Ocean Spray rejects Pepsi bid

In a vote that pitted one cranberry farmer against another, a narrow majority of the growers who own Ocean Spray Inc. chose to remain independent rather than pursue a joint venture with PepsiCo that would have given the beverage giant control of the Ocean Spray brand and its juice business.

"Ocean Spray's independence was affirmed today," said Chris Phillips, the Lakeville-based cooperative's spokesman. "But with that comes a responsibility to move the business forward in a way that improves the situation for our growers."

A Pepsi spokesman said the New York beverage company was "disappointed with the growers' decision" and "we wish them well."

The vote is the culmination of a years-long debate among growers and board members over Ocean Spray's ability to compete as a small farmer-owned cooperative against beverage behemoths like Pepsi and Coca-Cola Co.

Those in favor of the Pepsi deal argued that Ocean Spray simply can't survive on its own in a world of giants. Pepsi offered $100 million for the market-leading cranberry juice brand, in addition to assuming its debt. Those against it argued that the joint venture would cap cranberry prices for Ocean Spray growers, destroy the cooperative, and jeopardize the survival of the state's cranberry farmers.

In the end, the 925 growers remained divided. While 52 percent voted to stay independent, 48 percent believed joining forces with Pepsi would improve their prospects. The outcome ends any effort to sell the Ocean Spray brand or pursue a venture in which the cooperative surrenders control of its beverage business. It does not, however, stop the juice maker from entering into partnerships that preserve its independence.

"I'm delighted," said Ben Gilmore, a Carver cranberry grower who favors an independent Ocean Spray. "The most important thing now is to get past what has been a very divisive process and begin to deal with the issues that separated us."

Unfortunately, that may be easier said than done. Consultants and academics who study the beverage industry said that no matter how well intentioned the board members, the management or the growers, the vote can't put to rest the fundamental issue facing the cooperative: Can Ocean Spray make it on its own in today's competitive landscape?

"Can you be independent? Yes," said Tom Pirko, president of Bevmark Inc., a Santa Barbara, Calif., beverage consulting firm. "Can you survive? Yes. But can you prevail against your competitors and do well? That's really difficult."

Three cranberry growers founded the cooperative in 1930 as a way to expand the market for their crops. Its growers own the cooperative and share in the profits. But the structure can be cumbersome. At Ocean Spray, for example, all major decisions, such as the Pepsi deal, must be put to a vote of the growers.

Under the cooperative, Ocean Spray became the number one brand on the juice aisle, which does not include refrigerated drinks, accounting for 54 percent of the $1 billion consumers spent on cranberry juice last year in the United States, according to Chicago market-research firm Information Resources Inc.

But given the world in which Ocean Spray competes, many industry specialists believe market forces will overpower the cooperative. Large grocery chains such as Stop & Shop, Shaw's, and Star Market would rather deal with industry titans like Coca-Cola and Pepsi that can offer them an array of products than with a smaller beverage company with limited offerings.

With brands such as Tropicana, Gatorade, and Minute Maid, soft drink makers Pepsi and Coca-Cola own nearly 75 percent of the noncarbonated drink market, said Jim Tillotson, a Tufts University professor and former Ocean Spray board member.

Ocean Spray also doesn't have the distribution network to get its products in convenience stores, in vending machines, and in cafeterias, where Pepsi and Coke do booming businesses selling single cans or bottles. That area, said Tillotson, is among the greatest sources of growth for beverage companies today.

Ocean Spray, say industry consultants, also doesn't have the financial resources or clout to out-advertise its rivals. Tillotson predicts that Ocean Spray will eventually be forced to sell its business at a lower price.

"By selling out to a corporation, the farmer feels he's losing part of his identity," Tillotson said, referring to the growers rejecting the Pepsi offer. "The cruelty of the situation is that the business environment is overtaking him."

Ocean Spray's growers and management know many challenges lie ahead. The volatility in cranberry prices alone has made some growers nervous, with prices ranging from $13 to $65 a barrel over the past two decades. Ocean Spray growers were paid $35 a barrel for their 2002 crop of cranberries.

The amount for last year's crop won't be final until all the juices and products it produced have been sold.

In coming years, the cooperative's management expects that figure to climb into the $40s -- and that's before factoring in benefits of potential deals, said Ocean Spray spokesman Phillips.

Ocean Spray is developing new and innovative products to increase its presence on the juice aisle, Phillips said. The management also aims to bolster distribution of single cans or bottles of its cranberry drinks, continue expanding internationally, and more aggressively assert cranberries' health benefit.

To achieve their aims, he said, the cooperative will explore distribution deals with potential partners as well as sales-and-marketing alliances that don't give away ownership or control of the Ocean Spray brand.

"I'm hopeful that we will all pull together to find ways to grow our business that are acceptable to a broad spectrum of growers," said New Jersey cranberry grower Bill Cutts.

Naomi Aoki can be reached at naoki@globe.com.