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Ocean Spray's finance chief explains why his company's cooperative business model is so, well, fruitful. An interview with Richard Lees, CFO of Ocean Spray Cranberries.
Edward Teach, CFO Magazine
May 15, 2012
Richard Lees has always been a consumer-products guy, spending much of his career at Pillsbury, Dannon North America (where he was CFO), and Gillette, working in cities like Minneapolis and Boston. Today, as CFO of Ocean Spray Cranberries, the 49-year-old Lees goes to work in the small town of Lakeville, Massachusetts, where his office is located next to a cranberry bog. The bog reminds him daily of what makes his company so different: it's an agricultural cooperative, owned by more than 700 cranberry growers in the United States and Canada and a few dozen Florida grapefruit growers.
Founded in 1930 by three cranberry growers from Massachusetts and New Jersey, Ocean Spray has become a $2 billion-plus business primarily by selling just about anything that can be derived from cranberries, including a dizzying variety of drinks. But Lees says the cooperative's members are not just in it for the money. "If you talk to our grower-owners," he says, "they'll talk about how they're not in it to cash out on the investments that their grandparents or their parents made. They're in it to provide a good opportunity for future generations." Here, Lees explains in detail how the cooperative works.
How does the cooperative business model work at Ocean Spray?
We are owned by our growers, who contribute all of their cranberry harvest from a designated acreage that is under contract with us. We take that on consignment and, of course, produce, sell, and earn profits on all of the products that we offer.
Does the designated acreage change from year to year?
Yes, it changes every year based on what the yield looks like. We take the entire crop and sell it in roughly a 12-month period, what we call a pool year. If it takes us significantly longer than a year to sell that crop, then we're falling behind, because we're building too much inventory. If we're selling it in less than a year, we're going to have supply issues.
Our objective is to sell all of that crop and deliver to our grower-owners a premium return for their cranberries and for their membership in our cooperative. We just divide our total profits by the number of barrels and say, "Here's what you'll earn this year on your crop."
How much are you currently paying per barrel?
We've improved our return per barrel from roughly $35 in 2005 to more than $60 in each of the last three years. In the past year we paid just over $63 per barrel. The independent market has been getting much more of a commodity-like return for their fruit.
When do you pay the growers?
We pay them over the course of the year. When they first deliver the fruit to us, we'll give them what we call a harvest advance. That might be $10 per barrel. Then we give them progress payments throughout the year as we start earning on that crop. We make a final payment to them when we close that pool — that is, when we sell the last of that crop.
Does the cooperative accept new members?
Right now there is not an opportunity to come in, because we're in a pretty good place with our current growers, in terms of balancing supply and demand and giving them premium returns.
How is governance handled in this type of cooperative?
Our board is made up primarily of growers who represent their fellow growers in the different markets across the country. We also have two external directors who help on the business side of things. The board gives us high-level direction in terms of the balance between growth and profitability. Where they don't chime in quite as much is on the branded side of the business — our product innovations, marketing campaigns, public relations, pricing, and promotion strategies. That's our role, to add the value in that context.
Our grower-owners have made investments over time to create a very strong brand that will command a premium in the marketplace. We think of ourselves as the stewards of that brand value, always looking to improve it.
Innovation is a hot topic these days, but Ocean Spray has relied on innovation for many years, using cranberries as the basis of everything from blended juice drinks to Craisins.
We're always looking at how to get maximum value for the barrel of fruit that's been delivered to us. In the case of sweetened dried cranberries, this was purely a way of using more of the fruit that was given to us. We found a way of using the hulls of the cranberries while still extracting much of the juice from them.
What is Ocean Spray's share of the cranberry market?
About 60% of the cranberries grown in the world come through Ocean Spray. Cranberries by and large are grown in North America; you'll find virtually all of them in the U.S. and Canada. Our market share on the beverage side is around the same level. It's a bit higher on the sweetened dried cranberry side.
Since you have such a dominant position in cranberries, who are your competitors?
We think about shelf-stable juice-aisle drinks and beverage-refreshment drinks as our main competition. On the Craisins side of the business, we define dried fruits and snacks as our competitive set.
How do you capitalize the business?
The foundation of our capital structure is equity contributions made by our grower-owners. They own proportional shares of the company based upon how many barrels of fruit they deliver. We do have capital needs that come up from time to time, so on top of the common stock we have debt. We've got a great relationship with CoBank, which syndicates most of our debt through the Farm Credit System. We recently took on a $100 million term loan with the bank through this syndicate.
In addition, we had a preferred-stock issuing a number of years ago, which was a way of getting some equity into our capital structure without diluting the ownership. That's a vehicle we would probably look to tap again in the future.
Although Ocean Spray is closely identified with cranberries, the company also includes grapefruit growers in Florida.
Yes, we have about 35 grapefruit growers in Florida. They account for about 5% or 6% of our business, on a sales basis.
Will you branch out into other fruits?
We did launch a blueberry juice drink a couple of years ago, although it's a nonpatronage business. That means we're just buying the blueberries; we don't have a blueberry cooperative. We did that for several reasons. One, it gives us an opportunity to leverage the Ocean Spray brand. Two, it gives us a little more scale in our manufacturing environment; it lowers our cost per case across the business. Three, when you think about how our business is structured, we distribute all of our earnings, so you don't have retained earnings to help grow the business. With a nonpatronage business we can retain those earnings.
What's the best part of your job?
I love working with the brand and the innovation and the new products in the marketplace. But what really makes this a special place is the connection to our grower-owners. We go out to their communities a couple of times a year to talk to them about the state of the business and what the anticipated returns are. When we are able to deliver strong performance on their behalf, that makes for good meetings.