The Bankruptcy of Tri Valley Growers: What Went Wrong and What Lessons Can We Learn?

1
The Bankruptcy of Tri Valley GrowersWhat Went
Wrong and What Lessons Can We Learn?

• Himawan Hariyoga
• Richard J. Sexton
• Funding provided through a co-op work agreement
  with USDA, RBS, Co-op services

2
A Brief History of TVG

• Tri Valley Packing Assn. (TVPA) was formed in
  1932 with 89 members to process cling peaches.
  Around the same time Turlock Cooperative Growers
  (TCG) was formed, also to market cling peaches.
• In 1963 TVPA and TCG merged to form TVG. They
  operated 5 plants with tomatoes, peaches, pears
  and apricots comprising the major commodities.
• In 1964 Oberti olives joined TVG.
• In 1978 TVG purchased SW Fine Foods.
• In the early 1980s TVG purchased the assets and
  acquired the members of distressed cooperatives,
  Glorietta Foods and Cal Can.

3
A Brief History of TVG (cont.)

• In 1985 Bill Allewelt retires as TVG CEO.
• In 1987 Board Chairman James Saras becomes CEO.
• In 1989 TVG acquires Redpack Foods in NJ to
  remanufacture tomato paste.
• In 1990 TVG acquires the fruit business of F.G.
  Wool Packing Co. and also acquires its growers
  contracts.
• In 1993 TVG acquires peach business of Sacramento
  Growers Co-op and also offers membership to its
  growers.
• In 1995 Joe Famalette becomes CEO President.
• In 2000 TVG files for Ch. 11 bankruptcy.

4
Essential Aspects of TVGs Operations

• Major commodities Peaches, tomatoes, pears, and
  olives.
• Pooling Prior to 1983, TVG operated a single
  pool. In 1983 they adopted the 50/50 pooling
  concept, wherein both general and
  commodity-specific pools were operated.
• Raw product procurement Products were acquired
  both from members on a cooperative basis and from
  nonmembers on a cash-contract basis.
• Finance Prior to restructuring as a
  new-generation cooperative, TVG operated a base
  capital plan. Equity requirements were 140-145
  of 8-year average of the established value of a
  members deliveries.
• Processing plants In mid 90s TVG operated 10
  plants, 9 in CA (Figure 1) and NJ plant8 of 10
  were acquired from other co-ops or IOFs.

5
Figure 1 Location of TVGs Plants in California,
1996.
Fruit Plant Tomato Plant Tomato and Fruit
Plant Vegetable and Fruit Plant Olive Plant
6
TVGs Major Markets--Tomatoes

• Tomatoes comprised about 39 of TVGs revenues in
  the 1990s
• Industry has undergone major structural
  changes(i) relocation of production, causing a
  mismatch between production and processing
  capacity, (ii) emphasis on low-cost bulk paste
  mfg., with remanufacturing done elsewhere.
• Processed tomato products sell in a global market
  and prices are subject to wide fluctuations
  (figures 2 and 3). Prices are strongly influenced
  by inventories carried forward from the previous
  crop year.
• TVG used prices set by tomato bargaining assn. to
  determine established value for its tomatoes

7
Figure 2 Price Trends of Industrial Tomato Paste
(fancy 31, 55 Gal. drum), 1974-2000.
8
Figure 3 Trend of California Processing Tomato
Prices at First Delivery (Receiving) Point,
1970-2000.
9
TVGs Competitiveness in the Tomato Market

• Attempted to join the paste revolution by
  building a paste plant in 1974 and securing a
  10-year, cost-plus contract.
• Acquired remanufacturing operation in NJ in 1984.
• Acquired facilities and labels of failed co-ops
  Glorietta (1981) and Cal Can (1982).
• This nonstrategic approach to expansion led to
  processing facilities that (i) were not well
  aligned geographically with production, (ii)
  lacked state-of-the-art technology in some cases,
  and (iii) were not well aligned with market needs
  in terms of product capabilities.

10
These facilities were not geographically well
located nor was the equipment well suited or
coordinated to serve market requirements.
--TVG CEO and BOD Chair James Saras, 1993.
11
TVGs Competitiveness in the Tomato Market (cont.)

• TVG was credit constrained in terms of
  investments in plant modernization and relocation
  because (i) TVG was already carrying a high
  debt-to-equity ratio and (ii) members were
  suffering due to market adversities, thus
  limiting opportunities to collect more equity
  from them.
• Consequently TVG had high shipping and processing
  costs relative to its competition.
• TVGs resources were dissipated by producing a
  wide variety of low-value and/or low-margin
  products. 435 tomato product items or labels
  154 peeled products, 148 remanufactured
  products, 61 tomato paste products, 22 juice
  products, 17 puree items, etc.

12
TVGs Competitiveness in the Tomato Market (cont.)

• TVGs major tomato marketing channels retail
  44, food service 30, contract 12, industrial
  5, government 2, exports 1 tomato sales.
• Retail sales were mostly private label.
• TVG largely missed the explosion in demand in the
  1990s for pasta sauces, Mexican salsas, and
  barbecue sauces.
• Very low prices in 1991-92 years caused reduced
  grower shipments to TVG in subsequent years,
  leading to under-utilization of plant
  capacitytomatoes processed in 5 plants could
  have been processed in 3.

13
TVGs Competitiveness in the Tomato Market (cont.)

• Stagnant processed-product sales in early 90s led
  to high inventory costs (figure 4).
• Tomato market adversities led to low grower
  returns relative to the market (figure 5) and
  subsidization from fruits to tomatoes under the
  50/50 pooling arrangement.
• TVGs inability to compete in the growing
  bulk-paste segment caused it to refocus on
  producing peeled products and producing branded
  rather than private-label products.
• However, TVGs brands were relatively weak and
  the value-added strategy brought it into direct
  competition with larger, financially stronger
  rivals.

14
Figure 4 TVG's Tomato Products Sales Movement
( of Product Sold), 1988/89-1995/96 Pack Years
15
Figure 5 TVG's Tomato Pool Performance Returns
to Members As a Percentage of Established Value,
1983-1995
16
TVGs Problems with Tomato-Growing Members

• Most tomato growers were multi-cannery grower
  and lacked loyalty to TVG as a cooperative.
• TVG lacked strong membership contracts that would
  have required delivery and was forced to offer
  special dealscash contracts, accelerated
  payments, low rates of equity retentionto retain
  the patronage of these growers in the 90s.
• Membership declined 32 from 90-96. Only 54 of
  tomatoes were acquired on a membership basis in
  1996.
• In 1994 TVG actively contemplated a tomato exit
  strategy. However, a new board and management
  team took over in 1994 and recommitted TVG to the
  tomato market.

17
TVGs Tomato Market Dilemma

• Tomatoes were a growth industry relative to
  canned fruits.
• TVG gained marketing synergies by selling both
  tomato and fruit products . . . BUT
• TVG was not competitive in cost-driven commodity
  market for bulk paste, lacked strong brands and
  resources to compete with major branded-product
  producers, and faced stiff competition and
  powerful buyers in private-label sales.

18
Tomatoes in TVGs Last Years

• Under NGC restructuring 1.8 million shares of
  tomato stock (1.8 million tons) were authorized
  but less than 800,000 were issued.
• Nonmember contracts expired after 1996 and were
  not renewed, causing member based procurement to
  increase to 90 in 1997.
• New management raised prices after 1996 pack,
  causing sales to deteriorate and inventories to
  rise.
• Although prices improved in the late 90s, TVG
  could not pay an EV equivalent to the industry
  average price.

19
TVGs Competitiveness for Fruits and Olives

• Fruits comprised 53 (25 canned peaches, 20
  fruit cocktail) of revenues in the 90s and olives
  comprised 6.
• Per capita consumption of both canned pears and
  peaches has been declining, while olives
  consumption has shown a slight upward trend
  (figure 6).
• Prior to bankruptcy, TVG was the largest fruit
  processor in CA, with about a 40 aggregate
  share.
• 85 of tonnage was acquired on a membership
  basis.
• TVG operated its own brands (SW and Libby) but
  sold most (53.5) under private labels.

20
Figure 6 Per Capita Consumption of Canned
Peaches, Pears and Olives (fresh- weight
equivalent), 1970-1998
8.0
7.0
6.0
Pounds
5.0
4.0
3.0
2.0
1.0
0.0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
Year
Peaches
Pears
Olives
Trend Peaches
Trend Pears
Trend Olives
21
TVGs Competitiveness for Fruits and Olives
(cont.)

• Most of TVGs growth in fruits was through
  acquisitions, including failed cooperatives
  Glorietta, Cal Can, and Sacramento Growers.
• Despite its relatively large market share, TVG
  was essentially a price taker in its output
  markets1997 market shares for peaches were TVG
  total 15.3, Del Monte 43.7, PL 37.6. Shares
  were similar for canned pears and fruit cocktail.
• SW brand was consolidated into TVG in 1996
  whereas previously it was an independent
  subsidiary90 management positions, including
  considerable sales expertise, were lost.

22
TVGs Competitiveness for Fruits and Olives
(cont.)

• Fruit products on average generated a higher
  margin for TVG than did tomato products.
• Unlike tomatoes, most fruit procurement came on a
  membership basis, but nonmember procurement
  increased over time.
• 50/50 pool consistently caused peach growers to
  subsidize tomato growers, which caused some peach
  growers to opt for cash contracts.
• Fruit growers had fewer outside options than
  tomato growers and consequently were more loyal
  to TVGthis fact may have caused TVG to use peach
  revenues to subsidize tomatoes.

23
TVGs Competitiveness for Fruits and Olives
(cont.)

• Although olives were a high margin item for TVG,
  they caused many problemsmovement as a of
  production was consistently lowest of any TVG
  commodity, of nonmember purchases increased
  rapidly to 71.5 in 1996, and huge costs (10
  million) were incurred due to environmental
  contamination of Madera, CA processing plant.
• 50/50 pool returns relative to (a) EV and (b)
  independent poolsFigure 7 Peaches, and Figure 8
  Pears.

24
Figure 7 TVG's Peach Pool Performance Returns
to Members As a Percentage of Established Price,
1983-1996
25
Figure 8 TVG's Pear Pool Performance Returns
to Members As a Percentage of Established Price,
1983-1996
150.0
140.0
130.0
120.0
Pool Return ( of Established Price)
110.0
100.0
90.0
80.0
70.0
83
84
85
86
87
88
89
90
91
92
93
94
95
96
Pool Year
26
Evaluation of TVGs Fruit Operations

• As with tomatoes, acquisitions and joint ventures
  were by happenstance not strategy.
• Unlike Pacific Coast Producers, a peer co-op
  which focused on low-cost, private-label
  production and Del Monte, which focused on
  value-added brands, TVG tried to perform in both
  markets.
• Grade pack pear production was at a cost
  disadvantage relative to producers in the
  Northwest.
• The olive business was a loser and should have
  been jettisoned.
• The most profitable product was peaches, but
  cross subsidies from peaches to tomatoes and
  pears engendered discontent among peach growers.
• Despite many problems TVGs fruit operations
  (excluding olives) were competitive to the very
  end.

27
Joe Famalette and the NGC Restructuring

• April 1995 Famalette is hired as CEO and
  President.
• NGC restructuring plan is presented to growers in
  June 1996.
• Background TVGs equity base was hemorrhaging
  due to loss of members (who were then entitled to
  equity refunds) and increased use of cash
  contracts, which presented no opportunity for a
  retain.

28
The NGC Essentials

• Issuance of transferable capital stock by
  commodity class.
• Capital stock conferred a delivery right and
  obligation.
• Existing equity pool credits were converted to
  shares of capital stock.
• 50/50 pooling concept was replaced with a
  profitability target concept that was closely
  akin to a single-pool concept, i.e., all
  commodities shared in TVG returns until
  profitability target was reached.
• New pooling concept thus had the potential to
  exacerbate cross-subsidy problems of the 50/50
  pool.

29
The NGC Essentials (cont.)

• Restructuring was accompanied by a purge of many
  employees from the pre-Famalette era--the CFO
  position was eliminated, key new executives came
  from American Crystal Sugar (Famalettes old
  company), Pacific Bell Directory, and the
  railroad industry. Only three incumbent
  executives were retained.
• Criticism is that new executives knew little
  about (a) cooperatives or (b) the processed food
  business. They fired everyone who knew where the
  light switch was at Bill Allewelt, former TVG
  CEO.

30
The Final Downward Spiral

• In 1996 TVG changed its definition of operating
  income and redefined its fiscal year.
• Long-term debt rose from 30.1 million in FY95-96
  to 145.6 million in FY 1996-97.
• In August 1997 Deloitte Touche warned TVG of
  increased risk of inaccurate financial reporting.
• In August 1998 TVG announced a net loss of 78
  million and fired Famalette (Figure 9). About
  50 of this loss resulted from paying growers
  129 of EV vs. 90, which was the guaranteed
  payment.
• Losses were all carried forward, effectively
  depleting the co-ops equity (Figure 10).

31
Figure 9 TVG's Operating Income and Net Income,
FY 1970-2000
32
Figure 10 TVG Members' Equity,
FY1969/70-1999/2000
250,000,000
200,000,000
150,000,000
100,000,000
50,000,000
Value ()
0
69/70
71/72
73/74
75/76
77/78
79/80
81/82
83/84
85/86
87/88
89/90
91/92
93/94
95/96
97/98
99/00
(50,000,000)
(100,000,000)
(150,000,000)
(200,000,000)
Fiscal Year
Equity Pool Fund Credits
Capital Stock
Allocated Pool Loss
Retained Earnings
33
The Final Downward Spiral (cont.)

• Debt-to-equity ratio rose from 1.51 in FY 1996-97
  to 3.50 in FY 1997-98.
• FY 1998-99 closed with a net loss of 120
  million.
• Further losses in FY 1999-00 reduced the
  cooperatives book value of equity below zero.
• In July 2000, TVG filed ch. 11 bankruptcy and in
  2000 processed only a fraction of its contracted
  tomatoes, peaches, and pears.
• Signature Fruit, a John Hancock subsidiary,
  acquired the fruit business, Del Monte acquired
  the SW brand, and a grower co-op bought the
  olive business, including the Oberti brand.
• Litigation ensued and continues to this day.

34
What Went WrongVarious Opinions

• David Long, CEO Signature Fruit TVG had too
  many products in too many packages which ended up
  in inventories. It made a mistake pursuing
  branded products when its strength was in private
  labels.
• Jeff Boese, President CA League of Food
  Processors TVG was not a low-cost processor.
  Famalette brought in people who were not from the
  food business.
• Mike Machado, CA assemblyman and former TVG board
  member TVG lacked capital to make needed
  improvements in plant and equipment.

35
What Went WrongVarious Opinions (cont.)

• Larry Clay, CEO Pacific Coast Producers (i)
  Board was at fault for failing to discipline
  growers, lacking a strong business orientation,
  displaying favoritism towards certain growers,
  lacking controls over management. (ii) Acquiring
  failed competitors was a bad strategy, and (iii)
  accounting tricks and manipulations were used
  during Famalettes reign and before.
• Chris Rufer, CEO Morningstar Acquired
  facilities were in poor condition and
  unproductive, TVG postponed making the right
  decisions, lacked strong leaders and was run by a
  Board (farmers), not entrepreneurs.
• Bill Allewelt, former TVG CEO Company was taken
  down by ruinous decisions from a board of
  directors that seemed blinded to economic
  realities . . .

36
Some General Conclusions

• Seeds of TVGs demise were in place prior to
  1990s in the form of high inventories, low
  productivity of assets, high operating and
  transportation costs relative to the competition,
  and high debt/equity, which inhibited needed
  investments in modern plant and equipment.
• TVG was competitive in fruit, especially peaches,
  but not tomatoes. TVG either needed to become
  competitive in tomatoes by finding a market niche
  or jettison its tomato line. Using fruit
  revenues to cross subsidize tomatoes was not a
  viable long-term strategy.

37
Some General Conclusions (cont.)

• The NGC restructuring was largely unsuccessful
  (i.e., it failed to stabilize either the equity
  base or the base of raw product) but it had
  little to do with the bankruptcy. Rather, the
  restructuring was a desperate response to severe
  problems already in place.
• Famalettes cost-reduction measures were
  counterproductive because they were too radical
  and ill targeted so as to negatively impact TVGs
  ability to generate revenues.
• The long-standing problem of poor internal
  controls and lack of centralized information
  system was not addressed by Famalette.

38
Summary of Problems Co-op Genesis

• Acquisition of inefficient capital from defunct
  co-ops.
• High debt/equity ratio (horizon problem) and
  limited sources for equity capital (i.e.,
  financially distressed growers) inhibited
  attempts to modernize plant and equipment.
• Unwillingness to terminate growers who were not
  viable to the co-op.
• Growers were dramatically overpaid in final years.

39
Summary of Problems Market Genesis

• Tomato market, although growing, was very
  volatile.
• Canned fruit market was in decline.

40
Summary of Problems Management/Director Genesis

• Acquired inefficient capital from defunct co-ops.
• Failed to adopt an integrated information
  management system.
• Famalette purged staff members who were
  knowledgeable about the food processing business
  (can heads).
• Failed to come to grips with grower end of the
  tomato business or to get out. Needed strong
  contracts to induce grower loyalty. Cash
  contracts robbed co-op of a source of equity.
• Lack of focus on business end branded products
  vs. private label, paste vs. value-added tomato
  products.

41
Summary of Problems Bottom Line

• The fact that rivals such as Del Monte and peer
  cooperative Pacific Coast Producers did well
  during period of TVGs ultimate demise suggests
  that internal management/director problems were
  more responsible for the failure than problems
  endemic to TVGs cooperative structure or its
  core markets.

42
Some Relevant Lessons

• Multiproduct marketing co-op presents a
  conundrum Modern markets prefer full-line
  suppliers, but multiple products create
  significant internal problems in terms of (i)
  pooling and (ii) director loyalty and
  responsibility.
• Policies such as long-term contracts are needed
  to encourage grower-member loyalty.
• Loyalty to other co-ops should not displace sound
  business judgments.
• Co-ops may be more sluggish than IOFs in
  responding to changing market forces. Is
  information advantage sometimes ascribed to
  co-ops actually true?