Sun-Rype Products Ltd.

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Sun-Rype Products Ltd.

1165 Ethel Street
Kelowna, British Columbia V1Y2W4
Canada
Telephone: (250) 470-6405
Toll Free: (888) 786-7973
Fax: (250) 762-3611
Web site: http://www.sunrype.com

Public Company
Incorporated: 1946 as B.C. Fruit Processors Ltd.
Employees: 428
Sales: CAD 115.2 million ($95.6 million) (2004)
Stock Exchanges: Toronto
Ticker Symbol: SRF
NAIC: 31999 All other Miscellaneous Food Manufacturing

Sun-Rype Products Ltd. is a Canadian company that sells fruit juices and fruit snacks. It is located in British Columbia's Okanagan Valley near Washington state, which because of its climate and soil is ideally suited for the growing of fruit, including apples, apricots, cherries, peaches, pears, plums, and strawberries. Sun-Rype is best known for its 100 percent apple juice, which is also used to produce other fruit juice blends, such as Apple Orange Passionfruit, Apple Orange Peach, and Apple Pineapple Banana. Sun-Rype also sell other 100 percent fruit juices, including grape, raspberry, tropical, mango tangerine, wildberry, fruit medley, and strawberry kiwi. In addition, Sun-Rype offers orange juice and citrus blends as well as varieties of Fruit & Veggie Juice. Sun-Rype natural fruit snacks include apple sauce and Fruit to Go fruit "leather," Canada's top selling fruit snack, and FruitSource bars. Sun-Rype is a public company listed on the Toronto Stock Exchange.

Okanagan Valley Begins Raising Fruit in 1800s

Western Canada's Okanagan Valley initially attracted gold prospectors in the 1860s to 1880s to the surrounding mountains, but the valley itself was soon recognized as a good place to raise livestock and plant fruit orchards. In 1889 the B.C. Fruit Growers Association was formed to serve the interests of the many small fruit farmers in the valley. With the introduction of new species of disease-resistant trees in the 1920s the valley began to truly prosper, then in 1939 British Columbia passed new legislation that led to the establishment of a new growers' agency, B.C. Tree Fruits, which took charge of selling the valley's abundance of apples, apricots, cherries, peaches, pears, and plums. It also became the dominant entity, as B.C. Fruit Growers essentially served as the fruit growers political arm.

The apple growers of the Okanagan Valley had a problem, however. There was no market for their sub-grade fruit, cull apples. As a result they had to pay to have the packing plant haul away rejects to be dumped. Thus, in 1946 B.C. Tree Fruits instructed B.C. Fruit Growers to form a company called B.C. Fruit Processors Ltd., which the association would own on behalf of its 3,300 grower members as a cooperative, to turn cull apples into 100 percent apple juice and apple sauce. The new company bought a pair of struggling juice plants and for a brand name chose "Sun-Rype." In addition to apple juice and apple sauce, the company in the early years also manufactured pie filling and dehydrated apples.

In 1959 B.C. Fruit Processors took the name Sun-Rype Products Ltd. and launched Blue Label Apple Juice, which became the company's flagship product and over time became the dominant brand of apple juice in Western Canada. A major factor in the product's success was the forging of a joint venture in 1963 with the Fraser Valley Milk Producers Association, which distributed juice on established milk routes.

Because it was a cooperative, Sun-Rype distributed profits each year to members of the B.C. Fruit Growers. Then, in 1979 the arrangement was changed. Sun-Rype began to retain the profits to build the business. It upgraded its production lines and in 1979 became the first juice processor in Canada to offer tetra-packaging for 250 milliliter and one-liter packs. Richard Skelly wrote in a 1996 story for BC Report, "Earnings eventually stalled at about CAD 5.9 million, says grower and Sun-Rype chairman Merv Geen. Expenses kept rising, and, by 1992, 'we had a balance sheet that was out of whack with our debt covenants to the bank,' he said. 'The growers were not willing to put in more money. Under co-operative rules, you come in with nothing and you leave with nothing. So, as a grower, you'd get no recognition for contributing any capital.'" Moreover, Sun-Rype was overly dependent on apple juice, with Blue Label apple juice accounting for about 60 percent of sales. As a result, the company was put in a difficult position whenever there was a shortage of cheap cull apples. Moreover, it was operating in a limited marketplace in Western Canada.

Early 1990s Restructuring

In order to begin addressing its myriad of problems, Sun-Rype in 1993 underwent a financial reengineering. According to Skelly, Sun-Rype was "recapitalized by issuing 10.2 million shares. Enter investor Allied Strategies, which purchased 3.46 million shares. The Vancouver holding company paid CAD 8.7 million in return for a 30 percent stakes of the available Class B shares. A further 5.9 million B shares, one for every dollar of historic retained earnings, were divided on a pro-rata basis among grower." Some of the remaining shares were sold to growers and employees or award to management instead of salary. Another 430,500 shares were use to acquire a dried fruit and granola bar manufacturer, Okanagan Dried Fruits.

The addition of Okanagan Dried Fruits provided much needed diversity for Sun-Rype, which still had to contend with the uncertainty of its apple supply. The company expected a shortage in 1993 and tried to hedge its position by guaranteeing prices for apples that turned out to be much higher than necessary. Then, in 1995, Sun-Rype failed to hedge, a shortage developed, and the company was forced to pay a steep price for process-grade apples. It was able to remain profitable because of Okanagan Dried Fruits as well as the sale of blended beverages, which were cheaper to make and becoming increasingly popular with consumers.

During this period in the early 1990s, Sun-Rype's management developed ambitious goals, as laid out in a document called Vision 2000. In it, the company's stated mission was to become a leading international food and beverage company by the year 2000. There was talk in the press about growing revenues to CAD 500 million by then, which would represent a dramatic jump given that sales in 1993 totaled CAD 63.2 million. The company began taking steps to realize that dream. Research and development spending, which had totaled about 0.1 percent of sales was increased ten-fold to bring to market new products. Sun-Rype also began to spread its marketing reach eastward with the goal of serving all of Canada, and it looked to international markets as well. The company exported its products to the United States, the Philippines, Singapore, and Thailand, and was especially excited about the prospects for doing business in China. Management paid a number of trips to China in the early 1990s in hopes of arranging a joint venture to produce fruit juice from concentrates.

By the end of 1995, according to Skelly, "Sun-Rype executives faced new hurdles. Allied strategies wanted out of its Sun-Rype investment. Allied president William Sleeman tried and failed to persuade the growers' association to allow his firm to take control of Sun-Rype. Rebuffed, Allied bought Okanagan Springs Brewery instead. And when Mr. Sleeman purchased a similar craft brewery in Ontario, his eastern partners insisted he exit other beverage endeavors."

In search of a buyer, Sleeman looked to an Allied board member, Douglas Mason, who had made a splash with the launch of Clearly Canadian Beverage Corporation, a new age beverage company that began selling sparkling, fruit-flavored water in the late 1980s and enjoyed a meteoric rise in the price of its stock. Sales began to tail off in 1993, so Mason jumped at a chance to buy into Sun-Rype and recharge the fortunes of Clearly Canadian. He offered Allied CAD 6.5 million for its stake, then approached the Sun-Rype board with an offer in March 1996 to buy more stock and take control. The Sun-Rype board dismissed the overture and exercised its right to match any outside bid for Allied's shares, paying CAD 6.3 million but on terms that were faster than the CAD 6.5 million Mason had proposed. He then engineered a CAD 40 million hostile takeover bid of Sun-Rype, going over the heads of the board and appealing directly to the grower-members. Mason's team set up shop in a nearby hotel and began to woo growers in what became a nasty scrap with Sun-Rype management, who Mason accused of having its own agenda and using fear-mongering with shareholders to defeat his proposal. In the end Mason failed to persuade enough of the shareholders to trust his vision for growing Sun-Rype. In addition, for those shareholders who wanted to cash in their stake in Sun-Rype they only had to wait until the end of 1996 when Sun-Rype stock went public on the Toronto Stock Exchange.

Company Perspectives:

We are committed to providing simple, nutritious products that make it easier for today's busy families to incorporate healthy eating into their active lives.

Late 1990s: New Management Team

In the mid- to late-1990s, Sun-Rype made little inroad in achieving the goal of generating CAD 500 million in sales by 2000. Revenue totaled CAD 80.3 million in 1994, dipped to CAD 77.4 million in 1995, rebounded to CAD 80.2 million in 1996, and topped CAD 88.3 million in 1997 before tailing off in 1998 to CAD 83.8 million. More so, in 1997 Sun-Rype posted a CAD 5.8 million lost due to its failure to launch a business in China after four years of trying. A new management team was installed in 1998, as long-time Sun-Rype executive Lawrence Bates was named the company's chief executive officer just as he was on the verge of retirement. "When I assumed my position, the first job was fixing the basement," Bates told National Post in 2000. "We got back to basics." One move was to withdraw from the highly competitive granola bar business. Instead, Sun-Rype concentrated on the fruit snack business where there were no major players and was more in keeping with the company's core business. Fruit leathers and fruit bars had been essentially relegated to home kitchens due to the 24-hour drying time of the pureed fruit. It wasn't until Sun-Rype researchers discovered new technology in California that cut the drying time to three to four hours, that the company was able to mass produce the fruit snacks. The Fruit to Go fruit leathers were introduced in March 1997, then early in 1999 Energy to Go fruit bars, later renamed FruitSource, went on sale. Bates used both brands as a spearhead to introduce Sun-Rype to central and eastern Canada markets where the company's juice brands had not penetrated due to shipping costs. Also in 1999 Sun-Rype took another major step in its transformation from an agricultural co-operative to a modern, growth-oriented company when the company's nine Class A shares, held in trust on behalf of the fruit growers' association, were redeemed. Each of the shares, accord to BC Report, controlled "a whopping 50 million voting rights on each share. Even assuming they all agree on an issue, Class B shareholders would always lose by almost 440 million votes if the grower's association disagreed." With the association relinquishing its voting control, Sun-Rype gained greater flexibility and become more of an attractive investment. In 2000 Canadian entrepreneur and billionaire Jim Pattison bought nearly 15 percent of Sun-Rype's stock. Over the next few years Pattison would increase his stake to 25 percent.

Sales reached a record CAD 96.4 million in 1994, and Sun-Rype appeared well positioned to top the CAD 100 million, a far cry from the CAD 500 million dream of a few years earlier, but still an impressive performance. The company was spreading eastward and the fruit snack business was just beginning to spin off new products. A decline in process grade apples in the 1999 harvest, however, temporarily halted Sun-Rype's sales momentum, as revenues dipped to CAD 88.2 million in 2000. But net income improved from CAD 3.7 million in 1999 to more than CAD 4.9 million in 2000. More importantly, Energy to Go was available in 90 percent of Canada and Fruit to Go had a 96 percent national distribution. The products, supported by a national advertising campaign, both enjoyed sizable sales increases over the previous year.

Sun-Rype upgraded its beverage processing and packaging facilities in 2001 as part of an effort to revitalize its beverage portfolio. The company also added to its snack offerings by launching Sun-Rype Fruit & Veggie bars in September 2001. Sales rebounded to CAD 92.6 million in 2001, while net income totaled CAD 4.4 million. Sales in central and eastern Canada were also growing at a healthy 27 percent clip.

New product development continued in 2002 with the introduction of Sun-Rype's first entry in the "functional" beverage market, Calcium Enriched Orange Juice. The company was also successful in landing food contract manufacturing business, co-packing, an area of growth for Sun-Rype. Over the next two years its secured business from customers in both the United States and Europe. As a result of growth on all fronts, Sun-Rype cracked the CAD 100 million revenues mark in 2002. Sales improved to CAD 108 million in 2004 and CAD 115.2 million in 2004. Net income during this period increased from CAD 4.9 million in 2002 to nearly CAD 5.9 million in 2004. Through the first three quarters of 2005, revenues and earnings were also on record pace. There was every reason to believe that Sun-Rype was just beginning a period of sustained growth.