Strategies for U.S. Apple Exporting Firms

by

Vicki McCrackenAssociate Professor

Department of Agricultural EconomicsWashington State University

Patriya TansuhajAssistant Professor

Department of MarketingWashington State University

A. Desmond O’RourkeProfessor

Department of Agricultural EconomicsWashington State University

Karol WalterGraduate Research Assistant

Department of Agricultural EconomicsWashington State University

Introduction

World trade in agricultural products hasgrown rapidly in recent years. In 1985 over 15percent of the world’s food supply moved acrossinternational boundaries. The United States is theworld’s largest exporter of agricultural products,with nearly 15 percent of the value of the world’sagricultural exports originating in the UnitedStates. Hence it is becoming increasingly impor-tant to understand and address marketing issues ina global setting. The basic nature of marketingdoes not change between the domestic and interna-tional arenas, but marketing outside of nationalboundaries does pose special problems.

Basic marketing decisions can be dividedinto four areas: product, price, distribution, andpromotion (Jain). These decisions take on anadded level of difficulty when the targeted marketis unfamiliar to the marketer, Jain uses sevencategories to describe the environments in whichinternational marketing decisions are made. Thefirst four are the economic, cultural, political, andlegal environments. The others include interna-tional economics institutions and agreements, ageneral category including competition and tech-nological changes, and a final category which en-compasses the internal condition of the firm.International marketing requires a firm to makeproduct, price, distribution, and promotion deci-sions simultaneously in several countries (orregions) which may be characterized by very

Juno 91/page 63

different environments. The main focus of thispaper is on the distribution decisions made byUS’, fresh apple marketers in the internationalmarketplace. The following section providessome background information about the appleindustry.

Background Information and Objectives

The U.S. apple industry experienced largesupply increases during the 1980s (Figure 1).Domestic production grew from an annual averageof 196.2 million 42-pound boxes in 1979-81 to235.2 million boxes in 1987-89, almost a 20percent increase. Further increases are projectedin the 1990s as many new plantings come into fullbearing. Imports of fresh apples to the UnitedStates from Southern Hemisphere suppliers, whilerelatively small in absolute terms, increased froman annual average of 3.7 million boxes in 1979-81to 6.5 million boxes in 1987-89, about a 75 per-cent increase. In addition apple juice concentrateimports rose dramatically during the 1980s, reach-ing a record high of 183,657 metric tons (theequivalent of 70 million boxes) for the marketingyear 1988-89. Fresh and procewxi apple importscombined increased dramatically from an annualaverage of 23.6 million boxes (fresh weight equiv-alent) in 1979-81 to 67.3 million boxes in 1987-89(Figure 1).

The increasing total supply of apples andrelatively stable domestic demand for apples hasput a downward pressure on prices, with averagereal prices falling during the 1980s, The averagereal price of Washington fresh apples in the threeseasons 1987-1989 was about forty percent belowthe 1979-81 average. Consequently, the interna-tional marketplace has become increasingly impor-tant for the U.S. fresh apple industry.

During the 1960s and 1970s, the volume ofworld trade in agricultural products grew rapidly.Total world fresh apple trade more than doubledin the years from 1962 to 1986 (Figure 2). Thisgrowth was not evenly distributed, with majorchanges in the world trade flow of apples, Interms of imports, the large growth areas wereEast Asia and the Middle East. In terms ofexports, Europe, the United States, and SouthernHemisphere countries were major gainers.

The U.S. apple industry was relativelysuccessful in its export efforts in the mid-to-late1970s and came to depend on continued access toworld markets (Figure 3). In the 1980s, however,export expansion proved to be more difficult.Tariff barriers were reduced but non-tariff barrierswere increasingly used to impede the free flow oftrade. The Uruguay Round of GA’171’negotiationswas launched to attempt to deal with these tradeprotectionist strategies, potentially increasing theaccess to foreign markets. Other institutionalchanges, such as the FAS Cooperator Program,have also played important roles in U.S. freshapple expc.rting.

In light of the increasingly uncertain andcompetitive international marketplace, this studywas undertaken to address several critical issuesthat may influence the competitive position ofU.S. fresh apples in the international market. Inparticular, this study:

1. examines the structure of the U.S. exportmarketing system for apple products andthe role of cooperatives in that system;

2. assesses the provision of different market-ing support services by U.S. exporters; and

3. identifies the implications of the researchfor future international marketing strategies.

To achieve these objectives, apple exportingfirms and organizations were examined in twoseparate but related segments of the overallresearch project. In the first segment, the struc-ture of (mainly cooperative) exporters of freshapples was examined. In the second segment, thequality of marketing services for U.S. applesexported to Southeast Asia was assessed. Themethods and results of these research segments arediscussed in the following sections.

Methods and Results

Apple &operative Surveys and Results

Exporting is a complex task involving anumber of interrelated marketing fimctions, rang-ing from procuring the pro$vct through dealingwith and affecting regulation.s. Export marketing

June 911page64 Journal of Food DistributionResearch

coLo

E

u

C6

IQ●

co5

.-

coCQm

su)

(9com

%u)

Yt

u)

u).-

Journal of Food DistributionResearch

CN

IL

u

CDcom1-

(!4cc)(s)

0Qu’)

00m

mmolcv”

000

I

00Lc)

cof=

Nr-

u)(9

0

Journal of Food DistributionResearch

u)

sQxw

●

U35

C

IQc).-L

w

:

00*

00m

00OJ

00

0

Journal of Food DistributionResearch

should not be looked at simply as an extension ofdomestic marketing (Jain). New strategies areessential in order to comply with different andchanging cxmditions in each market area. Thereare a number of barriers to entry in the interna-tional market including volume requirements,financial risks, range of products, and the largef~ed costs that a fm faces when entering themarket as a single unit. Both cooperative andnoncooperative U.S. firms have dealt with theseconstraints with varying levels of success, due totheir characteristics and degree of commitment toexporting. The objective of this segment of theresearch was to examine the current structure of(mainly cooperative) apple exporting organizationsin the United States and to evaluate the perfor-mance of current arrangements.

A detailed questionnaire was developed foruse in a personal interview setting, The fivebroad areas of information collected in the surveywere: 1) company background information; 2)logistics of exporting; 3) market information -sources and usefulness; 4) sales/marketing activi-ties; and 5) evaluation of export efforts. Inter-views were conducted using the questionnaire asa guidance for discussion with the major applecooperatives in Washington State and in the statesof Michigan and New Jersey. An individual(s)familiar with or responsible for export marketingdecisions was (were) interviewed. The results ofthese interviews are summarized in the followingparagraphs.

The U.S. cooperatives interviewed werewell established firms, most having been in opera-tion for more than twenty-five years. They dif-fered considerably in terms of the number ofgrowers/suppliers with which they dealt, rangingfrom 12-20 members to approximately 2700 mem-bers with a median of 200 members, Similarly,the number of full-time employees ranged fromthree to over 30. The large size differencebetween these cooperatives is also indicated bytheir reported annual sales volume, which rangedfrom approximately $6 million to over $250 mil-lion.

These cooperatives differed in their depen-dence on the export market: at one extreme, asmall cooperative exported on average only 0.40

percent of its apple products while several largercooperatives exported almost 50 percent of theirsales volume in the 1988 crop year. When ques-tioned about their current and future objectives inexporting (using a scale that ranged from “12-month aggressive exporter” at one extreme and“export only ut request of foreign buyer” at theother extreme), most of the cooperatives consid-ered themselves to be aggressive exporters.

In general, firms avoid exporting because ofthe complexities involved with dealing in theinternational market (relative to the domesticmarket). The cooperatives were asked to providesome detail concerning how they carried out theirexport activities. The mechanics of exportingwere found to vary by cooperative, and appearedto depend upon factors such as size of cooperative(total volume and export volume). The typicalgrower cooperative had a single person in chargeof exporting. This person tended to have consid-erable exporting experience (10 to 20 years), tohave some college education, and tended to travelextensively. The general ability to communicatewith individuals of different cultures was consid-ered to be more important than specific foreignlanguage skills in being a successful exporter.

Channels of distribution in internationalmarketing are often classified as either direct orindirect. Direct distribution involves transferringtitle with a foreign firm (in the foreign country)while indirect distribution involves dealingthrough another U.S. firm (or foreign firm locatedin the United States) as an intermediary. Mostexport sales (aside from those to Canada) by thesecooperatives were made indirectly, mainly becauseof the seasonality of these exports, financial risk(especially related to exchange rates), paymentresponsibilities, time and personnel requirements,and lack of expertise in the international market.

Personal visits to foreign markets werebelieved to be a critical component of an exportmarketing program. Many cooperative managersvisited both potential and established markets ona fairly regular basis. Trips to potential marketswere perceived to be necessary in order to evalu-ate the markets and to make contacts in the casethat exporting did occur. Trips to establishedmarkets were necessary in order to maintain con-

June 91/page 68 Jownal of Food DistributionResearch

tacts with exporters and other members of theapple distribution channel and to continuouslymonitor the situation in the foreign country.

Most of these cooperatives made limiteddirect use of government services and publicationsin their export decisions. It is not clear that thesecooperatives made an obvious decision not to usethe services and publications since many indicatedthat they were not aware of their existence. Verylittle formal market research and few promotionalcampaigns were carried out by these cooperatives.The most critical decision that they made appearedto be selecting their export agent or broker. Theknown reputation of these individuals was seen asa critical piece of information. These individualswere trusted to provide the cooperative with rele-vant and timely information about quantity,prices, competition, product specification, credit,and exchange rates in foreign markets.

It is assumed that the cooperatives used thisinformation to develop their marketing and pricingstrategies. The most common strategy mentionedwas essentially that they marketed and priced theirproduct according to what the market (domesticand export combined) would bear, yet would stillallow them to move the crop in a timely manner.

Many factors can influence a firm’s exportactivities. C)ne element of success in the exportmarket is consistent provision of quality apples.Being a cooperative was perceived to be both ahelp and a hindrance in providing apples of desir-able quality. On the positive side, cooperativesfelt that because they were cooperatives they weremore likely to have funds to modernize equipmentand expand when necessary. On the negativeside, it was felt that cooperative management oftencould not make major decisions quickly becauseof board control. It was not clear whether currentpooling arrangements helped or hindered theirability to provide quality apples. Transportationcosts, trade barriers, foreign competition, and lackof foreign demand were other factors that thesecooperatives indicated negatively affected theirexport efforts.

SoutheastAsia ChannelSurvey and U.S.Exporter Results

The previous section (interviews of export-ing firms) emphasizes that international marketinginvolves more functions than simply selling orbuying products. A recent study by Tansuhaj,Hong, and Tan (1987) found that although U.S.(Washington) fresh apples were perceived ashaving high quality, the willingness of somewholesalers and retailers in Southeast Asian mar-kets to handle apples from the United States wasnot very strong. This reluctance stemmed at leastpartially from the perception that U.S. exportersprovided inadequate service and were not as reli-able as competitors from other countries. Grad-ing, shipping, financing, and customer relationsare examples of important functions which mightnot be emphasized enough by exporters and otherchannel members. This represents a potentiallyserious problem since these supporting servicesserve as the principal link between producers andforeign buyers. The total product concept sug-gests focusing not only on the “core” product butalso on the “auxiliary” product (e.g., brands,packages, facilitating services). Improving themarketing support services provided is believed tobe an important step for U.S. apples producersand exporters in gaining a competitive advantagein international markets.

Accordingly, this segment of the studyfocused on identifying areas of neededimprovement for the auxiliary componentsinvolved with marketing U.S. apples in a specificregion of the world, Southeast Asia. In particu-lar, the marketing services provided by U.S.producers and exporters were evaluated throughsurveys of U.S. exporters and channel members inthree Southeast Asian markets (Singapore,Malaysia, and Thailand).

SoutheastAsia ChannelSurvey

A questionnaire was developed (originallyin English, and translated into Chinese as neces-sary) which included a number of questions con-cerning the quality of various marketing servicesprovided by U.S. exporters. Importers, wholesal-ers, and retailers in each country rated these ser-vices, using a scale of excellent, good, average,

Journal of Fmd DistributionResearch June 91/page 69

below average, or poor. In some instances, therespondents claimed that the particular service wasnot performed by U.S, exporters.

The ratings for the services differed bycountry, reflecting either differences in the valueplaced on these services in different countries, ordifferences in the quality of services provided indifferent countries, or both. The results are pre-sented for each question by country in Table 1.In order to condense the individual responses forsimplicity in discussion, the original scale ofexcellent to poor was converted to a nominal scalewith values ranging from five to one (i. e., 5 =excellent, 4 = good, 3 = average, 2 = belowaverage, and 1 = poor). The average score foreach question by country was calculated, and theresults are summarized in Figure 4. Note thatthese averages should only be interpreted as ten-dencies in the data (e.g., in Singapore, the resultsindicate that shipping services were rated morefavorably (4.00) than were documentation services(3.78)). The specific numbers (e.g., Singapore,shipping = 4.00) do not have a clear meaning.

Based on interviewer experience, the ratingsof good and excellent are considered above thedesirable threshold level. The rating of averagetended to be used, however, even when therespondent was dissatisfied with a service. Therealso appeared to be differences across countries inhow the respondents used the rating scale (thatmight be unrelated to differences in satisfactionwith services). These warnings should be kept inmind when interpreting the responses in this sec-tion.

Singapore respondents generally rated ship-ping services, documentation, marketing research,meet ing schedules, and foreign customer relationsby U.S. firms as good or excellent. The respon-dents felt that financing, grading, packing, brand-ing, and qua]ity control services were only aver-age. These marginal ratings on grading servicescould he related to problems of inaccurate weight,insufficient number of apples per carton, a mix-ture otsizcs or qualities of apples in a carton, and

damage to the apples that occurred in transit to theforeign market.

Almost one-third of these wholesalers/retailers in Singapore rated advertising services asbelow average. Some of the respondents felt thatthe effectiveness of mass advertising (the methodmainly used by the Washington State AppleCommission) was reduced because of lack ofproper coordination with the indenters, whole-salers, and retailers in these export markets.

ln Malaysia, it was found that financing,meeting schedules, packing, quality control, andforeign customer relations were the service areasneeding improvement. Complaints with respect topacking referred to mixed sizes within the box ofapples and allegations of intentional packing ofsmaller apples at the bottom of the box. As far asquality is concerned, there were complaints aboutapples arriving very badly bruised and damaged,and white due to incorrect use of wax. Therewere also concerns about excessive use of chemi-cals on apples which are for export to overseasmarkets like Malaysia. Apple distribution channelmembers in Malaysia suggested that a centralbody be established to keep a tighter control onthe U.S. apples being exported overseas. Therewas some dissatisfaction expressed concerning thequality and frequency of customer relationsbetween the U.S. advertising agents and theMalaysian apple wholesalers/retailers. The otherservices provided by U, S. exporters were rated asaverage, good, or excellent by a larger proportionof Malaysian respondents.

The market channel members in Thailandgave low ratings to several services provided byU.S. exporters. In particular, grading, advertis-ing, and foreign customer relations services werefelt to be performed at a level considerably belowaverage. A number of retailers and wholesalersindicated that they were not aware that theseservices were being performed by U.S. exporters.Despite the relatively low ratings the “I”haiimport-ers gave to the grading of U.S. api)]es, they f’cl[that any problems they saw were not a l,iult of theexporter himself/herself, hut were a tdult of brand

TABLE 1Assessment of Services Performed by American Exporters

% of Respondents Rating

BelowExcellent Good Average Average Poor

I. SINGAPORE

ShippingDocumentationMarket ReserchMeeting ScheduleFinancingGradingPackingBrandingQuality controlForeign Customer RelationsAdvefiising

II. MALAYSIA

ShippingDocumentationMarket ResearchMeeting ScheduleFinancingGradingPackingBrandingQuality ControlForeign CustomerAdvertising

III. THAILAND

ShippingDocumentationMarket ResearchMeeting ScheduleFinancingGradingPackingBrandingQuality ControlForeign Customer.\dvertising

Relations

Relations

116

[8.-55

--

1?)5

%13127611

;6

27

25

;!20

2?35

;112.-

7888

%3330434519579

675331243139505039

:;

464120

2:

z443552--

11610

;55

::572952

;;564131502844224423

29

;:21

::1550273244

-.

;05

105

i--2

----

;431--11

;;6

--

;85

.-98464412

--

;4--6

--5

;0

1:

----------5--

;1----

--5

--54

------4

--44

Journal of Food Distribution Research June 91 /page 71

.“

Shipping

Documentation

Market Research

Meeting Schedule

Financing

Grading

Packing

Branding

Control

Foreign CustomerRelations

Advertising

Figure 4

Assessment of Services

Performed by U.S. Exporters in Southeast Asia

1I

I

1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00

Assessment (1 = poor, 2 = below average, 3 = average,4 = good, 5 = excellent)

■ SINGAPORE ❑ MALAYSIA ~ THAILAND

June 9I/page 72 Journal of Food Distribution Research

owners or growers. Many importers felt that theservices provided by the (tirmer) advertisingagency (promoting U.S. apples) did not provideadequate promotional support and did not helpthem deal with the Alar situation. These concernswere also the main reason for their low ratings fixforeign customer relations.

The majority of the l%ai respondents feltthat branding of apples is very important. How-ever, these direct importers believed that mostfinal customers do not know the differencebetween U.S. (Washington) apples and those fromother countries. ‘J%eretore, brandiig has littlemeaning in the retail market although brand nameaare very important to wholesalers in order toevaluate the quality of apples. The Thai importersrated the branding performance of U.S. exportersas marginal. The Thai respondents did indicatethatshipping,documentation,scheduling,packing,and quality control functions were satisfactorilyperformed.

UnitedStates Exporter Survey

In addition to questioning importers aboutthe services provided by U.S. exporters, U.S.exporters were asked about the marketingservicesthat they provide in the export market. A sampleof 43 members of the distribution channel forapplea in Washington State was interviewed,mainly through personal interviews. Most oftime firms or individuals were involved in morethan one activity: 63 percent were growers, 72percent packers, 74 percent shippers, 28 percentbrokers, 47 percent marketers, and 14 percentagents. Seventy-eight percent of the firms werecooperatives. Most of these firma used bothindirect and direct methods of exporting apples,with 88 percent exporting apples indirectlythrough a middleman, and 54 percent exportingdirectly to a foreign distributor.

As an alternative to directly asking theexporters to assess their own services, they wereaskedto rate factors which make themparticularlystrong or weak in competing in export markets.A scale ranging from one to five was used, withone indicating weak and five indicating strong.

The results are summarizedin Figure 5. Growingquality apples received the highest average score.Other important factors were CA (controlledatmosphere) storage, custom packing, and ship-ping services. Factors such as growing specialvarietiea, grading, order taking, export financing,and advertising/promotion were given weakerratings.

‘1.Mseratings by U.S. exporters indicatethat they are generally aware of problem areashindering export growth in foreign markets.There does appear to be a differencebetweenhowU.S. exporters see themselves and how foreignbuyers see the U.S. exporters. The issue appearsto be whether, and if so how, changes will bemade so as to improve marketing service c@ity.Currently, almost three-fourths of the companiessurveyed indicated that they provide services forforeignbuyers that are notperformed for domesticbuyers. Examples of such services are heavypacking, custompacking, longer credit terms, andpersonal assistance.

The U.S. exporters were also asked toevaluatethe usefulnessof organizationsor individ-uals that support apple export activities. Therewas strong agreement that brokers, buyers, andmarketing/salea agents provided valuable assis-tance to them in apple exporting. These organiza-tions or individuals are those which have directinvolvementwith the companies in export activi-ties. In contrast, U.S. Department of Commerce(ITA), State Extension Service, and theWashington State Apple Commission were notconsideredto be as helpfid. The lower ratings ofhelpfulnessfor these organizationsmay be relatedto the lack of direct involvement in export activi-ties by these latter org-ions, or the appleindustry’slow awarenessor recall of the availableservices.

In order to increaseappleexports, a numberof U.S. respondents felt that tariffs must bereduced and that the quality of applea needed tobe improved. Other important factors cited (iiorder of importance) for increasing exports weredetermining customer needs and wants, seekingnew markets, and promotion. The majority of

Journalof FoodDistributionResearch June 91/psge 73

Quality Apples

Special Varieties

Custom Packing

Refrigerated Shipping

CA Storage

Reliable Shipping

Grading

Order Taking

Customer Relations

Foreign Market Knowledge

Export Financing

Advertising & Promotion

June 91/page 74

Figure 5

U.S. Exporters’ Perception of Service Areas

Strengthening or Weakening Competitiveness

o

1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00

Competitive Position (1 = poor, 2 = below average, 3 = average,4 = good, 5 = excellent)

Journal of Food DistributionResearch

respondents believed that government should bemore involved in the aforementioned areas.

Summary and Implimtions

The descriptive analysis of the structuralcharacteristics of U.S. cooperative apple exportersindicates the potential that exists for reducingbarriers that these cooperatives face in the interna-tional market through combining the efforts of theindividual cooperatives. The cooperatives did notappear to differ in terms of their general outlookon exporting, but most were hindered by their sizeand overwhelmed by the immense task of export-ing.

The strategy followed by cooperatives toprice and market their commodity according towhat the market would bear is really a tactic, nota strategy, and indicates the limited control thatmany of these cooperatives felt that they had overtheir product in the export market. Many criticaldecisions are influenced by information providedto cooperatives by individuals who may not bedealing mainly in apples and are made withlimited explicit planning, These aspects of thebehavior or conduct of apple exporters suggest theneed for these cooperatives to have more controlover their destiny in the export market.

It appears that cooperative organizationsplay an important role in providing quality applesto the export market, but that cooperatives need toconsider changes that will allow them to respondmore quickly to market conditions. Also consid-ering the factors that were identified as hinderingexport efforts, some could be reduced (via econo-mies in moving larger quantities) by more effi-cient organization of cooperatives in exporting(relative to each using their own export agent orbrokers). Dealing in larger volumes and with amore diversified product line has the potential ofopening up markets to cooperatives that were notpossible in the past (due to these markets wantinglarge volumes or a mix of products).

as reliable as competitors from other countries.This research also indicated that there were prob-lems with the quality of services provided by U.S.exporters in Southeast Asian markets. U.S.export firms were found to be weakest in financ-ing, packing, and advertising. The specific rat-ings for services varied by country. U.S. export-ers typically rated themselves as being weak inthese same service areas. They also rated them-selves low in order-taking and in growing specialvarieties that are desired in the international mar-ket. And consistent with the opinions of the coop-eratives, the U.S. export firms gave low ratings tothe assistance efforts of public agencies (in termsof their usefulness) relative to that of individualswho have direct involvement in their export activi-ties.

These tindings suggest the need for applefirms to take a more active role in exporting theirapples. Currently export agents or brokers arerelied on to market apple products in the interna-tional market. Successful marketing involvesmore than producing and providing a qualityproduct. The total market concept focuses notjust on the core product but also on the auxiliaryservices (e.g., brands, packages, facilitating ser-vices). Given the problems identified by channelmembers in Southeast Asia, U.S. exporters arecurrently not doing a satisfactory job in providingsome of these auxiliary services. The apple indus-try needs to develop a more effective marketingstrategy for both domestic and export markets.

References

Jain, S.C. 1987. InternationalMarketingMan-agement. Boston: Kent Publishing Co.

Tansuhaj, P., K, S. Hong, and M. Tan. 1987.“Marketing Activities for Apples inSelected Southeast-Asian Countries:Thailand, Malaysia, and Singapore. ”IMPACT Information Series No. 20,Washington State University.

Recent studies have found that U.S. export-ers do not provide adequate services and are not

Journal of Food Distribution Research June 91/page 75