With half-year profits slumping 40 per cent to €19.5 million, fruit distributor Fyffes is to embark on a major cost-cutting campaign which may see a major rationalisation of its distribution operations in the UK and price cuts for both the group's suppliers of fresh produce and suppliers of shipping and packaging.

Fyffes finance director Mr Carl McCann declined to speculate on how much the group hopes to generate in cost savings, but industry sources believe that costs of at least €20 million will be taken out with Fyffes getting the benefit next year.

It is understood that one target for rationalisation is the distribution operations in the UK where the existing Fyffes network still operates in tandem with network bought as part of the Geest acquisition. Mr McCann said that Fyffes will also look at taking out cost in all areas of the distribution process and will be asking growers, shippers and suppliers of packaging "to share the pain".

Mr McCann also cited increasing levels of banana smuggling into the European market as one factor that has led to oversupply and lower prices. Last Friday, the Italian authorities estimated that more than 160,000 tonnes of bananas with import duties worth €127 million had been illegally imported into the EU.

The results from Fyffes were no worse than expected given the profits warning issued last March, but they still lead to a 8 cent fall in the Fyffes share price to €1.37. At this level, the shares are a fraction of their level of last February when they reached a peak of €3.98 on the back of the launch of its worldoffruit.com Internet portal for the fresh produce industry.

But with dot.com companies having fallen heavily since that peak, with oversupply in the core banana business and with the dollar/euro exchange impacting negatively, there is a negative attitude towards the group on the market. This is illustrated by the fact that stockbrokers ABNAmro downgraded the shares from a "hold" to a "sell" even before yesterday's results and have put a fair value of just €1.46 on the shares.

But Goodbody analyst Mr Liam Igoe took a more positive view. "I feel more positive about the outlook now than I did a week ago. "Now, visible action is being taken to restore margins."

There was little joy anywhere in Fyffes' half-year results, with operating profits down 36 per cent to €20.6 million even though sales were 10 per cent higher on €1.03 billion. The operating losses included €1.1 million in respect of Fyffes' share of the losses of Capespan Europe while the after-tax figure of €16.1 million includes €4.4 million against the development costs for worldoffruit.com, net interest income of €2.1 million. The interim dividend has been maintained at 1.0451 cents per share. Net cash at the end of the period totalled €53.2 million down from €138.7 million at the end of October. Most of the decrease is due to capital investment, including €39.1 million on the investment in Capespan and €25.6 million on capital projects.