Tensions now run hot between Sriracha producer Huy Fong Foods and Underwood Ranches, the largest domestic source of the fresh jalapenos that are the main ingredient in the Southeast Asian sauce.
In the past, Underwood produced 100 million pounds of peppers per year on California farmland for Huy Fong.
The model worked this way: Underwood estimated the cost of the upcoming year’s harvest, Huy Fong Foods fronted the money and assumed the risk, and at the end of each year the two companies settled up.
After 28 years of business and friendship, issues arose and the relationship deteriorated. Fong sued Underwood for not repaying a $1.5 million overpayment for the 2016 harvest season. While the jury awarded to Fong, it concurrently gave Underwood Ranches $10 million in punitive damages and $14.8 million for contracts lost over the next two years when Huy Fong sourced its peppers elsewhere.
This post is based on the Modern Farmer article, Sriracha and Its Pepper Farmer Are Mad at Each Other, by Dan Nosowitz, July 23, 2019; the San Gabriel Valley Tribune article, Jury says Sriracha manufacturer owes former pepper farmer millions, by Sarah Favot, July 10, 2019; the YouTube video How Sriracha is Made, by Refinery29, August 25, 2016, and the ABC7 News story and video, Sriracha lawsuit: California pepper grower awarded $23.3 million by jury, July 13, 2019. Image source: Foodcollection.
1. What benefits came from the close relationship that the two companies shared over the years?
Guidance: In this case, there was a personal friendship at the heart of the relationship which spanned almost three decades. The two owners thought of each other “like family.” The agreement was mutually beneficial, with Huy Fong providing the cash needed for the growing season and guaranteeing a ready buyer for the harvest and Underwood providing quality ingredients from a location close by the factory.
Positive supplier relationships can make the day-to-day dealings smoother and more pleasant, and they may often have a valuable undercurrent of trust.
2. What risks are involved when two companies rely on each other as heavily as Underwood and Huy Fong Foods did?
Guidance: While close vendor relationships are often touted as a key to lean and progressive companies, reliance on a sole vendor can leave one or both parties vulnerable if the relationship is disrupted.
When the relationship fell apart, Huy Fong Foods was suddenly left without a supplier for its jalapeños. The product was very popular, and there were many orders to fill for the upcoming year but no plans or processes for finding alternate vendors. Worried he might go out of business, owner and founder, David Tran, scrambled and ultimately did find the peppers that he needed to fill his orders. However, there was no guarantee that he would be able to accomplish that on short notice or at a cost that wasn’t prohibitive.
Underwood’s fate is less clear from the articles, but a company in that situation may not have the resources to plant and harvest without money being fronted by another entity.