A CASE STUDY

UNIVERSITY OF MARY

At Beech-Nut, small means big. It has been in the same small town
for over 100 years. Generations of the same families have worked
together, taking extra care to make delicious and nutritious baby
food, just like you would. Because the company believes that it’s all
of these small details that make their baby food taste good.

In 1891, Beech Nut started as a family business, smoking ham and

bacon in Canajoharie, New York. The next product produced was
grape jam, which was based on a family recipe of one of the
company’s founders. Over the past century, Beech Nut made many
additional food items including coffee, peanut butter, and macaroni.
In 1931, Beech Nut started making baby food, and now that’s all they
do. They divested all their other interests. Today, Beech Nut makes
more than 150 delicious baby foods formulated to supplement a
baby's diet of breast milk or formula. There are no added sugars, salt
or harsh spices to the jarred baby food recipes, because they believe
your baby doesn’t need those unnecessary additives. However, that
was not always the case. Beech Nut learned a hard lesson.

The company was one of the leading innovative firms in its early
years, becoming the first company to place their baby foods in glass
jars, becoming the industry standard and the first company to make
their baby food products free of additives.

In the early 1980’s, Beech Nut was in grave financial danger and
looking at ways to cut costs, due to the higher quality products and
their competitor, Gerber. Beech Nut entered an agreement with a
low-cost supplier of Apple Juice concentrate. The move was expected
to save the company $250,000 annually. A Beech Nut scientist,
however, began questioning the quality of the concentrate, and
suggested that the contents contained more than apple concentrate,
including large qualities of corn syrup and cane sugar. He brought
this to the attention of top management, but obsessed with keeping
costs low, they ignored the report. The company continued to sell
their product as “pure” apple juice.

Investigators from the Food and Drug Administration, (FDA),

confronted Beech Nut with evidence that proved the apple juice was
“adulterated.” The company denied any wrongdoing and shipped all
remaining stock before it could be seized by the FDA. That didn’t stop
the investigation, as the whistle blower was none other than the
scientist who alerted management.

The firm was charged with maximizing profits over informing

customers of the additives. The firm was fined more than $2 million
and its top management was found guilty and sentenced to prison
terms for their fraud.

With the company’s reputation ruined, the remains were purchased

by Ralston-Purina, makers of dog and cat food. The firm did very
little to help the cause, and eventually sold the company to Nestle, a
Swiss conglomerate, who installed a new management team and a
new code of ethical values.

In 2001, Beech Nut thought they found some help in the form of
Heinz, better known for its ketchup, in a $185 million merger which
would have given Heinz a larger share of the market. At the time, the
number 2 and 3 firms in the industry shared the remaining 31%
following the leader Gerber. A federal court and the FTC squashed
the deal, saying the merger would create a “duopoly” with only two
firms competing in the industry. The news was just another blow to
Beech Nut. Bouyed by the strength of Nestle and their restructuring,
the firm found new domestic help in the form of a private equity
group that purchased the company from Nestle. The Madison
Dearborn Capital Partners (under their Milnot Holding Group label, a
canned milk division) picked up the company and immediately set
forth changes to make Beech Nut a viable force against Gerbers.
However, consumer trust in Beech Nut products had plummeted by
then, and the company’s reputation was ruined. MDCP set out to
create innovative products, based on high quality ingredients. In
2002, the company launched a massive ad campaign with Milnot
Holding Company, to strengthen the relationship of Beech Nut with
retailers. Over a couple of years, market share began to rise, making
the company attractive to yet another buy out, this time by a Swiss
food group, called Hero.

Hero, a $1.4 billion European known brand, was ripe for an

acquisition, after divesting its operations of their UK sugar company,
Renshaw Scott, to the UK Sugar refinery company, Napier. The
purchase of Beech Nut allowed Hero to automatically increase its
revenues from 17% to 30% of overall company revenues and
strengthen its firm outside of Western Europe. The move also
allowed Hero to concentrate more on its nutritional dietary
supplement market, including a cinnamon extract designed for
diabetics. The firm estimates there are 194 million diabetics
worldwide, and the International Diabetes Association estimates
there could be 333 million by 2025.
Hero also purchased a Turkish baby biscuit making company, Ulker
Gida, hoping to increase its market share even more and provide
greater diversity. The baby biscuit industry is about $25 million
business.

The World Health Organization (WHO) is looking at increasing

nutrition and creating healthier environments for world infants.
WHO has determined through research that more than 50% of
infants who die under the age of 5, is due to malnutrition.

Gerbers, a subsidiary division of Novartis, another Swiss

congolomerate, continues to hold a huge lead in the market share of
baby foods, at 77.4%. Heinz (at 7.6%) and Beech Nut (15%) share
the remaining market share. Beech Nut is hoping to gain an
advantage by securing a Federal Government’s Women, Infant and
Children (WIC) contract, which would help to boost sales. Analysts
predict that 50% of consumers who purchase food under the WIC
program, stay loyal to the brand they use. Currently, that remains as
Gerber.

Beech Nut Nutritional Inc., as it is now known, also rests its hopes on
the additional products which Hero can help them supply in the
growing baby nutritional drink industry. Meanwhile, Beech Nut
continues to operate where they started, in New York, with 340
employees. Their headquarters is located in St. Louis, MO.. and was
awarded the LEED (leadership in energy and design) certification. In
2005, Beech Nut received the prestigious American Culinary
Chef’sBest (ACC) award, recognizing the highest taste quality
standard in the industry. The firm also partnered with Disney to
produce a new food line featuring Winnie the Pooh. Additionally, they
entered an agreement with General Mills and the use of Green Giant
products in their baby food products. To date, the company has
donated more than $2 million in food product to Haiti and other
emergency situations around the world.

The firm believes it is the new beginning of what was once a

promising, innovative company.