2010 Processor of the Year: TreeHouse Foods

Otherwise known as 'the biggest company you never heard of,' four former Keebler executives build a $2 billion company on private label.

By Dave Fusaro, Editor in Chief

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Imagine managing 9,000 SKUs. Developing products to meet the needs of 800 customers. Managing 19 manufacturing plants, not a single one of which you built yourself.

Such is the world of TreeHouse Foods Inc. and, to some extent, the lot of many private label manufacturers. But few food processors operate nothing but acquired plants, and none has gone from zero to nearly $2 billion in just five years and just as quickly become No. 1 or 2 in their product categories.

Nor has any other had First Lady Michelle Obama on its board of directors.

The past two years have seen unprecedented growth in store brands. Unprecedented, too, is the impact private label products have had on national brands, as well as on the overall food & beverage manufacturing industry, and, indeed, on the way Americans shop and eat.

"Branded products grow with population growth – maybe 1 to 1.5 percent a year," says Sam Reed, chairman and CEO. "But private label has been growing twice as fast for the past 20 years. And private label is not just growing because of the recession. Europe is still far ahead of the U.S. in store-branded products."

Private Label Market Share
Sources: Private Label Manufacturers Assn. & ACNielsen

Although private label actually flattened a bit at the height of the recession (see table), its 18.8 percent overall market share remains below the 24.2 percent mark across 21 European and North American countries, and well below that of highly developed markets such as the U.K., Germany and Switzerland. That headspace can be interpreted as opportunity.

But this is not a story about private label. TreeHouse Foods, Oak Brook, Ill., has turned in some stellar years by any measure. Sales have grown by a compound annual rate of 21 percent since the company was created in 2005, and net income has risen by 26 percent a year, hitting its highest level last year. With two acquisitions this year, the company should hit $2 billion in sales in 2011.

TreeHouse has the leading private label share in powdered nondairy creamer, soups, dressings, pickles, powdered soft drink mixes and hot cereal; and the No. 2 position in jams & spreads, salsa and dry mix pasta dinners (but No. 1 in the high-volume macaroni & cheese category).

TreeHouse is as adept at producing 39 cents-a-box mac & cheese as it is making deluxe shells and cheese that commands $1.59, and is just as capable at supplying dollar stores with ranch dressing as it is at creating organic lemon ginger sesame dressing.

Private Label Manufacturing
Sales and Earnings for TreeHouse Foods

Private label manufacturing on TreeHouse's scale requires a unique balance of customized product formulations with manufacturing that is both flexible enough to produce all those recipes and efficient enough to undercut the leading brands. So in a stellar year for private label manufacturing, it's especially fitting for Food Processing to honor TreeHouse Foods as our sixth Processor of the Year.

A very brief history
TreeHouse Foods has a history that stretches all the way back to … 2005, or at most 2001. But its key components have longer and more colorful pasts.

At its origin, TreeHouse is Dean Foods Co.'s former Specialty Foods Group. Over the years, Dean had acquired a handful of nondairy businesses, many of them private label or foodservice products, including pickles, dips and dressings. Four years after Dean was acquired by Suiza Foods (although it kept the name Dean), those businesses were deemed non-core, and Dean recruited the TreeHouse executives to spin off the business as a separate public entity.

A few years earlier, Reed and David Vermylen, both with extensive food industry experience, arrived at Keebler Foods in 1996 to help engineer a turnaround and leveraged buyout of the cookie and cracker business from Britain's United Biscuits. Flowers Industries and Artal Luxembourg S.A. also were key investors.

Reed and Vermylen restored Keebler's vigor and also made a number of strategic acquisitions, including Sunshine Biscuit Co. After just two years in charge of newly independent and private Keebler, Reed and Vermylen took the company public again, although Flowers retained more than 50 percent of the stock.

That team had firmly established Keebler as the country's No. 2 cookie and cracker maker, behind Nabisco. Entering the new millennium, Keebler was robust but Flowers opted to sell its interest. In 2001, Kellogg Co. bought Keebler for $4.6 billion (including debt assumption).

In addition to Reed and Vermylen, other key Keebler executives who banded together to pursue another venture were Harry Walsh, Tom O'Neill and Nick McCully. While looking for opportunities, they created TreeHouse LLC, which after the Dean spin-off became the firm's name.

"We still weren't that old. I guess we wanted a last hurrah in packaged foods," says Reed. "We naturally thought about a branded company first, but as we looked around we came to the surprising conclusion that private label foods offered an extraordinary opportunity. We thought we could apply our branded experience to the world of private label."

When Suiza and Dean merged, also in 2001, to form the world's largest fluid dairy company, there was immediate speculation the Specialty Foods Business would be excised in some way. Those nondairy businesses were spun off in 2005, with 98 percent of the stock going to Dean shareholders and the other 2 percent to the five TreeHouse principals, who poured in $10 million of their own money and were appointed to lead the new company. The newborn company had initial sales of $700 million, a market capitalization of $600 million and a debt-free balance sheet.

It wasn't long before the TreeHouse management team went to work making acquisitions. A textbook private label target had existed for years in H.J. Heinz's soup and baby food businesses -- with categories led by Campbell and General Mills' Progresso and Gerber and Beech-Nut in baby food, you get no style points for being No. 3. When a number of non-strategic Heinz units were sold to Del Monte, they never quite fit in there either. The soup and baby food businesses became TreeHouse's first acquisition, in 2006.

Strategy
"Our acquisition filter is a good, analytic model for evaluating an opportunity in private label," says Vermylen. Executives look for:

  • Category attractiveness.
  • Intrinsic value of the target.
  • Strategic fit with TreeHouse.

"We got started with pickles and nondairy creamers, two large, but slow growth categories," says Vermylen. "What we saw was a debt-free balance sheet that would allow us to buy other companies."

Ironically, TreeHouse is in just about every food category except the ones that Keebler was in. And that's not because of a negative opinion of those categories nor any noncompete agreement – the execs say they just haven't seen the right opportunity come by.

Private Label Categories
Private Label Cost Profit

TreeHouse clearly stakes its future on private label – it's 90 percent of current grocery revenue. But the company does maintain brands with varying degrees of recognition: McCann's Irish Oatmeal, Cremora coffee creamer, Peter Piper's and Nalley pickles, Second Nature egg substitutes, Thank You canned puddings, Hoffman House seafood sauces, Roddenbery's Northwoods pancake syrups. Its Nature's Goodness line is the No. 3 brand of infant food in the country (but after Gerber and Beech-Nut, who's counting?).

"We have no interest in branded products – we're too old for that," jokes Reed. However, E.D. Smith, acquired in 2007, "has a good branded business in Canada. But we really bought it for its private label salad dressing business."

But why exactly? In Canada, E.D. Smith is the leading private label manufacturer in several major dry grocery categories with good relationships with key retailers, which opened up opportunities for TreeHouse's U.S.-based business. In the U.S., Smith is the leading producer of private label salad dressings, which complemented the TreeHouse portfolio and is in a growth category aligned with healthy eating. Further, TreeHouse's U.S. foodservice business was a new distribution channel for E.D. Smith's products. In addition, E.D. Smith has three efficient manufacturing plants and, like TreeHouse, is as adept at value products as it is at upscale ones.

"Here's what we look for," says Sharon Flanagan, senior vice president of strategy, who spent years at General Mills and at McKinsey & Co. consulting. "We look at the category first. Who are the leaders? Is there room for private label growth? How important is it to our existing customers?" Ten percent might be the ideal level of private label penetration for an acquisition – showing both a good foundation for store brands but plenty of room for growth.

"No. 2, how attractive is the target company?" she continues. "Is there good management in place? Do they have good infrastructure, modern plants? How's their customer portfolio?

"Finally, how does it fit us [TreeHouse]? Are there common processing technologies, procurement synergies we can bring to bear? Can we add value?"

The ideal category, the executives say, is not stagnant or a vacuum, but one in which there is a strong branded leader that is focused on growing the category through innovation in product and packaging and generating consumer excitement. TreeHouse can deliver private label products that span the cost spectrum, from value items to top-tier ones.

The operating company: Bay Valley
The companies may be bought by TreeHouse Foods, but the operating company for most of these acquisitions is Bay Valley Foods. The name loosely relates back to Dean Foods' first nondairy acquisition in 1961, a pickle pioneer from Green Bay, Wis.

"The integration of these acquisitions is the key," says Harry Walsh, another of the Keebler ex-pats, who oversees precisely that as a corporate senior vice president and president of Bay Valley Foods. "We try to make one plus one equal three.

"[The acquired company] created a culture that made them successful as a small company," he continues. "We look at how they succeeded and how we can add to that. Not so much how they can adapt to us but how we can adapt to them."

The kind of scale brought to a deal by TreeHouse can immediately improve a smaller company's distribution, food safety, purchasing, research & development, finances and "intellectual synergies," says Walsh.

Product development at TreeHouse seems to follow two strategies. "Good-better-best" refers to the range of potential products; TreeHouse can deliver items from economical to high-end. Another common phrase is to be a "fast follower" -- so whenever a national brand delivers a product innovation, TreeHouse wants to be able to copy it quickly.

Product develop is done collaboratively with the retailer. "Seldom does a retailer come at you with a fully developed product idea. They usually don't have their own R&D departments," says Walsh. "They look at the category and its trends [and develop] a wish list, and we apply our R&D and manufacturing to that list.

"There's a certain set of retailers that are selling on the premium end, and those are more in tune to innovation," he continues. "A lot of folks simply want to get to the highest quality of an existing product with an economic price point, and that's an art in itself. And there are those, especially in these times, that are looking for quality, but entry-level pricing is most important."

"Really, they all approach it differently, each in accordance with its unique private label strategy" adds Reed.

"And it's a testament to our R&D and manufacturing people that we can operate across that spectrum," says Walsh.

As hinted at earlier, the company sells to more than 250 food retailers in North America, including 47 of the 50 largest food retailers; more than 450 foodservice customers, including 74 of the 100 largest restaurant chains; and the 200 largest food distributors. Its 10 largest customers account for approximately 47 percent of sales, although Walmart Stores, at roughly 20 percent of sales, is the only one accounting for more than 10 percent.

Manufacturing, of course, is a big part of the equation. "You have to be able to produce a high-quality product on a consistent basis in the low-cost neighborhood – and service the customer," says Reed.

While there have been four plant closings in TreeHouse's history, in almost every case an acquired plant's throughput and capacity utilization go up, not down, with the broader reach of TreeHouse.

If there is one growth target that has proven elusive, it's food away from home. Currently just 15 percent of TreeHouse's business, foodservice is an attraction for this group of executives. And maybe further down the road, refrigerated and frozen foods.

What direction is TreeHouse moving in? One direction made of two intertwined components: more acquisitions and more focus on private label. With a healthy bottom line and credit available, the company remains on the lookout for acquisition candidates.

When the five ex-Keebler executives set up the company in 2001-2005, they had a goal of building a $2 billion (sales) company, but believed it would take the rest of their careers to do so. Reed acknowledges they've moved faster than even he believed possible.

"Now we believe the [private label] opportunity far exceeds our $2 billion target," says Reed. That opportunity and assurances that they're "still having fun" implies a lot more wheeling and dealing ahead for TreeHouse Foods.

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