Herr Foods: Chipping away at the competition

Even giants Anheuser-Busch and Keebler have fallen to Frito-Lay. With audacious flavors and an ear toward its loyal customers, Herr Foods defends its turf

In the battle for the salty snack food aisle, Herr Foods Inc. would seem a likely casualty. Far bigger national foes, Anheuser-Busch and Keebler Foods among them, have succumbed to the onslaught of PepsiCo's snack powerhouse Frito-Lay. Procter & Gamble Co. is fending off a major attack on its Pringles business from Frito-Lay's Stax. With its national foes defeated or on the defensive, Frito-Lay announced earlier this year it's now setting its sights on regional players like Herr's.

But Daryl Thomas, director of marketing for Herr's, based in Nottingham, Pa., isn't losing sleep over Frito-Lay. With sales of around $200 million and "growth rates generally outpacing the category," he says, Herr's will stick to focusing on its consumers, trying to understanding them better than ever and developing new products that will meet their needs in a marketplace where diet trends are in flux.

"It doesn't surprise me that, across the national landscape, there are areas where companies such as Herr's have prominence, and that Frito-Lay would take an interest," he says. Herr's competes in 10 northeastern states, from Ohio, West Virginia and Virginia up the coast through Massachusetts. "As [Frito-Lay] is looking to grow its business, they're naturally looking for where those holes are." Herr's intends forever to be one of those holes in Frito-Lay's market map.

At the same time, the company doesn't appear particularly interested in joining Procter & Gamble in its plan to enlist "regional chippers," as companies such as Herr's are sometimes called by the national players, in P&G's own battle against Frito-Lay. P&G began a test late last year in Northwest markets of reviving Anheuser-Busch's discontinued Eagle Snacks brand, to which P&G bought the rights in the 1990s. Should P&G roll an Eagle revival nationally, it would be looking to regional snack companies like Herr's as partners to produce and distribute the brand, said spokesman Gary Dowdell.

"We're committed to the Herr's brand and marketing and distributing it," says Ed Herr, executive vice president. "If there's an item out there that would round out our line and not cannibalize sales, we certainly will look at those things. But our first commitment is to the Herr's brand. It's what we're about and what we do. I don't see that changing for the foreseeable future."

More focus on the consumer
What the company is doing to compete more effectively is focusing more closely than ever on its consumers, why they buy Herr's versus other brands, and how to get them to buy more.

"We're involved in a study right now to get a definition of who our consumer segment is," Thomas says. "Herr's is a family business. When we talk to consumers, we get a sense that theme seems to resonate with people. Families like the idea of family companies. It creates a good feeling toward the brand versus a big corporate conglomerate.

"This is a family that does one thing: makes snacks," adds Ed Herr. "Our name is on the bag with a tradition we want to keep alive."

Herr's had mixed but overall positive results in 2003, losing share slightly in its two biggest businesses , potato chips and pretzels , but more than making up for that with strong double- and triple-digit growth in all of its other categories, according to Information Resources Inc. data from food, drug and mass merchandisers, excluding Wal-Mart Stores. Those data also exclude convenience, club, dollar, foodservice and other small-store accounts , all of which are significant channels for Herr's.

In this qualified data, Herr's sales rose 3.2% to $87.8 million, according to IRI figures, twice the 1.6% pace of the $7.7 billion salty snacks business overall. In the fast-growing pork rinds category, Herr's grew its business 114% to more than $1 million, more than tripling the category's already strong growth. In the declining ready-to-eat popcorn and caramel corn business, down 6.4% last year to $196 million, Herr's nonetheless grew its sales 19.9% to $3 million. And in a fairly flat tortilla chip market, up 1.1% to $1.6 billion, Herr's boosted its sales an impressive 16.7% to $13 million.

(Thomas declined to give actual company figures, but said the IRI data is generally accurate but accounts for only about half of company sales.)

To Thomas, the reason for the strong showing is simple: Herr's has been following where its consumers are leading, into greater variety. "We started with one potato chip in 1946," he says. "Today, we have 21 different types. We have 340 [snack stock-keeping units] out there in all."

But he realizes Herr's is far from alone in product proliferation. "There were 700 new snack items introduced last year, accounting for about 5 percent of all new grocery items. So a lot of people are trying to satisfy consumers by giving them the great-tasting product they're looking for."

Audacious new products
For Herr's, product development in such a competitive and fast-paced environment means leaving no stone unturned , be it categories, trends, partners or resources.

"We have a structured program for new product development," Thomas says, in which marketing, R&D and manufacturing are equal partners and ideas are solicited from employees and suppliers, too. The company focuses innovation on areas where it sees emerging consumer interest, areas where a product line has excess capacity that should be tapped to maximize return on capital investment, or areas where the competition seems relatively less intense.

"We do focus groups with college students, interviews with everyone from kids to moms buying for the family, and we get input from our suppliers," Thomas continues. "We have 1,500 employees, who are also consumers and moms and dads, so we always are soliciting ideas from them. I think you really need an organized effort, with suggestions programs for your employees, planned research with consumers and dialog with your suppliers soliciting their thoughts."

Those sources combined have yielded 800 new product ideas for Herr's over the past two years, all of which go to concept testing with consumers and, depending on how they score, into prototypes that are again evaluated by consumers.

Marketing and product development are really everyone's job at Herr's, Thomas says, and he sees a 50-50 partnership between his marketing department and R&D. "They've got a lot of great ideas way beyond just the flavor of the product," he says.

While structure is important, so is speed to grab an opportunity. "No one five years ago could have predicted the environment we're in today," with growing consumer concern about obesity and carbohydrates. "Really, the challenge is to stay nimble and flexible and talk a lot to consumers to stay connected to the marketplace."

When Herr's saw the low-carbohydrate diet craze boosting sales of pork rinds, it cranked up production in that category. Likewise, the company has tapped the growing market for such products as soy crisps and ConAgra Foods' Slim Jim meat snacks by using its direct-store delivery system to distribute other companies' products.

But the company tries never to put too many of its chips on any one bet. "I think the reality of the [low carb] trend is less than the perception," Thomas says. "There really is a significant interest out there. Baby boomers have steered the course of public sentiment since they came on the scene, and the front edge of baby boomers is turning 58, so they're getting to that stage where their metabolism slows down a little bit.

"But it's dangerous to paint the consumer with one big brush," he adds. "We've had success with soy crisps, meat sticks and pork rinds. And we've seen a little softness in pretzels, which had been the snack of choice for dieters. But potato chips are still growing, too."

So while Herr's keeps an eye on the low-carb movement, it's also been launching new flavors to support its core potato chip business. These are the kinds of audacious flavors you won't see from a buttoned-down Frito-Lay: potato chips in ketchup flavor (co-branded with Heinz), salt-and-pepper, honey barbecue and steak & Worcestershire.

Thomas also expects the growing Hispanic population to keep the tortilla segment relatively strong and spawn wider adoption of new forms, such as guacamole chips, salsa & lime, Mexican cheddar with black bean and Nachitas, which are mostly nacho cheese but with a blend of Mexican spices added.

Innovation goes beyond products
Just as Herr's keeps an open mind for a wide variety of consumer trends, it also keeps its eye on a variety of retail formats. Though it's a only regional brand, Herr's has gained wider distribution via club stores, "certainly beyond our DSD [direct-store devliery] area," says Thomas. And it's been among the early players in developing business with the fast-growing dollar-store channel , which, despite being a limited-assortment format, can still find room for regional brands willing to meet their needs for smaller packs and specific price points.

"They've realized there's a regional preference, and naturally, when you open a store, you want to fit with that market," Thomas says of the dollar stores.

Herr's also has a history of innovation when it comes to packaging and production issues. In 1974, it was among the early adopters in the shift from glassine to foil bags, which blocked light and kept the chips fresher.

In 1983, when Pennsylvania began considering new waste restrictions on food processors because of environmental concerns, founder Jim Herr arrived on a novel solution by buying 1,000 acres of farmland near the Nottingham plant and reaching a deal with a couple to establish the Herr Angus Farm.

The 600 steer there were fed potato peels and rejected products from the plant mixed in their feed in accordance with recommendations by a veterinary nutritionist. Today, the farm also produces wheat, soybeans and corn, some of which is fed to the herd. Wastewater from the plant is trucked there for irrigation.

Today, the company is run by Jim's son, J.M. Herr. Ed Herr, a younger brother of J.M., sees the same spirit of finding innovative solutions to whatever problem arises auguring well for Herr's future generations, too. "There are so many diverse flavors and interests," he says, "that there are always going to be opportunities to grow your business through traditional and emerging snacks."

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