In an industry where the average after-tax profit is just under a penny for every sales dollar, Mega Foods, an independent black-owned supermarket in the District, was bound to have rough sailing. It began on a shoestring, a prayer and little capital.
The H Street NE supermarket, which closed last month after being in business for just over two years, began as a high-risk gamble with noble intentions. But as the store's owners soon learned -- and painfully so -- it takes more than noble intentions to make a venture such as Mega Foods succeed.
Indeed, Mega Foods' owners acknowledged along the way that the venture -- the first independent supermarket to open in the H Street NE corridor in two decades -- was undercapitalized. "We were trying to make this dream a reality, but everything had to go right and everything didn't," co-owner Arnold G. Montgomery told a reporter in hindsight.
Mega Foods' demise qualifies as a classic case study in the difficulties of financing and operating a small minority business. It also raises some disturbing questions about the business climate for struggling black-owned firms in the District, especially those whose owners may not be as politically connected as some who have a pipeline to the District Building.
That aside, the failure of Mega Foods casts a huge shadow on the Barry administration's claim of doing everything it can to help minority businesses develop in the District.
The D.C. government certainly made a point of citing Mega Foods as a key element in the revitalization of the H Street corridor and provided nearly $1 million in start-up money for store fixtures and subsequently more than $200,000 in loans for operating capital.
Some say it wasn't enough. That's possible, though it should be remembered that Mega Foods was a private enterprise operating in a free market and not a government agency. "No one wants to see this business fail," Wylie L. Williams, the District's deputy mayor for economic development, said in a statement shortly before Mega Foods was forced to close. "We've invested so much to prevent this from happening."
But happen it did. Mega Foods was forced to close even after gaining protection from creditors under Chapter 11 of the federal bankruptcy code. And while the District government can't be expected to bail out Mega Foods financially, it can and should move expeditiously to help the owners restructure the business, if only to recover public funds that went into the operation.
As it is, the the District could lose more than $1 million if B. Green & Co., Mega Foods' wholesale supplier and a major creditor, forecloses and if a group of Korean investors succeed in taking over the store as proposed.
What Mega Foods needs most now is a placement of equity capital from private sources and technical assistance. The D.C. government can play a pivotal role in helping the firm's owners obtain both.
In the abstract at least, Mega Foods appeared to be a sound undertaking. Montgomery and Edwards -- both graduates of Harvard University's graduate school of business -- had considerable experience as managers and a fair amount of expertise in the wholesale and retail food trade. The H Street corridor was highly touted as a growing consumer market and Mega Foods signed on as a tenant in an office-retail complex developed on land that was sold by the city to spur commercial development.
Mega Foods' operation was marked by a series of misadventures, however. Management badly miscalculated when it chose not to borrow start-up capital from a private lender or the Small Business Administration. The owners compounded matters when they borrowed $500,000 from the wholesaler that provided initial inventory for the supermarket. With the fledgling supermarket barely able to meet its obligations and still struggling for market share, Local 400 of the United Food and Commercial Workers threw up a picket line, pressuring management to permit workers to organize.
The Mega mess grew more complicated when management obtained a $700,000 loan from the Neighborhood Economic Development Corp., a quasi-public financing organization funded by the D.C. government and local banks. Negotiations with NEDCO hit a snag when the latter demanded -- but never received -- a new business plan prior to approving yet another loan for Mega Foods.
Meanwhile, in one of the more bizarre developments, Mega Foods ironically was decertified in March as a minority corporation by the D.C. Department of Human Rights and Minority Business Development because the company had issued 55 percent of its preferred stock to NEDCO as part of the loan agreement.
In yet another strange twist, the District approached Dart Group Corp. Chairman Herbert Haft about acting as a consultant to Mega Foods but dropped the idea reportedly when Haft expressed interest in discussing an unrelated business matter. Haft unequivocally denies that, explaining that there was little he could do to help Montgomery and Edwards. "They had a money crunch and the things we might have recommended couldn't be done," said Haft. "When people are drowning, you don't tell them how to brush their hair. It's a shame because they're nice gentlemen, two hard-working, dedicated gentlemen."
Haft agrees that the District should do more to help revive Mega Foods and, indeed, make it easier for other supermarket operators to enter the city. "It's a crying shame. A city this size needs more supermarkets," insisted Haft, who has tried unsuccessfully for several years to develop food stores in the city.
Three years ago, D.C. Council member John Ray, now a candidate for mayor, introduced legislation designed to attract more supermarkets to the District. One bill enacted into law two years ago provides for reductions in property tax for owners who develop land for a supermarket. The reduction would be passed along to the supermarket operator in the form of below-market rent. Other provisions of the law would give property tax waivers for as long as 5 years for supermarkets located on land owned by their operators, low-interest loans for equipment purchases and rent waivers for supermarket operators who lease land or structures from the D.C. government.
Another proposal by Ray would have empowered the mayor to condemn commercial property for economic development purposes, such as the construction of supermarkets in underserved communities. For reasons that remain unclear, that proposal never made it out of committee.
If the D.C. government is really serious about providing incentives to encourage supermarkets to locate in the District -- there are only 38 in the city -- it should first resurrect the Ray bill and aggressively apply it.
In the meantime, helping management clean up the Mega mess is important for reasons cited earlier. More than six months ago, the Coalition of Economic Development Organizations (CEDO), a community-based group, expressed its willingness to invest a portion of its equity grant program as a capital infusion in Mega Foods. In fact, CEDO informed D.C. government officials of the coalition's desire to help by becoming equity investors in Mega Foods. To date there has been no response to that offer.
Mega Foods' owners won't be the only losers if District officials fail to go the extra mile in considering such offers. Taxpayers and residents of the H Street corridor will also be losers.