Market disruptions force processors, foodservice to innovate

September 10, 2008

According to the most recent consumer price index, fruit and vegetable costs are up about 6 percent, but growers, processors and distributors are scrambling to find ways to stay profitable. Rising fuel costs, changes in consumer buying habits and a general downturn in the U.S. economy have created a gloomy environment.

“They’ve merged into a perfect storm that is changing an industry forever,” said Bryan Silbermann, president of the Produce Marketing Association, at the group’s Foodservice Conference and Expo in Monterey, Calif., in July.

Production costs are increasing across the board, said Bob Gray, chief executive officer of Duda Farm Fresh Foods. On average, costs are up 20 percent – ranging from 6 percent to 46 percent. That figure didn’t include a new round of increases that are driving costs up an additional 3 percent to 18 percent, Gray said.

“We’re pretty concerned about profitability right now,” he said.

Over the next three years, Gray expected costs to increase an additional 28 percent to 30 percent over the current level.

Uncertainty in the market is limiting long-term contracts. Processors don’t want to enter into contracts with distributors one or two years out with costs still rising, and growers and other suppliers don’t want to sign contracts that far out with processors for the same reason. In the short term, companies will have to work with their supply base to address unforeseen costs.

The retail fresh-cut segment has seen an uptick in sales in the last quarter, although packaged salad sales were down. Foodservice has been soft, but that market fluctuates more than other segments, said Bruce Taylor, president of Taylor Farms.

“The bigger issue is, what do people in the industry do about it?” Taylor said.

He said successful companies will go out and look for a better business model, and in many cases that will mean joining forces or, simply put, there will be more consolidation in the near future. Those companies that adapt now will reap rewards later, Taylor said.

“Those who get through this downturn will enjoy their best years three to four years after the downturn,” he said.

The same market conditions worrying produce businesses are also causing consumers to make changes. Some are eating out less, others are switching to store brands and still more are looking for local produce.

“Economics push reality. The economics of what’s happening now is going to push ‘locally grown’ to the forefront,” said Rich Dachman, vice president of produce for Sysco Corp.

A new term has recently been coined for customers that seek out locally grown or produced food: locavores. A recent survey of chefs from the National Restaurant Association found that locally grown was at the top of the list for produce. The definition of local varies from person to person, and processors and distributors have had to define what local means to them. At Sysco, the same state is considered local, and most customers agree. Others operate on a regional definition.

The problem for processors and distributors is the lack of year-round local produce in many parts of the country. It also isn’t feasible to source all local produce because the demands in urban areas will surpass the local supply.

“I’m not sure ‘local’ can feed the cities on a large scale,” Gray said.

Duda Farm Fresh is a diversified, multi-state operation, and has been for 30 years, Gray said. Even with regional production and distribution, the company loses some demand in-season to customers buying locally grown produce, but not enough to move the business model toward even more local sales, he said.

Taylor Farms also has expanded its growing and sourcing operations in recent years. Six years ago, all of Taylor Farms’ leafy greens were grown in California, but today only about one-third comes from the state, Taylor said. The company’s leafy greens come from four states and two countries, with the only downside being greater chances of weather affecting growing areas

With costs continuing to rise, the produce industry and American consumers should prepare for higher prices and lower returns. The practice of growing inexpensive produce and shipping it cross-country may be ending, or at least slowing down, as a result of high fuel prices and changes in consumer trends. The fresh-cut processors that remain profitable in the current economic climate are those that work with suppliers and customers and adapt to the environment.

“Cheap and plentiful eventually has a price, and now the piper is playing,” PMA’s Silbermann said.



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