B5801

Date: March 3, 2014

B ILL F ANN ING

Annie’s: Growing Organically

It was a grey day in February 2012 as the train pulled out of the Amtrak station in Berkeley, California
and headed east. John Foraker, CEO of Annie’s, Inc., a rapidly growing natural and organic food
company, sank into his seat and began to unwind from the stream of meetings and decisions that
consumed his day and moved into a part of the day that he anticipated—a chance to look out the
window and think about his business at a higher level. Big things were in the works for Annie’s and
there were key decisions to be made over the next few months in terms of entering a new category.

Annie’s had been enjoying strong and steady success in the marketplace with their healthy offerings in
shelf stable prepared foods across three product categories (Meals, Snacks, and Dressings), led by the
Meals category (macaroni & cheese), with Snacks (Cheddar Bunnies, Fruit Snacks, Pretzels, etc.), and
Dressings (condiments and dressings) following respectively. But the company was about to make
significant moves in terms of expanding into new categories.

Annie’s had strong investor support due to increasing sales and profits over the past few years (net
sales had increased from $76.8 million in fiscal 2008 to $141.3 million in fiscal 2012) and it was
likely they would be moving toward an IPO soon. They had also achieved a significant level of
success competing in non-traditional ways in very traditional CPG (consumer packaged goods)
categories. As a Berkeley-Haas School of Business graduate (MBA’94), this was particularly
satisfying to Foraker. Less certain was whether Annie’s could continue to achieve this level of
success in new categories while playing by their own set of rules.

As the team assessed expansion options, they kept two primary goals in mind. The first was to age up
the franchise—Annie’s had developed a strong following among younger kids and their moms. The
kids liked the taste and saw the products as fun, while the moms appreciated the fact that they could
provide healthy products for their kids that the kids actually liked. But there was an inherent
challenge with having such a strong, positive franchise with younger kids. At some point, they would
outgrow the brand.

The second goal was to broaden the target audience. Annie’s success to date had been driven largely
by a group they identified as “Core Consumers”. This group felt very strongly about making healthy
choices for their families, and was comfortable with the extra effort and money required to do so.
They were committed and loyal, but their attitudes were outside the mainstream. To grow the
Lecturer Bill Fanning prepared this case study as the basis for class discussion rather than to illustrate either effective or ineffective handling of
an administrative situation. Exhibits are authentic slides from the company, used with permission.

Copyright © 2014 by The Regents of the University of California. All rights reserved. No part of this publication may be reproduced, stored, or
transmitted in any form or by any means without the express written permission of the Berkeley-Haas Case Series.
business, the Annie’s team felt they needed to broaden their target and attract more mainstream
consumers to the brand. They set their sights on a group they called “Prime Prospects”, who valued
healthy alternatives to the extent they were available and convenient, but were more moderate in their
attitudes (Exhibit 1).

Background
Annie Withey and Andrew Martin started Smartfood in Boston in 1982 with their first and best known
product, a cheesy popcorn snack. They sold the company to PepsiCo in 1986 for $15 million. A few
years later, Withey took essentially that same cheese sauce and used it in Annie’s Homegrown Shells
and Cheddar, a stovetop macaroni & cheese dinner, and in 1989, Annie’s was born.

Over time, the company grew through new products as well as greater acceptance of its existing line.
Annie’s was able to appeal to consumers seeking healthy/natural/organic choices as well as more
mainstream food products, and felt they were in a sweet spot that allowed them to grow their healthy
food business by taking share from traditional CPG brands as well as the organic/natural sector. As
such, their product line and their growth efforts were focused on both areas (Exhibit 2).

Financially, the company was in good shape. In 2001, the same year Foraker joined Annie’s, Solera
Capital, a New York women’s private equity firm, acquired a major stake in Annie’s and that support
continued to fuel their growth. Sales and profits had been growing steadily as Annie’s was able to
maintain their price points even as they competed with larger, more heavily supported brands with
lower price points. Trends and projections were strong and investors remained bullish (Exhibit 3).

Annie’s Culture
Like many small companies, Annie’s was strongly driven by its culture during the early days. And
Annie’s was fiercely determined to preserve their culture as they grew. Annie’s was a company that
was passionate about food, people, and the planet, and their actions needed to reflect that orientation.

For example, the company was careful about the suppliers it worked with, preferring to seek out
smaller, local farmers whenever possible. They were also committed to non-GMO (genetically
modified organisms) products. Although Annie herself was removed from the business operations
and living on her certified organic farm in Connecticut, the Annie’s team made an effort to integrate
her persona into products and marketing efforts whenever possible.1 And they also viewed corporate
social responsibility as something that needed to be integrated across all the company’s activities.
According to Foraker: “Social responsibility is part of the Annie’s brand DNA. We’ve always tried to
do things differently and set an example for the broader world.”

Growth
Annie’s had developed a core proposition that included four pillars: authenticity, social responsibility,
great taste, and simple, healthy ingredients (Exhibit 4) that positioned them well for growth over the
long haul. The Annie’s team felt that this core proposition could be effective in a number of areas in
the grocery store. It was a proposition that made sense in terms of broad consumer trends as well as
distribution patterns that would address those trends.

Annie’s management team was not content to rest on their successes and simply grow with the
category as consumers moved steadily toward healthier options, in particular organic. They felt that

1
http://www.annies.com/about-annies#Our-Roots.
Annie’s could lead that charge rather than sit back and simply ride the wave. To be sure, there were
also a number of offsetting factors that represented hurdles, mainly a still sluggish economy. Despite
the continuing slow recovery from the recession, which could affect the willingness of consumers to
purchase premium products, Foraker felt the time was right for growth. The core business was strong
and there was a window of opportunity in terms of available funding for the company so a few months
earlier they had decided to make their move.

Frozen Foods
For a variety of reasons, the Annie’s team felt that their next area for growth was in the frozen foods
category, a huge category of $12 billion in retail sales. And this was not just an attempt to get
placement for one particular product line, but an assault on the entire section of the supermarket.
They had a plan in place for a series of new product launches in frozen foods, and it began with frozen
pizza.

The decision to move into frozen was not an easy one. Natural/healthy/organic foods as a segment
was not well developed in the frozen section, due to a combination of factors, including:

 A general perception of frozen foods as less healthy

 Strong consumer demand in the frozen section for desserts and snack items
 A limited number of “doors” in the frozen section

In addition, Annie’s Core Consumers were not big users of frozen food items. But Foraker and his
team had an “aha moment” on this issue when they realized that their success in the frozen category
might also be good for their retail partners if they could convince more Core Consumers to shop the
frozen section, thus creating a “win-win” situation for both Annie’s and their partners.

Within the frozen category, multiple opportunities existed and the Annie’s team had a plan in place to
expand into each area, but they had to decide where to start. There were numerous areas that made
sense in terms of both potential volume and fit with Annie’s. For example, frozen entrees seemed like
an obvious fit based on their success in macaroni and cheese. However, frozen pizza was also
attractive, and represented some opportunities beyond the obvious, and the decision was made to start
there. Sarah Bird, Chief Mom Officer for Annie’s said: “We know that cooking a meal from scratch
can be a challenge for busy families. Annie’s frozen pizza was a convenient solution for parents who
wanted to provide great taste as well as better ingredients they can feel good about giving their
families.”

Frozen Pizza

Product
Once the decision had been made to move forward with frozen pizza, there were tough marketing mix
decisions to be made. The first was around the product itself. The initial product developed was an
all-organic product, which meant that 95 percent of the ingredients were certified organic. The USDA
had very strict definitions for products using any type of organic terminology, as well as restrictions
governing where on the package these claims could be made. But would enough consumers respond
to the idea of Annie’s offering frozen pizza, or would it be seen as too extreme in a category not
generally known for healthy offerings? And how would the channel react?

The alternative would be to come out with a “made with” option, meaning the product was made with
organic ingredients, such as the cheese, tomatoes, crust, etc. The “made with” organic option needed
to have 70 percent or more of total ingredients as organic.
Some within the team felt the “made with” organic was the better option. They felt it would still allow
for the positive imagery connected with organic products and remain consistent with the
Annie’s brand, but at the same time, this strategy would take the product line closer to the mainstream
and to their competitors in the frozen pizza section.

The product had been tested successfully in Whole Foods in the San Francisco market. The version
tested was organic and there were four flavors in test: Four Cheese, Supreme, Spinach & Mushroom,
and Pepperoni. Although discussion continued about whether this was the right mix, the plan was to
move forward with these same four flavors.

Distribution
Closely linked to the product decision were issues about distribution. Annie’s products were sold
through the natural foods channel in chains like Whole Foods, as well as mainstream supermarkets
such as Safeway and Dominick’s. Annie’s also enjoyed a strong relationship with Target, as well as
other mass merchandisers. Their current business was divided roughly equally across these three
channels (Exhibit 5).

If Annie’s decided to launch their frozen pizza product with the all-organic product, would it sell at
Safeway or Target? On the flip side, would a “made with” approach be right for natural retailers? A
bigger distribution question was whether Annie’s would even get distribution in Safeway. Although
mainstream supermarkets had begun to create separate areas in the frozen section for healthy
offerings, progress had been slow, and there was some question whether it was really an advantage to
be located in these sections and away from the rest of the category.

Restricting distribution to natural retailers did not seem to be an option, as it would not meet their
volume goals or their goal of engaging Prime Prospects. Grocery still did the lion’s share of business
in frozen pizza, but that percentage was declining and the growth was coming from the natural and
mass channels (Exhibit 6).

A longer-term issue was rattling around in the back of Foraker’s mind. As mentioned, Annie’s had
been successful in achieving a delicate balance amongst three different channels—mainstream
supermarkets (Safeway, Dominick’s), natural retailers (Whole Foods), and mass merchandisers
(Target). But as the company’s volume grew and covered more categories, would they be able to
maintain that balance?

Each channel had demands and expectations. Target in particular had a tendency to take brands under
their wing in the food section of their stores and often chose upstart independent brands like Annie’s
rather than those owned by major CPG companies. Although the Annie’s team had worked hard and
been effective to date in keeping all channels happy, this was clearly an area of sensitivity and had to
be monitored carefully going forward.

Annie’s also had a strong partnership with natural retailers that had been in place from the beginning.
And although traditional grocery relationships were newer and growth was slower in this channel, the
big volume over the long haul was still going to come from traditional grocery (Exhibit 7).

Pricing
The pricing decision was also tightly tied to the product and distribution issues. Annie’s products had
competed successfully in other categories at significant price premiums relative to the competition
(Exhibit 8). Consumers had bought into Annie’s philosophy of simple, quality ingredients providing
a healthy option that kids liked, and were willing to pay more for it.
Certainly, Foraker and his team’s intent was to carry that philosophy forward into frozen pizza and
other categories in the future, as it was a philosophy that not only worked with consumers, but also
with the bottom line. But frozen pizza was new territory, and had a very different competitive
landscape. There were many competitors—strong national brands, smaller national brands, and
regional competitors (see next section). The price points for these competitors were all over the map.

More importantly, the category was heavily deal driven, and the reality was that new product trial
appeared to occur primarily as a result of a promotional offer. “I’m really excited about that product.
I’ll try it the next time I see a coupon” was a typical response from consumers talking about new
products in the category (based on focus groups conducted in early 2012)2.

Competition
As mentioned earlier, a competitive landscape that was fragmented, aggressive, and price-driven was
new for Annie’s. In macaroni & cheese, the primary competitor was Kraft—certainly formidable and
aggressive. However, Kraft was a single competitor, and the differences between Kraft and Annie’s
were quite clear. The situation was similar in snacks, where Goldfish (Campbell Soup) and Cheez-it
(Kellogg’s) were the main competitors. The competitive challenges in frozen pizza were myriad.
How would Annie’s get trial, given the entrenched brand loyalty combined with price competition and
heavy dealing in the category?

In frozen pizza, there were closer-in competitors in the “healthy” space such as Amy’s, Newman’s
Own, and Kashi. Although they represented tough competition, they had also paved the way (with
consumers and the distribution channels) in terms of seeding the idea of a healthier frozen pizza,
including higher price points. A more traditional brand, Di Giorno, was the category leader but there
were other significant national competitors, private label, and many smaller and regional brands
(Exhibit 9). And Di Giorno was pricing aggressively relative to Annie’s and the other healthy brands.

Advertising
Another important marketing mix issue involved promotion, specifically advertising. Typical CPG
new product efforts, particularly when venturing into a totally new category, were backed by
substantial advertising budgets.

The Annie’s formula to date included virtually no media advertising. Although they were active on
the promotion front, they leaned towards grassroots efforts, social media, and other areas that were
executed on the ground at the local level and with very low levels of spending.

By spending less on traditional advertising, they had even more to spend on trade promotion on top of
their non-traditional efforts. The formula had worked well; this approach was consistent with their
grassroots imagery and had proven successful even against heavy spenders like Kraft. But Kraft was
one brand in a category with few competitors. How successful would this grassroots marketing and
advertising strategy be against the well-known brands and big spenders in frozen pizza? And
advertising was only the beginning, as the leading competitors were also spending heavily on
consumer and trade promotion.

Many of Annie’s promotional efforts were both creative and effective (Exhibit 10) Such advertising
was different and helped position Annie’s as a brand that could compete in traditional categories, but
still do things a little differently. Foraker felt satisfied that Annie’s was doing things their own way

2
Annie’s.
and having some success across their product line. However, he was aware that Annie’s was lagging
significantly in awareness and penetration so there was lots of room to grow. And the bigger question
was whether this approach could continue to have success as they moved into frozen pizza— and
beyond.

Without traditional advertising to help with messaging, the role of packaging became more important
in communicating key features and benefits to consumers. Like the mix of flavors, the team was
satisfied with the current packaging (Exhibit 11) based on its test market performance and planned to
roll that out. But this was an ongoing topic of discussion and was occasionally covered in market
research as well.

Target
When thinking of getting trial, the source of volume was a basic question the Annie’s team had to
answer. Although this was a typical CPG variable (i.e., consumers trying Annie’s frozen pizza would
be substituting that product for what product they were currently consuming?), it was also an
important target issue.

Although it was agreed that one of the key goals was to engage Prime Prospects, what did that group
actually look like in the frozen pizza category? Specifically, was Annie’s hoping to attract current
frozen pizza users and persuade them to try a “better for you” frozen pizza? Or were they trying to
persuade loyal Annie’s users from snacks and macaroni & cheese to follow them and consider adding
frozen pizza to their meal repertoire because Annie’s was now an option?

All these decisions at some level kept coming back to the question of target audience. The right
choice on each of these variables was driven, to a great extent, by whether Annie’s saw Prospects or
Core Consumers as the key to growth. Was the high potential opportunity to get Core Consumers to
buy more from Annie’s or to attract new users?

Although both were needed to reach their volume goals, where should the emphasis be from a
marketing point of view? Although the groups were “close” to each other in many ways, there were
clear differences in terms of demographics, current shopping patterns, and maybe most importantly,
attitudes.

Future Growth
As Foraker looked out the window at the fast-moving and changing northern California landscape, he
wondered whether there were marketing tactics that would satisfy both of Annie’s target groups. For
example, was there a combination of price point and dealing level that would attract trial from
potential new users, but still deliver the necessary margins?

And even if there was such a price point, would it make sense to go there when Core Consumers were
already comfortable paying a healthy premium for current Annie’s products? This was the dilemma
Annie’s faced across the board in all their marketing decisions—could they retain the high margin
approach that had been successful to date even against bigger, stronger competitors, or did they need
to move to a more aggressive, lower margin approach to attract new users?

Another way to look at the decision was to ask the question of whether Annie’s could walk the line
between these alternatives or did they need to commit to one side or the other as a way to move
forward? Importantly, this was not a totally marketing-driven question either—because of the
company’s focus on organic as well as simple, high quality ingredients, part of their pricing decision
was driven by cost factors.
After all, it wasn’t just frozen pizza that was on Foraker’s mind as the train headed over the Carquinez
Bridge and neared Davis. He and his team had worked hard to develop a well-thought-out plan for
moving into different product lines within the frozen section and eventually, different categories
around the grocery store.

They had identified the categories and the order in which they would expand into each one. It worked
conceptually, and the numbers worked as well. But the questions on the table for frozen pizza applied
to all the categories in this growth plan. So the answers to these questions—product, pricing,
distribution, advertising, and target—were critical to their success in frozen pizza; but the implications
went far beyond frozen pizza.

Moreover, assuming frozen pizza was successful, where in the grocery store should Annie’s go next?
Did it still make sense to follow their plan to move into new categories at regular, pre-planned
intervals? And if so, what adjustments should the Annie’s team make going forward? Stepping back,
Foraker felt the two biggest challenges ahead for Annie’s and his team were: 1) keeping the brand
fresh and 2) keeping their relationships strong across all their channels.
Exhibit 1 Target Consumer Segments

quantitative consumer segmentation

Annie’s Target Mothers: Segment Snapshots

SIZE: 1.9 m households FOOD BUDGET: $179/week NAT/ORG VOL: 362m packs/year

More likely to be: younger, well educated, stay-at-home moms

CORE
CONSUMERS Progressive life beliefs, concerned with food safety, no bad stuff
Highest tolerance for price premium
Heaviest consumers of Mac & Cheese - a pack a week

SIZE: 2.5 m households FOOD BUDGET: $217/week NAT/ORG VOL: 276m packs/year

More likely to be: younger, well educated, working moms

PRIME Progressive life beliefs, nutritionally/healthy-aware but less stringent
PROSPECTS on food requirements, looking for positive benefits
Less kid-driven - adult needs and convenience play a role
Sizeable Mac & Cheese opportunity, requires taking share from Kraft

Source: Annie’s.
Exhibit 2 Product Areas

7 Brand with strong crossover appeal

U.S. Market size: $2 trillion U.S. Market size: $41 billion

Proposition: Natural Proposition:
 Price competition Mass / Other High quality, specialty products
 Convenience 28%
34% Made with “Better for you”
 “mega brands”
ingredients
Issues: Issues:
 Additives and synthetic Grocery 38%
 Typically expensive
ingredients Limited product offering
 Limited nutritional “Nichey” products and
value ingredients
 Fragmented industry –
limited brand
recognition

Annie’s is a proven crossover brand taking share from traditional grocery brands

Source: Annie’s.
Exhibit 3 Financial Performance

10 Strong financial performance

Net sales Operating income

$1.4

LTM LTM

Operating income / Total assets Operating income margin

26.2% 28.1%
22.5%

12.9%
5.8%
2.3%
NM
2007 2008 2009 2010 2011 LTM 2012E
9/30/11 LTM

Strong record of increasing profits

12

Source: Annie’s.
Exhibit 4 Brand

2 Leading authentic brand

authentic

Trusted Brand

responsible

Annie’s is a brand that consumers trust

4

Source: Annie’s.
Exhibit 5 Channels

Diversified multi-channel platform

Natural  Solid growth in most

 28% of 2011 sales developed channel
+7% ’09 – ’12E CAGR

 Largest channel with

Grocery significant opportunity to
 38% of 2011 sales grow
+16% ’09 – ’12E CAGR  Converting to direct
shipments

Mass  Strong overall performance

 34% of 2011 sales led by snacks

+19% ’09 – ’12E CAGR  Target Pfresh initiative

providing strong gains

29

Source: Annie’s.
Exhibit 6 Frozen Pizza Category Channel Trends and Size

Source: Annie’s.
Exhibit 7 Grocery Channel

Grocery is largest and fastest growing channel

this year
Natural is most developed channel
Grocery channel represents 39% of Net Sales, fastest growing segment
Mass channel growth driven by Target
Net Sales by Channel

$138 ‘09 – ’12E ‘11 – ’12E

CAGR CAGR
$118
$37
$94 $96 $33 +7% +11%
$31 $31
$54
$45
$35 $40 +16% +22%

$40 $47
$28 $25
FY09 FY10 FY11 FY12E +19% +18%

Product mix – % of total

Percent
of total FY2009 FY2010 FY2011 FY2012E
Natural 33% 32% 28% 27%
Grocery 37% 42% 38% 39%
Mass/other 30% 26% 34% 34%
30

Source: Annie’s.
Exhibit 8 Annie’s Price Premium

Grocery Kraft* Annie's** Premium

Promo $.95 $1.28 34%
NP $1.11 $1.98 78%

*Top NMC seller

**Average of top 3 SKUs

Target Kraft* Annie's** Premium

Promo $.89 $1.15 29%
NP $1.03 $1.67 62%

*Top NMC seller

**Avg top 3 SKUs

Premium Premium
Natural BTN** Kraft* Annie's** to Kraft to BTN
Promo $1.41 $1.42 $1.49 5% 6%
NP $2.07 $1.28 $2.12 65% 2%

*Top
SKU
**Avg top 3 SKUs

Source: Casewriter analysis.

Exhibit 9 Annie’s Pizza Competition

Source: Annie’s.
Exhibit 10

We're at @Whole Foods Market Austin today, sampling organic pizzas and handing out goodies. 11-2PM and then 4:30-7:30 PM. Same time tomorrow (3/20)!

3 repins 13 likes
Exhibit 11 Packaging

Source: Annie’s.