A Tribute to Greg Steltenpohl

In tribute to Greg Steltenpohl, who passed away this week, I posted this never-before-seen video of an inspirational talk he gave to our MBArk students at Expo West 2018, and I offer below the entire chapter  from Natural Prophets that features Greg and his groundbreaking work at Odwalla.

Those of us who knew him were touched to our core every time we had the chance to hear him speak and reveal parts of his beautiful soul.

 

Chapter 9: Dueling Business Models

In September of 1982, a curious looking set of newspaper coin boxes began appearing on the streets of major cities from coast to coast.  The boxes sat on top of pedestal columns, had a bright white base coat, rounded corners, and a sleek black modern façade through which the colorful newspapers inside peered out. The whole thing was suggestive of a television set – and that was precisely the intent.

Gannett’s USA Today was a new kind of newspaper: national in scope, jingoistic in tone, highly graphic in design, compartmentalized in structure, and lightweight in content.  Its motto – “An economy of words.  A wealth of information.” – was squarely targeted toward the TV generation, which pollster Lou Harris had told the Gannett Board of Directors “is not going to fight its way through dull, grey newspapers, however good they are.”[i]

It was not just a new newspaper brand, but an entirely novel newspaper model, one that was radically different from even the other 79 newspapers then owned by Gannett.  It wouldn’t rely on either classified ad revenue or a subscription base of home delivery, but on newsstand sales, display advertising, and revenue from third-party “blue-chip circulation” distributors such as hotels and airlines.  It wouldn’t build its reputation on journalistic heavy-hitters and far-flung foreign bureaus, but on a stripped-down newsroom staff churning out pithy blurbs, opinion polls and infographics.  It wouldn’t seek to become a pillar of any one city or local community, but a mouthpiece for the entire nation and a source of bite-size state-by-state information for those who were traveling or who longed for news of home.  It wouldn’t be limited to traditional black-and-white newspaper halftone images or the hand-drawn “hedcut” style of The Wall Street Journal, but would have plenty of splashy color photographs.  Other than the cover feature, it wouldn’t run any front page stories that needed to jump to another page.  It would always have an entire section devoted to celebrities and lifestyles.  And it would use satellite technology to print in as many as 33 locations throughout the country.  “The New York Times is edited for the nation’s intellectual elite, its thinkers and policy makers,” wrote the American Journalism Review in 1997.  “The Wall Street Journal…is edited for business leaders.  USA Today is edited for what has been called Middle America – young, well-educated Americans who are on the move and care about what is going on.”[ii]

It was, in more theoretical terms, what management science has come to refer to as a “disruptive innovation.”  In their influential 1995 Harvard Business Review article entitled “Disruptive Technologies: Catching the Wave,” Joseph L. Bower and Clayton M. Christensen illustrated how the business models of established companies sometimes keep them too close to their customers, resulting in an endless cycle of continuity: they just create more of the same product/services that got them to this point.  Therefore, “When a technology that has the potential for revolutionizing an industry emerges, established companies typically see it as unattractive: it’s not something their mainstream customers want, and its projected profit margins aren’t sufficient to cover big company cost structures.”  The established companies stay on the sidelines while new companies “invade” the market with a new business model that makes it structurally difficult for the established companies to respond; by the time the old companies realize what has happened, it is too late to do much more than disparage the upstart.  Disruptive innovation is all about tradeoffs: offering diminished performance along one dimension (e.g., journalistic depth) in exchange for new benefits related to simplicity, convenience and low price.

When Gannett first announced that they were going to launch USA Today, the company had enjoyed 86 consecutive quarters of earnings growth.  They were the Establishment.  But Gannett had a forceful and visionary Chairman/CEO in Al Neuharth, who recognized that American society was becoming more rootless, impatient, and information-hungry.  USA Today was the perfect “disruptive” antidote.  He predicted that it would take five years for his new paper to reach profitability, and the Gannett stock immediately took a dive.  “Wall Street thought we were nuts,” he recalled in an interview in 2007.  But he knew better.  “Your decisions cannot be based on quarter-to-quarter report cards to Wall Street.  If they are, you won’t do anything that has long-term possibilities.”[iii]

The newspaper debuted on September 22, 1982 and although it sold out all 155,000 copies, the Establishment skeptics soon came out in force.  Some called it “McPaper.”  David Hall, executive editor of The St. Paul Pioneer Press, said that reading it was like “reading the radio.”  Ben Bradlee, publisher of The Washington Post, said that if anyone considered USA Today one of the nation’s better newspapers, “then I’m in the wrong business.”  John Morton of the American Journalism Review said, “A national daily newspaper seems like a way to lose a lot of money in a hurry.”[iv]  But one month later the circulation had more than doubled, to 362,879, and by April of 1983 it topped one million.  By the end of its third year, it trailed only The Wall Street Journal in circulation, and it would surpass that in 1999.

Like many disruptive business models, this one was not born fully formed, and had to be tweaked.  Within two years of launch, USA Today added a home delivery subscription service, and within seven years that accounted for about half of the newspaper’s distribution.[v]  The controversial Neuharth – described in his 2013 New York Times obituary as “flamboyant, egotistic and proudly Machiavellian”[vi] – stepped down as CEO in 1989, but his vision continued to guide the newspaper’s development.  They improved the journalistic gravitas; redesigned the editorial pages to accommodate guest columnists; switched to all-digital production, which helped push the deadlines back to include late-night sports scores; and in 1991 added front-page advertising.  By then, Gannett’s once-healthy balance sheet had taken a big hit, with the investments in USA Today amounting to an $800 million loss.  But in 1993 the paper turned its first yearlong profit, $5 million, and that doubled in 1994.  From there, it went on to become one of the most profitable newspapers in the country, and, ironically, also one of the most influential.  As Neuharth said in 1997, “It has had a tremendous impact on newspapers for better or for worse….”[vii]

The growth of USA Today came at precisely the same time as the explosion of the natural foods industry – and in many regards, the two were equally disruptive to the conventional industries they sought to displace.  (Moreover, as the new self-anointed chronicler of all contemporary trends, “America’s newspaper” ran many, many stories about the natural foods movement.  “Our growing appetite for ‘natural snacks,’” read one headline on August 21, 1987.  “Organic supermarkets sprouting up like weeds,” said another on July 24, 1991.  Then there was “Buyers prefer organic produce” (March 20, 1989), “Is organic food worth the price?” (March 19, 1990), “The food fight over pesticides” (June 24, 1993), “New ‘organic’ labels will ease consumer confusion” (April 22, 1991), “Bringing home the bacon, healthfully” (September 12, 1994), “Whole Foods to gobble up rival Fresh Fields” (June 19, 1996), “Organics cropping up everywhere, Natural superstores cater to families hungry for chemical-free food (October 7, 1997), and plenty of others.)  And among those contributing to the disruption were a few natural foods companies which created products that, just like USA Today, might have looked familiar to mainstream America, but whose pure ingredients, highly entrepreneurial founders and very business plans themselves marked a radical departure from the norm.

***

Fruit juice had long been a staple of the American pantry.  What could be more pure and simple?  One of the earliest and most successful juice brands was Mott’s, which began bottling apple juice in 1842 using the runoff from apples crushed by a horse-drawn press.  Welch’s (1893), Martinelli’s (1898), Ocean Spray (1930) and Sunsweet (1932) were other early national “shelf-stable” juice brands, most of which, in their original formulations, would have met today’s standards as “all-natural.”  Orange juice, because it is a perishable product, was frequently produced by local dairies and distributed door-to-door by the milkman.  Florida’s Natural (1938) and Minute Maid (1946) were among the first national orange juice brands.

In the era of mass markets and mass production, as juice producers began shipping products over great distances and therefore requiring a longer shelf life, it became commonplace to develop juice “blends” using highly acidic ingredients like cranberry or lemon juice to act as a preservative.  Tropicana adopted the flash pasteurization (rapid heating) process in 1954 to help kill microorganisms and achieve longer shelf life, though the process was known to have a deleterious effect on nutrients and flavor.

After World War II, as with so many other foods, the chemical revolution overtook the fruit juice industry.  Hawaiian Punch, developed in the 1930s but not distributed nationally until 1955, was perhaps more typical of the wave of post-war processed juice products in its use of artificial preservatives such as potassium sorbate, and minimal use of actual juice: the ingredients included small amounts of apple, apricot, orange, pineapple, papaya, guava and passion fruit juice, but about 90% water and sugar, as well as artificial flavors, colors, sweeteners and preservatives.  (Amazingly, though Hawaiian Punch remains a best-seller to this day, with a market share in excess of 12%, it has been kicked around a lot over the years; its owners have included RJ Reynolds, Del Monte, Procter & Gamble, Cadbury Schweppes and Dr. Pepper Snapple.)

That was the backdrop against which, in 1980, three musicians decided to launch a fresh-squeezed juice company they called Odwalla.  Greg Steltenpohl, Gerry Percy and Bonnie Bassett were living in Santa Cruz, playing occasional avant-garde improvisational jazz gigs with their band, known as The Stand.  In need of money, they picked up an idea in a book called 100 Businesses You Can Start for Under $100, and began creating fresh-squeezed orange juice in the 26-year-old Steltenpohl’s backyard using a secondhand $225 juicer, delivered to local restaurants in the requisite 1968 VW microbus.  Apple juice and carrot juice would follow.

Santa Cruz was a good place to start such a business.  Long a bastion of liberal thinking and social activism, by the 1980s it already harbored a strong market for natural foods.  It was the home of Harmony Natural Foods, Staff of Life Natural Food Market, and an old pear packing plant.  The upscale restaurants of San Francisco were only 80 minutes away, and it was also close to the source of the fruit: Santa Cruz County contained more than 2,000 acres of apple orchards, and was not far from the citrus centers in the San Joaquin Valley and Inland Empire.  There were even some local juice companies to serve as inspiration: Mr. Natural Apple Juice, which had been started by John Battendieri in 1972 when he began to revitalize some of the abandoned orchards in the Santa Cruz Mountains, and a fresh line called Mrs. Wiggles Rocket Juice, which originated a drink made with spirulina.  Ferraro’s, Hansen’s, Langers, Escondido Juice, Heinke’s and Knudsen were all located within a couple hundred miles, as well.

The Odwalla partners began to find some success in natural foods stores like Living Foods and The Good Earth, and formally incorporated the business in 1985.  They grew right along with the natural foods industry (which in 1985 stood at $2.75 billion, and by 1991 had more than doubled to $4.64 billion[viii]): by 1991, spurred by deals with Safeway and Costco, Odwalla was up to about $6 million in sales.[ix]

The business model was as unusual as the name (which was borrowed from an Art Ensemble of Chicago song-poem called “Illistrum”).

First and foremost, all of the juice products would be fresh and non-pasteurized.  Steltenpohl, who had a degree in environmental science from Stanford, understood that the heat from the pasteurization process used by most companies to achieve shelf-stability resulted in a loss of flavor, nutrients and enzymes.  But this decision had a whole series of implications.  Without pasteurization, the juice would be highly perishable, which meant it would have to be maintained in an unbroken “cold chain” from production all the way to consumption, much like dairy products: no more than 40˚F, and preferably 36- to-38˚F.  This, in turn, would mean that Odwalla would have to be delivered in refrigerated trucks, preferably via Direct Store Delivery (DSD) rather than through an intermediary, in order to maximize the freshness and minimize the cost.  And that, in turn, would mean that its distribution radius would be limited – probably just to the Bay Area at first, maybe up and down the West Coast once the volume so dictated.

Additionally, the Odwalla name lent itself to the creation of a colorful, fun and whimsical brand.  The bottle labels and delivery trucks were filled with flighty hand-drawings of odd-looking birds that wouldn’t have looked out of place on an Egyptian sarcophagus; product names like “Strawberry C Monster,” “Femme Vitale” and “Mango Tango”; and the tagline “Juice for humans.”  Mott’s and Welch’s began to sound like relics from Ward and June Cleaver’s pantry.

Another key plank in the Odwalla business model was that because of the integrity of the cold chain, the structure of the company needed to be oriented around the DSD system.  Once a relationship was established with a retailer, Odwalla would not only deliver the product there, they would also set it up, rotate it, re-order it, and compensate the store for any returns (with a shelf life of only three days, there were times that juice was made on a Monday night, delivered on Tuesday morning, and then picked up from the same store if it hadn’t sold by Tuesday night).  It was a turn-key approach that saved the retailer considerable expense, in exchange for which Odwalla would keep more of the profit margin.  For example, if a typical bottled juice might command a 33% profit margin at the store, Odwalla might limit it to 25% and pocket the extra 8%.

Steltenpohl, CEO Stephen Williamson (who came on board in 1991) and VP of Market Development and Expansion Paul Orbuch (who joined in 1993 after having built an ingenious delivery system as CEO and Co-Founder at the tofu company Wildwood Natural Foods, which had helped to more than double the sales of Mrs. Wiggles Rocket Juice) eventually developed an extensive DSD system that put the truck drivers – Route Sales People, or “RSPs” in Odwalla-speak – front and center, and made them into the rock stars that Steltenpohl and his original founders had never themselves become.  Energetic and outgoing, the RSPs received honks and shouts of love from passing drivers throughout the Bay Area, who recognized them as likeminded souls.  “It wasn’t just that they were ‘hail fellow well met,’” Orbuch said of the RSPs.  “They were the customer.  They were people who believed in health and in the new age, the human potential.  They exemplified the lifestyle that Odwalla fit into.”

The RSPs were issued state-of-the-art hand-held Fujitsu computers to track their accounts and key metrics such as “dollars per route day.”  According to Steltenpohl, “That became the economic engine for the company….  All of a sudden you had the information flow.  I could know exactly what the driver was doing, hire motivated people, give them a feedback system, pay them better, and give them a piece of the action.”  They were converted from clock-punching hourly employees into base-plus-incentive entrepreneurs, partners in the growth of their routes who were encouraged by their Area Business Managers to get to know the store personnel and to distribute their “O-Zone” in-store Odwalla-branded refrigerated cases wherever they could.

The unusual business model began paying big dividends.  By 1993, Odwalla was doing about $13 million in annual sales from about 20 different types of juice, each selling for $1.50 to $2.00 a pint.  They had grown to 200 employees.  After watching a handful of other natural foods companies go public earlier in 1993, including Wholesome & Hearty Foods, Celestial Seasonings and the Hain Food Group, Odwalla did the same with a small early-stage offering in December, 1993, which brought in about $7 million.  A subsequent offering raised $18-20 million more.  The stock then took off, and in the overheated financial markets of the next couple of years, at times hit a price-to-earnings ratio in the triple digits.  They built a big new 65,000-square-foot production facility in Dinuba, CA, in 1994, and a corporate office in Half Moon Bay, just south of San Francisco, in 1995.  The company received lots of media attention, including reports that both Steve Jobs and Bill Clinton were big fans.  Revenue tripled from 1994 to 1995, surpassing $50 million.  “Managing Odwalla’s rapid growth was challenging but exhilarating,” Williamson later told Fast Company magazine. “We were sourcing, squeezing, mixing, blending, bottling, shipping, and delivering our products to more retailers and more consumers every day.”[x]  And although they had barely made a dent in either the shelf-stable juice market or the single-serve beverage business, their fast growth was instilling disruptive dreams in their heads.  “Odwalla was big on trying to inculcate the vision of what we were about,” said Orbuch.  In some of their meetings they would even talk about their “share of stomach” versus Coca-Cola, trotting out a picture Co-Founder Gerry Percy had snapped of an Odwalla truck passing a Coke truck on the road.  “We really thought of ourselves as competing with everybody who was making beverages.  We didn’t see ourselves as being in a different business as these unhealthy drink purveyors.  If anything, we were going to take them over!”  Steltenpohl estimated that Odwalla would hit the $100 million mark around 1999.[xi]

But the business model still had a big built-in constraint, because the DSD system was limited to the range of the trucks picking up in Dinuba, and even with advancements in controlled atmosphere and sanitation, shelf life was still no more than 18 days.  That meant that if the company ever wanted to get its products into more distant markets – and Fresh Fields, for one, was itching to bring Odwalla to the East Coast – it would have to find another way.

One means for expansion would be to build another production facility on the East Coast, and essentially replicate the entire Odwalla model there.  Flush with cash from the public market, the management team looked into the possibility of building a plant in Palm Beach County, FL.

But a much easier alternative was growth through acquisition.  On January 31, 1995, Odwalla announced the purchase of Just Squeezed Juices in Denver for $2.5 million.  “We looked at their volumes and we knew they were underperforming,” recalled Orbuch.  “They didn’t know that.  We knew that.  We needed to sort of take over their position. We always knew Odwalla was a better brand because of everything we could do with the creativity on the trucks and the coolers.  We weren’t going to recreate that with [Just Squeezed].  The main thing was to displace them….  We basically wanted their relationships.  We wanted their market position.”  The purchase of the Dharma Juice Company extended Odwalla’s reach into Seattle.  In October of 1996, Orbuch flew to Austin and negotiated with Whole Foods and the University of Texas to start bringing fresh juice there, too.  The East Coast, however, was still a missing piece in the Odwalla jigsaw puzzle, and so they began to take a look at a small company in Saco, ME called Fresh Samantha.

***

Despite the fact that he grew up in Belgium, Doug Levin was not really into food.  The aioli, fries and chocolate didn’t excite him.  The waterzooi and carbonnades flamanades stews were much ado about nothing.  He was a picky eater who liked the fresh pear juice that he could get in the malls in Brussels, but not much else.

He returned to his native America to attend college at Wesleyan, in Connecticut, where he met the woman he would marry, Abby Carter.  He graduated in 1984 and then went on to a couple of jobs as an art director at the big New York advertising agencies Doyle Dane Bernbach and Saatchi & Saatchi – periodically flying up to Maine on the chaotic discount airline, People Express, to see Abby’s family.  Those visits were intriguing for Levin, in part because Abby’s mother, Julie, who had grown up with the food co-op movement in the 60s, was a fabulous cook who made broccoli dip and hummus and guacamole, and grew alfalfa sprouts under heat lamps in her basement.  But Levin was also losing his interest in the world of New York advertising – an especially difficult thing for someone with a self-described “twitchy personality” who by nature is usually so enthusiastic that he peppers his conversation with interjections like “That point is so interesting!” and “That’s exactly right!”

“I felt really lost,” he said.  “I had always perceived myself as more of an artist than a businessperson and, you know, a lot of people sort of end up in the advertising world when they think of themselves as artists but can’t make any money.”  He tried his hand at photojournalism for a while, but on another visit to Maine in 1991, it suddenly hit him: “I just want to work with these people. I don’t want to do what I’m doing anymore.”

The Levins moved to Maine, and Doug started delivering Julie Carter’s alfalfa sprouts and hummus around town in a truck.  “I thought this could be a really cool product, so I started going down to Boston, the suburbs of northern Boston, and delivering the hummus DSD, telling them I’d buy it back if it went bad.  And of course, I’d often buy back puffed-up containers of hummus. And that was the system: we bring it, and we guarantee the sale.”

On one delivery to a Shop & Save in Portland, he spotted a bottle of a local product called “24 Carrot Juice” on the shelf.  “I went in there and saw the bottle of juice and I almost had a religious experience! I saw a little halo around it.  I just thought, ‘This is for me! I just know it’s for me!’  And I tried it.  I tasted it, and I loved the taste!  And that was it.”

He sought out the owner of 24 Carrot Juice to see if he could start delivering his bottles of carrot and orange juice during the alfalfa sprouts runs, and although he was initially rebuffed, he got a call back a few weeks later asking if instead he would like to buy the business.  “He called us up and said he didn’t want to make carrot juice anymore, he wanted to travel around the world. So we unburdened him of his business for a small amount of money.”  Bob and Julie Carter cashed in a life insurance policy so they could buy the 24 Carrot juicer and refrigerator.  They allocated a section of their basement sprout plant so that Doug could run the juice business, which began in 1992 with the production of fresh-squeezed unpasteurized juices, packed into bottles that had whimsical hand-drawn labels.  He named the company Fresh Samantha, in honor of his newborn daughter.  At this point, Doug Levin had never even heard of Odwalla.

By his own admission, Doug Levin had no idea how to build his business.  Employing the same DSD model he had used for the hummus, he tried to get convenience stores and gas stations interested in Fresh Samantha.  “Off I went with my little cooler to the gas stations and I said, ‘Here, put these in.  Don’t worry, we’ll buy it back.’  And they put it on the shelves, and of course I bought it all back.  Nobody in a convenience store and a gas station wanted to buy fresh carrot juice for $4 or $3.50 or whatever we were charging at the time.  And these juices were exploding on their shelves.  So not only did I have to buy it back, I had to clean up their shelves.”  There was no funding to expand the business.  There was no marketing plan.  There was no business model at all.  “Without any business plan,” he said, “I realized that I was missing something.  It wasn’t working.  It wasn’t happening.  It wasn’t clicking.”

By chance, he got lost in Medford, MA one day while finishing up a delivery of sprouts, and found himself in front of Tufts University.  He went to see the head of food service, who told him that Tufts had just signed a contract with Naked Juice, then owned by Chiquita, which produced a similar line of fresh juice products.  Levin pleaded, saying that it would be better to go with a New England company, and left behind about 20 samples of Fresh Samantha.  Before he even got back to Maine that night, all of the bottles had sold out and Tufts was asking for more.  “Until I got lost and found Tufts,” said Levin, “there was no future.  But the future happened at that moment.”

Soon, Fresh Samantha was in all of the major colleges in New England, and in Bread & Circus, too.  In 1994, they grossed $300,000.  Levin became more savvy with each passing day.  He set up contracts with fruit growers and companies to provide frozen fruit purées.  He consulted with Gary Hirshberg of Stonyfield Farm, by then the dean of New England natural foods entrepreneurs.  He studied another New England juice business, Nantucket Nectars, and realized they were basically just a marketing company that was outsourcing all of the production and distribution.  He took inspiration from Odwalla, copied their in-store refrigerated case system, and knowing that they might someday come into New England, “scoured every street, every little store” in an effort to achieve full market penetration.  He brought the retail price down below $3, and expanded the product list beyond carrot and orange to include flavors like Big Bang Body Zoom Juice, Raspberry Dream, and Desperately Seeking C; still later, there would be soy drinks and seasonal flavors, such Watermelon Whirler and Fuchsia Lemonade.  He built a 24,000-square-foot production facility in Saco capable of producing 600,000 bottles a week.  He approached Seth Goldman of Honest Tea just as that business was getting going, offering to buy it mostly so that he could make better use of his trucks and warehouse capacity.  He even launched TV ads, featuring a sassy talking moose inspired by the Sid and Marty Kroft TV puppet show “HR Pufnstuf” – a bit of a strange campaign, especially for an ad agency veteran, that unfortunately drifted away from the “warmth, coziness and New Englandness” of the brand and moved it toward what Levin later realized was “an edgy urban kind of farce.”  But it didn’t matter.  In 1998 Fresh Samantha hit $15 million in sales, and in 1999 they reached Levin’s goal of $38 million before his 38th birthday; as a reward, he took his 400 employees on a cruise to Nova Scotia.

Through it all, the DSD system remained central to the Fresh Samantha model.  “We put so much money, so much effort, into that direct store delivery system.  The drivers were salespeople. They were marketing people. The avant-garde, the forward point of our research.  When they came back to the warehouse, we found out so much about what was going on with our business! And for a while it was a huge advantage for us…. We knew exactly what was going on.  It was moving at Tufts, you know, but it wasn’t moving in the small little convenience store right next to Tufts.  So we could find these things out very, very quickly and make adjustments.”

The main problem was the Maine problem.  With a production facility tucked away in an inaccessible corner of the country, far from both the orchards and the retail stores, expenses were always going to be high.  At first Levin thought New York would be “the outer limit of our possibilities.”  But he also had grand visions, and before long was building a complex and expensive network of refrigerated warehouses up and down I-95 – in New York, Washington, Raleigh-Durham, Atlanta and eventually Miami.  In order to fund this expansion, he could no longer just rely on bank loans and liens on mortgages.  For the first time, Fresh Samantha turned to outside money, and brought in Bain Capital as investors.  “It was the only way to get the money in and to expand, but at the same time it was sort of doomed,” recalls Levin.  “[Moving] South was our undoing in terms of a marketing plan.”

***

Coming back from Austin on that night in October, 1996, Paul Orbuch was feeling good.  But then, as he relaxed back into his seat on the plane, he received a message on his pager from Michael Young, the VP of Operations at Odwalla: “Don’t go home.  Come to Half Moon Bay.  Important event.”

Because they didn’t pasteurize their juice, Odwalla had always cleaned the raw fruit with a phosphoric acid wash and whirling brushes.  But apparently, they had gotten a shipment of apples that had been picked from the ground instead of the tree, and this sanitation process had failed.  And now the word came from health officials in the state of Washington: the fruit, and the juice made with it, had become infected with the E. coli 0157:H7 bacteria, killing a 16-month-old girl and sickening what would ultimately be 66 other people.

The management team gathered at Half Moon Bay that night to put an emergency plan in place.  Apparently, industry experts had convinced them that E. coli could not live in the acidic environment of apple juice, so Odwalla hadn’t tested for it.  “We are Odwalla, these are our core values.” Steltenpohl told his team.  “Having one extra moment of risk for a consumer is not acceptable.  We own a DSD system, so let’s pull of a complete recall and see how fast we can do it.”  They would plan to have the RSPs pick up every bottle of Odwalla containing apple juice within 48 hours – a $6.5 million product recall, covering 4,600 stores.

Steltenpohl and Williamson faced the press the next day, saying “This is not who we are” and vowing to take care of any medical problems that arose.  Nevertheless, a firestorm of bad publicity immediately rained down on Odwalla, and to a certain extent, on the entire natural foods industry.  It may have seemed a bit ridiculous to some that the entire fresh juice industry was being condemned while products laden with artificial chemicals were being sold in massive quantities every day.  But the death of a 16-month old will do that.  Odwalla’s stock price plummeted 34% overnight.  Sales dropped by 90%.  Customers filed more than 20 personal injury lawsuits, and two years later, Odwalla ended up paying a $1.5 million fine, to that time the biggest criminal fine in a food injury case in the history of the FDA.  Even Fresh Samantha’s sales were affected, as supermarkets immediately began calling to say, “Get your product out of here!”  According to Levin, “Everything changed at that point.  The joy went out a little bit.  And the taint on the category didn’t go away for a while.”

As a result of the incident, both companies (and Naked Juice as well) changed one of the basic tenets of their business models, and began flash pasteurizing their juices, sacrificing taste and nutrition for food safety.  “Probably in the end you just needed to have pasteurization if you were going to do things on this scale, or on even a scale 1/10th the size of this, if you wanted to guarantee that you were going to be safe,” said Paul Orbuch.

Still, Odwalla soldiered on, powered in large part by the strength of its brand and the DSD model.  They suffered a net loss in 1997, but shortly thereafter entered the food bar market and began making soy-based “Future Shakes.”  Additionally, there was a silver lining to flash pasteurization: it extended the shelf life.  Hence, Odwalla was able to expand into the former Fresh Fields stores in Washington and Philadelphia in 1998 without having to build an East Coast production facility or buy an East Coast company.  By the end of 1998, their revenue exceeded the pre-incident levels.

In this changed world, where fresh pasteurized juice products could now go through distributors, DSD became less important than cash and brand strength.  Fresh Samantha was stuck with a network full of expensive distribution centers, talking moose ads and needy outside investors.  Moreover, tastes were shifting a bit, as a host of new fad diets (Low-Carb, Atkins) called attention to the fact that fresh juices like Fresh Samantha, Odwalla, Naked, and those made to order at Jamba Juice, were loaded with calories.  “You could feel it in the atmosphere,” recalled Levin.  “The frenzy was gone.”  In February of 2000, Doug Levin sold his company for $29 million – a fraction rather than a multiple of sales – to Odwalla.  Steltenpohl was impressed by Levin (“Doug was a sales maniac.  His metabolism was one of the highest of anyone I have ever met!”), and brought him out to Half Moon Bay to serve as President of the combined company, for a while.  But Odwalla itself was sold to Coca-Cola in 2001; Levin and his family moved back to the East Coast, where they have lived a quiet life ever since; and the Fresh Samantha sub-brand was retired forever in 2003.

***

Through all of Mark Retzloff’s many experiences in the years since he co-founded Eden Foods at the University of Michigan – running the Erewhon store in Seattle, living in the Divine Light Mission ashram in Denver, planning the Millennium ’73 celebration for the Guru Maharaj Ji, building Alfalfa’s into a powerhouse retailer in Boulder – he had always remained entranced by the simple power of organic farming.  Given the right conditions, he knew that organic foods could be regenerative for the food industry and perhaps for all of American business, just as organic farming was regenerative for the soil.  But that was a big “given.”

Part of the problem was what author Michael Pollan, in The Omnivore’s Dilemma, called “the perverse economics of agriculture,” which, he said, “would seem to defy the classical laws of supply and demand.”[xii]  The first Farm Bill, passed in 1933 at a time when the price for farm-raised food had fallen by more than 50% while farm production costs had only fallen by 32%, established a precedent by paying farmers not to grow, in an artificial attempt to balance supply and demand.  This then became an entitlement.  In the early 1970s, Secretary of Agriculture Earl Butz famously urged farmers to “adapt or die” and to “get big or get out.”  He switched away from the Soil Bank, which paid farmers to let land lie fallow, to a method of direct payments to farmers to make up for the shortfall in crop prices.  Thereafter, a larger and larger share – in fact, nearly half – of farm income came to depend on those subsidies.  With each subsequent passage of that omnibus Farm Bill, there would be more money for subsidies and virtually no incentives for organic research.  Indeed, the laws were set up so that as soon as a farmer stopped using chemicals and began the switchover to organics – typically, a three-year process – he would lose most or all of the crop subsidies.

Moreover, by 1990, after nearly half a century of “chemical farming,” the agrichemical and Big Food industries had become so accustomed to their way of doing things, and the enormous profits that came with it, that they were unwilling to cede even the paltry 1-2% market share that organic foods had won back.  So they mounted a ferocious counteroffensive – lobbying lawmakers, subsidizing research at universities – that left all efforts to create legislative support for organics in disarray.

Individual states did begin to pass legislation to define and standardize organic farming, including Colorado in 1989, but they weren’t consistent and this only served to create confusion among consumers about what each manufacturer meant when they labeled a product “organic.”  It was akin, in some respects, to the days before 1883 when the U.S. finally adopted standardized time: prior to that, “current time” was defined differently and was usually pegged to a local landmark like the clock on a church steeple, creating havoc for people trying to catch a train or attend a meeting in a nearby town.

“It became clear to me as a retailer that we needed to get that sorted out,” said Retzloff.  “I couldn’t be having doubts about whether something that I was selling was organic.  I wanted to be sure.”  He left Alfalfa’s in 1990 to devote himself to this problem, and formed the Organic Food Alliance as sort of an offshoot to Peter Roy’s old Natural Foods Network.  He spent a great deal of time in Washington, DC, and along with the efforts of many others in the industry, such as the Organic Foods Production Association of North America, and its successor, the Organic Trade Association) helped to secure the passage of the Organic Foods Production Act as part of the 1990 Farm Bill.  The Act itself was really just a starting point in what would become a 12-year process, stipulating the creation of the National Organic Program (NOP) to require and oversee mandatory certification of organic production and the National Organic Standards Board to advise the Secretary of Agriculture in setting the standards for the NOP.

In the process of all his lobbying, Retzloff scrutinized the way Alfalfa’s and other retailers were marketing organics in each department throughout the store, and made one of those stunningly obvious observations that are apparent only after one gets some distance from the subject: there weren’t many organic products in the dairy department.  He stood in the department and watched how many customers picked up conventional milk to go along with the organic produce or organic packaged goods in their baskets.  Having spent a great deal of time with Mel Coleman, Sr., he knew all about how hormones were being implanted behind the ears of cows, and had closely followed the conference about the safety of rBST – a cloned version of a hormone that Monsanto and others were pushing for approval to use – organized in 1990 by the National Institutes of Health.  Retzloff was also concerned about whether pesticides were working their way from the crops into the feed and on into the milk.

Along with his friend Paul Repetto, who had been one of the key people at Westbrae and Little Bear, he commissioned a study to look into the feasibility of producing milk organically in a big dairy, capable of generating enough to supply stores like Alfalfa’s and Bread & Circus and the other large natural products stores.  The answers were encouraging.  So even though it had never been done before, even though there was no national brand of milk except Lactaid (which had launched in 1984, and had a six-week shelf life due to its high-heat ultra-pasteurization), even though they had no idea how to create a business model that would support shipping organic dairy products to stores across the country affordably, Retzloff and Repetto each invested $100,000 to launch Natural Horizons in 1991.  The company name would soon be changed to Horizon Organic Dairy, and it would go on to become the leading organic brand of any food in the country.

Retzloff and Repetto did not own any cows, and Boulder was not exactly dairy country, anyway.  They cut a deal with the newly formed Coulee Region Organic Produce Pool (CROPP) co-operative of 12 organic dairy farmers in southwestern Wisconsin to supply the milk, and cut a separate deal with a processing facility in Madison.  Their first product line, yogurt, debuted in April of 1992, and in order to make up for their higher production costs, they made a key decision: to offer it in six-ounce cups for about the same price that Dannon and other yogurts were selling eight-ounce cups.  Consumers, Retzloff knew after all his years working in retail, would be willing to pay a slight premium for organic, and this was a fairly understated and painless way to extract it.  By the end of 1992, their organic yogurt had generated $460,000 in sales spread out over 2,000 stores from coast to coast.[xiii]

Fluid milk, however, was still very much on Mark Retzloff’s mind, because he knew it had enormous symbolic value.  “The notion of milk as a gateway product for consumers to get into organics was pretty much imbedded,” he said.  He understood that organic milk, unlike most of the other organic products then available, had the potential to become a best-seller in conventional stores, not just natural foods stores.  But he also knew this would require a novel business model.

From roughly the time the first cows had been brought to Plymouth Colony in 1624 up through the end of the 19th Century, milk was produced locally and distributed in buckets by milkmen.  The Thatcher’s Common Sense Milk Jar, sealed with a wax paper disk, had become the industry standard by 1889.  In the early 20th Century, milk tanker trucks were developed to transport milk over longer distances, and the 1922 Capper-Volstead Act gave dairies the legal right to band together for processing and marketing – so milk was now treated as a commodity, with several regional dairies combining their output into a single tank.  Square cartons with printable side panels came into vogue in the 1950s and 60s, opening up the first serious possibility of marketing milk under a brand name.[xiv]

But what Retzloff envisioned was more of a vertically integrated model, where Horizon Organic would own and operate its own big dairies, perhaps in different parts of the country; contract with a processing and pasteurizing plant; and ship from there under a single brand name.  In 1993, he and Repetto did a stock swap with their silent partner, Mark Peperzak of Aurora Dairy, so that they could acquire a conventional 4,000-acre dairy farm in Idaho which they had begun converting to organic by developing the pastures without pesticides and sourcing organic grain.  With $1.5 million in additional venture capital helping to offset their $5 million transition cost, they purchased 1,000 head of Holstein cows and made the farm operational in July of 1994.

Horizon Organic began selling its milk at Ralph’s in Los Angeles, at about a 40-cent premium over conventional milk, and they quickly ran short on supply.  Soon they expanded to other conventional chains in Los Angeles, Denver and New York, as well as to natural foods stores.  All of Retzloff’s theories, honed over 20 years in every aspect of the natural foods business, proved to be correct.  Mothers who were otherwise loading up their carts with Fruit Loops (red 40, yellow 6, BHT) and Hidden Valley Ranch Dressing (MSG, artificial flavors, calcium disodium EDTA) were opting for organic milk.  And it certainly didn’t hurt that when Monsanto was given FDA approval for use of its rBST hormone, Posilac, in 1994, there was a huge consumer backlash.  By the end of 1994, Horizon had added sour cream to the product mix and established themselves as the first national organic dairy brand, with total sales reaching nearly $4 million.[xv]  By 1995, sales hit $7 million.[xvi]

Horizon took off from there, but not without adjustments to its business model.  In its original conception, milk that was produced in Idaho would be shipped to Des Moines for processing, and then would be shipped from there to markets – including back to Idaho and points West.  The surge in demand for their products and some additional venture financing provided the capital to build processing facilities on the farm in Idaho, and to contract with processors in several other states, who in turn helped expand the product line to butter, cheese, cream cheese, and other dairy products.  (In 1997, they would also add an organic dairy farm on Maryland’s Eastern Shore to their holdings, with 556 head of cow.)  Retzloff tapped his fellow member of the Boulder Mafia, Barney Feinblum, to become President and CEO, and his financial acumen helped to steer the company – which in 1996 did $16 million in sales but still lost $5 million – toward profitability.  Feinblum had engineered the successful second Celestial Seasonings IPO in 1993, and would do the same with Horizon.  He took the company public in June of 1998, and arranged a private placement with the Brazilian conglomerate Suiza Foods that raised additional cash.  By the end of 1998, Horizon turned a small profit of $486,000 on its sales of $49.4 million.  From there, a variety of different licensing agreements, international and domestic acquisitions, expansions of supply and marketing efforts brought Horizon into rarified air within the natural foods industry, with sales exceeding $100 million ($127.2 million) in 2000.  The company was acquired by Dean Foods in 2002.

***

Competition, like Mother Nature, abhors a vacuum.  So not surprisingly, other dairies began to fill the void.  Stonyfield Farm, the leader in organic yogurt since its introduction in 1983, thrived.  Buoyed by the surge of awareness Horizon brought to the dairy department, and by the controversy generated by the rBST issue, Stonyfield’s sales, which had been averaging about $5 million a year, exceeded $42 million in 1998.  “The speed of change in the industry has been staggering,” Gary Hirshberg told The New York Times in 1999.  The Straus Family Creamery, which had been founded in the 1940s and was faltering in the early 90s, switched to organic in 1994 and quickly turned around.

And then there was that little co-op of 12 organic dairy farmers in the Coulee Region of southwestern Wisconsin….

The theory behind an agricultural co-operative is straightforward.  Farming is hard work, and expensive work, requiring lots of inputs (seeds, fuel, machinery, labor, capital or credit) and lots of outputs (storage, packaging, transportation, marketing).  Instead of each farmer buying materials in small quantities – a single tractor can cost $125,000 or more – or setting up a distribution network for his goods, why not pool resources together?  Though farming is a largely solitary endeavor, the barn-raising spirit has always permeated farming communities, so there has often been a philosophical alignment for co-operatives even while the farmers themselves have maintained their fierce independence on other issues.  Among the earlier and more important agricultural co-operatives in the United States were the Tillamook County Creamery Association (founded in 1909, but whose roots date back to 1854, when farmers banded together to build a schooner to transport butter from the Tillamook Valley to Portland, OR); Sunkist (formalized in 1893 as the Southern California Fruit Exchange, which launched one of the first branded co-op ad campaigns ever, in 1907, to try to deal with a surplus of oranges); Blue Diamond (formed in 1910 as the California Almond Grower’s Exchange, now comprised of 3,500 growers); Land O’Lakes (founded in 1921 by 320 creameries in Minnesota for the purpose of marketing butter, now with 3,200 members); and Ocean Spray (created in 1930 by three Massachusetts cranberry growers, now with 600 members).

George Siemon knew a little bit about that history when in 1988 he convened a meeting of 140 farmers at the Vernon County Courthouse, 20 miles east of where the Mississippi River divides Wisconsin and Minnesota.  Then 37 years old, he had spent the last 10 years as a dairy farmer, doing everything by hand, but had become disillusioned when the price of milk dropped precipitously in 1987 and sold his cows.  “Wasn’t just me that felt disgusted,” he recalls in his soft, almost scratchy voice, peering intently into the past through his round wire-frame glasses and always, always, using an economy of words.  “The money was poor and we felt insulted.”  Many of the Midwest farmers of that era had been born into farming families that had discouraged their kids from staying on the farm because they wanted to see a better life for them.  “There was that much droning involved, hard work and not being rewarded, never missing a milking.  It wasn’t a happy place.  There was an unhappiness there.  So out of that, those people that started the co-op with me, they were hungry to try something different.  They were frustrated.  So we really didn’t care if we succeeded or not.  We just wanted to do it.”

But it was not at all clear on that cold January day in 1988 that the answer was going to be an organic dairy co-op, because co-ops, according to Siemon, had a bad name.  “We started a co-op not liking co-ops.  But there was no other model to turn to.  We always used to use the Constitution – you know, you started the United States government not liking governments, so you put chains on it.  We always had that perspective.  Co-ops can be good or bad.  Depends on how well you build the foundation for it.”

Siemon himself was a rather improbable leader for the group.  Though he was a child of the 60s who “went to rock festivals and all that stuff” and once joined an anti-war protest that took over the highway in Miami, he did not consider himself a “disinheritor.”  He always had a gentle soul who was respectful of others and especially of the environment.  “Born and raised a naturalist.  Nature-lover, Boy Scouts, bird-watching.  My mother was a huge Rachel Carson fan, so you know, I am 10 years old and my mother is pushing The Sea Around Us.”  As a kid, he got to spend a couple of weeks here and there on farms owned by relatives in Alabama and Iowa, but his world was in Palm Beach, FL, where his father ran a chain of seven office supply stores called Halsey & Griffith, and served as president of the Downtown Merchants’ Association.  “Every store was in a downtown,” he recalled.  “I can remember my grandfather in the early 60s driving by the first mall and saying, ‘See that?  That’s the death of community.’”  Soon, Office Depot set up its headquarters in their district, and Halsey & Griffith went bankrupt – but in a Darwinian sense, that was just the way of the world.  George swore he would never become a businessperson.

In college, at Colorado State, Siemon studied forestry and animal science.  Sometimes he took jobs as a hired man on nearby farms, most of whom were heavily into using chemicals, but he had only respect for the farmers.  “They were saying they needed chemicals.  They were saying they needed fertilizers.  So it was hard for me to be that arrogant to say, ‘Yeah, but you are all wrong.’” It wasn’t until he moved to Iowa in 1974 and met some old-time organic farmers that he “got the bug” – a rather ironic turn of phrase for a man who would soon build a hugely successful brand using natural methods of pest management.

Siemon and the other organizers met a couple more times in the winter of 1988 before formalizing the CROPP co-operative in March.  They began studying the model established by Mondragon, a federation of worker co-operatives in Spain’s Basque Country that was in the midst of aggressive expansion.  They thought perhaps they would create a produce co-op, a goal that Simeon says in retrospect was “dreamy-eyed” and was “way out of our league” because they would have had to start from scratch and pioneer the whole thing.  Instead, they turned to dairy, which was familiar to them, and specifically to organic dairy, which, with the growth in the natural foods industry around the country, held the promise of higher prices, a decent life for the farmers, and a big boost for sustainable farming.

“Some were saying, ‘This is a big undertaking.  We shouldn’t try to do anything this year, we should pull back,’” Siemon remembers.  But they pushed ahead, bringing together support from “conventional ag” (including co-packers), the National Farmers Organization (a sometimes-radical group that had practiced collective bargaining to get a fair price for farmers), and the even more radical organic dairy farmers.  Their first product was cheese, sold to another co-op in Madison called North Farm.

A bit later came the call from Mark Retzloff, seeking a source of organic milk for the yogurt he was about to begin manufacturing.  CROPP entered into a contract with Horizon, and was their sole supplier for a few years.  “But,” said Siemon, “they had made it clear all along that they had this urge to do a big dairy….  We debated [internally], of course that, ‘Gee, these people could succeed.  We could be starting a competitor here.’  But the truth is we needed them….  They brought professionalism, they brought funding, they brought management skills.  They brought a lot of things we didn’t have….  They taught us a lot.”

Perhaps the key thing Horizon taught CROPP was that it was possible to build a national organic brand.  But for George Siemon – who continued to farm, but gradually devoted more time to running the co-op as its “C-EIEI-O” – it wouldn’t be done with a big dairy operation.  It would be done by growing the co-op business model to scale, from coast to coast, ensuring that the first priority was to create a stable living wage for farmers, regardless of the price vagaries of the market, in order to keep them on the land.  Thus, the man who started a co-op not liking co-ops became one of that business model’s most ardent supporters.  “In a co-operative it’s easier to have a mission-based business,” Siemon would later tell the Social Venture Network.  “You’re more about your mission and who you want to be versus any of the struggles of ownership value. . . . it’s not a stock company that has valuation or only looks at return on investment.”[xvii]

In 1990, with more farmers now on board, CROPP was able to mount enough marketing effort to create a brand, which they called Organic Valley.  Whereas Horizon was putting its bet on a business model that relied on a couple of large corporate-owned organic dairies, and all of the attendant logistics of processing and transportation, Organic Valley used a decentralized model: the milk would be produced at hundreds of locations around the country (typically farms with only 70-80 cows), and then processed and distributed regionally, all under one unifying brand.

For a few years, it was unclear if the model could be sustained.  CROPP insisted on paying farmers higher-than-market rates for their milk through good times and bad, and therefore could not always hit its very modest profit goal of 2%.  They began selling to Walmart in 2001, and soon were supplying them with 1.3 million gallons a year, as America’s biggest retailer was on its way to becoming America’s biggest organic milk retailer; but supply became a big issue, especially after a (non-CROPP) case of mad cow disease in 2004 created a huge surge in demand for organic milk.  Organic Valley began shorting its other customers in order to keep up with Walmart.  Finally, Siemon and his directors made the difficult decision, on a day in December, 2004 they dubbed “Dry Thursday,” to drop Walmart and walk away from a potential goldmine.  The natural foods stores, which represented 45% of Organic Valley’s business, were deemed more important.  Besides, Horizon was knocking on Walmart’s door and seemed willing to undercut Organic Valley’s price.  “No sense fighting a fight you can’t win,” Siemon told Inc. magazine. [xviii]

But in the end, it hardly mattered.  CROPP sales grew by 15% in 2005, and by 37% in 2006.  The brand, and the business model, had proven their worth.[xix]

By 2013, CROPP had become the largest farming co-operative in North America, with 1,814 members in 35 states (and three Canadian provinces) – representing about 9% of the certified organic farmers in the U.S.[xx]  Its 2012 sales were $860 million.[xxi]

***

While the fresh-squeezed juices and organic milks were battling it out, utilizing their unusual business models to thrive in the natural foods stores and break through into the conventional stores as well, nothing was more disrupted by the natural foods industry than the world of cookies.

For a century, the formula for commercial cookie success had been clear: develop a tasty recipe, come up with a clever brand name, and figure out how to mass produce it.  This was the basic pattern followed by Nabisco with all of their famous cookies, including the Fig Newton (introduced in 1891), the Oreo (1912), the Mallomar (1913), Chips Ahoy! (1963) and Nilla Wafers (1967), as well as by other major manufacturers like Keebler and Pepperidge Farm.  Ingredients never mattered much (Oreos, for example, used to include lard in the crème filling).  But advertising has always mattered a lot – from Nabisco’s 1950s Saturday morning TV commercials with a cowboy singing, “Yer darn tootin’, I like Fig Newtons” all the way up to the $4 million Oreo “Cream or Cookie Whisper Fight” commercial during the 2013 Super Bowl.

Responding to the inescapable shift toward healthier foods, Nabisco disrupted the market it already dominated with the introduction of SnackWell’s in 1993.  This line of cookies and crackers was made without tropical oils and included several low-fat or fat-free versions, including Fat Free Devil’s Food Cookie Cakes and Reduced Fat Bite-Size Chocolate Chip Cookies.  The brand caught fire, and hit $490 million in sales by 1995.  With supplies short, some fanatical consumers actually chased delivery trucks down the street.[xxii]  SnackWell’s Reduced Fat Crème Sandwich Cookies actually overtook Oreos as the best-selling cookie in the country.[xxiii]  But the SnackWell’s phenomenon proved to be more fatuous than virtuous, part of the fat-free fad that had also brought us the reduced-fat McDonald’s McLean DeLuxe (born 1991, died 1996) and Sara Lee’s short-lived Free and Light frozen desserts (which The New York Times eulogized as “the food-business equivalent of Kevin Costner’s fiasco with the film ‘Waterworld’”).[xxiv]  Supermarket sales of Snackwell’s plummeted by 35% from 1995 to 1997, and by the following year they were changing the formulation to add more fat and flavor.[xxv]

Into this world strode two entrepreneurs who had very different ideas about how to make and promote cookies.

Paul Newman had used some of the money earned during his long acting career to start an all-natural food brand called Newman’s Own in 1982, beginning with salad dressings and also including pasta sauce, salsa and other items.  But there was a twist to his business model: though the company was organized as a for-profit enterprise, Newman would donate 100% of the profits he received to charity. Utilizing a licensing program, every time a Newman’s Own product was sold a royalty would be generated, which was then given away by the actor (and still is, by the Newman’s Own Foundation). Newman always had an expansive world view, and supported humanitarian and social causes, though usually as a “white knight” who rode in and out quietly, rather than as a sustainer.  Newman’s Own would be the perfect way to capitalize on his legendary name and support his passion for philanthropy at the same time.

Around 1992, Newman was beginning to think about what else he could do with product development, and called his daughter Nell, who was living in Santa Cruz, CA working for the Predatory Bird Research Group.  She suggested that he think about organic foods, since that aligned well with his interest in land preservation.  He mulled it over, and after she surprised him with an all-organic Thanksgiving dinner, came back to her with the idea for a new business: Newman’s Own Organics, The Second Generation, which she could run.  She called her friend Peter Meehan, who lived nearby in Santa Cruz and had known the Newman family back in Connecticut, when he owned a swimming pool business.  “Wow, you should jump all over that,” Meehan told Nell Newman.  “He has baked the cake and iced it for you.”

The Newmans pulled Meehan into the business as CEO because of his tenacity and entrepreneurship, “knowing full well that I wasn’t from Kraft or Unilever… I was the guy who used to be at the bottom of his pool painting or scraping.”  Paul gave them $125,000 in seed money, lowering his glasses and peering out over them with his legendary blue eyes: “It’s a loan.  This needs to get repaid because it is charity money I would have given away.”  There would be no failure to communicate here.

Newman’s Own Organics launched its first product, pretzels, in 1993.  They followed up with chocolate bars in 1995.  The packages featured a picture of Paul and Nell on the front, in the pose of Grant Wood’s “American Gothic.”  The unusual business model meant that the cost of goods sold for every Newman’s Own Organic product would always include ingredients, production, overhead, packaging, brokers’ fees, distributors’ fees… and a charitable royalty, something no competitive product would face.  This led them to be very selective.  Moreover, they needed to make sure that the price points weren’t so high that consumers would feel like they were underwriting the Newman’s Own Foundation.  “It has to taste good and it has to be reasonably priced,” Meehan says.  “Then the mission works and people feel like it is a dividend.  People don’t eat mission.  It doesn’t taste good.”

The company managed to do reasonably well in its first few years, and then came the introduction in 1997 of Fig Newmans (which Paul thought was “the greatest name I have ever heard”).  When they first talked about it, Meehan remembers, “some of our brokers said, ‘Don’t go into cookies.  It’s a dead category.’  But we couldn’t find [an organic] cookie that tasted good.  They were terrible.  They weren’t even like okay.  Fig Newmans changed everything.”  The key was the combination of brand recognition and trust (Newman’s Own had been in the market for 15 years already, and Paul Newman was a revered figure), great taste (they bought every organic fig on the market, and soon began using organic palm oil), and packaging that used trays with an overwrap instead of boxes (which not only cut down on costs but enabled the cookies to be merchandised “off-aisle” in cardboard shippers).  In 1999, they introduced chocolate chip cookies, and in 2001, their Oreo knockoff, dubbed Newman-Os.  “Everything had to be something that my father, who was born in 1925, would look at, recognize and eat,” Nell told The New York Times.[xxvi]  She might well have stolen his line as Brick Pollitt from “Cat On a Hot Tin Roof”: “People like to do what they used to do after they’ve stopped being able to do it.”

The Newman’s Own Organic cookies “were really game-changers for us,” Meehan said in looking back, because they helped the brand cross over into conventional stores.  “They went into every natural foods set in every supermarket chain.  They were cornerstones for Stow Mills, Cornucopia and everybody else who was trying to get space for natural.”  The grocery buyers for those distributors saw this as such a monumental breakthrough that they even referred to it as “parting the sea.”  It would also lead to another remarkable breakthrough in 2008, when the owner-operators of the 640 McDonald’s restaurants in New England decided to start selling Newman’s Own Organic Fair Trade Coffee through a partnership with Green Mountain Coffee Roasters.  They have continued to do ever since, even after the McDonald’s parent corporation came out with its own premium coffee products.

Newman’s Own Organics separated from Newman’s Own in late 2000, and a few years after that the parent company actually introduced a few organic items of its own.  When he heard about that, Meehan said, it was “one of the most exciting days I ever had.”  Paul Newman died in 2008, proud that his efforts had raised hundreds of millions of dollars for charity, but perhaps unaware of the role his unique business model had played in the natural foods revolution.  “He did know it was a big thing,” Nell said, “but I don’t think that he realized he changed snacking in America….  He probably would have laughed at that.”[xxvii]

***

While Paul Newman’s charm and self-effacing personality drifted into the natural foods industry like a pleasant Hollywood spring zephyr, Richard Worth blew in with all the subtlety of a Nor’easter.

Blame it, perhaps, on his family.  His grandfather was a serial entrepreneur who had lost a $2 million fortune in the stock market in 1929, but refused to let the world get the best of him.  He bounced back to found the first ready-to-wear women’s clothing store in Boston, Worth of Boston.  By the time Richard was 11 or 12 his father Stanley was running the store, and he would occasionally bring his son along to New York to help select the fashion lines for the next season.  The ones Richard picked always sold the best.  As did the Hawaiian jewelry he chose.  “I would say to people, ‘Do you want to see something special?  REALLY special?’  And I would take out a slab of these things.  ‘How gorgeous are THESE?’  I could sell shit to anybody!”

Worth went on to earn a degree in psychology at Hobart, and spent much of his 20s hopping from one entrepreneurial opportunity to another: selling bread in upstate New York, marketing underground sprinklers in Boston, unloading tuna boats in Canada.  Once, he even burst into a small real estate office in Calais, ME and told them they needed to make him a partner – which they did.  Saying no to Richard Worth has never been easy to do.

In 1975, inspired by what he later told People magazine was “a cosmic desire to live with nature,”[xxviii] he bought a farm in rural New Brunswick for $9,500.  The notion of Worth – a Jewish kid from Brookline, MA who had grown up in the world of women’s fashion, and had grown into a chunky man with a walrus mustache and a smoker’s cough – becoming an organic farmer in Canada might have seem far-fetched to some.  But he was nothing if not resolute, and for seven years he raised organic blueberries, turnips, potatoes and livestock.  But the farm was generating very little income – just $3,500 a year – and he had just become a father, so in 1978 he decided to start a business that had a little more earnings potential: manufacturing organic jams, which he named after his farm, Sorrell Ridge.

It wasn’t an especially well thought-through plan.  The farm was at the end of a dirt road, across a wooden bridge, miles from the nearest neighbor; tractor-trailers had a devil of a time reaching him.  The production costs meant the product would have to retail for $2.49, much higher than the category-leaders, like Smucker’s.  And there was no marketing plan, other than the label he slapped on the jars with the tagline, “The fruit and nothing but the fruit.”  But through the sheer force of his typhoon-like personality, Richard Worth built Sorrell Ridge into a million dollar business within two years, and into a $10 million business within five years.

On one occasion he called up the head of marketing at Häagen-Dazs in an effort to set up a deal to get Sorrell Ridge jam included as a topping. “We don’t get involved with anybody else,” Worth was told.  “Good,” he said.  “What time on Wednesday would you like to talk to me about not getting involved?  10 or 11?”  The meeting happened, and so did the deal.  On another occasion, in order to take on Smucker’s, he mimicked their formula by filling a jar with 45% raspberries and 55% sugar and brought that around to supermarket buyers.  Representatives from Smucker’s heard about it and visited him at his plant.

“You are demeaning our product,” they said.

“No I am not,” Worth shot back.  “YOU are demeaning your product.  These are your ingredients!”

Smucker’s later tried to sue Sorrell Ridge, but Worth fought back hard.  “All I do in business is either create for myself or destroy the competitor,” he said.  One gets the sense he enjoyed them both equally.

The lesson that Worth had learned was that times were changing and the chumps in the world of Big Food hadn’t realized it.  “I changed the way large companies saw natural foods,” he immodestly observed.  “They said, ‘This guy is selling jam at $2.49 and he is gaining 10% market share….  We don’t believe this!  Why are they buying it?’  Dumbbells.  It’s called health, stupid.  Americans wanted health in the mainstream manufacturing.”

Itching to move his brazenness and braggadocio to a larger stage, Worth sold Sorrell Ridge in 1983 and set his sights higher: the $4 billion cookie category.  “If they love jams without the sugar, they are going to love cookies without the crap.”  He experimented with numerous recipes and 2,000 pounds of dough, and then in 1988 came out with a fruit juice-sweetened cookie that he unsurprisingly named after himself: R.W. Frookies.  It did $400,000 of business in the very first month.

Worth’s new company was brilliantly conceived in many regards.  The packages were what one writer described as “a weird and compelling ultraviolet contraption.”[xxix]  The wacky product names were spoofs on well-known mainstream brands: Frookwich, Animal Frackers.  To finance it, he invested $500,000 of his own money but also sold one-third of the equity in the company to some of his suppliers and distributors to get them to back the products.  He targeted conventional supermarkets right from the start – Kroger was his first account – and sidestepped the slotting fees that the big boys were paying by sending most of his product in shippers.

And then, of course, there was that force of nature called Richard Worth.

“He would just pick up the phone and [cold] call the supermarket buyers,” said Bruce Nierenberg, who was a natural foods broker.  “’I am sending a truck.  I know you don’t want it.  I am sending it anyway.  It’ll be there next week.’  Click.  He was passionate, aggressive, brilliant, but manic.”

Distributors often took on his products even if they didn’t want them, because they knew his track record was good and besides, he would probably just argue with them until he got what he wanted.  Worth said that he had more than a dozen people approach him at the Natural Foods Expos and say they didn’t want to talk to him because he was crazy.  “Just place an order and ship it, on all your products.”

He went on television, posed in a chef’s toque for ads, and disparaged his competitors (calling Health Valley “Death Valley” and SnackWell’s “SmokeWell’s,” because Nabisco was owned by the tobacco company R.J. Reynolds).  It also became well known in the industry that when Worth was hiring salesmen, he would ask if they had “skids” on their underwear: if in his candor or embarrassment someone answered no, Worth concluded that he “is either a fucking liar or he is not a salesman.  Because all good salesmen are bored after their second wipe!”

When Newman’s Own Organics came on the scene in the late 90s, they often found themselves competing directly with Frookies, and it was challenging.  Peter Meehan likened the situation to the cold war, “where one side didn’t have any missiles in the silo so the other side way overspent.”  He saw this happen with Muir Glen vs. Millina’s Finest pasta sauce, and with Kashi vs. Nature’s Path cereal, and then it happened to him.  “Frookies…was a serious discounter.  We were organic, so they had more margin, and Frookies was dominating with promotional activity.  At least it appeared that way.”  So Meehan had to decide whether there was really anything in those silos, and how much he should spend to fight back.

Frookies sold 70,000 cases and did $2 million of business in the first three months.  By its ninth month, Frookies was in more than 50% of all supermarkets nationwide.  The company did an astonishing $17.5 million in sales in its first year, and was soon featured in The New York Times, Inc., People and “20/20.”  Worth was interviewed on many TV news programs, including a segment about “self-made millionaires” on “CBS This Morning.”  With his round features, high forehead, prominent mustache and forceful personality, he greatly resembled the actor Dennis Franz, who was the then starring as Detective Andy Sipowicz on “NYPD Blue.”  Worth himself starred in two prominent national TV commercials for Avis, with its Worthy tagline, “We’re trying harder than ever.”

Armed with the ideological power of the High-Minded Idealism that had given birth to the industry, but empowered by cutthroat capitalism and a 24-gauge double barrel shotgun of a personality, Richard Worth and R.W. Frookies were the consummate brand of a changed industry.  Worth’s original goal of building a $100 million company in five years soon gave way to something even larger and more disruptive – perhaps even hubristic: he intended to buy Keebler, and gradually remove the trans-fats and sugar from their products.  “They would become a non-negative company,” said Worth, “and a positive force when they saw their margins jump and… moved into health.  The country would be more healthy.  The country would have more organic farmers like me.  The country would change Europe!”

And with Frookies riding the crest of the biggest, most sustained wave the food industry had perhaps ever seen, it wasn’t that implausible.  In April of 1994, Frookies pulled off a leveraged buyout of the Delicious Cookie Company, which was three times its size, creating a $65 million business that was larger than all but four other cookie companies in the United States.  Worth then began discussions with friends on Wall Street about a potential $500 million buyout of Keebler.

But it was all too good to be true: the marriage with Delicious Cookie quickly went south because of bad purchasing, dealmaking and accounting.  Frookies sales declined for four straight years.  In August, 1997, Worth accepted a buyout package that included stock, five years of consulting fees, and a licensing agreement for one of the other product lines he had started, Cool Fruits.  Carl Icahn purchased a 16% stake in the company in April of 1999 to prop it up temporarily, but the following year, the assets were sold to a subsidiary of Parmalat SpA, the Italian company, which shortly thereafter got involved in financial fraud and money laundering.  Frookies disappeared from the shelves forever, almost as quickly as they had appeared.

In the end, the Frookies tale turned out to be more myth than fairy tale, and Richard Worth more Icarus than Alger’s Ragged Dick.  Frookies changed the natural foods industry, along with other popular crossover brands like Earthbound Farm, Odwalla, Horizon, Organic Valley and Newman’s Own Organics.  It was an almost unimaginable distance from days of brown rice and gnarly fruit, Mo’s 36 Tea and WhiteWave Polar Bean Soy Ice Cream; but ultimately, all that Frookies disrupted was the meteoric rise of its indefatigable founder.

Worth would go on to other ventures, notching 11 different businesses on his entrepreneurial bedpost.  Today, in his 60s and living in semi-retirement in Asheville, NC, the fire still burns within.  He has kicked around the idea of writing an autobiography entitled Despite Myself (“despite the craziness, despite the eccentricity, despite all kinds of things, I succeeded”).  He insists that he could still create a new business in four days.  “I don’t care.  [Just] drive me down the street.”  And, even though he has not gone into a natural foods store in years, he says he has a third eye so he knows that the cookie category is mediocre.  “If I came back?” he says with a glint in his eye.  “If I got funded?  I’d wreck it.  I’D WRECK IT!  I’d be number one within six months!”  He probably would.

[i] “USA Today’s Al Neuharth chases new generation,”   by Nat Ives.  Published in Ad Age, June 11, 2007.  Accessed April 20, 2013 at http://adage.com/article/media-people/usa-today-s-al-neuharth-chases-generation/117239/. (Document 317)

[ii] “USA Today Grows Up,” by James McCartney.  Posted on ajr.org.  Accessed April 20, 2013 at http://ajr.org/Article.asp?id=878. (Document 313)

[iii] Op, cit. “USA Today’s Al Neuharth chases new generation.”  (Document 317)

[iv] Op, cit. “USA Today Grows Up.” (Document 313)

[v] Pride, William M., and O.C. Ferrell:  Marketing:  Concepts and Strategies.  Cengage Learning, 2006.

[vi] “Al Neuharth, News Executive Who Built Gannett and USA Today, Is Dead at 89,” by Herbert Buchsbaum.  Published in The New York Times, April 19, 2013.  Accessed April 20, 2013 at http://www.nytimes.com/2013/04/20/business/media/al-neuharth-executive-who-built-gannett-and-usa-today-is-dead-at-89.html?pagewanted=all&_r=0. (Document 314)

[vii] Op. cit. “USA Today Grows Up.” (Document 313)

[viii] “History of Natural Product Sales” in Natural Foods Merchandiser, June, 1993, page 1.

[ix] “HOW TO MAKE YOUR COMPANY MORE RESILIENT,” by Anni Layne.  Published in Fast Company, February 28, 2001.  Accessed April 22, 2013 at http://www.fastcompany.com/63866/how-make-your-company-more-resilient. (Document 319)

[x] Ibid. (Document 319)

[xi] “Odwalla, Inc. History.”  Posted on fundinguniverse.com.  Accessed April 19, 2013 at http://www.fundinguniverse.com/company-histories/odwalla-inc-history/. (Document 312)

[xii] Op cit. The Omnivore’s Dilemma, page 48.

[xiii] “Horizon Organic Holding Corporation History.”  Posted on fundinguniverse.com.  Accessed April 24, 2013 at http://www.fundinguniverse.com/company-histories/horizon-organic-holding-corporation-history/. (Document 321)

[xiv] “Historical Timeline:  a brief history of cow’s milk, from the ancient world to the present.”  Posted August 25, 2011 at milk.procon.org.  Accessed April 24, 2013 at http://milk.procon.org/view.resource.php?resourceID=000832. (Document 322)

[xv] Op. cit. “Horizon Organic Holding Corporation History.”  (Document 321)

[xvi] “Eating Well;A New Goal Beyond Organic: ‘Clean Food’,” by Marian Burros.  Published in The New York Times, February 7, 1996.  Accessed April 24, 2013 at http://www.nytimes.com/1996/02/07/garden/eating-well-a-new-goal-beyond-organic-clean-food.html. (Document 323)

[xvii] As quoted in “George Siemon Surprised to Use Business for Environmental Change,” by Camille Jensen.  Posted on SVN.org.  Accessed March 9, 2013 at http://svn.org/george-siemon-surprised-to-use-business-for-environmental-change. (Document 254)

[xviii] “Case Study: Could Organic Valley Thrive Without Wal-Mart?” by Kermit Pattison.  Published in Inc., July 1, 2007.  Accessed April 25, 2013 at http://www.inc.com/magazine/20070701/casestudy.html, and Op. cit. “George Siemon Surprised to Use Business for Environmental Change.” (Document 325 and Document 254)

[xix] Ibid “Case Study”

[xx] “Organic Valley to Celebrate 25th Anniversary.”  Posted on organicvalley.com, accessed January 14, 2013 at http://www.organicvalley.coop/newsroom/press-releases/details/article/organic-valley-to-celebrate-25th-anniversary/. (Document 112)

[xxi] “Organic Valley Ends Challenging Year with Resiliency:  Farmer-Owned Cooperative Furthers Mission, Experiences Growth Despite Severe Drought and Farming Hardships.”  Posted on organicvalley.com, accessed January 14, 2013 at http://www.organicvalley.coop/newsroom/press-releases/details/article/organic-valley-ends-challenging-year-with-resiliency/. (Document 111)

[xxii] “Fickle Finger of Fat; Nabisco Gives In as Consumers Shun Snackwell’s, Demanding Taste,” by Constance L. Hays.  Published in The New York Times, May 1, 1998.  Accessed April 25, 2013 at http://www.nytimes.com/1998/05/01/business/fickle-finger-fat-nabisco-gives-consumers-shun-snackwell-s-demanding-taste.html?pagewanted=all&src=pm. (Document 327)

[xxiii] Op, cit. The Food Chronology, page 709.

[xxiv] “Low-Fat Food: Feeding Frenzy For Marketers,” by Glenn Collins.  Published in The New York Times, September 27, 1995.  Accessed April 25, 2013 at http://www.nytimes.com/1995/09/27/business/low-fat-food-feeding-frenzy-for-marketers.html?pagewanted=all&src=pm. (Document 328)

[xxv] Op. cit. “Fickle Finger of Fat.” (Document 327)

[xxvi] “And Then There Was the Food,” by Kim Severson.  Published in The New York Times, September 30, 2008.  Accessed April 25, 2013 at http://www.nytimes.com/2008/10/01/dining/01paul.html?n=Top%2fReference%2fTimes%20Topics%2fPeople%2fN%2fNewman%2c%20Paul. (Document 329)

[xxvii] Ibid. (Document 329)

[xxviii] “Fortune Frookies,” by Dan Chu.  Published in People, September 30, 1991, Volume 36, Number 12.  Accessed December 7, 2012 at http://www.people.com/people/archive/article/0,,20110948,00.html.

[xxix] “Worth it!” by Joe Mullich.  Posted on joemullich.com.  Accessed December 7, 2012 at  http://www.joemullich.com/article6.htm. (Document 68)