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PMA And United:
To Merge Or Not To Merge? That Is The Question

Jim Prevor’s Perishable Pundit, June 1, 2012

Back when he was with Wal-Mart and also was serving on the board of directors of the Produce Marketing Association — of which he ultimately became Chairman — Bruce Peterson would frequently ask one question when assessing industry structures: “If we didn’t have the current organizational structure already set up, would we choose, today, to create this structure?”

If that is the criteria by which we look at United and PMA, the answer is foreordained as it is almost surely certain that nobody would build the structures of either United or PMA the way they are today.

The practice of having parallel structures in the form of two vertical industry associations has obvious and logical problems. Virtually all surveys done as to what people profess to be the main reason for which they believe the industry needs an association point to government relations as the raison d'être of such an association.

Yet multiple voices muddy the waters, and this is an issue that has grown in importance as food safety has become a more prominent concern of the industry.

And, of course, there is always the issue of what people really believe as opposed to what they say. After all, they may say they value government relations, but they seem to be willing to pay a lot more to do marketing.

We’ve been thinking and writing on the question of a possible merger between PMA and United for a long time. We have written many pieces, including those you can find here.

Veterans of the industry will recall a time when a penniless PMA went hat-in-hand to the then-largest trade association in the industry — the United Fresh Fruit and Vegetable Association — and pleaded to be acquired — but was shown the door.

At the recent United Fresh convention, a bit of a hullaballoo broke out when a trade publication published the rough timeline by which the boards would make a decision on a possible merger. It is anticipated that a favorable vote would then be followed by a vote of the membership.

Steffanie Smith and Mike O’Brien, who co-chair the task force that has led the merger discussions, put out a tersely-worded release asking for “a chance to complete our work in confidence.” These are truly wonderful people, and they want the best for the associations they love and for the industry. It is understandable why they feel this way, and it is always easier to reach a “deal” and make compromises without the glare of public inquiry.

Yet, we wish they had not chosen this path. The problem is that merely making a “deal” is not a measure of success or failure. The goal is the optimal outcome, not a “deal” — to set up the process in such a way that makes a “deal” more likely is to presuppose that a “deal” is the optimal outcome. In fact, the purpose of the process is to determine the optimal outcome.

It always seems more efficient to operate without the opportunity for public critique but it does not necessarily lead to an optimal outcome. Partly this is because more brains on a problem can bring more ideas to an issue. Partly it is because the issue doesn’t end the day the deal is done. If people feel railroaded and don’t feel respected or engaged, we will solve the existing “problem” only to have new problems crop up in the future and perhaps someone might decide to form a new association.

It is counter-intuitive, but it is important to remember that the United States — with all the weaknesses inherent in having to be public and win public support — beat Nazi Germany, imperial Japan and fascist Italy. It may be that the very advantages that secrecy allows in terms of ease of coming to decisions are actually weaknesses as they lead to bad decisions and allow leaders to avoid the process of building grassroots support. Decisions reached under the bright lights of public scrutiny may be harder to come by, but, quite probably, such decisions are also better decisions, with greater legitimacy. That is why we won World War II and went on to beat the Soviets in the Cold War.

Although proponents of the more secretive path will point out that after a decision is reached, there will have to be outreach — presumably to prepare for a membership vote — presenting members of the trade with a fait accompli means we miss out on the opportunity for structural change in the agreement. This means the proposal will not be as good as it could have been.

In addition, the failure to engage the broad reach of members at the earliest stages means it is less likely to garner approval by the membership, and, even if it does pass, it is less likely to sustain the deep reservoirs of support that sustain these types of decisions over the years.

Still, for better or worse, a secretive process has been conducted and the question for board members remains now, as it has been for years, whether the associations should merge. The arguments have actually changed very little over the years.

The associations have conducted a very professional process. Several people used the words “McKinsey-level analysis” to describe the quality of presentations done regarding the possibility of a merger.

We should say that if our vote count is correct, and people don’t change their minds, the proposed merger seems likely to pass. That is a change and it is worth analyzing why it has changed.

Some is happenstance… the people who happen to be on both boards this year; the fact that Mike O’Brien and Steffanie Smith are consensus-type people; and the fact that United’s chairman during most of this process was Reggie Griffin, who was a former board member of PMA and worked for Kroger, and PMA’s chairman was Rich Dachman of Sysco. Both leaders are soft-spoken gentlemen who also carried big sticks.

The last go around, the leadership of the PMA board was composed of different people and basically said to United that PMA had the superior business model and that really PMA should make a take-it-or-leave-it offer. This was very different from the United vision of a merger of equals seeking to identify and combine the best of both associations into one. Anyone who knows the personalities involved knows that it says nothing about their success in business to say that the current players just wouldn’t speak that way.

There are other reasons, though, beyond personalities and the composition of the boards, why things have changed.

The big players in the industry have become more focused on cost reduction. Several have told us that if a merger doesn’t pass this time that things “will get ugly,” by which they mean that they will reduce their financial support for one or both of the associations. This may be true, but it may not. After all, nothing stops big companies from cutting their financial contributions now. Some may keep spending because of sentimental attachment but most do it for clear business reasons.

When United had its 100th anniversary, for example, an executive at Costco asked Dole to donate a half a million dollars to fund the gala. Under those circumstances, certainly a worthy cause and excellent promotional opportunity, but also a chance to please — and avoid displeasing — an important customer, Dole thought it a prudent investment to fund the evening. Equally, those large exhibitors who might feel they do not get value out of two shows often continue exhibiting for competitive reasons. They might prefer that there not be a second show — thus they would like to negotiate it out of existence through a merger — but they don’t want to be seen as unsupportive or to risk alienating important board members. It is not obvious that would change if a merger fails to go through.

One big change is that support for United as the shield of the industry in government relations has severely weakened among the big California growers who think of their primary advocate as the Western Growers Association. Over and over, among many of the largest players in the industry, we hear an assertion that it is Western Growers that really advocates for these big players. WGA just opened its DC office in April of 2007 and we raised the issue then as to what the long term implications of this might really be in a piece we titled Justifying WGA’s Washington Office.

The big WGA members are industry powerhouses. All the associations depend on their resources. As WGA has become more prominent in DC, it transformed United in the eyes of many major players into a luxury, rather than a necessity. And, of course, if things are tough, one can do without a luxury. The whole issue of WGA and its role in the industry haunts these discussions. It enables a merger by allowing many big producers to feel they have DC protection without a national association dominated by producers and focused on government affairs, but it may block passage if the more numerous smaller members from states without strong regional associations come to feel they need protection that the deal doesn’t give them and thus vote against it.

And post-merger, one question is whether this is all for naught. Might a newly energized WGA, perhaps with national ambitions, or more robust regional associations be just as guilty of duplication and mixed messages as United/PMA are?

The weakening of the terminal market sector, traditionally a source of strength for United, and a sector able to stand up against retailers in a way grower-shippers often cannot, left perhaps the most passionate and independent group of United supporters diminished.

We would go so far as to say that the common use of e-mail led to a change in attitude toward having two associations. For decades, the associations have claimed that they worked hard to avoid duplication. Yet every time there is a significant industry issue — even with that release sent out under the names of Steffanie Smith and Mike O’Brien — a release comes one minute from one association and an exactly identical release from the other two minutes later. It tells the whole industry that whatever is being said, the two associations are not close enough to coordinate and have just one industry contact list for joint announcements — if they can’t avoid duplication on something so simple, how much other duplication must there be?

Finally, the big change is that the notion of having two compatible and non-competitive trade associations has simply been abandoned. One can make a list: United had converted its show to an equipment and technology show, but in deciding to co-locate with FMI, the supermarket industry association, United reasserted itself into produce marketing. When the spinach crisis hit, PMA decided it needed a food safety scientist on staff, a qualification previously held solely by a United staff member. In doing so PMA thus showed it was not prepared to cede this arena to United. PMA staff and board go to Washington DC to do “brand building,” and both associations have foundations and executive development programs. It has simply become impossible to make a list of things that PMA does that United doesn’t and vice versa. Once that reality began to sink in, industry leaders really started to say what is the point of retaining two infrastructures?

Of course, announcing a merger is the easy part. If the goal is saving money, that is much harder. The devil is in the details, of course, but it seems like a lot of the heavy lifting is being left for a future board. You can merge and have two offices, one at PMA’s Newark, Delaware, headquarters and one at United’s DC headquarters; you can have two high level executives for a while; you can maintain multiple programs; you can do a lot of things to make everyone happy with the idea of merging — what you won’t do, of course, is save much money just by having everything done under one banner. That requires actual reductions in staff and real estate and programming. If the goal is economy, have the hard decisions really been made?

So what, exactly, are the prime arguments for and against merger? The big background is that through a quirk of history the industry wound up in a place that nobody actually expected. PMA, because of its focus on buyers — indeed the requirement that a majority of the board be buyers — attracted both buyers and sellers. Its trade show became fabulously successful, a massive business that churns out enormous resources. The surplus is so substantial that PMA has been able to donate money to jump-start the Produce for Better Health Foundation, the Center for Produce Safety, etc. In contrast, United has traditionally been assigned roles such as lobbying, which doesn’t make money. So the industry wound up putting the majority of its money in PMA, while assigning many core expenses to United.

So what are some of the key issues that swirl around the idea of a merger?

1)  One hopes for economy — but it is not clear how that will be realized without actual reductions in services.

2)  One hopes for a unified voice in government relations — but it is not clear that the voices of WGA, FFVA, TPA, FPAA and many others won’t keep the industry fragmented. If issues such as the PACA Trust or NAFTA rear their head, it is not clear that splinter associations won’t be formed.

3)  Will the industry lose the benefit of competition? Although it is easy to see the waste of duplication, it is hard to see if people are motivated to do a better job because they know members can go somewhere else. Most of the industry is made up of capitalists. We believe consumers get better and cheaper products when we make retailers compete against each other even though, theoretically, it would be much more efficient to have just one retailer. We understand that the efficiencies in, say, logistics and marketing can easily be outweighed by a reduction in human motivation when not spurred by competition. Why do we think that trade associations are, somehow, uniquely exempt from this dynamic?

4)  Who will run the board? PMA has been run by buyers, and that has not only given it enormous strength in marketing, it has given it enormous heft to drive supply chain initiatives, such as PLUs. It seems an enormous loss to the industry to abandon this highly successful buyer-centric business model. On the other hand, government relations in the produce industry mostly means representing production agriculture. If the board representation gives production agriculture a majority, that will kill the buyer-centric business model; if it doesn’t, how can the association claim to represent production agriculture in D.C.?

5)  What is the future of the foreign initiatives? PMA has been working hard to expand across the globe. This is partly because the produce industry has been changing with more production outside the US and more international trade and because consolidation in the US compelled PMA to look outside for growth. Yet if these non-US companies are going to be true association members, they are unlikely to want to spend lots of money on US government relations. In fact they would find the proceedings of an association heavily focused on US legislative issues to be off-putting.

6) Will we lose a valuable pressure valve? There have been numerous cases of board members who for one reason or another were not able to find the opportunities they wanted in one association or the other and then went to the other association and contributed greatly to the industry. Karen Caplan of Frieda’s was a board member at PMA, and PMA at that time was simply not going to make her chairman. She moved over to United, became the first woman to chair that association and made a valuable contribution. If a second association hadn’t been there, what would she have done? Started a splinter group?  Not contribute as much to the industry? Who knows? But if there is just one national association and you have a personality conflict with the CEO, a merger eliminates an option that has existed. If it leads talented people to make contributions elsewhere, is that really a win for the produce industry?

7)  Who will be the CEO? One reason this whole subject is feasible right now is that both Bryan Silbermann, President of PMA, and Tom Stenzel, President and CEO of United, are both longtime veterans. Bryan has frequently mentioned that he was not going to stay around for all that many years. So it is easy to imagine some kind of program in which a planned exit is developed. The truth is that these associations are, despite denials, typically run by the staff. DC-based government relations-oriented organizations almost always are as the boards depend on the CEO for lobbying expertise. Marketing-based associations are not necessarily so, but the CEOs stay around for decades and they get a new boss every year.

It is not hard to arrange things in the way the staff executives would like. Although this is typically the case, on a high profile issue such as this, it is much less so. All the United board members who tell us that Bryan Silbermann is the big problem and all the PMA board members who tell us the main obstacle is Tom Stenzel are kidding themselves. This is a moment when board members have to, to use the vernacular, “man-up” and make their own decision. It will be to their discredit if they allow themselves to be unduly influenced by the interests of any staff member.

8)  Disruption. Anyone who has ever gone through a merger is aware that all mergers are disruptive, and they distract from the mission. Those who believe that their association is on the right path will always be hesitant to endorse anything that might slow it down.

******

 

For the board members who will cast the first vote, we can only rely on their judgment. Perhaps as Solomon did on ascension to the throne of ancient Israel upon the death of his father, King David, the board members shall kneel and ask for an "understanding heart” — for the choice before them is a transformational one, and we can all pray that these industry leaders have been granted wisdom.

One challenge is to decide who they are obligated to when casting that vote. Charles Wilson was the CEO of General Motors, and when President Eisenhower nominated him for Secretary of Defense, it became a controversy as he preferred not to sell his General Motors stock. During his Senate confirmation hearing, he was asked if he could take an action inimical to the interests of General Motors while he held the stock. He explained that though he could, he couldn’t imagine a need to do so. As he explained: "because for years I thought what was good for the country was good for General Motors and vice versa."

Especially for the PMA directors, this is a dilemma because it is not obvious that what might be good for the industry is also good for PMA. PMA has great resources and is free not just from the financial burden of core lobbying but also from the divisive necessity of taking sides in controversial matters. It can do so, but if it feels doing so is divisive, it can also take a pass. That is an enviable place to be.

Yet, in the end, these associations exist to advance the industry, so if a director thinks the industry will benefit by a vote one way or the other, we would hope he or she would decide to vote in favor of the industry rather than the parochial interests of a particular association. 

For four decades Bob Carey was the chief staff executive at PMA. He was there when United turned down PMA’s appeal to merge and he was there to see PMA become the dominant association. In the last go-around on the PMA/United merger question, he told us that he had urged the PMA board to consider the issues generously. There was a lifetime of observation and wisdom packed in that word “generously” — it seems prudent advice for this go-around as well.

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