Cranberry Stressline

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updated: May 26, 2002, 7:00 AM

Is consideration of a sale of Ocean Spray a moot point?

Thoughts for "Wi OS grower"

Posted by Dove on May 25, 2002, 9:09 am

You made a very thoughtful post on May 17th, stating that "the issue of a sale is a moot point." I'd like to offer a few more thoughts for you to consider.

Wi OS grower, the "issue of a sale" has been voted on only once, by the 25 member board in November 1999. That vote, exploring the possibility of sale of merger, was defeated by the barest of margins, 13 to 11. At that same time, the board voted to hire new management, downsize the board from 25 to 15 and change the board nomination procedures so that "different opinions" would be much less likely to win a place on the board. Then the entire board membership but one promptly resigned.

The inclusion of outside members on the board was intended to include opinions from people with business experiences lacking in the former, all-farmer board. Such inclusion implies healthy, constructive dissent. In practice, the outside members were mostly previous associates of the CEO hand-picked by him. Because they owe their positions to the CEO and not to the shareholders they supposedly represent, they form a pro-CEO voting bloc. One of these "outsiders" exercises key power in selecting grower/director nominees. Thus, the CEO can maintain a pro-CEO voting bloc. This is farther from an independent-thinking board than anyone could have imagined two and a half years ago. It is also contrary to most of the Board of Director reforms that have been sweeping the American business world for the last two generations. Although abuses still occur, the relative independence of American boards resulting from these reforms is one of the main reasons the American economy has performed better than Europe or Japan.

At the time of Ocean Spray's 1999 changes, many former board members on both sides of the sale question expected that berry prices would sink below $25 a barrel for only a year, then begin to climb back into the $30's & $40's. Incoming management stated that a "turnaround" would take 18 months to two years. They also said the 2000 setaside of 15% would probably be sufficient to restore the balance of supply and demand and that Ocean Spray could expect sales growth of 15% annually.

In fact, in the last two years, the 2000 setaside had almost no effect and another setaside more than twice that size was asked for and granted in 2001. Its burden fell most heavily on those growers who did not cause the surplus. Nevertheless, berry prices sank into the teens, where they remain. Management has warned that another large setaside may be necessary in 2003. Management tries to make the sales picture sound rosy by emphasizing growth in certain categories, but overall sales growth has been nil. The prospective recovery of single serve continues to disappoint. Grapefruit is declining rapidly. Both of these declines reduce the "brand growth" essential to restoring profitability to growers. More dangerously, impending departures and bankruptcies of many growers, both citrus and cranberry, place increasing demands for capital on a grower base that is shrinking.

As you wisely point out, most parties seem to agree that "continuing reinvestment in the business" is essential, but advertising -- a key element in restoring brand dominance -- is budgeted at a very modest figure for a business of this size, and it is not going to be fully spent.

Let's get back to your contention that "sale is a moot point" because "the topic has been discussed and surveys have been done." In truth, only the discussions orchestrated by management have resulted in a negative assessment. The effort to release consultants' findings at the 2001 Annual Meeting was misrepresented by opponents as a poll "for or against" a sale. Proponents correctly represented the effort as an opportunity for growers to become educated on what their choices really are. The "summaries" of Bain's findings were given by employees who either didn't work at Ocean Spray at the time or have a vested interest in opposing any change. No grower outside Massachusetts ever heard directly from Bain. No grower in the entire cooperative outside the pre-2000 board ever heard directly from Merrill Lynch, even though Merrill Lynch stated in a series of grower meetings that they were "working for the shareholders" when they took the assignment. Growers were asked to "voice their opinions" on an issue they were not properly informed about, and remain uninformed about to this day. THAT IS NOT FULL DISCUSSION.

As "Doomed" suggests, a discussion of sale would have to include a range of prices. It would have to include plans for the future of the cooperative handler/supplier. It would have to include prospects for fruit use, sales growth, etc. Most importantly, it would have to include information presented by prospective partners. When you put a backhoe or water reel on the market, you set an asking price and talk to prospective buyers. You don't just ask the hired man who operates it now if he thinks anyone would be interested. Does a large business deserve less?

When you ask the fox about conditions in the chicken house, you get one answer. When you ask the chickens themselves, you might get a different answer.

Surveys conducted by the owners of Ocean Spray have come out differently than the ones conducted by management. When a major shareholder conducted a professional, mail-and-phone survey several years ago, more than three quarters of the growers who replied wanted more information about a strategic merger. When a trusted former director conducted a mail survey a few months ago, growers who replied asked for information about business options from an "outside source" by more than five to one. The first of those surveys was never officially responded to. The second has resulted in management refusing to answer "sale-related questions" from growers.

The board won't stand up to management. They seem to fear that any business alternative will be worse than what we now face. Just for good measure, they're still trying to make sure that ordinary growers never learn anything. The management-controlled Ocean Spray board seems to feel that a major company interested in the brand would use it to sell FEWER cranberries, rather than more. Is that plausible, when 90% of the world's people constitute a virgin market for cranberries, and the beverage majors have established sales and distribution systems with many of those people? What would these fearful directors say about Coke expanding sales of Minute Maid and Pepsi expanding sales of Tropicana? What do they think about Mauna Lai, which Ocean Spray started, and is doing better since Cadbury Schweppes bought it? The tropical drinks category -- which languished when Ocean Spray was a player -- is thriving now that Cadbury dominates it. Companies such as Snapple, SoBe, Mad River, Fresh Samantha and many others, have innovated in a category, then sold to the beverage majors so that the founding shareholders can profit from their investment and so growth can continue on a larger scale. Article after article in the business press describes the "non-carbonated" category as being where the action is in beverages. Everywhere, it seems, but Ocean Spray. Do you suppose that the Ocean Spray board will ever give an impartial assessment of these developments? The reason, Wi OS grower, that you can "offer no better alternatives" is that the board and management have prevented you and most ordinary growers from knowing what the alternatives might be.

Using low fruit prices to transfer the danger of bankruptcy from the corporation to the grower/owners is not progress. Conducting business by making the shareholders lose money year after year and deliberately keeping them uninformed is not just "moot." It is extremely retrograde.

Posted by Doomed on May 25, 2002, 10:15 am , in reply to "Thoughts for "Wi OS grower""

Unless the BOD actually follows their fiduciary duty and explores an alternative I continue to believe that many growers are simply doomed. The BOD and management has officially confirmed that opinion by telling growers publically that the only viable plan is the current "turn around". Why does the BOD refuse to investigate other alternatives? Why are the grower shareholders being denied the right to vote on other alternatives? Solicit offers and then present the best one to a shareholder vote. If it wins it wins if it loses it loses. Allow the shareholders the right to full disclosure and the right to decide. Who knows what someone would be willing to pay for the OS brand. Would the vote be the same at $400 per share as $200 per share? We should have the right to know rather than simply being doomed to turning back our stock at $25 when the "turn around" plan puts us out of business.

I do not understand all the ways that investment banking works but I would not be surprised to see a significant group of shareholders banning together to approach potential buyers. I think that a buyer would realize that at the right price they could get a 51% vote. I do not believe that growers will continue to just go out of business and have their stock redemmed at $25 when we all know that it is worth far more than $25. If OS BOD fails to act I predict that a shareholder group will in fact put the OS brand in play. Remember when the last vote was taken at the BOD every BOD member was under the impression that it took a 75% vote to approve the sale of the brand. Some directors voted NO because they felt that any efforts to sell the brand would be blocked by 26% of the shares. They thought that wasting time exploring a sale would be useless since a block of 26% had openly stated they would NEVER accept the sale of the brand. 51% is a lot different than 75%. Buyers may be willing to launch an unsolicited offer knowing that 75% is not required.

I also encourage growers to look at the NUMBERS. The six months results are in our hands. Compare the last six months of 2001 to the numbers that are required for the last six months of 2002 to meet the "turn around" plan for the current year. You will be shocked! Sales must be 12% GREATER than last year and Gross Profit must be 39% GREATER than 2001. It will not happen and even the "turn around" is doomed.

We need to act now before the brand loses more value and we have no alternatives.

Posted by grower on May 25, 2002, 9:33 am , in reply to "Thoughts for "Wi OS grower""

Very good post interesting and thought provoking. Dove you sound like a nuetral unbiased person, keep it up !

Posted by industry player on May 25, 2002, 3:51 pm , in reply to "Thoughts for "Wi OS grower""

Some more food for thought.

1. Domestic and international distribution systems are highly concentrated. We know this, but do we really understand what it means. I do not know the exact numbers, but to make the point, let’s say a half dozen US retailers control 75% plus of the market. To play competitively with that enormous concentration of power, national brands must be equally as strong, creative and professionally managed.
2. Professional and competent management needs strong incentives. It is difficult if not impossible to get the best of the best in terms of management talent throughout an organization without equity incentives. A coop cannot offer equity incentives. It is difficult for a coop to reach a critical mass where true economies of scale and power are effective.
3. The concentration of power in off shore markets is not dissimilar to the US. One better be a strong global player, if one expects to compete and succeed off shore. This is an expensive arena to be a new player versus someone who has already paid their dues.
4. The solution to the surplus should not be grower dumping, but to grow the demand side domestically and internationally. The following is not totally accurate but for the purpose of trying to make a point: Relative to the tremendous potential our industry has, I think retail buyers in the US, especially all those following the baby boomers look at our industry more as a quasi cure for a bladder infection versus something that is ‘in’ ……healthy is nice but exciting and non boring might be better.
5. Before we start slapping import taxes on fruit from Europe or wherever, let’s remember that some 90% or higher of the world has yet to try a cranberry. The opportunity in Germany alone is enormous. Global trade/expansion in the hands of the right global player could solve our surplus problem both for the short and for the long term.
6. I own a little stock in Pepsico. I have been impressed with their vision and brand portfolio not to mention their stock performance. They have 15 brands with sales of more than $1 billion. 15! Whoever decided to sue Pepsico over the Tropicana acquisition should have won the dumbest move of the decade award.
7. The Nestle alliance on the other hand is a step in the right direction. Nestle is a global giant with a great reputation and sales of 30 plus times the sales of OS.
8. If one were an OS grower, getting $25 because one can not hold on any longer is actually much worse than that given the time value of money, for most it will be less than half of par.
9. I feel that most OS grower / owners have bought a train ticket on the Coop Express and the train is moving faster than they realize. The question is ….is the train moving in the right direction? If it is not, how long does one wait before you either get off individually or collectively try to turn the train around. Not an easy decision. Turning a train around is not easy. Not turning the train around could be a disaster waiting to happen.

Posted by Pia on May 25, 2002, 6:49 pm , in reply to "Thoughts for "Wi OS grower""

Pretty convincing arguments, Dove. Let me see if I can predict which pat answers the true believers will use to discredit your comments:

1) Stressline is an anti-Ocean Spray site.
2) Hawthorne’s team is “world class” and we’re lucky to have them, leave them alone. (World class judging by handsomeness, apparently, because there is nothing world class about the growth they are achieving.)
3) The turnaround! The turnaround! The turnaround!
4) Rob goes to each growing area quarterly. So there.
5) Aw, you must like Northland or something.
6) “Mine is not to reason why! Mine is to brownose – and die!”
7) Shut up! Shut up! I don’t care what happens to me, as long as nobody knows.
8) Stressline? Oh I never read that drivel. I prefer to get my information the official Ocean Spray website. (Did you know that the official newspaper of communist Russia was called “Pravda”? And that means “truth”.)
9) Well, you know, I don’t care if a lot of growers DO go out of business. I am so god-damned smart that I know I can continue farming without profit. And once those dead-heads are gone, life will be sweet!
Rabble rousers will be the death of us all. This industry was not built by sensible men looking out for their common interests. It was built by men with their heads in the sand relying on the kindness of strangers. Just like all the other commodities. We always did well because we were the same as the rest of agriculture.

Posted by Wi OS grower on May 25, 2002, 7:56 pm , in reply to "Thoughts for "Wi OS grower""

Dove, you have presented a number of thoughts and ideas. I thank you for your most educational post along with a number of supporting facts to substantiate your points. Could it be that the Board and management are rebuilding the value of the Brand to sell at a later date and become a marketing Cooperative that is no longer involved in manufacturing and distribution? The time to sell an asset is when the valuation is high-not at its lowest point in more than a decade. I realize that a number of grower/owners may not survive the rebuilding of the value of the Brand-perhaps it is time to do another survey of the grower/owners concerning the subject of a sale. So, how do the OS owners become informed regarding the sale subject?

Posted by demonjd on May 25, 2002, 9:18 pm , in reply to "Thoughts for "

> Because they owe their positions to the CEO
> and not to the shareholders they supposedly
> represent, they form a pro-CEO voting bloc

If the biggest shareholders have lost
control over management, you'd think
they'd be a little more upset about it. Why
is DeMarco the only one who's suing?

Ocean Spray has ceded power to a dictator
to get them out of an economic mess. It's
no wonder the minority is being oppressed.

Posted by Dove on May 28, 2002, 9:18 am , in reply to "Re: Thoughts for "

Yes, it is possible that management is ATTEMPTING to rebuild the value of the brand for sale at a later date. Unfortunately, management is not ACHIEVING a "rebuild" of the brand. No "world class" CEO would lower sales growth targets from 15% to 7% to near zero % two and a half years into a turnaround that was supposed to take two years and claim the turnaround was still working. No "world class" board would let him get away with it.

How can growers survive the "rebuilding of the brand" when there isn't any?

The declines in single serve and grapefruit are both reductions in branded business. They reduce the brand's visibility to the public. You suggest Ocean Spray "become a marketing cooperative that is no longer involved in manufacturing and distribution." Ocean Spray is already uninvolved in distribution. It doesn't ship out product in Ocean Spray trucks; it doesn't send staff to stock grocery and convenience store shelves the way Coke and Pepsi do. Ocean Spray products are distributed by brokers. Store employees do the stocking.

Consolidation of several brands under the food and beverage majors makes economic sense because you do not need an entire corporation for each brand. Snapple, SoBe, Minute Maid and so forth can be run more efficiently as divisions of larger companies. The parent companies can achieve economies of scale by accounting, distributing, etc. for the whole family of brands.

Ocean Spray is expecting to receive well over 4.5 million barrels of cranberries this fall and only needs about half that for its branded products. The rest of it will either pile up in inventory or be resold as concentrate to competitors. That's upside down from an efficient business model. Ocean Spray is incurring a full corporate overhead for one brand while acting as handler for larger, more efficient companies that are piggybacking on Ocean Spray's support for the cranberry category.

We don't need another survey taken in an information vacuum. The surveys we have demonstrate that growers need and want more information. The growers need that information so that the NEXT vote is taken from a position of greater knowledge.

Finding out what the brand is worth, whether an offer could make growers whole again, how much fruit another company could use and what they might pay for it, will not hurt growers. It will help them. If they choose to act on that information, it will be an INFORMED decision.

The first thing growers can do to get this essential information is: UNITE!

Growers have to be less willing to throw each other off the lifeboat and more willing to look at the reasons the ship is going down. The problem is systemic; it is not the fault of any one region or any one type of grower. We have to realize that and pull together for mutual benefit, the way a cooperative is supposed to do. As long as growers prefer to fight with each other, they will remain disenfranchised, divided and demoralized. Others will take advantage.

Growers need to look at the numbers dispassionately and frankly recognize that the turnaround is not working. We need to consider alternatives and we need to consider them as soon as possible. The brand is probably not increasing in value. The big food and beverage companies have better access to Nielsen and IRI data than growers do. They know that Ocean Spray is a venerable brand that can return to greatness in the right hands -- but no company is going to stick its neck out for the growers if they won't stick up for themselves. As things are going now, companies can sit and wait and let the brand get cheaper.

Information about "alternatives" has to come from outside Ocean Spray -- not from the same people who tell you that zero sales growth, a grapefruit collapse, financial losses for six years straight, massive attrition of the grower base and the likelihood of three set-asides in four years is a satisfactory "turnaround."

There are several things growers can do to get that information. They can insist that Merrill Lynch be brought back in to see what other companies can do for the industry. They can call a special stockholders' meeting to discuss these issues. They could assesmble groups of growers and invite companies to come and talk to them. They could insist that the board represent the shareholders. Directors always talk about "their responsibility to the cooperative as a whole," but that always seems to mean management, not the grower/owners.

Growers can take the story to the media. Irresponsible companies are terrified of the glare of publicity -- now more than ever. Ocean Spray has always managed to spin itself as a piece of Americana, a wonderful little cooperative, the champion of the yeoman farmer. Plenty of us know that is no longer true. We know our fruit is good, the products are good, but our leadership no longer represents us. The public would understand that.

Let's hear some other suggestions.

Posted by Hotmail on May 28, 2002, 10:19 am , in reply to "Re: Thoughts for "

You should consider posting an anonymous
e-mail address where like-minded people
can contact you.

Posted by yankee on May 28, 2002, 11:01 am , in reply to "Re: Thoughts for "Wi OS grower""

I agree. an e-mail address where we could state our opinion would bee great. I feel that an overwhelming amount of growers would support this action. We need to get some idea of how many growers would like more info.

Posted by Doomed on May 28, 2002, 10:07 am , in reply to "Re: Thoughts for "Wi OS grower""

You are right on target. If the BOD refuses to explore alternatives and allow the shareholders to decide then a group of shareholders needs to approach an investment banker and solicit offers outside of the BOD. It is sad that we even need to consider this strategy.

Posted by Dove watcher on May 28, 2002, 4:13 pm , in reply to "Re: Thoughts for "Wi OS grower""

Dove I think you have a lot of growers thinking. They should be considering the possibility of the brand decreasing in value. The " buyer" backing out etc. Then the corting company could come back at a later date and buy what's left for a song and a dance. Happens all the time.

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