Who’s in the high chair? – baby food industry; includes related article on organic alternatives
Who’s in the HIGH CHAIR?
Baby food companies are back in the high chair again.
It’s been three years since glass fragments were found in Gerber baby food, and almost seven years since Beech-Nut Nutrition Corp. was found guilty of selling fake apple juice. And though moms and dads are more concerned than ever about what they feed their tots, there are strong signs of rebirth in the baby food category.
Much of the change can be attributed to market leader Gerber, which has bounced back from bad publicity, focused on its core businesses, and impressed Wall Street with a dramatic financial turnaround.
Gerber, the only national brand in the $837 million category, controls almost 70% of sales and has been cranking out new products faster than you can say strained carrots.
Competitors, such as H.J. Heinz, admit they’ve been playing catch-up to Gerber’s lead. “We see ourselves as an innovative company,” says Bob Roussey, general manager of marketing at Heinz U.S.A. “But we have a very aggressive competitor – Gerber – that really keeps us hopping.”
Changing demographics should keep all baby food manufacturers hopping over the next few years. While baby food sales have benefited from the upswing in the U.S. birth rate – from 3.6 million in 1983 to 3.9 million in 1988 – the baby boomlet is expected to level off in the next decade. A report by Frost & Sullivan, a New York research firm, predicts that births could drop to 3.5 million a year through the early part of the 1990s.
At the same time, baby food consumption has dipped from an all-time high of 780 per infant per year in 1972 to about 564 today.
These two factors have Gerber and its competitors scrambling to introduce products that may revitalize the category and position them for a changing marketplace.
For Gerber, at least, the strategy is paying off. The company is quickly laying the building blocks to increase baby food consumption. In 1986, for instance, Gerber launched First Foods, a finely strained product designed to start babies on baby food at four months instead of the usual six months.
John McMillin, an analyst with Prudential-Bache Securities in New York, estimates that this line alone generated almost $40 million in sales for Gerber in 1988 without siphoning sales from the company’s flagship products.
The company has followed up with no-fuss, microwaveable products, such as a single-serve cereal, and has expanded its juice line with a larger, 750 ml product that can be used by the whole family.
“Baby food is not a mature product category,” says Bob Johnston, Gerber executive vice president and president of the Gerber Products Division. He predicts that new foods like these could lift consumption levels back up to 600 jars per baby.
Gerber also made a big splash last fall with its entrance into the infant formula market through a joint venture with Bristol-Myers. If Gerber reaches its goal of 8% to 10% market share in the category, the new venture could add $80 million in sales within two years, says Johnston.
Gerber took an unorthodox approach to the formula market, which has been dominated by Abbott Labs, with a 48% share, and Bristol-Myers, which controls about 35% of sales. In September, the company launched a controversial ad campaign targeted directly at mothers, not pediatricians.
Johnston says Gerber plans to stick with its marketing approach, despite opposition from the American Academy of Pediatrics, which feels the ads discourage breast feeding.
Gerber, however, did concede a change in its original ad, changing the tag line from “Nothing comes closer to your own milk than Gerber baby formula,” to “No formula is more nutritious than Gerber baby formula.”
There’s no question that Gerber sits high in the high chair. Since the 1920s, when Daniel Gerber introduced the first commercial baby food product, the company’s name has been synonymous with baby food.
The company’s progress over the last few years, though, has been anything but a steady crawl. In 1986, Gerber’s market share plummeted to 50% following reports of glass fragments in its products. (The FDA exonerated the company from responsibility in the incident).
More upheaval followed with the July 1987 death of CEO Leo Goulet. Profits were suffering, too, as the company struggled to rebuild its baby food business and at the same time maintain farflung operations such as trucking, toys, and furniture.
Gerber took its first steps toward recovery with the arrival of David Johnson (not to be confused with Gerber Products Division president Bob Johnston) as chairman and CEO in 1987. Johnson has been credited with focusing the company on what it does best, divesting underperforming businesses and streamlining operations.
In 1988, Gerber sold its baby furniture business, which Bob Johnston says was a drain on the company’s profits, and in October it announced plans to sell its child care centers.
The company’s baby food operating profits, which had dropped as low as $55 million in 1987, are expected to reach $134 million in fiscal 1990, according to analyst McMillin’s estimates. First quarter pretax margins tripled from 5.3% in 1988 to 15.8% in the company’s 1990 fiscal year.
The moves have been widely applauded among financial analysts. “Clearly Gerber has created a juggernaut,” says Richard Davis, an analyst with J.C. Bradford & Co. in Nashville. Adds Rod Rumreich, an analyst who follows the food industry for Moody’s in New York: “Gerber is the biggest surprise in terms of turnaround performance.”
Campbell Soup also was impressed by Gerber’s rebound. This month the company hired Johnson to take over as president and CEO to replace R. Gordon McGovern, who resigned in November. Alfred Piergallini, Gerber president and CEO, will take over Johnson’s role.
While it remains to be seen what impact the third chairman in as many years will have on Gerber’s performance, by most accounts Johnson leaves Gerber a stronger company.
For one thing, Gerber products are priced for profits. “We try to be the highest-priced product on the shelf,” says Johnston.
As a result, Gerber’s baby food business brings in operating margins of about 22%, McMillin estimates.
Beech-Nut battles on
Beech-Nut, on the other hand, has had less success restoring consumer confidence in its products. Analysts say that seven years of a tarnished image was enough for Nestle, which sold the troubled unit to Ralston Purina in September. “It was a small business for them,” says McMillin, “They got sick of hearing about it (the apple juice scandal).”
While analysts don’t see Beech-Nut as a strong threat to Gerber, most think the company should fare better under Ralston’s direction.
“Ralston is bringing something to the party,” says McMillin. “Ralston has its own sales forces. Nestle didn’t.”
McMillin draws a comparison between Kellogg’s pricing strength in the cereal category and Gerber’s pricing strategy in baby foods. “Living under the Gerber pricing umbrella might not be too bad,” he says. One of the keys, he adds, will be to see whether Beech-Nut can leverage its brand name from the Northeast and the West, where its distribution is strongest, to other parts of the country.
Ralston didn’t disclose a purchase price, but McMillin suggests that Nestle, anxious to unload the company, sold Beech-Nut for a bargain basement price, probably only about half the company’s sales.
For this reason, he adds, “If they (Ralston) could get 8% or 9% operating margins, they could make money.”
The acquisition doesn’t seem to have rattled Gerber’s Johnston. “The jury is still out,” he says. “We know Ralston to be good followers. They have not necessarily shown a lot of ingenuity.”
Change is also underway at H.J. Heinz. Of the three baby food companies, Heinz has kept the lowest profile. This has caused analysts to speculate about the company’s commitment to the category.
“I can’t figure out what they’re doing,” “says McMillin, noting that Heinz spent $35 million to launch in 1987 an instant baby food product that requires mothers to go through the extra step of mixing the product.
Heinz’s Roussey, however, insists that Heinz hasn’t lost interest in the category. “H.J. Heinz is committed to the baby food business,” he says.
The company does seem to be putting its money where its mouth is. In October, Heinz U.S.A. launched a $90 million modernization project at its baby food and soup plant in Pittsburgh. The project is touted as the largest single capital investment in the company’s 120-year history.
Like Beech-Nut, Heinz competes regionally in baby food. The company’s jarred baby foods are available in the North Central, Southwest, and Southeast regions, as well as pockets of the Northeast. The company’s Saver Size Juices are marketed nationally.
Heinz has followed Gerber’s foot-steps into several new product categories, but the company operates in a distinctly different style than Gerber.
“Consumers perceive Heinz as the value brand,” says Roussey. To support this low-price positioning, Heinz doesn’t spend a lot of advertising. Instead, the company focuses on direct mail to new mothers.
The company has invested in new products such as yogurt for babies, which Roussey describes as “moderately successful.” Beginner Foods, the company’s answer to Gerber’s First Foods, hit the market in late 1988.
Roussey says the company’s key strategy is to become recognized as a full-line supplier of baby foods, not just a marketer of strained foods and juices. “This is the only way that the retailer and we can fully benefit from our value positioning,” he says.
You’ve come a long way,
Product safety will continue to be a central issue for all three baby food companies over the next few years. Despite continuing consumer concern over pesticides and food additives, both Heinz’s Roussey and Gerber’s Johnston believe that consumers are regaining their faith in commercial baby food products.
“We are seeing confidence in baby food,” says Johnston, noting that fewer mothers today are preparing homemade foods for their babies.
Gerber is also covering its bases by branching out into what it calls “family foods,” with products like Fruit Classics, a single-serve apple-sauce that is designed to compete with Mott’s.
Because sales are so closely tied to the birth rate, baby food has often been called a mature product category. Perhaps today it’s more accurate to say that baby food has grown up.
PHOTO : Heinz products are positioned as the value brand.
PHOTO : New product development and restored consumer confidence in commercial baby foods is fueling sales growth.
COPYRIGHT 1990 Business News Publishing Co.
COPYRIGHT 2004 Gale Group