Good Ventures, Good Deals: Fifth Town Artisan Cheese Co.
This is the first blog in a series of Good Ventures, Good Deals blogs by the Social Venture Exchange (SVX) for SocialFinance.ca to showcase the breadth and depth of the social venture sector (for profit and not-for-profit) in Ontario, highlighting innovators, their business models, their commitment to social and environmental justice, and their successes and challenges in accessing capital to advance their mission. The blogs will also highlight social finance or impact investment deals to demonstrate to investors, ventures, service providers, policy makers, and the general public the positive social and environmental impact such investments have enabled, while generating multiple bottom line returns to the investors.
Small scale can be successful and sustainable
When Petra Kassun-Mutch (formerly Cooper) set out to start her own dairy, her goal was to revive small-scale cheese making in Ontario. By starting her own dairy, she wanted to prove that small-scale cheese making could be a successful and sustainable business. She wanted to see Ontario on the map for artisan cheeses, and she took it upon herself to do so.
Fast-forward just two and a half years and Fifth Town Artisan Cheese Company (Fifth Town) is a $1.3 million enterprise, producing handmade goat, sheep and cow milk chesses in a 4,800 square foot facility that is situated on 20 acres of agricultural land on the eastern ridge of Prince Edward County. It is also the first dairy in the world and the only industrial project in Canada to qualify for LEED’s (Leadership in Energy and Environmental Design) top platinum standard. Since its opening in the summer of 2008, Fifth Town has won over 30 awards for its cheeses as well as its sustainability initiatives, including the 2009 Ontario Premier’s Award for Agri-Food Innovation Excellence. What’s more, all of Fifth Town’s cheeses are made with Prince Edward County milk that is Local Food Plus (LFP) certified which means that the farms have environmental sustainability plans in place and manage their herd in accordance with humane animal management practices. The dairy is equally conscientious about the packaging for its cheese which is either biodegradable or recyclable, with labels printed in water-based ink on post-consumer paper using environmentally friendly adhesives!
Even before beginning construction on the facility, and as part of her efforts to revive the Ontario small-scale cheese industry, Petra co-founded and led the creation of the Ontario Cheese Society (OCS) in 2004. The OCS works with all the links in the cheese supply chain to facilitate opportunities for collaboration, advocacy, and the promotion of Ontario artisan, regional and farmstead cheeses to wholesalers, distributors, retailers and consumers. In April 2010, Fifth Town also became one of Canada’s eight founding B Corporations (Benefit Corporations). Fifth Town’s certification score at 124.6 was higher than the average certified B Corporation’s score at 105 and the qualifying bar of 80 required for the certification, reflecting the dairy’s strong commitment to its sustainability mission.
Embedded social and environmental mission
In the parlance of social innovation and social finance, Fifth Town is what can be described as a social purpose business. In other words, it is a business that has a social and/or environmental mission embedded into its DNA. This mission is not ancillary to or outside of the business, but rather at the heart of the business’ activities. It is not a strategy that the business employs, but the business itself.
An erstwhile publishing executive in New York and Toronto, Petra was resolute in her desire to weave social and environmental responsibility into the very fabric of her dairy. “The reason is simple. The quality of our food is inextricably linked to the quality of our environment. For example, you cannot have safe, high quality milk if your animals do not have access to clean water and non-toxic feed,” she says.
Going local and going green
Petra chose to locate Fifth Town in Prince Edward County because of the County’s growing reputation as a culinary tourism destination. Since her husband was raised in the County, Petra also had some personal knowledge of the challenge of rural economic development in the region. She wanted to have a positive impact on the County and saw Fifth Town as a lever in overcoming some of the County’s economic challenges. Today, by sourcing all the required milk supply from local, family-owned, small-scale dairy farms, Fifth Town is directly contributing towards the economic well being of the County and its residents. Currently, 93 cents of every dollar spent in the making of Fifth Town cheese stays in the local area. In addition, the facility that constitutes the dairy’s processing, retail and educational space is a model for substantiality. Having undergone an intensive third party audit to ensure it meets the highest environmental and social responsibility best practice standards, the facility further formalizes Petra’s commitments to environmental and social responsibility. An additional benefit of operating a sustainable business has been Fifth Town’s ability to attract and retain its small but talented team of employees who sought Fifth Town themselves as their preferred employer.
The choice to go “green” did not come cheap, however. The LEED certified facility came at a cost of $2-million, and $400,000 of this went towards higher cost, eco-friendly materials such as Forest Stewardship Council-certified wood, Agilia cement (low extraction impact/low GHG cement mix), Durisol block construction (wood chip/epoxy blocks instead of concrete block), non-toxic paints, recyclable steel, eco-friendly, seamless and food safety approved trowel on epoxy walls, high efficiency lighting and triple-pane windows, and low-flow faucets. The 9,000 square foot geo-thermal field and the 12 tonne heat exchanger keep costs low for heating the space as well as the water used for processing the cheese. The geo-thermal system is also used for cooling the facility and the dairy cases, caves, and wrap room walk-in. Hydro for the facility comes from wind and solar installations which is supplemented by Bullfrog power, which in turn sources power primarily from wind power installations and green hydro sources.
As a result of these investments, Fifth Town’s longer-term utility and water costs are much lower than other facilities, and as energy prices rise, this will become a competitive advantage. Already, with 2 years of data in hand, Fifth Town’s energy bills are significantly lower than that of a typical dairy. In fact, Fifth Town runs on approximately 69% less energy than a similar facility designed to standard building code specifications. It also uses 62% less water due to a 10,000-litre rain cistern and the ability to recycle much of the water used for cleaning and sanitation. As a result, the average water usage by Fifth Town is approximately 6,500 litres per week; the average Canadian household has been said to use 400-600 litres per day! Given that Fifth Town also has an average of 13 to 19 workers on site plus over 5,000 visitors a week in the summer, all of which affect water use, one can do the math on the resulting impact on the preservation of a precious resource.
The challenge of seeking patient capital investors
Despite what one might presume to be an obvious attraction of such a business to investors, Petra did not find it easy to secure financing from angel, venture capital or private investors to start the business. Many thought that a small-scale artisan cheese manufacturing facility in a rural county was a 1970’s idea that would not succeed financially. In addition, a rather traditional, capital intensive, manufacturing-type of business where one makes and caries inventory of a physical (and perishable) product is not a popular use of investment cash for those looking for low investment, fast return, internet-style ventures. Petra therefore had to rely mainly on family savings and a variety of conventional loans to invest into the business. But even conventional lenders were hard to convince. Most could not get behind the investment in “green”, and limitedly valued the facility and the land against standard building code valuations.
However, once the facility was operational, and the reputation for Fifth Town’ cheeses started to grow, more people became convinced that this could work. They started to believe. And so, in 2009, the dairy successfully applied for and received an interest free loan under a federal government stimulus plan, allowing it to expand operations.
With growing demand for its products, which are sold nationally at select gourmet grocery stores and cheese boutiques, Fifth Town has additional capital requirements to put towards its working capital and near-term expansion needs. However, access to capital still remains an important challenge. Petra believes that the traditional risk/reward analysis as undertaken by investors is not applicable to businesses like hers. First the payback takes longer. “This is not the type of investment for someone looking for exceptional returns in 18 months. If you have heard of Slow Food, you can think of this as Slow Business. But the returns are there. And the foundation of the business tends to be more resilient as its customers are more loyal and less likely to switch on the basis of price. In fact, they often go out of their way to buy the product and will make special efforts if the company experiences a difficult period,” she explains.
Also, social purpose businesses can in fact pose a lower risk to investors given the embedded positive social and/or environmental impact of their activities. “Investors can relax a little in knowing that you are less likely to be sued or fined for environmental infractions and the costly damage to your reputation that can come from this,” she adds.
In Fifth Town’s case, and despite the economic downturn of the last couple of years, the dairy is not only steadily moving towards profitability, but also helping sustain the operations of the partners along its supply chain.
In addition to need for capital, Fifth Town faces the challenge of limited supply of high quality local milk for the production of its chesses in its chosen catchment area (within 100 miles of the dairy). Petra also identifies three distinct challenges in the small-scale dairy sector in Canada, including the current “one size fits all“ regulatory environment and existing distribution networks that favour large scale (and often unsustainable) cheese production, as well as the challenge of sourcing experienced talent.
A resourceful and energetic eco-entrepreneur, Petra is optimistic about the sector and Fifth Town’s role in it. Her work through the OCS and Fifth Town has already begun to show measurable results in reviving the Ontario artisan cheese sector. An advantage of being a small sector within a larger industry has meant that the Ontario artisan cheese sector is less affected by the challenges faced by the larger cheese industry such as those resulting from increased consumer awareness and concerns of agricultural substantiality. Petra is confident that as the broader agricultural market faces a future of great change, and potential, Fifth Town and Ontario artisan cheeses will continue to see double digit growth in demand, and be faced with what she calls “good” challenges of capacity and distribution.
Special thanks to Alexandra Pattee, SVX Research Associate, for research support, and Petra Cooper, Founder and CEO, Fifth Town Artisan Cheese Company.