Delivering value to members

 Welch’s CEO says National Grape members reap benefits
from efforts to expand markets, develop new products

By Dan Dillon, CEO, Welch’s

Editor’s Note: This article is based on the keynote address Dillon
delivered to the Eastern Member Relations Conference in Buffalo,
N.Y., in May.
t Welch’s, and as a cooperative, our mission is different in several very important respects than if we were a publicly held company.

Providing a secure market and increasing demand for our members’ quality grapes and other non-financial measures are central elements to our mission. Adding value to our co-op, delivering value to our members, is quite different from that of a public company because our mission is different. Our owners have different goals.

What they expect from their ownership is different from what, for example, a General Mills’ stockholder expects. The question then is, what do they want? What adds value for them?

In the late 1990s, we surveyed our National Grape directors and delegates and asked them to rank 15 possible actions we could take to add value to our members’ ownership. What were the most important, most relevant measures of performance?

The study results were very instructive. Not surprising, topping the list were: But what was particularly enlightening in the survey and in follow-up discussions was the high value National Grape members put on other, more subjective measures: Based on this research and discussions, we have over time refined our mission.














Corporate mission
The mission of our company, as a cooperative, is to: Our mission, in addition to the obvious objective of more proceeds in the present, includes increasing demand and providing a secure market for all our members’ grapes over the long run.

It is important to understand that there is a price for these additional elements of the mission. They add value, but there is a tradeoff in that they reduce proceeds in the short term.

If our mission were only to maximize proceeds or maximize proceeds per ton, then the actions we should take would be different. Our investments would be focused differently from what they are currently focused on.

We literally take thousands of actions every year that reduce proceeds per ton for the current year. But these actions are essential to achieving the other dictates of our mission: Let’s look at some real examples driven by this mission.

In the early 1980s, Welch’s was receiving 192,000 tons of grapes per year, but only selling 168,000 tons demand was 10 percent less than supply. Every year, inventories were building as deliveries continued to exceed sales. We were headed for a disaster.

Welch’s recognized this dilemma and made the very difficult decision to invest in growing demand even though it depressed earnings $75 to $100 a ton in those investment years. We were sacrificing short-term proceeds per ton for other important longer-term objectives. The alternative, and one we not only considered but one often used by other co-ops and companies faced with a similar situation, was to allocate the number of tons our members could deliver.

But, we didn’t do that. In 57 years, we have never done that. We took all the grapes and invested heavily in marketing, in new products and advertising to increase demand over time even though it seriously depressed the proceeds per ton we were able to pay in the short term.

But the investment in receiving and marketing all our members’ grapes not only increased demand to absorb the greater supply, but it also increased demand so that by the mid 1990s we were offering our members opportunities to plant more grapes.

In an average year in the 1980s, we sold 192,000 tons and paid $197 per ton. But by the 1990s, Welch’s had increased demand to 274,000 tons a year. The increased demand allowed us to earn an average of $252 per ton—28 percent more per ton on 43 percent more tons sold per year almost doubling (up 83 percent) total proceeds per year back to the members.


But creating and maintaining this demand also has a price. Today, for example, Welch’s invests more than $80 per ton every year in advertising alone.

There are some who would suggest that we should sacrifice that advertising investment or other marketing investments in some years in order to increase short-term earnings.

In 1999, for example, we had increased demand so quickly in the mid-1990s that the cash market for Concord grapes shot up and was actually higher than the earnings we paid our members. A seemingly simple solution would have been for us to reduce or eliminate the advertising or new product investment or other investments to increase our earnings $100 per ton.

We could have materially beaten what others were paying if we did, and we could have easily moved all the tons we were receiving without advertising in that year. But our mission demands that we maintain a consistent investment in growing demand in order to maximize long-term owner value.

The logic of that commitment really manifests itself in a year of big crop surpluses (as 2002 appeared to be prior to some devastating freezes in late April and May). Concord inventories have been running at record-high levels because of the increased supply and low prices for California grapes. Demand for Concord is flat to declining for everyone else, but not for Welch’s. And if that were not bad enough, other processors are already warning that there may be a significant reduction in the price they pay for Concords in 2002. But for Welch’s members, the consistent investment made in growing demand has not only added value through the opportunity to plant more grapes we just concluded the biggest planting program in our 57-year history but we will also materially increase our earnings in fiscal 2002 vs. 2001.

We are adding value by consistently investing in increasing the demand for Welch’s products increasing the demand for Concord and Niagara grapes through advertising, new products, marketing programs in new channels of distribution, such as club stores and single-serve channels, through health and nutrition research and public relations programs.

At the same time that we had been investing in increasing demand by more than 80,000 more tons per year, we recognized that tens of millions of dollars in capital investment would be required to receive and contain those grapes.

As a co-op, our mission includes providing a secure market particularly in times of surplus another way we add value. Welch’s has established a policy for receiving and containment aimed at minimizing the risk that our quality grapes will not be harvested, received or contained.

This is an investment well beyond what a public or nonco- op company would make because it reduces profit. It is an added value that we provide to our members. But it’s not free. We have calculated that our receiving and containment strategy costs our members about $30 a ton every year.

Perhaps this can be viewed as insurance. Our members sacrifice $30 a ton in proceeds most years in order to ensure they get all their grapes delivered in exceptional years as in 2002 or 1992 or 1996.

The original 2002 forecast was for a record crop of 342,500 tons, or 53 percent (118,000 tons) more than in 2001. Welch’s was fully prepared for this, because we had made the investments to receive, contain and sell that entire bumper crop. But spring freezes in Michigan and in the tristates region (New York, Pennsylvania and Ohio) reduced the projected crop to one that is now expected to be only 6,800 tons, or 4 percent, larger than last year.

If our mission were to maximize the proceeds per ton on the tons we receive a logical objective if we were a public or non-co-op company then we probably would not accept all the grapes originally forecast or even the current, more modest expectations.

The point is, the cost of having a secure market in a year such as 2002 was originally projected to be, is reflected in an earnings-per-ton reduction. The value of maintaining demand, growing demand, having the resources ready to receive and contain exceptional crops, the value of having the marketing flexibility to sell 50,000 or 100,000 more tons in an exceptional year, is why National Grape members choose National…and Welch’s.

There is also a serious trend to consider the substituting of California grapes and foreign grape juice for Concord. For 133 years, Welch’s has defined grape juice with the unique, distinctive, special taste of Concord. Only in North America is the Concord taste the taste of grape juice and grape jelly. In the rest of the world, when a consumer thinks of grape juice, the taste expectation is entirely different from the U.S. consumer.

This expectation is critical to our growers. The substitution of California grape juice for Concord may still produce a nice-tasting juice, but it is not the unique taste of Concord.

Much of our product formulation work, our marketing, advertising and health and nutrition efforts are focused on the unique taste and health attributes of the Concord grape. It is imperative that Welch’s continue to drive these efforts.

While other juice manufacturers are substituting California and foreign grape juice for Concord, National Grape growers can rest assured that they have a secure market at a higher, more stable price because they own Welch’s.

Our mission is not to maximize earnings per ton or to maximize profits or return on members’ equity. Rather, our mission is focused on creating long-term value for our members. We believe the success of Welch’s strategies to build value for our members has indeed been fulfilling that mission.

Obviously, the spotlight will always remain focused on the proceeds per ton we pay. But there is recognition of the value provided through: This is value over and above the proceeds per ton we pay. It is real. Is it worth $50 a ton? $100 a ton? In many years, as in 2002, it might be priceless.






































































July/August Table of Contents