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Perishable Pundit
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Produce Business

Deli Business

American Food & Ag Exporter

Cheese Connoisseur

July 20, 2007 —
Perishable Pundit Overview:

An Industry Discussion: Pros And Cons Of A PMA/United Merger




An Industry Discussion: Pros And Cons Of A PMA/United Merger

Note from the Pundit: There are ongoing discussions between authorized representatives of the Produce Marketing Association and the United Fresh Produce Association exploring the possibility of a merger or other forms of cooperation between the associations.

Because of the importance of this issue to the future of the trade, we have decided to offer one extended piece today analyzing the issues surrounding the long-debated possibility of a merger between the Produce Marketing Association and the United Fresh Produce Association. This issue will be discussed over an extended period as the various boards and executive committees are consulted.

To help guide and inform industry discussion we have tried to review the fundamental issues arguing both in favor and against a merger between the two national produce associations. We have also tried to analyze what may have changed this time that gives the industry reason to suspect that the outcome of the current ongoing discussions may be different than the outcome of previous talks.

When the Pundit was a child, the Prevor household filled with excitement at the arrival of United’s brochure detailing its annual convention. We still remember Momma Pundit’s breathless explanation to Poppa Pundit that on that particular year the convention would be held in Hawaii and that, surely, business necessity required a mid-February trip to the Aloha islands!

Yet by the time the Pundit launched PRODUCE BUSINESS in 1985, things had changed. While United still had a strong and profitable trade show, it was already significantly smaller than PMA’s. In the fullness of time, PMA’s trade show became so dominant that United abandoned the space, turning its trade show into a technology- and supplier-oriented event, before reentering the business with its co-location with FMI in 2005.

Why did this happen? It is hard to say exactly. Clearly, PMA developed a successful business model by focusing on buyers — and the presence of those buyers attracted suppliers. This made the PMA show the most successful event of the produce world.

Yet, to say this is not really to explain why United, which at one time was much larger and wealthier than PMA, couldn’t adapt. One suspects there is in this story a case study useful for all businesses.

There was a time in the early years when PMA was so broke and in such trouble it offered to merge with United — and United had no use for it. Bob Carey, the man who stewarded PMA through four decades of growth, joined the military reserves while working at PMA because PMA couldn’t afford a pension plan and he felt he would need a little income in his old age. Yet from nothing, a dominant institution grew.

Perhaps United simply had bad management. We know that at its apex, there were complaints about imperial management. And it went through a series of CEOs.

Perhaps United’s focus on government relations created an expense burden that made it compete with one hand tied behind its back when PMA was free to reinvest in product and services that members would value.

Poppa Pundit saw United’s position weaken as the business changed. He always said that February, United’s traditional convention month, was a great month for a convention — until the industry changed and we became big on counter-seasonal fruit. Suddenly, a time that was great for vacations became a time when big chunks of the industry couldn’t get away.

United’s core, established in a merger between a shipper and a receiver organization — thus “uniting” the trade — never fully found a way to adapt to the rapid growth of retail.

And the infighting between the nominally “united” industry often threatened to tear United part. The tomato section — where repackers battled with shippers — often came near to blows. Some of United’s strongest members felt nothing of setting up outside organizations, such as North American Perishable Agricultural Receivers (NAPAR), when the United position didn’t reflect their concerns.

PMA, in its organization, recognized that what makes the produce industry an industry is a common buyer. PMA is organized so that virtually all issues go through one of two boards, a retail board or a foodservice board. Although all industry sectors are represented, the fact that things must pass through these funnels has encouraged supply chain coordination and identified items of true common interest to the trade. United’s history in which commodities and business sectors had their own space led to discord.

Over the years there have been many discussions of a merger. Sometimes the process was public, sometimes the approaches private, sometimes the meetings and discussions were authorized by the boards of directors and sometimes approaches were rogue operations without any sanction.

In the end, nothing has ever come of all this, and it is not clear that anything should have come of it or will come of similar processes now or in the future.

Yet hope springs eternal, and the Pundit has been sitting on the story for many months as leaders from PMA and United Fresh have undertaken a process to explore the issue of industry governance in the 21st century — and beyond.

This is a delicate process, and we’ve tried to assist it by allowing the participants to brain storm free from the public pressure to publicly explain their positions.

But meetings have been held. One was held this week in Chicago, though this was not the first meeting, and the associations reluctantly issued a brief statement acknowledging the meeting in response to reporters likely to publish incomplete or inaccurate stories without such a statement.


Tom Stenzel
 
Bryan Silbermann

Just before the meeting, PMA and United issued this joint statement, which was sent out by Tom Stenzel, United’s President and CEO:

Bryan and I have received questions about a meeting we have coming up on Wednesday, and felt it would be best to answer those questions clearly here.

There is a one-day meeting of PMA and UFPA leaders scheduled for this Wednesday, July 18 in Chicago. This meeting includes six Board leaders from each association, plus the two of us as CEOs. This is not a secret meeting, and we of course intend to share information from the meeting with our two memberships at some point after the meeting. The general purpose of the meeting is as follows:

Both associations’ priority is always to deliver the best value to our members, and our volunteer leaders and staff have been talking about ways to do that better. We are now exploring ways to enhance member value through collaboration between our two associations, although there is no predetermined endpoint such as merger. Rather, we are focusing on enhancing value to members of both associations and letting that guide our discussions.

We hope this addresses any immediate questions and fully explains the nature of the meeting.

And after the meeting, the associations jointly said this:

On Monday we shared with you information about the July 18 meeting our two associations had planned in Chicago. We said that “both associations’ priority is always to deliver the best value to our members, and our volunteer leaders and staff have been talking about ways to do that better.

We are now exploring ways to enhance member value through collaboration between our two associations, although there is no predetermined endpoint such as merger. Rather, we are focusing on enhancing value to members of both associations and letting that guide our discussions.

Yesterday’s meeting was the second this year between representatives of our respective leaderships. Our discussions have focused on how the two associations can work more effectively together in future for the benefit of our industry members. We discussed a variety of options on how to accomplish this.

Our Boards will receive a report on this meeting and we will involve them in continuing the discussions. Both of our associations have leadership meetings already planned over the next several months and these will give us the opportunity to examine the variety of options available. We are committed to sharing the outcome of those discussions with one another.

So the process is now public, and there are some real reasons to think the outcome this time may turn out differently than it has in the past.

For one thing this is a far more professional process. In the past, industry members have met together and tried to “make a deal,” but few had any experience in creating new association structures, merging associations or starting new associations.

This time United and PMA voted to bring in a professional in this area to help facilitate discussions. They brought in a neutral party, experienced in these matters, being paid by both sides who can help structure the process, keep emotions in check and help organize needed information — a person who does not feel the weight of history in every decision.

This ‘professionalization’ of the process in and of itself significantly improves the likelihood of a successful conclusion to the process. But, of course, merely to say this is to raise the question: What would a successful outcome look like?

We shouldn’t prejudge the process and assume that a merger is a success and anything else is a failure.

Although industry leaders have long been considered with the duplication of effort and excess expense of maintaining two national associations, the specific background to the current discussions was, in a sense, related to the spinach crisis. We reviewed the early discussions here, pointing to the need to look at our industry association structure with regard to unity in government relations.

The Pundit caused some controversy this past fall when we saw the decision of the FDA to advise consumers not to eat spinach as a failure of the trade’s government relations efforts. This point was hotly disputed both by Tom Stenzel of United and John McCLung, President of the Texas Produce Association.

Yet others, such as John Baillie, President of Jack T. Baillie Co., shared the notion that the industry institutions weren’t functioning optimally.

Beyond this specific complaint, though, it is fair to say that those who have argued in favor of a merger have made three general points:

  1. Industry funds are fundamentally misallocated. United has traditionally been expected to fund government relations and lobbying — non-remunerative activities. Yet the trade show that throws off a big chunk of the trade’s surplus cash flow is in PMA. It is as if the industry put its expenses in one organization and its revenues in another.
  2. It is important to present one unified voice before government and consumer media and in negotiations with other trades and organizations. Two organizations inevitably means either conflicting messages being put out, duplicative work being done to put out the same message twice or expensive staff coordination to avoid conflicting or duplicative messaging.
  3. Inefficient use of industry resources — duplicate office space, executive personnel, etc. The basic belief is that one organization could operate more efficiently than two and thus save the industry money or allow funds to be spent on programs rather than overhead.

Yet, despite these three clear reasons for a merger, it has never happened. Why is this?

Well, in many cases mergers don’t happen because of personalities and individual dynamics. Out in the corporate world, it is unusual to see mergers between two companies with young CEOs both looking to stay CEOs, and there have been instances of personal ambition and mutual distrust that have certainly held things off.

Yet there are also substantive points that have spoken against a merger:

  1. PMA especially has seen its future in tying together the world of produce marketing. And, today, that really is a world. So PMA does seminars in Chile, has an Australia-New Zealand Country Council and sends its Vice President For Global Business Development, Nancy (have-briefcase-will-travel) Tucker to every corner of the globe to woo members for PMA. Yet the dilemma is obvious. Surely there is an inherent friction between having a fully functioning international membership and having a core function that includes lobbying the Federal government of the United States.
  2. PMA has seen the trade-buying organization as a crucial component of its membership, to the point of saying that a majority of its board should be composed of buyers. Yet this level of buyer participation is probably only sustainable in an organization devoted to marketing and supply-chain issues. Janet Erickson of Del Taco recently finished her term as Chairman of the Board of PMA. Her company could accept her time commitment and prominent role in an association focused on marketing and supply-chain interests, but it is unlikely her company would have been supportive of her chairing an organization whose core focus was representing produce farmers before Congress.
  3. It is not really clear how great the financial savings will be from a merger. The two associations have relatively few duplicative programs and, presumably, the relatively small savings from reducing duplicative staff — one CEO instead of two, one CFO instead of two, etc. — would be mostly made up in higher salaries and more junior employees that come from managing a larger organization. Presumably the industry would want to maintain a Washington, D.C. office, and so office expenditures don’t seem likely to be reduced substantially.
  4. United itself has had to deftly navigate its own membership to come out with positions on things such as NAFTA and PACA. Washington apple shippers had a different interest than Florida tomato shippers on an issue such as NAFTA. Although United does have people such as Reggie Griffin from Kroger on its board, United makes it very clear to these members that it is not there to represent them. Government relations is inherently adversarial, and there is an open question as to whether, inherently, having government relations as a core function doesn’t create tension that slows progress on other issues.
  5. For many years the complaint against there being two associations was very specific. It was really not a critique of two associations but of two trade shows. As United’s trade show became less vibrant, United pressured vendors to exhibit explaining that its trade show was the way it funded the association and, especially, government relations. Yet this was a horribly inefficient way to fund government relations. Vendors paid a few thousand dollars to the association to rent a booth and then ten times that amount to set up a booth, staff it, entertain people, etc. By the time the association paid the convention center and other costs, we had situations where the association was netting 5 or 10% of what the exhibitors were spending.

    Yet this issue has more or less disappeared. Even now with the FMI variant of the show, it is mostly the case that that the companies that are exhibiting want to exhibit. Equally, the companies that don’t want to spend the money sending teams to Chicago and paying for their room and board are not exhibiting. Dole did not exhibit at the most recent show; even stalwart United supporters such as Karen Caplan of Frieda’s elected not to exhibit. These were business decisions.

    Only one industry show can be the biggest show in the trade. It is no shame to be smaller. If United can create an event where the participants are happy, this reduces the pressure for a merger.
  6. With a smaller show, of course, United had to find other ways to fund its activities. The Pundit had the privilege to coordinate a strategic planning effort at United many years ago and one key point that came out was that we had to find out how serious the industry was about supporting government relations. This principally involved making the need to fund these efforts explicit by paying for them through dues rather than in an indirect manner via a trade show. And the unheralded story is how successful United has been at raising dues substantially over the last 15 years. United sold a building when it moved to a rented office in D.C. from Alexandria, Virginia, which gave United some reserves that have been kept well-protected, and with the higher dues, United has managed to stay financially sound.
  7. One argument against a merger is that having two associations provides an outlet for industry leadership. Look at someone such as Karen Caplan, President and CEO of Frieda’s. She won wide acclaim for the job she did as United’s Chairman and as the first female chairman of one of the “Big Two” national associations. (Lorri Koster, Co-Chairman of Mann Packing, was the first female Chairman of a national produce trade association, serving as Chairman of the International Fresh-cut Produce Association in 2000.)

    Yet Karen had earlier served on the board of the PMA, but PMA has its own rotations, and Karen was not scheduled to be Chairman. Eventually she rotated off PMA’s board. If that was the only association, she might have devoted herself to private affairs. Instead, with United waiting, she jumped right in and, in time, became chairman.

    The fresh-cut industry has always had a group of national leaders disproportionate to its size, and that leadership, to no small extent, came about because the fresh-cut industry had its own association. Already with the merger between United and the International Fresh-Cut Produce Association, the dilemma has become clear. Although in the short term, United combined both boards into one, in the long term, United will have to either set up a special subsidiary board for fresh-cuts with all the risks of establishing a special-interest section in the middle of the association or United and the industry at large will have lost an important group of leaders.

    Of course in a one association world, Karen Caplan would have another option as would those fresh-cut people now that there is no fresh-cut association — they could break away and establish another group. Surely someone, someday, will be sufficiently upset with what one industry trade association does to start a new one. If so, maybe we are better off keeping our two-association structure as the second association provides a needed “stream release valve” for those unable or unwilling to work with one or the other of the associations.
  8. There is a cultural difference in leadership between associations built around government relations and those built around other interests. Almost inherently, government relations requires expertise. So the boards of associations with a government relations orientation tend to hire people with D.C. connections and then to defer to their judgment. Other types of associations, such as PMA, see the expertise as being resident in their boards, who are the experts in the trade… the CEO is an information source, a facilitator, an organizer. It may be like a see-saw, and an association heavily focused on government relations will be weaker on other matters.
  9. Coordination and duplication may not be so easy to get rid of as merging two associations. The two national groups work so closely that coordination and avoiding duplication is second nature. The real issue may be coordination and avoiding duplication with regional groups. Western Growers Association has opened a Washington D.C. lobbying office as we mentioned here and here. It is not clear a merger will really resolve this situation.
  10. Finally, in our capitalist society, we have to ask about the advantages of competition. Nobody goes around saying, “Let’s have only one monopoly supermarket operator,” although we could make the same arguments for the increased efficiency we would gain from such a move. But Soviet retailers weren’t so great because what they gained in monopolistic “efficiency,” they lost 10 times over by lacking the competitive spirit. Is it so crazy an idea to think that both PMA and United do a better job because they can’t take the industry for granted, because they know every member has another ready place to turn? Efficiency may be overrated compared to creativity and energy unleashed through competition.

With three strong points in favor of merger and 10 strong points opposed, we might have stumbled upon an explanation for why we have not had a merger. Yet there are a few indications that the times they are a changing and that these big issues are being superseded by others.


Peter Goulet
 
Emanuel Lazopoulos

Aside from the professional process we’ve already mentioned, let us take a look at the five key changes in the situation that may mean a different outcome in these talks than in all previous conversations:

  1. This time there is personal chemistry. Peter Goulet of Pinnacle Sales and Marketing and Emanuel Lazopoulos of Del Monte Fresh Produce, NA, Inc., are this year’s Chairmen of PMA and United, respectively. They go back many years and have a good personal relationship and easy rapport. There is a degree of trust at the top of both organizations that hasn’t been there before.
  2. Any real sense of separate spheres between the Associations has sort of broken down. PMA has a Vice President of Government Relations and is seeking out a vice president for technical matters and science related to food safety. United launched a trade show with FMI clearly geared toward produce buyers. The associations generally avoid duplicate programming, but they have no notion of respecting any boundaries in which they can’t produce programming. It is more a practical matter of not exactly duplicating because it wouldn’t be successful and it would attract criticism.
  3. United is in a state of flux. It had hitched its wagon to FMI’s star and that has come down crashing with FMI’s decision to do a trade show on alternative years and a conference on the off years. This has financial implications and implications for maintaining contact with members. A decision of some sort will have to be made soon. This creates some urgency.
  4. WGA’s decision to open a DC office is almost a declaration of war on United. United’s financial structure is heavily dependent on large western shippers, but if WGA makes the argument that United can’t be counted on to represent western growers, then many may decide that they need WGA for representation and PMA for marketing. Where does that leave United?
  5. A quick glance at the United membership roster and you see prominent names gone missing. Sun World was always a member. In fact David Marguleas is the Senior Vice President for Licensing and Business Development at Sun World and his grandfather was Chairman of the Board of United. Sun World is not a member any more. D’Arrigo Bros Co. of California was always a member. In fact, the owners’ New York cousin, Matthew D’Arrigo, of D’Arrigo Bros Co. of New York, is on United’s Board of Directors, yet the California company is not a United member. It doesn’t add up to an imminent crisis, but it adds up to a potential problem.

Still a merger will be hard to pull off. The United board is likely to seek a “blank sheet of paper” approach in which everything is on the table.

The PMA board won’t find that realistic. In real world mergers, a much larger organization with a successful business model becomes the dominant partner defining the terms of a merger.

IFPA had approached PMA before it had approached United, and it was PMA’s unwillingness to “deal” and risk its successful formula that led IFPA into the arms of united.

The board of PMA would probably vote to merge, but it would want to keep its governance structure — including the prominent place for retailers and foodservice operators. It would pick up those highly successful United Programs: The annual Leadership class, the Cornell Executive Development program, the science personnel and other great United programs.

Over the years there have been various proposals on how to handle government relations. One plan was to keep the association in Newark, Delaware, but maintain a DC lobbying office. At another time, PMA proposed that it would take over all industry functions except lobbying and United would focus on just lobbying. It was expected that some financial subsidy — say a half million dollars a year — would be required, and the PMA board was favorably disposed toward providing that.

Now WGA’s opening of a DC office may open a new opportunity. Maybe that office could be expanded to handle the lobbying needs of produce growers throughout the country. Florida, Texas and the Northwest have strong associations and could probably chip in, and if some extra funds were required to help the less concentrated regions, we think the PMA board would want to make that possible.

When we raised the issue in the fall, the biggest point of letters we received was that growers need a DC lobbying presence. Maybe they would do best with a pure lobbying presence just for growers.

United’s board faces more uncertainty in the years ahead what with the FMI situation and WGA’s toe-hold in Washington, DC. Logically, United has more to gain from a merger than PMA. Yet United is an old and storied association and many members have fathers, grandfathers, great-grandfathers, great-great grandfathers and others who were on the board or Chairman of United or some predecessor organization. If the board of PMA decides the industry will benefit from a merger, it needs to pay respect to that history or the merger probably won’t happen.

In an industry like this, the boards should have already given assurances to key executives that whatever happens they will be financially protected during an extended transition period. We need their honest council and productive assistance, not have them worried about their personal financial situation.

There is a tremendous amount of inertia in the world, and the most likely outcome is nothing. But, just maybe, this time will be different.

We’ve tried to lay out the major issues and welcome the trade’s input on this important matter.

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