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

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The Decision

The crisis came to a head on a day that has gone down in company lore as Dry Thursday. In December 2004, managers gathered in a boardroom. They projected spreadsheets onto a screen and began reviewing accounts, scrutinizing sales volume, credit history, pricing, and competition. Then the cutting began.

Their first key decision: to favor the natural food stores--which represented about 45 percent of the company's sales--over mass-market accounts. Then Wal-Mart came onto the chopping block. Siemon's team feared growing with Wal-Mart would make the co-op vulnerable. Eventually, Wal-Mart could consume so much milk that the co-op could become beholden to one client and vulnerable to pressure to lower prices--violating its fundamental mission of providing fair prices to farmers.

Wal-Mart hadn't demanded lower prices--yet. But Siemon and his team had heard that Horizon was selling milk at low-ball prices, at least 15 cents per half gallon less than Organic Valley. Siemon's team harbored few illusions about Wal-Mart's loyalty. "No sense fighting a fight you can't win," says Siemon. "We just walked away." He called Wal-Mart and said Organic Valley was going to withdraw. "The buyer," Siemon says, "was dumbfounded." Wal-Mart declined to comment for this story.

By January 1, Organic Valley had stopped shipping to Wal-Mart. In all, the company cut about 15 of its 200 accounts, including several supermarket chains. In the end, Dry Thursday didn't curtail Organic Valley's growth. Dairy sales grew by 15 percent in 2005 and 37 percent the following year. A few clients retained bad feelings about being cut, but the majority came back once the milk supply caught up about six months later.

Still, more than two years later, Newman thinks Organic Valley could have held off a bit longer before surrendering market share. "Maybe we should have said, 'Can we fend these people off for six more months until we know the milk supply catches up?" says Newman. "I would say we were slightly naive, and we've learned from it."

They've also tried not to burn any bridges with Wal-Mart--a job made more difficult by inaccurate press reports that the retail giant had given Organic Valley an ultimatum to slash prices. In fact, Organic Valley products have quietly returned to Wal-Mart shelves in some regions. "Wal-Mart was never negative to us," says Siemon. "We've become the hero…the little guy who stood up to Wal-Mart. I never felt that way. We just made a business decision about our best odds of longevity."

Horizon remains the overall leader in organic dairy, outselling Organic Valley by $339 million to Organic Valley's $232 million last year. But Organic Valley leads in the natural food stores with $124 million in sales and 28 percent growth, compared with Horizon's $91 million in sales and 9.5 percent decline. These natural grocers tend to be market leaders, and what they do today is what the supermarkets will be doing tomorrow. Says Siemon: "That's why we gave up Wal-Mart."

The Experts Weigh In

Ride out the shortage

I would have kept everybody on allocation and shorted everybody. Selling to Wal-Mart as part of a balanced mix of customers is a really valid thing to do. There's a lot of growth there, they're probably a good credit risk, and it's easier to do business with a large entity. For me, there are two separate issues: maximizing sales of my product and trying to support simpatico businesses. I've never considered the idea of cutting people off. I've viewed shortage as a temporary situation, and once it was over I wanted all my customers.

Ben Cohen
Co-Founder
Ben & Jerry's
Burlington, Vermont

Good to leave Wal-Mart

It is extremely dangerous to become too dependent on one retailer. While there may be few examples of suppliers saying no to Wal-Mart, there are plenty examples of Wal-Mart dropping suppliers. Such occurrences can cause suppliers great difficulty and not infrequently their demise. This is not about big guys versus little guys, but about making a decision that is best for the long-term health of the business. Failing to completely fill orders from other customers ultimately could result in the loss of those customers as well.

George Whalin
President
Retail Management Consultants
San Marcos, California

The dilemma continues

Organic Valley sacrificed short-term profits but protected its core: the natural food stores. It has a more difficult question ahead now that the production shortfall has passed. Should the company aggressively rebuild it presence in Wal-Mart and expand in other discount chains, where efficiency, scale, and low prices are most important? Or remain true to its roots and its core customers? A brand can't be all things to all people. Organic Valley should be careful it doesn't dilute its brand in the long run in pursuit of fast growth.

Tim Calkins
Marketing Professor
Kellogg School of Management
Evanston, Illinois

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