Canadians are right to be concerned when three or four companies effectively control a single national business like wireless telecom. But what if an important and expanding global market were dominated by only a trio of powerful players?
That will be the case in the already concentrated banana universe, once Chiquita Brands International Inc. completes an all-stock merger with smaller but financially sounder Irish company Fyffes PLC. Their combined market share will come in at just under 30 per cent, supplanting current top banana Dole Food Co. Inc. and its 26-per-cent chunk. Fresh Del Monte Produce Inc. holds down the third spot among the banana-peddling elite with about 15 per cent (based on 2011 figures) of a $9-billion (U.S.) export market.
As the positive reaction in equity and bond circles indicates – both companies' shares rose, and credit market observers applauded the combination – the deal makes sense for both Chiquita and Fyffes. Demand for what is already the world's most popular fruit is growing. But producers face serious cost pressures, as the major grocery chains in North America and Europe drive prices lower. Operating margins for both companies run below 3 per cent.
So they simply have to find ways to reduce expenses, which will mainly have to come out of overhead, tax and distribution costs. The companies, which will locate their head office in tax-friendly Ireland, tout pretax cost savings for the merged entity of a minimum $40-million annually by the end of 2016.
The planned merger "is doubtless a reflection of the way the banana market has been going for the last 15-20 years," commented British-based Banana Link, a non-profit organization that lobbies for fair trade in bananas and pineapples. "Two big fruit companies have felt the downward pressure of the big retail buyers on their margins, and consolidation appears to them to be a strategy for survival."
Besides having tough customers, the banana crowd also faces weather and disease risks, both of which have been rising. Most worrisome is the spread of a fungus which threatens to wipe out the Cavendish, the most widely available type of banana and the one that can be found in most of the world's supermarkets.
The plant-destroying fungus variant, known as Tropical Race 4, first surfaced in Southeast Asia a couple of decades ago and has devastated crops across the continent. It has now made the leap to southern Africa and the Middle East, and its arrival in the major growing countries of Latin America, the source of Chiquita's supply, seems inevitable. Although the company plays down the risk, it's hard to contain the spread of something that can be carried in dirt on the bottom of a container, or on a worker's shoes.
So it's a safe bet that the industry will be facing huge costs for powerful fungicides and the development of new, fungus-resistant banana strains, which aren't likely to sit well with anti-GMO activists. The Cavendish itself was the last commercial banana standing in the 1950s, after an earlier variant of the fungus destroyed what was then the main export type, the Gros Michel, causing billions of dollars worth of damage.
Scientists say that the Cavendish and numerous other species that weathered Tropical Race 1 will not be so fortunate this time, warning that production could collapse by 80 per cent or more.
That's the less than rosy outlook that awaits the banana companies, which will need all the concentrated firepower they can muster.