Tortilla Makers Try Not to Get Flattened

Shoppers at the Food 4 Less in Highland Park would seem to be spoiled for choice when it comes to tortillas.

The shelves are jammed with more than two dozen varieties, from miniature corn disks to cradle a few morsels of carne asada to placemat-sized flour wrappers for molding monster burritos.

But what appear to be competing products are really the handiwork of a single company: Gruma. The Mexican giant dominates America’s packaged tortilla trade through its U.S. subsidiary Gruma Corp., whose stable of brands includes the Mission, Guerrero and Buena Comida labels found at Food 4 Less and other supermarkets.

And that has Los Angeles tortilla maker Philip Manly steaming like a vat of fresh-cooked corn dough. He and other manufacturers say Gruma broke the law to wrap up its daunting market share, allegedly paying retailers hefty fees to grab prime shelf space and eliminate competing products. A trial is set to open today in federal court in Houston in a lawsuit that claims Gruma violated antitrust laws. The suit seeks $70 million in damages.

“This is war,” said Manly, owner and general manager of El Dorado Mexican Food Products, one of eight California tortilla makers among the 18 plaintiffs; the others are from Texas, Arizona and Michigan. “If I go down, I’m going down swinging.”

The case is notable because relatively few small businesses have mounted legal challenges to the so-called slotting fees some producers pay to retailers. Introduced decades ago by supermarkets to cover the cost of adding new products to their lineups, the fees have morphed into a complex and shadowy system of selling shelf space--a practice that may or may not be legal depending on how the deals are structured.

The suit doesn’t provide details of the alleged slotting deals between Gruma and the supermarkets, none of which were named, that supposedly gave Gruma products superior treatment. Nor does it specify how much money allegedly changed hands. Gruma’s attorney, Gregory Huffman, declined to discuss the company’s slotting arrangement with supermarkets and said his client was innocent of wrongdoing. Officials of publicly owned Gruma, based in Monterrey, Mexico, declined to be interviewed about the lawsuit, and supermarket executives wouldn’t comment on the slotting fee system.

The plaintiffs are represented by Thomas Stanley, who recently won a $14-million judgment against Coca-Cola Co. on behalf of five independent soft-drink bottlers in Texas, Arkansas and Louisiana over anti-competitive practices similar to those alleged in the Gruma case.

“They have gained control of the placement of competitors’ products” on store shelves, Stanley said of Gruma. “They have attempted to monopolize markets and restrain trade.”

The Gruma case underscores the transformation of the humble tortilla into a big-bucks enterprise worth fighting over. Thanks to a growing Latino population and America’s passion for Mexican cuisine, U.S. tortilla sales have been rising by 9% annually in recent years--warp speed for the pokey bread industry. With $5.2 billion in sales last year, tortillas now account for nearly a third of the U.S. bread market and will overtake white bread at American tables within the next few years, according to the Texas-based Tortilla Industry Assn.

But many of Southern California’s old-line tortilla makers aren’t reaping that windfall. At a time when Mexican food is enjoying unprecedented popularity, many are struggling to protect their turf in an industry they helped build from the ground up.

“We’re working harder and longer for a lot less money than we used to,” said Fernando Ruiz, a third-generation tortilla maker and manager of Los Angeles-based La Gloria Foods Corp., which is not a plaintiff in the lawsuit. “More people are eating tortillas now, but the competition is fierce.”

No one knows exactly how many tortilla companies are battling for a share of the trade. The most recent Census Bureau statistics show there are 268 tortilla makers nationwide, more than a quarter of them in California. But experts say those figures don’t include hundreds of bakeries, restaurants and other mom-and-pop entrepreneurs that are feeding the market as well.

The U.S. industry for decades was fragmented with no dominant national player. That was before Gruma, Mexico’s largest corn-flour producer, began looking northward to expand its empire.

The company’s principal shareholder is Roberto Gonzalez Barrera. Known as Mexico’s Tortilla King, Gonzalez is a billionaire with close ties to former President Carlos Salinas de Gortari, a relationship that proved lucrative for Gruma. The Salinas administration showered the company with hundreds of millions of dollars’ worth of corn subsidies and promoted the conversion of thousands of Mexico’s small tortilla factories to the use of corn flour instead of fresh corn. In the late 1970s, Gruma seized on the opportunity to tap a lucrative new market north of the border and create a strong national tortilla brand in a country where none existed. It began buying up a string of small U.S. tortilla manufacturers. Among them were two L.A.-area firms, Mission Foods Corp. and Guerrero Mexican Food Products Inc., which eventually would become its flagship brands. Today, Gruma is America’s largest tortilla producer, with 13 manufacturing facilities, five corn-flour plants and 5,000 employees in the United States. The company employs 1,600 workers at its four facilities in California, including 600 at its 320,000-square-foot plant in Rancho Cucamonga. Opened in 1995, it is the largest tortilla factory in the world, cranking out more than 300 million pounds of tortillas and corn chips a year. Gruma’s U.S. operations are headquartered in Irving, Texas, and contributed about half of the parent company’s nearly $2 billion in revenue last year. Four Gruma brands-- Guerrero, Mission, Diane’s and Mission Estilo Casero-- accounted for nearly 50% of U.S. supermarket tortilla sales over the last year, according to recent scanning data from Information Resources Inc., a Chicago-based market research firm. The company produces myriad in-house labels for grocery clients and is also a big player in the food service industry, supplying well-known companies including Taco Bell Corp., the nation’s leading Mexican fast-food chain. Analyst Joaquin Lopez-Doriga of Deutsche Ixe in New York said many of Gruma’s plants boast state-of-the-art equipment that have allowed it to drive down its costs while giving supermarkets the quality and consistency they want. In addition, he said, Gruma’s far-flung distribution system and speedy service have set the industry standard. “These guys are good,” Lopez-Doriga said. “They are very professional. Very savvy.” Competitors see things differently. The lawsuit against Gruma accuses its U.S. subsidiary of trying to take over the retail tortilla market by engaging in a variety of illegal and predatory practices, including paying retailers for access to the best shelf space and the ability to dictate the display or removal of rival brands.Because of Gruma’s behavior, “our retail business is shrinking,” said Ricardo Robles, president of La Reina Family Brands,the East Los Angeles parent of plaintiffs La Reina Inc. and Anita’s Mexican Foods. La Reina, Spanish for “the queen,” was founded in 1958 by Robles’ father, Mauro. Now 80 years old, the native of the central Mexican state of Zacatecas had little formal schooling but a keen eye for opportunities. Peddling chorizo, cheese and pastries to Mexican grocery stores around Los Angeles in the 1950s, he noticed shopkeepers slaving long hours over antiquated tortilla presses. So he saved $9,000, bought the most efficient machine he could find, and launched himself into the tortilla business. By the late 1980s, La Reina claimed to be the biggest manufacturer of flour tortillas in the world. A huge oil painting from that era displayed in the company conference room shows a dashing Mauro superimposed on a map of the world, bestriding it like a tortilla colossus. To survive the Gruma juggernaut, the company has expanded the food-service side of its businesses and added frozen foods, taco chips and other Mexican specialties to its product line. Yet its $42-million revenue is nearly 20% smaller than it was in the late 1980s. Nattily dressed in a silky shirt and tie at the company’s East L.A. headquarters recently, Mauro Robles’ chatter about La Reina’s history faded when the topic turned to the lawsuit. “We just want a chance to compete,” he said evenly. In Lincoln Heights, El Dorado’s Manly is far from taciturn. Sporting a goatee and a silver loop in each ear, the 28-year-old said he was ready to rumble with Gruma even if it cost him his livelihood. “If we don’t win, I’ll probably have to sell the company--maybe to Gruma,” he said with a laugh. Manly said traditional recipes combined with new technology and tenacious marketing have enabled the 57-year-old company, founded by his grandfather, to nearly triple sales in the last five years to a projected $6 million this year. But he says a lot of that growth has been in the food-service business where Gruma isn’t as dominant and profits are the puniest. He said doors at many of the big retail chains remain closed to him, including those at markets such as Food 4 Less. “We’ve been dying to get in there,” Manly said. “But the buyer has told me they can’t because of their contract with Gruma...That’s a monopoly.” Tortilla makers throughout California will be watching the proceedings in Houston closely.Gruma “just gets stronger every year,” said La Gloria’s Ruiz, “and a lot of family-owned companies are worried they’re going to come after what market share they have left. Obviously, they’re rooting for Gruma to lose.”