Charity case: Why Goodwill's failure in Toronto was anything but sudden
Shuttered stores, embittered employees, discarded donations. Janet McFarland, Jeff Gray and Eric Andrew-Gee report on a financial failure long in the making
For 31 years, John Petti was a janitor at a Goodwill outlet in Scarborough. Now, bewildered, jobless and left with just 11 boxes of Kraft Dinner in his North York apartment, he is struggling to understand the thrift store's sudden demise.
Looking at piles of newly donated goods sitting untouched in motley heaps outside Goodwill's locked doors at the Progress Avenue location, Mr. Petti wonders how a business model with a well-established brand relying on free donations could suddenly run out of cash and go belly up.
"The maddening thing is, every single day, people are donating," he said. "They come out in a freaking rainstorm and drop off donations."
Mr. Petti joined dozens of out-of-work Goodwill employees in the parking lot on Wednesday to demand their paycheques and call for the resignation of chief executive officer Keiko Nakamura. Some had showed up to work on Sunday to find shuttered stores and no explanation.
Coursing through their expressions of fear and anger is a deep sense of betrayal and confusion over how this could happen. "In my world, if you give me something for free, and I sell it, I'm going to have money in my pocket," Goodwill truck driver and union steward James Nickle said. "It's pretty simple."
Sadly, for the 430 mostly low-wage employees put out of work, the fall of Goodwill's Toronto operation was anything but simple.
While the organization's closing was abrupt, a Globe and Mail analysis of Goodwill's operations shows that its decline was long in the making. The group's financial woes stretch back well over a decade, and the charity weathered a string of major and minor crises for years as it attempted to find a solid financial footing.
Goodwill's failure is a story of numerous poor management decisions set against the backdrop of an increasingly competitive retail environment for second-hand goods. Coming together, the two factors were a fatal combination.
While Ms. Nakamura has offered minimal public comment about the financial issues that sunk the organization – and would not agree to be interviewed for this article – it is clear that the charity has operated on the brink for years.
Court records in legal disputes illustrate how long Goodwill has struggled to make ends meet. In 2006, for example, the charity's lender cancelled its line of credit because of financial concerns, which prompted the organization to distribute credit cards to executives in order to make key payments and provide petty cash.
Ms. Nakamura's predecessor, former Deloitte human resources consultant Ken Connelly, ran Goodwill for more than a decade before retiring in 2011. The organization was always financially up against the wall and, by its nature, difficult to manage, he said.
Among its challenges, Goodwill has a mandate to employ people with disabilities, immigrants, people with criminal records and the chronically unemployed.
"It's like the people who Goodwill serves, it's a marginalized community," said Mr. Connelly, 75, who now writes poetry. "Most of the employees have come through a program of some sort, and it is unionized … so you're always negotiating. And it's just a very tough environment for everyone connected to it."
The combination of a union and Ontario's move to increase the minimum wage, which Mr. Connelly supports, did make it harder to meet the payroll. Wages were Goodwill's single biggest annual expense, at around $17-million, close to two-thirds of its revenue.
Plus, Mr. Connelly said, new competitors in the second-hand clothes market were emerging.
In addition, the 2008 financial crisis hit the charity, and the city's poor whom it serves, very hard, he said.
But even before the financial crisis, Goodwill was struggling. It made a series of bold moves meant to shore up its future, but kept ending up further behind. In 2005, it sold off its Jarvis Street flagship store, which had stood for 70 years, to developers. Goodwill earned $14-million, but it was soon eaten up paying off debts, buying new equipment, paying severance to laid-off workers, setting up new stores and facilities and subsidizing ongoing losses.
Around the same time, Goodwill Toronto thought that it could fix its problems by bringing in consultants from a successful Goodwill branch in the United States, signing an 11-year deal for help from Goodwill Manasota Inc. of Bradenton, Fla. But the help did not come cheap.
Trainers were sent north from Florida to work with Toronto's staff to find ways to maximize revenue. However, according to Goodwill Toronto's financial statements, by 2008, with the financial crisis biting, Toronto had to cancel the deal. Mr. Connelly said he felt that the trainers had taught his organization all they could.
But Goodwill Toronto was left with a $160,263 (U.S.) bill it couldn't pay. It agreed to make $1,000-a-week instalments until its financial health improved.
In an interview, current Goodwill Manasota vice-president Veronica Brandon Miller said she was unaware of the details of the Toronto contract, or why it was cancelled. But she said her organization does its best to help struggling Goodwill stores.
"A lot of people don't understand … there's a whole process to make sure that you are gaining the most revenue from [each] donation," she said. "And that's what we do."
Goodwill Toronto had also fallen way behind on the $1,300 (U.S.) a month in dues it must pay to Goodwill Industries International Inc., the organization based in Rockville, Md., that serves as an umbrella for independently operated Goodwills across the United States and Canada.
In 2009, according to its financial statements, Goodwill Toronto agreed to pay Goodwill Industries International $136,811 in back payments, spread out in monthly instalments scheduled until 2017. This week, a spokeswoman for the international group said her organization had sent a representative to Canada to look into the sudden collapse of the Toronto-based chapter.
Mr. Connelly said that, despite all Goodwill's many problems, the shuttering of the organization on his successor's watch came as a shock. He is hopeful that it will reopen, not just for the staff, but for the many customers who live in poverty and not only shop at the store but also feel like part of a community there.
"When they go into one of the downtown stores or an upscale store, they don't feel welcome, they are basically told to get out," he said. "Whereas when they go to a Goodwill store, they feel at home."
In 2011, Mr. Connelly retired and was replaced by Ms. Nakamura, who had been fired as CEO of Toronto Community Housing Corp., the massive city agency that oversees its 58,000 units of public housing. She was asked to leave TCHC in March, 2011, after an audit report uncovered lavish staff spending and sloppy procurement practices.
Ms. Nakamura's background was in the public sector, and she had no experience running a retail-store chain. At Goodwill, she was overseen by a volunteer board that also lacked significant retail-management backgrounds, many of its members coming from other parts of the business or charitable world. They resigned en masse last Friday and have declined to speak, leaving many questions about their handling of the crisis.
By all accounts, Ms. Nakamura hit the ground running. Her first priority was to develop a strategy to turn around the organization, including a "real estate consolidation" plan that ultimately saw Goodwill close at least five store locations under her tenure.
She also launched a strategy to cut overhead costs, and replaced some top officials. In 2012, she fired the long-time chief operating officer, Vijay Goutam, after alleging that he used a Goodwill credit card for $27,000 in cash withdrawals or advances "to benefit him personally," according to court documents filed in a wrongful-dismissal suit.
At first, Mr. Goutam, who received a salary of $156,550, agreed to pay the money back and was allowed to stay on, on probation. In the court documents, he denies any wrongdoing, saying that in previous years, once expense receipts were reconciled, he would cover any "overage" for cash spent without receipts.
But he was let go after allegations emerged that he had then "pressured" a subordinate to lend him $9,000, which Mr. Goutam also denies in the documents. He sued in 2013, but the two sides reached a settlement.
Through his lawyer, Mr. Goutam declined to comment for this story.
The CEO changeover came as Goodwill was in the midst of making one of its biggest financial decisions in years: the sale of its only significant remaining real estate asset. After the selloff of its Jarvis Street location, it had retained a nearby parcel of land on Richmond Street, where it once had a garage to repair its fleet of trucks. It had turned this property into a donation centre and, in 2006, had taken out a $980,000 mortgage on it.
In 2011, Goodwill got an offer from condo developer Brad Lamb for the site for $4.2-million. But a legal dispute threw the deal into question, after it emerged that an adjacent property owner had actually purchased a right of first refusal on the property from the original owners who had sold it to Goodwill in 1987.
Mr. Lamb did not get the land. It was sold to Goodwill's neighbour, and the charity continued to rent from the new owners and operate its donation centre until this week.
The proceeds from the 2011 sale came at a critical time. Without the cash, Goodwill would have suffered a $2.4-million loss that year. The money was supposed to go into a reserve fund, but it ended subsidizing the organization's losses in the next few years.
A period of relative calm followed. According to the 2012 financial numbers, sales grew and costs fell. Yet the company's auditors still attached their standard warning to the 2012 financial statements, signed in May, 2013, warning that Goodwill faced risks "that cast significant doubt about the organization's ability to continue as a going concern."
That warning was a major barrier that kept Goodwill from being able to borrow more money from banks. But the new management team was optimistic that the auditor's alert would soon disappear.
"While the organization has endured problems in the past, the financial results in 2012 are a positive trend and represent an ongoing commitment by management to return Goodwill to operational stability as a going concern," the charity said in its 2012 financial statements.
However, competition continued to grow stiffer, not only from long-standing thrift-store charities such as the Salvation Army and the Society of St. Vincent de Paul, but especially from a growing number of for-profit retailers moving into the second-hand market.
Value Village, a for-profit company owned by U.S.-based Savers Inc., is the best known of the group, and has moved aggressively into the Toronto market. But competition has also grown from new chains emerging in various niches of the second-hand-clothing sector.
For example, Canadian-owned chain Talize has opened six second-hand clothing stores in Ontario, while Minneapolis-based franchise giant Winmark Corp. is seeing its operations expand in Canada with a growing array of second-hand businesses.
Winmark's brands include Once Upon a Child, which sells children's clothes and equipment; Play it Again Sports, which sells second-hand sporting gear; and Plato's Closet, which sells clothing aimed at teens and 20-year-olds. All now have multiple outlets in Southern Ontario.
Many of those competitors also pay for donated clothes, drawing away some of the best-quality merchandise that previously would have been given to charities such as Goodwill, which do not pay for donations.
Goodwill has also had to contend with the rise of personal online sales of second-hand goods over the past decade on sites such as Kijiji, which have been a blow to donations. Some are turning to local "freecycle" sites to simply give away their unwanted stuff.
Ms. Nakamura told reporters at a news conference on Monday that Goodwill also struggled with steep rental costs in an expensive market such as Toronto, where it owned none of its own stores.
One of Goodwill's competitors, the Salvation Army Thrift Stores, also leases a majority of its locations.
Michele Walker, national retail-operations manager for the Thrift stores, said rent costs have been an issue. But Ms. Walker said the Salvation Army Thrift organization, which operates 30 stores in the Central Ontario region, has had "moderate" revenue growth, even in Toronto, which has offset increases in leasing costs.
And she said Salvation Army has benefited from long-term relationships with its landlords, meaning that it has not had to move locations frequently. "We have a lot of long-standing relationships and long-standing leases in the Toronto area, so we're not constantly moving," she said.
Goodwill has faced more churn, with Ms. Nakamura closing at least five stores, and many other stores closed before she arrived. She also had to contend with other real estate decisions made before she joined the organization.
For example, Goodwill moved locations in 2010 from a bustling but high-rent retail location on Roncesvalles Avenue in west-end Toronto to a new "flagship" in an industrial park on Islington Avenue, at the off-ramp from the adjacent Gardiner Expressway. The store is far larger, but the location has little foot traffic and there are no other retailers within sight of the building.
John Williams of retail consultancy JC Williams Group, who has advised Goodwill and the Salvation Army on retail strategy in the past, said Goodwill's troubles have all the signs of a mismanaged operation. Considering that the retailer paid nothing for its merchandise, "obviously the management and oversight structure wasn't functioning," he said.
"I'd love Salvation Army to take them over. They know what they're doing," Mr. Williams said.
By the time it closed this month, Goodwill Toronto – whose territory stretches from the Greater Toronto Area to Ottawa – had just 16 stores left, leaving it with diminishing brand awareness.
Goodwill Industries Ontario Great Lakes region, based in London, Ont., was almost the same size as the Toronto-based operation in a region with a 10th of the population, CEO Michelle Quintyn said.
"It could be a lot bigger," Ms. Quintyn said of the Toronto operation. "The hope is that one day they will get their market penetration."
Nonetheless, she said she has been impressed by Ms. Nakamura's leadership, adding that she felt her Toronto counterpart made progress, but could not overcome the difficult retail landscape.
"She's a new leader and that brought a lot of hope to the organization," Ms. Quintyn said. "She had a lot of issues to deal with, and I know she was able to deal with many of them, but they just couldn't get there fast enough."
The optimism that greeted Ms. Nakamura's arrival in 2012 quickly evaporated as her renewal plan was overtaken by weak store sales.
From a peak of $27.5-million in 2012, the Toronto region's retail store sales revenue fell steadily under her watch to $23-million in 2014. In both 2013 and 2014, the organization again recorded deficits. (The charity has not disclosed its 2015 financial information.)
At the end of 2014, Goodwill faced a further setback when management lost a dispute with the Canadian Airport Workers Union, which represents most of its employees.
The union complained about Ms. Namakura's "winter strategy," meant to cut costs in the slow cold months of January to March. All employees were to see their hours cut, but the union complained that the collective agreement required Goodwill to lay off part-timers first, before slashing hours for full-timers. Management argued that laying off at least 53 part-timers for a full three-month period each year would be disruptive.
An arbitrator upheld the union's grievance. The ruling also required Goodwill to work out a deal to reimburse full-time employees for lost wages from having their hours reduced, which the union's lawyer, Denis Ellickson, said could be a "considerable sum." However, Mr. Ellickson said the union agreed last fall to postpone a hearing to determine the size of the payments until Goodwill could get "over a hump" financially.
Goodwill did not get over the hump. Although the fourth quarter is traditionally stronger for second-hand retailers because of the lucrative Halloween costume season, Goodwill Toronto began its slow winter season in January, 2016, without even enough cash in the bank to cover payroll costs.
Employees said they had no sense of the financial problems and were assured in late 2015 that things were going well.
One long-time Goodwill employee who worked at the company's Thorncliffe Park location said Ms. Nakamura met with staff at the store a few months ago and assured them that the organization was healthy.
"We actually had a meeting with Keiko. She said, 'It's wonderful, everything's good,' " Nadia Manikis said. "No indication."
It is likely no coincidence that Goodwill faced its final showdown in early January. Starting the year without a decent cushion of cash is a bleak proposition for such an organization.
In its legal dispute over winter hours, the company explained to the arbitrator that it always loses money in the first quarter every year and then spends the rest of the year trying to cover the deficit.
Dan Kershaw, executive director of Toronto-based charity Furniture Bank, sympathizes with Goodwill's troubles, saying his organization "always hates" the winter season because fewer people are cleaning out their houses or moving and donating unwanted furniture. Furniture Bank offers a service hauling away unwanted furniture for a fee, then donating it to people living in poverty.
"This is a cautionary tale," Mr. Kershaw said of Goodwill's cash-flow crisis. "We always watch our cash flow – every week we're having cash-flow meetings and making sure we don't overextend ourselves."
While people may think charities have stable funding, Mr. Kershaw said the opposite is true – money is "lumpy," especially for those that offer a retail service and are reliant on customers.
"Social enterprises are businesses like any others, they just focus on a higher calling," Mr. Kershaw said. "So, like any business, the first lesson I learned is that cash is king."
With inadequate cash at the start of January, and no hope for a quick turnaround in the coming months, Goodwill's volunteer board decided at an evening meeting on Friday, Jan. 15, to shut down operations immediately.
(Strangely, Goodwill had posted an ad on its Facebook page the day before looking for three new directors to join the board.)
No one has explained why the move was so abrupt, and why no interim measures – such as further store closings, partial layoffs or a major restructuring – were attempted.
Retail adviser Wendy Evans of Evans & Co. Consultants questions why Goodwill did not have more warning of its cash crunch. "You would have thought that their forecasting would have indicated more lead time than 24 hours," she said. "You know when you're going into a cash-flow squeeze."
Shocked employees waited all week to see if they would at least get their unpaid back wages, only to be told that their final pay would be provided on Friday. Ms. Nakamura said in a statement that she is still seeking "support and alliances to create a constructive path forward for the organization," but offered no details about what is being considered.
"This crisis may present an opportunity for a transformation," she said.
Workers' hopes are fading, however.
At the Wednesday protest in Scarborough, many former employees directed their anger at Ms. Nakamura.
"She's warm, she's going to eat tonight, she's going to sleep," cried Raphelia Debique, a donation sorter at another Toronto location.
Ms. Debique said she can't afford her anti-anxiety medication without company benefits, which have been cut off. The drug goes for more than $70 a pill, she said. And with rent looming and her job of nearly a decade suddenly gone, her anxiety is flaring up.
"This is cruel what she's done," said Ms. Debique, tears running down her face.
Others had anguished stories about the abruptness with which they found out that the charity was closing.
"Everything was perfect. Sunday we show up for work: no manager, no sign on the door," said Nadia Manikis, who described being locked out in the cold at the east-end Toronto Goodwill store where she worked. "One lady, we almost had to take her to the hospital. She's older and her blood pressure dropped."
Zahra Mohamed, who worked at a location in Brampton, is over 60 – she wouldn't say how old, exactly – and fears that without Goodwill she will struggle to find work. "Who's going to hire me at this age?" she said.
But, like many other employees at Wednesday's protest, she believes that Goodwill is fundamentally viable and could be revived. While it's still unclear whether that interpretation holds water, it is all the employees have left.
"We know we are in a mess," Ms. Mohamed said. "But we know we can come back."
With a report from Marina Strauss