1.How strong Chiquita Bananas was before the trade war began? Chiquita Bananas (and its predecessor United Fruit Company UFC) was very strong before the trade war began. They have been one of the front bearers of the banana industry and dominated the international banana trade and affected the economic and social conditions of the Caribbean and Latin America. The following points illustrate Chiquita Bananas position before the trade war: •They were the largest supplier of banana in the world with the highest market shares in all the markets they operated. European Union was their largest customer.
•They had a very strong presence in Latin America which was the largest exporter of banana in the world. Chiquita was responsible for development and communication infrastructure in the area and employed thousands of workers at wages that exceeded local rates with excellent social care. They had a very strong control of the region. In some of the countries, Chiquita’s (UFC) business was much bigger than the countries revenues.
•The company had extensive political connections in US and in Latin America. Because of how they worked with banana producing countries, they were responsible for the tag of “banana republic” to those countries. Minor Keith, VP of UFC (earlier name of Chiquita) had various names like Green Pope, the uncrowned king of Central America.
•Chiquita was vertically integrated across all value chain of the banana trade industry. They owned and developed vast lands in producing countries for banana cultivation, most of it in dangerous jungles with poor infrastructure, and natural and medical calamities. They had complex logistical systems because of the perishable nature of banana with vast network of roads, rail lines, ports and shipping owned by the company. They also invested in communication systems like telegraph, telephone and computers in the region. Since the company had established all this, it was impossible for someone else to enter either in upstream or downstream segments of their value chain.
2. Why was Chiquita vulnerable to trade barrier? Chiquita was vulnerable to trade barrier imposed by European Union that favored banana grown in former European colonies like the ACP (Africa, Caribbean and Pacific) region because of the following reasons:
•Chiquita was the largest supplier to European Union primarily from countries which were not part of European colonies in the past. •European Union was also the major customer base for Chiquita with major portion of their sales going into the region and no substitute market was available or developed. •Chiquita could not decide to stop the supplies for some time to reduce losses as banana is a non-essential product for consumers and stopping supplies would have decreased consumption and hence market.
•Since they were vertically integrated across the value chain, they had huge barriers to exit. They owned lands in countries with trade barriers, owned ships, rail lines and owned huge infrastructure in the producing countries. •Chiquita’s major production was in Latin America and because of unique perishable nature of bananas, they could not supply effectively to regions other than United States and European Union as there were risk of bananas getting spoiled during transit.
•Chiquita could not enter into ACP region because they were under high debts because of investing in assets land, ship etc. and had no cash. This increased their dependence on supplies to European Union. •The company had not diversified its products. There were a strategy in the past to decrease banana production and convert those fields into producing other products but it was reversed in 1991 following continued growth over last several years only to affect them later.
3. What should Chiquita do now? Chiquita should continue fighting the trade barriers through their petition with USTR and look at implementing the following actions to improve earnings and stabilize its business: •Chiquita should diversify to produce more fruits by converting its land from producing just banana and utilize synergies from other value chain segments to sell them. This will make them less susceptible to the trade barriers and will also help them with banana market fluctuations in the future by reducing their dependency on one product. •They should explore options of expanding/increasing their banana production in the Latin American countries like Columbia and Costa Rica who have signed the framework agreement with EU. This is because Chiquita is already producing in these countries and even though there is a pending investigation by USTR on unfair attempt by EU to split the Latin American producers, Chiquita has nothing to lose.
•They should look at entering new markets where they can supply from Latin America without spoiling the product due to its perishable nature and there are no trade market barriers. Regions close to EU that maybe explored are Russia and Middle East and the supply costs would be incremental. Prices need to be ascertained though. •The company should look at improving their cash positing and restructuring the debt structure as huge interest payments from 1992 to 1994 has resulted in losses in spite of some operating profit (Exhibit 1). One idea would be to sell assets like land, ships etc. and lease them back to improve cash position.
•With improved cash situation, Chiquita can look at investing in R&D to develop banana derivatives like dried banana, juices etc. and entering new and existing markets. This will help them enhance sales and they can continue with their presence in the EU market. •Improved cash situation can also give Chiquita an opportunity to invest in ACP countries but they need to evaluate the situation as cost of production is higher there (Exhibit 8A). Since prices in EU might not go up, there will be margin loss if they supply EU from the ACP region. They can explore new markets nearby.
•Chiquita should start lobbying with EU to lower trade barriers. They should also approach World Trade Organization as there are already World Bank reports that the European Community’s policy was seriously flawed. •In a longer term, after improving their cash position and restructuring the debt, they can look at mergers/acquisitions with the European companies like Geest/Fyffes and/or EU distributors to get Category B licenses as well.