Yes, We Have No Profits The rise and fall of Chiquita Banana: How a great American brand lost its way.
By Nicholas Stein

(FORTUNE Magazine) – My first glimpse of the Chiquita banana plantations in Bocas, Panama, comes through the window of Sweet Bocas, the twin-engine company plane transporting me across the Costa Rican border to this remote swath of northwest Panama. As I look below, the lush rain forest, which creeps inland from the Caribbean coast, gives way suddenly to the manicured plots of the banana plantations. These symmetrical squares seem the ultimate triumph of man over nature--a dark green quilt stitched from the surrounding jungle.

When you enter the plantations, the calm and order that seem so apparent from 20,000 feet disappear, and the tidy plots morph into roiling jungle. The tropical air is heavy with humidity, the muddy ground strewn with the tangled remains of fallen leaves and stalks. Banana plants sprout from the earth like magic beanstalks. Red twine used to stabilize the plants dangles in intricate cobwebs. Stems laden with cascading bunches of green bananas, wrapped for protection in pale blue plastic, hang just out of reach. And the banana workers--their tattered clothes and dark skin covered with the gooey latex that drips from the plants, their machetes constantly in motion--dart from one plant to the next, harvesting and pruning.

The scene probably looks much as it did a century ago, when Chiquita Brands International--then the United Fruit Co.--first hauled bananas from this area. Though harvesting and packing and shipping techniques may have changed, the essence of Bocas remains the same. This is Chiquita country, and the interests of the company are indivisible from those of the people who live and work here.

That may change later this year, when Chiquita is expected to file for Chapter 11 bankruptcy protection--an act that could result in layoffs at the plantations. Over the past decade, the company has lost more than $700 million and has watched its stock price plunge from a high of $50 in 1991 to a low of 48 cents. In January, after a dismal 2000 in which the company lost $112 million on revenues of $2.3 billion, Chiquita announced that it could no longer pay the interest on its $862 million debt.

How could a company with a brand name recognized the world over and nearly a third of the market for one of the globe's most popular foods find itself in such a precarious position? According to Chiquita, the answer is based on a single circumstance: the European Union's decision in 1993 to enact a restrictive quota system, which limited the access of Chiquita (and other non-European companies) to what was then its largest and most profitable market--the 15 member states of the EU. Overnight, the company says, its share of the European banana trade was cut in half. For the past eight years, Chiquita has engaged in an expensive and well-publicized trade dispute with the EU to force it to reverse its position, a battle Chiquita says has cost the company hundreds of millions of dollars and left it without the resources to service its debt. Though the feud was resolved this summer in Chiquita's favor, the reprieve may have come too late. "We had a good business," says CEO Steven Warshaw. "Then the [EU] quota system came into effect, and we had eight-plus of the most trying years you could imagine."

At first glance, Chiquita's explanation for its decadelong slide seems both logical and clear. But like an aerial view of the banana plantations, it only hints at the deeper, more complicated story that lies beneath. After dozens of interviews with former Chiquita executives, independent banana producers, industry analysts, and other experts, that story begins to emerge. It is a chronicle not simply of unfair quotas and bad luck, but of poor management--of an executive corps that placed risky bets, made poor decisions, and alienated customers and supporters on Wall Street. The company's dispute with Europe did not cause these problems. It merely exposed and exacerbated them.

In 1998, after years on the periphery of the national consciousness, Chiquita once again found itself in the spotlight. An 18-page section of the Cincinnati Enquirer--headlined CHIQUITA SECRETS REVEALED--charged the company with perpetrating a host of political, environmental, and human rights abuses in Central America. Then, eight weeks later, after learning that the story's lead reporter had illegally hacked into Chiquita's voice-mail system, the newspaper issued a front-page apology, fired the reporter, and agreed to pay Chiquita $14 million in damages. The Enquirer's mea culpa made headlines across the globe, but Chiquita, happy to talk about how it had been violated, never addressed the validity of the newspaper's claims. Jeff Zalla, Chiquita's corporate responsibility officer (yes, the company now has one), dismisses most of the newspaper's charges but acknowledges that it was a mistake to remain silent. "It left some people with an unsavory impression of our company," he says.

Throughout its history, the company, long referred to as "the Octopus" for its broad reach and influence, has often left such an impression--on employees, competitors, politicians, and anyone else who got in its way. To grasp the significance of Chiquita's recent decline, you need to understand what the company once was: an enormously powerful player in the banana industry, the American corporate establishment, and the Latin American countries in which it operates. So entwined were these nations with the company's business that the term "banana republic" was coined to describe them.

When United Fruit first opened its doors for business in 1899, such prospects would have been hard to imagine. At the time, the banana business was in its infancy. Though traders had been bringing small quantities of the fruit from the tropics to the U.S. and Europe since the 1860s, it wasn't until the development of the steamship that large-scale transportation of such perishable cargo became possible. Created by the merger of two of the largest operators, United Fruit quickly came to dominate its industry. In only its second year of operation, the company accounted for 75% of the 20 million banana stems sold in the combined U.S. and European markets.

As demand grew, so did United Fruit. By 1955, banana sales in Europe and the U.S. had risen sixfold, and United Fruit's share of those markets was 40%. The company employed more than 60,000 workers, operated the world's largest private shipping fleet, and owned more than 1.7 million acres of land and 1,100 miles of railroad in Guatemala, Honduras, Costa Rica, Panama, Colombia, and Ecuador--the republics responsible for 60% of world banana exports. United Fruit's $288 million in sales that year would have placed it at No. 106 on the first FORTUNE 500 (back then, the list included only industrial corporations).

The company was not simply a beneficiary of changing consumer tastes. Rather, United Fruit's own innovative practices were responsible for much of its growth--and by extension the growth of the entire industry. The company was a pioneer in the use of pesticides and herbicides; the first to ship its cargo in refrigerated vessels; and the first to brand bananas by labeling them with stickers. Its 1944 advertising campaign--featuring the Carmen Miranda-esque Miss Chiquita and the popular "Chiquita Banana Song"--was one of the most memorable in history and helped make the banana the world's most widely consumed fruit.

The labor, technology, and infrastructure required to get a box of bananas from the plantations of Latin America to supermarkets in the U.S. is truly astounding. Bananas grow year round, in 13-week cycles, and need to be harvested daily. Because the stems have to be cut by hand, the process is highly labor intensive. Once the stems are harvested, workers take them to packing plants, where they are separated into bunches, sorted, cleaned, labeled, and placed in cardboard boxes. The boxes are stacked in refrigerated containers, transported to the nearest port, and loaded onto refrigerated ships. The cool atmosphere keeps the bananas from ripening until they reach their destination. Most large supermarket chains have ripening rooms, which introduce small amounts of ethylene gas, prompting the bananas to reach their optimal level of ripeness. All this for a fruit that, in North America, sells for less than 50 cents a pound.

Since most of United Fruit's assets and workers were based in Latin America, the company became a major force in the economic, social, and political fabric of the region. United Fruit recognized early on that infrastructure would be critical in delivering bananas to market on a reliable basis, and it was responsible for building many roads and train tracks. It also built entire villages with homes, schools, medical facilities, and factories that made cardboard boxes and other ancillary products.

But as its power in the region grew, United Fruit sought to control the workers it employed and the leaders of the republics in which it operated. "Through bribery, fraud, chicanery, strong-arm tactics, extortion, tax evasion, and subversion [United Fruit] grew to be a swaggering behemoth," writes Stephen Schlesinger, whose book Bitter Fruit details the involvement of United Fruit and the U.S. government in the 1954 overthrow of Guatemala's democratically elected president. "America smuggled guns on banana boats and trained an army of mercenaries on [United] Fruit Co. plantations," writes Thomas McCann, a former vice president of public relations, in his book On the Inside. "Companies like United Fruit...became political instruments. The government got what it wanted through the use of the company, and the company got what it wanted as well."

For years, rumors circulated about United Fruit's nefarious activities. Then, in 1975, the Securities and Exchange Commission uncovered a $2.5 million bribe the company had agreed to pay a Honduran official in return for reducing his country's banana tax. At the time, corporate raider Eli Black led the company. Black had gained control of United Fruit in 1968 and had merged it with his own public company, AMK--made up principally of meatpacker John Morrell--under the name United Brands. But when the bribery scandal surfaced, Black was no longer in control. A few weeks earlier he had jumped to his death from the window of his 44th-floor office in midtown Manhattan.

The company Black left behind, though still among the largest in America (No. 84 on the 1975 FORTUNE 500 list), was not the same as the one that had dominated its industry and Latin America for so long. Its reputation was sullied, its finances were in shambles, and its competitors--Standard Fruit (now Dole) and Del Monte--were making inroads into many markets, especially North America.

One member of the United Brands board at the time was a 55-year-old high-school-dropout-turned-corporate-raider named Carl Lindner. Lindner had built his reputation--and a sizable fortune--reviving distressed corporations. (He had also left behind a trail of SEC consent decrees relating to stock-manipulation charges.) Intent on doing the same for United Brands, he slowly accumulated a majority interest and, in 1984, installed himself as chairman and CEO. And for the next eight years, it appeared as if he might succeed.

Europe's restrictive banana quotas did not emerge suddenly after the formation of the EU in 1993. They began at the end of World War II, when many European nations decided that banana production was fundamental to the social and economic health of their former and current colonies and territories in Africa, the Caribbean, and the Pacific. To encourage St. Lucia, Dominica, and others to grow the fruit, many European nations gave preferential treatment to bananas grown in those territories and granted European traders exclusive rights to sell them.

The countries most protective of their former territories, including Britain, France, and Spain, kept strict quotas on Latin American bananas and imposed steep tariffs on the fruit that did get in, limiting the access of United Fruit and other Latin American producers. Denmark, Belgium, and others levied tariffs but allowed significant Latin American imports. And Germany, Europe's largest consumer of bananas, maintained a free market. So in spite of the barriers, United Fruit had access to many European markets. Moreover, growing conditions in the former European territories were vastly inferior to those of Latin America, meaning the territories' combined output could fill only a third of Europe's demand, leaving plenty of room for United Fruit and other Latin American producers to supply the rest.

The quotas also resulted in greater profits for Latin American producers. Since much of Europe was obliged to purchase fruit from inefficient and expensive producers in its former territories, retailers in Europe had to charge twice as much as their counterparts in North America, enabling efficient producers like United Fruit to rake in twice the profits.

The company began to focus more of its attention and marketing dollars on Europe, especially the continent's less protected markets. By the late 1970s, even as the company lost ground to Standard Fruit and Del Monte in North America and other parts of the world, Chiquita remained Europe's dominant Latin American brand.

When Carl Lindner took control of the company, he sought to increase its market share in Europe even further. Lindner wasted little time putting his stamp on the company. He moved United Brands' corporate headquarters from New York to his native Cincinnati, where his $16 billion holding company, American Financial Group, is based; changed its name to Chiquita; and replaced many of its seasoned banana men with younger executives, including his son Keith, whom he installed as president in 1989. Recognizing Europe's potential as a cash windfall, the elder Lindner began to reconfigure the company's supply chain--from its mix of production regions to the deployment of its ships--to better serve the European market. Under the Lindners' guidance, Europe became Chiquita's primary engine of growth. Between 1987 and 1991, European sales grew an average of 8% per year and soon made up more than half of the company's $1.8 billion in annual banana sales and an even larger portion of its earnings.

Around this time, the European Community finalized plans to form a single trading block and began to consider what to do about banana quotas. They debated whether to adopt the highly restrictive policies of Britain and France, the free-trade approach of Germany, or something in between. Convinced that post-Cold War Europe would develop a relaxed regulatory environment, Chiquita embarked on an ambitious and expensive expansion of its European operations. "We were led to believe by people throughout the governments of Europe that there would be a gradual liberalization of trade policy," says Warshaw, at the time one of the company's senior executives. The Lindners outlined their aspirations in Chiquita's 1990 annual report: "The European Community, which is poised to become a single market in 1993, may offer Chiquita access to previously restricted countries, including the United Kingdom, France, and Spain. The Company continues to make strategic enhance its prospects in these countries, where almost 200 million potential customers live." Chiquita also believed banana consumption would escalate in the newly liberalized economies of Eastern Europe and the former Soviet Union.

The expansion efforts focused on two areas: banana production and shipping. Between 1989 and 1993, Chiquita increased its production capacity in Latin America by 32,000 acres. To handle the transportation of all those bananas, the company took delivery of 14 custom-made refrigerated ships that at the time were the largest ever built. The total cost of these initiatives exceeded $1 billion. Since the majority of that cost was financed with debt, the expansion left the company in a highly leveraged position. (In 1989, Chiquita's debt was 96% of its equity; by 1993, the debt had ballooned to 270% of equity.)

In 1991, Chiquita had its best year in decades, posting an operating income (earnings before interest and taxes) of $226 million on revenues of $4.6 billion. More than 80% of those earnings came from its European division.

Management gurus say you can't really judge a corporate leader until he or she is tested. For Keith Lindner, the youngest of Carl's three sons, that test came in 1992. Keith had taken over as president and COO in 1989 at the age of 29 (his father retained the CEO title) and had shepherded the company through two years of growth. Then, in April 1992--well before the EU quota system took effect--Chiquita reported that its first-quarter earnings would fall 85% short of the consensus analyst estimate. The company ended up posting losses that year of $284 million.

The sudden shift in fortunes was largely a result of the company's own miscalculations: The increase in Eastern European demand that Chiquita anticipated never materialized, resulting in a supply glut and depressing prices worldwide. But instead of accepting any responsibility for the company's poor earnings, the Lindners blamed the results on "a decline in product quality resulting from an extraordinary outbreak of disease and unusual weather patterns."

The earnings shortfall shocked analysts, who had been assured by Lindner less than a month earlier that Chiquita would hit its targets. "Not only do we now have no confidence in the earnings, but we have serious doubts about the abilities of management to deal with the company's problems," wrote C. J. Lawrence food analyst Timothy Ramey in a report accompanying his "sell" recommendation.

A few months later the EU announced that its new banana quota and licensing system would go into effect July 1, 1993. Rather than the loosely regulated model upon which Chiquita had wagered its billion-dollar expansion plans, the new system resembled the highly restrictive policies of Britain and France. Prior to the implementation of the new system, 70% of the bananas sold in Europe came from Latin America. Chiquita was responsible for 40% of those sales, giving the company a 22% share of the Continent's banana market. Once the quotas were put in place, Chiquita says, its market share was sliced in half, costing the company close to $200 million a year in lost earnings.

Chiquita suddenly found itself in a precarious position. Its most profitable market had been obliterated. It had a surplus of bananas and nowhere to sell them; a fleet of ships and nowhere to sail them; and a mountain of debt and no way to pay it. "If an angel had come to us and said, 'Trust me, Europe is going to be thoroughly regulated, the size of the market is going to be smaller, and you are going to have your market share illegally taken away,' the plan for Chiquita would have been completely different," says Warshaw. "And the enterprise value of Chiquita would be many billions of dollars higher."

Chiquita was not the only banana company to misread the EU's intentions. In the late 1980s, Dole had also ramped up its operations with the expectation that a united Europe would mean a less regulated Europe. Yet a decade later Dole's balance sheet is clear, while Chiquita's is awash in red ink. True, Dole had a smaller share of the European market and less to lose. But the difference between the two rivals comes down to how each of their management teams handled the crisis.

While Dole continued to protect its non-banana-related assets--its pineapple business accounted for much of the company's success in the 1990s--Chiquita focused almost exclusively on bananas. Perhaps the company's biggest blunder was its decision in 1992 to sell John Morrell, the meatpacker that contributed nearly half of the company's revenues. After languishing on the block for three years, Morrell was purchased by Smithfield Foods in 1995 for about $58 million. With much of the same management team still in place, Morrell now contributes earnings of between $40 and $50 million a year to Smithfield. "The company pretty much paid for itself in two years," says Smithfield's Jerry Hostetter. According to one former Chiquita executive, the protracted sale and low selling price were a result of panic: Chiquita, spurred by concern over its mounting debt, had announced its intention to sell Morrell prematurely, before properly calculating its value or gauging the market conditions.

Keith Lindner declined to comment about the Morrell sale, or any other aspect of the company's business, but Warshaw says Chiquita felt pressure at the time to reduce its debt. It also unloaded Numar, its edible-oils business, in 1995. "It was an excellent business," says Warshaw. "And it has done very well since. But we needed to reduce debt and deleverage to survive."

In the early 1990s, Chiquita also made several smaller mistakes that exacerbated the company's financial woes. It bought 43-foot containers to ship its fruit--rather than the standard 40-foot size--only to discover that when filled they exceeded the weight restrictions for U.S. highways. It made an expensive foray into the frozen-fruit-bar market, only to abort when profits failed to follow. And, on a whim, it purchased a tilapia breeding company. When the fish business faltered, Chiquita was forced to turn to Morrell (then still part of the company) to help unload the fish.

As it struggled with the fallout of the trade dispute, Chiquita faced serious labor problems in Latin America, forcing it to curtail production, lay off thousands of workers, and incur millions of dollars in losses.

These developments weren't well received by Wall Street analysts. Nor was the discovery of Honduran court documents claiming that a Chiquita executive had been involved in a kidnapping attempt of an executive at rival Fyffes. Though the executive protested his innocence, and the case was later dismissed, it provided analysts with another reason to distrust the company. "That [incident] really sealed the stock's demise," recalls one analyst. "We just thought this company was not only fundamentally dishonest but also stupid. Increasingly, people just stopped covering them."

After years of dominance in the U.S., Chiquita lost ground to Dole and Del Monte. "The Lindners got rid of a lot of old-school people," says a former Chiquita executive, "people who had relationships on the produce side. And the new managers they brought in didn't understand the business." In 1995, the Cincinnati division of the Kroger supermarket chain announced it was switching from Chiquita to Dole. The move was especially embarrassing for Carl Lindner, who was a major shareholder of Cincinnati-based Kroger and is an influential member of the city's business community.

"If a secretary on the 27th floor of the Chiquita building got pregnant out of wedlock," jokes a former Chiquita executive, "the company would blame it on the European Union." Indeed, in each year that the company posted a net loss--as it did in eight of the past nine years--it attributed its poor performance to the EU regime. "As a result of government legislation," says Bob Kistinger, president of Chiquita's fresh food division, "what took us years to develop was wiped out, without any ability on our part to deal with the issue."

Similarly, Chiquita says that its weakened position in Europe made it vulnerable to the mid-1990s rise of the U.S. dollar, which the company blames for its current cash crunch. "Ultimately," says Warshaw, "we reached the point where we had to restructure the parent company's debt because of the weakening of European currencies." (Of course, Chiquita didn't credit strong European currencies for bolstering its earnings in the late 1980s.)

It was this attitude that led Chiquita to challenge the EU. Where other corporations might have resigned themselves to the new quota system, Chiquita was determined to regain the market share it felt had been stolen. Faced with what it considered a hostile foreign act, the company turned again to the ally that had helped it in the past--the U.S. government.

But much had changed since the days of the Cold War, when the Octopus and the CIA collaborated to keep Latin America free of communism and profits flowing to the company. Besides, the U.S. was reluctant to antagonize its European allies to protect a product that wasn't even produced in America. Internal memos from the U.S. Trade Representative (USTR) suggest that, in 1993, the banana issue was a low priority. Yet the following year, the USTR joined Chiquita in an all-out trade war with the EU. At first, the U.S. battled cautiously within the courtrooms of the World Trade Organization. But in 1999, with the EU refusing to replace its quota system even after two separate WTO panels found it "illegal," the USTR went a step further, imposing prohibitive sanctions on select EU products, including coffeemakers and bath oils.

Some have suggested that the change in the USTR's position was influenced by the more than $5 million donated between 1993 and 1999 by Carl Lindner, his family, his companies, and his executives to the Republican and Democratic parties. In 1992, the year before the EU announced its quota system, Lindner and his associates donated a combined $67,500 to both political parties, a number not unusual for the head of a large multinational corporation. Yet in 1993, the year Chiquita approached Washington for help, Lindner's contributions rose to $484,000. They continued to climb for the duration of the trade war, reaching a peak of $1.4 million in 1998, the year before the U.S. imposed sanctions. By the mid-1990s, Lindner had become one of the top donors in the nation, warranting invitations to the White House and even a night in the Lincoln bedroom. (The USTR did not respond to requests for an interview, but it has denied any link between Lindner's contributions and its actions.)

This summer, in response to the USTR's sanctions, the EU finally relaxed its quotas. A new system, which went into effect July 1, returns import volumes to levels similar to those existing prior to the EU regime, when Chiquita dominated the competitive landscape. In 2006, the EU plans to move to a tariff-only system. While the new system gives Chiquita the license to import more bananas, it doesn't restore the market share the company lost over the past eight years. Chiquita now faces the formidable task of convincing customers that its financial woes will not affect its performance.

Acre by acre, the reddish-brown mud that covers the Bocas plantations is being transformed into green. Slowly, ivy-like plants are taking root at the base of the banana plants, reducing Bocas' reliance on herbicides by 75%. Plastic sacks hang at regular intervals so workers can dispose of waste. Nearby, rotting bananas lie neatly in landfill pits. These projects are part of a six-year, $20 million environmental improvement campaign. Chiquita's plantations are now certified according to the dictates of the Rainforest Alliance, an American nonprofit organization. And last year Wal-Mart named Chiquita its most environmentally conscious supplier--quite a departure for a company that long battled charges of environmental and labor abuse.

Chiquita recently released a corporate responsibility report acknowledging the company's troubled past and promising a more open future. "Times have changed," writes Warshaw. "Our stakeholders expect more of us. We expect more of ourselves. Our understanding of...what it means to be a responsible corporate citizen is quite different than it was not long ago."

One of those changes was the elevation of Warshaw this summer to the position of CEO. A trim, square-jawed 48-year-old, Warshaw came to Chiquita in 1987 and replaced Keith Lindner as president and COO a decade later. (Lindner moved to the parent company, American Financial, where he and his brothers are co-presidents.) In fact, since the Cincinnati Enquirer imbroglio, the Lindners have taken a more hands-off approach to Chiquita. The family stake in the company, once 55%, now sits at 36%, and with Chiquita shares trading at under $1, their investment is insignificant relative to their other holdings. Company executives say Chiquita's newfound openness is not unrelated to the Lindner's diminished role.

Since Chiquita announced in January that it could no longer pay its debts, Warshaw has had to guide the company through one of the most challenging periods in its long history. Chapter 11 is a costly process. To move through it as quickly as possible, Warshaw has worked diligently over the past year to orchestrate a prearranged bankruptcy, in which Chiquita bondholders agree to relieve the company of its debts in exchange for equity. Though Chiquita has already realized cost savings of $150 million over the past three years from layoffs and streamlining, more of these measures are likely to follow.

Ironically, the company's weakened condition seems to have quelled any threat of a takeover or a breakup. In fact, a Latin American company that had amassed nearly 10% of Chiquita's shares and was considering a takeover will be left with a diluted stake once Chiquita's bondholders swap their debt for equity.

The end to Chiquita's eight-year trade dispute with the EU also leaves the company in a stronger position. But it removes the crutch the company has used to explain away its problems. Chiquita has owned up to its spotty environmental record and is taking steps to improve it. If it wants to emerge from Chapter 11 with a chance to succeed, the company similarly will need to acknowledge its corporate missteps.