Chiquita’s Woes

Chiquita – once so powerful a company that the countries in which it operated came to be known derisively as “Banana Republics” as it was widely recognized that Chiquita ran the show – now teeters on the verge of bankruptcy after failing to make required debt payments. Indeed a Chapter 11 filing seems almost unavoidable with the only question being whether it will be a ‘prepack’ – in which the major players agree on the resolution beforehand – or if it will be a traditional reorganization in which the bankruptcy court struggles to balance the interests of the parties involved.

Chiquita’s management identifies the cause of its current situation as being the decision of the European Union to impose quotas on so-called “dollar bananas” – those from Central and South America – some eight years ago.

There is no question that the European Union was wrong to impose the quotas. They were clearly a direct violation of World Trade Organization (WTO) rules. The whole point of these rules is that countries cannot use quotas and tariffs to discriminate against individual countries that have been granted normal trading status.

The whole issue has been litigated extensively before the WTO, and the organization has consistently ruled against the European Union plan. Now the EU is proposing to drop the quota system and replace it with a “first-come, first-served” approach, which seems to imply that there will be a weekly boat race to Europe from banana-producing areas. This plan probably violates WTO rules as the EU is no more permitted to give advantage to those growing regions closer to Europe or to those with the fastest boats than it is to former colonies.

But, this all being said, it does not seem likely that the EU’s various schemes are really the cause of Chiquita’s problems. True, the quotas and restrictions may have reduced market share, but that doesn’t mean they reduced Chiquita’s profitability. It is very likely that, although Chiquita has been selling fewer bananas in Europe than it might have in the absence of quotas, those sales are much more profitable than they would have been in the absence of quotas.

Is it possible that Chiquita does not really want a free market in Europe? That would mean a massive battle for market share with the likelihood that the more bananas one sells in Europe, the more money one would lose. What Chiquita may really want is an adjustment in the quota that will bring it back to the higher market share it once enjoyed. This would be better for Chiquita, but is not the kind of cause that would lead free traders to rally to Chiquita’s side.

So if the EU didn’t cause Chiquita’s problems, what did? There are many reasons, but a few big ones stand out: The collapse of Russia and economic problems in Eastern Europe meant that the market there wasn’t the bonanza Chiquita had been forecasting and investing in. Also, Chiquita invested heavily in South American bananas, which are widely seen as less sweet and thus less desirable than the Central American fruit.

There also has been a fundamental change in the banana business. Thirty years ago my father got a banana deal and thought it was the best business in the world. Chiquita set the price every week, so no-names like my dad’s shipper would allow us to undercut Chiquita by a little bit. We would sell out quickly and wait for more bananas the following week.

That would last until the giants retaliated. If the independents started to ship too many bananas, the big boys took notice, dropped prices to levels that were unprofitable – unless you owned your own ships – and drove out the independents. Prices then rose, and the cycle would start again.

Today, shipping is much more available, and indeed owning ships – if you don’t have the demand to fill them – can be far more expensive than chartering vessels. This has led to a much more competitive supply environment.

But most of Chiquita’s problems are of its own making. A number of years ago Chiquita brought in a new management team with experience in non-produce food items. But as talented as this team was, they made a mistake thinking that things that worked in the other businesses were the best way to proceed in produce.

Chiquita withdrew from the International Banana Association, a way of expressing its disdain for the notion that they were part of a commodity business. But they were and are a part of a commodity business.

Chiquita spent a lot of money on consumer advertising. But they never realized that all those studies showing brand preference for Chiquita – and there are many – don’t matter. In the fresh produce business – where the consumer can inspect the product – brand preference does not translate into store choice. In other words, consumers may well refuse to shop at a store if it doesn’t carry Campbell’s Soup, but we have no evidence that consumers refuse to shop at stores that carry high quality bananas of other brands.

Finally, Chiquita really ruined the whole banana business way back when its managers showed up at Vons’ door in Los Angeles with a big check in exchange for switching to Chiquita. Vons switched, and Dole – the company that lost the account but was not going to lose market share without a fight – marched over to Ralphs and gave them a big check to switch from Chiquita. When the smoke settled, the banana companies gave out a lot of money and no more bananas were sold in Southern California than had been the year before.

If you want to know why Chiquita may be visiting the bankruptcy judge, I suggest you look to LA, not to the EU.