STREET WISE by Sam Jaffe

IS NORTHLAND CRANBERRIES RIPE FOR INVESTORS?

When Pepsico (PEP) announced the acquisition of Seagram's Tropicana fruit-juice division last month for $3.3 billion, it left a sour taste in the mouths of Ocean Spray executives. The Lakeview (Mass.)-based cooperative of cranberry and grapefruit farmers already had a joint-venture agreement to provide Ocean Spray juices to convenience stores through Pepsi's distributors. Now, Ocean Spray is doing its best through legal maneuvers to bog down the Tropicana deal.

So if you're looking for a way to invest in the current chaos of the juice markets, the ripest berry on the bush might be one that's easily overlooked. Tiny Northland Cranberries (CBRYA), which already owns 13% of the nationwide grocery-store cranberry-juice market, is getting ready to launch an attack on the smaller but much more lucrative convenience-store market, just as chief competitor Ocean Spray is enmeshed in a legal fight with its primary distributor.

Among agricultural products, cranberries are especially unusual. Most American farmers sell their crops to a distribution company, which sells to a food processor, which sells to a retailer. Because of the difficulty in raising cranberries and the unique conditions they need (they flourish only in boggy farmland that can be flooded), this isn't a crop that can be grown anywhere. As a result, only a limited number of farmers have the technical expertise to raise them and a limited amount of suitable acreage on which they can grow. Most cranberry farmers, a tiny group to begin with, banded together back in 1930 and formed the Ocean Spray cooperative, which processes and sells the end product, allowing the farmers to enjoy the profits of most of the stages of the food production process.

Not all growers belong to Ocean Spray, however. The largest single independent cranberry grower is Northland Cranberries, a former member of Ocean Spray that went independent in 1992. Based in Wisconsin Rapids, Wis., Northland has over 2,500 acres under cultivation and also buys 30% of its berries in bulk from other independent growers. Of course, its 1997 revenues of $47 million are still puny compared to cran-monster Ocean Spray, which last year had $1.4 billion in sales.

Nevertheless, Northland is showing steady revenue and market-share growth. In the quarter that ended on May 31, the company had sales of $26 million compared to only $10 million for the same quarter last year. Market share on grocery-store shelves increased from 12.7% to 13.4%, according to the company. It also says it now accounts for fruit juices sold in 81% of all grocery stores in the U.S. However, profit margins declined from about 51% in last year's quarter ended May 31 to 44% this year, but that's understandable considering that the company increased marketing and advertising expenses by more than 250% in a push to grab market share.

The real key to Northland's future growth is its branded juice. That means bottles of juice with the Northland name on the label. In the past, Northland sold most of its cranberries to private-label bottlers and frozen concentrate makers. But it's now hawking its own brand of cranberry drinks, which should provide higher profit margins once consumers begin to recognize the brand. Currently, branded products account for half of its sales. The company plans to steadily increase that number until it's closer to 80%.

As part of that strategy, Northland last week bought the juice division of Seneca Foods, which makes apple and citrus juices, for $35 million. Northland plans to continue selling Seneca's products under that label. But Seneca's production facilities and bottling plants will allow Northland to approach retail outlets with a full line of juices, rather than just cranberry products.

Most significant, the Seneca purchase will give Northland entree to the convenience-store market, which although smaller in volume than grocery-store sales, offers much higher profit margins. Indeed, the convenience-store market was the target of Ocean Spray's joint distribution agreement with Pepsico. "The Seneca purchase was a great move on their part," says Michael Reinarts, an analyst with Minneapolis-based Craig-Hallum Group. "It will help them both with the grocery-store market and the convenience-store sales. The Pepsi-Ocean Spray conflict can only help them also."

And Ocean Spray's attempt to stem its losses to Northland in the grocery segment have been less than successful. Ocean Spray recently launched a line of "100%" cranberry juices, copying Northland's claim of not watering down its juices, but after a year of heavy marketing, that line has captured only 2% of the grocery market.

The next 12 months are crucial to Northland's future. By this time next year, analyst Bonnie Wittenburg of research firm George K. Baum expects that Northland will have either made significant inroads on the convenience-store market or will have been shut out of it. If it has succeeded, which Wittenburg expects, the stock could rise from its current price of $12.63 to as much as $33, she says. In addition, she predicts that the company will increase earnings per share from its 1998 level of $0.19 to $0.80 a share in 1999. That would quench any investor's thirst.

Sam Jaffe writes about the markets for Business Week Online