Fresh Del Monte Produce (FDP)

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Fan Zhou

Alan Ibrahim

Fresh Del Monte Produce (NYSE:FDP) is the world's third largest supplier of fresh produce and prepared foods, like whole and cut bananas, pineapples, melons, and pre-packaged juices.^[1] It is the number one producer of pineapples and the third largest banana producer worldwide. Its products are grown and packaged in production sites and farms located in Central and South America, Europe, and Africa, and are sold directly to retail outlets around the world, including Wal-Mart (WMT), who accounts for more than 13% of annual sales.^[2] The company earned $3.5 billion in revenue and $145 million in net income in 2009.^[3]

FDP, along with other food retail firms such as Chiquita Brands International (CQB), Kraft Foods (KFT), and ConAgra Foods (CAG), offers what are known as nondiscretionary products. These have nearly constant demand year-on-year, but fluctuate seasonally - both regardless of economic conditions. In Del Monte's case, a majority of its revenue and profits are earned during the first two quarters of the year. As a result, the profitability of food retail firms are highly dependent on their costs of production. Specifically, Del Monte's largest expense is the fuel cost associated with transporting its products to markets around the world.

Company Overview

Fresh Del Monte Produce is organized into four segments that are distinguished by the types of products that each segment produces:^[4]

Bananas (43% of Revenue)

The Banana division of FDP is the only division within Del Monte that is comprised of a single product. Unlike with other produce, only one specie of banana out of more than 1,000 that exist - the Cavendish - dominates the marketplace. Bananas also have one of the shortest shelf lives out of any other fruit, lasting less than two weeks after harvesting.^[5] As a result of these idiosyncrasies, it is logistically impossible to combine the growth, packaging, and shipment of bananas with any other fruit, forcing Fresh Del Monte and other food retailers to have segments dedicated to this very popular fruit.^[6]

Other Fresh Produce (44% of Revenue)

This division is responsible for the production, transport, and marketing of pineapples, melons, tomatoes, strawberries, and other non-tropical fruit. Non-tropical fruit, in this case, includes grapes, apples, pears, peaches, plums, nectarines, avocado, and kiwis.

Prepared Foods (10% of Revenue)

Del Monte's prepared foods division is responsible for the production of canned fruits and vegetables, pre-packaged juices, beverages, snacks, and a poultry and processed meat division. Unlike the other products in this division which can be found in retail stores around the world, Del Monte's poultry segment operates primarily in the Jordanian market and since its initial acquisition in 1997 has grown to become the largest poultry producer in that region.^[7]

Other Products and Services (3% of Revenue)

The fourth and smallest division of Fresh Del Monte Produce encompasses a third party ocean freight business, a plastic product and box manufacturing, and grain business. Fresh Del Monte first entered into the grain production industry in 1999 and has seen nearly a six fold expansion of its operations in South and Central America since that time.^[8]

Business Growth

FY 2009 (ended January 1, 2010)^[3]

• Net sales remained flat at $3.5 billion. The economic conditions had a negative impact on prepared food sales, which was offset by an increase in banana prices due to short supply.
• Net income fell 8% to $145 million. Fuel prices increased by 32% in the period.

Trends and Forces

Del Monte's costs are heavily influenced by the price of gas

Sea and inland transportation costs associated with bringing FDP's produce to market represent the largest proportion of costs for the company. Chartered boats are responsible for more than 30% of Del Monte's products and FDP has not only had to cover the fuel costs for its own shipping vessels and trucks it has also had to cover fuel costs for any boats that it chooses to charter. Moreover, these costs have increased more than 100% since 2004 due to higher Oil prices, which in turn have helped to drive the increase in overall costs of goods sold.

Whole produce sales are resistant to economic fluctuations

Unlike traditional retailers, Fresh Del Monte's products are considered to be nondiscretionary items that remain an essential component of consumption regardless of the economic climate. In other words, no matter the state of the economy the average consumer will eat approximately the same amount of fruit. For the average American, the consumption of non discretionary items amounts to approximately 6% of average per capita income, or around $2000 per year.^[9]

While the overall sales of fruit have remained fairly constant for FDP, consumers, in economic downturns, do tend to substitute from more expensive fruits such as pineapples into cheaper fruits such as bananas.^[10] In Del Monte's case, this substitution effect does not affect earnings due to the large variety of fruits that it offers which helps to smooth earnings.

Sales of Produce are highly seasonal

Fresh Del Monte, like other firms in the produce industry, recognizes a majority of earnings and revenue during the first two quarters of the year. FDP recognizes 52% of revenue and 55% of annual profit during the first two quarters of year. In particular, while production of bananas is essentially continuous during the year, demand reaches its peak during the first six months of year. Fresh Del Monte is able to hedge against this seasonality, though, through its sales of non-tropical fruit and prepared foods for which demand peaks during the latter months of the year. In other words, the seasonality present in the sales of fruit is determined not only by the price fluctuations that result from supply and demand changes but also the availability of other fruits that may be more in season at the time.^[11]

Competitors

Del Monte competes primarily in the food and agriculture sector along with other firms such as Chiquita Brands International (CQB) and Maui Land & Pineapple Company (MLP) in a market with near homogeneous products that are differentiated either through price or proprietary recipes and formulas. Although other firms use the same metrics of performance as FDP, there is some discrepancy in how these companies have chosen to define the boundaries of each geographic region. Due to the different organizational structures in each of the firms and the lack of financial disclosure, it is impossible to compare sales in similar product lines.

References

1. ↑ FDP 2009 10-K "Business Overview" pg. 2-3
2. ↑ FDP 2009 10-K "Sales and Marketing" pg. 9
3. ↑ ^{3.0 3.1} FDP 2009 10-K "Selected Financial Data" pg. 28
4. ↑ FDP 2009 10-K "Products Sourcing and Production" pg. 3-8
5. ↑ New York Times "Yes, We will have no bananas"
6. ↑ Website for book by Dan Koeppel- Banana: The fate of the Fruit that Changed the World
7. ↑ Fresh Del Monte Website: Poultry Division
8. ↑ Fresh Del Monte Website: Feed Grain Division
9. ↑ Forbes "How the World Spends its Money"
10. ↑ Retail Week "Consumer behaviour: A new era of frugal living"
11. ↑ FDP 2009 10-K "Seasonality" pg. 15