Tom Gelsthorpe's rebuttal to Bruce Lachney

I appreciate Mr. Lachney's views and concerns in regard to my letter to Ocean Spray growers, but I think he misunderstands key points in ways that warrant clarification. I hope other growers will join this discussion.

Mr. Lachney refers to "an initial public offering." I have never suggested an IPO for Ocean Spray. Selling our common stock on the open public market would sidestep Ocean Spray's most pressing challenges: 1. Ocean Spray is called "a marketing cooperative" but the Board of Directors lacks sufficient marketing experience to understand our competitive situation, formulate strategy or evaluate management performance in this crucial area. 2. With the juice business consolidating in the hands of beverage giants, offering Ocean Spray shares to the public would still not create a large enough corporation for the arena in which it competes. 3. Likewise, an independent, public Ocean Spray would be no more likely to get a satisfactory Board or management. 4. An IPO would pay current shareholders cash for stock, creating an immediate capital gains liability for any amount over the $25 a share basis for growers' common stock.

On the other hand, a stock-for-stock merger with the right multinational food or beverage company -- which is what I have advocated -- could provide the Ocean Spray brand name with top-flight, proven marketing expertise, a professional Board and sufficient capital to develop the brand's potential and to sell existing amounts of cranberries. What appears as a "surplus" to our undercapitalized industry would become a resource for growth to a Coke, Pepsi or Unilever. Also, in a stock-for-stock merger, current Ocean Spray stockholders would receive stock in the acquiring company in a tax-free transfer. No capital gains liability would be incurred unless or until a shareholder chose to sell the new stock.

Mr. Lachney's essay exhibits much sentimentality that contradicts crucial facts. As such, these sentiments are not only naïve, but dangerous, because they give the Board and management a green light to ignore business considerations in favor of placating the growers with propaganda. For many years the coop has been run in a political rather than a businesslike manner, with the disastrous results we are now facing. For example, Mr. Lachney states that "publicly traded shareholder interests are not synonymous with grower interests." But current management interests are not "synonymous" with the financial interests of growers, either. In a public company, top management receives much of their compensation in the form of stock options. When they perform well, the stock goes up and management's net worth goes up. At Ocean Spray the incentive structure is antagonistic rather than complimentary. When management pays the growers more for fruit, there is less money left over for salaries, hiring more people, buying sports arena luxury boxes, introducing non-pat products, making acquisitions, etc. Under current arrangements, management is risking somebody else's money, rather than their own -- and it is human nature to be less careful with somebody else's money. Jack Llewellyn told me to my face years ago, with resentment, that management at Ocean Spray could not receive options like executives at public companies. I believe the fix we're in today is largely a result of the Board ignoring this crucial management incentive.

Mr. Lachney uses the National Airlines buyout by Pan Am and Delta as an example of what not to do. "National's employees no longer have any equity stake or control. . ." "The true remains of National Airlines rest only in the hearts and minds of its former employees." But are "hearts and minds" proper concerns for a business -- or for a religion? Are Ocean Spray grower/owners a religious flock or like National's employees? Are National's "true remains" employees' memories, or planes that still fly, routes that are still served, pilots who still work? If a corporate structure changes, but services are still provided, people still work and new stock- holders still profit, what's the matter with that?

Ocean Spray's market share is declining, advertising is curtailed, manufacturing and distribution are in chaos, berry payments below cost of production, stock redemptions suspended and supluses accumulating. The current trajectory will drive hundreds of growers out of business in a few years and render their fruit, cooperative stock and real estate all but worthless; hundreds more employees will be laid off and thousands of acres of cranberry bogs will be abandoned. The public will be deprived of a healthful fruit that an astute marketer could effectively provide. Does that prospect serve any useful purpose? Does it bolster "Ocean Spray's grower intrinsic identity?" How can growers still be reluctant to consider a restructuring that could convert reversal to advance? Is it part of "grower intrinsic identity" to roll over and die rather than adapt to change?

Mr. Lachney warns that a "larger partner" would only want the grower to "supply the raw material. . . without regard to future grower concerns." A "corporation" might obtain fruit from a "less expensive source (such as an independent)." For the last five years, "corporations" have paid independent growers more than Ocean Spray has paid members. For the past ten years Ocean Spray has steadily reduced the percentage of sales paid for proceeds. Does that show high regard for "raw material?" Or service to "future grower concerns?" Management has complained about the cooperative's capital limitations, then with virtually no grower input, secured Board approval to buy Nantucket Nectars, a company with no earnings, for a price-to-sales multiple nearly double what Pepsi paid for Tropicana. Within a year of that purchase, Ocean Spray issued to outside investors a preferred stock with a nominal value half again higher than the common stock held by growers. Ocean Spray official counsel has made a statement that it is under no obligation to redeem the preferred stock that former growers hold -- stock that growers paid for! Do such policies conform to the warm & fuzzy "cooperative value we place on our farms?"

Fiasco after fiasco have now resulted in a de facto policy to pay growers less than the cost of production for several years. Independent growers -- those hapless victims of corporations -- have received $35/bbl. for the 1998 crop, enough to raise this year's crop. Ocean Spray growers have received $18, which is not enough. If we don't receive final payment for 1998 until March of 2000, what can we expect from the 1999 crop beyond the $5 harvest advance? And Mr. Lachney characterizes the suggestion of restructuring as "sedition" -- highlighting again the political, rather than businesslike priorities of Ocean Spray.

His closing statement -- "The cooperative's autonomy insures our ability to base decisions on values unknown to corporate America, that of the grower and family" -- is absurd. "Corporate America" is a group of the greatest wealth-producing institutions in the history of the world. Hundreds of millions of "families" prosper from corporate achievements. To demonize "corporations" and revere the "cooperative" irrespective of any rational performance standard is to set the growers up as patsies for more squandering of shareholders' wealth. Growers like Mr. Lachney are apparently infinitely willing to accept rhetoric in lieu of money. Such gullibility confers a free hand for more management bumbling and more excuses for the Board to evade their fiduciary responsibilities to grower/owners.

I hope Chairman Don Hatton realizes his choices are stark -- either he can remain a prisoner of nostalgia and consign his constituent growers to ruin, or he can be a leader, adapt to change and help the growers profit from it.

 

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Related comments from the forum:

RE: Point - Counter Point
Sunday, 30-May-1999 22:24:49

Message:

Bruce Lachney and Tom Gelsthorpe have a well thought out, intelligent debate going on here. I still maintain the inappropriate nature of this forum, but that is not the purpose of my comments. What comes to my mind, after reading both sides of this, is difficult to eloquate. The difficulty I have describing my thoughts is born out of the emotional nature of our common problem. I feel a part of this cooperative, and I feel a loyalty towards this cooperative. It is for that reason that I can really be moved by Mr. Lachney's comments. I also have a responsibility to my family to provide, and that is looking to be more difficult as things unfold. There is now serious talk of returns dropping lower in the interest of a marginal effort. It is for that reason that Mr. Gelsthorpe's comments move me to consider his proposed alternatives.

The problem lies herein; Mr. Lachney has his heart in the right place, and he seems to posses a loyal attitude towards Ocean Spray, yet his ideas are not based upon current conditions. In short, they do not address the problem. On the other hand, Mr. Gelsthorpe has many good, well thought out concepts, and clearly has some good points. The problem here is his complete lack of humility and open mindedness. Those factors sometimes make it difficult for me to swallow his delivery, I think his attitude is poor.

What I propose is a compromise, to bring together loyalty to what our forefathers have built and the intelligent ideas that we all posses. Let's get it together, and lobby the ENTIRE board to make real movement towards change. There has been enough commentary, now it is time to act.

Or maybe I'm some bozo out in cyberspace just trying to stir it up. After all, I could be anybody.

J. Q.

In response to Mr. Lachney's prose
Wednesday, 26-May-1999 19:07:59

Message:

I would like to commend the Chair for sharing the well-articulated letter written by Mr. Lachney. (Ed. note: I didn't make it clear originally that it was Mr. Lachney that sent me a copy of his letter to Board Chairman Don Hatton and suggested I put it on Sressline.) Unfortunately, the conclusions he draws are based solely on the rhetoric heard in debates amongst first year MBA candidates and fall short of explaining the actual events surrounding the steady demise of Ocean Spray.

"The cooperative's autonomy insures our ability to base decisions on values unknown to corporate America, that of the grower and family." The above captioned sentence appears to be the summation to Mr. Lachney's entire thesis. Unfortunately, if you study the decisions made by Ocean Spray over the past several years, it's difficult to ascertain what motives were driving management, but they surely weren't considering the needs of the family farmer.

The best interests of the "Grower" haven't been considered since Hal stepped down. Of course the argument repeated at all the coffee shop tables by bottle-fed growers who believe the rhetoric of management will always be, "the Board, elected by the growers, run Ocean Spray Cranberries. If you disagree with a decision they've made, take it up with the Advisory Board." Unfortunately, disproving this myth is tantamount to explaining Maslow's Hierarchy of Needs to a Drill Sergeant. They understand the structural makeup of the Cooperative, but their knowledge stops there.

The company is steered by a small segment of the Board, who were elected by an even smaller percentage of overall growers. The rest of the Directors are second-rate reporters, and nothing more. What's sad, and a very big reason why the Co-op is in it's current position, is that most of the Director's truly believe they represent and speak for their constituencies. They are both unable and unwilling to see the truth!

 

 

Re: RE: Point - Counter Point
Wednesday, 02-Jun-1999 22:58:44

216.41.29.219 writes:

Interesting, J.Q. that you should fault my argument for "lack of humility." Consider the lack of humility that led Ocean Spray to overextend itself over the last ten years:
first using the logo on too many different products, then coining the grotesquely pompous vision statement about being a "world leader in
fruit-based foods" and finally spending a very generous multiple on a subsidiary that markets peripheral products. A company with a market capitalization of less than $300 million cannot afford to lead the world in more than a tiny,
well-defined niche, nor use its brand name promiscuously, nor acquire marginal subsidiaries.
If I seem to lack humility, I beg your indulgence, but I protest the charge of lacking "open-mindedness." I think the emphasis on "loyalty" as if it will somehow solve every problem is muddling up our emotions and holding us back from rational problem-solving. If loyalty to the coop means refusing to consider change, while an ossified structure and an inept management drives growers to ruin, we should reexamine the value of loyalty. I feel highly loyal to my fellow growers -- that is why I feel we must be open-minded about seeking a new corporate structure that will reward our investment. We should be open-minded enough to consider a new structure that could turn reversal to advance.
If the Ocean Spray brand becomes a subsidiary of a company that's powerful enough to sell all the fruit profitably, growers could obtain that stock in a merger but retain the coop as a handler. We would still have our coop for the limited function it performs well, while the merger partner advances our stock in the business world -- a big positive. Clinging to an obsolete structure that is pulling us all down is not loyalty; it's obstinacy. Let's think and act more positively than that.


Tom Gelsthorpe

Re: Re: RE: Point - Counter Point
Thursday, 03-Jun-1999 06:05:27

24.218.4.21 writes:

I stand corrected, and you are right about "loyalty". I have fallen victim to that sentiment.
Now, will you go as far as recommending a large, more powerful company. We need to give the BOD something to work with. I admit I was wrong in accusing you of lacking "open-mindedness". That might be my problem sometimes, but you lack specifics concerning this aquisition. If you are comfortable with this public forum, tell us more.

J. Q.