May 16, 2017 9:00 am JST

Itochu's streamlined Dole business returns to profit

Japanese trading company has exited loss-making products in cost-cutting revamp

SHIN WATANABE, Nikkei staff writer

Dole's bananas on Japanese retail store shelves

TOKYO -- Japanese general trading house Itochu is pressing ahead with a strategic selection and concentration policy for its Dole fresh produce and packaged foods business, which it purchased four years ago. Thanks partly to cost reductions due to a drastic reorganization, the Dole business bounced back to 8.3 billion yen ($73 million) in net profit for the year ended March 2017 from 16.9 billion yen in net loss a year ago.

For the next fiscal year, the company projects a 9.7 billion yen net profit.

The goal is to become the biggest fruit producing and processing company in Asia. 

In October last year, something extraordinary happened at grocery stores across Japan. Vegetables, citrus fruits and mangoes sold by Dole's Japanese unit under Itochu disappeared all at once from store shelves.

It happened after Itochu pulled out of selling non-lucrative products, even though it had handled a wide range of products in an effort to secure as much shelf space as possible. Instead, the company is steering toward a strategy of channeling most of its resources into sales of its flagship bananas and other products.

Itochu bought part of U.S. fruit giant Dole Food for about 135 billion yen ($1.68 billion at the time). Almost half of Dole's sales come from production and sales of fresh produce, including bananas and pineapples; the other half comes from packaged foods such as canned pineapples and juice.

After the massive purchase, the company's initial goal was to log 10 billion yen in net profit. But the company posted a loss of 16.9 billion yen for fiscal 2015.

Lower banana yields stemming from adverse weather conditions in the Philippines, the main banana supplier, was mainly to blame.

Unproductive businesses

Another reason is that the company had numerous unproductive businesses.

Itochu President Masahiro Okafuji is credited with significantly lifting the earnings of Itochu's entire operations by withdrawing from unprofitable businesses while making aggressive investments. His mantra is "make money, cut costs and prevent losses."

Okafuji is applying this approach to the Dole business.

In March last year, the company pulled the plug on production and sale of bananas in Australia. The country had banned Philippine-grown bananas, and Itochu expected the ban would be lifted, but it was not, and the plan backfired. The company's aim was to popularize the brand through banana sales.

"From a short-term perspective, the ban will not be removed," said an official at Itochu's food segment. "The cost of small-scale production [in Australia] is high."

The withdrawal incurred about a 2 billion yen loss, but the official said the company could wipe out what is weighing down on the company.

Canned pineapple processing factories in Thailand and the Philippines are also the targets of the company's reform project.

In September 2016, the company shut down one plant in southern Thailand and consolidated the operations into two other factories.

"We will consider factory automation to further cut costs," said Singapore-based Dole Asia CSO Masazumi Nishikage.

While Itochu has conducted a series of restructuring measures, it has aggressively pursued the expansion of the packaged foods business in Japan and abroad.

In April of this year, green-colored and orange-colored smoothies under the Dole brand lined the shelves at FamilyMart convenience stores across Japan.

When the line debuted in March 2016, the products became popular for their delicious flavors and nutritional benefits. The latest line has improved texture.

The company will also beef up the frozen fruits business, including oranges distributed to restaurants. Although the U.S. has been the main market for these fruits, they were introduced in the Japanese market in 2015.

"As consumer preferences vary from country to country in Asia, we want to develop processed foods that are tailored to each region," said Yutaka Yamamura, the head of the Fresh Food Division of the Itochu's food segment.

The traditional focus of Itochu's fruit business has been wholesaling of products imported from overseas. After the purchase of the Dole business, it has transformed into a fruit company boasting production and processing divisions.

ITOCHU Corp.

Japan

Market(Ticker): TKS(8001)
Sector:
Industry:
Distribution Services
Wholesale Distributors
Market cap(USD): 23,962.02M
Shares: 1,662.88M

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