Apple industry's future depends on a united effort

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Washington's apple industry is poised to enter a new and profitable business cycle, Willem Drost, president of Trout-Blue Chelan, one of the state's largest fruit growing and packing cooperatives, believes.

But it's going to take a determined and united effort by marketers to manage the crop so it returns a profit to the grower.

"It had better be a profitable year," Drost declares. "It would be a disaster if this would be a breakeven year."

Three years of losses have put a significant number of apple growers out of business. Remaining growers are banking on a relatively short 2001 crop to compensate for the mounting losses they have been accumulating. If profits on the coming year's crop are not enough to cancel out those losses, there will be more financial failures in the industry, Drost expects.

"We either get together and find unity in this industry and manage this crop profitably, or it's going to be a very brutal process of business failures and a decline of the business, and it will take us years to get out of the downward spiral."

And yet there may be pressure on the market from packers who need quick returns to finish paying their 2000 pools.

"My biggest fear," he added, "is there are so many people in a dire financial situation that there will be a tendency for packers to pack it up and move it out of the door and get money in the door before Christmas. That's a big risk that hangs over this crop."

Drost, who has been one of the most visible and vocal proponents of Washington's new apple and pear marketing cooperatives, believes alliances hold the key to dealing successfully and profitably with the megaretailers.

The Washington tree fruit industry is made up of fragmented suppliers who are facing a concentrated buyer group.

Drost, who worked for an international food company before moving to Chelan two years ago, said it's time for the Washington tree fruit industry to change the way it does business in order to secure better returns. He hoped the consulting firm The Food Partners, which has worked with big agricultural marketing companies such as Land O Lakes and Ocean Spray, would help the industry develop a blueprint that could be a catalyst for companies to start working more closely together.

"This is the time to open up your mind and start doing things totally different," he said. "We have to make structural changes, and that can only work when we work together and find unity."

No one packer can tackle the market alone, Drost stressed. It takes large entities to successfully market the crop, and he hopes the industry will form broad marketing alliances.

He's anxious to see more season-long contract pricing, to avoid undercutting of prices. Retailers and suppliers would agree on margins and prices ahead of time and on what advertising they will do. Suppliers would become active marketers and promoters of the products. Every retail chain wants its own promotion program, not a generic Washington apple program, and these can drive a tremendous amount of volume, he said.

"The problem is, to do contract pricing you need to basically do all of their business the whole year around. In this business, there's no individual packer big enough on their own to be a major supplier for a supermarket," he said.

With contract pricing, a supplier cannot be in the market one week and out the next.

"To make it work, we need to form alliances where you have a group of packers that together can supply the supermarket chains with all the product."

Drost does not believe there's an oversupply of tree fruits from Washington. If there were, the solution would be easy--just take out acreage until supply and demand comes into balance again. But every box of apples packed is being sold, and consumers are buying fruit at high prices. The reason producers are not receiving a share of those high prices is they lack a strong marketing plan, he said. "We don't have the marketing tools to sell this product at the right price into the marketplace.

"Retailers have done an awesome job of keeping retail prices for apples high. The consumer is willing to pay a high price for the product. They don't even know the growers are losing money on those apples. We need to get to a situation where we get our fair share of those prices."

He believes the lack of a unified marketing effort is the reason apple consumption has been flat, while produce sales in general have been growing.

Ideally, there would be just a few marketing groups and marketing alliances in the marketplace, he said. "That would set the stage to bring discipline in the market place. That would give us a chance to get into contract pricing arrangements with retailers and take us out of the daily bidding contest, which is the number-one enemy of our industry."

Each marketing entity would need a balanced mix of products, such as apples, pears, cherries, and soft fruits to supply their customers. This might be accomplished through mergers as well as alliances, where certain parts of the company focus on the various products, so they can be handled on a large scale. One of the reasons packing costs have increased so much in the past decade or so is that packers have been evolving from businesses totally focused on Red and Golden Delicious into more diversified operations with multiple apple varieties and different fruits, Drost said.

In the new alliances that he foresees, individual packers would not try to be all things to all people.

"I am of the philosophy that we, as an organization, are better off doing a limited amount of things extremely well at the least possible cost, rather than going overboard with too much diversification.

"What I hope is that these alliances will grow into product specialization arrangements, where you focus on what you do best and you do it on a larger scale," he explained.

For example, the microclimate in Chelan is conducive to certain varieties, and the area has a worldwide reputation for its premium Red Delicious apples.

"We work hard to maintain the mystique of the Chelan apple," Drost said. "It's something we need to capitalize on because it has value. There's value in the reputation that they have built over generations in this growing region."

But Drost believes Trout needs to reach out and expand in order to remain a competitive player in the industry.

"We could not, as an organization, be a survivor long-term and be a cost-efficient operator if we relied on the Chelan Valley," he said.

Trout-Blue Chelan receives apples from the Canadian border to Mattawa, and will cast its net further and further to find apples that meet its quality standards and its marketing plan. Last season, the cooperative packed 320,000 bins (about 6 million packed boxes) of apples. Drost wants more.

"If you really want to be a long-term, low-cost producer, you need to be at least 350,000 to 450,000 bins," he said.

Drost believes there will be a place in the industry for some small-scale niche players--those who have a special product for a special market--but not for midsize packers.

Though efficiencies are important in paring down costs, it is marketing that will save the industry, he said. "On the cost side, there's only so many gains to be had. What the industry really needs to survive is more dollars per box to come from the marketing side."

But in the global market, prices will never be sky high, he said. Global forces will keep prices within a range of perhaps $12 to $16 a box, he said. It costs the grower $6 to $7 to produce the apples, so if a packer is not able to pack them for $6 or $7 or less, then it is not economically feasible in the long term.

Trout-Blue Chelan has been making major investments in packing house improvements designed to increase efficiency and reduce fruit loss. It has a $2 million automated bag line that takes very few people to run, and can fill the bags to a precise weight, so there's no need to overfill them and give fruit away.

It also has a new addition to its commit-to-pack line for Golden Delicious apples, which has greatly reduced losses from fruit handling. Revenue from the additional fruit that can be sold will quickly pay for the new equipment, said Drost, who won't make any improvement in the packing house that won't pay for itself within 2.5 years or less.

He has other renovation plans, including internal defect sorting equipment when it becomes available, another commit-to-pack line for new apple varieties and pears, and a 50-lane presizer, which would be more efficient than the two 28-lane presize lines it has now.

"We will do it when the time is right," he said. "The first thing is to make some serious money for the growers."

Drost expects Red Delicious to remain Washington's number one variety for some time, and notes that it's a good variety for growers because it is easy to produce high yields of quality fruit.

"If we are better marketers, I can guarantee Red Delicious is going to be a more profitable apple. I think it would be a mistake to eliminate all the Red and Golden Delicious from the variety mix," he said.

But that doesn't mean Red Delicious should be produced industrywide in any amount, Drost commented. He would feel more comfortable with Red Delicious representing 30 percent of the crop, rather than 40.

Trout-Blue Chelan also packs pears--which amount to about 10 percent of its production--and has plans to pack cherries when the volume in the Chelan area is enough to justify installing a line--probably 4,000 to 5,000 tons. Orchardists have been diversifying into cherries because of low apple returns.

Some of the area's growers have sold their orchards as home sites, because of the low value of orchard land, and Drost said the Lake Chelan area's fruit acreage will shrink. However, removed orchards tend to be the lower producing ones, and he expects the more productive orchards will remain, so that total production may not decline much.

Though he expects to see consolidation of orchards in the Chelan area, he believes there is a place in the industry of the future for the smaller grower. As members of a large cooperative, the small operator can still enjoy the benefits of economies of scale.

"As long as we have the total mix of apples, we don't care that there are certain growers that are growing Red Delicious. If they produce enough bins per acre, they're going to be profitable with it. There will be growers who are exclusively producers of Golden Delicious and Red Delicious, and that's fine as long as we, as an organization, have the right mix to match up with what the market needs."

Drost thinks the outlook is improving. "There's still going to be more business failures among growers and packers. It's also the way the business rejuvenates itself because you see some successful operators be in a position to pick up acreage at low cost, and lowering their breakeven significantly.

"We're at the beginning of a new business cycle. Produce will continue to be a fast-growing category in the supermarket. Prices will continue to be high. If we just get a grip on the market, you will see profitability coming back into the industry." m