Good Fruit Grower

January 15

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36 JANUARY 15, 2015 Good Fruit Grower A ll industries go through periods of consolidation. Industry consolidation can happen over a very short period, like the technology sector, or over longer periods, like the steel and auto industries. There is a typical pattern we see where the first wave of consolidation occurs in a 1-3 year period, the industry remains static for many years, and then another wave of con- solidation occurs as new factors drive change in the industry. The most prominent factors that drive consolidation include market con- ditions, international competition, increased customer concentration, introduction of new technology, and increased capital costs. Consolidation can also take many forms. The two most common forms are mergers that achieve scale and mergers of vertical integra- tion. The first form spreads capital costs over a greater revenue stream and enables a com- pany to better drive margin expansion through scale to cut costs and hold off pricing pressure or, at the very least, generate sufficient returns in a price pressured environment. The second form, vertical integration, enables companies to control the value chain and ensure high quality standards throughout the chain and wring out costs and capture margin through- out the value chain. The fruit sector is not immune from economic reality, and consolidation is on the horizon. The industry has been on the forefront of identifying market trends, developing product to meet the demand, and marketing and branding their product as a premium to capture premium pricing. The strong market over the past few years has clouded changing industry dynamics including larger capital investment requirements in the form of packing technology, continued consolidation among customers, customer desires to deal with fewer suppliers who can provide year- round product with guaranteed minimum quality, and a need to offer workers as close to full-year employment as possible in order to ensure a sufficient supply of workers. The dynamics driving industry change are natural, and while they can be viewed as a risk, they can also be viewed as an opportunity. Because consolidation occurs in waves, it's important to understand where the industry is going and what it will look like in the next 5-10 years. Our view is that the fruit industry will take on the look of a barbell. At one end of the spectrum, there will be smaller independent growers who serve a niche, perhaps organic product or varieties that do not make sense for larger growers to farm. At the other end of the spectrum will be large vertically integrated suppliers of year-round products. In a barbell industry, the mid-sized producer is most at risk as they are not large enough to have the scale to capture margin and compete against the larger suppliers, yet they are not small enough to capture a niche. The second cate- gory most at risk is the smaller producer who doesn't serve a niche with a superior product. So how does the mid-sized and small play- ers strategically adapt over the next 5-10 years to changing industry dynamics? Good Point By Michael Butler, Chairman and CEO, Cascadia Capital Remaining competitive Ignoring change puts your business at risk. The fruit sector is not immune from economic reality, and consolidation is on the horizon.

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