Fruit Bar Makers Launch Cold War

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There are still many people who don’t know what a paleta is, but during peak season, Fruiti Pops Inc. cranks out 400,000 of them a day. Owner Rudy Aguado has watched as the product – a Latin American frozen fruit bar that comes in flavors from coconut to rice pudding – has gained in recognition and popularity since he began selling them to ice-cream truck distributors some three decades ago.

But last month, Aguado’s Santa Fe Springs company saw a 24 percent drop in year-over-year sales. It wasn’t alone: Another paleta maker, North Hollywood’s Frutifresca, suffered a 70 percent drop. They don’t blame the weather or a decrease in their consumers’ spending, but a new rival and what they believe are cold-hearted tactics.

The fruit bar makers are pointing fingers at South L.A.’s Arya Ice Cream. Arya, which claims to be the largest ice-cream vending distributor on the West Coast, started making its own line of paletas last year.

The company has cut into the sales of the longer-established fruit bar makers, but Fruiti Pops and Frutifresca claim their rival has been unfairly leveraging a mobile ice-cream distribution monopoly. They say it has threatened to cut off vendors or raise prices on other products if the vendors don’t buy its paleta products.

“Fruiti Pops is continuing to suffer large losses due to Arya’s Loyalty Incentive Program,” Aguado said in a court declaration. “We suffered these losses even though March has been an unseasonably warm month, in which sales of our fruit paletas should have increased.”

Arya’s attorney, Bruce Wessel of Century City’s Irell & Manella, said the company is competing fairly.

“The allegation that there’s a tying arrangement is not correct,” he said. “The plaintiffs know it’s not correct; they have no evidence there ever was a tying arrangement.”

Accidental beginning

Aguado founded Fruiti Pops in 1980, as he said, by accident. In the late ’70s, the New York-born Aguado was working in insurance in the L.A. area – and he was unfamiliar with paletas. One day, someone brought one of the fruit bars to his Mexico-born stepfather, who owned a market and remembered the bars from his youth. His stepfather thought he and Aguado could make a business out of it.

“It was new to me,” he said. “I didn’t even know what a taco was until I came to L.A.”

His stepfather got busy with other ventures and handed the reins of the paleta-making idea to Aguado, who began experimenting with recipes with his wife, Jackie, in a commercial kitchen in Artesia. After much trial and error, business expanded as they began partnering with distributors.

Other paleta makers serving local Latino communities cropped up around the same time, some expanding beyond a single storefront or pushcart. One of the most successful, Paleteria La Michoacana, was founded as a pushcart in 1988 in Modesto. Chino’s Tropicale Foods, another major manufacturer, began as a pushcart in 1991 in Modesto. Frutifresca states it is more than 20 years old in legal filings.

The product grew in popularity over time, boosted by the increased buying power of Latinos and also catching on in mainstream retail outlets and with mobile vendors. Today, Fruiti Pops sells to a sizable distributor network, which supplies the fruit bars to trucks, pushcarts, supermarkets and convenience stores. Among its clients are ice-cream truck commissaries – places where truck drivers park overnight and stock up on supplies.

Aguado declined to disclose Fruiti Pops’ annual revenue, but in 2012 he told the Los Angeles Times that he was on pace for $2.4 million in sales that year, up from $2.1 million the year before. That would account for about 6 percent of the U.S. market for frozen fruit bars, according to market research company IBISWorld, according to the Times. Others have enjoyed growth, too: Annual sales at Paleteria La Michoacana reportedly grew by more than 25 percent from 2005 to 2010.

New competition

As in any market, success created competitors. New paleta companies have opened across the country in recent years; Nestlé reportedly began partnering with Tropicale Foods to distribute its products.

“Everybody’s trying to get into it,” Aguado said.

One of the new entrants is Arya, an ice-cream distributor that reaches more than 5,000 Southern California ice-cream trucks and pushcarts a day. It began manufacturing a line of paletas last year.

One of the company’s advantages as a distributor is an exclusive regional deal to supply Blue Bunny products from Wells Enterprises Inc., the third-largest ice-cream manufacturer in the country, and maker of Bomb Pop popsicles and Champ ice-cream cones. Arya also owns a large network of ice-cream storage spaces and a fleet of customized trucks to deliver products.

“Given how decentralized ice-cream trucks are and how big Southern California is, we have the ability to get ice cream from the distributor to the truck,” said Wessel, Arya’s attorney. “The logistics of that are complicated, and Arya has spent a lot of resources and management time to figure out systems that allow for delivery of product.”

But Aguado contends that in selling its new fruit bars to clients, Arya has broken antitrust laws. Aguado declined to discuss his legal dispute, but a Los Angeles Superior Court complaint filed last month jointly by Fruiti Pops and FrutiFresca says Arya used its hold on the mobile ice-cream distribution market to coerce vendors.

Representatives of Frutifresca did not return a request for comment.

Fruiti Pops and Frutifresca allege that Arya began threatening clients that unless they bought its paleta products, the company would cease guaranteeing delivery dates for Blue Bunny products, raise prices for Blue Bunny products by as much as 20 percent or cease selling Blue Bunny products altogether. They also allege the company threatened to audit clients’ freezers and storage space for competing paleta products and required them to remove advertising and displays for competing fruit bars.

“The above conduct has substantially harmed the business of plaintiffs, reducing their sales and profits and threatens to put them out of business,” the complaint states.

In a subsequent filing, Fruiti Pops says it saw just $105,000 in sales last month, down from $138,000 the year before. Frutifresca was hit even harder, with sales dropping to $16,000 last month from $54,000 the year prior. Both companies also claim to have suffered a 70 percent year-over-year drop in February sales.

Wessel said the allegations are untrue, and that the company sent a letter to clients March 31 stating that they are free to buy from whomever they wish. A hearing is scheduled for Thursday, with the busy summer season not too far away.

The case will hinge on how both sides can define the mobile ice-cream market, said Tom Hanrahan, an attorney at Sidley Austin who reviewed the case for the Business Journal. Tying product sales together only violates antitrust laws if a seller has monopoly power over a specific market.

Hanrahan said the plaintiffs will try to argue that Arya has a monopolistic hold on Blue Bunny products and mobile ice-cream distribution, which it is using to kill off competition in another area. But he added that would be tough to show, as Arya could argue that there are plenty of other places to buy ice-cream products.

“It’s one thing to say I won’t sell you a pen unless you also buy a pencil,” Hanrahan said. “If you can buy pens and pencils anywhere, then it doesn’t matter – it’s not a violation of the law. But if I’m the only place to buy pens, then it may matter. It depends on how you define what the market is.”

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