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Case Study: Could Organic Valley Thrive Without Wal-Mart?

Organic Valley couldn't sell enough milk to Wal-Mart. And that was the problem.

George Siemon was getting milked dry. It was 2004 and the CEO of Organic Valley, the second-largest organic milk company in the country, was facing the worst supply crisis of his career. After years of double-digit sales growth, the whole world seemed to be going organic, and demand had run away from supply. Organic Valley was shorting some orders by up to 40 percent. Customers were getting restless.

Part of Siemon's problem was one of his biggest customers: Wal-Mart (NYSE:WMT). Organic Valley had built its business working with independent organic groceries. Wal-Mart's business didn't cause the milk shortage, but to the small customers it sure looked like the dairy was skimping on their orders to serve Wal-Mart. And Siemon knew that growing demand from Wal-Mart could become overwhelming.

"All of a sudden it hit us: What are we doing?" Siemon says. "We thought, 'We're shorting everybody, treating everybody poorly, and damaging our reputation. We need to decide what's most important.'" So he gathered his top managers to make some tough decisions. It was time to cull the herd.

Few would pick Siemon as a likely candidate to face this kind of problem. He looks more likely to run a commune than a business projecting half a billion dollars in sales this year. His hair falls to his shoulders and his office attire is blue jeans, a fleece jacket, and wire-rim glasses. He studied forestry in college but abandoned plans to become a park ranger because he didn't want to "count picnic tables for the government forever."

He became an organic farmer during the back-to-the-land movement of the 1970s and settled in southwestern Wisconsin. In 1988, he started a cooperative with half a dozen other farmers just as the organic food industry was taking off. Despite misgivings about being trapped behind a desk, Siemon was tapped to handle the business end of the co-op and didn't receive a salary until the second year--$5 per hour.

The cooperative, based in red barnlike headquarters overlooking the bucolic Kickapoo Valley in LaFarge, Wisconsin, is fundamentally different from conventional businesses. It is owned by the farmers. From the outset, it has sought to maximize direct payments to producers and set a modest profit goal of 2 percent. Over the past two decades, the company has expanded into a national enterprise with 940 farmers and 350 employees and projected 2007 sales of $482 million. It produces more than 200 products, including milk (organic dairy cows are given no synthetic hormones or antibiotics and eat organically grown feed), butter, meats, and eggs that are sold in 13,000 stores.

Organic Valley has remained independent as other organic pioneers have been snapped up by the Jolly Green Giants of the food industry. It touts itself as the "un-corporation" and Siemon's business card identifies him as "CEIEIO." He has a corner office, but its floors and beams are made from local pine and recycled wood. Says Siemon: "We have our own way of doing things."

In 2001, that way was put to the test. Siemon's sales team came to him with the notion of selling to Wal-Mart, which was moving aggressively into organic foods. Organic Valley managers spent weeks ruminating--even talking to activists and local farmers--before agreeing to sell milk to the retail giant. Some employees saw Wal-Mart as the antithesis of everything their company stood for--an impersonal, price-slashing menace, a killer of small businesses and rural downtowns. Siemon saw an opportunity to take the organic movement to the next level. "In the long run, we decided two things: It's the consumer's choice, and Wal-Mart gets organic milk to places where it's not available," he says.

Wal-Mart quickly grew into Organic Valley's third-biggest customer. At its peak, it represented 3.6 percent of the company's fluid milk sales, 1.3 million gallons per year. Organic Valley managers discovered they liked doing business with Wal-Mart. The famously efficient giant taught the co-op to master techniques such as inventory management and electronic payments. "Wal-Mart educated us quite a bit," says Siemon. "When they say on-time delivery, they'll knock you if you're there early!"

But in 2004, everything changed. Early that year, a case of mad cow disease in Washington state sent customers stampeding toward organic milk. A poor crop of feed grain caused a drop in dairy production. "We learned the hard way how important demand planning is," says Eric Newman, Organic Valley's vice president of sales. "I needed about 20 percent more milk for six months."

Customers began padding their orders to finagle more milk. Eventually, there wasn't enough milk to go around. "Some people were screaming bloody murder," recalls Newman.

Meanwhile, Wal-Mart was presenting another problem. Organic Valley's biggest rival, Horizon--the nation's leading organic milk brand, owned by Dean Foods (NYSE:DF), the nation's largest dairy company--had begun making a play for Wal-Mart business. Now what? Should Organic Valley continue underserving all customers? Or choose favorites? If the latter, who? The natural grocers who helped build the business, or big accounts like Wal-Mart with potential for explosive growth?