Innovative Produce Company Takes Financial Battering : Sun World’s Setbacks Blamed on Untimely Deaths, Mexican Tomato Costs
Think of Sun World, the California produce giant now in deep financial trouble, as a beautiful piece of fruit that got bruised on the way to market.
The company has taken a series of hits in the past three years, ranging from a disastrous year for California vegetables and the high cost of growing a tomato in Mexico to the untimely deaths or departures of key executives and a reluctant French lender who has moved to shut off its credit.
The setbacks forced the heavily indebted firm to file for protection from its creditors early this month under Chapter 11 of the federal bankruptcy laws.
“We’ve lost a lot of money,” acknowledged Sun World Chairman Howard P. Marguleas, a part owner of Irvine Co. in Orange County and a widely respected figure in California agriculture and public life.
Yet the ambitious firm, which Marguleas says has every intention of continuing scaled-back operations, has also made a lot of money in the past 18 years, while carving out a unique position in the high-risk industry that brings fresh fruits and vegetables to supermarket shelves.
The idea behind Sun World--which introduced to consumers such popular items as the Red Flame seedless grape and the seedless watermelon--has been to grow and ship one-of-a-kind, user-friendly fruits and vegetables, particularly during seasons when no one else is growing similar produce.
“Bigger, redder, blacker, sweeter--and off-season,” Marguleas said during an interview in Century City days after the bankruptcy petition was filed in San Bernardino.
Though Sun World has marketed as many as 75 produce varieties at a time, it has been most aggressive in promoting fruits with those features, many of which are patented. It also has one of the most elaborate research and development operations of any in agribusiness, every year scrutinizing 35,000 new varieties of fruit trees and 100,000 new grapes at a facility in Bakersfield, where the firm is based.
“They’ve been very strong marketers,” said David L. Moore, president of the Western Growers Assn. “They’re one of the top produce companies in the country, for quality and for quantity.’
But Sun World also is bogged down with only interim financing for working capital--and with $182 million in long-term debt and other liabilities, compared to $188 million in assets. The company maintains that much of its assets are in real estate with a market value higher than its book value.
Sun World was formed in 1976 by three of California’s best-known produce men, who together still own more than 85% of the stock.
A former board chairman of the California Chamber of Commerce, Marguleas has been the dominant partner, whose strong suits are marketing and promotion as well as citrus and date production. He owns more than 65% of Sun World.
Marguleas was one of the wealthy investors, led by Donald Bren, who in 1977 bought a 35% interest in Irvine Co. for $337 million after a furious bidding war. Now Marguleas is in the process of selling his 5% of the Orange County real estate giant for an estimated $94 million.
The other Sun World founders were Domenick T. (Cookie) Bianco, with 7% of the company, a well-respected table grapes grower, and Carl Sam Maggio, an experienced vegetable farmer and marketer who owns more than 12% of the privately held firm.
Sun World’s first project in uncommon produce was a big success for the fruit but an expensive lesson to the company.
In 1977, Sun World spent millions of dollars on full-page newspaper ads and other promotions to market Red Flame seedless grapes, a crisp, tasty variety developed by the University of California.
Consumers loved it. But the Red Flame was unpatented, public property. Sun World’s competitors planted hundreds of acres of the same grape--and the price dropped through the floor.
“It became too generic a commodity” to bring the premium price that Sun World’s promotion and development costs required, Marguleas recalled. “That really focused us.”
In 1978, Sun World bought a 50% interest in Interharvest, the big Salinas Valley lettuce grower that long had been a focus of angry labor strikes by the United Farm Workers of America. Renaming the company Sun Harvest, Sun World eventually shut it down after six more years of labor complaints.
The kind of niche-market success the partners had in mind came in 1983, when Sun World delivered its first branded specialty product: the Le Rouge Royale sweet red pepper. Yellow and orange patented peppers followed.
The Sun World seedless watermelon debuted in 1988, and the DiVine Ripe tomato--a variety that can be ripened in the field--arrived in 1990. The next year, the Star Sweet deep red grapefruit hit the market, the Black Diamond plum arrived one year later.
This year, despite the distractions of its business problems, Sun World is promoting the first California-grown mango, an off-season version of the world’s most popular fruit.
In Tokyo, Sun World mangoes are selling for as much as $18 each. But it has also cost the company an enormous amount to get them into Japanese shopping baskets.
Developing a mango (a fruit normally grown in the tropics) that could be produced in the Southern California desert during a part of the year when the rest of the world was mango-less was a multimillion-dollar research effort that began more than a decade ago.
The experimental mangoes, planted on a secret plot near Indio, survived a 1990 freeze only because Sun World used a helicopter to circulate warm air over the field. The effort was set back when armed intruders scaled a 12-foot razor-wire fence and killed a guard dog to steal a row of the trees in an apparent act of commercial espionage.
Then the company had to familiarize Japanese consumers with a mango that was big and tasty but green-skinned even when ripe. Sun World set up sample tables in Japanese supermarkets, offering slices of the fruit to shoppers. Each mango now bears a Japanese decal that translates, “I’m green, but I’m sweet and ready to eat.”
In 1989, Sun World bought Bakersfield-based Superior Farming Co., with 25,000 acres of farmland and what many believe is the largest tree fruit and grape research center in the world. At the same time, the company was expanding its operations overseas, particularly in Mexico and Japan as well as 28 other countries.
By 1992, however, some of the company’s projects began to unravel.
In December of that year, Sun World says, its working capital financier--Caisse Nationale de Credit Agricole, France’s largest bank--told the company it was pulling out of its investments in the western United States.
This has left the company without permanent working capital for the past year, though Credit Agricole has agreed to provide interim financing until a bankruptcy lender can be found.
“If any farmer’s bank pulled their line of credit midseason, the financial consequences would be terrible,” said Don Johnston, senior partner in Johnston Farms, a Bakersfield grower.
John R. Zivnuska, a Credit Agricole executive, denied that the bank is pulling out of its U.S. loans and says the Sun World decision was “based on facts the bank became aware of.” He declined to elaborate.
However, like other international banks, Credit Agricole has been hit hard by soured foreign loans since 1990. In the fallout, heads have rolled at the bank’s Paris headquarters. The Los Angeles office has been closed, and the San Francisco staff cut to four.
By all accounts, the already-conservative bank has tightened its loan policies even further.
“Credit Agricole was part of all the mess,” said Katharine Rossow, a senior analyst at Salomon Bros. Since then, all the international banks are more conservative in their lending policies, she said.
No matter what caused Credit Agricole to withdraw, the bank would soon have more “facts” to be concerned about.
The most expensive project to go bad was one involving tomatoes in Mexico. Though fertilizer and other essentials cost the same or more there as in California, transportation, border-crossing and labor costs were far higher than Sun World expected.
“When you get done, the unit-per-acre cost is higher in Mexico than in the United States--with labor costing seven times higher,” Marguleas said.
Turnover at Sun World became an issue in the industry. By most reports, the inevitable differences of opinion between three strong-minded founders had always made Sun World a challenging place to work.
“They had some real knock-down battles,” one industry executive said.
Carl Sam Maggio quit to start his own business in December, 1992, though he remains an owner. President James R. Rinella then 57, retired in 1992. His successor, Robert V. Igleheartthen 52, resigned in April, 1993, saying he wanted to spend more time with his family.
Steve Poindexter, vice president of sales, resigned last January after 11 years with the company. In early April, Marguleas himself stepped down to concentrate on the sale of his holdings in Irvine Co., though he has since returned to active leadership.
Sending more jitters through the produce world, Sun World’s longtime controller, Jo A. Horning, known for keeping her work close to the vest, died of a heart attack after a medical examination at a Rancho Mirage hospital in June, 1993.
After the company’s books were turned over to a new controller, the company began to send--and is still updating--a series of financial “adjustments,” with less optimistic numbers, to its lenders and others.
This summer, in a haunting if apparently coincidental development, the new controller, Gary A. Winters, died of a heart attack on a Bakersfield golf course.
Meanwhile, California’s cauliflower, broccoli, celery and iceberg lettuce harvest, crops that Sun World also markets, had a terrible season in 1993. Produce on the West Coast couldn’t be trucked past the Midwest floods to customers who were storm-besieged themselves on the East Coast.
“The last 11 months have been about the worst that I have ever seen in the fresh vegetable business,” said Moore of the Western Growers Assn. “We had a lot of production, but we didn’t have anyone to take the product. And produce is a special business. If you don’t eat a salad today, it doesn’t mean you’ll eat two tomorrow.”
As word of Sun World’s troubles quietly spread in the industry, growers that had marketed their crops through the company began to turn elsewhere.
In May, even Irvine Co. shipped 500,000 boxes of avocados through Mission Produce Inc. of Oxnard, instead of through Sun World. It sent a million cartons of Valencia oranges and grapefruit to Dole Citrus for marketing.
Last month, Sun World brought in a new chief executive, turnaround expert John P. Brincko, who quickly persuaded the company to file for bankruptcy protection.
Because the firm operates year-round, Brincko doesn’t expect to have his restructuring plan complete for another year. But some elements are already clear.
Plantings will be reduced for the DiVine Ripe tomato. It faces increasing competition from two gene-altered varieties that claim the same vine-ripened tastiness and long shelf life. The Mexico operation will be cut back, and some farmland and other assets will be sold.
But the mangoes are a big hit in Tokyo, Marguleas says. His Japanese buyers expect to take 100,000 boxes next year, up from 5,000 at the beginning of the promotion just two years ago.
Sun World At-a-Glance
* Founded: 1976, by Howard P. Marguleas, Carl S. Maggio and Domenick T. Bianco
* Business: Privately-held agribusiness engaged in growing, packing and marketing fresh fruits and vegetables
* Headquarters: Bakersfield
* 1993 sales: $231.5 million
* 1994 sales (est.): $190 million
* 1993 revenue: Not available
* Employees: 600 permanent, 4,500 seasonal
* Notable products: Le Rouge Royale sweet red peppers, Le Jaune Royale yellow peppers, DiVine Ripe vine-ripened tomatoes, Sun World Seedless watermelon, Superior Seedless grapes, Star Sweet red grapefruit, Black Diamond plums, other tree fruit, citrus, dates, mangoes and row vegetables
Source: Sun World Inc.
