brand name Shepherd’s Grain, worked with Hot Lips and Grand Central for two years to develop the kind of wheat that would work in their restaurants. Hot Lips was their first official customer in 2003, paying the farmers a price set before harvest.

“So the price of the wheat to the farmer was the cost of production plus a reasonable profit,” explained Hot Lips co-owner David Yudkin. “It removed it from the swings of [the commodity market]. They knew it was going to be profitable.”

“The key is relationships,” says Shepherd’s Grain founder Karl Kupers. “To just have a couple of wheat growers walk into an established food production and delivery system and compete, no way, impossible.”

Part of the values—the “higher purpose” as Guest Editor Ron Shaich would call it—that guide both Hot Lips and Grand Central—and Burgerville, who we’ll talk about later—are the importance of local sourcing and sustainability. Through that prism, then, the relationship with Shepherd’s Grain represents more than a truck at the back door. The restaurants help a partner who shares their values. They market the relationship, which helps solidify their values in the minds of their customers. And they give their business stronger footing for the long haul.

“You have to be focused on the long term,” says Grand Central co-owner Piper Davis. “But then, once we’ve invested in them, once our entire menu and our financial reality is dependent on their product coming to us with this quality, this story, this set of practices, we’re married. It’s seriously a relationship, and for better or worse, but it’s something I really enjoy about doing business.”

Grand Central had to break up with a pork supplier recently, who wasn’t able to meet their new standards, which included the need for no sub therapeutic antibiotics, hogs raised with bedding, no farrowing crates, no gestation crates. And it needed the hogs to be local, even though Oregon isn’t a big pork producer.

They found what they wanted with Dayton Meats out of Dayton, Oregon.

“This is one of the coolest projects we’ve ever worked on because we’re actually creating a supply chain,” says Davis. “We’re at the end saying, ‘What we want are hogs raised in Oregon, in an environment that looks like this, we want them processed in Oregon and … we want it to work for everybody along the lines: I want that farmer to be making enough profit that they can stay in business, I want the processor to be able to continue to stay in business and improve their methods.”

Financially, both the Shepherd’s Grain and Dayton Meats relationships have been beneficial. Since Grand Central has a set price for a year with Shephard’s Grain, it sometimes comes in higher than the average commodity price but also comes in lower some years, as it has so far in 2012. But it also gives them more time to react to price changes, rather than responding to a new commodity price every six weeks.

With Dayton Meats, Grand Central was able to get a more sustainable bacon product that cost more than it was previously spending, but it was also able to maintain the sustainable pedigree of its ham, the price of which dropped with its new vendor. In the end it was a wash.

“There are customers who are loyal to us because of our practices,” says Davis. “But in addition to all that good stuff, we have competitive prices and a really great product. Without that, all of our other do-gooder values would just be lost.”\

In a similar vein of self-determination, Yudkin was wondering in 2005 why he was sending so much money out of the local economy to the soda giants and bringing in so much high fructose corn syrup. He had an audacious idea: to brew his own soda using locally raised fruit.

The pizza chain teamed up with a local bottler, which was set up for bottling jelly, so Hot Lips bought new equipment for the plant. Because nobody makes soda from real fruit anymore—everything is from concentrate—some of the equipment is circa the 1960s.

Yudkin says their soda business—which supplies the entire West Coast and parts of the East Coast—has become profitable. Just as importantly, he says, it follows the company’s ethos: it is a win for the bottler, for the local fruit farmers and for the customer looking for a tasty, local product (and, granted, who is willing to pay $4 for a soda). And it’s a branding and bottom line win for the company.

Obviously, this sourcing process is much more labor intensive and time consuming than a traditional supplier relationship. You don’t just pick up the phone to create a new supply chain or to start a line of sodas. And it also gives some insight into where these restaurants are coming from: they are not just trying to improve their product, they are trying to improve the world.

Conscious HR
But the long view of Conscious Capitalism isn’t isolated to supply. As Jeff Harvey, president and CEO of Burgerville, says, the long view—in fact, the whole idea of sustainability—must encompass more.

“The things we do—whether it’s healthcare [for hourly employees], wind power, biofuels, recycling, compost, whatever it is—we look at from both the standpoint of how does it help ensure that the communities where we’re going to put restaurants, it helps make those communities better, and by better I mean wealthier, better disposable income, more jobs, more sustainable, more robust.

“But also, it doesn’t take a lot for people to tie the dots together. They go, ‘Oh, Burgerville was in my kid’s school, Burgerville did this for my kid’s music program or my kid’s sports program.’ People pay attention to that and say, ‘You’re willing to stake that claim on my behalf … that buys you some credibility when I go out to find food.’”

None of their efforts, in other words, are simply feel-good endeavors. Harvey is at pains to make this point. Particularly with Burgerville’s healthcare program, which gives full benefits to everyone, and which many simply assume does not have a tough-minded business ideal behind it.

It does. But the challenge—and the challenge for many Conscious Capitalist efforts—is inventing new ways of measuring ROI in the short term. Long term, the efforts result in greater profits—hopefully—but what about in the short term?

“I characterize it more like your commitment has to be true, because you’ll have to put some effort into quantifying. [These business practices] are not in a regular system, it’s not like it will spit out just like other aspects of ROI, because it’s territory people haven’t covered as robustly.”

In 2004, Burgerville began a one-year research effort, including blind surveys of employees to understand their feelings about health insurance, analysis of the cost of investment and an effort to quantify ROI, which proved challenging.

“We made the decision to trigger it based on a gut assessment” of ROI, says Harvey.

At that point the company pulled together a team comprised of the CFO, the chief cultural officer and outside experts on health insurance. They were tasked with developing a formula to measure the ROI for the new insurance program: how much was actually being saved due to greater retention? Was the caliber of talent increasing? What does it normally cost to find that caliber of talent that didn’t need to be spent now? Etc.

The program required a minimum number of hours to qualify. Unexpectedly, as a result productivity skyrocketed.

“They learned pretty quickly, ‘If I’m not a performer, I’m probably not going to get the hours I need, so I better be good at what I do, I better take on a level of visibility and performance that has me preferred for hours.’ Well that made a huge impact.”

The program has been a financial success, says Harvey (and a chart Harvey showed me, but wouldn’t allow us to reproduce, shows the company is experiencing huge financial success as a whole). But it requires constant adjustment to keep it financially sound and will require a new wellness initiative. Which sounds like an awful lot of work for something that didn’t need to be done in the first place.

Harvey points back to the long view: it helps build more sustainable communities better able to support Burgerville. It also reinforces the company’s values in the minds of employees and customers. But it also makes them better business people.

“There’s not a single one of these things we’ve done that has not produced very powerful business acumen, skills, abilities and systems inside of our company that have leveraged everything else,” he says. “That healthcare program and that team that went about identifying how you measure [ROI], created a whole new system that we’ve then applied in other parts of the company around how do you measure things that are obscure? So the skill set that got embedded in the company is irreplaceable, I couldn’t send somebody to a school to gain that.”

Conscious returns
For these three chains, building businesses around values—the central conceit of Conscious Capitalism—has paid off in many ways. They are all three profitable, and have been consistently so through recessions and boom times. By connecting with customers on the basis of shared values they create evangelizers: the kind of customers that spread positive word of mouth. All three spend pennies on marketing compared with more traditional chains. And they have found greater loyalty among vendors and greater employee retention. It has also allowed them to set high expectations for employees.

“We’ve created a business that’s very generous in spirit but we’re kind of known as being a little bit of hard asses to work for,” says Davis. (Grand Central offers health benefits to all employees, too). “You can lose your job here.

“But it’s so great to sit in these interviews,” she continues, “and talk to someone … that’s just like, ‘I want to work for a values-oriented business. I come into your cafes, people seem happy, the product’s great, and I just think this would be a great place to work.’ We are able to attract good people, it does show in the bottom line.”

Yudkin adds that attracting employees who are energized by the company’s values ends up spilling over.

“It’s not bullet proof, but largely, [employees] want to do right by the company, so when a customer comes in, the experience tends to be better. Also I think a significant percentage of our customers, as they learn about our ethics, trust that we’ve done some work in the selection of our products. Parents with children, who are concerned about what they’re feeding them, they can hand them a bottle of soda or pizza and know it’s better, better in a lot of ways. So that’s a value we deliver.”

Burgerville has found that the community it strives to bring value to has brought unexpected value back to them.

“We’ve had partnerships with the universities in the local market. They’ve done an endless number of research projects for us.” The architecture school at Portland State developed designs for a Burgerville restaurant—free of charge—which the chain is incorporating in a new unit.

The values approach—the Conscious Capital approach—has also bred a different attitude toward competition. “We don’t sweat bullets over someone wanting to be in the burger business here,” says Harvey. We’ve got staying power, we’ve got a set of skills, loyalty and talent that is the envy of just about anybody.”

“One pizza chain in Portland, Oregon, trying to save the world means squat,” adds Yudkin. “So really, what has to happen is everyone needs to adopt these practices. The responsibility is to share the knowledge, and to continue to be the innovator.”

Yudkin is apt to say that he wakes up an optimist and goes to bed a pessimist. “I am optimistic, I’m participating in change, but I get upset that in some ways it’s not going faster.”

Harvey feels the pressure of time as well.

“So many people are more focused on ‘where can I get the cheapest products?’ They’re going to come from commodity supply and factory farming in a different part of the world and get shipped here ... but what do you really lose if you do that? What do you lose culturally? What do you lose financially? What do you lose sustainably? What do you lose in that local market that you can never get back again? ... At the end of the day how do I explain to my kids, ‘You know what, those strawberries that came from that field down the road from your grandmother’s, sorry it’s not there anymore.’ That’s not a conversation I want to have, and at some point, the business ... the ROI ... pales dramatically in comparison to those other questions.”

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