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.
"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.
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.