Welch's strength is also a liability

Owned by a co-op, company maneuvers against the giants

Food industry

April 19, 1999|By NEW YORK TIMES NEWS SERVICE

CONCORD, Mass. -- It would seem simple. A food-processing company with a strong brand in a relatively narrow niche finds the competition toughening and the niche's sales trend flattening.

To grow, it needs to extend its brand to new products, to make acquisitions, or both. That calls for a big financial commitment, which most companies can raise by tapping capital markets.

But Welch Foods isn't most companies: It is owned by a farmers' cooperative, the National Grape Cooperative Association. And that makes meeting its competitive challenges anything but straightforward.

Co-ops, of course, play a huge role in American agriculture. And the value-added co-ops -- the ones like National Grape that process members' produce into consumer products rather than just handling bulk commodities -- own more well-known brands than many consumers realize.

Co-ops help farmers by ensuring that each year's harvest will be bought at predictable prices and by sharing profits, expertise and purchasing muscle. But the ownership structure can also be a significant competitive handicap.

By definition, a co-op cannot sell stock or use it to pay for acquisitions, or even build a reservoir of cash from retained earnings; profits must be distributed to the members each year. So co-ops often have a difficult time financing major expansion, unless they borrow or merge with other co-ops.

National Grape has managed to find steady if unspectacular growth by aggressively marketing the Welch's line of juices, jellies and related products, whose sales topped $600 million in 1998. But, against increased competition from publicly traded companies with formidable marketing and financial strengths, Welch's now needs to look further afield.

"They have done a very good job of building their brands back," said Ted Dardani, a principal with BT Capital Partners who has worked with Welch's on acquisition and joint venture ideas. "The point now is, how can Welch's take all that brand equity and expertise and do some other product lines that make sense?"

Welch's now finds its longtime strength, an undistracted focus on jelly and juice, turning into a shortcoming, as ever more Americans skip a traditional breakfast and demand sags.

For decades after the co-op acquired it in 1945, Welch's did well by remaining steadfastly grape-centric and conservative. It shunned new product development and avoided advertising spending. But by 1983, that strategy was flagging, and the co-op was in danger of reneging on its promise to buy 70 percent of its members' ever-growing harvests, according to Daniel P. Dillon, Welch's president.

So Welch's stepped up marketing to rebuild demand through new TV advertising and a revival of the cartoon-character jelly glasses. And it trumpeted the benefits of grape juice and stretched the juice line with new blends.

But moving beyond grape juice means tangling with the likes of Pepsico, Coca-Cola and Cadbury-Schweppes, a league in which Welch's is at a distinct disadvantage. Still, co-ops can take advantage of low-interest loans from the National Cooperative Bank, a $19 billion entity that lends only to them.

Much of what has kept Welch's intact can also hold it back. With grape farmers for owners, "it's a conservative environment," said Rex Green, a managing director at Advest, a Boston investment bank that has advised Welch's. "These are men and women of the soil, rather than day traders. They look at their company and their stewardship of Welch's in the long term."

The next step for Welch's seems to be acquiring or pursuing joint ventures with companies that make other kinds of consumer packaged foods. Executives were quiet about specific plans.

Approaching such ventures slowly works in Welch's favor, Green said.

"They have an excellent record of not launching failed products," he said. "They can't afford to invest the capital, and then not have it work. That absolutely reflects being in the environment of a co-op."

Pub Date: 4/19/99

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