The Colors Co-op Experiment: Learning the Right Lessons from Our Failure

Image Credit: Sabri Tuzcu on unsplash.com

The 9/11 terrorist attack and the Twin Towers’ destruction was a monumental tragedy. Almost 3,000 workers lost their lives, and many more lost their livelihoods. Windows on the World, the restaurant atop Tower One, lost 73 restaurant workers. With assistance from their local union, surviving workers did not give up. The Restaurant Opportunities Centers United (ROC) was born from the ashes of this tragedy.

While ROC has always been a nonprofit organization, its signature restaurant, Colors, was an LLC, created as a co-op and run by former Windows on the World workers. ROC’s mission was to build power by improving wages and working conditions, and ROC worked to achieve its mission by using Colors as an asset. Colors helped train more than 5,000 people, raising the wages and improving the livelihoods of thousands of low-income families.

Yet, as a business, Colors struggled. As a former Windows on the World worker and a co-founder of ROC who witnessed the restaurant’s opening (2005) and closing (2020), I believe it is important to assess what worked, what did not, and what can be learned from the experience that might inform future co-op and social enterprise efforts.

 

The Original Vision and Purpose of Colors

In 2001, the US economy was in recession, shedding thousands of jobs. The 9/11 attack exacerbated pressure on New York City’s local labor market, leading to an additional loss of 143,000 jobs per month in New York City for a three-month period, above and beyond the national recessionary trend.

This bleak labor market made it hard for Windows on the World’s survivors to find new employment. The displaced workers asked ROC for assistance in opening a worker-owned cooperative restaurant. Their dream was to create a fine dining restaurant that replicated the multicultural staff and cuisine at Windows on the World. With the help of our late friend, Bruce Herman, a dozen Windows workers traveled to Italy to learn how to manage a successful worker cooperative restaurant. They visited Emilia Romagna for two weeks, a region known as a world leader in the cooperative movement.

The original vision for the restaurant was also to build wealth for its predominantly people of color workforce. A $500,000 investment from the Italian cooperative movement and multiple loans from community funders made the dream possible. Founders’ hopes and aspirations varied: launch a vibrant fine-dining restaurant, promote workplace democracy, demonstrate a successful high road model, provide a space for fundraising events, host restaurant worker trainings, and support ROC programs.

 

The Positive Impact of the Colors Business Venture

A low-cost venue, Colors was used for informal meet-and-greets, community meetings, and fundraising activities and served as a training and job placement center, especially for immigrant families. Over 15 years, more than 5,000 workers received restaurant work training, and about 2,250 were placed in full-time jobs. Today, a full-time New York City employee is paid a minimum of $15 an hour, the equivalent of $30,000 a year. Based on this data, the economic impact of full employment for 2,250 graduates exceeds $67.5 million yearly.

From a social impact perspective, Colors was successful. Few businesses have such a lasting impact on so many lives. Because of Colors, thousands of Black and Brown workers—many of them women—are now servers, bartenders, cooks, and chefs earning family-sustaining wages.

Colors also provided vital community infrastructure. Resource-constrained emerging social justice organizations used Colors as a community space to host their meetings and organize fundraising activities. Creating a safe space for allies strengthened coalition-building and networking efforts. To build power for low-wage workers, one needs a vast network of allies, making Colors the nexus of ROC’s coalition-building efforts.

 

Challenges of Running Colors

Yet, Colors struggled as a business. Yes, it operated for 15 years, longer than most businesses, but it required regular subsidizing. Colors, in short, was never (or at best, rarely) profitable. It operated as long as it did thanks to the cost-cutting measures and creativity of ROC’s management team. After a time, it stopped running as a fully functioning restaurant, reducing operating costs. The payroll was reduced to one individual, an events manager. Colors had two non-restaurant sources of revenue: a restaurant workers’ training center for ROC and other organizations, supported by workforce development funding, and an event space for upcoming chefs of color and diverse celebratory activities.

As it happens, Colors shut down just prior to COVID-19, which turned out to be fortuitous timing for ROC. Amid the COVID-19 shutdown, neither in-person trainings nor large public events would have remained viable revenue generation options.

Like many failed businesses, Colors management made mistakes related to business model design, management, core competency, concept creation, capitalization, location, and overall business operations. Colors, like any business, was supposed to be profitable. However, a cooperative business’ success requires cooperative member-owners to share not just ownership, but also financial commitment and responsibility. Sweat equity (volunteer time before the opening of Colors) was the main member-owner equity investment. This approach, commendable in terms of inclusion as it allowed low-income individuals to be co-owners, resulted in low capitalization.

One simple illustration of this point: Typically, a co-op is started by capital contributions from its member-owners. In other words, co-op members must purchase their ownership shares. In many cases, this purchase is subsidized, or the money is fronted then repaid by workers through a regular payroll deduction as they purchase their ownership shares. The price of Colors’ worker co-op shares, however, was zero. This might seem to benefit workers—after all, it saved them money. However, it proved to be an albatross for the business.

A lack of capital contribution from cooperative participants meant the co-op depended on ROC to solve its early cash flow issues. While Colors workers intended to run a profitable business, or to at least break even, Colors operated as an excellent training and community empowerment program but as a poor business.

Ultimately, cooperative members received inadequate training on running a for-profit enterprise and failed to deepen their sense of ownership of the restaurant. ROC leadership did not adequately analyze the different strategies necessary for balancing two competing aims—create a for-profit cooperative and operate a general restaurant training program, in which most trainees go on to work for other businesses. On the business end, failure became the only possible outcome.

How do you develop a successful cooperative business? Member-owner training in governance and the creation of a culture of ownership are essential, unique co-op features. But a lot of what you would do to develop a non-cooperative business is also relevant. Any successful business must address product, price, place, and promotion.

Excellent concept creation to sustain service and product promotion is at the core of any marketing strategy. A good concept leads to competitive advantage in a highly competitive industry such as the restaurant sector, especially when faced with low capitalization. Colors relied heavily on ROC’s emotional connection with 9/11 as its primary concept to attract customers, but this was not enough to keep people coming back. The restaurant also chose to sell “global cuisine,” which according to customer reviews was vague and unattractive.

Then there were operational challenges. Rising rents forced Colors to move several times. Of course, location matters, and not all locations were well selected. Colors’ last location in New York City was adjacent to a synagogue, subjecting the restaurant to strict limits on alcohol sales when up to 25 percent of restaurant profits came from such sales.

Colors’ multiple missions were a further challenge. Even though the fundraisers and the community events hosted at Colors benefited ROC, these activities were a net loss for Colors as food sold at the events was discounted, making it impossible to cover labor and inventory costs.

Colors underwent several iterations of its business structure over the years. It started as a cooperative restaurant in 2005. By 2009, it had no member-owners; they left to secure more stable employment in other restaurants. It was clear that the model had not worked for them. Colors continued to be a training and event space until a last failed attempt to reopen in fall 2019 and its final closure in early 2020.

Most cooperative members, perhaps with reason given that co-op members’ decision-making authority was strictly limited by ROC, considered themselves ROC employees—rather than Colors co-owners. When Colors could not cover payroll, employees routinely requested back pay from ROC. There was insufficient appreciation of the fact that a robust marketing plan drives income generation, exacerbating cash flow issues, which, in turn, demoralized the workforce.

 

Opportunity Costs

In business operations, all decisions have an opportunity cost. ROC’s mission was to improve wages and working conditions for low-wage restaurant workers and build worker power. ROC was successful in enforcement and policy fights, winning millions for workers and their families. Opening and running Colors meant that ROC dedicated resources to running Colors, resources that might have otherwise gone to hiring community organizers for power-building and system change efforts.

Even the benefits were a mixed blessing. Though Colors enhanced workers’ training, it may have been more cost-effective to rent an affordable training space than prime real estate in Central Manhattan. As a training center, Colors created quality jobs for many unemployed and under-employed restaurant workers. Boosting the number of career coaches and slashing rental costs by half could have doubled or tripled our job placement numbers and increased membership engagement. Together, cheaper rent, more community organizers, and more career coaches could have significantly expanded ROC’s mission of building worker power.

In general, business leaders must be aware of the talent required to implement their strategic goals and visions. The same is true for nonprofits. Organizations planning to open a cooperative business must carefully assemble their initial team of worker-owners. Colors co-op members met consistently for three years, only to discover at the restaurant’s opening that they needed experienced managers to run their finance and operation teams. Seeing these newcomers become the business’ leaders and highest earners was challenging and frustrating, leading to internal conflicts.

Additionally, the last consultant and executive chef hired to lead Colors had no experience working in either a worker cooperative or a social enterprise. Ultimately, we learned that businesses with unqualified human capital and insufficient capitalization are constrained and likely to fail.

The outcome could have been different if ROC had converted a retiring restaurant owner’s business into a worker-owned cooperative or fundraised to purchase a building instead of renting. A capital campaign with an experienced fundraising team might have leveraged enough revenue to purchase a building for both ROC and Colors. The LLC structure of Colors also forced ROC to lean on loans, a more expensive approach to capitalizing a social venture than a business with more equity.

 

Lessons for Social Enterprise

With nonprofit social enterprise, by definition the nonprofit is seeking to balance financial and social goals. In terms of social goals, Colors played a meaningful role in building worker power, with its training operations helping improve restaurant workers’ wages and working conditions. But some fundamental conflicts between business and mission goals were never resolved.

For example, Colors might have succeeded if it were primarily a training center that did not also try to compete as a restaurant business in one of the world’s most expensive markets. Another possible path for Colors that might have worked would have been a high-road venture focused on creating a profitable fine-dining restaurant without the constraints posed by doubling as an event and training space. But it was never able to operate as such.

Another area of tension was in the business design, which fostered separation between Color’s customer base and its workers. When a nonprofit creates a social enterprise, social impact should align with the population it seeks to serve. For Colors to succeed financially required it to attract an affluent professional consumer base that could afford fine dining. Yet ROC was focused on recruiting low-wage restaurant workers. This mismatch rendered power building a complicated proposition because ROC’s members could not afford to be regular customers at the restaurant.

 

The Ultimate Outcome of the Colors Experience

Colors’ closure was disappointing, but it also provides ROC and the field with a much-needed learning experience. Under external pressure, many nonprofit organizations like ROC are encouraged to think through revenue-generating ideas but end up creating underperforming businesses like ROC’s Colors restaurant.

What can be done differently? First, a cooperative is a business—and should be run as one. This means developing a business plan and a robust marketing strategy enhanced by products or services that a dedicated group of customers wants to pay for.

Despite the best efforts of ROC leadership, the lack of business management experience and the absence of a failure contingency plan led to irreparable damage. Specifically, scant working capital meant that Colors managers had a limited cash cushion available when strategy adjustments were needed.

Ultimately, ROC’s team decided that we needed to pull away from managing restaurants and focus on the most critical issues that low-wage restaurant workers face and on the drivers of poor job quality for restaurant workers in a way that centers the voice and power of workers. Returning to ROC’s mission would lead us to build power in communities of color.

ROC’s vision today centers on advocacy, including our participation in the campaign to pass the Restaurant Workers’ Bill of Rights (RWBOR), which would improve job quality through higher wages, benefits, and paid time off; professionalize the industry; and provide equal access to higher-earning jobs in the restaurant industry. This requires both policy shifts and culture change in the industry. Our leading policy goals today include efforts to win state and local versions of RWBOR (minimum wage, childcare, racial and gender equity), defending those policies where they exist, and increasing the federal minimum wage (including getting rid of the $2.13 subminimum wage for tipped workers).

We also continue to operate our COLORS Hospitality Opportunities for Workers Institute, which in addition to helping low-wage workers access living wage jobs in fine dining, serves as an excellent base building tool for our ongoing leadership development, organizing, and public education.

Our efforts to build worker power also seek to transform the industry and its narratives. The restaurant industry’s dominant narrative, predicated on claims that improving wages and working conditions will cripple small businesses and lead to restaurant closures, is belied by evidence from around the country, which shows that higher wages and dignified working conditions benefit workers and businesses. To date, over 900 restaurant businesses have joined our RAISE (Restaurants Advancing Industry Standards for Employees) campaign. These businesses demonstrate daily the viability of a high-wage road to profitability.

Of course, much work remains to be done. At some point, ROC might start a new co-op to build ownership in our community. But we would do so differently. Colors reminds us of the importance of bringing the right people, business model, and capital together to build sustainable community-owned businesses for the long haul.