Agricultural & Applied Economics Association

Dried-Fruit Processing at Dole Dried Fruit and NutAuthor(s): Lois Schertz Willett and Mark CastaldiSource: Review of Agricultural Economics, Vol. 19, No. 1 (Spring - Summer, 1997), pp. 193-197Published by: Oxford University Press on behalf of Agricultural & Applied Economics AssociationStable URL: http://www.jstor.org/stable/1349687 .

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Review of Agricultural Economics-Volume 19, Number 1-Pages 193-197

Dried-Fruit Processing at Dole Dried Fruit and Nut

Lois Schertz Willett and Mark Castaldi

This study presents a case where classic financial analysis was applied to an operations problem in the Dole Dried Fruit and Nut Division of Dole Food Company. Dole Dried Fruit and Nut used three quantitative measures (net present value, internal rate of return, and payback period) and qualitative factors to determine whether it should consolidate several processing plants and the corporate offices into a single plant. The lessons learned from this case can be applied to other businesses evaluating similar consolidation scenarios.

Samuel Northrup Castle and Amos Starr Cooke founded Dole Food Com- pany in Hawaii in 1851. They focused on producing and marketing several

agricultural commodities until 1899 when James Drummond Dole joined them and began planting pineapples. The company later diversified into bananas. These two products, which drove the company for many years, are highly cyclical and their overall earnings generally exhibit great fluctuations. Recog- nizing this pattern and the need to smooth out its earnings and cash flow and reduce its risk exposure, the company diversified in the mid to late 1980s by expanding into other deciduous fruits, such as grapes and citrus, vegetables, juices, and dried fruits and nuts. The dried fruit and nut expansion in 1987 resulted from acquisitions of the agricultural properties of Tenneco West, Bonner Packing Company, and T.M. Duche.

These purchases culminated in Dole Dried Fruit and Nut, a stand-alone division of Dole Food Company. Dole Dried Fruit and Nut is the largest independent producer of dried fruits and nuts in the United States. Dole Dried Fruit and Nut is publicly held with more than $250 million in annual sales. The division buys about 25% of the total dried fruit and nut crop produced in

n Lois Schertz Willett is associate professor, Agricultural Markets, and Stephen H. Weiss Presidential Fellow, Cornell University. n Mark Castaldi is former agricultural economist and director of business strategy, Dole Dried Fruit and Nut Division, Dole Food Company.

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194 Review of Agricultural Economics

California. Dole's crop share varies by commodity. It bought about 6% of the prune crop, 15% of the raisin crop, 10% of the California almond crop, and 40% of the California date crop. Dole's dried fruit and nut markets include export, domestic, 'name-brand, private label, and industrial outlets. Its main competi- tors are SunMaid, Sunsweet, Blue Diamond, Del Monte, and Mariani.

The result of Dole's acquisition maneuvers in the dried fruit and nut indus- try left it with corporate offices at one site and several dried fruit and nut processing plants throughout California. None of the plants was operating at full capacity. Furthermore, because of market competition and narrow profit margins, Dole needed to maintain careful control of its expenses, including production and operating costs. The multiplant situation created logistics problems in terms of scheduling, planning, and tracking inventory.

Dole Dried Fruit and Nut's strategy involved defining three strong entities for its operations:

(a) one for almonds (b) one for dates (c) one for raisins and prunes

Dole closed its Bakersfield, California, plant and concentrated its almond production at its Orland, California, plant, currently at capacity and with low processing costs. The date-processing plant in Thermal, California, was modi- fied to increase throughput and operate as a stand-alone packing plant. The remaining dried-fruit operations comprised four plants. These were in Morgan Hill, Kerman, Locans, and Sunnyside (in Bakersfield), all in California. They ranged in size from 50,000 to 250,000 square feet and processed from 10,000 to 60,000 tons of fruit each year. The Sunnyside plant also was a Dole distribution center.

Dole Dried Fruit and Nut's problem was that it wanted a strong entity for its raisin and prune operations, but had four plants, none of which was at full capacity. Each location had overhead, high cost structures because of outdated equipment and older processing techniques, and administrative and support function duplication. Dole also realized that the margins in the dried fruit and nut markets were thin. It wanted to reduce its costs and have a plant with state-of-the-art equipment to enhance its profitability, provide an acceptable return on investment to its shareholders, increase the quality of its product, and differentiate itself from its competitors. Much of the new equipment under consideration would allow Dole to pursue high-end customers seeking tight specification products that would have larger profit margins.

Analysis Dole considered three options in its review of raisin and prune consolidation

sites:

(a) maintaining the status quo with continuation of operations in all four plants and corporate offices in a separate location;

(b) building a new processing plant;

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Dried-Fruit Processing at Dole Dried Fruit and Nut 195

(c) consolidating the Morgan Hill, Kerman, Locans, and Sunnyside plants and the corporate offices into an existing plant with modifications.

Each option was reviewed using quantitative and qualitative measures. Analysts at Dole Dried Fruit and Nut looked at each option's potential cost savings, capital requirements, and effects on quality and customer service. Dole used three key measures of capital budgeting (net present value, internal rate of return, and payback period) to assess the financial viability of the options. Other factors, such as zoning and ownership of the land surrounding the plants, access to rail and truck transportation, availability of labor, cost and availability of municipal services, proximity to crops, and future urban growth and development, also were considered.

Using this analysis, Dole Dried Fruit and Nut determined that maintaining the status quo [option (a)] was not feasible because processing and operating costs were excessive, which resulted in low profit margins. Option (b), building a new plant, seemed prohibitively expensive because of capital requirements. Historical margins were too low to generate a net present value and internal rate of return that would be acceptable to stockholders.'

Hence, Dole pursued option (c). Dole began to look for an existing plant, to make modification plans for the plant, and to consolidate operations. Dole identified a plant at Malaga, California, as a possibility for purchase. The plant, built in 1969 by Durkee French Company, was attractive because it was an existing food facility, was about the right size for the dried-fruit operations, was close to the crops, and had good access to transportation and distribution.

Dole conducted further capital budget analysis to determine whether it should proceed with the purchase and modification of the Malaga plant. First, Dole defined its capital requirements to modify the plant, to expand it, and to relocate and modify processing from existing Dole plants to the new plant. Dole estimated the cost to be about $28 million. Second, Dole estimated the cost savings, by location and by function or department, of the consolidation. Dole analyzed each processing and packaging line as a stand-alone business, and as such, each had to generate sufficient savings to justify the capital requirements for removal and reinstallation. In its cost savings estimate, Dole considered such things as wastewater treatment, urban pressure, direct labor, administration, utilities, warehousing, repairs and maintenance, security, quality control, property tax, depreciation, and other items. The cost savings were used to project cash flow and estimate net present value, internal rate of return, and payback period.

Dole collected information for the cost savings analysis from the financial offices of Dole Dried Fruit and Nut and the department managers of the operations. Collecting information from each operation's manager gave Dole analysts new knowledge of potential adjustments to the processing plants and

1Company internal target rate of return is 15% minimum, but competition for capital funds from other high-margin divisions and projects placed the threshold internal rate of return at 21%.

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196 Review of Agricultural Economics

Table 1. Scenarios based on assumptions of several factors

Worst Base Best Net present value (million $) 3.4 7.4 14.5 Internal rate of return (%) 17.8 22.8 27.9 Payback period (years) 6.9 4.9 4.5

realistic measures of the savings generated from consolidation of the four plants.

Analysts at Dole Dried Fruit and Nut estimated base-case, worst-case, and best-case scenarios. The scenarios were characterized by varying assumptions of several factors, including wage rates (because of union pressures), changes in market aggression by SunMaid, volume fluctuations from production cycles, changes in consumer and industrial sales, and changes in raw fruit costs. Dole then determined the effects of these variables on cash flow, net present value, internal rate of return, and payback period. Using a discount rate of 15%, the results from each measure were consistent as table 1 shows.

Several components of the overall consolidation project were treated and analyzed as stand-alone opportunities. One opportunity was Dole's review of the sugar spillage and dispensing system. The existing facilities required a laborer to dump 100-pound sacks of sugar into a hopper. The sugar was then augured to the sugar distribution unit for application onto the raisins. The spillage rate was about 0.24%.

At the time of the analysis, it was projected that the new Malaga plant would include a dispensing unit above the distribution units with the dis- penser holding two, two-thousand-pound sacks of ingredients and a rede- signed flow conveyor to the applicator. This new system would have only 0.04% spillage. The ability to buy sugar in bulk, reduce labor costs, and sugar spillage suggested more than $41,000 in annual savings on this issue alone.

Dole also performed a detailed review of the severance pay cost, resulting from inevitable layoffs associated with consolidation of four plants to a single plant. In this analysis, the base rate and benefits were factored in for a reduc- tion of more than one hundred people.

Dole reviewed the installation of a revolutionary, direct-feed distribution system, which takes fruit from the processor to each of the packaging lines directly, eliminating the need for forklifts. Furthermore, Dole assessed the costs and savings of a new automated bulk processing line, which would increase throughput and decrease labor costs, allowing Dole to produce for high-end industrial customers. The cost of the line was about $4 million. As part of the new bulk line, an automated packaging line, which builds a bulk case, collars it, inserts a bag, folds the bag, tapes it shut, and places it on a pallet with minimal labor, also was installed.

The economic analyses of consolidation of the four existing processing plants and the corporate offices into a single plant at Malaga suggested that Dole could save $6.9 million in annual costs, receive an internal rate of return of 22.8%, have a net present value of $7.4 million, and a payback period of 4.9 years.

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Dried-Fruit Processing at Dole Dried Fruit and Nut 197

Solutions Dole Dried Fruit and Nut decided to buy and modify the Malaga plant and

close the raisin and prune processing plants at the Morgan Hill, Kerman, Locans, and Sunnyside sites. Dole decided to retain the Kerman plant as a raw- fruit storage and receiving station. Dole moved the corporate offices from Fresno, California, to Malaga.

Engineering for the Malaga plant began in February 1994. Shortly after that, construction began. Construction was completed in late 1994, and the plant was ready for operation in January 1995. The Malaga plant is 350,000 square feet and can process 80,000 tons of raisins and 20,000 tons of prunes each year. This decision has enabled Dole Dried Fruit and Nut to achieve a substantial savings in its processing budget. Furthermore, Dole has increased the quality of its product and captured more high-end customers, resulting in higher margins and improved earnings.

Implications Dole Dried Fruit and Nut's approach to its problem was based on standard

financial analysis along with consideration of qualitative measures. Its analyses of cash flow, net present value, internal rate of return, and payback period were enhanced by its ability to collect information from employees in the financial offices of Dole and employees on the production lines. It was the information from the employees involved in the raisin and prune processing operations that allowed Dole's analysts to get accurate measures of the savings, net present value, rate of return, and payback period of the project.

Consideration of qualitative measures, such as urban pressure and neighbor- ing land ownership, also contributed to the analyses. No single factor drove Dole's decision. Each of the quantitative measures and the qualitative factors had to indicate success for Dole to proceed with the project. Dole's problem of several raisin and prune plants, high cost structure, and thin margins, and its desire to reduce costs and have a plant with state-of-the-art equipment was met by its consolidation to the Malaga plant. As a result, Dole enhanced profitability, increased the product quality, and differentiated itself from its competitors in its customers' eyes.

Acknowledgments The authors appreciate the helpful comments of the case study editor. Any errors are the authors'

responsibility.

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