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Perishable Pundit
P.O. Box 810425
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Ph: 561-994-1118
Fax: 561-994-1610


email:
info@PerishablePundit.com

a

Produce Business

Deli Business

American Food & Ag Exporter

Cheese Connoisseur



Tesco’s Earnings Report
Comments Indicate Better Sales;
$200 Million In Losses Expected

Tesco has announced its earnings — without breaking out separate numbers for its new U.S. concept, Fresh & Easy. This was a change from its original commitment to provide complete data from the start on Fresh & Easy. We discussed the switch here.

As we have mentioned many times, we would like nothing better than to see Tesco succeed in the U.S. In a consolidating market, a new retail concept rolling out nationally and inspiring others to launch small format chains will be a boon to the supply side. So if we were wrong in our assessment, we will joyfully eat crow. But we will hold on calling the baker to make the blackbird pie until we actually see full financials.

Overall, although profit growth was the slowest in eight years, the stock boomed in London with the biggest one day gain in almost six years. As much as anything, this gain may have been driven by Tesco’s announcement that its property portfolio had increased in value from 28 billion pounds to 31 billion pounds. Since at the opening bell, the whole company was trading for a valuation of around 31 billion pounds, investors were getting the whole Tesco operation for free.

This was a bit unexpected as many had expected the value of the real estate portfolio to shrink because of the troubles in real estate markets around the world. As we’ve written before, our assessment of the quality of Tesco management has often been less enthusiastic than those of other analysts precisely because the company’s earning depend heavily on a reservoir of real estate earning sub-par returns.

When it comes to Fresh & Easy, this is what Tesco had to say:

We are very encouraged by the start Fresh & Easy has made. The first stores opened only in November and we now have over 60 trading. Whilst it is still early days, the response of customers to our offer has surpassed our expectations — with our research regularly confirming that they like the quality and freshness of our ranges, as well as the prices and the convenient locations of the stores.

Sales are ahead of budget and sales densities are already higher than the U.S. supermarket industry average, with our best stores exceeding $20 per square foot per week. We are seeing strong growth in the early stores as we step up, as planned, our marketing programmes and as we build awareness of the brand. This is also reflected in the strong sales performance of recent openings in all of our markets in Southern California, Nevada and Arizona. Fresh foods and own brand products have sold particularly well, confirming that the core of our offer has already gained acceptance with customers.

Progress with real estate has been good and we have secured enough sites for our immediate needs — although the deteriorating property market, particularly in Arizona and Nevada, will mean that some of the third-party developments in which we had planned to open prototype stores later this year, will now be deferred. Nevertheless, we still expect to open around 150 new stores this year.

Our Riverside distribution centre (DC) and kitchen operation is gearing up well as volumes rise. As we announced last November, we have taken the necessary steps to secure the site and begin the process of obtaining the necessary permits to launch operations of our second DC in Northern California in due course. We expect a proportion of these costs will be incurred in the current year.

Last April, with our Preliminary Results, we said that costs of recruitment and training of staff for the stores, combined with the other pre-launch costs and initial trading losses, would involve estimated US start-up costs of around £65m in the financial year. We have delivered on this guidance — trading losses were £62m. We expect losses to rise this year to around £100m and then reduce thereafter as early stores begin to mature and we see increased overhead recovery from higher volumes.

US segmental reporting of sales and trading results within International will begin with our Interim Results in September.

Much of the commentary is not helpful — we are not able to know what it means about operations for Tesco’s management to be “encouraged” about the Fresh & Easy start. Same point with the notion that the response of consumers has surpassed the expectations of Tesco executives — we have no way of evaluating this statement.

That sales are ahead of “budget” tells us little since we don’t know which budget — the one made a year ago or the one made last week — nor do we know what dollar amounts these budgets represent.

The things that may be meaningful in the statement are these:

1) …sales densities are already higher than the U.S. supermarket industry average, with our best stores exceeding $20 per square foot per week.

2) Fresh foods and own brand products have sold particularly well, confirming that the core of our offer has already gained acceptance with customers.

3) …the deteriorating property market, particularly in Arizona and Nevada, will mean that some of the third-party developments in which we had planned to open prototype stores later this year, will now be deferred. Nevertheless, we still expect to open around 150 new stores this year.

4) …we have taken the necessary steps to secure the site and begin the process of obtaining the necessary permits to launch operations of our second DC in Northern California in due course.

5) We expect losses to rise this year to around £100m and then reduce thereafter as early stores begin to mature and we see increased overhead recovery from higher volumes.

Sir Terry Leahy, Tesco’s CEO, also gave a presentation mostly repeating the same points, but he added some graphics. His main comments are inserted below each slide:

167 days since first opening
Project lasting a generation
Customers love the stores
Some becoming completely dedicated
Sales ahead of budget

Trajectory good
Growth in weekly turnover per store
Graphic covers 27 stores we open just before Christmas

Independent Data Commissioned by a shareholder
IPSOS market research interviewed 200 Fresh & Easy customers in Las Vegas could not find a single dissatisfied customer

Fresh foods, prepared foods and ready meals,
own brand sold well
People transfer out of fast food to Fresh & Easy
Move faster and move into northern California

So what do we make of all this?

We have studied Tesco/Fresh & Easy extensively and in dealing with this company we have learned that in many cases what they don’t say is more important than what they do.

Sir Terry Leahy is really admired in the UK, and it is clear why — a long record of performance and a smooth-as-glass manner that allows him to say, in a very believable tone, something like they are beginning to see “people transfer out of fast food” into the Fresh & Easy product. This kind of statement is certainly true — at least two separate people answered a survey saying today they decided to try a sandwich at Fresh & Easy instead of going to McDonald’s — but to what extent; whether that behavioral change was verified or simply self-reported is all left to the imagination. And it is this kind of communication effort that is leaving many industry members in America skeptical of whatever Tesco has to say.

The release of select sound bites pre-determined to make Tesco look favorable in lieu of full financials as was originally intended is likely explained because if the data was released in full, analysts would find things that Tesco prefers they not find.

We take away the following:

There are two big pieces of news in the release.

First, "sales densities are already higher than the U.S. supermarket industry average, with our best stores exceeding $20 per square foot per week."

Second, "we expect losses to rise this year to around £100m and then reduce thereafter as early stores begin to mature and we see increased overhead recovery from higher volumes."

We think these two points are related.

We can’t find a place in the documents where Tesco specifically states what it considers the U.S. supermarket industry average is, and it is unclear from the documents if Tesco is referring to the U.S. average for stores in their first year of operation or if it is referring to the U.S. average for all stores or for mature stores. These are three very different numbers. The investment bankers in London are all using the same $9 to $10 per square foot figure, so we’ll assume that Tesco gave them that guidance.

This would indicate sales of $90,000 to $100,000 per week, per store, which although still a big shortfall from the $200,000 a week per store Tesco expected, would be significantly higher than the $50,000 per week per store that Willard Bishop estimated, that a correspondent told us, a store manager confirmed and that we deduced from a statement by Safeway’s CEO.

It is also substantially more than Piper Jaffrey estimated, and it is also more than we were thinking when we pointed out that there were few customers in the stores.

Assuming the Tesco number is accurate, what would explain the discrepancy? Well it is possible we were just wrong, but we don’t think so. And when all the financials come out, we think a few other considerations have come to affect the numbers:

First, as we pointed out to investors in our conference call with Citi, we expected reported sales to be significantly higher than our baseline sales estimates. Baseline sales are the sales following the end of the grand opening period. Depending on the store and the chain, this can be a period of four to eight weeks. It is not uncommon for sales to drop by anywhere from 20% to a third after this period. Because all of these stores had their grand opening period included in the results, we would expect reported results to be higher than average results.

Second, the baseline results only represent a snapshot. They start increasing immediately. As we wrote here:

Stores go through a normal maturation period. We would expect to see sales increase 20% the first year and on a new concept that is gaining success, as much as 35%. This doesn’t happen in one day on the date a store turns a year old. It happens gradually during the course of the year.

So if we had a store that sold $90,000 a week during its grand opening, then it dropped by a third down to $60,000, if it was going to grow as a new concept can at 35% per year, we would expect sales to grow by an average of $403.85 a week.

Yet these adjustments would not be sufficient to bring sales to the Tesco number. There are two broader explanations that can be divined from the data Tesco released and they have opposite implications for the future of Fresh & Easy:

One possibility is in the claim that some stores are selling over $200,000 a week. Without quantification this means little. Two stores? Twenty stores? And how much over $200,000? $250,000? $300,000? This happens to be one number Tesco would legitimately like to keep quiet for competitive reasons.

All chains have a range of locations of varying success. Everyone knows that in retail, as in real estate, the adage is location, location, location. If a few high performing stores are boosting the numbers, this might have been missed. For example, the Willard Bishop report was done entirely in Phoenix, so if the high volume stores are in California and Nevada, they just wouldn’t have been on that radar screen.

If this is it… if location is the wild card and certain locations are wildly successful for Fresh & Easy and others a flop… then the path to success for Fresh & Easy becomes clearer. Its losses can be seen as a learning mechanism, and if it adjusts its real estate criteria it can start leasing more successful locations. If this is the scenario, we are likely to see not only the 150 new stores Tesco expects to open this year, but also some closures as it rationalizes its real estate portfolio to only include locations it can succeed at.

Of course, even this path is not without difficulties. For one thing, even knowing perfectly where stores may succeed doesn’t help if those locations are not available. Tesco still has a big warehouse and wants to defray its costs over a large store base. Closing a bunch of stores and waiting years to secure locations or paying big “key money” to get great locations may not be viable.

Also, the best selling stores are not always the most profitable. Sometimes those high volume stores are high volume precisely because they are in great locations that can demand high rents. So execution in this area can be difficult. Still, the idea is plain: if the problem is a real estate problem, the answer is a real estate answer.

Another possibility, and one we think more likely, is that all the studies of volume were on target when they were done and that the publicity given the low sales figures led Tesco to take immediate action to goose the numbers.

The two big changes since the assessments were done are A) That Tesco is offering a $5 coupon off a $20 purchase. It is difficult to determine policy but, in practice, these are given away freely at check-out and given in multiples. So if you have $20 basket, they charge you $15, and if you have a $40 basket, they charge you only $30.

B) The other big change is that Tesco began a practice of sharply discounting perishables to sell them before the “best if used by” date. We have seen discounts of 25% the day before expire and 50% on the day of expire and have reports of some stores doing 75% discounts.

We can’t really assess the value of the consumer study of 200 people done by a shareholder without being given the whole study. What we can say is that the consumers we hear from tell us over and over again about the discounts on perishables and the $5 off coupons. When asked, many tell us that the day they will stop shopping at Fresh & Easy is the day those discounts stop.

If this is true, if Tesco decided it needed to move quickly to boost sales and did it through deep discounting, it may be in serious trouble. Sales may have risen dramatically and fast but only because its customers are hooked on the “crack” of 25% off coupons. That is an addiction that will not be easy to shake and withdrawal can get really ugly.

The sparse information in the release contains a clue that this may be the situation. The guidance that Tesco expects Fresh & Easy to lose “around £100m” or around $200 million this year is shocking. This is around four times the consensus estimate.

Although verbally Tesco tells investment bankers about “start-up” costs, especially if it is going to proceed with a DC in northern California, in writing it says losses will go down “…as early stores begin to mature and we see increased overhead recovery from higher volumes.”

In other words, Tesco is counting on increased sales per store and more units to become profitable.

This makes sense as most of the major start-up costs, say building a new DC, are capitalized and Tesco has every incentive to distinguish between start-up losses in northern California and profits in the existing division.

Our bet is that the quadrupling of the operating loss over consensus estimates is due to the massive discounting Fresh & Easy has to do in order to maintain and build sales volume.

This assessment puts the report in a new light. It is very hard to sell food at a profit; it is easy to give it away. Perhaps for this year Tesco will average 100 stores open for the full year. If so, a loss of about $200 million translates into a loss of about $40,000 per week, per store. For a little 10,000 square foot store, that is an enormous loss.

The viability of the Fresh & Easy concept depends not solely on the dollar volume of sales but on the profitability of those sales. Nothing in these comments just released from Tesco provides any reassurance on this point.




Produce Gets 60 Minutes Segment

CBS News correspondent Andy Rooney devoted one of his 60 Minutes commentaries to fresh produce. We wonder if Andy is reading the Pundit? His thesis:

From the time you’re very young, someone is always telling us to eat more fruit. Well, I think we would eat more fruit if we knew for sure that it was going to be any good when we bought it. So expensive.

We’ve run a number of pieces, including Lousy Fruit Undermines Consumption, Pundit’s Mailbag — More On Lousy Fruit: Where’s The Management? — and Ripening Workshop Set For May 20 — all of which dealt with issues of taste and ripening.

In this video Andy Rooney takes a trip to New York’s famed Fairway Market and takes an idiosyncratic tour of the store, highlighting his opinions on improvements in grapefruit, lemons, green apples, local strawberries, items he doesn’t know what to do with, melons that aren’t ripe, the pit of a mango, bags of bananas, good eating pears, stickers on fruit, the placement of tomatoes in the department, the mysterious pluot, stealing cherries and his curiosity about where future grapes will come from if they are all seedless.

Lots of brands get a shot, including Enza, Naturipe, Top Crop and Sun World. You can see the tape here:




Fix Suggested For FDA’s Vigilante System Of Banning Product
Through Import Alerts

The story of Agropecuaria Montelibano and the “import alert” the FDA imposed against its cantaloupes grown in Honduras still remains an issue of great concern — partly because the “import alert” is ongoing, partly because there are continuing issues with cantaloupes and partly because the conduct of the FDA poses troubling issues for the produce industry and for America.

FDA Fumbles Again On Cantaloupe ‘Alert’ was our first piece addressing the issue, and we ran a special 14-article edition devoted solely to the controversy. This piece was entitled, We Are All Affected By Cantaloupe Issue.

Then we ran Positive Test On Cantaloupe Causes More Confusion, dealing with an alleged positive test result on a serotype of salmonella different from that implicated in the food safety outbreak.

We proceeded to deal with some of the letters we have received on the subject, including one from Tom Church of Church Brothers in a piece we called, FDA Status Quo Cannot Stand. Most recently we ran an article entitled, Despite Flawed FDA, Cantaloupes Are Challenged, which pointed out that whatever the problems of the FDA, the industry still has to deal with issues related to the nature of cantaloupe.

We also owe a hat tip to Steven L. Varnis, an attorney specializing in Customs Law as well as doing work in international trade and logistics. Steven has done many things in the food industry, from evaluating emergency food distribution in Ethiopia to coordinating food inspections with FDA in Detroit, to name just a couple. We appreciate that Steven took the time to send us a letter that has led us to a most important interview:

With respect to the (rhetorical?) question you posed in your piece entitled, FDA Fumbles Again On Cantaloupe ‘Alert’:

The “import alert” was peculiar in several ways. First of all, what in the world is an “import alert”? Do we have something called a “domestic product alert”? What does this term mean?

You may find the attached, written by a former FDA Investigator/Compliance Officer, to be instructive. It highlights one of the (many) shortcomings in the FDA import program.

— Steven L. Varnis, Ph.D., LL.M.
Houston Center for Food System
Research and Development

You bet we found it instructive! The attachment Steve sent along, a Law Review article entitled The Food and Drug Administration’s Import Alerts Appear to Be “Misbranded”, which was published in the Food and Drug Law Journal, was written by Christine M. Humphrey.

At first we thought Ms. Humphrey was a prodigy of some sort, as she wrote the article while in law school. Then we realized that by the time she wrote the piece in 2003, she had already been working as an Investigator and Compliance Officer for the Food and Drug Administration since 1994.

The article is a fascinating analysis of the way the FDA has subverted procedural safeguards through the use of “import alerts”:

This article suggests, however, that Alerts — labeled as “guidance” — do not provide fair notice. The aggregate effect is an administrative scheme that undermines principles of uniform enforcement, and moreover, fundamental fairness and procedural due process, which are the hallmarks of the Administrative Procedure Act’s (APA’s) notice-and-comment procedures.

Since the article was written in 2003, we wanted to get an update and discuss the applicability of the thesis to the “import alert” associated with the cantaloupes from Honduras. We asked Pundit Investigator and Special Projects Editor Mira Slott to find out more:

Christine M. Humphrey, Esq.
Mitchell Fuerst, Esq
Fuerst, Humphrey, Ittleman
Miami, Florida

Q: In the context of how FDA has handled the cantaloupe outbreak, there is much confusion throughout the industry as to FDA’s legal authority and procedures in issuing and upholding import alerts, and concurrently, the responsibilities and rights of produce companies it implicates.

A: HUMPHREY: It’s interesting that under the Bioterrorism Act, FDA has new enforcement authority it hasn’t used and has reverted to issuing arbitrary import alerts, basically banning product from entering the country. [Editor’s note: issues regarding the Bioterrorism Act are discussed later in the interview.]

Q: Does the import alert legally mandate a ban? What is the scope of the ban and how is it lifted?

A: FUERST: When FDA issued an import alert on cantaloupes from this Honduran grower, the effect was to ban product from this grower. The ban was specific to cantaloupes, although the reality is no one wants any of [the company’s] product. And it is also likely that anything that comes in under [the company’s] name will be flagged by a compliance officer and easily go under requirement for inspection.

Once the import alert is in place, the burden is on the importer to demonstrate product is not adulterated, so testing is mandated before product can ever be released. When the alert is issued, FDA compliance officers will automatically detain product. The concept has arisen over the years that just before product is about to enter the U.S., it will be detained and either released or refused based on adjudication, an informal administrative process.

A: HUMPHREY: You don’t see the word detention or detained in the statute [the Food, Drug and Cosmetic Act export provision, commonly referred to by FDA as Section 801. The correct citation under U.S. Code is 21USC381]. But practically, when an import alert is issued, the product will be automatically detained and subject to refusal. The importer will have 14 days to demonstrate what it plans to do, and to prove the product is not violative or it will be refused. The importer bares the burden of third-party lab tests so FDA is satisfied that product does not contain salmonella, or E. coli or whatever the problem in question.

Q: Is that 14 days a rule?

A: HUMPHREY: There is no general rule. OASIS (Operational and Administrative System for Information Support) automatically generates FDA notices of action, and they’re programmed to allow for 14 days for an importer of record or other party of interest to respond to the notice of action. It’s not found in regulation or statute; it’s just FDA policy.

Q: So the import alert is not a legal document? The FDA doesn’t have legal authority to ban product from entry?

A: HUMPHREY: The FDA alleges or it’s their posture that import alerts are guidance documents, not a law, just guidance that FDA officers in the field can use when making an assessment.

The reality is where import alerts are issued. Every compliance officer who comes upon product at entry will automatically detain product. There is a paper notice issued to the broker and importer that states product is subject to refusal.

Q: What is actually on the notice? Are these standard protocols? Does it give the importer instructions on what needs to be done?

A: FUERST: These import alerts are not consistent or uniform. They don’t always specify how the violation can be overcome. Some alerts have requirements, like in Chinese agricultural and seafood products. They mandate the importer conduct a battery of tests at third-party labs to make sure antibiotics are not in shrimp, for example. It’s like a rule. It’s a real problem from a legal perspective because an import alert acts as a rule. It prevents the importer from bringing any product in; it’s a ban.

Q: Has anyone ever brought the issue to court and legally challenged FDA’s authority here?

A: HUMPHREY: It’s been challenged. The courts have struck down import alerts in the past. [Editor’s note: Humphrey details related court decisions here and here]. But FDA continues to use import alerts. It’s a real problem. It does confuse importers because the requirements are not clear. Sometimes when a prescribed set of events must take place, many times FDA will add additional requirements later.

Q: In other words, FDA moves the goal posts?

A:HUMPHREY: The alert says the importer must test this product to determine x, y and z. We’ve seen several incidents where the importer does conduct these tests in compliance with what FDA has required and the FDA says that’s not good enough.

A lot of the third-party labs look to the FDA guidance in the laboratory bulletins, which are not necessarily clear or complete. The third-party labs often have to work with those FDA centers that issue the lab bulletins. What you have is third-party labs calling all these centers, with no real point person. They don’t know who to call.

One regional lab says one thing, and another regional lab says the opposite; headquarters says something else, and there’s no clear directive. It’s a real mess, and the rights and obligations on importers and even manufacturers are unclear.

Hundreds of Chinese companies are trying to get on an exemption list and only one is exempt. There is no process for a company to get an exemption. FDA keeps requiring more and more. The initial requirements are met and FDA raises the bar higher. Requirements are added to the alert but not documented on the alert. It’s a crap shoot.

How can I get product in or an exemption? No one knows the answer.

Q: The time delays in getting product released could be disastrous for produce companies. Products with short-shelf lives could be rotting away while companies await resolution, and end up in the trash regardless of the outcome.

A: FUERST: In perishable categories like produce, you don’t have the time to wait two, three days, sometimes up to a week to get those test results back. How does a foreign grower of cantaloupes demonstrate to FDA that a particular lot of product is unadulterated to satisfy FDA?

Q: How forthright does FDA need to be when documenting the reasons for import alerts? If FDA does product testing, for example, does it have any legal obligation to release test results and methods for how its labs arrived at those results?

A: FUERST: The importer would be a party to that adjudication, the informal hearing, and under due process, the importer needs to be addressed. In the case of product sampled by FDA found to obtain salmonella, the importer has the right to those results.

Many districts will refuse to supply the whole testing analysis. This is a problem. The importer needs that information to present its case; it could be challenging FDA’s own methodology, where the FDA lab has a false positive. The importer has the legal right to those tests.

A: HUMPHREY: Unfortunately many districts require the importer to submit a Freedom of Information Act, which is absurd. You might have a compliance officer in Florida willing to supply you with the full lab work so you can assess and audit, while others refuse. Getting the documents through the Freedom of Information Act could take two weeks to a year. No way is that acceptable when dealing in perishables. A lot of our clients understand these issues, and we can make these arguments so companies don’t have to wait.

At what stage does that foreign grower have the right to the information that the FDA is asserting is the reason behind the import alert? If FDA is dragging its feet on giving lab results to the foreign grower, it can’t mount a defense and is left stranded.

Q: Does politics complicate matters when dealing in the international arena?

A: FUERST: A foreign grower has no legal right to do business in the U.S. When FDA takes action in the form of an import alert, if it affects just a particular grower, that grower has no right to go to court and say, ‘you’ve taken away our business.’

But if FDA banned all country imports, it would create the right of that country to go to WTO and contest what FDA has done. In order to avoid that issue, FDA will put out a countrywide alert with one exemption to prove the FDA is not creating a non-tariff trade barrier; but is instead asserting its right under WTO to protect the U.S. public from unhealthy food. The FDA can contentiously say, ‘we’re not revealing what we have,’ and evade the judicial process.

Q: How should FDA procedures change? What needs to be done? What actions should the produce industry take to facilitate a better process?

A: HUMPHREY: In my import alert report, at the very end I present ideas of how the agency could better utilize its resources and provide a more just and effective system to insure a safer food supply.

Having a rule published in the Federal Register establishes clear standards and procedures that can be followed by a company, and ways the importer can establish product is not violative. Currently, each case is different, some have requirements that others don’t. It’s confusing for third-party labs in the U.S. It is unclear if the company would be allowed to do testing overseas before importing product. With perishables, that’s the only way to do it.

Since I wrote the import alert report, Mitchell and I have worked with FDA to implement a prototype where the agency would focus on risk assessments as the way to look at particular commodities.

On April 2, FDA issued stakeholder comments on its Food Protection Plan. It includes a great deal of what we presented in our prototype; the ability of foreign companies to identify critical steps in their process that will meet FDA approval.

If you have a cantaloupe grower in Honduras, the focus might be on water systems due to certain risk factors, and there would be checks and balances a company would institute and document through accredited third-party certifications. If the grower went through that process, they’d move lower on the FDA responder list. The risk level would be reduced and therefore that grower’s product should come into the country without having some arbitrary review.

Right now FDA doesn’t have its arms around products coming through or an established risk assessment to demonstrate product is controlled and audited by third parties.

Q: The implicated Honduran grower has done exactly as you suggest. It has gone beyond standard GAP procedures instituting GlobalGAP, critical control point testing, and undergoing extensive third-party auditing by Primus Labs, a reputable third party. Yet FDA maintains the same threshold in issuing and upholding an alert as it would a company with minimal standards.

A: FUERST: This Honduran grower is the perfect example of a company doing everything in its power to provide safe product and FDA has no mechanism in place but to say the food safety controls sound great but we see a problem. Because there is no implemented policy to measure risk, FDA doesn’t know what to do, so it goes back to issuing an import alert.

Q: How is the actual decision made to issue an alert?

A: HUMPHREY: Bureaucracy at the FDA is out of control. The FDA Division of Import Operations and Policy (DIOP), the division that issues import alerts, doesn’t report to anyone but the Office of Regulatory Affairs (ORA). The Center for Food Safety and Applied Nutrition (CFSAN) is consulted in some respects, but there is no synergy between the divisions. CFSAN is its own distinct body, so there are no real procedures for one entity to speak to the other. The varying offices within FDA don’t communicate and when they do, there is no systematic protocol.

Q: Having 14 years of FDA experience and working inside the FDA for 10 years, gives you additional perspective to understand the disconnect.

A: HUMPHREY: One hand doesn’t know what the other is doing. FDA’s legal section hasn’t focused on imports as much as domestic issues. In judging the lawfulness of this, the avenue is the Office of Chief Council. I actually dealt with the Office of Chief Council recently; they fumble around and don’t have an answer.

The Center for Food and Applied Nutrition says this product needs this requirement before it can be considered unadulterated. Another arm says something different. There are a lot of disconnects and at the end of day, you have ambiguity and no clear pathway for a firm to get a fair hearing. There is no pathway to adjudicate; there is no pathway for a foreign company to demonstrate product is unadulterated to the satisfaction of the FDA because it is dealing with four or five offices.

A: FUERST: When it comes to import alerts, the agency’s fragmented functions prevent adjudication from occurring. One part of the agency says thou shall not do this, another part enforces it. Those controversies have to be handled on an import by import basis. It prevents the affected party from getting a true resolution.

A: HUMPHREY: I can only imagine what the company in Honduras is going through. Having worked in the agency, I can understand how truly frustrating it is that no matter what the company has done in the past, there is no structure for the grower to gain recognition for good agricultural practices.

Q: What does the Bioterrorism Act allow FDA to do? And why wouldn’t it use its new powers to handle food safety issues rather than revert to ineffective and from what you say illegal import alerts?

A: FUERST: Through the Bioterrorism Act, the agency can detain these products, if these companies say they won’t recall product. As a health and safety issue, FDA can administratively detain, similar to a seizure, taking enforcement action to stop further distribution of product. FDA has to have enough evidence, but if there is significant evidence of a food safety problem, the Bioterrorism Act gives FDA the legal authority. Instead they use import alerts.

Q: WHY?

A: HUMPHREY: I would suspect the agency doesn’t have a system in place to execute administrative detentions. I don’t know this for certain, but I haven’t seen any signs. In some instances, you have a company that shouldn’t be subject to an import alert. How can we get that company on an exemption list? Time and time again, this happens and we are still trying to figure out how we will handle this. The FDA doesn’t have procedures in place.

Even with port shopping [going into one particular U.S. port of entry whether by air or ship and having product refused and subsequently shipped back to the country and having it re-imported via another port], one of the provisions in the Bioterrorism Act makes it unlawful for a firm that has product refused to bring that product back into the U.S.

In the case of administrative detention, I don’t believe the agency has articulated how they would handle it. FDA began promulgating regulations to effectuate the Bioterrorism Act provisions, and with respect to the port shopping provision, I haven’t seen if FDA has final regulations. I don’t believe it does. With respect to the resources and FDA’s ability to act under the codification of all the requirements under the Bioterrorism Act, it’s taking a lot of time and I think port shopping provisions are last in line.

Q: In FDA’s import alert against this Honduran grower, it also asked companies that have purchased product from this company to conduct voluntary recalls. Could you address the concept of voluntary recalls?

A: FUERST: FDA issues a warning, and unless the foreign company litigates and says, ‘forget it, you don’t have any authority to recall’, the agency will continue to put pressure on companies to voluntarily recall. Depending on who is speaking from the FDA, they’ll threaten these companies, letting them know if they do not cooperate and proceed with the recall, then FDA will issue a release that it is concerned the product is not safe.

Q: Prior to the spinach crisis, FDA asked several companies to recall packaged spinach and several refused since they believed the FDA epidemiology was flawed and they were not part of the problem. In the end FDA was persuaded. But FDA still issued a consumer advisory that no consumer should eat any spinach period. All companies wound up not being able to sell spinach anyway. Is this an attempt by FDA to assert power they don’t have?

A: FUERST: You put the hammer on the head of the nail. The agency doesn’t have authority to mandate a recall. This is the core issue. If FDA goes into mandatory recall posture and attempts to use the Bioterrorism Act, the recall could result in litigation, which is estimated to take 25 to 28 days. If the problem is with a perishable item like produce, consumer safety is not protected. Therefore, FDA has turned into the direction of voluntary recalls and putting companies in the position of being adverse to consumer interest by not cooperating.

The FDA believes its mandatory authority to cause a recall or force a seize-and-arrest presents a posture that FDA may not have adequate evidence for the volume of product it sees as dangerous to prove its case. It uses the public media and reputational concern of manufacturers and distributors and retailers to bring about the same results.

What happens in order to force a mandatory recall, the standard of evidence required in court doesn’t allow the speed necessary for potentially dangerous product to be taken off the market. The law doesn’t allow the FDA to proceed with the alacrity that FDA feels is necessary.

In the case of the spinach recall, because FDA didn’t have evidence to enforce a mandatory recall — it was too sweeping and no court would allow it to happen at that level — the FDA had to force consumers away from the product instead of forcing manufacturers to recall it.

Q: What key steps can be done at this point to effectuate change at the FDA to create a just system while insuring a safer food supply?

A: FUERST: One solution is putting into place a process where risk assessment is recognized; where foreign manufacturers have an avenue to travel down to show their compliance. If there is a particular outbreak, all these companies can be affected, but there is no process whereby they can vindicate themselves. There’s no risk assessment strategy.

Q: But FDA says there must be clear evidence that the source of the problem behind the import alert must be found and corrected before the ban can be lifted. The catch is that the source of the problem may never definitively be determined, as was the case in the spinach E. coli crisis.

A: HUMPHREY: A true beginning is in The Food Protection Plan; having established processes in place to be sufficient to control hazards with a particular product. If those principles are adopted, at least there will be a measurable standard in which to move forward. There will always be cases of adulterated product; that is a fact of life. There is never a way to guarantee produce will be safe 100 percent of the time. If there is a strong food safety platform for these companies to operate from, that is the best we can expect.

The whole system needs to be in harmony, so corrective actions can occur when there is a breakdown.

A: FUERST: If it’s based on a HACCP model, and the company has this model in practice, it can go through all the procedures. There will always be potential for contamination in water, but the company must demonstrate [it has] taken adequate safety measures to mitigate potential problems. It’s about addressing hazards and mitigating risks, targeting where problems surface and having corrective actions in place to prevent contamination.

There will be times where it will be difficult to assess where in the chain the problem originated, but the company can demonstrate that whatever the problem was, it has taken adequate measures to contain it. The final analysis is that where they identified critical control points, they evidenced product is complying with those requirements through testing; that has to be good enough.

FDA can’t expect every processor to test every piece of fish and every cantaloupe. Typically with foodborne issues, generally it’s a problem with the water system or GAP in the field, but the problem could be related to shipping or have occurred at another point in the supply chain.

A: HUMPHREY: Last year in October or so, President Bush mandated that the agency put together a food safety plan. We worked over a year on this particular prototype with senior officials at FDA. A large percentage of the principles that we recommended were adopted in the plan.

The agency is recognizing they must do something. There were formal meetings with the agency on this prototype. We’re actively involved in working with the agency and other third-party verification agencies to make this happen. These third-party agencies exist, the HACCP programs work, so let’s operate in a risk-based universe, not through arbitrary import alerts.

There’s no incentive for these foreign companies to put these systems in place if they’re not going to get priority review or a green light when they do.

We are very proud of what we do here at the Pundit, and bringing the work of Christine M. Humphrey and Mitchell Fuerst to the attention of the broader industry is truly important work.

There is a cornucopia of information in this interview, but the situation seems to break down to five principles:

1. The FDA is currently dysfunctional:

Bureaucracy at the FDA is out of control. The FDA Division of Import Operations and Policy (DIOP), the division that issues import alerts, doesn’t report to anyone but the Office of Regulatory Affairs (ORA). The Center for Food Safety and Applied Nutrition (CFSAN) is consulted in some respects, but there is no synergy between the divisions. CFSAN is its own distinct body, so there are no real procedures for one entity to speak to the other. The varying offices within FDA don’t communicate, and when they do, there is no systematic protocol.

One hand doesn’t know what the other is doing. FDA’s legal section hasn’t focused on imports as much as domestic issues. In judging the lawfulness of this, the avenue is the Office of Chief Council. I actually dealt with the Office of Chief Council recently; they fumble around and don’t have an answer.

The Center for Food and Applied Nutrition says this product needs this requirement before it can be considered unadulterated. Another arm says something different. There are a lot of disconnects and at the end of day you have ambiguity and no clear pathway for a firm to get a fair hearing. There is no pathway to adjudicate; there is no pathway for a foreign company to demonstrate product is unadulterated to the satisfaction of the FDA because it is dealing with four or five offices.

2. The FDA acts to achieve what it wishes to achieve, regardless of whether Congress has given it that authority:

The FDA alleges or it’s their posture that import alerts are guidance documents, not a law, just guidance that FDA officers in the field can use when making an assessment. The reality is where import alerts are issued, every compliance officer who comes upon product at entry will automatically detain product. There is a paper notice issued to the broker and importer that states product is subject to refusal.

It’s been challenged. The courts have struck down import alerts in the past.

…if FDA banned all country imports, it would create the right of that country to go to WTO and contest what FDA has done. In order to avoid that issue, FDA will put out a countrywide alert with one exemption to prove the FDA is not creating a non-tariff trade barrier; but is instead asserting its right under WTO to protect the U.S. public from unhealthy food. The FDA can contentiously say, ‘we’re not revealing what we have,’ and evade the judicial process.

In the case of the spinach recall, because FDA didn’t have evidence to enforce a mandatory recall — it was too sweeping and no court would allow it to happen at that level — the FDA had to force consumers away from the product instead of forcing manufacturers to recall it.

3. The FDA is needlessly obstructionist:

Many districts will refuse to supply the whole testing analysis. This is a problem. The importer needs that information to present its case; it could be challenging FDA’s own methodology, where the FDA lab has a false positive. The importer has the legal right to those tests.

Unfortunately many districts require the importer to submit a Freedom of Information Act, which is absurd. You might have a compliance officer in Florida willing to supply you with the full lab work so you can assess and audit, while others refuse.

4. Current FDA procedures act as a disincentive to spend money on food safety:

These third-party agencies exist, the HACCP programs work, so let’s operate in a risk-based universe, not through arbitrary import alerts. There’s no incentive for these foreign companies to put these systems in place if they’re not going to get priority review or a green light when they do.

5. The light at the end of the tunnel is a risk-assessment strategy:

One solution is putting into place a process where risk assessment is recognized; where foreign manufacturers have an avenue to travel down to show their compliance. If there is a particular outbreak, all these companies can be affected, but there is no process whereby they can vindicate themselves. There’s no risk assessment strategy.

A true beginning is in The Food Protection Plan; having established processes in place to be sufficient to control hazards with a particular product. If those principles are adopted, at least there will be a measurable standard in which to move forward. There will always be cases of adulterated product; that is a fact of life. There is never a way to guarantee produce will be safe 100 percent of the time. If there is a strong food safety platform for these companies to operate from, that is the best we can expect.

The whole system needs to be in harmony so corrective actions can occur when there is a breakdown.

There is a sense in which the import alert against Agropecuaria Montelibano is tragic… with thousands unemployed, reputations ruined, perfectly healthy food left to rot in shipping containers and unpicked in the field. There is a sense in which it is pointless… since the FDA has simply no statistically valid reason to believe that cantaloupe currently being shipped by other companies is any “safer” for human consumption than the product that would be shipped by this farm if the “import alert” were not in place.

From a business perspective, the problem with the FDA’s modus operandi is clear: The uncertainty it injects into the system reduces the incentives to invest in production, import and distribution. The costs imposed on producers, importers, retailers, etc., are ultimately passed on to consumers and raise food prices.

From a public health perspective, it fails to incentivize producers and processors to invest in food safety. How did the FDA’s action in the fall of 2006 give an advantage to the very best spinach processor that invested fully in food safety over the very worst? Answer, it did not. The FDA just told consumers not to eat spinach. Period.

Yet the broader issue, for the country, is that FDA is behaving like a law unto itself. In America, citizens are not supposed to cower before government agencies. The food industry is filled with people who want to speak out but are filled with fear. The FDA has too much discretion and can destroy businesses by simply deciding to hold product for testing. Nobody wants to get on the bad side of FDA officials.

As food safety has become more complex, depending on difficult-to-interpret epidemiology, and as food safety efforts have made expertise in this area a big ticket item in business, FDA is left with many officials, especially in regional FDA offices, who are not top-notch people. They make low salaries compared to the private sector and are not able to understand the complex epidemiology driving FDA decisions.

Sometimes this leads the FDA to make mistakes — as when they tried to get other companies to recall during the spinach crisis. Sometimes it leads to bullying — a not-uncommon human reaction to being unable to explain or defend one’s actions.

In the end, the discovery of a pathogen is an almost random event. For the same reason testing of finished product is rarely done on produce with the frequency required to be statistically valid, so the occasional pathogen on crops grown in dirt under the rain is not surprising.

Christine Humphrey and Mitchell Fuerst are working to redirect our resources from hysteria at a normal occurrence to a risk-based assessment system that can provide a stable business environment and maximize food safety.

An additional and not inconsiderable benefit of this approach is that it moves the time line back so that if there is a dispute with FDA as to how risk should be judged or how a critical control point should be addressed, those disputes could be addressed through normal judicial channels, as it would not typically involve perishable food waiting to be eaten.

This would allow businesspeople to communicate with the FDA as free people and not as supplicants begging for a break.

Freedom and the bureaucratic discretion to destroy the lives and businesses of people are simply not compatible. We must find an alternative.

Many thanks to Steven L. Varnis, Ph.D., LL.M. of the Houston Center for Food System Research and Development, for pointing us in such a productive direction and to Christine M. Humphrey and Mitchell Fuerst of Fuerst, Humphrey, Ittleman in Miami, Florida, for fighting the good fight and sharing their insights with the industry.




Pundit’s Mailbag —
Fear Of Losing Market Share

We ran a piece entitled, Just Say No: The New Dynamic Of Producer/Buyer Relations, and followed it up with an extended discussion of transition at a large Salinas Valley based firm entitled, Tanimura & Antle Changes…A Sign Of The Times.

There is a lot of pressure on the Salinas Valley, plenty of quiet layoffs. Yet the issue of obtaining profitability for producers goes well beyond leafy greens. The articles brought several letters including one from a stalwart of the potato industry:

Your article, Just Say No: The New Dynamic Of Producer/Buyer Relations , was “Right On” or “Spot On” as our UK brothers would say.

Too many producers in the potato industry have an extreme fear of losing market share, and unless their sales people don’t have product to sell, are afraid to raise prices to a profitable level. I will send a link from your article out to the industry.

Keep up the good work.

— John S. Cross
General Manager
Newell Potato Cooperative, Inc.
Tulelake, California

We appreciate the kind words and the “bonus distribution” — there is little question that with the rising cost of inputs, it will be impossible to sustain a company that insists on selling unprofitably to boost market share. In this sense, we suspect Tanimura & Antle is a model for what is to come. It doesn’t work for a producer to just say it will hang tight; it has to bring production in line with the demand of profitable customers.

In the course of this discussion, we also ran a piece by produce luminary, Ted Campbell. We described Ted this way:

Ted Campbell has served the industry in numerous capacities, including as Chairman of the Board of Directors of the Produce Marketing Association and as President of the Produce for Better Health Foundation.. He has held many positions in the industry, including Corporate Director of Produce for Supervalu and Vice President of Sales and Marketing for Kerry’s Bromeliad Nursery. He currently works on a consulting basis.

In the piece, Ted articulated a vision of procurement:

During my years at SUPERVALU and AWG, I spent many days training young buyers that their key responsibility was securing the “best” source for products rather than the apparently cheapest source. As you well know, it is critical to have consistent supply, superior quality, product safety, innovative items, and numerous other attributes — none of which happen fortuitously (they almost always cost more).

The second leap of faith in this training exercise was to develop their understanding that these premier suppliers deserved adequate return on investment and thus should receive a “fair premium” over general market pricing.

Finally to really make their heads spin, I always told them that a reasonable pricing premium returned dividends at retail because better stuff just simply sells better: more eye appealing, better eating quality/customer satisfaction, less shrink & labor, usually better margin, better repeat sales with positive customer referrals, etc. No one makes money until the product goes through the cash register, so I wanted items to fly off the shelves (and the financial advantages of rapid inventory turns are often overlooked).

To us the advice sounded timeless, but we heard from many producers that believers in Ted’s philosophy are few and far between these days.

You can read the whole piece; it is called Pundit’s Mailbag — ‘Little Tolerance For Dictatorial Buyers’

Of course, buyers can only buy what someone is willing to sell, and it is hard to blame buyers for bargaining hard, but producers have to know their cost structure and use contracts to mitigate risk.

If growers don’t care enough about themselves to change with the times, it is hard to imagine that buyers will care enough to save them.

Many thanks to John S. Cross at the Newell Potato Cooperative for the generous letter.

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