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


email:
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Produce Business

Deli Business

American Food & Ag Exporter

Cheese Connoisseur



Ten Reasons Why U.S. Chains Should Be Concerned About Tesco And Target

There is a new research report out authored by analysts at JP Morgan entitled Supermarket Industry Review and Outlook: Is There Room for Two More Giants? It is unusually insightful and brings to the fore crucial points that are often overlooked.

First, it points out that consolidation may be advanced in supermarket retailing but that hasn’t stopped two deep-pocketed giants from entering the market:

Just when the supermarket industry seemed to be settling down, two powerful outsiders are coming to shake things up once more. The likely result: the bitter competition that has marked food retailing since Wal-Mart forced its way onto the stage in the mid 1990s will likely not be abating soon.

These new contenders come with deep pockets and a thorough understanding of the US market. One is Tesco plc, Britain’s leading grocer and one of the very few food retailers anywhere with a record of strong international performance. The other is Target Stores, the old-line department-store company that has transformed itself into America’s most profitable discount retailer and is now pushing hard to build its presence in food retailing.

Alone, we think either one of these companies has the muscle to occupy a meaningful position in the grocery market. Together, they should start to take market share just when the traditional supermarket retailers thought they had mastered the techniques of competing against Wal-Mart.

In our piece The End Of Supermarkets? we explained why the new Tesco concept merited so much attention:

…the underlying point is that we are really talking about the end of the supermarket.

We have already reached the place where it is widely accepted that supermarkets need to emphasize perishables and prepared foods because it is the only way to make a little money as the competition on selling packaged goods from warehouse clubs and supercenters is simply too fierce.

But if Tesco is right and some new concept of small stores is the way to sell perishables and prepared foods, well there is then nothing left.

The supermarket will be finished.

In a sense, the JP Morgan analysts are pointing out the same thing, but adding the impact of a Target newly dedicated to food.

Just as most large and successful supermarket chains seemed to have reached a stasis with Wal-Mart, in which they — a la Safeway’s Lifestyle stores — go a little upscale and emphasize organics and fresh foods, two behemoths start roll-outs that will undercut that positioning.

How will a supermarket compete that has a Wal-Mart Supercenter nearby serving the paycheck-to-paycheck crowd, a Target supercenter attracting a more upscale clientele, 10 Tesco’s Fresh & Easy Neighborhood Market stores stealing the “top-off” shoppers with their convenient neighborhood locations and generous assortment of perishables and prepared foods? Add in some specialty operations such as a Whole Foods, a Costco and a Trader Joe’s and one sees the battle supermarkets will have to come up with a reasonable positioning.

Second, the JP Morgan report reminds us that Tesco must be viewed as a long term strategic competitor and not evaluated solely on its Fresh & Easy concept:

Tesco is a multi-format operator. As it learns more about the US market, we would not be surprised if it looks to add larger supermarket formats, or even hypermarkets. This flexibility has worked well in other markets and lets Tesco avoid a “one size fits all” mentality.

Third, if successful, Tesco will probably drive some competitors out of certain markets:

Based on its initial choice of markets, Kroger, Safeway, SuperValu, Stater Bros., and the privately held Basha’s chain all are exposed to market-share loss from Tesco’s entry. All of these markets already have more large competitors than the average US metropolitan area. If Tesco succeeds in gaining significant share in any market over the next few years, we would anticipate that another retailer would be forced to exit due to the competitive pressure.

Fourth, Target is now becoming a real player in food retailing in certain local markets:

Target is finally beginning to command noteworthy shares of local food retail markets. We consider local market share a vital element of success in broadline food retailing, as critical economies of scale in distribution and advertising can be obtained only with high store density. In previous years, Target’s local market shares have been quite small. In 2006, however, Target took 8% of supermarket sales in its home market, Minneapolis-St. Paul, and had shares in the 5% range in Denver, Omaha, and Cedar Rapids. It also held a 4% share in the large Dallas-Fort Worth market. While these positions are small in comparison with

Wal-Mart, they are enough to affect the competitive balance and weaken the pricing power of established supermarket operators.

Although Target is weaker than this in perishables (the JP Morgan numbers include substantial food sales through its conventional Target stores which sell few perishables as compared to its SuperTarget stores), Target is building the infrastructure for substantial growth in perishables, as we mentioned in our piece Target Builds First Food Distribution Center.

Fifth, Target’s expansion, JP Morgan explains, is a problem for conventional supermarkets:

we anticipate that Target will continue to increase its shares in local markets in a cautious, steady way. Unlike Wal-Mart, it will likely not trail independent grocers’ bankruptcies in its wake. But we believe its expansion will almost inevitably erode the market shares of incumbent supermarkets, and may increasingly constrain their pricing power.

Sixth, despite the popular perception that Wal-Mart is in trouble, its operations continue to garner more and more of the food industry:

Wal-Mart extended its domination of the US food retail market last year. Wal-Mart’s supercenters now account for more than 50% of supermarket sales (excluding warehouse-club sales) in seven of the 100 most populous markets, and for at least 40% of supermarket sales in 20 of the top 100 markets. Wal-Mart SuperCenters lost share in only one market last year.

Seventh, JP Morgan believes that Wal-Mart’s gains in market share seem highly likely to continue:

In 2007 the company plans to open 265-270 supercenters, most of them conversions of or replacements for traditional discount stores. This is all but certain to bring substantial further gains in sales and market share.

Eighth, although Kroger posted strong sales in 2006, it is not opening enough new stores to increase market share:

Kroger fared poorly in the market-share wars last year, losing share in 26 of the 36 major metropolitan areas in which it holds at least 10% of the market. This share loss appears to be due to Kroger’s extreme caution about opening new stores. The company’s store count fell by 39, and square footage remained unchanged.

Ninth, Safeway is also seeing total store count drop and has not been able to capitalize on opportunities to increase market share:

Safeway’s store count declined in 2006, for the second consecutive year, due principally to store closures in its troubled Texas markets… It gained only 1 share point in San Francisco, despite the closures of 36 stores by Albertson’s LLC and 10 stores by Kroger.

Tenth, JP Morgan’s report emphasizes that while supermarkets reshuffle assets and, in some cases, such as Supervalu, this may really benefit individual companies, the supermarket industry as a whole is changing in ways that will be further evidenced by Tesco’s new offer and a Target focused on food:

Wal-Mart Stores strengthened its position as the largest US food retailer in 2006. JPMorgan estimates that Wal-Mart sold $106 billion of supermarket items through its supercenter division and another $25 billion at its Sam’s Club warehouse stores. The total of $131 billion gives Wal-Mart nearly twice the sales of supermarket items of Kroger, the largest traditional supermarket operator. Costco advanced one place in our ranking due to the break-up of Albertson’s Inc., and Target Stores has emerged as an industry leader due to its increased emphasis on food sales — and to its willingness to disclose sales in the relevant categories. Thus, four of the top 10 food retailers are not traditional supermarket operators.

This point is crucial, we made the ame point fourteen years ago in our piece “Death By A Thousand Cuts,” which ran in PRODUCE BUSINESS, the Pundit’s sister publication is crucial. We don’t know what market share Tesco needs to make a good return on its investment or how much fresh foods Target needs to sell to justify building new distribution centers, but only a small market share is necessary to affect the competitive balance, to constrain the pricing decisions of competitors and to force a weak competitor out of a market.

Contributors to this excellent report are the following:

Marc Levinson, Economic Research, Carla Casella, CFA, North America High Grade Credit Research, Virginia Chambless, CFA, US Equity Food & Drug Retail Research, Stephen C. Chick, CFA, US Equity Broadlines Retail Research, Charles Grom, CFA, CPA, European Equity Retail Research, Jaime Vazquez and Alastair Johnston, European Credit Retail Research, Katie Ruci, J.P. Morgan Securities Inc.

The report includes specific credit opinions and much else of great value. We appreciate JP Morgan’s willingness to allow us to share their insights with the broader industry.




United Meets With Challenges Ahead

As the industry prepares to assemble in Chicago for the upcoming United Fresh Produce Association trade show, the last one to be regularly located in Chicago, United Fresh announced its new board of directors:

United Fresh Announces
2007 Board Officers and Members

Emanuel Lazopoulos to Assume Chairmanship;
Tom Lovelace Nominated to Serve as Chairman-Elect

Washington, D.C. — Chairman of the Board Development Committee Matthew Caito, Imagination Farms, has announced new officers and Board members elected to serve on the United Fresh Produce Association Board of Directors, effective at its May 5, 2007 meeting.

Ascending to Chairman of the Board is Emanuel Lazopoulos, Senior Vice President, North America, Sales, Marketing and Product Management, Del Monte Fresh Produce, Coral Gables, FL. Lazopoulos started his career in the produce industry in 1979 with Castle & Cooke, now Dole Food Company, after graduating with a bachelor’s degree in Agriculture Business from the University of Delaware. His progression through the company culminated in the position of Vice President of Sales for Dole Fresh Vegetables. He then moved to Salyer American Fresh Foods as Vice President of Sales and executive committee member. He subsequently worked for DNA Plant Technology before becoming one of three Managing Directors who founded and co-owned NewStar Fresh Foods, LLC in Salinas, CA. In June 2003, Lazopoulos joined Del Monte as Vice President of Fresh-Cut and after two years was promoted to his current position. In his present capacity, he oversees North American sales and marketing programs, as well as management of all Del Monte’s products imported or grown in North America. Lazopoulos is also one of the founders in the Pessagno Wine Group in the Santa Lucia Highlands of Monterey County.

Elected as Chairman-Elect is Tom Lovelace, Executive Vice President, McEntire Produce, Columbia, SC. Lovelace has over 30 years experience in the fresh-cut produce and quick service restaurant industries, and now serves as Executive Vice President of McEntire Produce, a fresh-cut processor, tomato re-packer and vegetable wholesaler. He previously served as Senior Vice President of Performance Food Group and Chairman/CEO of Fresh Express from 1995 to 2004. During that time of rapid consolidation, PFG acquired Dixon Tom-a-toe, Redi-Cut Foods and Fresh Express. Prior to joining PFG in 1995, Lovelace spent nine years with Coronet Foods involved in both its fresh-cut processing operations and its bulk iceberg growing/shipping business in Salinas. He began his career with McDonald’s Corporation, spending 16 years with the company in an operations and supply chain management capacity.

Current Co-Chairmen, Maureen Marshall, vice president of Torrey Farms Inc. in Elba, NY; and Mark Miller, President/Owner, Fresh From Texas, San Antonio, TX, will hold the office of Immediate Past Chairman, and remain on the Board and the Executive Committee for one year.

 

In addition, Steffanie Smith, President, Deli/Prepared Foods, Taylor Farms, Salinas, CA, will continue to serve as Secretary-Treasurer.

 

The following industry leaders have been elected by the membership to serve on the United Fresh Board for a two-year term beginning May 2007:

Charles Hall
Executive Director
Georgia Fruit and Vegetable Growers Association
LaGrange, Georgia

Hall is Executive Director of the Georgia Fruit and Vegetable Growers Association, a role he has held since 1996. He is also the CEO of the Association Services Group, an association management firm focused on agriculture related commodity organizations. Hall began his career at Georgia Agrirama, State Museum of Agriculture where he served as chief executive officer for the 75-acre living history museum. He then became Director of Member Services for Georgia Farm Bureau Federation. In 1985, Hall joined Paul French & Partners, where he served as COO for 10 years. Hall has a bachelor’s and master’s degree from the University of Georgia, Athens. Currently, he is the director of the UGA Ag Alumni Association Board and a member of the Association Management Company Institute Board of Directors for the Georgia Society of Association Executives.

Ashley Rawl
Director of Sales and Marketing
Walter P. Rawl & Sons, Inc.
Pelion, South Carolina

Rawl is Director of Sales, Marketing and Product Development for Walter P. Rawl & Sons in Pelion, SC. As a child, Rawl spent summers working in the farm fields alongside other family members in a business started by his grandparents in the 1920s. After earning a bachelor’s degree in agricultural economics from Clemson University in 1994, he joined the company full-time and has been influential in its progression to a major grower/processor/shipper of quality fresh vegetables. Rawl is a 1997 graduate of the Produce Industry Leadership Program, and is a current member of the United Fresh Government Relations Council. He is a past president of the Leafy Greens Council and a past board member of Southeast Produce Council. In 2006, he was named by PRODUCE BUSINESS magazine to the “40 under 40” list. He is active in a variety of other national and state organizations, including the South Carolina Farm Bureau Association, SC Young Farmer Committee, and Future Farmers of America.

Mitch Smith
Director US Quality Systems Agricultural Products
McDonald’s Corporation
Nampa, Idaho

Smith is Director of U.S. Quality Systems for Agricultural Products for McDonald’s Corporation. In this role, he ensures that McDonald’s quality requirements for potatoes, oils, produce, fruit and nuts are applied, maintained, validated and enhanced to provide consistent food safety and quality to the McDonald’s system. Smith is responsible for assuring that McDonald’s quality expectations are met for more than two billion pounds of raw potatoes, 80 million pounds of salad mix, 100 million pounds of green leaf and iceberg lettuce, 54 million pounds of apples, 30 million pounds of tomatoes, 6.5 million pounds of grapes and 4.2 million pounds of walnuts. A 27-year veteran of McDonald’s, Smith previously held a variety of positions in quality assurance and purchasing both for the United States and markets abroad. Prior to joining McDonald’s, he worked with Simplot, as well as Del Monte’s fresh and frozen potato and produce facility.

Jay Taylor
President
Taylor & Fulton, Inc.
Palmetto, Florida

Taylor is President of Taylor & Fulton in Palmetto, Florida. Founded in 1953, Taylor & Fulton is a grower, packer, shipper of fresh market premium tomatoes. He is also president of Tomato Man, Inc., North Florida Tomatoes, and Southern Machinery and Equipment, a John Deere dealership with locations in west central Florida. Taylor received his bachelors degree from the University of Miami. He is currently Chairman of the Board of the Florida Fruit and Vegetable Association, and a member of the Board of the Florida Tomato Committee and Florida Tomato Exchange. He is Chairman of the Board of the Florida Housing Finance Corporation, the second largest provider of affordable housing financing in the United States, and serves on the Boards of several banks.

Rick Urschel
Vice President, Operations
Urschel Laboratories, Inc.
Valparaiso, Indiana

Urschel is vice president of operations for Urschel Laboratories in Valparaiso, IN. Urschel Laboratories is a leading innovator in manufacturing size reduction equipment for the produce industry. Urschel received his bachelor’s degree in management from Purdue University and has been in the equipment and manufacturing industry his entire career.

In addition to the new Board Members, the following current Board Members will continue service on the Board — Nelia Alamo, Gills Onions; Ron Anderson, Safeway, Inc.; Rick Antle, Tanimura & Antle; David Barney, Bakkavor; Barry Bedwell, California Grape & Tree Fruit League; Matthew Caito, Imagination Farms; Charles Ciruli, Jr., Ciruli Brothers/Amex Distributing Co., Inc.; Brendan Comito, Capital City Fruit Company, Inc.; Peter John Condakes, Peter Condakes Company, Inc.; Richard Dahl, Dole Food Company; Matthew D’Arrigo, D’Arrigo Brothers Company of New York, Inc.; Pete Donlon, Earthbound Farm; Reggie Griffin, The Kroger Company; Alan Heinzen, Heinzen Manufacturing International; Mark G. Hilton, Harris Teeter Supermarkets; Lawrence Kern, Kern Associates; Bob Kistinger, Chiquita Fresh Worldwide; Bruce Knobeloch, River Ranch Fresh Foods, LLC; James Lemke, C. H. Robinson Worldwide, Inc.; Robin Poynton, One Harvest; John Shelford, Naturipe Farms, LLC; Victor Smith, Fresh Innovations, LLC; Walter Strickland, Strickland Produce, Inc.; Alan Temple, B & W Quality Growers, Inc.; Nicholas Tompkins, Apio, Inc.; Alessandro Turatti, Turatti Srl; Timothy R. Vaux, Vaux Group, Inc.; Robert Whitaker, Ph.D., NewStar Fresh Foods, LLC; Frederick M. Williamson, Andrew & Williamson Fresh Produce.

Board Members who will complete their terms of service at the May convention include: Gary Black, Condies Foods, Inc.; Elisa Spungen Bildner, RLB Food Distributors/FreshPro; Parker Booth, Fresh Express, Inc.; Ronald F. Carkoski, Four Seasons Produce, Inc.; Jan DeLyser, California Avocado Commission; Walter (Drew) Duda, Jr., Duda Farm Fresh Foods, Inc.; Jan Fleming, Strube Celery & Vegetable Company; Steve Grinstead, Pro*Act, LLC; Hugh Topper, H-E-B Grocery Company; and Michael J. Wootton, Sunkist Growers, Inc.

“I’d like to personally thank Matthew Caito and the Board Development Committee for their work this year in nominating an outstanding individual in Tom Lovelace to serve as Chairman-Elect, and five great new Board members who bring specific technical expertise and representation of very important constituencies to serve our overall membership,” said United Fresh President Tom Stenzel. “I’d also like to thank those leaders who are concluding their service at this meeting, and truly honor them for giving back so much in their time and resources to serve our industry.”

This begins the process of scaling back the size of the United Fresh board, which had ballooned in size following the merger of the United Fresh Fruit and Vegetable Association and the International Fresh-cut Produce Association. This accounts for 10 board members retiring from the board, while only five new members are being named.

It is interesting to note that, excluding processors, while five (or 50%) of the departing board members represent buying organizations — RLB, Four Seasons, Strube, Pro*Act and HEB — only one (or 20%) of the new board members comes from the buy side — McDonald’s.

The structure of the board will likely be very important as United’s board will be wrestling with important issues in the year to come. For example:

  1. The relationship with FMI is set for next year. The shows will be co-locating in Las Vegas, and United will add its FreshTech show to the mix. But the long term relationship is still up in the air.
  2. United’s board came out in favor of mandatory, federal regulation. But no legislation has been drafted, no industry consensus built. Next steps need to be identified and the industry has to be won over.
  3. We’ve dealt with the plans of the Western Growers Association to open a Washington, DC office here, here and here. It most likely symbolizes the expectation of a fissure over the issue of mandatory, federal regulation, with WGA favoring a marketing agreement or marketing order approach, done through USDA while United favors a form of regulation that is most likely to occur through the FDA. How will United’s directors deal with this potential industry fissure?
  4. At PMA’s last convention there was much talk about the possibility of a merger between PMA and United. We’ve dealt with the issue extensively. It is an old issue, but the priority of the industry to spend its funds on food safety is leading many industry leaders to be open-minded on this issue for the first time in many years.

Each issue is, itself, enough to challenge any group of industry leaders. We thank all the board members for being willing to serve. Taking on the responsibility of helping United and the industry grow and prosper is an important job. We are fortunate so many high caliber people have been willing to do this important work.




PBH Sets Policy On ‘Cross-Branding’

This memo was sent out to the trustees of the Produce for Better Health Foundation:

To: PBH Board of Trustees

Based on my message to you last week regarding PBH & Imagination Farms, I indicated I would share the PBH executive committee’s policy decision that will provide guidance for future PBH “cross-branding” possibilities. The policy that was approved is:

Approved by PBH Executive Committee — May 1, 2007

“PBH will continue to aggressively encourage industry members and others to use the Fruits & Veggies — More Matters brand logo and messages in their marketing efforts following PBH approval (as agreed upon in the Fruits & Veggies — More Matters brand licensing agreement.)

PBH will not use brand images (e.g. logos, characters) of other food or marketing entities exclusively aligned with individual food companies in PBH materials (e.g. printed materials, websites, etc) if use of the brand precludes any PBH licensee in good standing from benefiting through the marketing of said brand. Use of said brand in PBH materials to show that the company has provided a contribution to support PBH activities (e.g. in-kind, cash, sponsorship, or advertisement) is acceptable. When the situation is not clear-cut or obvious, it will be brought to the executive committee for review. When confidentiality is a high priority, PBH officers may review the situation first to determine if it should be brought to the full executive committee.”

We believe this guidance prevents an unfair competitive advantage to some at the expense of others, while still allowing for collaborations that benefit our collective effort to increase fruit and vegetable consumption.

Let me know if you have any questions.

— Elizabeth Pivonka, Ph.D., R.D.
President & CEO
Produce for Better Health Foundation
Wilmington, Delaware
www.fruitsandveggiesmorematters.org
www.pbhfoundation.org

This concludes a saga that began with our piece Imagination Farms/Disney Garden Score Big With PBH and Pixar, which was focused on the accomplishments of Imagination Farms but mentioned the announcement of a “strategic alliance” with PBH.

This quickly brought forth some industry reaction which we published as Pundit’s Mailbag — PBH/Imagination Farms Alliance Questioned, which featured a letter from a longtime contributor to PBH that questioned whether PBH announcing itself “aligned” with a particular company was a good idea.

We then published Complaints From PBH’s Board Members Point To Weakness In Governance, which looked at PBH’s governance structure as a possible contributing factor to the way this issue was allowed to develop.

Trustees and members of PBH’s Executive Committee looked at the situation and demanded a fix. We explored this issue in PBH Reassesses Imagination Farms Decision. This piece also included the text of a memo from Elizabeth Pivonka to the Board of Trustees that she references in the memo above as her message from the previous week.

Most recently we published Pundit’s Mailbag — Pivonka Sheds Light On PBH’s Decision-Making Process in which Elizabeth Pivonka emphasized the organization’s deep commitment to proper process.

Now, we have the end result of that process. The policy adopted by the Executive Committee is clearly driven by the nature of the situation PBH finds itself in. PBH is dependent on many produce companies to fund its operations and, clearly, those companies spoke out and said that the “alliance with Imagination Farms was unacceptable.

The reason it was unacceptable, the Executive Committee felt, is that each PBH licensee ought to be able to utilize all PBH materials, such as brochures and websites. Yet, of course, these licensees would be hesitant to use such materials if they were festooned with characters or logos that represent direct competitors.

All’s well that ends well and everyone will probably be satisfied with this comeuppance. It is far better that the issue came out and was brought to a head right now while changes could be made than to have irate supporters walking out the door six months later.

As far as the substance of the policy goes, it is probably as good a policy as could be drafted in this situation. The key lesson, though, is that nobody knows what the next big problem is going to be, so staff needs to use the board, bother them if need be, but insist on the board sharing insight. To get different perspectives on the issues at hand is one of the most valuable contributions a board can make.

One of the most important jobs of the professional staff is to force the board to make that contribution.




Chiquita Changes Plans In Chile

One of the reasons the Pundit’s family decided to sell its produce business was because our large importing business, which traditionally had operated on a straight commission business model, was becoming difficult to sustain.

Large companies started entering markets such as Chile and either leased or bought the production land or offered large minimum guarantees to growers. An article in La Tercera entitled, “Chiquita Fruit Company Restructures its Operations in Chile,” indicates that this newer model is not working out so well for at least Chiquita:

LA TERCERA — Wednesday, April 18, 2007

CHANGES IN MANAGEMENT — CHIQUITA FRUIT COMPANY RESTRUCTURES ITS OPERATIONS IN CHILE

By: Christian Viancos

The North American company will make drastic production cutbacks. It decided to end its rental contract of 2,000 hectares distributed in six farms throughout the country’s central valley.

CHIQUITA, one of Chile’s largest fruit exporters, is restructuring its business operations in the country. Over the last few years, the traditional exporter had expanded its own fruit production but the project recorded losses and didn’t turn out as planned.

At the end of March, the North American company decided to put an end in advance to its rental contract of 2,000 hectares in the central valley that belong to Romano Vercellino, owner of Verfrut, an export company. Chiquita sent a letter on April 9, notifying its decision to terminate the business contract that allowed it to exploit six farms over a period of five years, of which three had already passed. Four of the farms are located in Rapel, one in Longaví and another one in Combarbalà. Chiquita was producing 3.6 million boxes of all types of fruit on these farms, accounting for around 40% of their annual 10-million box production in Chile.

The change in strategy imposed by Chiquita on its Chilean branch was accompanied by changes in management. A few months ago, general manager Andrés Alemany left the company and was provisionally replaced by commercial manager Pablo Rosales. According to the industry, Alemany’s exit, along with other executives, was brought on by the project’s bad results.

In the last few years, Chiquita tried to follow the trend set by other large fruit exporters who privileged their own production over buying fruit from growers.

The exporter believed it to be good business to grow since it would earn the grower’s margin while benefiting from the vertical integration of commercializing its own fruit. However, complications arose that affected their results (see inset).

The current management at Chiquita must define the strategy they will develop in the future. The North American company is not planning to pull out of the country. Rather, it must define whether it will opt to buy fruit on the market to cover production cutbacks or assume its losses. There is also the possibility of continuing to privilege exports and running a tighter operation in Chile.

Sources close to the process stated that Chiquita and the lessor are now negotiating the conclusion of the contract that will stipulate the options of termination and the additional costs for the termination in advance of the business agreement.

COMPLICATED PRODUCTION PROBLEMS
FACED BY CHIQUITA

Production over the last three years at Chiquita was affected by a drop in the dollar’s exchange rate and increasing labor costs. These factors, according to industry sources, have also affected other exporters who are fruit growers.

Additionally, in the case of Chiquita, the business could not be run as efficiently as was foreseen. Sources explained that large-scale production is not easy, considering that thousands of seasonal workers must be hired during harvest. This resource, which has become scarce, plays a relevant role and implies a cost that can reach up to 70% of a fruit grower’s production costs.

FRESH FRUIT EXPORTS
2005-2006 Season (Tons)

Dole-S.A. 160,000
Unifrutti Ltda 122,559
David del Curto 121,076
Del Monte Fresh 104,568
Copefrut S.A. 103,082
Frusan S.A. 79,460
Rio Blanco Ltda. 75,309
Chiquita Chile 71,261
Rucaray S.A. 68,641
Agricom Ltda. 64,234
Others 1,222,595
TOTAL 2,192,775

Source: Agricultural and Livestock Service SAG/ASOEX

It is interesting to note that the article identifies a shortage of seasonal workers as being a key challenge in growing in Chile.

Maybe they need their own version of AgJOBS? Or perhaps we all need to focus on mechanical harvesting?




Ahold Sells U.S. Foodservice

In the category of news that is hardly new, Ahold has announced that it has reached an agreement to sell U.S. Foodservice to a private equity consortium. This sale has been expected since an accounting scandal surfaced at U.S. Foodservice in 2003. The investment bankers gave details of the sale as follows:

CLAYTON, DUBILIER & RICE AND
KOHLBERG KRAVIS ROBERTS
TO ACQUIRE U.S. FOODSERVICE FROM AHOLD

Transaction Valued at $7.1 Billion
for U.S. Market Leading Foodservice Distributor

NEW YORK, May 2, 2007 — Clayton, Dubilier & Rice, Inc. (CD&R) and Kohlberg Kravis Roberts & Co. L.P. (KKR) announced today a definitive agreement to acquire U.S. Foodservice, the second largest broadline foodservice distributor in the U.S., from Royal Ahold N.V. (NYSE: AHO). Funds affiliated with CD&R and KKR are equal partners in the transaction, valued at $7.1 billion.

With revenues in 2006 of more than $19 billion, U.S. Foodservice’s operations cover a geographic area in which over 95 percent of the U.S. population resides. The company provides food and related products to independent restaurants, healthcare and hospitality customrs, educational institutions and prominent multi-unit restaurant companies.

Michael M. Calbert, a Member of KKR, stated, “KKR has a long history of acquiring industry-leading franchises. U.S. Foodservice has built one of the leading businesses in the foodservice distribution industry, with a wide range of growth and operational improvement opportunities. We and our partners at CD&R look forward to working with the company’s management team, which has done an excellent job of refocusing the business in recent years, to continue executing the strategic initiatives in place.”

“U.S. Foodservice is well positioned in a stable and growing industry that we know well from prior investments,” said Richard J. Schnall, the partner leading the transaction from CD&R. “We plan to leverage the company’s strong national and local market positions in the nearly $200 billion U.S. foodservice industry to accelerate growth in both revenues and profitability. We are very pleased to be partnering with KKR and the company’s outstanding management team to build an even more valuable enterprise.”

“We are pleased to be partnering with two outstanding firms — two of the oldest private equity firms in the business — which have a great understanding of our industry, from both a financial and operating standpoint,” said Robert Aiken, President of U.S. Foodservice. “We have great confidence the strategic and financial support of these two firms will enable us to grow and better serve our customers.”

Completion of the transaction, which is expected to occur in the second half of the year, is subject to regulatory approvals, approval of Ahold’s shareholders and customary closing conditions.

Financing for the transaction is being provided by Citigroup, Deutsche Bank, Goldman, Sachs & Co., J.P. Morgan Securities Inc., Morgan Stanley & Co. and Royal Bank of Scotland.

Citigroup, Deutsche Bank, Morgan Stanley & Co. and Rabobank are acting as financial advisors to CD&R and KKR. Simpson Thacher & Bartlett LLP is acting as legal advisor to the buyers and Debevoise & Plimpton LLP is acting as legal counsel in connection with the financing.

About Clayton, Dubilier & Rice
Clayton, Dubilier & Rice, Inc. (CD&R) is a leading private equity investment firm that has earned consistent, superior investment returns using an integrated operational and financial approach to building and growing portfolio businesses. CD&R’s portfolio investments have included Alliant Foodservcie, sold to Ahold in 2001, and Brakes Foodservice, the U.K.’s market leader with operations in France, as well as Hertz, Culligan International, and VWR International. CD&R recently announced an agreement to acquire ServiceMaster in a transaction valued at $5.5 billion. The firm is based in New York and London.

About KKR
Kohlberg Kravis Roberts & Co. (KKR) is one of the world’s oldest and most experienced private equity firms specializing in management buyouts. Founded in 1976, it has offices in New York, Menlo Park, London, Paris, Hong Kong and Tokyo. Throughout its history, KKR has brought a long-term investment approach to its portfolio companies.

The question now is whether U.S. Foodservice will pose more of a competitive challenge to Sysco. It seems very likely. U.S. Foodservice has been neglected as a foodservice island in a retail company, and what funds that were available for investment weren’t going to be focused on foodservice.

Although Sysco recently missed its profit estimates, it has been conducting business reviews of thousands of accounts to find ways to boost business and has been adding both salespeople and distribution hubs. It is almost like Sysco was getting ready for a new approach from US Foodservice — why not, they’ve only had four years to prepare!




Pundit’s Mailbag — Translation Way Cool!

Our piece New Translation Capabilities explained that in order to serve our growing international readership, we have added translation capabilities to the Pundit:

Simply click on the appropriate national flag in the box to the left of this column, and you can translate the Perishable Pundit into Chinese, German, Japanese, Korean, French, Italian, Portuguese or Spanish.

Since it is, of course, an electronic translation, we were a little concerned at how readable and accurate it will be. So we were pleased when one of the Pundit’s multilingual friends sent along this note:

That new translation tool is way cool — — Translation into German is not very good, but into Dutch and French very passable.

I call this customer service!!!

— Marc De Naeyer
Managing Partner
TROFI
The Netherlands

We try, Marc. We really try. And we are working right now to expand into other languages. Still we would welcome some feedback from readers native in Chinese, Japanese, Korean, Italian, Portuguese and Spanish. Is the translation functionality good enough to use?

Many thanks to Marc for his feedback.

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