1660601214815 Hearthsideflakes

2019 Processor of the Year: Hearthside Food Solutions

Dec. 5, 2019
As a silent partner, Food Processing’s 2019 Processor of the Year discreetly helps the biggest names in snacks.

This year's honoree didn't exist when we started naming Processors of the Year back in 2005. The company has no brands of its own and was assembled by private equity firms (and a former Big Food executive with a vision). But, almost overnight, Hearthside Food Solutions has amassed sales of $3 billion, operates 39 plants, including four in Europe, and is the industry’s largest contract manufacturer.

Hearthside Food Solutions is, first and foremost, a manufacturer, the actual producer of some of the most famous, successful and highest-quality baked goods in the U.S. The biggest marketers of cookies, crackers and bars entrust their brands to this Downers Grove, Ill., company. While Hearthside wouldn't name customers, the company has been mentioned publicly as a partner to Mondelez, General Mills and PepsiCo.

It's also the nation’s largest privately held bakery and largest producer of granola and nutritional bars.

In the under-the-radar world of contract manufacturing, it's impossible to prove your success without breaking confidentiality, but $3 billion in sales in 10 years is its own proof. You don't get that big without a lot of satisfied, albeit secret, customers.

Food Processing is pleased to name Hearthside Food Solutions our 15th annual Processor of the Year. Following this story are ones that focus on its research and development and its extensive, global manufacturing network.

The bakery category was ripe

Sometimes in the ebb and flow of the food & beverage industry, a product category becomes ripe for consolidation. Dean Foods and Suiza Dairy consolidated the dairy industry in the 1990s. PepsiCo did it to snacks. Meat and poultry are more concentrated than ever.

By 2009, the baking category had no middle ground. There were huge bakers like the Nabisco division of Kraft Foods, Flowers Foods and Interstate Bakeries/Hostess, and there were many mom-and-pop companies. For most of the latter, mom and pop were ready to retire after struggling to keep their regional brand on the shelves and were already doing some private label or contract manufacturing.

Rich Scalise, Hearthside's CEO until last month and still chairman, recalls a conversation with Mark Burgett of Wind Point Partners. "We said, 'Maybe we should roll up the co-manufacturing bakery space.' There were just too many small companies, many of them under-capitalized."

Rich Scalise had been president of Ralcorp's Frozen Bakery Products and ConAgra's Refrigerated Foods Division. Wind Point Partners is a Chicago-based private equity investment firm. Along with Scalise, Hearthside founders included Steve England, who remains senior vice president of human resources; Brian McNamara, vice president of sales; and Bob Burchfield, chief information officer. Founders Dwayne Hughes, who became senior vice president of supply chain, and Jim Wojciechowski, who became CFO, have moved on.

In his past jobs, Scalise used many contract manufacturers "and saw the need for greater innovation and scale, especially for premier food companies facing increased competitive pressures," he says. And as a fellow Chicago west suburbanite, he was familiar with the work Sam Reed was doing at nearby TreeHouse Foods – assembling the largest private label manufacturing organization.

Maybe the final straw was the Peanut Corp. of America scandal in 2008. The ingredient supplier's safety lapses forced more than 360 high-profile companies to recall more than 3,900 peanut products across 46 states. Nine people died of salmonella-contaminated peanut butter and thousands were sickened.

The onus fell heavily on big brand marketers like Kellogg and ConAgra, which quickly became concerned about the integrity of their suppliers. "This was before the Global Food Safety Initiative, before FSMA [the FDA Food Safety Modernization Act]," Scalise points out.

"I was at Ralcorp at the time and we had 10 or 15 co-manufacturers and we really didn't know much about them. While attending conferences and talking with other companies about that, I learned they didn't know much about their co-manufacturers either."

Scalise believed there was a need for a contract manufacturer combining the speed, flexibility and innovative drive of a startup with the scale, depth, quality and capacity of a world-class food manufacturer. So, Hearthside was created in 2009 and made its first acquisition: several components of Roskam Bakery in Grand Rapids, Mich.

That purchase brought Hearthside snack bars, snack mix components (such as pretzels, popcorn and crisps) and croutons. The Roskam family retained their granola business until 2011, when it was also acquired by Hearthside.

"Like many family-owned contract manufacturing and contract packaging businesses, Roskam had evolved over many years and in another era," says Scalise. "We made strategic investments in plant and equipment, and deferred maintenance that increased the competitive position of the operation.

Hearthside Grew by Acquisition

Rich Scalise and Wind Point Partners (and subsequent equity funds) have assembled Hearthside from a series of acquisitions; most included multiple plants:

  • 2009 Roskam Bakery
  • 2010 Consolidated Biscuit Co.
  • 2010 Golden Temple
  • 2011 Roskam (granola)
  • 2013 Ryt-way Industries
  • 2014 VSI
  • 2014 Shuttered PowerBar facility, Boise Idaho
  • 2016 Oak State Products
  • 2017 Standard Functional Foods Group
  • 2018 Shuttered bakery, Seelyville Ind.
  • 2018 Greencore USA

"We began our first implementation of HPS [Hearthside Performance System], our continuous improvement system to drive quality and efficiency across the operation. We also began investing in the people and systems necessary to put us on a path towards world class performance.

"The Roskam acquisition proved that existing operations can be transformed in continuous improvement-driven organizations that could deliver superior value for customers," says Scalise.

A year later, Hearthside bought Consolidated Biscuit Co. in McComb, Ohio – including the largest privately owned bakery in North America – and also the cereal division of Golden Temple, a Eugene, Ore., maker of granola.

Hearthside made an acquisition or two every year for the next couple of years, hitting the $1 billion mark in sales in 2013, $2 billion in 2018 and, when the books are closed this year, the total should be $3 billion.

Hearthside's strategy meshed with plans from the branded marketers: They, too, wanted to consolidate their co-manufacturers and were happy to deal with a large and reliable co-manufacturer with multiple capabilities, one that allowed an intimate view into the quality of its operations.

"We invested in the same quality systems that our customers had," Scalise continues. "At just $145 million in sales, we immediately began implementing an SAP system, far more complexity and expense than a company of that size could justify. Some people laughed at us, but we could foresee growing into it and viewed it as a strategic investment in our future. We wanted a robust ERP system that could help us in continuous improvement and quality control and one that could interact with our customers’ systems."

Although all the acquisitions do amount to consolidation, not a single plant has been closed and most employees are retained. "Half of our 39 plants are run by people who have been with us from day one – employees who worked at those family-run businesses and who have been trained to do bigger and better jobs. We have a robust Continuous Improvement Group that implements HPS, our own CI system, at each location. HPS enables us to measure and drive safety, quality and efficiency across our entire network."

Baking through changes

"In 2009, our customers brought us pretty fully developed new product ideas," says Scalise. "We were great at commercializing, manufacturing that product and getting it to market fast. After the 2012 recession, our customers were asking for help in innovation. So we started hiring product development people."

Hearthside now has seven R&D centers, all co-located with manufacturing plants. Hearthside’s R&D teams include 22 food scientists, R&D staff and technicians as well as 16 commercialization specialists and 47 engineers.

"It's not just about manufacturing. One point of difference [from other contract manufacturers] is proactive market awareness," says Scalise. "We buy Nielsen data. We attend conferences about consumer trends. We participate with customers about how to clean up labels, new categories to enter, etc. Some of our customers invite us to participate in their product innovation discussions, even including where they want to go from a strategic point of view.

"Then we'll go off and consider what kinds of products we could make for them, returning with ideas and new product concepts. Then their R&D groups will take them further, eventually coming back to us to manufacture them.

"One example I can share, since they spoke of it publicly, is the FiberOne brownie by General Mills. It was their idea, but we were the ones who made it for them and got it to market faster."

The arrival of Small Food

For Hearthside, it was all about size and scale in 2009-2013 and doing business with the biggest food companies, which, for whatever reason, chose to contract out some of their manufacturing. But around 2013, Hearthside started getting requests from entrepreneurial companies that had no manufacturing of their own.

"Small Food" was on the rise and needed manufacturing. In tandem, even the bigger companies started pursuing smaller product categories. Scalise felt Hearthside was not well-equipped to handle these new requests.

So the company pursued some smaller acquisitions with smaller ovens and more flexibility, some with expertise in unique categories, enabling Hearthside to provide a wider array of services and production scale.

VSI, acquired in 2014, brought the company not just a European beachhead but expertise in the nutritional/energy bar segment … which was also put to use on these shores in a former PowerBar plant, sold to Hearthside by Post Holdings.

Other, more recent acquisitions have steered the company into new categories. A couple of the acquisitions had interesting, niche packaging businesses. Ryt-way Industries, which was merged into Hearthside by its owner Wind Point Partners in 2013, brought significant new contract packaging capabilities and also a packaging equipment company, Cloud Packaging Solutions, an industry leader in multiple high-speed packaging categories, including sweetener packets and stand-up pouch machines.

A real milestone occurred late last year when Hearthside acquired the U.S. assets of Ireland's Greencore Group Plc. "That essentially was Peacock Foods, a company Greencore had acquired to enter the North American market,” Scalise explains. "That brought us into USDA fresh, refrigerated and frozen food categories that include fresh sandwiches, salad kits, meal kits, frozen breakfast items and fresh entrees, among others."

While Wind Point Partners was a critical partner in the inception of the company, Hearthside in 2014 was sold to Goldman Sachs and its Vestar Capital Partners group. In 2018 the company was acquired by Charlesbank and Partners Group.

And while those two investment firms own most of the company, Scalise and a handful of executives retain a share and about 40 employees have been allowed to buy in as individual investors.

What the future holds

Although the pace may slow for a bit, more acquisitions are certain to come for Hearthside. While there are niches to fill in its current bakery categories, radically new categories also are being considered.

"The confectionery space looks interesting," Scalise offers. "So are retorted and aseptic beverages. Millennials are rediscovering frozen foods." Hearthside already has a toe in the frozen foods space via the Greencore/Peacock acquisition.

Nutritional products should grow as the population ages. And grab-and-go convenience, via both tweaks to a product and new packaging, is undeniable.

Those aren't just musings from Scalise. In the midst of preparing these stories, Hearthside promoted COO Chuck Metzger to CEO, allowing Scalise, as chairman, to devote even more time to acquisitions.

In addition to "going wherever our customers go," Scalise says, "I'm proud to say that, as we've bought other businesses, our customers have followed us into those categories. I think all our top customers are doing things in categories now that they weren't in before [because of us]."

But, "We're not interested in fresh bread, nor in-store bakeries," he warns. And he doesn't want to start private label work because he fears current customers would see Hearthside as competition, perhaps using proprietary product knowledge to develop a copycat.

"We're not a sales and marketing company. We are a food manufacturer and packager. I think we'll always want to be a partner to the world's biggest and best branded manufacturers."

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