Fresh America Corporation History

Company Perspectives:

As we go forward, we will diligently continue the strategy that has brought us to this point. We will target acquisitions and alliances that offer synergy with our existing operations, maximize utilization of our distribution network and capabilities, and represent both efficient use of capital and profitable growth. The diversification of our business base is calculated into that equation. Although we intend to further expand our geographical reach, we are not gratuitously "filling in the map." The opportunities we seize are the result of prudent, patient decision-making. We look for prominent customers that we can perform with; we seek those acquisition prospects whose management is strong and intact. We measure possibilities by their potential effect on three key groups, our customers, associates and shareholders. We only pursue new business that provides meaningful advantages to all three.

Company History:

Fresh America Corporation is a growing national force in the procurement, processing, warehousing, and distribution of fresh produce and other refrigerated perishable products. The company provides items such as apples, bananas, oranges, onions, potatoes, seasonal berries, high-end specialty produce, pre-cut fruits and vegetables, packaged salads, and fruit juices to marketers. Working with hundreds of growers and suppliers nationwide, Fresh America has dedicated itself to sustaining strict quality and performance standards, while maintaining strong vendor relationships, volume purchasing, and provision of products even in times of short supply. The company operates in 39 states through 14 distribution centers and processing plants. Fresh America competes with food service companies, produce distribution companies, and wholesale food distribution companies. The company's business is seasonal, with its greatest quarterly sales volume occurring in the fourth quarter. Factors such as adverse weather conditions, unavailability of quality produce, and heightened product cost are among the uncertainties of the industry.

1989: First Major Contract

Fresh America was incorporated in Texas in May 1989 as a successor to Gourmet Packing, Inc. Their core business, beginning with the company's inception, involved providing fresh produce and other perishable products to Sam's Club membership warehouse clubs (a division of Wal-Mart Stores, Inc.) under a special agreement with that company. Mass merchandising through the 187 Sam's Club outlets that Fresh America had contracted to supply, provided accelerating revenues for Fresh America, largely accounting for growth from $22.5 million in fiscal 1993 to almost $32 million by the end of 1994. In an effort to purchase additional transportation equipment and other fixed assets, repay indebtedness, improve their management information systems, and fund working capital, among other things, the company went public in May 1994, with an offering of approximately 1.5 million shares at $9 per share. In that same month a staff writer for the Wall Street Journal stated that Fresh America reported a "first quarter loss of $43,000 or a penny a share, down from a profit of $266,000, or 11 cents a share a year earlier." Fresh America claimed that its first quarter revenue actually grew 6.6 percent and challenged whether its primary customer, Wal-Mart Stores, Inc., had underreported the revenue it was owed, spurring negotiations between the two companies in an attempt to settle the matter. Under their licensing agreement, Sam's Clubs' employees rang up all Fresh America purchases at store check-out counters, and then Sam's Club paid Fresh America, less a licensing fee, on a weekly basis. Since nearly all of Fresh America's revenue came from Sam's Club, resolution of the discrepancy was significant for the company. By August the company announced that an agreement had been reached regarding a new five-year contract with Sam's Club. The renegotiated agreement with Sam's Club included the stipulation that the warehouse retailer pick up costs that Fresh America had been responsible for in the past. The announcement precipitated an 11.6 percent rise in Fresh America's stock for that week. The company restated that its first quarter net was $182,000, or a gain of five cents a share. By the second quarter of the following year revenue more than doubled to $64.7 million. The company continued to have strong ties with Sam's Club, and the number of Sam's Clubs served by Fresh America nearly doubled in 1996, which accounted for about 90 percent of Fresh America's revenues. The company proceeded with maximizing system efficiencies, and added the distribution of fresh Florida orange juice to its Sam's Club cargo.

Selective Acquisitions in the Mid-1990s

Acting on management's intention to diversify the company's customer base through selected acquisitions, Fresh America entered the central Texas foodservice market at the end of 1995, when the company acquired Lone Star Produce of Austin, Texas, and demonstrated strong growth in the Austin to San Antonio region. In the Houston area, Fresh America supplied roughly 250 new retail customers following the purchase of Produce Plus, suppliers of fresh fruit and vegetables. The company began planning the construction of an 80,000-square-foot facility in Houston to accommodate Produce Plus and their value-added tomato operation.

In a further move toward developing and streamlining its system, Fresh America signed a 1996 agreement with DoleFresh Vegetables, Inc., agreeing to provide forward distribution of packaged salads and other fresh-cut produce through its Chicago distribution center. Product offerings nearly doubled by the end of the year, and Dole authorized additional distribution to 12 of its southeastern customers, serviced from Fresh America's Atlanta center. According to the company, "Under the forward availability concept, Dole ships products to Fresh America for warehousing prior to receiving firm customer orders. Fresh America then distributes the product as needed. This arrangement has enabled Dole to compete more effectively with local processors without having to build or maintain its own facilities in these regions."

Following a strategy of negotiating agreements with organizations willing to commit to volume produce sales, Fresh America began servicing Alliant Foodservice (formerly Kraft Foodservice), the second largest broadline foodservice distributor in the United States. Alliant benefits by saving on costs by using Fresh America to more efficiently purchase, warehouse, and distribute their fresh products. The original agreement allowed for the company's servicing of 10 Alliant districts in the Northeast, which soon grew to 16 additional districts, and should encompass Alliant's remaining 13 districts by the end of 1997, with the size of deliveries in each district steadily increasing. The company also added to its purchasing power, and strengthened its national position in the fast foodservice sector when it entered into a long-term exclusive agreement with Fast Food Merchandiser's Inc. (FFM), a wholly owned subsidiary of Hardee's Food Systems, Inc., a nationwide restaurant chain and subsidiary of IMASCO, Ltd. and other customers through FFM's 12 distribution centers. Continuing to expand on processing capabilities, Fresh America acquired FFM's production center in Richmond, Indiana. The company provided a wide range of value-added products for FFM, including salad bar items, lettuce, tomatoes, and other sliced vegetables to top sandwiches, and intended to use the facility to produce items for other customers as well.

Buying One More Tomato: Acquisitions in the Late 1990s

Furthering its value-added capabilities, Fresh America also acquired the assets and business of One More Tomato, Inc., a tomato ripening and repacking company based in Houston, Texas. The company reported that revenues rose to $10 million in the first full year of operating within this higher-margin business segment. Fresh America executed a five-year exclusive distribution agreement with Delray Farms, Inc., a privately-held specialty grocery company based in Chicago, Illinois. In regard to the deal, company Chairman and Chief Executive Officer, David I. Sheinfeld commented in a press release that "We are very excited and pleased to form this new long-term affiliation with a dynamic and rapidly expanding company. The combination of Delray's focus on providing high-quality produce to the customer, and Fresh America's emphasis on delivering the best service available, enables us to provide value in the marketplace." He continued, "This agreement is part of our plan to develop new programs which build upon Fresh America's infrastructure and expertise."

Preparing for an era of rapid expansion, Edward Sabin, who previously held executive positions at both Del Monte Foods and Chiquita Brands, respectively, was named executive vice president of the company. Next in the lineup of company acquisitions was the 1997 purchase of Fresh America California, a company specializing in procuring and distributing high-margin specialty produce, such as white asparagus, Japanese baby eggplant and European salad greens. The company name was changed to Fresh America The Chefs' Produce Team and would specialize in items typically purchased in smaller quantities, including those that require special handling. At the time of the purchase the company catered to fine restaurants and higher-end hotels throughout California, and to places as distant as Las Vegas. The company has moved into a distribution center in San Francisco, and established satellite distribution facilities in San Diego and Las Vegas, and supplies approximately 100 customers. In May 1997 Fresh America announced the formation of Fresh America Orlando, serving fresh produce and foodservice to customers in the greater Orlando metropolitan area.

By purchasing a minority interest in Henri Morris & Associates, a software and systems provider to the produce and grocery industry, Fresh America is incorporating communications systems which will allow the company to better place and receive orders, communicate with customers, and manage logistics and product delivery in the most timely way possible--a crucial factor in the perishable items industry.

Due to the expansion of the company's operating territory under the revised 1995 agreement with Sam's Club, and the resulting addition of 184 Sam's Club locations within Fresh America's operation regions, and including the acquisitions of Lone Star Produce and Produce Plus--and the commencement of contracts with Alliant and Dole in January 1996, net sales for the company increased $114. million, or $91.6 percent, from $124 million in fiscal 1995 to $239 million in fiscal 1996. In regard to the Sam's Club agreement, the company became a wholesale distributor, whereas under the previous agreement the company was selling at retail to the Sam's Club members. In essence, Sam's Club took ownership of the product as it entered the clubs and resold the product to Sam's Club members, and assumed all costs and liabilities related to the operation of the departments, including personnel, merchandising and sales costs, product shrink, etc. Previously, Fresh America had been responsible for these costs and maintained ownership of the product until sold to Sam's Club members.

In February 1997 the company announced that Sam's Club exercised an option under its agreement to distribute to 40 clubs directly, in effect beginning in May of the same year, meaning that Sam's would take over the produce business for 40 clubs previously supplied by Fresh America. Under the contract, Fresh America received partial remuneration perpetually through the life of the agreement with Sam's so as not to feel the full financial impact of such a loss. The expectation is that the company will lose revenues of between $17 million and $20 million for 1997. The agreement stipulated that Sam's could exercise its option to take back up to 10 percent of its clubs in a given year if Wal-Mart opened a distribution center that operated at less than full capacity. The clubs being reclaimed by Sam's represented some of the longer-haul distances for Fresh America, and are not as profitable to the company as many other clubs. Now that Sam's has exercised this option for the first time, and has the legal right to take back up to 40 clubs per year for three years, it is expected that Fresh America will accelerate the pursuit of new non-Sam's Club agreements and acquisitions.

Although the company is a growing force in the $10 billion fresh produce market, its future, according to at least one analyst, depends on two major factors. Writing about Fresh America in Produce Industry, Mark Speeks addressed the challenge the company faces of increasing its operating margin while remaining competitive, and of convincing Wall Street to grant the type of earnings multiple common for the broadline companies. Speeks reported that "While welcoming the continuing diversification of the business, the increasing proportion of Fresh America's volume paid for by commission raises the question of how much Fresh America can increase its operating margin. While the nine months prior to September 1996 show an increase in operating margin to 2.2 percent from 1.8 percent for the same period in 1995, it is still comparatively low compared with distribution giants Sysco Corporation and JP Foodservice, Inc." With the underlying cost of items being paid for by the customer, Speeks speculates that the calculation of commission paid for distribution may not be elastic enough to reproduce a Sysco-type operating margin. Programs with Alliant and Dole showed an increase of 35 percent, while their specialty food service companies increased revenues 47 percent over the fourth quarter of 1996. Considering the company's commitment to growth and diversification, it remains to be seen what Fresh America will produce.

Principal Subsidiaries: Lone Star Produce Acquisition Corporation; Lone Star Produce, Inc.; Fresh America California; Produce Plus.

Further Reading:

• "Five-Year Accord Reached with Wal-Mart Division," The Wall Street Journal, August 4, 1995, p. B7.
• "Fresh America Corp.," Wall Street Journal, August 8, 1996, p. A2.
• "Results of the First Period Are Restated to a Profit," Wall Street Journal, August 10, 1995, p. B4.
• "Fresh America Posts First Quarter Loss; Wal-Mart Is Cited," Wall Street Journal, May 12, 1995, p. B5.
• "Fresh America Receives Job," Wall Street Journal, January 23, 1997, p. A6.
• Speeks, Mark, "Fresh America on Target," ID: The Voice of Foodservice Distribution, February, 1997, p. 29.

Source: International Directory of Company Histories, Vol. 20. St. James Press, 1998.

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