A Paradigm Shift For Citrus
Jim Prevor’s Perishable Pundit, February 16, 2007
An expert in the citrus industry sent us these thoughts about a potential sea change in the western citrus deal:
I can see a paradigm shift coming to the whole California and Arizona citrus industry.
points to Consider:
- Sunkist has lost roughly 25% of its volume with the exit of Paramount.[Editor’s Note: See Sunkist Wake-up Call? here.]
- Bee Sweet was added to make up some of the volume but now they have left Sunkist [Editor’s Note: See Bee Sweet Departure Adds To Sunkist Woes here.]
- Sunkist has lost a $16 million lawsuit to Stark Packing.
- paramount is waiting in the wings with another lawsuit at least as large.
- At least 50 percent loss of orange revenue due to the freeze. Usually Sunkist is shipping around 1 million boxes per week of navels, and word has it that they might do 350,000 a week for the same period this year.
- Charter ship to Japan from Lauritzen-Cool agreement stops. Now Sunkist will have to fight for this important market on more even ground. [Editor’s Note: See Another Blow To Sunkist here.]
- Few meaningful steps have been taken to reduce expenses and in some areas they cannot be reduced. Per unit sales expenses will go through the roof, which could drive more growers away.
- The freeze was bad enough, but Sunkist panicked and put its prices far too high, and the market came crashing back because demand ‘stopped’. Also the panic has attracted excess Spanish, Egyptian, Moroccan fruit to Eastern Canada, and Chinese navels to Western Canada. Thank God there were not enough oranges that could meet USDA protocols from Spain or the USA would have been inundated as well. There is going to be a shortage, but not until April or May.
- Not being privy to inside numbers we can only estimate, however, this may add up to as much as a $50 million hit to Sunkist against retained earnings of perhaps $70 million.
- Interesting, if Paramount, Bee Sweet, and say Booth Ranches combined their volume of navels, they would be bigger than Sunkist in that item.
The paradigm shift may be so dramatic that Sunkist as we have known it simply can’t continue. A dramatic change is necessary to compete in this new environment.
Big events can have big and long term consequences. This freeze may be the ‘global warning scenario’ for Sunkist — you cannot go back. We will see.
Many thanks for this pointed letter. The situation reminds us of a solution that Jeff Garguilo, then CEO of Sunkist, floated some years ago.
We didn’t want to put Jeff on the spot so we didn’t call him to ask but if memory serves Jeff suggested that Sunkist should just ‘shut down’ and set up a quality control company and license the Sunkist brand to ‘anyone and everyone’ who is willing to pack to a set quality standard, and collect royalties. Possibly, like a franchise, Sunkist could do an assessment for marketing the brand.
Although a horrified board didn’t want to go near the plan, it actually reminds us a lot of what Sunkist has done in the Southern Hemisphere in the LLC that Rick Eastes had built up.
These growers and packers in Australia and South Africa are not members of the co-op, nor are the exporters from these countries. They basically get quality specifications and pay Sunkist a royalty.
The return on equity is thus very high.
We are not certain if this is the right approach. Possibly a public offering of an operating company might do better for the growers.
What the ten points in this letter do indicate is that the system is under severe stress and something big has to happen.
Hopefully it is going to be both big and for the better.