To be successful in the impulse purchase-driven cookie and cracker category, you need to win customers store by store, day by day, by having the right product in the right place at the right time. At Keebler, we do this by combining great brands and elfin ingenuity with sales and distribution excellence. In our industry, new products and innovative promotions are critical to capturing the all-important impulse purchase. We pair our captivating products and promotions with unparalleled hands-on service, provided by our direct-store-door (DSD) delivery system. Through our company-owned and operated DSD system, we have 3,200 sales and distribution Elves calling on 31,000 supermarkets and mass merchandisers twice weekly. The benefits from this level of close contact with our customers makes the DSD system an invaluable asset to our business, not simply a delivery cost.
Keebler Foods Company, majority owned by Flowers Industries, Inc., is the second largest cookie and cracker manufacturer in the United States, marketing its products in more than 75,000 retail locations in the country and in selected international markets. Keebler's brands include Cheez-It, Famous Amos, Plantation, Murray, Ready Crust, and its signature Keebler brand. In addition to manufacturing private label cookies and crackers, the company ranks as the leading manufacturer of Girl Scout Cookies, producing more than 60 percent of such cookies sold.
Keebler took its name from Godfrey Keebler, who in 1853 opened a small bakery in Philadelphia. Godfrey's bakery earned the distinction of becoming the first member of a network of local bakeries that later was amalgamated under the Keebler corporate umbrella. The other constituent bakeries opened up in subsequent generations, neighborhood bakeries that operated under the names Streitmann, Hekman, Supreme, and Bowman. The affiliated bakeries came under the control of a single corporate entity when the United Biscuit Company of America was formed in 1927. By the time of United Biscuit's formation, the value of geographically separate bakeries operating under a single organization had proven its worth with the advent of the automobile. A fleet of trucks enabled the locally oriented bakeries to develop into regional bakeries, providing the locomotion for a territory-widening distribution system. By 1944, the network of affiliates comprised 16 bakeries whose geographic scope included markets stretching from Salt Lake City, Utah, to Godfrey Keebler's home city of Philadelphia.
More than a century passed from the opening of Godfrey Keebler's bakery to the adoption of the Keebler name as the unifying corporate title for the entire organization. In the decades leading up to that signal decision, the crackers and cookies were marketed under the brand names of their respective bakeries, a sprawling assortment of products and labels as diverse as the number of bakeries that constituted United Biscuit's ranks. Eventually, however, the management of the bakery network tightened the structure of its organization, aping a corporate trend that swept from coast to coast. During the 1960s, countless companies embraced the benefits to be found in centralizing all corporate functions under a single entity. The management of United Biscuit followed suit, realizing that greater corporate efficiency, quality control, and marketing effectiveness could be achieved by operating under one corporate banner. Accordingly, in 1966 Keebler was adopted as the corporate title for the bakery network and the single brand name for all the bakery products.
Although the debut of the Keebler brand name marked the introduction of one of the most recognizable brand names in the country, enviable marketing strength was not enough for the Elmhurst-based company to overcome its fiercest rival, Nabisco, Inc. Nabisco, like Keebler, was formed from a consortium of bakeries, beginning business in 1898. By the latter half of the 20th century, the New Jersey-based cookie and cracker manufacturer had developed into a towering force, its market share representing the yardstick by which Keebler's progress was measured.
1974 United Biscuit Acquisition Proves a Failure
Keebler remained an independent company until 1974, when it was acquired by United Biscuit Company, one of the largest food manufacturers in the United Kingdom. Within the corporate folds of United Biscuit, Keebler operated as a unit of UB Investments US Inc., a subsidiary of the British parent company that would preside over Keebler's operations for the next two decades. Organized as such, Keebler continued its perennial battle against Nabisco, but eventually the strategy underpinning the company's war plan proved self-destructive. At United Biscuit behest, Keebler concentrated on developing and marketing salty snacks, such as Zesta Saltines, which, critics contended, diverted the company's attention from its core expertise in cookies and crackers. Further, Keebler drew criticism for trying to directly compete against Nabisco's stalwart brands, such as Frito-Lay, instead of building its market share in product niches where Nabisco's strength was more assailable. Ultimately, the period of United Biscuit's ownership turned Keebler into an unprofitable company, a period, so claimed ADWEEK Eastern Edition on October 11, 1999, when Keebler 'did almost everything wrong.' In 1995, the last year of United Biscuit's control, Keebler registered $93 million in losses. The time had come for profound changes to be made.
1996: New Management Sparks Rapid Growth
Two individuals were credited with Keebler's revival, Sam Reed, who would become the company's president and CEO, and David Vermylen, who would oversee the management of Keebler's brands. Vermylen had spent 14 years working for General Foods, marketing brands such as Stove Top Stuffing, Bird's Eye, and Post cereals. In 1988, he joined his wife in business and for the next three years the pair worked as marketing consultants. In 1991, the Vermylens received a telephone call from Sam Reed, who had worked with Vermylen's wife a decade earlier. Reed, a snack and baking industry veteran of more than 20 years, was about to become the new chief executive office of Mother's Cookies, and he solicited the Vermylens for help in developing marketing strategies. David Vermylen and Sam Reed ended up working side by side at Mother's Cookies, with Vermylen joining as the company's vice-president of marketing before earning promotion to the post of president.
Reed and Vermylen arrived at Keebler in January 1996. Concurrent with their arrival, a leveraged buyout (LBO) of the company from United Biscuit was begun, restoring, it was hoped, Keebler's capability to turn a profit. Thomasville, Georgia-based Flowers Industries, a producer of fresh and frozen baked foods, and Artal Luxembourg S.A. acquired Keebler through a joint-venture arrangement, installing Reed and Vermylen as the saviors they would soon prove to be. The company's vice-president of research and development remarked in a November 1999 interview with Food Processing: 'The leveraged buyout was a catalyst for a huge change in our method of strategic direction. Sam Reed set the tone and standard and provided the permission to change.' Reed radically altered the organizational structure of Keebler, placing a great emphasis on research and development, one aspect of the company's operations that had benefited from the era of United Biscuit ownership. In 1996, Keebler opened an 83,000-square-foot technical center in Elmhurst for cookie and cracker development projects. Designed to replicate a functional bakery, including receiving docks, a mixing room, ovens, and manufacturing lines, the technical center enabled Keebler to test all possible scenarios and it enabled Reed to develop products for niches where Nabisco's dominance was less resilient.
New product introductions played a pivotal role in the turnaround campaign begun in 1996. Reed instilled a renewed spirit of freedom and creativity among employees and reorganized the chain of command affecting research and development. New products, more than a dozen a year, were the result. Meanwhile, Vermylen developed a portfolio strategy that emphasized Keebler as the company's signature brand. Toward this end, Reed revived Ernie Keebler, a cartoon character that acted as the company's spokesperson, and his attendant elves. The use of Ernie Keebler and the elves had been discontinued under United Biscuit's ownership, but the fictional figures played a prominent role in the company's advertising and marketing campaigns and as the symbolic centerpiece of the new corporate culture cultivated by Reed and Vermylen.
The most visible aspect of Keebler's progress following the LBO occurred on the acquisition front. Roughly six months after joining Keebler, Reed acquired Sunshine Biscuit Co., the third largest cookie and cracker manufacturer in the country. Sunshine Biscuit was best known to consumers for its Cheez-It brand of snacks, which generated $125 million in annual sales at the time of the Keebler acquisition. Reed hoped to increase the brand's sales volume by distributing Cheez-It through new distribution channels and by relying on his research and development department to develop new varieties of Cheez-It snacks. Under Sunshine Biscuit's ownership, Cheez-It snacks had been sold in supermarkets and convenience stores, a distribution foundation Reed built on by making the brand available in vending machines and mass merchandising outlets. With greater exposure to consumers, Cheez-It sales began to climb, particularly after a flurry of product line extensions. Keebler introduced Hot and Spicy Cheez-It, Nacho Cheez-It, Cheez-It Chip-Its, and Cheez-It Heads and Tales crackers, which were targeted to children. The new product offerings and the additional distribution channels in which Cheez-It snacks were sold boosted sales considerably, more than doubling the brand's sales volume during the late 1990s.
The resounding success of the Sunshine Biscuit purchase convinced Reed of the gains to be made by pursuing growth through acquisitions. To finance further acquisitions, Reed celebrated his second anniversary at Keebler by taking the company public, completing an initial public offering (IPO) of stock in January 1998. Nearly 12 million shares were sold at $24 per share, which gave Reed the financial wherewithal to contemplate his next move on the acquisition front. By September 1998, he had reached an agreement to acquire a private company owned by Taiwan-based President Enterprises Corp., the largest food company in Taiwan. Reed's target was President Baking Co., a nearly $500-million-in-sales cookie manufacturer that ranked as the fourth largest company of its kind in the United States. Headquartered in Atlanta, President Baking manufactured Famous Amos cookies, Plantation brownies, Murray and Murray Sugar Free cookies, and ranked as the leading supplier of Girl Scout Cookies, accounting for 60 percent of total production.
Keebler's acquisition of President Baking was strategically important for several reasons. Keebler enjoyed tremendous national brand recognition, but if the company had a geographic weak point it was in the southeastern United States, where President Baking's Murray brand of cookies was strongest. Aside from providing a core customer base in the Southeast, the Murray brand also steered Keebler, considered a premium brand company, into the value brand category. Equally as important, President Baking possessed a distribution system geared for delivering products to convenience stores, which complemented Keebler's strength in distributing crackers and cookies to supermarkets.
In January 1999, Reed established two new business units to help integrate the distribution of President Baking's brands into Keebler's existing distribution system. Mother's Cookie Co. was formed to oversee the Girl Scout Cookie business and other specialty channels, and Murray Biscuit Co. was organized to manage direct store delivery and direct sales group channels. President Baking Co. Inc. was established as a wholly owned subsidiary of Keebler. As the cumbersome task of incorporating President Baking into the growing Keebler organization progressed, the effect of Reed's influence over the company was tangibly evident. In less than three years, he had added nearly $1 billion in sales while leading a remarkable turnaround in profitability. The $93 million loss posted by Keebler before his arrival had transformed into a $265 million profit by the end of 1998. Although the company lagged behind Nabisco, controlling approximately 20 percent of the market for cookies and crackers sold to supermarkets, drugstores, and mass merchandisers compared to Nabisco's 40 percent market share, the strides achieved under Reed's leadership were remarkable nonetheless. The announcement that the President Baking purchase was the first of many acquisitions to come promised further advances in the short-term future.
As Keebler entered the 21st century, Reed demonstrated his commitment to further acquisitions by announcing a pending $250 million deal. In January 2000, he agreed to acquire privately held Austin Quality Foods, a $200-million-in-sales manufacturer of cookies and crackers that was best known for its Zoo Animal Crackers brand. On the heels of the Austin Quality Foods deal, speculation arose regarding Keebler's relationship with its parent company. Flowers Industries was expected, at least by some, to sell Keebler or spin it off as a separate company at some point in 2000. As industry pundits offered their various theories regarding the affect of Flowers Industries' future decision on Keebler, one fact remained clear. Keebler, under the vibrant leadership of Reed, was pushing forward impressively, something the company was expected to do in the future regardless of its relationship with Flowers Industries.