The Big Apple
New products, added plant capacity play major role in Tree Top's sales strategy
By Carli Lyon, Cathy Durham, Steve Betula
Oregon State University
Editors Note: The authors are agricultural economists. Lyon is a former
staff member and Durham is the Markets and Trade Economics program leader
at Oregon State University's Food Innovation Center Experiment Station.
Steve Betula is a professor in the Department of Agricultural and
Resource Economics at Oregon State University.
This article is the result of a research project funded by USDA's Rural Business-
Cooperative Service to explore issues related to exporting and importing high-valued
products by cooperatives.
ree Top, a Washington based fruit processing cooperative, is pursuing a multifaceted marketing strategy that increasingly is focusing on new technology, both as a marketing tool and means to develop unique, value-added fruit products for the food ingredients industry. These and other efforts to increase returns to the 2,000 grower-members who own the cooperative have proven especially important during the past five years, as juice and peeler market apple prices have declined sharply.
Much of Tree Top's marketing success is the result of a state-of-the-art research and development (R&D) facility, staffed with creative technicians who work to develop specialty products that expand possible uses for fruit. Tree Top's R&D employees often move laterally to other parts of the organization, such as sales, spreading a "product development mentality" through out the cooperative. Richard Bailey, Tree Top's chief financial officer, says the pilot plant at its headquarters in Selah, Wash., is state-of-the-art. Tree Top's R&D unit has developed unique methods for drying and quality control and many special fruit ingredients used by their further-processing customers.
The cooperative, established in 1960, sells products across the entire range of food product buyers: retail, Hotel-Restaurant-Institutional (H.I.), and other food processors, including cereal-maker Kelloggs and the Orowheat bread company. Tree Top packs juices and applesauce in ready-to-consume form for retail and institutional distribution, concentrates for H.I. and other juice bottlers, and a wide range of ingredients for further processing.
One of the co-op's more ambitious recent product introductions is Tree Top packaged fresh apple slices for the retail market. The co-op introduced the apple slices in a retail test market in June 2001. However, at the request of its member fresh-apple warehouses, the distribution process was changed in January. Tree Top is now selling the slices directly to member warehouses. They, in turn, make the slices available to their customers. Since both products require refrigeration, Tree Top slices are a perfect "traveling companion" for fresh apple shipments out of the Pacific Northwest. Tree Top's management is broken down into a consumer packaged goods division, which focuses on juices for retail sale, and the ingredient division, which provides specialized processed apple products to other food processors.
Tree Top's members are primarily apple producers that pack first for the fresh market and use the cooperative as an outlet for culls. Known to the public for its Tree Top fruit juices and applesauce, the company is the largest provider of apple juice west of the Mississippi. It also produces a range of products for further processing.
Tree Top earnings rise despite depressed market
The past five years have been a time of struggle for the U.S. apple industry. Grower returns significantly decreased from 1996 through 2001 due to severely depressed tree fruit prices. In 1995-96, grower returns on juice and peeler apples were $193.80 and 209.63 perton, respectively, and $91.77 per ton for processed pears. In the 2000/01 processing year, juice and peeler apple returns were $61.73 and $91.08 per ton, respectively, and processed pear returns were $47.51 per ton. These precipitous drops in grower returns are solely due to the dramatic decline in commodity prices.
While coping with fluctuating supplies and depressed prices, Tree Top managed to increase its prof-its per ton from $10.86 for juice apples and $4.34 for pears in 1996 to $18.80 and $7.52 in 2001, an increase of 73 percent for both commodities in 5 years. Improved profits are attributed to a number of factors, including an ability to maintain prices for its premium juice products and increased category sales due to promotions and overall lower prices. The ability to achieve higher plant efficiencies due to increased scale, and increased production allowing the company to re-enter world markets for bulk concentrate also helped it boost profitability.
Tree Top is maximizing the efficiency of its plants by processing more non-member fruit products, such as cherries, for use in yogurt and other products. The earnings of non-member business have been sufficient to satisfy the financing needs of the cooperative. This has enabled Tree Top to distribute all of its grower earnings in cash for the past nine years.
Increasingly, international markets are proving to be a major factor in how the U.S. industry fares. Tree Top has shipped apple products into more than 50 countries in the past 20 years. While the domestic market is definitely Tree Top's primary target, international sales have traditionally been viewed as a way to maintain and increase market share and increase sales quantities.
Chinese exports trigger
U.S. trade action
Critical changes in international apple product markets have led Tree Top to adjust its international sales focus in recent years. World production of, and trade in, apple juice and apple juice concentrate has expanded dramatically. A major force behind this trend is the expansion of apple production in China and that nation's entrance into the juice concentrate market.
In 1991, China surpassed the United States to become the world's second largest producer of apple concentrate (the Soviet Union was then first). While U.S. production has remained fairly steady and the United States is still the No. 2 producer, Chinese production passed the 20-million-metric-ton mark in 1999, more than four times larger than U.S. production.
China's influence on the world apple market is primarily in its export of apple juice concentrate. In 1999, low prices for Chinese concentrate exports led the U.S. Department of Commerce and the U.S. International Trade Commission to file
an anti-dumping petition against China. Tree Top and other industry leaders backed this effort. The successful petition resulted in the imposition of a retroactive import duty (up to 50 percent of import price) on apple juice concentrate imported from China into the United States. However, the duty rate actually imposed has reportedly been considerably less than 50 percent.
While production has continued to rise, the rate of increase has dropped considerably and China's reported production area began to decline after 1996. But its influence on domestic U.S. apple juice markets is likely to be important in the near future. Chinese apple concentrate is still being exported to the United States, which also impacts U.S. prices due to its effects on world supply. These developments in the world juice and concentrate markets have led Tree Top to focus on the domestic market, where it has an advantage in market knowledge, transportation and brand name recognition. However, it continues to ship juice and concentrate to overseas markets where demand exists. Tree Top does the shipping for these products but uses brokers to handle the sales.
The cost of exporting juice is an underlying factor in Tree Top's licensing its juice brand in France. Since France is a major producer of apples and apple juice, it is not possible for Tree Top to competitively price its own juice there. The licensing agreement provides an opportunity to gain some income while increasing international recognition of the Tree Top brand.
Web site revolutionizes international marketing
Tree Top marketing efforts include taking advantage of the World Wide Web. Its Web site, http://www.tree-top.com, is a sophisticated marketing site with links to product-specific request forms and even a credit application. This marketing tool is proving to be especially effective in international marketing efforts. Indeed, John Twomey, the co-op's ingredients sales marketing manager, says the Internet has revolutionized Tree Top's international marketing.
The Web site makes the company visible to buyers all over the world and has led to inquiries from places Tree Top would otherwise not have reached through trade shows, such as the Middle East. On a typical day in his office at the cooperative's headquarters, Twomey Fields over 20 inquiries from all points around the globe.
Twomey estimates that in 1997, 80 percent of his sales leads came via fax and 20 percent by e-mail. In 2000, nearly all his communications were by e-mail, with many potential customers coming to him through the Tree Top corporate Web site. Twomey has not done a formal study of the efficacy of the Web site. However, he Feels it has had a significant impact on number and quality of leads he receives.
The home page provides three main links: to company information, to consumer packaged goods and to the ingredient division. The latter pages provide information on product lines and a description of processing methods. The consumer goods page links to recipes and frequently asked questions; the ingredient division page links to descriptions of how Tree Top's products can be used as ingredients in a wide variety of processed foods.
The company has also adopted a Uniform Communications Standard, implemented through Electronic Data Interchange (EDI) to allow for a more efficient exchange of business documents, such as orders and invoices, benefitting Tree Top as well as its customers by improving information exchange and reducing transaction costs.
Baking products market requires special strategy
Tree Top's sales strategy for its cereal and baking ingredients differs
markedly from that used for its juices. With ingredients, the company has a technological advantage and it isn't constrained by the high transportation
costs and the commodity like nature of the juice concentrate market. Tree Top has positioned itself in the international bakery and cereal ingredient market as a high-quality producer that sells technical service along with the physical product.
Twomey worked as super-intendent of Tree Top's Wenatchee, Wash., plant before becoming regional sales/service manager in the ingredient division. He says to prevent Tree Top's products from being viewed solely as a commodity, technical service to customers is crucial. He routinely works with cereal manufacturers, bakers and others to develop specific products that meet their individual requirements. For example, he helped to customize a flavor formulation for a food processor in Russia, fashioning pineapple and melon-flavored apple pieces that are specifically targeted to Russian tastes.
The broad range of activities in which Tree Top is engaged retail, H.I. and ingredient products, in both domestic and international markets clearly follows from its strategy: "accommodating as much member fruit as we can profitably sell, " as stated in the 1999 Tree Top annual report. Tree Top continues to adapt to the rapidly changing domestic and international market by developing new products and improving old ones, implementing new marketing and communications technologies and working closely with customers. It has found success in developing products that are less vulnerable to commodity price swings and achieve a better return to members' raw product and will continue to pursue that strategy in the years ahead.
