Escazu Chocolates explains how Southern Season's bankruptcy affects local food market
Amanda Fisher, owner of Chapel Hill-based The Blakemere Co., a maker of traditional English foods like clotted cream and treacle tarts, didn’t cry last month after learning that a fire at La Residence restaurant destroyed much of her equipment and ingredients.
But Fisher says she did cry when she got notice on June 24 that Southern Season, the longtime Chapel Hill gourmet food and kitchen wares store, was filing for Chapter 11 bankruptcy. The store owed her $1,404. Southern Season’s court filing says it expects funds to be available to pay unsecured creditors, like Fisher; bankruptcy lawyers say it is typically pennies on the dollar.
“The ripple effect for me is not a ripple; it’s a bloody sledgehammer,” said Fisher, who has found new kitchen space to use at Chapel Hill’s City Kitchen. “I’ve lost everything that I’ve spent five years building.”
Fisher is not alone. Southern Season’s bankruptcy will affect thousands of small businesses across the country, many based in the Triangle and the Carolinas. The 412-page bankruptcy filing is a who’s who of the state’s small artisan food and beverage makers: Chapel Hill Creamery, Counter Culture Coffee, Videri Chocolate Factory, Guglhupf Bakery and many more. Amounts like $500, $1,000 or $5,000 may seem small compared to the $18 million in liabilities that Southern Season owes, but those small amounts helped keep these businesses afloat and growing.
We carry other local businesses – that’s an order of coffee from Counter Culture, an order of peanut butter from Big Spoon Roasters, an order of milk from Homeland Creamery.
Danielle Centeno, a co-owner of Raleigh’ Escazu Artisan Chocolates
“In all practicality, this probably is going to put us out of business,” said Jeff Milliken, who manages his father’s company, Bear Branch Milling Co. Southern Season was the largest customer for the Tabor City business that sells grits and honey. Records show Southern Season owes $4,639 to Bear Branch, but Milliken said the correct amount is closer to $10,000.
Milliken added: “They are the reason we’re in business and the reason we’re going out of business.”
The bankruptcy’s effect will continue down the food chain of local businesses. Hallot Parson and Danielle Centeno, co-owners of Raleigh’ Escazu Artisan Chocolates, are owed $1,031. “We carry other local businesses – that’s an order of coffee from Counter Culture, an order of peanut butter from Big Spoon Roasters, an order of milk from Homeland Creamery,” Centeno explained.
The couple has decided not sell their chocolate bars any more to Southern Season.
Other business owners – some of whom got their start thanks to Southern Season – say they will continue to work with the company.
“We still got to support them. They’re a solid brand. They just hit a bump in the road,” said Michael Lloyd, who owns Num Num Sauce, a Durham condiment company, which is owed $2,113.
And Christy Graves with Chapel Hill Toffee Co. explained that their family business has a special relationship with the store since their toffee was first sold out of a jar at the candy counter. The toffee company is owed $27,799, which Graves said will be tough to manage but will not shut down the business.
“Southern Season holds a special place in our hearts as they are the ones who helped us launch our family business and have remained one of our largest accounts since that very first day,” Graves wrote in an email. “Both personally and professionally, we are all hoping for the best.”
Graves did note, however, that they only will fill future orders “that have been paid up front in full.”
On Friday, Southern Season president Dave Herman said he has spent the last week answering phone calls and emails from business owners with questions about the bankruptcy. The reactions have ranged from supportive to anger, he said. He is hopeful that the company will be able to regain many of these business owners’ trust and move forward. “The only way we’re going to win back their trust is the way we built it over the last 40 years – one at a time,” Herman said.
Business sold after 2008 downturn
Southern Season was founded by Michael Barefoot in 1975 as an 800-square-foot specialty coffee and food store. It grew to become a $30-million operation with its current anchor location in Chapel Hill’s University Mall and a strong mail-order business. But the economic downturn hit hard in 2008, and the company never recovered. Barefoot sold Southern Season in 2011 to TC Capital Fund, a company led by entrepreneur Clay Hamner, who became Southern Season’s CEO.
Hamner had big expansion plans for the company but was unable to replicate the success of the Chapel Hill store with its restaurant and cooking school in other locations. The company is closing a 44,000-square-foot store in Mount Pleasant, S.C., outside Charleston, and closed its 53,000-square-foot Richmond, Va., store in April. In court on June 28, Hamner said, “In both markets, we got rave reviews but not traffic.” It is also canceling plans to open another large store in Atlanta. The flagship store in Chapel Hill remains open.
Once the company reorganizes, hopefully by December, it plans to revamp its website to compete more as an online retailer and shift to opening smaller A Taste of Southern Season stores, like the ones at Raleigh’s Cameron Village, as well as in Charleston and Asheville. It also plans to open two smaller stores in Southern Pines and Wilmington in the next few months.
The bankruptcy filing shows that Southern Season has $9.8 million in assets, including $3.6 million in inventory, and $18.3 million in liabilities. Those liabilities include $4.6 million owed to creditors whose debt is secured by property and $13.7 million in unsecured claims. The News & Observer is among those unsecured creditors and is owed $13,682.
At that court hearing, bankruptcy administrator Bob Price told the judge that the company will run out of cash in five weeks. However, Hamner testified that he expects to sign a deal next week for at least $4.5 million in financing from the company’s three shareholders to help during reorganization.
To keep its inventory up at its stores, Hamner testified that they were working out arrangements with vendors – small and large – to accept payment upon delivery. Hamner admitted it will take some effort to get smaller vendors to continue to supply the company despite being owed money. “Those are the ones who are going to take more handholding than the sophisticated vendors who have been through this with other companies in the past,” Hamner testified. “...They will deliver on COD but they will have some heartburn on the fact that we owe them money because we didn’t honor what we said we were going to do – in their mind.”
After reviewing the court records, Raleigh lawyer Terri Gardner, who has handled bankruptcy cases for 35 years, is optimistic that Southern Season will recover once it rids itself of the leases for the failed stores in South Carolina and Virginia. “I feel good about this company making it,” she said.
It is not likely that the unsecured creditors will see much if any of the money the are owed. “Unsecured creditors do not do very well in Chapter 11, they get paid pennies on the dollar,” said Raleigh lawyer Holmes Harden, who has been practicing in bankruptcy court since 1983.
After Southern Season changed hands, several vendors said it took longer to get paid and sometimes payments were up to 90 days late. Plus, it required a lot of persistence; business owners say they had to make numerous calls and send many emails to accounts payable.
The only way we’re going to win back their trust is the way we built it over the last 40 years – one at a time.
Southern Season president Dave Herman
Mark Overbay, owner of Big Spoon Roasters, a Durham nut butter company owed $2,163, says he was so frustrated with the payment delays after the last two holiday seasons that he asked for a meeting with company executives. He explained in an email: “Only after senior company leadership gave me assurances that the delinquency would stop did I decide to continue selling to them. We’re a very small business that operates on hand labor and which pays employees living wages, so every dollar means a lot to our cash flow and ability to purchase ingredients, pay our employees, cover shipping costs, etc. When a customer fails to pay for an order on time, we really feel it.”
In light of the bankruptcy, Overbay wrote that he was disappointed that Southern Season placed a rush order three times larger than normal on May 19. He doesn’t believe the buyer was being deceitful. “However, it’s plausible that, since this was one month before the Chapter 11 announcement, executives at Southern Season knew of the impending filing and chose to let business go on as usual, even if that meant asking small businesses like us to fill large orders that Southern Season, by virtue of Chapter 11 protections, would not have to pay for,” Overbay wrote. “The responsible thing to do would have been to alert store-level and replenishment staff know of the coming Chapter 11 filing so that Southern Season could help protect the financial security of the small-business vendors like us who make the products that fill their shelves. It’s extremely frustrating and disappointing that the executives did the opposite.”
Randall York and Joanne dela Rionda, who own Charlotte-based Cloister Honey, which sells honey and a line of honey products, had a similar experience. They said they noticed Southern Season increase their orders the last few months and request rush delivery. Now the couple is owed $3,323. York said: “We’ll probably not do business with them at all.”
They are not alone among business owners deciding whether to work with Southern Season again. “We decided not to deliver today,” said Sam Kirkpatrick on Thursday. Kirkpatrick is one of the owners of Raleigh’s Boulted Bread, which made weekly deliveries of its baked goods to Southern Season’s Raleigh store on Thursdays. Boulted is owed $638 for about seven orders, he said.
Everybody is optimistic that they will execute their plan and come out of it in six months.
Bonnie Julian, owner of Bev & Bites
Herman, Southern Season’s president, disputed the notion that the company placed larger than normal orders before the bankruptcy in order to avoid paying for those bills. With 80,000 products for sale, he said the company uses an automated system to place orders and replenish its stock.
Some of those vendors who supplied goods to Southern Season within 20 days of the bankruptcy filing may have a way to get paid, said Harden, the Raleigh bankruptcy lawyer. Bankruptcy law allows those vendors to file an administrative claim, which Harden explained “gives an unsecured creditor a leg up because those claims have to be paid in full on a priority basis.”
Some small business owners are hopeful that if they stick by Southern Season that the company will survive and it will turn out better for both parties.
Bonnie Julian and Paul Raybin say they weathered many bankruptcies in their previous careers in the textile industry. They and Bonnie’s husband, well-known Charlotte haberdasher Bruce Julian, own Bevs & Bites, a Charlotte company that produces Bruce Julian Heritage Foods, including Bloody Mary mix, condiments, pickles and such. Southern Season owes them $1,706.
“Working with a company with a vision and a plan can also beneficial to the vendor in the long term,” Bonnie Julian said. “... Everybody is optimistic that they will execute their plan and come out of it in six months.”