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Chiquita Sets New Course For Future

Big news from Chiquita:

Chiquita Brands International, Inc. (NYSE: CQB) today outlined a restructuring plan and management changes designed to accelerate its previously announced strategy to become the global leader in healthy, fresh foods. This business restructuring is designed to improve the company’s profitability by consolidating operations and simplifying its overhead structure to improve efficiency, stimulate innovation and further enhance focus on customers and consumers.

As a result of these changes, the company expects to generate new,sustainable cost reductions of approximately $60-80 million annually, beginning in 2008, after a one-time charge of approximately $25 million in the fourth quarter 2007 related to severance costs and certain asset write-downs. Realized savings will improve profitability, and resulting additional cash flow will be used primarily to reduce debt, consistent with the company’s previously announced target to achieve a debt-to-capital ratio of 40 percent.

“Since 2005, market dynamics and the competitive landscape have been rapidly changing, which has limited our profitability and slowed the execution of our strategy,” said Fernando Aguirre, chairman and chief executive officer. “While we have already taken various actions to strengthen our balance sheet, improve our risk profile, and diversify the company, we continue to endure rising industry costs, punitive European banana import regulations, and a slower-than-expected recovery in the value-added salads category. We began a major analysis in the summer when we realized the effects of these negative forces were impacting our profit plans longer than originally anticipated. As a result of this analysis, we are taking several significant broad-based actions across the business, which are designed to improve our performance in areas we can more directly influence and control.”

Aguirre added, “The changes we are making will result in fewer layers of management, better and faster decisions and improved accountability. Also, we will drive greater integration and efficiency across business units and geographies, resulting in one face to customers, one global supply chain from seed to shelf, and one global innovation program with targeted priorities and better execution. Taken together, I am confident these actions will strengthen our long-term market position and enhance our ability to achieve sustainable, profitable growth.”

The $60-80 million of annual cost savings are expected to come primarily from two areas:

  1. a simplification and reduction of the company’s operating and corporate overhead structure, including the elimination of more than 160 management positions worldwide, or a 21 percent reduction at the three highest levels, and related reductions in administrative expenses; and
  2. business model changes, including network optimization, as described below, and the planned exit from certain nonstrategic or unprofitable businesses. All of these changes will be made in a manner designed to maintain high-quality service to customers and consumers, consistent with existing legal and contractual obligations, while treating fairly all Chiquita employees throughout the world who are impacted by the announced changes.

Simplified Organizational Structure

Chiquita has simplified its organizational structure and realigned it by geography, rather than product line. In addition, the company’s product supply organization, innovation efforts and certain corporate support functions have been consolidated worldwide to drive greater network efficiency, prioritize the development of higher-margin, value-added products, and improve the company’s market competitiveness.

The company announced the following changes in the roles and responsibilities of senior management positions, all of which will report directly to CEO Fernando Aguirre:

  • Michel Loeb, President, Europe and Middle East
    Loeb will be responsible for all aspects of the company’s operations throughout Europe and the Middle East, including bananas, other produce and diversified value-added products such as Just Fruit in a Bottle. Loeb joined Chiquita in 2004 and served most recently as president, Chiquita Fresh Group — Europe. He has more than 25 years of senior management and consumer marketing expertise, including experience at S.C. Johnson & Son and Nestle.
  • Brian W. Kocher, President, North America
    Kocher will be responsible for all aspects of the company’s operations in North America, including value-added salads, bananas and other produce. Kocher joined Chiquita in 2005 and served most recently as vice president, controller and chief accounting officer. He brings more than 15 years of accounting, sales, finance and business process change expertise, including previous work experience at General Electric and Hill-Rom.
  • Tanios Viviani, President, Global Innovation and Emerging Markets, and Chief Marketing Officer
    Viviani joined Chiquita in 2004 and has served since June 2005 as president of the Fresh Express Group. In his new role, Viviani will be responsible for the company’s consolidated innovation, research, quality and product development initiatives worldwide, as well as having profit-and-loss responsibilities over certain emerging markets, such as Asia. He will also coordinate all marketing globally. Before joining Chiquita, Viviani served for 16 years at Procter & Gamble in various general management, operations and new business development roles in the United States, Latin America and Asia.
  • Waheed Zaman, Senior Vice President, Product Supply Organization
    In this role, Zaman will lead the company’s end-to-end supply chain, driving excellence and efficiency in the company’s global sourcing and processing operations. Zaman joined Chiquita in 2004 and served most recently as senior vice president, supply chain and procurement. Before coming to Chiquita, Zaman held a variety of senior-level information technology and business process improvement positions during his 15 years with Procter & Gamble.
  • Kevin Holland, Senior Vice President, Chief People Officer
    Holland joined Chiquita in 2005 and has served most recently as senior vice president of human resources. In this expanded role, Holland will be responsible for the execution of this restructuring effort. He will continue to be responsible for human resources in addition to various corporate support functions worldwide, including information technology, communications, administrative services and security. Before joining Chiquita, Holland held various senior human resources roles at Coors, Kinko’s, Gateway and Abbott Laboratories.

The roles and responsibilities of the following leaders who also report to the CEO remain largely unchanged: Jeffrey M. Zalla, senior vice president and chief financial officer; James E. Thompson, senior vice president, general counsel and secretary; and Manuel Rodriguez, senior vice president, government and international affairs and corporate responsibility officer.

In conjunction with these organization changes, the president and chief operating officer role at Chiquita Fresh Group has been eliminated. As a result, Bob Kistinger, who has served in that capacity, has been appointed president, special assignments. Kistinger will serve in that role until the end of the year, at which time he will be leaving the company to pursue new opportunities.

“I wish to thank Bob for his many significant contributions and for his dedication and loyalty to Chiquita for more than a quarter century,” Aguirre said. “While we will certainly miss the benefit of his extensive industry knowledge, Bob developed a strong team of leaders in the company, several of whom will take over the daily duties of his position.”

Business Model Changes

Chiquita previously announced the downsizing of its operations in Chile and the exit from certain unprofitable farm leases. The company is making several additional structural changes that will take place over the next several months:

  • Network Optimization in North American Value-Added Salads
    The company’s recent acquisition of the Verdelli Farms production facility in Harrisburg, Pa., will allow Fresh Express to rebalance its production and distribution network for value-added salads. To optimize network efficiency, the company has decided to close its distribution center in Greencastle, Pa., and production facility in Carrollton, Ga., over the next several months. Closing these two facilities will reduce operating costs while further improving the freshness of products we supply to customers. The company employs approximately 240 people at Carrollton and 40 people at Greencastle.
  • Exit from U.S. Fruit Bowl Business
    Chiquita has thoroughly reviewed its fresh-cut fruit business and has decided to focus on its line of healthy snacks, such as Chiquita Apple Bites, which have achieved market share leadership and wide acceptance from customers and consumers. However, the company’s line of fresh-cut fruit bowls will be discontinued over the next several months. As a result, the company will convert facilities in Edgington, Ill., and Salinas, Calif., to focus on the production and distribution of value-added salads and healthy snacks. This change will eliminate approximately 130 full-time positions dedicated to fruit-bowl production.
  • Closure of Bradenton, Fla., Distribution Facility
    In conjunction with the company’s consolidation of its North American logistics operations, Chiquita will close its banana distribution facility in Bradenton by year end. Closing the Bradenton facility will reduce operating costs and is not expected to impact its current customers, which will continue to be served from the company’s distribution center at Port Everglades, Fla. Chiquita employs 15 people at Bradenton.
  • Exploring Strategic Alternatives for Atlanta AG
    Chiquita acquired full ownership of Atlanta AG in 2003 and executed a successful three-year cost-saving turnaround plan for this unit, which has annual revenues in excess of $1 billion and leading market share in the fruit and vegetable distribution sector in Germany and Austria.

    During the past two years, however, various macro-level market influences, including changes in the E.U. banana import regime, stiff price competition and consolidation of the retail sector, have combined to reduce Atlanta’s profitability. In addition, while Atlanta has significant strengths, management has determined that its commodity distribution business is not a strong fit with Chiquita’s long-term strategy. As a result, the company has launched a process to explore strategic alternatives for this unit, including a possible sale. To assist with this effort, Chiquita has retained Taylor Companies, Inc., a Washington, D.C.-based investment bank specializing in synergistic mergers and acquisitions. The company does not expect to disclose developments with respect to this process unless and until its board of directors has approved a definitive transaction. There can be no assurance that these activities will ultimately lead to an agreement or a transaction.

Updating Long-Term Growth Objectives in 2008

Aguirre concluded: “With these actions, we are taking a major step forward to create a more positive future for Chiquita. Furthermore, these actions will strengthen our corporate culture and help us become more innovative and customer-focused. This restructuring does not change our strategic focus; rather, I am confident that by simplifying the organization, consolidating operations and reducing costs, we will improve our profitability and accelerate our ability to achieve sustainable growth.

With these changes, however, we will need to redefine our growth targets, since the negative impacts of rising industry costs, the E.U. tariff regime and the E. coli event have slowed down our strategic growth plan considerably, such that reaching our goals will take us longer than we originally estimated. We expect to provide more information about these long-term financial goals early in 2008.”

It is a little hard to know what to make of all this. Having gone through two bankruptcies, one would think most of the fat would have already been carved off the bone. Plus Chiquita had already indicated that it would pull back from much of its operation in Chile.

Now, other than fresh-cut apples, it seems as if Chiquita is abandoning the fresh-cut fruit business, surrendering to a portent that Eric Schwartz, President of Dole Fresh Vegetables, pointed out in Pundit sister publication, PRODUCE BUSINESS. You can read his letter here.

It seems to want to sell Atlanta AG, a big European distributor, and has hired an investment bank to do so.

Its acquisition of Verdelli, which we discussed here, now seems as much a rationalization as an expansion, as Chiquita is going to close its production facility in Georgia.

The program calls for a leaner staff — 160 management jobs gone and reorganized to focus on geography not product. Tanios Viviani, who was President of the Fresh Express group and who recently won our Single Step award, is now President, Global Innovation and Emerging Markets, and Chief Marketing Officer

Chiquita is an iconic brand in the industry and we wish them well. Yet, the problem as Chiquita identifies it:

While we have already taken various actions to strengthen our balance sheet, improve our risk profile, and diversify the company, we continue to endure rising industry costs, punitive European banana import regulations, and a slower-than-expected recovery in the value-added salads category.

Doesn’t seem likely to be solved by this kind of reorganization. The stock market reacted positively, but that is because the company has promised that all the changes will reduce costs and debt:

“Realized savings will improve profitability, and resulting additional cash flow will be used primarily to reduce debt, consistent with the company’s previously announced target to achieve a debt-to-capital ratio of 40 percent,” Chiquita said.

Put another way, this is a program to survive to fight another day. Wall Street is saying that this is probably the best strategy for now, and it may be right.

The problem with this kind of strategy, though, is that competitors don’t stand still. If during tough times a company doesn’t invest. When the upswing comes, someone else may be there already with dominant market share.

Chiquita has been through a lot. It is an important industry institution, and it would be good for the trade if after years of instability this plan finally sets Chiquita on a secure course.

Is Wal-Mart Foolish
For Focusing On Small Savings?

Our piece, Wal-Mart’s Global Procurement Division Gets Special Pass On Quality, was the latest in a series of articles dealing with Wal-Mart’s procurement practices.

We launched this discussion with our piece, High Lettuce Prices Strain Supplier Relations With Wal-Mart, and then followed up with an article we called, Wal-Mart Tightens Quality Specs.

We then heard from a Wal-Mart vendor and used his letter in a piece we called, Pundit’s Mailbag — Wal-Mart’s Path of Decreased Store-Level Execution. All of these pieces built on a series we ran a few months ago that concluded with an article entitled, Wal-Mart’s ‘Opportunity Buy’ Policy Reveals Much About The Company.

We’ve received many letters in response to the piece on Global Procurement, including this thoughtful missive:

In an effort to ‘cut cost’, the concept of ‘adding value’ can get lost, especially with imported items that arrive to North America from great distances like Chile, Argentina, South Africa, or Australia.

Fully 70% (or more) of the total value of any produce product, even by sea shipment, involves cost inputs to deliver the actual produce to the market in salable condition. The actual fruit is most often the ‘cheapest input’ in the delivered product, and yet if its condition is compromised, all the other cost inputs may be ‘lost’. There is no ‘cost savings’ if the produce item is compromised in transit from a far away port of embarkation.

Importers who have all of the resources and skills to clear customs, inspect fruit to assure its suitability for buyer delivery, arrange domestic transportation to the buyer’s final destination, are really ‘adding value’.

The expression ‘pennywise, pound foolish’ comes to mind.

Some forget that there are two ways to improve an item’s value. One is to cut cost, but a more important way often is to find a way to ‘add value’.

— Rick Eastes
Director of Special Projects
Ballantine Produce Inc.
Reedley, California

The general issue of direct importing by retailers is somewhat problematic. Among the obvious challenges:

  • Producers often produce large ranges of sizes, grades, varieties and items. Retailers typically want only certain sizes and grades. Although they may be able to get what they want by paying for it, importers who have a diverse customer base and can accept a range of product will often get preference — and a cheaper price. Clever importers with ranges of customers can often pay less for product than retailers who are restricted in what they can buy.
  • It is very difficult to buy produce in foreign countries with guaranteed good delivery to distant distribution centers. Inevitably a retailer importing directly will have many containers that have to be sold outside the retailer’s own channel. The ability to maximize returns in this environment is typically not an area of expertise held by the employees of retailers.
  • The “just in time” inventory systems common in the produce industry are typically not compatible with distant transit times, congested port and border conditions and delays due to customs, APHIS and what not. So Global Procurement operations either will not meet delivery dates or they will over-import to have excess stock available to cover for late arrivals.
  • If the goal is to import 100% of a retailer’s needs, in light of the long supply chain, the tendency is to over-order. This means more shrink and product that is less fresh for the consumer.
  • If the chain doesn’t import 100% of its needs, it will still depend on importers. Now, however, instead of being the favored customer of the importer, the chain is viewed as a quasi competitor. It will get less favorable pricing, find its orders unfulfilled in tight markets and, in general, not be treated as well as it would be if it bought all its imported product from importers.

In the specific case of Wal-Mart, you are dealing with a situation in which for 15 years the company encouraged companies to become importers, the better to provide Wal-Mart with 52-week-a-year service.

Regardless of who encouraged who, the real question is, ‘Are there any savings by importing independently of that system?’ The problem is that if a company has a building and 50 people dedicated to the Wal-Mart account and all the sudden gets a “time out” because of a Global Sourcing initiative (or, by the way, a Local Buying initiative), the salary and the rent, etc., still have to be covered. Because it is typically not possible to suddenly get other business that will soon be dropped, Wal-Mart, through the prices it pays, winds up covering those people and facilities.

In effect, you could say that Wal-Mart will pay twice for people and facilities at that time, hiring its own while sustaining the “eco-system” of domestic Wal-Mart vendors.

Beyond the issue of cost savings, Rick Eastes, who has worked with both Sunkist and Oppenheimer, points to the foolishness of focusing on small savings — when one should be focused on the large benefits of maintaining quality.

This requires expertise, and one wonders if retail salary structures will allow for the chains to maintain these top-notch people — or if the people won’t be wooed away by more lucrative opportunities.

Very often the thirst to eliminate a “middleman” and the supposed “excess cost” he represents stumbles over a surprise — the value that intermediaries can often provide.

This whole situation reminds us a bit of another occasion in which retailers thought themselves best served by doing everything “direct.” We dealt with that in an article that ran in Pundit sister publication PRODUCE BUSINESS, entitled Broker is Not a Dirty Word.

Many thanks to Rick Eastes for reminding us that a balance sheet must contain both credits and debits.

Lessons On Social Responsibility From GAP’s Child Labor Woes

The GAP is being crucified around the world because of a discovery that child labor was used to produce clothing for retail clothing giant. This piece from the Telegraph in London, entitled ‘Gap sweatshop children’ saved in India raid, has lots of pictures.

It may seem distant from any concerns of the produce and perishable food industries; however, with the increasing focus on corporate social responsibility we can expect much more rigorous attention to be paid to the way we operate. Especially, we can expect the attention to be focused on the condition of farm labor and, particularly, farm labor in developing countries.

We wrote a piece in Pundit sister publication, PRODUCE BUSINESS, entitled Wages And Social Responsibility, that dealt with this exact issue.

By the way, don’t think all this attention to social responsibility will actually help any of these poor children laboring in the factories. As soon as the news broke that the GAP was promising to act, Forbes put the headline as GAP Vows Action After Child Labor Report and executives from the GAP were very clear:

“We appreciate that the media identified this subcontractor, and we acted swiftly in this situation,” Chandler told The Associated Press on Sunday. “Under no circumstances is it acceptable for children to produce or work on garments.”

The company plans to convene all of its suppliers in the India region at a summit in the coming weeks to “forcefully reiterate the prohibition on any child labor,” he said.

Marka Hansen, president of GAP North America, said its prohibition of child labor is non-negotiable.

“While violations of our strict prohibition on child labor in factories that produce product for the company are extremely rare, we have called an urgent meeting with our suppliers in the region to reinforce our policies.”

Note, however, that GAP’s policy is merely one of disassociation from child labor. The practice is banned from the factories, and the GAP will drop a supplier if the practice is found. Beyond keeping children out of its factories, GAP takes no responsibility for children at all.

One supposes there are people who believe that now that these children will be fired, they will go back to school and study hard and grow up to be accountants and ballet dancers.

Notice GAP did not say they would build schools or in any other way help these children. It raises the question of whether social responsibility is to actually do good or just to avoid sullying our hands with unseemly things?

In any case, this is not an issue that will stop with clothing.

Pundit’s Mailbag — Houston Will Need To ‘Step It Up’ For PMA’s Permanent Rotation

A quick review of Post-PMA-convention articles before we move on to our letter of the day:

PMA Analysis — Does Houston Merit A Permanent Place In The PMA Rotation? — this was the question we asked to kick off our post-PMA analysis.

PMA’s Attendance Just Shy Of 16,000, focused on attendance.

Peter Dessak, Vice President of Six L’s Packing Company, pointed out that with a hotel room in the Galleria area, there were increased costs. The piece was called, Pundit’s Mailbag — PMA Needs To Factor Bus Time And Taxi Costs Into Convention City Choice.

Pundit’s Mailbag — Selling Versus Learning At PMA, featured a contribution from Jack Vessey, Vice President and Marketing Director for Vessey & Company, who focused on the benefits of increased attendance by growers. This piece also raised the issue of a ‘disconnect’ between exhibitors there to sell and some attendees at PMA to learn.

Pundit’s Mailbag — Should PMA Facilitate Meetings During Program Times? — dealt with the tension between accommodating attendees’ desires to set up their own meetings and PMA’s need to maintain attendance at official functions.

Pundit’s Mailbag — PMA’s Opportunity To Learn From Friends And Foes, included a letter from Eric Schwartz, President of Dole Fresh Vegetables, defending the PMA convention as a fantastic opportunity to learn and build friendships.

Today, we thought we would deal with a few of the more succinct letters related to PMA.

A prominent customs broker based in South Florida thought our critique of Houston — that its “two core” layout… some near the convention center and some near the Galleria — was not what the industry wants. She was right on target:

We were wondering if you overheard our conversation on Monday night ?

Your views were exactly ours.

Although Houston was a nice show, we missed the “together” feel that you get from other cities such as Atlanta and New Orleans.Those are the shows whereyou know as soon as you step out of your hotel room, you are bound to “bump into someone.”

See you in Orlando …

— Ana M. Ramos
Doral, Florida

From across the country, an avocado expert had similar thoughts:

Your comments on PMA/Houston clearly define the reason why this venue does not work for PMA.

For those of us who see the off-floor meetings as a very productive part of the convention, Houston was a logistical nightmare.

Despite this, Prime Produce International did have a very successful 4 days in Houston. But, I look forward to Orlando in 2008!

— Avi Crane
Prime Produce International
Orange, California

A gentleman who lives right near the site of PMA 2008 is urging PMA to go West:

Ask the exhibitors and heed their opinions. San Diego and the Gas Light District was a great place for the PMA. San Diego should be added as a permanent place in the PMA rotation.

— Louis J. Hymel III
Director of Purchasing/Marketing
Spice World, Inc.
Orlando, Florida

Alas, San Diego has joined an exclusive club — a roster of very nice cities that are now too small for PMA. The convention center in San Diego is 3 or 4% smaller than Houston and Houston was maxed out. Assuming that PMA wants to stay out of the cold and heavily unionized cities, we are pretty much down to a rotation that would include Anaheim, New Orleans, Atlanta and Orlando.

JC Myers of Eurofresh seems happy to go anywhere as long as it isn’t Houston:

You forgot to mention the weather delays that regularly strand travelers for 20+ hours at an airport that can’t accommodate all of us in 1 Chili’s bar!

I say good riddance to Houston!

— JC Myers
Regional Sales Manager (Monterey, California)
EuroFresh Farms
Willcox, Arizona

The consensus was probably represented by the following representative who works in the fresh fruit affiliate of a company well known for organic juice. Nothing wrong with Houston if they would just build more hotels and restaurants near the convention center:

Because we flew in from Florida, I see only two drawbacks to the Houston Convention Center location; there were minimal hotels within a close proximity of the center, and few places to dine.

For us Floridians, it would be nice to have it in a similar location but with the closer accommodations and restaurants.

— Janet Barrett
Fruit Division Team Member
Uncle Matt’s Fresh
Clermont, Florida

The feedback is very focused:

  1. The extracurricular activities at PMA are as important to many attendees as the program and show.
  2. It is very difficult and expensive to have a big chunk of the show out by another center, as is the case in Houston with the Galleria district.
  3. Dining options within walking distance as in the Gaslight District in San Diego are valued highly, saving both time and money.

Many thanks to Ana M. Ramos, Avi Crane, Louis J. Hymel III, JC Myers and Janet Barrett and their companies for contributing to the industry discussion on this matter.

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