Press Coverage

Shaking the tree

Chiquita set to loosen big profits from
convenience-store shelves

Cincinnati Business Courier - June 12, 2006
by Dan Monk
Senior Staff Reporter

For decades, the battle for banana market share has raged in the produce aisle of your favorite grocery store. Now, Chiquita Brands International Inc. is trying to shift that battlefield to the coffee shop, the convenience store and the corner gas station.

"I would love to be able to compete with Frito-Lay," Chiquita CEO Fernando Aguirre said in a recent public appearance, "but I can't today because I can't be present in all the little places where you find Frito-Lay (products)."

In the future, "you'll be able to buy bananas in a lot of little stores and even in places like Starbucks. That could give us as many as 200,000 to 300,000 more distribution points than you can buy bananas today," Aguirre told business students at the University of Cincinnati.

The new distribution strategy is one of several new initiatives aimed at reducing Chiquita's reliance on European profits. Those initiatives include last year's purchase of Fresh Express, a California-based salad maker that added roughly $1 billion in annual revenue to Chiquita. It also includes this year's launch of fruit smoothies in the United States and nonfrozen fruit drinks in Europe. And it includes the development of new global markets, including Asia, where Aguirre hopes Chiquita will grow rapidly in the next decade.

By 2010, Aguirre hopes to double Chiquita's annual sales to $8 billion. Bananas, which now account for 42 percent of total sales, would shrink to 25 percent, while Fresh Express brands would swell to 45 percent of total sales.

Chiquita is a long way from reaching that goal, but it is moving rapidly on the convenience store front. In February, it announced a distribution agreement with Core-Mark International Inc. to distribute individually wrapped bananas to at least 7,500 convenience stores nationwide by the end of this year. Aguirre said Chiquita already has achieved 3,000 stores, and he thinks Chiquita will reach 10,000 stores by year-end. Core-Mark, which delivers products to 20,000 convenience stores in the United States and Canada, pegged its progress at 2,000 stores in a May 24 conference call.

Chiquita sells to convenience stores individually wrapped bananas dubbed "single fingers," using packaging technology by Landec Corp. of Menlo Park, Calif. Its permeable plastic wrap slows the ripening process for bananas, giving them a shelf life of up to nine days (compared with one or two days in grocery stores). All of that translates into a higher price. Aguirre said "single finger" bananas sell for an average of 75 cents, more than triple the grocery store price of 18 cents to 20 cents per banana.

In a March 29 conference call, Landec Corp. CEO Gary Steele boasted of 50 percent gross profit margins in Chiquita's convenience store launch. He predicted Chiquita would take the initiative to Europe once it proves there's a North American market for premium-priced, individually wrapped bananas.

He said Chiquita's competitors are "starting to scratch their heads a little bit and wonder maybe they ought to be thinking about this thing a little bit differently," Steele said in the March 29 call. "They're stuck in the commodity world ... you know, commodity bananas is not a lot of fun."

Chiquita's competitors are pursuing similar strategies, said Gary Murray, manager of perishables for McLane & Co., a Texas-based distributor that competes against Core-Mark. McLane & Co.'s customers include about 30,000 convenience stores in the United States. Murray said Dole Food Co. Inc. is testing a new line of portion-packed fruit aimed at the convenience store market. Within two years, he thinks fresh fruit will be widely distributed through convenience store channels.

"I don't think it'll be limited to bananas," Murray said. "I think you'll see it with grapes, apples, all kinds of things."

The new distribution strategy offers Chiquita its best chance for improving profits in the near term, said Heather Jones, an analyst at BB&T Capital Markets.

"It could add anywhere from $3 million to $5 million in earnings (6 cents to 9 cents per share) in 2007, assuming they reach their 10,000 stores by the end of this year," said Jones, who downgraded Chiquita's stock from "buy" to "hold" last fall because of new European tariffs expected to cost Chiquita $70 million this year.

BB&T doesn't own Chiquita shares, but it has sought investment-banking business from the company.

Jones said the new distribution strategy will not be enough to offset losses generated by the new tariffs, but it is another step toward decreasing Chiquita's reliance on its European banana business. As for Aguirre's dreams of competing against snack foods giant Frito-Lay, Jones is skeptical.

"Frito-Lay has significant shelf space in these C-stores," she said, not to mention the American "predilection for saltier, junkier foods."

But Aguirre noted that even Frito-Lay is catering to a growing demand for healthier snack foods. In March, it announced a new line of "100-calorie" snacks, and in May it announced a 50 percent reduction in saturated fats in its Lay's and Ruffles potato chips brands, which it accomplished by switching to "heart-healthy" sunflower oil.

"Research shows that more than 40 percent of the people would be buying more and eating more fruit if they had it available," Aguirre said. "Now, they buy a Coke and a bag of chips. Tomorrow, they could buy our (fruit) smoothies and a banana or a sliced apple."