Sell Bad Food, Lose Your Company: How SK Foods Got Hit by Bad Tomatoes

The demise of Monterey, CA-based tomato processor SK Foods is a cautionary tale of how not to cope with a recession. The family owned company, which opened its doors in 1990 and grew to garner 14 percent of the U.S. market for packed tomatoes, was forced to declare bankruptcy and sell out to Olam International of Singapore this summer following allegations that its executives paid bribes to inflate prices and sell substandard products.

A second SK Foods employee pleaded guilty last week to participating in the conspiracy, which some in the industry say was a desperate act by the company in tough economic times. Scott Sayler, SK Food's former CEO, maintains that any wrongdoing was the fault of a few bad actors, but prosecutors say they have taped telephone conversations indicating that Sayler and other top officials actively engaged in and encouraged unlawful behavior. Further indictments in the case are expected to follow.

Not only is the tomato industry suffering from recessionary pressures, it's also still recovering from the salmonella scare last year, not to mention increased competition from Mexico and new greenhouse and hydroponic operations. SK apparently felt the pressure, particularly because it had racked up enormous debt buying cropland and building three processing plants in California that employed more than 1,500 employees.

Purchasing agents at Kraft, Frito-Lay and B&G Foods pleaded guilty earlier this year to accepting bribes from SK Foods to prop up prices and accept poor quality -- i.e., overripe and moldy -- tomatoes. The revelations prompted banks to stop extending credit to SK, and soon enough the company ran out of cash for operations.

The marketplace probably won't feel the effects since Olam plans to continue operations at full tilt -- although prices to consumers may come down since the price fixing racket was uncovered.

While the FDA promised earlier this month to more aggressively pursue food safety investigations, and the House passed a bill last month to give the FDA more authority to do so, it's unlikely the proposed measures will stop the kinds of desperate and fraudulent acts perpetrated by SK Foods. Moldy tomatoes, though gross, are not a health threat and therefore not the FDA's highest priority. It was the Department of Justice's Antitrust Division that discovered the rotten tomatoes as part of a wider bid-rigging investigation.