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Fan Zhou

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] 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 15% of annual sales each year.^[2]

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.^[2] Since the negotiations regarding fuel costs are typically conducted months in advance, falling fuel prices during the third quarter of 2008 have not yet caused the expected decrease in food prices; instead food prices are actually up 7% in certain regions of the country, such as the Northeast.^[3]

In 2008, FDP expanded its operations overseas, acquiring three separate companies in Central and South America involved in the cultivation of bananas, pineapples, and melons. As a result of these acquisitions, Fresh Del Monte increased its production capacity by 13 million boxes of bananas, 11 million boxes of pineapples, and 7.5 million boxes of melons.^[4] FDP also chose to streamline its lineup of products during 2008, as a result of higher seafood prices and increased volatility in consumer demand, by selling the division responsible for the production of StarKist branded tuna.^[5]

Company Overview

The Other Fresh Produce division has been the most profitable for FDP with the Prepared Foods division experiencing the greatest level of volatility due to the rising cost of fuel during 2006

Sales of Bananas has grown by more than 11% between 2005-2007

While North America remains the most largest region by revenue, sales in the Middle East region have grown by 153% between 2005-2007.

Fresh Del Monte Produce is organized into four segments that are distinguished by the types of products that each segment produces. As of Q3 2008, FDP had sales in excess of $2.5 billion with the Other Fresh Produce segment representing both the largest proportion of revenue as well as earnings.^[4]

The main financial metrics that are used to analyze performance in this industry are gross profit for each product as well as sales in each geographic region. Profits and revenues have remained fairly constant between 2005 and 2008, showing an average growth rate of 3% each year.^[2] The most dramatic decline in profits occurred at the start of the 2006 fiscal year as a result of a new trade policy instituted by the European Union, Del Monte's second largest market, that imposed a tariff on imported bananas of 176 euros per ton.^[6] As a result, profits fell more than 50% in the division before prices and supply stabilized in 2007.^[4]

Bananas (% of Revenue: 36%, % of Income: 17%)

The Banana division of FDP is the only division within Del Monte that is comprised of a single product, and during 2008 it brought in more than $1 billion in revenue and close to $100 million in profits.^[4]

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.^[7] 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.^[8]

Other Fresh Produce (48%, 66%)

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. In 2008, this segment was the largest and most profitable division within Del Monte, bringing in more than $1.2 billion in revenue and almost $140 million in earnings for the company.^[2]

Prepared Foods (11%, 13%)

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.^[2] In 2008, this division brought in more than $300 million in revenue and was responsible for almost $40 million in earnings for Del Monte.^[4] 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.^[9]

Other Products and Services (6%, 4%)

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.^[2] In 2008, this segment brought in almost $110 million in revenue and more than $2 million in earnings for the firm.^[4] 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.^[10] This rapid growth has helped sales increase more than 22% between 2007-2008, making the segment the fastest growing out of the four.^[4]

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.^[2] Moreover, these costs have increased more than 100% between 2004 and 2007 which helped to drive the increase in overall costs of goods sold during this period by almost 10% annually.^[2] Overall, costs are increasing three times faster than revenue. However, the cost of fuel has seen record declines during the third and fourth quarters of 2008 which should lead to reduced prices in 2009 as shipping contracts are renegotiated for the upcoming fiscal year.^[11] In a report released in December 2008, the USDA reports that food inflation will decrease to 4.5% in 2009 as a result of lower costs.^[12]

As of 2007, chartered boats were 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.^[2] Between 2004 and 2007, these chartering costs grew at the same pace as fuel costs but the 2008 economic turmoil has caused rates in the chartered shipping industry to fall by more than 90% which will further help to reduce costs as contracts are renegotiated for the 2009 fiscal year.^[13]

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.^[14] This phenomenon was evidenced during the 2008 Christmas season when every sector of the consumer retail industry saw declines except for the health care and food sectors, which saw sales that did not exceed the typical seasonal fluctuations.^[15]

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.^[16] 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. In 2007, FDP recognized 52% of revenue and 60% of annual profit during the first two quarters of year.^[2] 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.^[2] 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.^[2]

Competitive Analysis

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. ↑ Yahoo Finance: Farm Products Industry Browser
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11} Fresh Del Monte 2007 Annual Report
3. ↑ Boston Globe 12/27/08:"Food costs chained to expenses, expectations"
4. ↑ ^{4.0 4.1 4.2 4.3 4.4 4.5 4.6} Fresh Del Monte Produce 2008 Q3 10Q
5. ↑ The Motley Fool 6/5/2008: "Del Monte Says 'Sorry Charlie'"
6. ↑ Washington Times 2/9/08: "EU's banana tariffs ruled out"
7. ↑ New York Times 6/18/2008: "Yes, We will have no bananas"
8. ↑ Website for book by Dan Koeppel- Banana: The fate of the Fruit that Changed the World
9. ↑ Fresh Del Monte Website: Poultry Division
10. ↑ Fresh Del Monte Website: Feed Grain Division
11. ↑ CNNMoney 12/28/2008: "Gas Prices: Five-year low and falling"
12. ↑ Wisconsin Agricultural Connection 12/29/08: "USDA sees food price inflation falling to 4.5% in 2009"
13. ↑ Forbes 12/2/08: "Dry Bulk Shippers May Tack Away From Market"
14. ↑ Forbes 7/30/08: "How the World Spends its Money"
15. ↑ Los Angeles Times 12/27/08: "Retailers see weak sales after Christmas"
16. ↑ Retail Week 12/18/08: "Consumer behaviour: A new era of frugal living"
17. ↑ Chiquita Brands International 2007 Annual Report
18. ↑ Maui Land & Pineapple Company 2007 10K
19. ↑ Heinz Company Shareholder Information: 10K