Though 105 million tonnes of bananas are consumed each year, the banana industry barely gets a second thought from most consumers. So when Fyffes and Chiquita merged into a powerful banana conglomerate recently, not a lot of people paused to consider what it would do to everyone’s favourite snack. However, the recently founded ChiquitaFyffes will have annual revenues of $4.6bn according to projections, making the deal much more than just monkey business.
The banana industry is huge not only in volumes of exports, but also in the way it affects national economies. Entire countries in the Caribbean and Latin America revolve around the farming and distribution of bananas, which makes the Fyffes Chiquita merger incredibly significant.
Together, these two companies will employ over 32,000 people in over 70 countries, and will have a market value exceeding £1bn. They also have a combined history that has essentially shaped the banana industry into what it is today.
Fyffes, based in Dublin, was the first company to import bananas into London in the late 19th century, and remains Europe’s largest distributor of the product. Chiquita, based in North Carolina, largely distributes to North America. The new company, ChiquitaFyffes, will dominate around 14 percent of the global market.
The merger also marks a highly significant moment in the banana industry. For years the industry has been blighted by political scandal, and held back by low market prices. But as the two biggest banana players join forces, they hope to challenge these norms.
“The combined company will… be able to provide customers with a more diverse product mix and choice,” said Ed Lonergan, Chiquita’s CEO. “This is a milestone transaction for Chiquita and Fyffes that brings together the best of both companies which, we believe, will create significant value for our shareholders and offer immediate benefits for customers and consumers worldwide. This is a natural strategic partnership that combines two complementary companies of long history and great reputations that have built upon an unwavering commitment to exceed our customers’ expectations. We will maintain our brands, all of which are valued by both customers and consumers.”
The business of bananas
Though the merger is nothing short of Homeric in proportions, so too are the challenges the new company will face. The global market for bananas is held back by the simple fact that consumers are just not willing to shell out the big bucks for the product, excepting small premiums for a Fairtrade or organic label. The trouble is that despite the fairly low production costs, a banana price war between supermarkets and other retailers has meant the banana producers have been operating at a loss.
The global market for bananas is held back by the simple fact that consumers are just not willing to shell out the big bucks for
the product
Fairtrade International, the company behind the blue label so many shoppers look for in their products, estimates that only about 20 percent of the prices paid by consumers for bananas make it back to exporting countries. And as supermarkets and wholesalers continue to keep the price low, banana producers often lose out.
Five corporations control around 80 percent of the bananas produced globally. Often, small independent banana producers are forced to sell their crops to the likes of Fyffes and Chiquita at extremely low rates, or risk not being able to shift the produce in the export market.
But larger distributors have still managed to keep their businesses profitable; just a few weeks before the merger was announced, Fyffes revealed its before tax profits for 2013 were up 9.8 percent to €28.7m. And though the company trades other fruits as well, it describes profits in its banana division as “broadly satisfactory”, though there had been a drop from 2012.
Fyffes is by far the smallest of the major banana players, with Chiquita, Dole Food Company and Fresh Del Monte trading significantly more fruit per year; but the merger will mean that ChiquitaFyffes, when it is fully operational, will be a true force to be reckoned with.
At the moment the two companies do not compete for market share as they operated in different North American and European markets, but as they pool their resources, the new enterprise will emerge head and shoulders ahead of its competitors globally, and dominate sales in both Europe and the US.
“The first three [companies] on a global scale are not too far away from each other, whereas Fyffes was a good deal smaller. Now a firm number one has been created, there will be some impetus for further consolidation in the sector,” David Holohan, analyst at Merrion Stockbrokers, told the BBC.
Chiquita EBITDA
$70m
2012
$118m
2013
But being big does not necessarily mean that ChiquitaFyffes will be immune to some of the issues facing the industry. What the new company will be able to do, however, is to shift the wind in its direction. By combining operations, the new company will have more streamlined operations than either of its predecessors could have hoped for, and is expected to generate at least $40m a year in synergies as early as 2016.
Savings will come primarily from logistics and procurement, according to a Chiquita review of the merger. “Uniting two leading companies in the produce industry enhances scale, scope and portfolio diversity: upon completion of the transaction, the combined company will become the leading global banana and other fresh produce company with greater scale and efficiency,” it reads.
“As part of a larger, more diversified organisation, on the basis of current volumes, ChiquitaFyffes will become the largest global entity in the banana category with sales of more than 160 million boxes annually. The company will maintain its significant presence in the packaged salads and healthy snacks category. The company will also have stronger positions in the melon and pineapple market segments as the number one importer in the US and number three distributor globally, respectively.”
Crop killer
However, although demand remains high, ChiquitaFyffes will be born in the midst of the most serious threat the banana industry has ever faced: Black Sigatoka. The virus has been spreading across the Caribbean and towards South America for some time, leaving behind nothing but ravaged plantations. The global collective appetite for the larger, sweeter banana varieties means these are almost exclusively cultivated in monocultures that span millions of hectares across Latin America, leaving the crops particularly vulnerable to diseases and plagues.
In the 1950s, a fungus known as Panama Disease completely wiped away what was then the world’s favourite banana: the Gros Michel. However, before all commercial varieties were wiped out, growers managed to breed the Cavendish – the banana we still eat today. Compared to the Gros Michel, the Cavendish is smaller and less flavoursome. It is also more fragile and must be exported more carefully in refrigerated containers, but it has still grown to account for close to 95 percent of banana exports globally.
Farmers have resorted to spraying crops weekly, which increases costs considerably. Soon, even highly concentrated doses will no longer be enough
And now it is under threat from yet another fungus. Black Sigatoka has proven itself curiously resistant to the fungicides already widely deployed in banana plantations. Farmers have resorted to spraying crops weekly, which increases costs considerably. Soon, even highly concentrated doses will no longer be enough.
Bananas today are seedless clones, the species propagated by replanting cuttings of successful trees. This method of planting has been cheap and efficient for many years, but has also left almost the entire global export bananas susceptible to the same disease.
Huge amounts of resources will have to be invested in research and development in the coming months and years in order to breed another, even more resilient, variety, and even then there are no guarantees.
In many ways the merger has been an attempt to address some of these issues. By pooling the resources of its constituent companies, ChiquitaFyffes will be much better positioned to find alternative ways to deal with the dangers facing the industry. Though Fyffes was the smaller company going into the deal, it has retained the bulk of the executive roles according to the Chiquita review of the merger. David McCann, currently the Fyffe Executive Chairman, will assume the role of CEO in the new company, bringing with him Tom Murphy and Coen Bos as Finance Director and COO respectively. Lonergan will take the helm as chairman.
Though the deal is still pending approval from US and EU regulators, McCann is not mincing his optimism. “This deal will be transformative and offer exciting opportunities for the new business. We are looking forward to working with the Chiquita team to build a combined company, which is well positioned to succeed in our highly competitive marketplace and which will create significant value for our shareholders.
“Our outstanding employees will benefit from working for a larger, more diverse business, which offers opportunities for growth. We believe we will be able to use our joint expertise, complementary assets and geographic coverage to develop a business that can run smoothly and efficiently to better partner with our customers and suppliers.”
