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Produce Business

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American Food & Ag Exporter

Cheese Connoisseur

Trip To Tesco’s Fresh & Easy Store
Reveals The Good, The Bad and The Ugly

On a quick trip to California, the Pundit and Mrs. Pundit visited one of Tesco’s Fresh & Easy stores “up close and personal”.

For those familiar with the Los Angeles area, we went to the store at 4211 Eagle Rock Blvd., a mixed community not too far from Occidental College. We visited the store Wednesday at lunch time.

Although we enjoy visiting stores, we rarely write about those visits. The problem is that with a large chain, it is difficult to know if what we notice is an aberration or is representative of the whole chain.

With a new chain such as Fresh & Easy you run the double burden of trying to distinguish what might be considered part of an expected “shake-down” period and what are fundamental issues in the concept.

Still, for better or worse, these were our initial thoughts:

The Good:

  1. Plenty of staff… all with excellent attitudes, very anxious to help. Although the store was rather empty, thus giving the staff plenty of time to help, they were asking customers, “Do you want me to show you how to work the self-checkout or do you want me to do it for you?” Question: Staff looked heavy for the volume of business being done. Will staff hours be cut and the friendly staff be less so?
  2. A number of very interesting products; for example, a series of items being positioned to compete with Oscar Mayer’s Lunchables — but with healthier food and at a bit higher price point.
  3. The fact that almost every produce item was in a clamshell, bag or wrapped made us feel that the product was safer — since it couldn’t easily be touched by store employees or fellow customers.
  4. Excellent range of baked goods.
  5. Many interesting sauces and whatnot to try — in that sense reminded us of Trader Joe’s.
  6. The Spartan décor and fact that everything was displayed in a shipper gave it a warehouse feel and engendered the hope we would be getting a good deal.
  7. Nice lady sampling the house brand of tiramisu, chocolate chip cookies, stuffed olives and a few other grocery items.
  8. Plenty of parking.

The Bad:

  1. The store was dead; there were more employees than customers when we were there.
  2. There is an obvious problem in all the fresh foods areas with out-of-stocks. For example, no chicken tenders in the meat and poultry department, no sliced roast beef in the self-serve deli. You could get rice but they were out of the refried beans in the prepared foods section. In produce, they were out of bagged spinach and strawberries. In Grab-and-Go, they were out of tuna salad sandwiches.
  3. When an item was still in stock, the display was often half empty, so the consumer would see several big black tubs with a lonely bag of tangerines in each one.
  4. Bananas, priced oddly at 18 cents per banana, were one of the few produce items stocked to the brim. Lots of overripe bananas — Bonita brand — plus newer bananas. Impression is the fruit hasn’t been selling and the staff doesn’t know how to properly cull the bananas.
  5. It is impossible to know the cause of the out-of-stocks. We have been told, confidentially, about a computer glitch that has caused improper orders to be sent out. It may be as simple as getting some historical data in the computer and adjusting certain assumptions. For example, although the store was out of pre-made tuna salad sandwiches, its rack overflowed with pre-made chicken salad sandwiches.
  6. It seems as if they are allowing store-level staff zero flexibility on merchandising. When the store is out of stock, nobody seems to be thinking in terms of filling up the space with anything else. If the planogram says two feet for bagged spinach and the store is out, they just keep an empty shelf there with the spinach sign.
  7. The sampling program was limited and odd. Although the sampling lady explained that the purpose was to reassure us of the taste of the Fresh & Easy branded items, we didn’t feel we needed a sample of, say, a jarred stuffed olive. We would have liked to sample some of the prepared foods and the meat and poultry items that are being sold pre-basted. We are OK with gambling with a stuffed olives, but if we are having a dinner party and are thinking of serving the nice looking chicken in their special sauce, we would like to taste that first.
  8. We found the taste of the private label products being sampled to be mediocre. The tiramisu and the chocolate chip cookie were fine — but just fine. Nothing to make us feel we must shop at Fresh & Easy to get these great items.
  9. We found the overall appearance of the store dour and cold. It didn’t really make us happy to be there. Costco is institutional looking too, but somehow the buzz, the serendipitous appearance of new products, the demos and sampling, all make Costco feel much more fun.
  10. The produce packaging was frustrating as it de facto created minimum purchase requirements. Maybe we don’t want six apricots, we only want two?
  11. The store is a little too preachy for our taste. We know our values and don’t want to be sold on a retailer’s values. The various references to sustainable, recyclable and reusable made us feel like we were being lectured to.
  12. Especially with kids, we want the brands we are accustomed to and so couldn’t see making Fresh & Easy our regular shopping haunt. The Jr. Pundit Segundo, aka Matthew, age four, likes his yogurt with Blues Clues on it, and the Jr. Pundit Primo, aka William, age six, likes his fresh-cut apple slices with Mickey Mouse. There is no upside for us in taking these little joys away from our children. The branded selection is just too small to work for us.
  13. We like a service deli. We like to tell the guy that the roast beef isn’t rare enough, please open another. We like to get a sample slice and ask the guy to make it thinner. To us, a product is fresher if we see it cut before our eyes.
  14. In some ways, Fresh & Easy is a step backward. At our supermarket in Florida, we often buy both rotisserie and fried chicken — in most cases, it is for immediate consumption and we buy it hot. We saw no fried chicken and the rotisserie chicken is sold cold and pre-packaged. Didn’t strike us as fresh or easy.
  15. The produce assortment left us having to go elsewhere. For example, the kids love Grapple apples — Fresh & Easy didn’t have them. We have another trip to make.

The Ugly:

  1. Many of the prepared items simply looked horrible. This is because curry-like items have flipped over and smeared all over the top of the plastic prepared food packages. Although we appreciate the desire to let shoppers see the food, if Fresh & Easy doesn’t have a solution to this problem, it should design a sleeve to put over the items so consumers are spared unattractive views.

It is certainly a professional store, but in the end we draw these conclusions:

  • One big advantage of the store can be the small footprint. In certain areas, this small footprint will enable Tesco to open many stores that will be conveniently located to consumers. However, the small footprint won’t help in most suburban markets as zoning restricts where stores can be built. The small stores will thus be on the same streets as supermarkets.
  • It will take time to see how pricing settles down both at Fresh & Easy and competitors, but the bare-bones interior seems likely to appeal to bargain hunters. Yet pricing does not appear to pose much of a threat to Wal-Mart, deep discounters such as Aldi, Sav-a-lot or dollar stores. There seems a little disconnect between the appeal of the store and its pricing structure.
  • As with Trader Joe’s, the success of the store will depend on the private label product. If consumers fall in love with Fresh & Easy sauces, its tiramisu or refrigerated lasagna, then the store will attract a passionate clientele for those items who will buy other items. If not, then the concept may not survive.

Florida Tomato Growers Reject Penny-A-Pound Initiative At The Industry’s Peril

While much of the industry has been focused on an effort to explain to the American people and members of Congress that a severe labor shortage is hampering agriculture, the Florida tomato industry is acting in a manner that undermines the industry effort.

For many years, advocates for migrant farm workers have pushed for improvements in pay, living and working conditions for migrant farm workers that toil in Florida’s tomato fields. The advocates attempted to pressure growers to boost pay, but it was difficult to find leverage points that would move growers to pay more — especially since, in the absence of buyers willing to pay more, any pay increase for pickers would come right out of the growers’ pockets.

Eventually, though, the advocates for the migrant workers hit upon a strategy more likely to have success. Instead of pressuring anonymous farmers, they would attempt to pressure foodservice operators.

It was a brilliant strategy on two accounts:

First, these consumer brand names ran real reputational risk in being tarred as responsible for low wages and poor working conditions. As such, they were susceptible to public relations campaigns singling them out as villains. Boycotts by “consumers of conscience” could really hurt these businesses — in a way they could not hurt any anonymous tomato farmer — and therefore created a real incentive for these foodservice operators to head off boycotts and protests.

Second, focusing on the foodservice operators accurately reflected the economics of the situation. Tomato farming is not so wildly profitable that individual tomato farmers could unilaterally decide to dramatically increase their labor costs. On the other hand, the cost of tomatoes in most foodservice applications — say a slice of tomato on a hamburger — is sufficiently small as a percentage of total ingredient costs or total item price that it is feasible for foodservice operators to contemplate an increase in tomato costs. In addition, foodservice operators have greater control over menu prices, and thus greater ability to pass costs onto consumers than do farmers selling a commodity.

The strategy bore fruit when Yum! Brands — which owns KFC, Taco Bell, Pizza Hut and other fast food restaurants — decided to participate in a so-called “penny-a-pound” scheme by which companies would agree to pay an extra penny a pound for tomatoes and the penny would be paid directly to workers.

For reasons unknown, the Florida growers refused to make the bookkeeping easy and simply add the penny-a-pound supplement to each worker’s paycheck. Instead a somewhat awkward mechanism had to be developed whereby a third party actually issued separate checks to the workers.

The Yum! Brands program had two successful seasons, and then the advocates for the farm workers scored a big breakthrough: McDonald’s, the great giant of the foodservice world, decided to join the penny-a-pound scheme.

The consequences of this decision would be expected to be far-reaching. Not only would this represent an immediate and substantial supplement to the incomes of many tomato pickers, but the precedent set by having McDonald’s — often benchmarked against for best practices — adopt this policy seemed to herald a day when many more buyers would join the penny-a-pound plan.

Beyond this, once the principle of buyer responsibility for farm-worker conditions was so clearly established, surely a penny a pound would not be the end of things. Over time, perhaps the increment would be increased or the responsibility would broaden to include health insurance and other benefits.

For those who advocated for the tomato pickers, it seemed the dawning of a great new day… but it was not to be.

Although the program had been operating for two years with Yum! Brands and the third party making payments to laborers, all of the sudden, the Florida Tomato Growers Exchange declared that the program was a violation of antitrust laws — although it cited no legal opinions nor court decisions to buttress this assertion. It even announced that any members who elected to participate in the scheme would be fined substantially. As a result, no growers are participating this season. And, so, for the moment at least, the program is dead.

The workers who were getting extra checks from Yum! Brands for the last two years suddenly find themselves living without this supplement. Those who would have benefited as McDonald’s massive purchases began to pay a premium also do without.

Both Yum! Brands and McDonald’s have said they will continue to buy Florida tomatoes, pointing out that they won’t help the workers by refusing to buy and thus causing them to be out of work.

It is not clear why the Florida tomato growers have taken this tack. The antitrust argument is transparently absurd. If a buyer announces it wants to pay all the employees of all its suppliers a bonus, the suppliers commit no antitrust violations by facilitating that act. The only antitrust violation here might be the one the Florida Tomato Growers Exchange could be committing by trying to prevent growers from contracting with whom they choose. The Exchange hopes the laws on co-ops will protect it.

One supposes that the tomato growers feel the buyers will negotiate tougher on price since the growers know they have these supplemental payments to make. Yum! Brands is small enough that the market was established independently of its purchases, so a supplemental amount could be figured on top of the market. If McDonald’s joined the program — and certainly if it expanded to include Burger King and others — the folks pushing the penny-a-pound deal would constitute the market.

Still, the argument is weak because it is also true on the other side. When growers set wages for laborers, those laborers will now be aware of any supplements they might receive from the buying groups. So just as restaurants can pay low wages to waiters because of the certainty of tips, the greater the likelihood of farm laborers receiving supplements, the less farmers will have to pay to attract laborers.

In fact, the irony of all this controversy is that, although in the short term these programs may result in a bonus for the workers, in the long term pay rates adjust for the presence of supplements and thus these plans, carefully created by worker advocates, won’t actually help workers at all. To do that, the buyers have to dictate total compensation, not a supplement.

The only real explanation for the obstacles that the Florida Tomato Growers Exchange is that, although there are individual exceptions, this is a defensive industry that needs to start playing offense.

We saw this quite recently when Florida’s tomato farmers tried to crush the UglyRipe tomato by applying cosmetic grade standards that were obviously inappropriate to the variety. We wrote about this controversy in the Pundit both here and here as well as in a column in Pundit sister publication, PRODUCE BUSINESS, which you can read here.

The farmers lost that battle, but that was only because they picked the wrong enemy. Joe Procacci and the Procacci family do not get rolled. They fought in the courts, they fought in regulatory agencies, they fought in the Press. More than once Joe Procacci himself thought to pick up the phone and draw some issues to the attention of the Pundit.

The Florida Tomato Growers Exchange is hoping that the farm workers and their advocates, mostly small religious groups representing the nascent “consumers of conscience” movement, will not be as tenacious. In the short term, the Florida tomato growers may get their wish but, in the long term, both the tomato farmers, and the broader industry, shouldn’t count on it.

The issue for the Florida tomato industry is that in the new world of emphasis on corporate social responsibility, the industry would do better to position itself as a leader rather than a retrograde industry.

A few years ago, as pressure began building on the Florida tomato industry over worker issues, the leadership put together an organization to certify farmer compliance. In a textbook example of how certifications can be abused, when one studied the certification, it basically certified nothing more than that the farmers were obeying the law.

The Pundit had the chance, at the time, to hear a presentation about the certification as it was being established and in the room were several people who worked in the produce trade in Europe and Australia. Everyone was polite while the speaker presented, but when he left the room, one of the foreigners slapped the table and said “Well, that brings the industry all the way up to the 19th century. Did they ever hear of EurepGAP?”

Right now, many think that sustainability and corporate social responsibility mean locally grown and solar panels on the roof, but as we have been warning the industry the actual vulnerability of the industry is labor issues.

If you think about all the problems Kathie Lee Gifford had because her clothes were being produced in “sweatshops” and ask how we will stack up when scrutiny starts to be paid to working conditions and compensation both of migrant workers in the US and field workers in developing countries, the challenge ahead is obvious.

To its credit, the Florida Tomato Growers Exchange has tried to move ahead on some key issues such as food safety, and we chronicled those efforts in an interview with Reggie Brown right here. We have applauded these efforts.

On labor, though, the association keeps pointing out that the hourly earning of tomato harvesters, when working, is almost double the Florida minimum wage of $6.67 per hour, as the Exchange explains in a recent press release condemning the "professional activists":

This season’s payroll records show that Florida tomato harvesters’ hourly pay ranged from $10.50 to $14.86, with an average of $12.46 per hour. The harvesters earn more than double the current federal minimum wage of $5.85 per hour and nearly double Florida’s minimum wage of $6.67 per hour.

The farm workers harvest tomatoes an average of 25 to 30 hours per week in addition to other tasks on the farm. For most workers, the tomato harvest in Florida is only part of the work they do during the year. Many move on to other regions to harvest other crops throughout the growing season.

The problem is that these positions are not like offering a city kid a chance to make $15 an hour after school; these are full time jobs and the relevant issue is going to wind up being what kind of life can people lead doing this work? Can they make enough money to support a family and raise good children who, one day, will be productive citizens?

The very fact that the Florida Tomato Growers Exchange is so focused on the hourly wage and not the annual earnings shows a disconnect with not only how they will be evaluated but how the entire produce industry will be evaluated.

It is not the wage but the situation we must pay attention to. We could set up a summer program and invite college students from around the world to come and work on our farms during summer vacation. We could feed and house them, and as long as we kept them safe and gave them the opportunity to experience America — nobody would care what they earn. Students from around the world have been going to work for free on the Kibbutzim in Israel for many years.

But if we are going to ask adults to make this a full time job, the industry will not be allowed to be indifferent to the conditions in which our workers live and their children are being raised.

We have no delusions that this is a morally easy issue. If we raise wages, it could lead to the American industry not being competitive with third-world suppliers. It is far from clear that workers would be better off staying in their home countries rather than coming to the U.S., whatever the wage.

Yet it strikes us that this decision has, in a sense, been made for us. If we can’t compete with seamstresses toiling day and night in unsafe conditions in third-world countries, we can try to compete with technology, we can even try to compete by attempting to get the developing country to impose its own labor and health regulations, but Americans would sooner the industry leave the country than have a “race to the bottom” in which we remain competitive by allowing people in the U.S. to live and work in degrading conditions.

And hard, outdoor, irregular work, without health insurance or retirement programs, in which during a year a man will not make enough to boost a family out of poverty, will inevitably be seen as degrading.

From a broader industry perspective, five points stand out:

1) Are farm workers in short supply?

The Florida Tomato Growers Exchange position on labor places the trade’s efforts on AgJOBS in a whole new light.

If the problem is a labor shortage, one would think the Florida tomato growers would be thrilled to have a customer offer extra payments to workers — payments helpful in enticing more people into this line of work.

The new season in Florida just started recently. As awareness of what is going on in Florida grows, it will undercut everything industry leaders have been saying in their push to see AgJOBS passed.

The crucial claim of the campaign for AgJOBS is that farm workers are deeply valued and in short supply. Yet this action by the Florida Tomato Growers Exchange sends the opposite message — farm workers are not valued at all and they are a dime a dozen. After all, they are in such good supply that the Florida tomato growers seem unwilling to see them make even a penny a pound more.

It will be difficult to sustain a position that crops are going unharvested when Florida’s tomato growers reject this kind of initiative.

2) How much of a burden are these workers on our communities?

The Pundit is based in Boca Raton, Florida, and in that generally affluent city there are many charities focused on helping migrant workers. The Pundit has received many letters such as this one in which industry members blame immigrant farm workers for causing crime, etc.

If the industry is going to urge that the US allow a substantial population of immigrants to do this work, we better be able to demonstrate that these workers are not a burden to society.

In other words, things such as health insurance may not be necessary to attract the workers, but we have to provide it so that we can assure the public… and the policymakers… that our workers aren’t freeloading off the local hospital when they get ill.

Much of our industry effort has been devoted to getting out the message of what we in the industry need from immigration reform. We have not succeeded in getting that kind of reform. Perhaps the next step is listening, really listening to those with different concerns — like ill-prepared migrant children burdening the schools or uninsured populations burdening the public health system — and start to develop actual responses that will alleviate these concerns. Then we might be able to actually pass some version of AgJOBS.

3) Yum! Brands and McDonalds can’t get off so easy.

The mere fact that the Florida Tomato Farmers Exchange has said no should not allow Yum! and McDonalds to do nothing. At very least, they should commit to putting the penny a pound into a foundation to help migrant workers.

More broadly, this whole issue is about creating a supply chain aligned on certain values. Food safety may be one, labor treatment another; the penny-a-pound initiatives are a start, but a gimmicky one, since, as we discussed above, there is no way to assure that, over time, wages won’t be depressed by the existence of supplements.

But it is unreasonable to think that corporate leaders such as these can turn a blind eye to the working conditions of the employees of suppliers. In the end, they will have to articulate standards and refuse to do business with those who don’t meet these standards.

4) One wonders if there isn’t a role in solving this problem for PMA or United.

Part of the problem is that migrant workers can work for many different employers over the course of only one year — and even more over several years. We need a mechanism whereby these people could participate in one health insurance plan, one 401-K plan, etc., regardless of where they are working that week or that year.

This is not really that difficult. Most unionized terminal markets, for example, have union-run plans in which the particular firm the employee is working for that week has no bearing on the employee’s benefits.

Well, why couldn’t PMA or United offer an industry-wide plan where seasonal or temporary field workers, working for anyone in the business, could keep the same pension and medical plan?

If the nationals aren’t interested, how hard would it be for WGA to extend its already substantial insurance operation to offer such a plan nationally, perhaps in conjunction with other regional associations?

What a great boost for the industry… and for AgJOBS… if we could announce a national initiative to provide health insurance and 401-Ks for our field and packing house labor.

5) Abuse of cooperatives.

The Florida Tomato Growers Exchange is, technically, a co-op, yet its activities in this case — threatening to fine companies that want to cooperate with the penny-a-pound initiatives — are so far from any purpose for which co-ops were created that it may lead to someone questioning the whole idea of co-ops. Is that a positive step for the industry?

It is a truism now that in food safety, the industry will be judged by its weakest link. We should not think that any less so on issues regarding labor relations and social responsibility.

PMA Education Foundation Looks To Attract And Retain New Industry Talent

We’ve worked hard to try and give PMA’s recently founded education foundation a good start. In Pundit sister publication, PRODUCE BUSINESS, we offered the foundation a chance to lay out the rationale for the foundation. It took advantage of that opportunity and we published five articles delineating the basis for the foundation:

May You Live In Interesting Times — July 2007

Workplace Disconnects — August 2007

Finding — And Keeping — Talent — September 2007

Early Exposure Breeds Success — October 2007

Supporting The Foundation — November 2007

The Foundation is already buttressed by impressive contributions:

Current Contributors

Don Harris
Lisa McNeece
Dr. Ed and Anne McLaughlin
Dr. Ron and Cindy Steel
Bryan and Bonnie Silbermann
Steve Junqueiro
Dr. Roberta Cook
Margaret D’Arrigo-Martin
Duane and Toni Eaton
Janet and Richard Erickson
Peter L. Goulet
Mr. and Mrs. Gene Harris

Confirmed contributors as of Oct. 4, 2007

And pressing a campaign to raise $5 to $6 million for the foundation, the campaign is headed up by an aggressive campaign committee:

Leadership: Campaign Committee

Committee Co-Chairs:

Bill Schuler
President and CEO
Castellini Company
Steve Barnard
Mission Produce, Inc.
Steve Junqueiro
Save Mart Supermarkets

Committee Members:

Dan’l Mackey-Almy
DMA Solutions, Inc.

The Foundation has now announced its Board for 2007 — 2008:

The 2007-2008 Board of Directors for the Produce Marketing Association Education Foundation (PMAEF) took office at the foundation’s second annual meeting in October during Fresh Summit International Convention & Exposition. Chairman Stephen Barnard, president of Mission Produce, Inc., Oxnard, California, is joined by three officers and 16 directors.

“Our most valuable and unique assets in the produce industry are the people at each organization,” said Chairman Stephen Barnard. “The foundation takes attracting and retaining the best and brightest very seriously — as it is truly an investment in the future of the produce industry. The members of the board are committed to creating programs that highlight career opportunities for students and create awareness of the breadth of careers available.”

The officers include: Vice Chairman William M. Schuler, president and chief executive officer, Castellini Company, Wilder, Kentucky; Secretary/Treasurer Jay Pack, chief executive officer, The Pack Group, Dallas, Texas; and Immediate Past Chair Janet Erickson, executive vice president, purchasing and quality assurance, Del Taco, Inc., Lake Forest, California. Other representatives of the foundation board include:

John Anderson, chairman,
president and chief executive officer,
The Oppenheimer Group,
Coquitlam, BC, Canada
Dr. Roberta Cook
cooperative extension specialist,
University of California
Davis, California
Margaret D’Arrigo-Martin
executive vice president of sales and marketing
D’Arrigo Bros. Co. of California
Salinas, California
Duane Eaton
senior vice president of association services
Newark, Delaware
Bud Floyd
vice presiden
C.H. Robinson Worldwide, Inc.
Eden Prairie, Minnesota
Don Harris
Longmont, Colorado
Gene Harris
senior purchasing manager
Denny’s Corporation
Spartanburg, South Carolina.
Peter Goulet
Pinnacle Sales & Marketing, Inc.
Saco, Maine
Robert Gray
chief executive officer
Duda Farm Fresh Foods, Inc.
Salinas, Calififornia
Dr. Edward W. McLaughlin
Cornell University
Ithaca,New York
Lisa McNeece
vice president, foodservice and industrial sales
Grimmway Farms
Bakersfield, California
Bryan Silbermann
Jim Smits
group vice president,
merchandising and marketing
Eden Prairie, Minnesota
Bruce Taylor
chairman and chief executive officer
Taylor Farms California, Inc.
Salinas, California
Geoff White
vice president of produce
Safeway Stores, Inc.
Pleasanton, California
Timothy York
Markon Cooperative, Inc.
Salinas, California

“The foundation board has achieved so much in its first year, and I’m proud to continue to work with these committed individuals again this year. Not only did we reappoint all of last year’s directors to another term, we also added three new directors who will help us advance our mission and our campaign efforts. I feel fortunate to work alongside these dedicated, generous, and visionary leaders,” said PMAEF executive director, Cindy Seel. “With leaders like these, we’ll be able to maximize our education efforts to ensure a quality talent pool for the industry and continued leadership for our future.”

The new board carries over everyone from the previous board and adds buying-end firepower in the persons of Jim Smits from Supervalu, Geoff White from Safeway and Tim York from Markon.

Although economic uncertainty might slow down some contributions, it is a powerful group and has a good shot of achieving its financial goal.

The bigger challenge actually is to find productive ways to spend the money. The problem is obvious to any economist: If we are talking about hiring and retention, companies have powerful financial incentives to hire and retain the best employees they can. It is hard to imagine that the general industry will ever have a stronger incentive than the specific employer does.

We think there may be two key areas of market failure, if you will, that the foundation could be helpful in:

One is training and education. Here companies might like the employees to have training and education, but the companies fear the employees will either leave, thus precluding the company from getting a return on this investment, or that as they enhance the value of the employee, the more they will have to pay to keep the employee.

As a result, there is probably an underinvestment in training and education. So, either by developing its own programs or subsidizing and facilitating access to programs run by others, the foundation can increase industry wealth and productivity by mitigating this market failure.

It is also true that making careers in produce interesting to students is too uncertain for any individual company. After all, even if a company convinces high schoolers to look at the produce industry for a career, it will only realize a small fraction of those students as employees. So an industry effort reaching out to colleges and universities, DECA clubs in high school, etc., makes sense as a way of introducing new blood into the produce trade.

Subprime Crisis Affects Us All

Hat tip to the Pundit Poppa for passing along this humorous U.K. take on the subprime mortgage crisis and the role of the markets and investment bankers in general.

It is interesting to see how things play in different cultures. The video, in making reference to the subprime customers, adds a superfluous reference to the prototypical subprime mortgagers’ race — a reference that is both not true and irrelevant. To American ears, it rings slightly racist.

Yet I run it because it so perfectly captures the absurdity of the situation.

One of the problems with relying too much on trade associations and trade publications for business intelligence is that their narrow focus can lead you to miss big, societal issues that can have a major effect on the business.

The subprime crisis is like that. If it is not resolved soon, you will see many bankruptcies result of perfectly good companies. Why? Business depends on rolling over debt and the ability to get short term waivers of covenants.

Very few companies could stay in business if their creditors demanded immediate repayment, and nobody else would take on the banker role. This is true even though these companies may never have been late on even one payment and not in violation of any covenants.

If you think back to Sun World’s first Chapter 11, the key issue was that the company couldn’t refinance the land acquired in its acquisition of Superior. Its original bank was exiting the business, and new banks appraised the land at lower value — thus an industry icon came tumbling down.

Covenants are another issue — most business loans are filled with covenants, and it is fairly common for businesses to require waivers at certain times of year or to complete certain transactions.

The sub-prime mortgage crisis has created a dynamic whereby it is becoming more difficult to get loans rolled over and more difficult to get waivers of covenants.

The reason is not that the sub-prime crisis is so large — best estimates are that even catastrophic losses in this area will not exceed, say, the value of 3% of the world’s public stock markets. The problem is that nobody knows the extent of the losses or who, exactly, holds what securities. Subprime mortgages are not generally held as individual mortgages. After they are issued, they are revamped into securities but the securities do not hold full mortgages.

To make the matter simple, if you have $10 billion in subprime mortgages, you might sell them in ten tranches of a billion each. The top tranche, which has first dibs on any money collected, will probably be rated AAA. Even now, those investors will probably be paid in full with interest. But the 10th tranche, which has last call on any money, will probably pay nothing now — those investors are wiped out.

Until it is clear who owns what, and what it is worth, banks are hesitant to lend, especially to other banks or financial institutions that might have exposure to this area.

But banking depends on borrowing as much as lending, so a hesitancy to lend to a bank quickly translates into hesitancy by the bank to lend.

A combination of higher interest rates and a liquidity squeeze leads banks and financial institutions to refuse to waive covenants and to decide at a loan expiration date that they want to reduce exposure.

Although the PACA trust generally secures most produce vendors, it is not a 100% guarantee, and if you sell things not covered by the PACA trust, it is not a guarantee at all.

The government is desperately trying to do something, but the situation is constraining. The dollar is weak, commodity prices are high… if the Fed tries to lower interest rates enough to save all these institutions, we can expect inflation to zoom.

Many of the government proposals are going to make the problem worse. The government has tried to encourage a pool to buy some of the subprime mortgages from major financial institutions. Of course, they could all be sold tomorrow at market price without any pool. The point seems to be to avoid having them sold at market price. This proposal will make the situation worse by contributing to the obscuring of market prices when what we need is clarity.

The President pushed holders of sub-prime mortgages to agree to a complicated program by which certain people who received mortgages that had low initial “teaser” rates will be spared from having those rates reset for a few years. It is a very complicated plan, excludes more people than it includes and probably won’t, in and of itself, do much harm or much good. But the principle, that the government will pressure people to change the terms of contracts between private parties, will hurt capital markets in the future.

Many other plans are outright catastrophes. For example, John Conyers, the Democratic Chairman of the House Judiciary Committee, is pushing a bill that would rewrite bankruptcy law to allow bankruptcy court judges to reduce the principle amount due on a mortgage and let the debtor keep the house.

Of course, this means mortgages will become much more risky to grant, which means they will become much more expensive.

It is important to keep in mind that many bad outcomes have a silver lining. You may have read projections of over a million homes to be foreclosed on and the immediate image is of a million families being evicted.

Each family’s situation is, of course, a source of sadness. But the story doesn’t end there. The houses don’t get knocked down; they wind up being resold to new families and, probably, at lower prices that these families can actually afford.

So the actual capital stock of America doesn’t grow or shrink from this crisis and the imagery has a good side as well as a bad.

Long term, there are a few steps we could take that reduce the likelihood of such a crisis happening again:

  1. Appraisers must be independent
    In a sense the whole crisis is odd. Even if everyone defaulted on their subprime mortgages, accurate appraisals should mean the losses are minimal. But, today, when the issuers of mortgages rarely hold them for long, the incentive structure is bad. When the Pundit refinanced his mortgage, the first question the appraiser asked was — “How much are you looking to get?” — a question one would think completely irrelevant to his work.
    The key problem is that the mortgage originators are the ones who call for the appraisers and the originators want to do the deal. If the appraiser comes in with low numbers, the mortgage originators never call that appraiser again.
    What we need is some kind of pool of certified appraisers who give out the jobs. In other words, the originators would just ask for the “Appraisers Society” to send an appraiser and they would do so in random order. The originator could challenge an appraiser for incompetence or demand an appeal appraisal, but the originator can never control who gets hired to do appraisals.

  2. Mortgage brokers’ incentives need to be fixed.
    Part of the issue is compensation: Mortgage brokers sometimes get paid based not just on the value of the loan, but based on how high a charge they can get. This makes them like a car salesman who gets a commission not on the value of the vehicle but on how high a profit he can talk you into giving the dealer. We should never allow mortgage brokers to have any financial incentive to steer clients into more expensive products.
    The other issue is responsibility. It doesn’t work perfectly but at least a stock broker has the responsibility to make sure what you buy is appropriate for your investment goals. That is why they always make you fill out those forms defining your goals.
    Mortgage brokers should have similar responsibilities. It is a free country and if a guy wants to stretch to buy a house, he should be able to, as long as someone wants to lend him the money. But let’’s make him fill out the form and declare that he wants to do that — rather than run the risk that a mortgage broker may steer him into taking on more debt than he can presently afford.
  3. We need more flexible financial instruments.
    For all the innovations in financing, they don’t go far enough. We need markets that would serve to reduce the cost of living in a home. Why couldn’t someone buy a house and simultaneously sell the appreciation rights to that house? We need to find ways to facilitate these things so people can get nice houses for their families without stretching so far.
  4. We need to reduce the cost of housing.
    The growth of interest-only mortgages and subprime options has enabled prices on homes to keep going up, but the dangers have been obvious for a long time. It is one thing for home prices to go up due to inflation or to go up due to incomes increasing. But our home prices have been going up due to a combination of people devoting an increasing portion of their income to housing and easier financial standards, such as no longer requiring payment on principle. That meant it had to stop at some point.

There are probably four things we can do to address this problem:

  1. Governments have to move faster. Permit and zoning approvals can take months and sometimes more. Time is money and we need to have default systems that grant approval if action isn’t taken within, say, 30 days.
  2. Building codes are often antiquated, restricting use of prefab construction, plastic pipes, and other economical methods. We need the equivalent of a WTO, a national board where anyone could bring a complaint that a restriction is not based on science. This would break us free of the local political fiefdoms that have kept these inefficiencies in the building codes.
  3. Density is typically key to reducing costs. It also fits very well with the new sustainability ethos as urban dwellers tend to use cars less and leave less of a carbon footprint on the planet. All over the country, density is treated as the enemy, yet if we want affordable housing, it is essential.
  4. Houses have gotten very large and we may need to rethink if this is sensible. This has been encouraged by tax policies that encourage excessive home purchases. Instead of, for example, giving a tax deduction on a mortgage payment — thus encouraging people to borrow and buy bigger houses — why not give a tax credit to encourage home ownership at a fixed amount. Is there any public interest in encouraging people to take mortgages or buy bigger houses?

Whatever the future holds, for now the prudent thing to do is to be cautious. There will be fortunes made in this crisis. The obligation to “mark to market” means that all these subprime mortgages will be valued at what they can be sold for now. Because few will want these assets, the price they will sell for is probably significantly less than the value that will be realized as people make mortgage payments, mortgages are renegotiated and as foreclosed properties are sold.

The fact that fortunes will be made doesn’t mean that your best customer won’t be going broke. This is definitely a market environment in which “Cash is King” and caution is the watchword.

Pundit’s Pulse Of The Industry —
Chiquita’s Tanios Viviani

Chiquita has had a tough year and has decided to reorganize.

We’ve been talking to Tanios Viviani, who was President of Chiquita’s subsidiary company, Fresh Express, since the spinach crisis. He was the key man to decide that Fresh Express would not join the California Leafy Greens Marketing Agreement and then the key man to decide that it would join the agreement.

Tanios was also one of our Single Step Award winners. [You can read his interview in the Pundit here]. We asked Mira Slott, Pundit Investigator and Special Projects Editor, to check back in with Tanios — both to learn more about changes in his specific role as a result of the restructuring and to help the broader industry wrestle with the business issue of how a company can optimally organize to obtain its goals:

Tanios Viviani
Global Innovation and Emerging Markets
and Chief Marketing Officer
Chiquita Brands International

Q: Congratulations on your new position at Chiquita. It sounds quite far-reaching. What does it entail? How do your responsibilities fit within the overall company restructuring plan?

A: This is a journey we’re going through to transform Chiquita. This restructuring is meant to accelerate the company’s transformation to become more consumer-focused with higher value-added programs, improve customer profitability and turn around our own business performance. We’ve been on this path since I and my CEO were brought into the company. What expedited change was the not-so-exciting business results this year.

External factors impacted progress; European regime change on banana imports, the EU more than doubled the import taxes on banana, coupled with E. coli costs and slower growth of the salad category due to the spinach E. coli situation last year, and additional imports suffering.

This confluence of blows made us take more aggressive action in changing the organizational structure to hasten product growth, alleviate the impact of the E. coli crisis, and try to neutralize costs from the European side.

Q: Is there a fundamental shift in the company structure?

A: Yes. We are moving from a product-structured company and going to a geographic structure with the national and European organizations. Before, the fresh salad group reported to me. Now my role as leader of Fresh Express is consolidated with the North America group. And I take on a different role across all geographies, overseeing innovation and emerging businesses and providing leadership in marketing.

Q: With your broader responsibilities, you’ll have a lot on your plate. What will you focus on?

A: My goal going forward is doubling the fresh salad category. I’ve said all along I believe the category should be two to three times bigger. I will continue to develop consumer products and customer merchandising solutions to allow us to double the size. That work doesn’t go away. I also take on responsibility to help other geographical regions in Europe and Asia; to develop new programs as well. It may be in fruit. It may be in salad; any areas in the fresh food business.

The beauty of this, and what gets me excited about the restructuring, is the ability to continue to work with retail and food service customers in the U.S. and be more active in the international area to bring ideas that work effectively here elsewhere.

Q: Could you provide some more specific ideas of what you have in mind? Do you have any projects already underway that you could discuss?

A: For example, let’s talk about salads for a second. We have built a program with seeds developed in the Netherlands that led to sweet butter lettuce, which was a success in the U.S. We would be able to apply that to other geographies where we choose to sell our products. Conversely, fruit in a bottle is just being done in Europe. I am excited by the opportunity to test this program in other geographies including the U.S. This is based on the concept of cross-fertilizing ideas and helping other regions develop innovation programs more efficiently.

Instead of having an innovation group working in Europe and another here, we can integrate ideas and solutions. I don’t have specific projects to tell you about yet. This is a new work model for the company. Research and development can be streamlined and shared faster. A lot of the innovation will come.

Q: Products don’t always translate well across different cultures and environments. What challenges will you face in adapting innovative products to various customer and consumer likes and nuances?

A: It requires that we understand local needs and local desires to develop programs that make sense. In my past professional history, I had to roll out ideas throughout the world. What gives me an advantage in my new role is that multicultural background working in various countries in Asia and Latin America and learning how to adapt product solutions.

Q: What kinds of products were you involved in prior to Chiquita? Are there lessons you can apply to the fresh produce business?

A: When we were launching a fabric laundry softener globally, we adapted formulations. In southern Europe, consumers were interested in higher softener feels. When we launched softeners and shampoos in China, because of the income levels of target customers, we needed to provide specially designed small packets. There were different needs in Egypt. We diluted the formulations of dishwasher detergents to be less concentrated in Argentina because that’s what consumers wanted.

Being able to reinvent packaging, brand names and advertising is critical to success. This is not just applicable country to country. If you translate this to the U.S., the taste profiles consumers are looking for on the East Coast are often completely different than in the South. Curly spinach is popular in the northeast and mid-Atlantic, but is not a staple in California.

The acquisition of Verdelli gives us the ability to tap into the company’s curly spinach expertise, to encourage regional tastes and make product fresher and more available. We’ve launched an arugula product with targeted geographic SKUs. We’ll continue to look for locally relevant tastes.

Q: Your new job title emphasizes global innovation. Variations in packaging and taste profiles don’t necessarily define groundbreaking product advances. Innovation in the produce industry is often more challenging than in fast-moving high tech industries such as electronics. What do you mean when you say innovation?

A: We define innovation in four areas: product innovations, which we continue to develop. An example here is our sweet butter lettuce, rolling out nationally now in single-serve portions which include recipes and proprietary packaging with “fork chops”, a tool to eat salad that combines a fork and chopsticks.

We observed how consumers eat salad. They eat from the top well but have a hard time picking up a tomato or smaller pieces at the bottom of the container. The ability to use a fork to poke into the ingredient and chop sticks to grab it like a tongue make eating salad both easier and fun.

Then there is the second prong of merchandising, which is critical. We are still in an impulse category and have to help consumers navigate through the store, to reduce shrink, improve efficiency, and provide a pleasurable shopping experience so they come back.

You need well-thought-out plannograms and clever utilization of merchandising tools to close the sale in the store. Within the past two years, we have put new energy into secondary displays. Produce is one of the few categories with hardly any secondary displays. We worked with Albertson’s to develop hot/cold secondary displays close to checkout. The cross-merchandising strategy improved sales of both salads and rotisserie chickens.

Q: Do you find challenges in executing merchandising ideas based on different corporate structures and departmental segmentation and rivalries?

A: Merchandising solutions are sometimes harder to develop but also will pay off more so than a product innovation. We’ve invested significant time and money in merchandising solutions. Like product initiatives, sometime they fail and sometimes they succeed. We’ve had some great collaboration with retailers, including HEB, Wal-Mart and A&P, that have produced phenomenal results. All around, we’re trying to create a better shopping experience for the consumer and a more efficient experience for the retailer.

We have to manage labor and understand how the department accounts for its growth. We have many innovative customers working with us to overcome conflicting retail issues and figure out how we are going to win with the consumers. When you have strong relations with customers, you understand their strategies and they share yours to find points that intersect to grow and develop. The approach has to be a joint relationship as opposed to ‘we versus them.’ That has been a trait at Fresh Express and Chiquita that we want to make stronger. My goal is finding consumer solutions that meet retailers’ goals and objectives as well.

Q: That kind of talk is easy to come by, in almost a cliché kind of way. Can you share with our readers grounded examples of action steps you’ve taken to build effective working relationships with retailers to achieve these results?

A: In rolling out our new single-serve products, it was paramount we worked with retailers on size of packaging to accommodate shelving and stocking efficiencies in the backroom. This is not something that can be learned through phone calls or boardroom meetings.

What I require of my direct reports is that every six months they need to spend at least one day working out in the harvesting fields, in the manufacturing facilities where we process products, and in the grocery store stocking shelves and in the backroom. I require this from everybody that works for me, even the senior level managers.

The General Manager for our salad and snacking division, Ed Romero, takes that to heart. Not only does he spend time in the three areas, he goes further. For instance, he took his entire team to work for two full days, spending an entire day stocking shelves at HEB in Texas. To me, it is very important being in touch with both the customer and consumer. When we launch a product, we want to be sure we do our homework, and understand the day-to-day reality on the ground.

Q: What are some of the biggest surprises or revelations that have resulted from this field work?

A: Every time they do this, every six months, they are truly working, not just visiting and talking to the manager, but getting into the backroom and unpacking boxes. Ed comes back with pages and pages of insight… nfrom consumer complaints to suggestions on recipe of products to packaging to pallet design.

On salads, something really silly was discovered that led to four-sided coding on our boxes and inevitably a change that improved the whole stocking program. Typically labels are placed on one or two sides. As you go in the backroom and try to pick up a box, if it’s shelved in the wrong position, an employee won’t see the label and opens an SKU not needed. This creates waste and additional work. Ed came back a year ago and said we must have four-sided coded boxes. The action improves accuracy, reduces shrink and saves money on labor.

To me all these things are innovation. It sounds basic and simple, but it is all part of creating a profitable shopping experience for everybody. We win selling the right products, it allows our customers to reduce shrink, and the consumer wins by always having the right product fresher.

Q: So there’s product innovation and merchandising innovation. What is next in the four areas you’ve categorized?

A: Third is technology. We have spent a few years improving salad bags through modified atmosphere technology. There are almost six layers of film in our bags, each layer intended to do one thing. For each product variance, different respiration rates are involved.

Another example, we have developed an automated harvester we’ve been testing for our spring mix and other mechanical processes for our raw product program.

In the banana world, our Chiquita-To-Go product is a single banana packed in a proprietary box. The technology allows the banana to ripen at the right time. It allows us to sell in places where consumers only want single units, such as coffee shops, airports and convenience stores.

That technology increased penetration of produce items in channels too difficult to get the right ripening or yellow color with conventional methods. It was a huge break-through in the past year for selling in different channels. We are still rolling out the product Chiquita-To-Go. Now consumers can get a perfectly ripened banana in a single serve package. And it is possible for those channels that have difficulty handling fresh produce to store smaller boxes and open them only when it’s time to sell.

Q: What is the final piece in your innovation square?

A: The fourth is very dear to me. I believe much innovation comes through the supply chain. How do you transport from seed to shelf? Talk about innovation around trucking and logistics. We are now rolling out through our logistics partners more fuel-efficient truck designs. They’re using different designs with the wheels in front to save on fuel.

We’ve redesigned pallet configuration to improve capacity and significantly reduce the carbon footprint.

On the international side, innovation is much broader than a product. Putting the product out in the grand scheme of things is not that difficult. Putting out profitable, relevant and sustainable product is very hard and requires you to work through these four dimensions.

Repacking a product and putting on a new label is like throwing spaghetti against the wall and seeing what sticks.

Our principle is to test many things, and fail cheap and learn from our mistakes. Much of this innovation is a combination of luck and inspiration because I came from a family business where I learned basic principles from my dad, and then worked with large companies as an ‘intrapreneur,’ not an entrepreneur — I was given the ability to act like an entrepreneur in a large public company.

The changes at Chiquita were done to expedite our transformation. I hope to facilitate the process through these four prongs of innovation. We need to simplify the decision-making process and make the company more entrepreneurial in its behavior, faster in making decisions. We need to be a company that sees innovation beyond product innovation through seed to shelf so we can be profitable and sustainable.

Q: How involved will you be in Fresh Express operations going forward?

A: Brian Kocher, President/North America, will focus on the day-to-day business, superior service and more efficient operations, while I’m helping to grow the engine and work with our partners to develop trailblazing ideas and solutions.

I’ll be heading to Europe and Asia for business and working on global strategies, but I continue to live with my family in Salinas. I love to host visitors at our innovation center, where we test new varieties and methods to more efficiently grow our lettuces at our trial farm. We have a pilot plant facility to experiment with processing procedures and advanced drying equipment. We research and test food safety programs here. We also have a test kitchen where we bring in consumers to help us develop recipes and new salads. These elements make up the foundation for innovation; not only for the Valley to continue to prosper but to drive the whole industry.

When some of our customers heard about my new position, they asked if I was moving away. I joked that I’d stick around if they’d invite us to participate in their innovations. They kindly responded, ‘with pleasure.’ I am happy to say that I will continue to make Salinas my home.

Chiquita is attempting a geographic, rather than product-line, approach to management. Tanios thinks the salad category can be doubled or tripled in size. He wants to focus on cross-fertilizing ideas across geographies and focus on four types of innovation:

  • Product Innovations
  • Merchandising Innovation
  • Technology Innovation
  • Supply Chain Innovation

There is certainly much to be done on those four areas around the world. We like the simple innovations, like putting a label on four sides of a box so employees in a store won’t open the wrong SKU.

Chiquita is one of those names that means produce, and Fresh Express is the most successful and consumer habit-changing launch of our lifetimes, so we wish Chiquita well in its restructuring.

As for Tanios, wherever the winds may take him, at a moment when he needed to be in Salinas, he was there, and that has in many ways transformed the food safety efforts of the industry.

That is something a man can carry with him through a lifetime and into the history books. We wish him good fortune as well.

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