Squeeze Is On

With 108 years in the citrus business, Sunkist Growers has created a brand so powerful it can sell more than 600 products around the world, everything from jelly beans to vitamins to orange soda.

But when it comes to oranges, just having a well-known brand is no longer enough. Sunkist is fighting for its competitive life.

Foreign-grown fruit is eating into Sunkist’s U.S. market share. Consumers are finding a much wider variety of choices in the supermarket produce aisle. Slumping citrus prices and rising costs are squeezing Sunkist member-growers’ profits.

And with a bloated, inefficient organizational structure, growers say, Sunkist has found it hard to move as quickly as some of its smaller competitors.

“It’s a challenging time for all of produce right now,” said Sunkist President Jeffrey Gargiulo, recently brought in to breathe new life into the mighty brand after years of inexperienced and temporary management.

His biggest challenge is to convince supermarkets that the cooperative’s products still are worth paying a premium price for.

Such pressure would have been unthinkable a few years ago, when fruit from Sherman Oaks-based Sunkist was a fixture in supermarket produce aisles and consumers around the world saw its brand as synonymous with oranges and lemons. Sunkist’s marketing might brought California citrus to consumers from Canada to Japan, making it a model for American export prowess.

With its dominant position in the marketplace, the marketing cooperative reaped a healthy profit, which it funneled back to its 6,000 grower owners in California and Arizona. Although Sunkist is self-supporting, in recent years its growers have struggled and some of its contract packers that distribute its fruit have closed their doors.

Today the organization is still the market leader, representing 60% of the citrus production in California and Arizona. But it must work much harder to convince retailers its fruit is special.

That’s partly because citrus has more competition than ever. Supermarkets have added new items to cater to a greater range of ethnic tastes and are importing more produce to ensure that shoppers can get their favorite fruit out of season. Convenience items, such as pre-cut vegetables, baby carrots, fresh herbs and bagged salads, also have stolen more shelf space.

Competition has become particularly fierce during the summer months. Sunkist’s Valencia oranges compete not only against Florida oranges, but against California peaches, plums, nectarines and melons, Australian and Israeli oranges, and Spanish tangerines and mandarins.

Navel oranges, grown in winter and spring, have traditionally had less seasonal competition. But even navels have been losing ground to imported fruit, such as the seedless, easy-to-peel clementines from Spain.

With the quality of imported fruit rising, shoppers these days care less about where a product comes from, says Karen Caplan, president of specialty fruit marketer Frieda’s Inc. in Los Alamitos.

The bottom line for most people, industry observers say, is how much fruit costs and how well it tastes.

When it comes to taste, American shoppers are increasingly finding California navel oranges somewhat wanting. That’s partly because the best fruit is shipped abroad, leaving lesser-quality fruit in local supermarkets. “The quality could be better,” Caplan said.

“People pick up the best item they see, regardless of brand,” said Kathy Means, vice president of the Produce Marketing Assn.

If greater competition wasn’t enough, the handful of giant supermarket chains--formed through mergers in recent years--are using their clout to demand lower prices for Sunkist and other fruit.

“We always prefer U.S.-grown product, except if the product isn’t available or is out of season,” said Jack Brown, chairman of Stater Bros. Markets, a Colton-based regional chain. But “it has to be fairly comparable in price [to imported fruit]. The quality of foreign-grown produce has improved greatly.”

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Turning Up the Volume on Marketing Efforts

To persuade retailers to continue to pay more for the Sunkist brand, the cooperative’s marketing officials have put together special research telling retailers where its navel oranges and other fruit sell best, and how they must be packaged and displayed to get more shoppers to buy them.

Sunkist marketers also are putting together splashy displays that dispense recipes and tell shoppers why Sunkist citrus is healthier than some other fruit.

The cooperative also is negotiating with a celebrity chef to promote Sunkist citrus on his or her television cooking show as an ingredient, rather than as a garnish. Sunkist is test-marketing new, more expensive products, such as pre-peeled, pre-sectioned oranges that last 12 days in their container.

“I think our brand is still very strong and we have some great opportunities ahead of us,” Gargiulo said.

However, Gargiulo is hedging his marketing bets by negotiating to import some products, such as lemons from Chile, and sell them under the Sunkist label. This plan hasn’t made him popular with Ventura County lemon growers, who will see their sales slacken at the end of their season as imported fruit enters the market.

But, Gargiulo says, the deal will add to the cooperative’s bottom line, enabling Sunkist’s U.S. growers to profit from the new, more competitive realities of the produce business.

Over the last five years, Sunkist and the rest of the U.S. citrus industry have seen their share of the world market drop steeply, while countries such as China and Australia have upped production.

His own company, Gargiulo Inc., which was purchased by Monsanto Corp. in 1997, commanded a 10% share of the U.S. tomato market by producing fruit in Mexico, Puerto Rico and Chile as well as in the U.S.

Gargiulo faces other challenges as well.

One of them is a bloated management structure. Sunkist has seen its market share stolen by smaller, more nimble U.S. competitors who don’t have to wade through a lengthy board approval process to institute small changes in their businesses.

“We’ve been slow to adapt to what our customers want,” Gargiulo said. For example, he said, Sunkist didn’t move fast enough to distribute its fruit into such discount retailers as Costco and Wal-Mart, which have taken a bigger share of the U.S. grocery business.

It took years, he said, just to get around to making the easy-to-carry cardboard crates of fruit that some retailers were demanding.

To streamline the cooperative, Gargiulo closed eight of Sunkist’s 32 sales offices this year, many of which were in cities without a major produce terminal market. And, he says, more could be closed as the company reorganizes and retrains employees.

He also has announced his intention to whittle down Sunkist’s huge board and add some directors from outside the industry.

But perhaps his biggest challenge will be reversing the profit squeeze growers have felt amid rising production costs and falling prices. Profit margins are so thin, growers say, it takes a bumper crop of large, sweet fruit just to have a decent year.

The industry’s economic problems started in the 1998-99 growing season, when much of California’s orange crop was destroyed. The next year, the poor quality of California oranges put a bad taste in the mouths of retailers, who stocked more imported fruit in response.

“Our industry has had less-than-satisfactory returns ever since that time,” said Joel Nelsen, president of the California Citrus Mutual trade group.

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Growers May Not Get a Reprieve This Year

This year isn’t looking that great either. Although larger, sweeter fruit are commanding higher prices, growers’ yields were small because of a heat wave. Thus, they probably won’t turn a profit this season.

“Many may make their costs back,” Nelsen said. “But we’re not in this business just to break even.”

Gene Greenstadt, a Tulare County orange grower, says his orange groves, which once turned a tidy profit, have in recent years been a drain on his retirement income.

Last year, with a large, sweet crop, he thought things were finally on the rebound. But he didn’t receive most of his payment because the packing house that processed and shipped his crop, Kaweah Citrus Assn., went under.

“We were counting on finally digging ourselves out of the hole,” Greenstadt said. “But I doubt we’ll ever see that money.”

To find out where things went wrong with the packing house, he and other growers requested Sunkist’s detailed financial records. It took months and a lawsuit for the cooperative to hand over the papers, not the kind of treatment member growers expected.

Greenstadt believes Sunkist should be more responsive and protect its growers by providing them with indemnification insurance to assist them if their packing house should go under.

Gargiulo says Sunkist can’t ensure that all of its licensed packing houses are doing the right thing. But, he says, because these closures affect Sunkist’s profit, perhaps it should do something more to protect growers.

Given the tough economic run of the last few years, rumors are circulating that more packing houses will close their doors this year.

Gargiulo says he wouldn’t be surprised. The citrus packing business is contracting just like the supermarket industry, he says, with chains getting fewer but larger.

Sunkist’s largest packer, Paramount Citrus, has doubled in size over the last five years. It operates 3,000 acres of citrus, mostly its own, as well as four huge packing plants. By itself, Paramount now makes up 10% of California’s citrus industry.

Some say Sunkist favors these huge packers with its most lucrative orders, usually for fruit to be sold early in the season and for export. Tulare County packer Brad Stark, a former Sunkist board member, dropped out of the cooperative last year and filed a suit claiming Sunkist wasn’t distributing its orders fairly, particularly for the lucrative ones.

“In a cooperative there should be one standard that’s applicable to all the members,” Stark said.

Gargiulo says Stark’s suit is groundless. Others in the industry say charges of favoritism have been around longer than many of the state’s orange groves. Large, efficient packers with consistent quality often command a larger share of the business and are requested by buyers more often.

But, he says, some small packers with high-quality fruit are doing well too.

What will make or break most packing houses and growers, analysts say, is how much fruit they are able to export.

Although Sunkist’s fruit isn’t as golden in the U.S. as it used to be, Sunkist’s navels command a premium price in Asia. There they are displayed in Sunkist cartons with the brand facing outward like a designer label. Big packing houses such as Paramount now export about a third of everything they grow--the highest-quality fruit--to Japan, Hong Kong, Korea and elsewhere.

Although exports to many key Asian markets have remained relatively flat in recent years, thanks to recession and a strong U.S. dollar that makes the fruit more expensive to foreign buyers, there are some encouraging signs. Tariffs are coming down in China, Japan and Korea, which will make Sunkist’s oranges more affordable. And Sunkist has begun to move into some of Wal-Mart’s markets abroad, such as Taiwan.

“We are making progress now that will clearly identify our position as the world leader in citrus,” Gargiulo said.

But, he says, things won’t get better overnight. “It’s like they say, you have to eat the elephant one bite at a time.”