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Ocean Spray Trial Will Shed Light On Business Practices

The May 2007 edition of PRODUCE BUSINESS magazine, a sister publication of the Pundit, featured an important piece entitled Special Report: Ocean Spray Sued By Longtime Associates, which told an important and fascinating story. Some of the story is about Jim and Theresa Nolan and how they were treated by Ocean Spray. Some has to do with the way Ocean Spray did business:

As the new fresh cranberry season was starting in September 2000, Nolan sent out a price announcement under his name to Ocean Spray’s club store accounts that was approved by the co-op. The season-long price for both domestic and Canada was $25 f.o.b. for cases of 12 two-pound bags.

However, only 10 days after Nolan’s price announcement, September 25, 2000, Ocean Spray offered Costco, without Nolan’s knowledge, a price of $18 delivered on the club store pack for the months of September and October, and a delivered price of $23 for November.

An exhibit in the Nolan complaint is a voice mail to Ocean Spray’s account manager for Costco, Jay Salamon. The voice mail was from the Costco fresh cranberry buyer and was forwarded to James and others at Ocean Spray. In it, the buyer states, “….we talked about how to avoid the Robinson-Patman Act.”

Nolan protested to Ocean Spray’s management the lower pricing should not be given to Costco unless the same price was offered to competitors of Costco, including BJ’s and Sam’s Club. Nolan also protested about Ocean Spray funding in-store demonstrations for only Costco.

“Ocean Spray then initiated an elaborate cover-up which continues to this day,” alleges the Nolan complaint. “Ocean Spray tried to justify the lower price given to Costco by claiming to be meeting the price offered to Costco by Northland Cranberries Inc. on its fresh cranberries club store pack. Northland did not then, and still does not have, a fresh cranberries club store pack.”

It was the Ocean Spray practice to issue standard price lists for each class of trade, so, theoretically, all club stores should have been paying the same price. C&S supplied BJ’s and sent Ocean Spray a letter:

On September 7, 2001, Robert Hawthorne, president and CEO of Ocean Spray, received an e-mail from Ken Ryan, procurement manager for C&S, who supplies BJ’s, which currently has over 160 club stores in the Eastern United States, according to its website.

In part, Ryan wrote: “In reviewing last year’s sales data, which includes competitors’ retails, we have concluded not all club stores received the same price from Ocean Spray on 12/2lb cases. Based on our $25 f.o.b. price, plus .50 cents freight, we had a $2.125 unit cost price. This is before any warehouse costs and costs to transport them to our BJ’s club stores. These costs average .75 per case, which brought our delivered cost to the stores to $2.19 per unit.”

Ryan further stated this “forces” the company to have a $2.99 retail price to make a profit. At the same time, C&S store checks of Costco revealed Costco selling the same pack for $2.29 during the season, which is only .10 cents above C&S’s total cost.

“Stores do not survive on that type of gross profit margin. This difference in retail has hurt our stores’ price image and increased our shrink due to lower sales,” Ryan’s e-mail said.

Ryan proceeded to request a meeting with Ocean Spray “to correct this problem.”

According to the Nolan complaint, Graham West, managing director of ingredients technology group, O’Brien’s boss, as well as Neil Bryson, Ocean Spray’s in-house attorney, and O’Brien went to C&S headquarters.

The complaint states, “Although C&S requested Theresa, TNN’s president, also attend the meeting, West did not allow her to attend… West refused to allow Theresa to attend the meeting because he knew Theresa was aware of the special pricing given Costco in 2000; had opposed it from the beginning; and had already stated she would not lie to C&S’s management about it.”

At the meeting Ryan demanded that Ocean Spray reimburse C&S for the price difference it paid versus Costco, plus damages.

“The Ocean Spray representatives told C&S to claim some cranberries it would receive from Ocean Spray were of poor quality and to take a discount from an Ocean Spray invoice,” the Nolan complaint reads.

The complaint points out that the Nolans were deeply unhappy with the whole situation:

A January 15, 2002 report from the Nolans to Ocean Spray says, “We still believe the cooperative needs to tell Sam’s Club what took place on fresh cranberries club store pricing during season 2000. It should offer to remit them the difference between the considerably higher price that they paid Ocean Spray for the 1/2lb. club pack versus what Costco was charged.

“In addition, there should be reparations for any other damages that Sam’s Club may feel they suffered from being out of line on price with their main competitor all season. Over four months now have passed from the time when C&S Wholesale Grocers e-mailed Rob Hawthorne confronting him about this identical situation in connection with the fruit that they supply BJ’s.”

Continuing, the report says, “Since C&S quickly reached a settlement with Ocean Spray, we’re surprised that something hasn’t been done to also compensate Sam’s Club. It’s almost ironic that the cooperative was a recipient of Sam’s Club prestigious ‘Vendor of the Year’ award for the same year when this unfortunate incident occurred.

“Legal considerations aside, the fact remains that the special pricing Ocean Spray gave to Costco in 2000, which we advised against from the start, was highly unethical in the least. It enabled them to enjoy a significant competitive advantage over the other club stores as well as those conventional supermarket chains, such as Safeway, that have come to view Costco as a rival.”

The complaint explains that to appease C&S, Ocean Spray started doing some unusual things:

In September 2002, with a new fresh cranberry season getting underway, Ocean Spray’s James Lesser, group product manager for food, produce and value-added ingredients, announces what the Nolan complaint describes as “an unprecedented, last-minute addition” to the co-op’s trade program, a $2 per case “non-retailer promotion.”

While this promotion was offered to all domestic produce wholesalers, it “was created to appease C&S which, still upset over the Costco incident, had stopped supplying both Pathmark and BJ’s with Ocean Spray fresh cranberries in 2001.”

We have spoken to sources at Sam’s Club that indicate they have been monitoring this lawsuit. If Ocean Spray gave special pricing to Costco and then “made it up” to BJ’s, Sam’s Club may have a sizeable check coming. As a public company, Sam’s Club and its parent, Wal-Mart, have a fiduciary responsibility to pursue this money, and our sources tell us that they are waiting to see how this lawsuit turns out before acting.

The complaint, however, indicates that another competitor to Wal-Mart — as well as other supermarket chains — was also getting special deals:

Although The Nolan Network was contracted to handle sales and merchandising for Ocean Spray, the co-op decided to use Jacksonville, FL-based broker, Acosta Sales Inc., to make sales calls on H.E. Butt, the large San Antonio-based grocery chain.

Only a week after Lesser’s September 5th price announcement, Acosta, without the Nolan’s knowledge, provided H.E.B. with a price of $19 f.o.b. for cases of 24/12-ounce packages and 20-pound bulk fresh cranberries for the whole season. The deal also contained a $3 off-invoice allowance on purchased fruit “without ever advertising Ocean Spray branded fresh cranberries during that season,” the complaint reads. Other retailers were required in writing to advertise to get the promotional allowance.

Additionally the Nolans claim O’Brien approved H.E.B. receiving truckload rates at $1.53 per case even though “H.E.B. did not take delivery of Ocean Spray cranberries in full truckloads at any time during the 2002 season. This resulted in H.E.B. sometimes paying as little as half of what the freight rate for the size of its order should have been.”

People close to Ocean Spray were growing concerned, particularly about how Wal-Mart might react when the truth came out:

On April 1, 2003, Mike Dubuc, vice president of finance for North Easton, MA-based Morse Brothers Inc., the largest supplier of fresh cranberries from Massachusetts to Ocean Spray, wrote Ocean Spray chairman Bob Rosbe. In part, the correspondence reads, “I have reason to believe Ocean Spray has enormous exposure stemming from fresh fruit in what is referred to as the Costco cover-up from two years ago. Further there is a storm brewing with C&S Wholesale regarding this past season where H.E. Butts (sic) was given far more favorable case pricing than the rest of the trade.”

Dubuc also addressed his concern that “the trade will discover our past questionable practices, in particular the Costco scandal where Sam’s Club was a victim, and that our single largest customer, Wal-Mart at 11 percent plus of our sales, will stop buying Ocean Spray.”

So far Ocean Spray is not talking:

PRODUCE BUSINESS has tried to reach numerous individuals connected to Ocean Spray, including management, board members, grower-stockholders and the defendant’s law firm. However, each party either declined to return phone calls, or refused to comment.

This will wind up being a big story. Much of it turns on legalities such as the exact circumstances under which the Robinson-Patman Act are deemed violated and the legal status of Ocean Spray’s own antitrust Policy Compliance Guide. If this goes to trial, the lawyers will duke it out on these grounds.

For the industry, though, the bigger issues have to do with right-dealing and with what one should expect from one’s employees.

In our minds, it is simple. Nobody forces a company to issue standard price sheets. If, however, a company elects to send everyone letters stating that everyone will be charged X, then it should charge everyone X.

It seems as if Ocean Spray’s basic defense on the Costco allegations is that it offered a lower price to keep the business in the face of a competitive offer to Costco. We haven’t seen any evidence that such an offer was ever made but, even if it was, that might satisfy the legalities of the Robinson-Patman Act but wouldn’t make it right. The price list doesn’t say this is what we will charge, unless we get a better offer.

In effect, if one does business the way that is alleged here, publishing a price list but then selling at lower prices to select accounts, one turns the sales staff into liars.

How can any company ask sales people to build up a reputation for trustworthiness while asking them to deceive?

And what kind of industry would we have if everyone was comfortable with this? Read the article right here.

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