Pinnacle Foods' story reads like the shows on home improvement channels. Metaphorically, the company began as HGTV's "Fixer-Upper" and "House Hunters," then segued into "Income Property." With recent independence and a new strategy going forward, it's switching channels to DIY's "This New House," maybe even "Dream House."
But so far no "Flip or Flop."
Pinnacle Foods, based in Parsippany, N.J., spent its first 16 years as an assemblage of cast-off but still profitable grocery staples – Armour canned meat products, Swanson frozen dinners, Duncan Hines mixes, Log Cabin pancake syrups. It flew under many people's radars but amassed a $3 billion food products empire that also turned annual profits for its private equity owners.
But starting with the purchase of Birds Eye in 2009, its launch into a publicly held company in 2013 and kicking into high gear with the 2014-2016 acquisitions of Wish-Bone, Gardein and Boulder Brands, Pinnacle Foods now is poised to compete as a food processor of the future, not just of the nostalgic past.
Pinnacle has been growing around 10 percent a year, from $2.4 billion in 2013 to $3.1 billion last year. It's committed to manufacturing, making most of its own products and doing it in lean and efficient ways. And with its new leadership and public company status, it's invigorating product development – not just product maintenance -- with rewards coming in the form of soaring Birds Eye vegetable sales and Duncan Hines "Perfect Size for 1" cake-in-a-cup singles, which is one of the industry’s largest center-of-store innovations in 2017.
We are pleased to name Pinnacle Foods our 2017 Processor of the Year.
Pinnacle Foods was created in 2001 when it acquired the Vlasic International business, which went bankrupt after spinning out of Campbell Soup Co. The business included Vlasic pickles, Hungry-Man frozen dinners and Open Pit barbecue sauce. A group of investors, including C. Dean Metropoulos, J.P. Morgan and J.W. Childs, owned Pinnacle at the time.
That set the tone for two decades, as Pinnacle acquired and resuscitated once-leading brands from big companies that no longer considered them a part of their core marketing strategy, nor would invest in their marketing and product development.
The next acquisition, in 2004, was Aurora Foods, a collection of discarded brands. Decimated by a 2000 securities fraud scandal that sent its executives to prison, Aurora was preparing a bankruptcy filing when Pinnacle swept in. That deal contributed Aunt Jemima frozen breakfasts (only), Celeste pizzas, Duncan Hines, Lender's bagels, Log Cabin and Mrs. Butterworth's syrups and Mrs. Paul's and Van de Kamp seafood. Two years later Pinnacle picked up Armour canned meats from Henkel North American (formerly Dial Corp.).
"Interestingly enough, I sold Log Cabin to Aurora Foods during my Kraft days," interjects CEO Mark Clouse. A former U.S. Army captain and pilot, he spent 20 years at Kraft and Mondeléz, leaving as chief commercial officer. He has been Pinnacle's CEO since May 2016.
In 2007, Blackstone Group bought out the original three investors. The new owner first helped fund a key acquisition -- Birds Eye and other vegetable brands from Vestar Partners in 2009 – and then began preparing Pinnacle for an initial public offering of stock, which came in 2013. That year also brought the acquisition of Wish-Bone and Western salad dressings from Unilever.
Although Blackstone initially retained a 51 percent interest after the IPO, the fund sold all its shares by 2015. Pinnacle is now 100 percent in public ownership, with no investor holding 9 percent of the company.
Birds Eye may not have looked like such a prize when it was acquired eight years ago, but the subsequent consumer interest in vegetables – and especially in riced vegetables – is making that business the top segment of Pinnacle Foods.
The timing of the Birds Eye acquisition was fortuitous, coming just before the rising interest in vegetables. The next two acquisitions were calculated bets on the future, based on already surging consumer trends.
Delving deeper into plant protein, particularly meat analogues and meatless products, the company in 2014 bought plant-based protein-food maker Garden Protein, maker of the Gardein brand. Two years later came Boulder Brands, which contributes gluten-free brands Glutino (gluten-free since 1983) and Udi's, plus "clean-ingredient" brands Evol (frozen dinners) and Smart Balance/Earth Balance (initially spreads but more recently popcorn, chips and mac & cheese).
CFO Craig Steeneck describes Pinnacle's history in three stages: "Private equity guys accumulate a portfolio by buying companies out of bankruptcy and merging them together. Then they flip it to a buy-and-build equity firm in Blackstone that's willing to invest to prepare the company for an IPO by building a headquarters, putting better management in place, putting better processes in place. Then, after the IPO, you have a fully public company with the infrastructure of a public company."
Clouse says the frugal history will serve the company well. "In the early days, as you would expect in private equity, you have lean operations, cost-orientation, 'we're gonna grind dollars out of this and create value that way.' A significant advantage for Pinnacle going forward is we're born of that culture and mindset, but we've begun to introduce the concept of growth as a contributing factor.
"Since the acquisition of Birds Eye, all of these newer brands we consider leadership brands, ones we can invest in and grow," Clouse continues. "And if you look at the last two acquisitions – Gardein and Boulder – these are in categories with even stronger trajectories."
Every food company claims to participate in the health and wellness space, and most define that to fit their strategy. Clouse says Pinnacle defines health & wellness as lifestyles, and under that philosophy the company participates three ways.
First is plant-based proteins, where Pinnacle offers everything from Bird Eye vegetables to Gardein meat replacements. Second is gluten-free, supplied by the Glutino and Udi's brands. Third is "clean convenience." "This is millennial consumers who are eating on the run. They're not so opposed to microwavable foods but they want clean ingredients, a clean label, high-end culinary sophistication. And that's Evol," Clouse says.
And with those last three brands – Glutino, Udi's and Evol – all coming from Boulder Brands, that Colorado office will be maintained. "We see it as a strategic part of how we're building out this business," says Steeneck. "We expect health and wellness to continue to be a part of our strategy, and Boulder will be the hub that enables us to do that in an efficient way. It gives us a different set of competencies, because the mindset is different than what we'd want to do with Armour canned meat."
"Nine out of 10 consumers in this country don't eat enough vegetables, but two-thirds of them are trying to eat more," says Clouse. "The barriers are taste, convenience, cost, and availability. So Birds Eye is the solution. It's a billion-dollar business that has been growing middle-single digits for three years now – an extraordinary accomplishment in the environment we're in.
"It started with Steamfresh packaging, which was a more convenient way to prepare vegetables. It expanded to flavor and starch combinations to make more interesting and complete side dishes. It now includes protein with Birds Eye Voila!, so you have a complete skillet meal. And now it's branched off into other value-added segments, like protein blends, where we bring together ingredients that would be very difficult for you to do on your own – like figuring out how to prepare kale and edamame in the same dish. That's attracting a lot of millennials to the franchise.
"And most recently, we launched Veggie Made, which has completely replaced the starch with vegetable-based offerings – cauliflower rice, lentil-based pasta. These are products that deliver like the original but give you a full serving of vegetables.
"Those kinds of innovation are at the heart of how this Bird Eye franchise, which hadn't really grown in a decade, is taking off and bringing people not just to frozen vegetables but to the entire frozen aisle," Clouse says. "For years, there was not much health & wellness in the frozen aisle. So we're also solving a problem for retailers by bringing people back to the frozen department."
With so many legacy brands, Pinnacle cannot neglect the center of the store. The strategy here, too, has switched from maintenance to improvement and growth, with "cleaning up" ingredient statements being the key.
"The No. 1 driver right now is cleaner products – not low fat, low sodium or low sugar. It's about the origin and the simplicity of the ingredients," says Clouse.
The longstanding Comstock brand of pie fillings has been augmented by Simply Comstock, fruit bases "with nothing more than a little lemon juice, starch, and a pinch of salt." In pickles, the company has launched Vlasic Purely Pickles, which have no artificial flavors or preservatives, no colors from artificial sources and are zero calories per serving. Log Cabin syrup has no high-fructose corn syrup, and the All-Natural version is certified by the Non-GMO Project.
The Pinnacle Playbook
Again referring back to its miserly private equity days, Pinnacle keeps a keen eye on financial fundamentals. As a result of all those acquisitions, it carries $3 billion in long-term debt, and paying that down is a key goal. "But this portfolio is so cash-generative we're able to pay it down very quickly," says Steeneck.
M&A also has brought synergies and productivity improvement. Margin enhancement and cash flow are paramount. "A lot of this is part of the culture of this company," says Clouse.
They call an overall program MVP, standing for "maximizing value through productivity." "It's cross-functional, bringing in folks from finance, sales, marketing, supply chain and R&D, our best and brightest all working to create efficiencies in the business," says Steeneck.
"It drives a maniacal focus," says Clouse. "We force ourselves to make trade-offs because we treat the cost envelopes that we live within as guard rails that are fixed. It forces you to work on the things that matter most. We end up with significant conviction that we're going to deliver against what we choose to do."
The company now is about two-thirds "leadership businesses" and one-third "foundation businesses." The margins are higher in the former, "and about 90 percent of our investments go into the leadership brands," says Clouse. The leadership businesses include both "accelerate brands" (Udi’s/Glutino, Gardein, Evol and Birds Eye) and "core brands" (Duncan Hines, Vlasic and Wish-Bone).
The foundation businesses continue to be managed for cash and profitability, with suitable investments. But Pinnacle just learned when to cut ties: most of the Aunt Jemima frozen breakfast business, long an underperformer, was exited this past May.
None of which precludes further acquisitions. "We've built this great business and platform and we have a clear vision for improving elements of it, so let's now add business to it," says Clouse. The Boulder acquisition gives Pinnacle a springboard into health & wellness in general and plant-based, gluten-free and "clean and convenient" products in particular. That office, management team and overall way of thinking will be maintained as key investments in the future.
"I would prefer not to open a lot of new fronts but to solidify leadership in those areas and to continue to drive the center of store," says Clouse. "So where we can bring in iconic brands – like a Wish-Bone or a Duncan Hines – those are businesses we will continue to be interested in."
What will Pinnacle look like in the year 2020, or somewhere down the road?
"I think you'll continue to see a business that is expanding, growing and adding brands to its portfolio, but generally within the same construct we're in [and staying in North America]," says Clouse. "So strengthening our position in the health & wellness categories we're already in, adding more scale in frozen, selectively building our iconic brands that are center-of-store. But doing it in such as way that we're able to show steady progress on our margins and profitability -- which allows us to fuel investment into the businesses, existing and new ones, and creating a virtuous cycle."