One of the reasons the Pundit’s family decided to sell its produce business was because our large importing business, which traditionally had operated on a straight commission business model, was becoming difficult to sustain.
Large companies started entering markets such as Chile and either leased or bought the production land or offered large minimum guarantees to growers. An article in La Tercera entitled, “Chiquita Fruit Company Restructures its Operations in Chile,” indicates that this newer model is not working out so well for at least Chiquita:
LA TERCERA — Wednesday, April 18, 2007
CHANGES IN MANAGEMENT — CHIQUITA FRUIT COMPANY RESTRUCTURES ITS OPERATIONS IN CHILE
By: Christian Viancos
The North American company will make drastic production cutbacks. It decided to end its rental contract of 2,000 hectares distributed in six farms throughout the country’s central valley.
CHIQUITA, one of Chile’s largest fruit exporters, is restructuring its business operations in the country. Over the last few years, the traditional exporter had expanded its own fruit production but the project recorded losses and didn’t turn out as planned.
At the end of March, the North American company decided to put an end in advance to its rental contract of 2,000 hectares in the central valley that belong to Romano Vercellino, owner of Verfrut, an export company. Chiquita sent a letter on April 9, notifying its decision to terminate the business contract that allowed it to exploit six farms over a period of five years, of which three had already passed. Four of the farms are located in Rapel, one in Longaví and another one in Combarbalà. Chiquita was producing 3.6 million boxes of all types of fruit on these farms, accounting for around 40% of their annual 10-million box production in Chile.
The change in strategy imposed by Chiquita on its Chilean branch was accompanied by changes in management. A few months ago, general manager Andrés Alemany left the company and was provisionally replaced by commercial manager Pablo Rosales. According to the industry, Alemany’s exit, along with other executives, was brought on by the project’s bad results.
In the last few years, Chiquita tried to follow the trend set by other large fruit exporters who privileged their own production over buying fruit from growers.
The exporter believed it to be good business to grow since it would earn the grower’s margin while benefiting from the vertical integration of commercializing its own fruit. However, complications arose that affected their results (see inset).
The current management at Chiquita must define the strategy they will develop in the future. The North American company is not planning to pull out of the country. Rather, it must define whether it will opt to buy fruit on the market to cover production cutbacks or assume its losses. There is also the possibility of continuing to privilege exports and running a tighter operation in Chile.
Sources close to the process stated that Chiquita and the lessor are now negotiating the conclusion of the contract that will stipulate the options of termination and the additional costs for the termination in advance of the business agreement.
COMPLICATED PRODUCTION PROBLEMS
FACED BY CHIQUITA
Production over the last three years at Chiquita was affected by a drop in the dollar’s exchange rate and increasing labor costs. These factors, according to industry sources, have also affected other exporters who are fruit growers.
Additionally, in the case of Chiquita, the business could not be run as efficiently as was foreseen. Sources explained that large-scale production is not easy, considering that thousands of seasonal workers must be hired during harvest. This resource, which has become scarce, plays a relevant role and implies a cost that can reach up to 70% of a fruit grower’s production costs.
FRESH FRUIT EXPORTS
2005-2006 Season (Tons)
|David del Curto||121,076|
|Del Monte Fresh||104,568|
|Rio Blanco Ltda.||75,309|
Source: Agricultural and Livestock Service SAG/ASOEX
It is interesting to note that the article identifies a shortage of seasonal workers as being a key challenge in growing in Chile.