Storm Clouds Gather Over Sunkist

Is the 21st century global economy putting a squeeze on Sunkist Growers Inc., the 120-year-old citrus growers cooperative? In February, it sold off its landmark Sherman Oaks headquarters, only to buy a smaller building in Santa Clarita. And late last month, the cooperative got caught dipping into retirement funds to pay salaries and benefits for employees and managers. A U.S. District Court judge in Los Angeles ordered Sunkist to pay back some $1.6 million that it had taken from the retirement funds over a five-year period, which Sunkist contends was an accounting error. All this comes as the industry has evolved, with South American imports stealing market share from the California citrus farmer in the summer months while global tariffs squeeze the export business. “The entire market has opened up, so the buy-in of oranges has become much more sophisticated and globalized,” said Ali Dibadj, senior analyst at New York investment bank Sanford C. Bernstein & Co. covering food and beverage giant Pepsi Co., which owns popular orange juice brand Tropicana. “It’s a big challenge for local players and farmers to defend. It’s just become tougher and tougher to deal with this broader global change.” Sunkist declined to comment for this article, but at least on the surface, its financial status seems strong. In its annual report for last year, it stated that revenue topped $1 billion for the third straight year, while farmer payouts hit $840 million, up about 3.5 percent from 2011. “Sunkist continues to be the dominant player in our industry,” said Joel Nelsen, president of California Citrus Mutual, a non-profit trade group in Exeter. “Our business is healthy and they’re a big part of it.” Business model The non-profit cooperative’s business model has remained stable for decades. It’s essentially a marketing entity that oversees and organizes all the transportation, contracting and sales for its more than 6,000 farmers in California and Arizona. It offers citrus farmers large and small an opportunity to easily sell their products on the open market. By pooling the product, even small output operations can get better prices. “I’m too small to market myself,” said Richard Pidduck, who runs Santa Paula Creek Ranch in Ventura County. “I need an avenue for selling my citrus products and they give me that.” Pidduck, who predominantly grows lemons, sends all of his produce to a cooperative packing house. From there, his lemons will travel to grocery stores, which is where most of the citrus from Sunkist ends up. Only about 10 percent ends up in juice, a market that is dominated by Florida citrus growers, where the produce quality is lower. Both the packing house and Sunkist get a piece of the action to cover overhead, costs and marketing. But Pidduck said most of the money ends up back in his hands. He would not be precise, but said the cooperative’s cut was “very small.” An additional revenue stream for Sunkist that it shares with farmers are its various brand licensing deals: Dr Pepper Snapple Group Inc. of Plano, Texas distributes the popular Sunkist orange soft drink; General Mills Inc. of Minneapolis sells Sunkist branded fruit snacks, fruit and grain bars and baking mixes; and WN Pharmaceuticals Ltd. of Coquitlam, Canada, even sells a line of Sunkist vitamin supplements. In all, the cooperative boasts having about 800 licensed products in 76 countries. New players Darren Tristano, executive vice president at Chicago food industry research firm Technomic Inc., said agricultural operations like Sunkist have long held a size advantage. “What you’re seeing is that the large are getting larger,” he said. “It makes it harder for those that don’t have the scale to compete.” Nonetheless, there are changes in the industry affecting domestic citrus growers. “In the past 10 years, there has been a significant increase in citrus imports, primarily from the Southern hemisphere. It has eroded some of our market share,” said Nelsen, though he couldn’t put a precise figure on the impact. What’s more, Nelsen said increases in international tariffs have made it hard for West Coast farmers to work in the classically profitable Asian and European markets. “We used to export a ton into Asia, but tariffs make that difficult. And the industry in Europe is subsidized, so we can’t compete anymore,” he said. Jim Finch, a Sunkist grower who has 500 acres of mostly mandarin oranges in Ventura County, said the industry changes are impacting his bottom line. “The imports are definitely adding competition and I definitely feel that,” he said, though he would not supply any monetary figures. Domestic rivals also are getting stronger. Paramount Citrus, a unit of Roll Global LLC, owned by L.A. billionaire backers Stewart and Lynda Resnick, has some 47,000 acres of citrus farmland. And this summer, Paramount announced it would spend $100 million over the next five years to market its “Wonderful Halos” brand of California mandarins. The firm has also been making acquisitions of other citrus outfits in an effort to increase its market share. However, Sunkist has about 328,000 acres in its system, far and away more than any other West Coast group. Sun Pacific in Pasadena, which markets the “Cuties” brand made famous through a former partnership with Paramount, grows and markets some 35 million boxes of citrus fruit a year, according to its website. But Nelsen said Sunkist remains the 800 pound gorilla, with a dominating share of the 180 million 40-pound packages of West Coast citrus that are shipped each year nationwide. “Sunkist has over 50 percent of the lemon industry and over 50 percent of the summer orange industry. And probably 40 percent of the navel orange industry too,” he said. Time of change Still, the decision by the Department of Labor, following a lawsuit brought by the government Employee Benefits Security Administration, was surprising. Lynn Dudley, senior vice president for retirement and international policy at the American Benefits Council, an employee benefits advocacy group in Washington D.C., said smaller firms such as Sunkist often don’t know enough about the rules regarding pensions and make mistakes when trying to administer pensions in-house. But she said it was odd that no one at Sunkist noticed the problem over the five years – January 2006 to April 2011 – cited in the suit. “There’s every reason in the world that they ought to have known the rules,” she said. “I’m surprised they didn’t have any outside people looking at their paperwork.” Joan Wickham, a Sunkist spokeswoman, called the violation a “basic misunderstanding” in an email following the decision. “Sunkist never made any attempt to conceal its expense practices,” she said in the email, which noted Sunkist plans to have retirement plans handled by a third party going forward. This year has also included a shift in location for Sunkist. In February, the cooperative sold its building in Sherman Oaks to IMT Capital Inc. The Sherman Oaks development firm has plans to build out the 8.3-acre campus around the 14130 Riverside Drive building with mixed-use buildings. Scott Unger, senior associate at the Glendale office of Charles Dunn Co., said the sale of the 123,000-square-foot office building and corresponding land fetched about $36 million. And in August, Sunkist bought the 96,115-square-foot LNR Entrada Gateway Center at 27770 N. Entertainment Drive in Santa Clarita from developer LNR Property Corp. of Miami Beach for $21.9 million, Unger said. Sunkist still leases space in its Sherman Oaks headquarters, with the term set to expire in August 2015. It then presumably will move into its new space. “I think it is cutting costs and a sign of the times,” Unger said. “This frees up money.”