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The Chiquita-Fyffes Merger: Should Vietnamese banana farmers adopt mass production or product diversification?
  • | dtinews.vn | March 28, 2014 01:34 PM

By Dr. Tung Bui, Faculty Director of Vietnam Executive MBA, University of Hawaii

 
 A woman in southern Tien Giang province is collecting bananas for export. Photo by Danviet.

 There has been a bit of discussion about bananas lately. In Vietnam, the recent success of growing quality bananas and the export of high-yield banana flowers and leaves from the commune of Tan Long, Huong Hoa, Quang Tri, have been praised as a successful initiative by local farmers to reduce poverty. Bananas are one of the most important and traditional fruits in Vietnam. According to the FAO, annual commercial production of bananas is just over one million tons. This number seems small. And statistics should take into account the large number of additional bananas grown by family farms in small production outputs, for local and family use. According to Reuters, the global export market of bananas is worth $7 billion. If Vietnam wants to join the world’s top producers of bananas for a share of this growing market, it has to quickly modernize  its production. According to the United Nations, Uganda, China, Philippines, Ecuador, Brazil, Indonesia, Columbia, Cameroon and Tanzania are the top 10 nations that collectively produce 96 million tons of bananas or two-thirds of total world’s production.

Since the announcement on March 10 in the U.S. that Chiquita International is going to do a stock purchase of Fyffes in Ireland for $1.07 billion to become the top world supplier of bananas, the business media is still debating about what is behind the acquisition strategy and what will be the impact on the global banana market. By 2014, after the merger, the combined revenues of Chiquita-Fyffes will be around $4.6 billion. Some of these discussions seem to misread the main reason behind the Chiquita-Fyffes merger.

Typically, benefits for a business merger or acquisition (M&A) include: (1) elimination of competition by buying a menacing competitor; (2) quick acquisition of skills and knowledge to gain competitive advantage through innovation; (3) instant access to new markets offered by the purchased firm (4) combined production capacity to offer more diversified products and; (5) reduced operational costs through economies of scale.

However, the merger of two of the world’s oldest fruit importers is somehow out of ordinary because of the unique nature of the banana market. In the Chiquita-Fyffes merger, market expansion would not happen in the near future. For a long time, Chiquita and Fyffes have established their own local markets at different countries. Chiquita exports bananas mostly to North America and Asia. Fyffes serves primarily the European markets. By merging, there is no clear sign of how market expansion can be done given established existing distribution networks.

Another typical benefit of M&A is the ability of the merged company to increase prices. This might not be easy in the banana business. Consumers consider bananas as a common and cheap fruit. If they are willing to pay more, they will switch to apples, oranges and pears. Despite the fact that demand of bananas is predicted to increase by 5% this year, it would be still a challenge for sellers to sell bananas at a higher price. Acknowledging the low-price expectations by grocery shoppers, giant supermarkets who have control of the food distribution networks, use their local purchasing power to prevent importers such as Chiquita to increase prices.

With prices of bananas set low by giant supermarkets, importers such as Chiquita and Fyffes might try in turn to force farmers to sell their bananas at even lower prices. But this strategy has limitations. Prices are already very low. And with increased quantity of production, farm owners are increasingly feeling pressures from workers’ unions to increase the salary for their members.

Facing all of these challenges and the prospect of low profit margin from a perishable good, the only sensible business strategy for banana exporters to increase the currently low profit margin would be to reduce operational costs. This seems to be the key motivation behind the Chiquita-Fyffes deal. With bananas grown at different locations thousands of kilometers away from the final destinations, logistics costs are non-trivial. Production at many locations. Quality control at very different economic environments. Packaging of a perishable fruit. Inventories at many locations before reaching the markets. Global and domestic transportation. Stringent food inspection. Complex distribution planning. These activities add substantial costs to the price of the bananas. Likely, With business involving 70 countries and 180 million boxes of bananas each year, logistic costs will likely increase and consolidation to slash costs seems to be a strategy for survival.

With the merger, Chiquita-Fyffes will likely be able to further standardize  its entire supply chain network to cut costs. Banana Link, a non-profit organization based in the UK that advocates for the sustainable trade of bananas, claims that the newly combined company could force farmers to grow only one type of banana. With the production of a single type of banana — likely the Cavendish —mass production, packaging, scheduling and shipping would be more optimal, thus costs can be reduced significantly. As such, the potential key impact of the merger would be to increase profit margin through a more efficient process from production to delivery. Consumers will be able to continue to buy bananas cheaply. But, they might just have only one type of banana to enjoy! Investors seem to like the idea. Immediately after the merger announcement, Fyffes stocks rose 46% and Chiquita 11%.

Vietnam is industrializing its agricultural sector. To join the nations of banana exporters, Vietnamese farmers should be prepared to adopt the type of banana that the global importers are interested in buying. To go global, banana growers from main production provinces such as Dong Nai, Can Tho, Son Trang, Tien Giang, Vinh Long, Ben Tre, and Vinh Phu should set up a modern mass production chain to ensure the best quality at the lowest possible price. The move by Chiquita to acquire Fyffes highlights the strategic importance of having an efficient global supply chain for agricultural products.

In parallel, and reflecting the long tradition of having a variety of types of bananas in Vietnamese daily cuisine, bananas from provinces such as Tan Long in Huong Hoa, Quang Tri, should continue to diversify their banana-based products to secure a niche market that giant companies such as the reunited Chiquita-Fyffes and the other two top producers, Dole Food and Fresh Del Monte Produce, will not be able to compete. Low-price mass production strategy? Diversified high-end product strategy? The good news is that Vietnamese banana growers can do both, if they want to.

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