This story appears in the December 1, 2013 issue of Forbes. Subscribe
Gary Garretson makes his living the way his father and grandfather did: in the bogs of southeastern Massachusetts, slurping up cranberries with a hose. "I'm a few steps above a hunter-gatherer here," he says.
Like three generations before him his family's fruit--some 200 barrels of berries per acre harvested daily for processing under the Ocean Spray label--goes straight into juice or, more recently, into creating the dried cranberry Craisins that are favorites of customers at Costco and other grocery stores.
But now some of his berries are about to find themselves part of the latest--and riskiest--experiment in the history of the 83-year-old farming cooperative. Under the direction of CEO Randy Papadellis, Ocean Spray is hoping to go from $1.7 billion to $2 billion in annual net revenue and fight off powerhouse rivals with extracts--powdered or gelled concentrate that can be added to water to make healthy drinks (think high-end Kool-Aid).
It's a promising, $400 million category, with lots of room to grow. "Liquid enhancers really capitalize on major soft-drink trends, including both variety and a push for low calories," says Jonas Feliciano, a beverage analyst at Euromonitor International in Chicago.
Papadellis likes extracts for obvious reasons. "You can take the same berry and now have three profit streams off it, and that's amazing," he says.
But extracts are risky, too. Aside from costing Ocean Spray as much as $25 million to develop and market them, every major beverage company is making its own formulation, from Kraft with its MiO line of additives to
Though Papadellis has guided it to record revenue for two years in a row, Ocean Spray, a cooperative of 750 farms across Massachusetts, New Jersey, Oregon, Washington, Wisconsin and Florida (as well as Canada and Chile), is bound by financial obligations public companies don't have--like a mandate to buy ingredients from its grower-owners for top dollar , which changes how members view profits. Sales are 40 times smaller than PepsiCo's, yet Ocean Spray will return about $340 million, equivalent to 20% of net, to members this year. "You can imagine the pressure that is on management when these owners only grow cranberries," says Michael Cook, agricultural economics chair at the University of Missouri.
For Ocean Spray that pressure--and the dependency on one crop--leaves little choice but continuous innovation. With over 60% of the world's processed cranberry supply, Ocean Spray will always live and die by its ability to promote the berry--a feat at which it has excelled for decades.
Founded in 1930 by three growers led by Marcus Urann, Ocean Spray launched during an agricultural downturn that intensified during the Great Depression with the mandate of finding and marketing new cranberry-based products to keep growers' crops on shelves. They found a slew of new ways to squeeze dollars from their berries over the years, from the brand's first product, the jellied cylinder of cranberry sauce still famous as a Thanksgiving staple, to juice cocktail and then blended products like Cran-Apple, Cran-Grape and Cran-Raspberry. Ocean Spray got lucky when an engineer stumbled upon the idea of reinjecting juice into discarded husks. In 2003 it introduced the Craisins snack, which now outsells the sauce as a $200 million product line.
Ten years ago Ocean Spray almost sold out to PepsiCo. Farmers were unloading berries at a quarter of historical rates, each barrel selling for dollars less than cost due to oversupply and a lack of direction from management. Many growers in Massachusetts and New Jersey saw value in selling the brand name at a premium and turning their bogs over to property developers, a less attractive option to those in Wisconsin and the Pacific Northwest. But Papadellis, a former Cadbury Schweppes marketing executive who took over as acting CEO in 2003 after Ocean Spray stumbled through three other chiefs in five years, convinced members to stay independent. In 2004 his belief that new products and international growth could get the co-op back on track won over members, who blocked the PepsiCo deal with just 52% of the vote.
Since then he's expanded the co-op's partnership with Pepsi to sell beverages in its vending machines and done distribution deals with Coca-Cola to push product in regions where no cranberries grow, like Europe and Asia. One-quarter of sales now come from outside North America; Papadellis wants to get that number to one-third in the next couple years. "They've really stepped it up under [Papadellis]," says
And though it lacks the budget of the competition, being a private co-op has advantages, says Papadellis. For one thing, his team can look further ahead than it would as a public entity with quarterly earnings to fret about. That's allowed a big bet on R&D, convincing its grower board to reinvest member dividends into new products--like extracts.
At a laboratory in Lakeville-Middleboro, Mass. ten researchers are developing products they hope will hit shelves in 2014. They're coy on specifics (gel? powder?--they don't actually have a marketable product yet), but executives brag that they have an innate competitive advantage in their beloved cranberry. Tart, with low sugar content and known health benefits like treating urinary tract infections, each berry can pack a lot of nutrients in a low-calorie water additive. "We have this powerful little ingredient we can extend to a lot of possibilities," says director of innovation Kelly Reilly, an 18-year Ocean Spray veteran. Down the road she can see yogurts, beauty products--even cat food.
All of which would be great news for Garretson, who could use his share of the profits to pay for the installation of servers and high-tech remote sensors on more of his bogs and also build another cranberry harvester (think of a bog Zamboni) soon. "Innovation is going to be our future," he says, leaning out the window of his pickup truck. "If we don't do this, we will just wind up with a ton of cranberries."
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