HBR.

ORG OCTOBER 2011

reprint R1110L

HBR CASE STUDY AND COMMENTARY

The Mission Versus

The Bottom Line
Should an organic lettuce farm close a distribution
center that is reaching customers but losing
money? by William A. Sahlman and Alison Berkley
Wagonfeld

Should Baldwin Farms close the

Pottsville facility or reinvent it?
Expert commentary by Charles Sweat and
T. Gary Rogers
EXPERIENCE
Case Study
The Experts
Charles Sweat is the CEO
of Earthbound Farm.
T. Gary Rogers is the
retired chairman and CEO
of Dreyer’s Grand Ice Cream.
HBR’s fictional case studies present
dilemmas faced by real leaders and
offer solutions from experts. This one is
based on the HBS Case Study “Earthbound
Farm” (case no. 807061), by William A.
Sahlman and Alison Berkley Wagonfeld.
It is available at hbr.org.
2 Harvard Business Review October 2011
Should an organic lettuce farm close a
distribution center that is reaching customers
but losing money? by William A. Sahlman and
Alison Berkley Wagonfeld
The Mission
Versus the
Bottom Line
P ottsville, Pennsylvania, is not known
for its lovely winters,” Wayne Mo-
riarty said as he pulled his car into
a space in the lot outside the East Coast
distribution center of Baldwin Farms.
Gretchen Cussler, the company’s COO,
looked up at the massive snowbank next
to the car.
“So what exactly is it known for?” she
teased.
She knew that Wayne had moved up
from North Carolina to manage the facility.
Pottsville wasn’t a bad place to live, but it
wasn’t home for either of them. She’d ar-
rived in Pittsburgh that morning on a flight
from Sacramento, where Baldwin Farms
had its headquarters. Now she was wrapped
in a parka she used only for skiing trips.
Even so, she shivered as she and Wayne
walked to the warehouse’s front door.
Inside, workers were readying pallets
of organic bagged lettuce for delivery. She
was happy to see the place looking so busy.
The East Coast distribution center, or ECDC,
had been weighing on her mind lately. Troy
and Shawn, the brothers who had started
Baldwin Farms in 1993 and now served
as co-CEOs, wanted to further penetrate
the East Coast organics market and, with
Gretchen’s guidance, had opened the
facility two years ago. One of their primary
goals was to help regional customers
avoid stock-outs of the company’s most
successful product: organic prewashed
lettuce. Typically, after East Coast retailers
placed an order, it took 10 to 15 days for the
lettuce to make its way from California to
their stores. The time lag made accurate
forecasting tricky for customers. Most
wouldn’t realize they needed to restock
until about five days before they ran out of
product. But they ended up leaving their
shelves empty because they wanted to
avoid overordering and having to throw
lettuce out.
Baldwin stored enough lettuce at the
ECDC that customers could place small
Illustration: miguel santamarina
orders and keep their shelves full while
waiting for large orders to arrive from
California. For a premium, the customers
could even get next-day delivery from the
ECDC, instead of sending their own trucks
to pick up the lettuce, as they typically did
with their West Coast orders.

But the ECDC was not meeting its
original performance targets. In fact, it was
losing money. The previous year it had
operated at a loss of $1.7 million. Gretchen’s
team had predicted that the operating costs
would be offset by increased sales volume,
but it seemed that customers weren’t
ordering more. Instead they were reducing
their orders from the West Coast by the
amount they ordered from the ECDC. And
because the ECDC orders tended to be
small, Baldwin Farms’ trucks were often
going out from Pottsville half empty.
Wayne walked Gretchen around,
showing her some of the updates to the
refrigeration system.
“Are the brothers still talking about
closing us down?” he asked, trying to seem
nonchalant. Still, Gretchen could see that
he was nervous. He had agreed to work for
the Baldwin brothers because he believed
in the organic label and knew how big the
opportunity was on the East Coast. But
his reputation in the small world of food
distributors was on the line. He didn’t want
to be linked to a failed venture any more
than she did.
“It’s been discussed, but I don’t think
either of them is there yet,” she said.
“We just need more time. Two years
is not long enough to change customers’
buying behavior. You know that.”
Gretchen nodded.
“And we’re still working out the kinks
operationally,” he said. Transportation was
a particular sore spot; between half-full
trucks and the dedicated trips they had to
make to more-remote customers, the fuel
costs were killing the ECDC.
“Shawn and Troy should come out, do
some deliveries, talk with some of our
customers,” Wayne suggested. “They’ll see
what’s not reflected on the balance sheet—
that we’re building strong relationships.”
“They’re already spending way too
much time on this. Shawn especially,” she
said. This was what bothered Gretchen
most. The ECDC represented less than 5%
of the company’s $600 million in sales the
previous year. She understood that it was
an investment that needed tending, but
For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org
it was distracting the brothers from more
important things.
“You should at least talk with Kurt at
Better Food. He’s caught wind that we’re
having trouble,” Wayne said.
“I’ve been playing phone tag with him
all week,” Gretchen said. Better Food was
one of their largest East Coast customers.
Kurt Conway, the grocery chain’s produce
buyer, had been a main proponent of the
ECDC and lobbied the brothers heavily
on the benefits it would bring both the
customers and Baldwin Farms.
“If we don’t figure out how to help our
East Coast customers, they’re going to
turn to our competitors, whether they’re
organic or not,” Wayne said. He had a point.
Although Baldwin Farms’ market share
was larger than 50% in the organic lettuce
category, the company couldn’t afford to
cede any shelf space. Once a retailer like
Better Food turned to another, more avail-
able brand, it would be nearly impossible
“If we don’t figure out how to help our East
Coast customers, they’re going to turn to our
competitors, whether they’re organic or not.”
to get the business back. And because
Baldwin Farms wanted to introduce new
organic products, such as sliced apples,
to its East Coast customers, it needed to
maintain a strong reputation for helping
stores keep their shelves stocked.
“I’ll give Kurt a call from the airport,”
Gretchen promised.
A New Direction
Back in California, Gretchen looked out
on the fields. It had been a good growing
season, the first in a while. The company
was hoping to make $750 million in sales
this year, a target that seemed doable.
But it needed to get costs under control.
Gretchen watched the field workers and
thought about how many people relied
on Baldwin Farms. If she allowed profit
margins to slip, a lot of people could lose
their jobs.
Shawn Baldwin knocked lightly on the
door. “What are you daydreaming about?”
he asked.
Gretchen turned around. She hadn’t
seen Shawn since she’d left for Pennsylva-
nia. He asked how Wayne was doing.
“OK. He’s nervous we’re going to pull
the plug. He wants more time to prove the
ECDC’s worth.”
“We know it’s valuable. It’s just not mak-
ing money,” Shawn said. “I was thinking
over the weekend that we may need to
take it in a new direction. Even with Wayne
at the helm, we’re struggling with the logis-
tics. We should look into partnering with
someone who’s better at that stuff.”
“That’s not a new direction,” Gretchen
said. The first iteration of the ECDC had
involved a partnership with a wholesaler
in Connecticut. The company had let
Baldwin Farms piggyback on its refriger-
ated space, tracking systems, and truck-
ing network. But the two companies
had mismatched inventory systems and
approaches to customer service.
“But we’d do it differently this time.
What happened to the conversations with
WholeCo?” Shawn asked. WholeCo was a
large grocery packager and distributor in
New Jersey that was known for its massive
truck fleet and logistics expertise.
“I’m still in touch with them, but you
know they run a very different company
than we do,” Gretchen said.
Shawn and Troy had started Baldwin
Farms 18 years ago by growing their own
lettuce and selling it out of their pickup
truck. Organic food was a niche market
back then, but it did well in the San Fran-
cisco area and soon started catching on else-
where. Now it was a huge growth market.
“But that’s OK,” Shawn said. “We know
lettuce and growing. They know transpor-
tation and logistics.”
October 2011 Harvard Business Review 3
 EXPERIENCE
“But a partnership raises our risks of
contamination and spoilage. That’s one of
the reasons we opened the ECDC: control.
We wanted fewer hands on our product,”
Gretchen reminded him.
“We could handle those risks. Besides,
we’ve learned from our mistakes. Whole­Co
could work,” Shawn said.
“You know your brother will disagree,”
Gretchen countered.
“He always does,” Shawn replied.
Shut It Down
Gretchen sat down on the leather couch in
Shawn and Troy’s office. The brothers had
shared a workspace since the beginning.
In the early years, it was because they had
to—back then, the entire headquarters was
not even 300 square feet. But now it was
more out of habit.
Famous
First
Words
Harvard
Business
Review
16425_HBR_1third_sq.indd 3
For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org
“Shawn already told me about the
Whole­Co idea,” Troy said, cutting to the
chase. He was less patient than his brother,
although both often acted in haste. “I
think it’s time to cut our losses. The ECDC
just didn’t catch on like we thought it
would.”
“Gretchen’s done the analysis,” Shawn
said, jumping in. “We’ll recoup only 25%
of our initial investment if we close it now.
That’s assuming we can get out of the five-
year lease we signed.”
Gretchen nodded. “Plus we’ll annoy all
of our customers who are using the ECDC,”
she said. “I talked to Kurt Conway on my
trip back. He made a good case for keeping
it open. He says Better Food is still figuring
out their forecasting and that growth is
making it hard to predict demand, which is
why they’re placing only small orders now.
hbr.org
The Revival of Smart
12/3/10 1:17 PM
“How long are we going
to devote so much
energy to a facility
that’s hemorrhaging
money?”
But that will change—not the least because
we have our sales guys out there telling
them how to make the most of the ECDC.
And when demand picks up, we need to
still be there. Wayne says he’s heard the
same from other customers.”
Troy shook his head. “But can Kurt or
Wayne or anyone else tell us when that’s
going to happen? How long are we going to
devote so much energy to a facility that’s
hemorrhaging money?”
Shawn laughed at his brother’s propen-
sity to exaggerate. “We got into this busi-
ness to bring organic to as many people as
possible. As long as we can break even, the
investment is worth it.”
Gretchen knew this was a point on
which they all agreed. Although a profit-
able distribution center would be ideal, the
brothers just wanted to keep their custom-
ers happy and get more organic product
out there. Still, the ECDC wasn’t close to
breaking even.
“I’m just not sure this model is working,”
Troy said.
Both brothers turned to Gretchen. She
was used to playing referee and typically
enjoyed it.
“What do you say?” Troy asked. “Do you
have an answer for us?”
“Not right now,” Gretchen said.
“So when can you give us one?” they
asked, nearly in unison.
She knew the reply they wanted: “I’ll
have a proposal to you by tomorrow
morning.”
The Baldwins liked to move quickly,
even on big decisions.
Time to Decide
On her way home that evening, Gretchen
replayed the meeting in her head. She
was used to helping Shawn and Troy sort
out their differences, but this time she
was stuck. In Pottsville, Wayne had been
persuasive. He explained that the ECDC
was putting them in close contact with
customers and that could only be good in
the long run. Kurt had driven that point
home. Still, logistics were not the com-

Business
pany’s strength.
As she turned onto Route 88, she won-
dered if the company had moved too fast
with the ECDC. She loved the entrepre-
neurial pace the brothers set at Baldwin

Not As
Farms—it was one of the reasons she’d
taken her job—but sometimes it resulted in
rash decisions. Between low gross margins,
overhead, and fuel expenses, the center
was unlikely to be profitable anytime soon.

Usual
Gretchen drove by a sign for another
new organic farm, which had opened in
the past month, and was reminded of an
idea that had come up in her discussions

Harvard
with Wayne. They’d talked about making
the center a hub for other organic growers
in California. By helping them reach the
big East Coast retailers too, the company
could fill its trucks and get more organic

Business
food to more people. But developing a hub
like that could take years. She wasn’t sure
Shawn and Troy could be patient enough.
After putting her kids to bed that night,
Gretchen turned on her computer and

Review
started a new e-mail. She addressed it to
Shawn and Troy and wrote “ECDC” in
the subject line. If she knew the Baldwin
brothers at all, they’d be checking for her
answer tonight.
hbr.org
The Revival of Smart
William A. Sahlman is a professor of
business administration and the senior
associate dean for external relations at Harvard
Business School. Alison Berkley Wagonfeld is
the executive director of the Harvard Business

Q
School California Research Center.

Should Baldwin
Farms close the
Pottsville facility
or reinvent it?
See commentaries on
the next page.

16425_HBR_2thirds.indd 4 12/3/10 1:18 PM

EXPERIENCE
The Experts Respond
Charles Sweat is the CEO of Earthbound Farm.
It’s clear that Wayne believes fully in
Baldwin Farms, in the value of bringing
organic produce to as many people as
possible, and in the potential of the ECDC
to help the company achieve its goals. His
commitment is admirable.
But for Wayne, the ECDC is his whole
business. If he stepped back, it would be
easier for him to see, as Gretchen does,
that the ECDC is not autonomous. It’s an
extension of Baldwin’s primary business
and was intended to enhance profitability
and develop customers. And, unfortunately,
the facility is diverting resources from the
primary business and taxing it financially,
logistically, and emotionally.
Gretchen clearly sees why the concept
should work: In the fast-paced world of
perishable produce, retailers are chal-
lenged to forecast their needs and order
from the West Coast (where most of the
country’s produce is grown) seven to 10
days out. As we know at Earthbound Farm,
in a week major changes can take place
that affect sales in an East Coast produce
department. So retailers are understand-
ably eager for a solution that could
potentially reduce stock-outs, which result
in eroded margins and lost sales at the
store level. And the East Coast is one of the
What Would You Do?
Some advice from the HBR.org community
the ECDC accounts for 5% of
$600 million in sales. Does $30 mil-
lion in sales justify its own ware-
house? Wouldn’t it be better to start
with an outsourced facility, perhaps
in a multiuser warehouse oper-
ated by a logistics service provider?
Maybe Baldwin can find a logistics
service provider to take over its
lease and bring in other customers
to take up the slack.
Mark Foscoe,
group logistics manager,
Mitsubishi Electric Europe
HBR case studies appear at hbr.org prior to publication here.
6 Harvard Business Review October 2011
regions where sales of organic produce are
strongest.
However, because the incremental sales
volume at the ECDC doesn’t cover expenses
and has created inefficiencies such as half-
filled trucks, the model isn’t working as
planned. Gretchen may not have consid-
ered that there isn’t enough of an incentive
Gretchen should advise
the Baldwins to close
the ECDC and serve
East Coast customers
from the West Coast.
for produce buyers to pay the higher cost of
ordering from the ECDC, even though they
appreciate the convenience of quick turn-
arounds for fill-in orders. And if custom-
ers won’t pay the higher price that covers
freight costs, converting sales volume from
the West Coast to the ECDC will only erode
Baldwin Farms’ margins.
This case study is based on Earthbound
Farm’s experience with a distribution center
in New Jersey. In 2006 we decided to close
Gretchen should further ex-
plore setting up the ECDC as a hub
for other West Coast organic farm-
ers. This structure will allow other
growers to tap into the huge East
Coast market more cheaply than
they could on their own. Baldwin
could offer a stake in the hub to in-
terested farmers or let a third party
operate the facility as a cooperative
to lend it credibility.
V.P. Kochikar, associate vice
president and principal consultant,
Infosys Technologies
the center because of its poor performance
in its initial year. To compensate for its clo-
sure, we helped our East Coast customers
transition to purchasing through top-quality
wholesale distributors. This allowed us to
focus on our core strength—organic farming
and salad production—and let the distribu-
tion experts handle the logistics.
That strategy has paid off: We main-
tained great relationships with those
customers. Today we’re taking another look
at an East Coast facility, but from a very dif-
ferent angle. We’re looking at growing some
organic fruits and vegetables (not lettuces)
in the East, as well as importing off-season
organic items from trusted partners in
South America.
Gretchen should advise the Baldwins to
close the ECDC and continue to serve their
East Coast customers from the West Coast.
In the meantime, the business should invest
in developing products that can be grown
in the East or easily imported there. When
those products are in place, the company
will have a much stronger base from which
to operate a distribution center. Baldwin
Farms will then be able to transition its East
Coast customers to an ECDC that has an
economically viable plan and defends its
market share.
Baldwin Farms needs to focus on
its customers, both end users and
retailers. It should develop relation-
ships with enthusiastic consumers
who can serve as advocates for its
products. It can partner with retail-
ers that can provide information
about what matters to consumers
and how to reach them through in-
store promotions. This would result
in higher sales and steadier demand
and lay the groundwork for Bald-
win’s future plans.
Bill Self, president,
The Leadership Factor
 For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org
T. Gary Rogers is the retired chairman and
CEO of Dreyer’s Grand Ice Cream.
Opening an East Coast distribution cen-
ter is only the first step in implementing
Baldwin Farms’ new strategy. The busi-
ness is growing; it just can’t cover its fixed
costs yet. But it’s way too soon to give up.
The Baldwins have made a major invest-
ment that they can’t get back. Now they
need to make it work. Gretchen should
recommend that they keep the Pottsville
facility but look at other ways to make it
profitable.
As Dreyer’s Grand Ice Cream expanded
across the country from its West Coast
base with a direct-store-delivery strategy,
we opened distribution centers in every
major midwestern and eastern city. Most of
those centers generated losses for years,
but over time the unique strategic com-
petitive advantage of direct store delivery
allowed us to transform ourselves into the
nation’s largest ice cream company. Our
It’s way too soon to give up. The Baldwins have
many options they could pursue besides closing
the Pottsville facility.
competitors, who were unwilling to take
such a risk and absorb the initial losses of
this strategy, never enjoyed the benefits
and ultimately fell behind.
The Baldwins have many options they
could pursue besides closing the Pottsville
facility: find “partner brands” to share
overhead, train their drivers to do in-
store selling, pay slotting fees, or provide
customers with additional benefits that
support the whole produce category. Those
were all strategies we successfully pursued
at Dreyer’s.
Gretchen’s idea of distributing for other
California growers is worth exploring, but
a better strategy would be to find one or
two smaller companies that can’t afford
their own distribution center to share
costs. In our case, we began distributing
Ben & Jerry’s ice cream when that company
was just entering Boston, its first major
market. As we began distributing nation-
ally we helped Ben & Jerry’s do the same.
The good margins we made on its products
covered much of our logistics overhead as
we grew.
Baldwin Farms could also accelerate
growth if it trained its drivers to become
salespeople or replaced them with trained
or experienced direct-sales-delivery
people. In-store selling can be very effec-
tive, especially with perishable products.
There is always space that hasn’t been
merchandised, and overworked in-store
personnel often welcome the help. An inch
Follow
or two gain in shelf space on every trip will
turn into feet very quickly.
the
Many East Coast grocers make their
profits selling shelf space instead of
groceries. Baldwin might consider paying
Reader
them slotting fees. Though this adds cost,
it is often justified if it helps a company
Harvard
break into a new market.
Business
Baldwin could also offer customers many
other benefits that would build loyalty to
Review
the brand. When we couldn’t crack the
New York market, we gave grocers ideas
for improving the very sterile ice cream
aisle to boost sales of the whole category.
They included better lighting and use of
color, ways to defrost freezer doors, and
optimizing temperatures, defrost cycles,
and freezer maintenance. The relationships
and credibility we built helped us get our
products into the freezers without jeopar-
dizing our values.
In the end optimism and persistence are
necessary for young growing businesses.
You can’t achieve success by constantly
second-guessing yourself. The Baldwins
simply have to take the long-term view and
make this strategy work. 
HBR Reprint R1110L
Reprint Case only R1110X hbr.org
Reprint Commentary only R1110Z The Revival of Smart
16425_HBR_1third_vert.indd 3 12/3/10 1:16 PM