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Outbreak has salad companies’ profits wilting

Companies up and down the food chain are taking a financial hit from the E. coli outbreak that led to a nationwide recall of bagged spinach, but the California produce company at the center of the investigation stands to lose the most.
/ Source: The Associated Press

Companies up and down the food chain are taking a financial hit from the E. coli outbreak that led to a nationwide recall of bagged spinach, but the California produce company at the center of the investigation stands to lose the most.

“It should have pretty far-reaching implications on the whole bagged salad industry,” said Tom Weir, executive editor of the monthly industry publication the Grocery Headquarters.

It’s hard to overstate the role Natural Selection Foods LLC played in launching the bagged salad craze that became a $2.5 billion business and propelled the former roadside farm stand to a major agribusiness.

Now that’s all in jeopardy because of the outbreak that sickened at least 183 people in 26 states and Canada is taking a toll on much bigger companies that recently jumped into the booming business.

“The whole bag salad industry has just taken off exponentially,” said Samuel Fromartz, author of the recently published book Organic Inc., which describes the growth of Natural Selection Foods LLC and its various brands, including Earthbound Farm.

“It has been a big growth story for farmers and processors,” he said. “Spinach consumption has just gone through the roof.”

Seeing the success of Natural Selection and its biggest competitor, Fresh Express, big industry players like Chiquita Brands International Inc. and Dole Food Co. got into the bagged salad business.

Cincinnati-based Chiquita, which bought Fresh Express for $855 million in cash last year, said Monday that concerns over the tainted spinach had led to unexpected costs and lower sales for the company’s packaged produce business. By Tuesday’s close on the New York Stock Exchange, the company’s shares were down 14 percent since Friday.

Dole, a privately held company based in Westlake Village, has been linked to the E. coli outbreak through its association with Natural Selection, which packages greens for Dole and dozens of other companies. Test results have linked two bacteria-tainted bags of Dole baby spinach to a single batch from Natural Selection’s San Juan Bautista processing plant.

Dole spokesman Marty Ordman said the company was offering the services of its food scientists and “any and all resources to find out what the problem is.”

He pointed out that most of the salad industry shifts its operations to Yuma, Ariz. for the winter, giving California farmers and processors more time to figure out how to prevent future outbreaks.

“We need to get to the bottom of this,” Ordman said. “We need to make sure the spinach going out for consumers is safe.”

Analysts say the spinach troubles will have an adverse effect throughout the distribution chain.

At one end, grocers are likely to suffer the least, Weir said. Even if consumers shun all packaged salad products, shoppers will still visit supermarkets for their other needs.

“The bagged salad shelf in stores should take a huge hit, but those lost margins will be replaced by other purchases,” Weir said.

Farmers, on the other hand, will be hit the hardest, experts said.

Growers and processors in the Salinas Valley, heart of California’s lettuce and spinach industry, announced plans last week to adopt new food safety guidelines to safeguard the crop against future outbreaks. The Food and Drug Administration has set such guidelines as a prerequisite for lifting the consumer warning on fresh spinach.

Tim Chelling, a spokesman for the Western Growers Association, said the guidelines are still in the development stage. But more frequent testing of water, soil and produce for signs of contamination are among the changes under consideration, as well as possibly modifying the testing procedures themselves.

A team of growers and processors is in Washington working with the FDA on the new guidelines, Chelling said.

“You want to look at anything and everything to resolve the situation,” he said. “The beauty of this in some ways is you do have procedures and documents in place, and you can look at those right now and intensify them, amplify them and adjust them, if necessary.”

No player has more to lose than Natural Selection, which has been the focus of state and federal investigators since soon after the outbreak was announced.

The company offered the first bagged salads in 1986 as a tiny roadside stand on California’s Central Coast and has grown to employ 1,200 people and log about $360 million in annual sales. Only Fresh Express is bigger in the packaged salad business, with about $1 billion in sales last year.

Natural Selection said sales were down 40 percent last week; spinach accounts for roughly 20 percent of its business.

In all, packaged spinach accounted for about $293 million in sales in the year ended July 31, according to estimates from the analysts at Perishables Group.

Company spokeswoman Samantha Cabaluna said Natural Selection will survive the crisis and work with regulators and the industry to prevent another E. coli outbreak.

“I think that we will come through this,” she said. “This is a company that has always done the right thing and we hope that we can be a solution for this problem.”