Quaker Foods North America - Company Profile, Information, Business Description, History, Background Information on Quaker Foods North America



Quaker Tower
555 West Monroe, Suite 16-01
Chicago, Illinois 60604-9001
U.S.A.

Company Perspectives:

You know us by our brands, which have been around for as long as a century. They are symbols of quality, great taste, and nutrition. Holding No. 1 positions in their respective categories are favorites such as Quaker Oats, Quaker Rice Cakes, Chewy Granola Bars and Rice-A-Roni. With its Aunt Jemima brand, Quaker, a unit of PepsiCo Beverages & Foods, is also a leading manufacturer of pancake syrups and mixes. It is among the four largest manufacturers of cold cereals with popular brands like Cap'n Crunch and Life.

History of Quaker Foods North America

Quaker Foods North America has inherited the mantle of the Quaker Oats Company, which was acquired by PepsiCo, Inc. in August 2001. The product of a rocky union between three 19th-century millers, Quaker Oats originally centered around oats, but it was its Gatorade sports drink brand that was its most coveted asset by the late 20th century. Responsibility for Gatorade, however, was shifted post-merger to PepsiCo's beverage operations, while Quaker Oats' snack business, consisting of granola bars and rice cakes, was transferred to PepsiCo's Frito-Lay snack unit. This left the newly named Quaker Foods North America with a predominantly breakfast-oriented product lineup: the flagship Quaker oatmeal, Quaker grits, Cap'n Crunch and Life cereals, Aunt Jemima syrups and pancake mixes, and the Rice-A-Roni, Pasta Roni, and Near East side dish brands. Several Quaker Foods brands--including both Quaker oatmeal and grits, Aunt Jemima syrup, and Rice-A-Roni--lead their category in the U.S. market, though Quaker's cold cereals rank a distant fourth. Quaker Foods focuses exclusively on the United States and Canada, its former international operations having been transferred to other PepsiCo units following the takeover. Quaker is the smallest of PepsiCo's four divisions, generating about 5 percent of the parent company's revenues and 8 percent of its operating profits.

Oatmeal Battles in the 19th Century

Ferdinand Schumacher undertook an ambitious project in 1856 when he organized his German Mills American Oatmeal Factory in Akron, Ohio. His mission was to introduce steel-cut oats to the American table at a time when oats were considered an inappropriate food for anything but horses. German and Irish immigrants were his initial customers, because they were accustomed to eating oats and unused to the high cost of American meat. Oat milling was a low-cost operation, and competitors quickly appeared as oats gained acceptance as a food.

One competitor with an innovative approach to business was Henry Parsons Crowell of nearby Ravenna, Ohio. Crowell purchased the Quaker Mill in Ravenna, gave his oats the Quaker name, and packed them in a sanitary, two-pound paper package with printed cooking directions. He also advertised in newspapers with German, Scottish, and Irish readers, a practice at the time associated with disreputable showmen. Crowell became the first marketer to register a trademark for cereal, registering his Quaker symbol in 1877. (The Quakers--that is the Society of Friends Christian sect--played no role in the development of the Quaker Oats Company.) Soon Crowell's success impinged on Schumacher's business, with urban customers often specifically requesting Quaker brand oats.

Another competitor, Robert Stuart, emigrated with his father from Embro, Ontario, to establish a mill in Cedar Rapids, Iowa, in 1873. Eventually he helped finance the building of a new oatmeal mill in Chicago and expanded the original mill. Under the same label the two mills established markets throughout the Midwest, especially in Chicago, Milwaukee, and Detroit, carefully avoiding territories dominated by Schumacher or Crowell.

In 1885 Crowell and Stuart joined forces in a price war against Schumacher's larger operation. An attempt to form the Oatmeal Millers Association that year failed when Schumacher refused to join. One year later Schumacher's largest mill burned to the ground; Crowell reacted by immediately raising his prices. Because Schumacher had been uninsured, he finally agreed to join Stuart and Crowell in their venture. Crowell became president of the Consolidated Oatmeal Company, Stuart was vice-president, and Schumacher, the former oatmeal king, was treasurer.

Consolidated, however, made up only half of the trade, and the other half was determined to destroy it. Competitors built mills they did not want, knowing Consolidated would purchase them simply to keep them out of production. Half of Consolidated's earnings were spent this way, and in 1888, under financial and legal pressure, it collapsed.

A third and finally successful attempt at consolidation came that same year, when seven of the largest American oat millers united as the American Cereal Company. Schumacher ended up with a controlling interest, and he appointed himself president and Crowell vice-president. The company doubled production in two years by consolidating operations into the two major mills at Cedar Rapids and Akron, Ohio. The concentration of facilities gave them the strength to survive the depression of the 1890s.

Crowell promoted Quaker Oats aggressively during the decade. Schumacher, however, insisted that his own brand, F.S. Brand, be sold alongside Quaker, blunting the success of the better-selling Quaker. Then Stuart crossed Schumacher, the company's treasurer, by purchasing two food companies at bargain prices and investing in machinery for the Cedar Rapids mill. Opposed to both actions, Schumacher requested and secured Stuart's resignation in 1897. The following year he also voted Crowell out of the organization.

The ousted Crowell and Stuart, who together owned 24 percent of American Cereal, quietly began to buy available shares. In 1899, after a proxy fight, Schumacher lost control of the company to Stuart and Crowell. Stuart immediately built new facilities and diversified the product line while Crowell increased promotional efforts. Quaker was now producing wheat cereals, farina, hominy, cornmeal, baby food, and animal feed.

Early Years As Quaker Oats

In 1901 American Cereal became the Quaker Oats Company, with sales of $16 million. Twenty years of growth followed, including a wartime peak of $123 million in sales in 1918. With the 1911 acquisition of Mother's Oats, Quaker owned half of all milling operations east of the Rocky Mountains. (The federal government filed a suit against the purchase, but eventually withdrew its last appeal in 1920, when national interest in trust-busting had faded.) An interest in finding a use for discarded oat hulls led to the establishment of a chemical division in 1921. Although a profitable use for furfural (a chemical produced from oat hulls that has solvent and other properties) did not appear until World War II, postwar sales of the product would exceed oatmeal sales into the 1970s.

Also in 1921 the company weathered a grain-surplus crisis; dealers had been caught with an oversupply and prices fell rapidly, leading that year to the company's first reported loss. Stuart's eldest son John became president of Quaker the following year. John Stuart immediately changed Quaker's retail sales strategy to one of optimum, rather than maximum, sales. The growth of the grocery chains helped to encourage a system of fast turnover rather than bulk purchasing.

Early in the century Crowell and Stuart invested in foreign markets by establishing self-supporting overseas subsidiaries. These subsidiaries operated mills in Europe and sold oats in South America and Asia. Under John Stuart's company reorganization in 1922, foreign operations became a corporate division. Approximately 25 percent of Quaker's sales were derived abroad. During John Stuart's 34 years as CEO, the company increased its toehold on the growing market of ready-to-eat cereals with Puffed Wheat and Puffed Rice. Quaker further diversified its product line by purchasing name brands that were already established, such as Aunt Jemima pancake flour in 1925. Similarly, the company entered the pet food industry through the purchase of Ken-L-Ration in 1942. Internal attempts to develop a cat food failed, and the company eventually purchased Puss 'n Boots brand cat food in 1950.

In 1942 sales reached $90 million. Wartime demand for meat and eggs pumped new life into the sagging animal-feed division as well as boosting sales of the company's grains and prepared mixes. Quaker's furfural became important in the manufacture of synthetic rubber, and during the war Quaker built and ran a bomb-assembly plant for the government.

Postwar Growth and Diversification

In the years that followed World War II, Quaker's sales grew to $277 million generated by 200 different products, a broad product line requiring heavy promotion. John Stuart's younger brother, R. Douglas Stuart, studied under Crowell and assumed control of promotions when John Stuart became CEO. After World War II he adopted the then radical policy of using more than one advertising agency. The Stuart brothers recognized that the grocery industry would continue to expand into pet foods, convenience products, and ready-to-eat cereals, and matched the company's product line and promotions accordingly.

The company's first outside manager, Donald B. Lourie, rose to CEO in 1953. Under Lourie, Quaker retained the atmosphere of a family company with personal leadership. The company needed external support, however, for its increasingly complex marketing decisions. National advertising for the Aunt Jemima brand came at a price of $100,000. The cost of introducing Cap'n Crunch in 1963 was $5 million.

For many food companies, the 1960s were a period of automatic growth as consumer demand for convenience increased and brand recognition grew. For Quaker, however, sales rose just 20 percent and profits only 10 percent as long-term development absorbed earnings. Quaker expanded in the industry's fastest-growing areas: pet foods, convenience foods, and ready-to-eat cereals. By the end of the decade growth rates had increased, but not as much as hoped. Robert D. Stuart, Jr., became CEO in 1966. The decade's slow growth and a general corporate trend toward diversification prompted him to make acquisitions outside the food industry for the first time since 1942. Many of these acquisitions were eventually sold, but Fisher-Price Toy Company, purchased in 1969, was held for more than two decades and grew beyond expectations. Within ten years, it made up 25 percent of Quaker's total sales.

Late in 1970 Stuart restructured Quaker's organization around four decentralized businesses: grocery products, which now included cookies and candy; industrial and institutional foods, which contained the newly acquired Magic Pan Restaurants; toys and recreational products; and international. Sales in 1968 had been frustratingly low at $500 million, but with Stuart's acquisitions, the company reported $2 billion in sales by 1979.



Economic recession during the 1970s kept sales down. A second toy company, Louis Marx Toys, was purchased in 1972. During 1974 and 1975, Marx, which was purchased as a "recession-proof" company, drove earnings per share from $2.04 to $1.45. Magic Pan Restaurant's profits fell for four consecutive years. The chemical division reported a net loss of $7 million when a cheaper substitute for furfural came onto the market. This introduction took the company by surprise, as it expected earnings from that division to climb steadily.

Looking to expand its foreign market in grocery and pet foods, Quaker made seven acquisitions of foreign companies during the decade. But while the company focused on diversification, product development slipped. Between 1970 and 1978, only one new major product, 100 Percent Natural Cereal, was introduced. Shelf space in major grocery chains did not increase. Stuart had successfully lessened the company's dependence on grocery products, but profits also dropped, to a low of $31 million in 1975.

By the end of the decade, however, a turnaround was in sight. Quaker's least profitable areas were limited to its smallest divisions, and since the entire industrial and restaurant industries had been weakening, the company was already preparing to divest its holdings in that field.

William D. Smithburg replaced Stuart as CEO in late 1979. Smithburg aggressively increased Quaker's sales force and advertising budget, improvements that were badly needed. The company also refocused on its core food business. Quaker had two new successes as the 1980s dawned: Ken-L-Ration's Tender Chunks became the second best-selling dog food in its first year, and Corn Bran had a commendable 1.2 percent share of the ready-to-eat cereal market. In addition, Fisher-Price sales had increased tenfold since 1969, to $300 million. Quaker planned to expand the division by building plants in Europe, raising its target age group, and lowering unit selling prices.

By 1979 Quaker had a return on invested capital of 12.3 percent--higher than the industry average, but well below competitor Kellogg's 19.4 percent. The company still needed to divest its interests in companies that absorbed profits.

Addition of Gatorade and Golden Grain in the 1980s

In the first half of the decade, Quaker sold Burry, a cookie maker; Needlecraft; Magic Pan Restaurants; its Mexican toy operations; and its chemical division. During the same period, the company made several acquisitions. Like many food companies at the time, Quaker entered specialty retailing, with such purchases as Jos. A. Bank Clothiers, the Brookstone mail-order company, and Eyelab, all purchased in 1981; all would be sold in late 1986. By then, Smithburg had decided that the price for retail chains was inflated and that Quaker could get a better return on food. He proved himself right. By 1987 Quaker's return on shareholder equity matched Kellogg's. Quaker confirmed its new path with its 1983 acquisition of Stokely-Van Camp, the maker of Gatorade sports drink and Van Camp's pork and beans. By expanding Gatorade's geographic market, Quaker made the drink its top seller in 1987.

Quaker's revival came about through the strong potential of its low-cost acquisitions. Golden Grain Macaroni Company, the maker of Rice-A-Roni, gave the company a base to expand further into prepared foods. Anderson Clayton & Company, purchased in late 1986, gave Quaker a 15 percent share of the pet-food market with its Gaines brand, effectively challenging Ralston Purina's lead in that market.

With the purchase of Anderson Clayton, financed by the sale of its unwanted divisions, Smithburg managed to strengthen Quaker's position in existing markets and improve its product mix without overloading the company with specialty products. Products with leading market shares made up 75 percent of 1987 sales and over half came from brands that Quaker had not owned six years earlier.

The late 1980s tempered that success, however. Pet food sales were flat throughout the industry, and Quaker took $112 million in charges related to its recently expanded pet division. The corporation was a rumored takeover candidate because of its high volume of shares outstanding and its strong branded products. In response, the company announced in April 1989 that it would repurchase seven million of its nearly 80 million outstanding shares, and that July, Smithburg reassigned some managerial duties. The company also decreased its advertising and marketing expenses.

Refocusing on Food and Beverages in the 1990s

Despite some setbacks, Quaker entered the 1990s with 14 years of unbroken sales growth. The company concentrated on three major divisions: American and Canadian grocery products; international grocery products; and Fisher-Price toys. Still, Quaker continued to streamline its operations into the early 1990s, spinning off Fisher-Price Toys in 1991, a move that made Quaker solely a packaged-foods company for the first time in over 20 years. Sales that year hit a record $5.5 billion, and over 70 percent of the products in Quaker's portfolio held either the first- or second-place position in their segments. Quaker's international sales continued to comprise a significant percentage of the company's total, and in 1991 the company restructured both its European and Latin American operations to focus marketing on a continental, as opposed to a country-by-country, basis.

As it divested itself of its nongrocery products, Quaker continued to expand its packaged foods portfolio. Its concentration was on healthful food brands, such as Near East rice and pasta products, Chico-San rice cakes, and Petrofsky's bagels, all acquired in 1993. The buying spree continued through 1994 and into 1995 with the acquisitions of Proof & Bake frozen bagels, Maryland Club coffee, Arnie's Bagelicious Bagels, and Nile Spice Foods, a maker of dried soups, pasta, and beans.

Quaker's largest acquisition was its 1994 purchase of Snapple Beverage Corporation, a maker of ready-to-drink juice beverages and teas, for $1.7 billion. Some industry experts considered the price too high for this upstart company with annual sales just below $1 billion, but the purchase boosted Quaker's share of the nonalcoholic beverage market significantly. With combined sales of over $2 billion, Quaker was now the nation's third largest producer of nonalcoholic beverages.

On the international front, Quaker continued its aggressive Gatorade marketing drive, and by 1994 the beverage was available in 25 countries across Latin America, Asia, and Europe. The company also strengthened its foothold in the Latin American food products market with the 1994 acquisition of Adria Produtos Alimenticos, Ltd., Brazil's top pasta manufacturer. Although much of Quaker's expansion was through acquisitions, the company also sought to grow its product portfolio internally, especially in its historically strong rice and grains category. Between 1992 and 1995, volume in that category tripled with the addition of new products such as Quaker chewy granola bars and flavored rice cakes. Companywide sales in 1994 hit $5.95 billion, a record high for the 19th consecutive year.

Despite its record sales figures, Quaker's overall financial outlook was not so bright as it entered 1995. Because of the acquisition of Snapple, Quaker held a high debt to total capitalization ratio and felt it necessary to divest itself of a number of businesses in early 1995. In March, H.J. Heinz Company acquired Quaker's U.S. and Canadian pet foods operations for $725 million. The following month, Quaker's European pet foods division was sold to Dalgety PLC for $700 million. Other 1995 divestitures included a Mexican chocolates business and the Wolf/Van Camp's bean and chili businesses. The selloff continued in 1996 with the sale of the company's U.S. and Canadian frozen food business to Van de Kamp's (eventually part of Pinnacle Foods) for $185.8 million.

While Quaker worked to pay down debt incurred with the Snapple acquisition, it also almost immediately found that it had paid dearly for a faltering brand. In hindsight, it became clear that Quaker had bought Snapple just as the brand reached its peak. Imitators were quick to enter the tea drink market, including Arizona Iced Tea, Mystic, and Nantucket Nectars. Even worse, soft drink giants Coca-Cola Company and PepsiCo, Inc. entered the sector through alliances with Nestea and Lipton, respectively. By the end of 1996 Lipton had claimed 33 percent of the market and Nestea 18 percent, while Snapple was left with only a 15 percent share. In addition to the increased competition, Snapple was also hurt by distribution problems and failed marketing campaigns.

By early 1997 Quaker Oats had suffered Snapple-related losses and charges of more than $100 million. Unable to turn the brand around, and facing pressure from angry shareholders, Quaker sold Snapple to Triarc Companies, Inc., owner of RC Cola and the Arby's restaurant chain, for $300 million. It also took a $1.4 billion pretax charge--essentially the difference between the purchase and selling prices. This led to a net loss for the year of $930.9 million. The Snapple debacle also led to the departure of Smithburg, who was replaced as chairman, president, and CEO by Robert S. Morrison, a former head of Kraft Foods' North American operations, in October 1997.

Almost immediately, Morrison took several decisive measures. Feeling that for a relatively small food company Quaker had an overall complex management structure, Morrison eliminated an entire layer of top management, then elevated ten managers to head the company's main brands, with each reporting directly to the new CEO. He also initiated a number of restructuring moves, including a consolidation of U.S. sales operations, a streamlining of the worldwide supply chain, and the realigning of Quaker's overseas units. These and other moves led to $65 million in savings during 1998. Morrison also took a hard-line approach to the company's brand portfolio, jettisoning those product lines identified as underperforming. Four such brands were sold during 1998 for a total of $192.7 million: Ardmore Farms juice, Continental Coffee, Nile Spice, and Liqui-Dri foodservice biscuits and mixes. The sale of the troubled Adria pasta brand followed in 1999.

Approaching the turn of the millennium, Quaker Oats appeared to be a company on the rebound, with net income increasing from $284.5 million in 1998 to $455 million in 1999. The Gatorade brand was leading the way, generating about 38 percent of overall sales and a like percentage of operating profits. In late 1999 the company announced a 10 percent workforce reduction, equivalent to about 1,400 employees, as part of a cost-saving plan centering around Quaker's slower growing cereal operations. At the same time the company said it would increase production capacity for Gatorade through a $230 million to $245 million expansion program. In addition, as part of revitalized new product development initiatives, Quaker Oats in early 2000 was planning the introductions of a Gatorade-branded bottled water called Propel (which included some of the beneficial nutrients featured in Gatorade but with one-fifth the calories), Gatorade energy bars, and a juice drink dubbed Torq, which was heavier in carbohydrates and calories than Gatorade.

Beginning of the PepsiCo Era in the Early 2000s

As Morrison engineered this turnaround, a number of analysts began predicting that the CEO was getting Quaker Oats in shape for a sale. Quaker was a relatively small player in the U.S. food industry, which was rapidly consolidating, and its powerhouse Gatorade brand made it a particularly attractive target. Sales of Gatorade had reached $1.8 billion in 1999, up from a mere $100 million in 1984 when Quaker bought the brand. It controlled an astounding 86 percent of the sports drink category in the supermarket channel and an equally impressive 83 percent in convenience stores. The desire to gain ownership of Gatorade led three of the largest beverage companies in the world to make bids for Quaker Oats during a rather wild couple of months in late 2000.

In early November PepsiCo offered to pay $14.8 billion in stock for Quaker, but the latter rejected that offer as too low, and PepsiCo walked away. Later that same month the CEO of the Coca-Cola Company, PepsiCo's archrival, engineered a tentative deal to take over Quaker for $15.75 billion in stock, but at the last minute Coca-Cola's board pulled the plug on the deal, mainly concerned that the price was too high. Just days later, Paris-based Groupe Danone terminated its discussions with Quaker as well. PepsiCo then reentered the picture and finally sealed a deal in early December. The terms were essentially the same as PepsiCo's earlier offer: 2.3 shares of its stock for each share of Quaker. When the deal was completed on August 2, 2001, this translated into a final purchase price of $14 billion.

Once the deal was consummated, there were numerous changes at Quaker. The company was essentially broken apart, with various brands and operations moving to other PepsiCo areas. Responsibility for Gatorade, the biggest prize, was shifted to the parent company's beverage operations. Quaker's snack brands, which included Quaker Chewy granola bars, Quaker Fruit and Oatmeal bars, and Quaker Quakes rice cakes, became part of a new convenience-food unit within Frito-Lay North America, PepsiCo's giant snack food division. Oversight of Quaker's international businesses was transferred to Frito-Lay International and eventually became part of the PepsiCo International division, which was created in 2003 and took over responsibility for all of the parent company's snack, beverage, and food units outside North America. Soon after being acquired by PespiCo, then, the newly renamed Quaker Foods North America had a much smaller portfolio of brands, and its operations were limited to the United States and Canada. It now had a predominantly breakfast-oriented product lineup consisting primarily of Quaker oatmeal, Quaker grits, Cap'n Crunch and Life cereals, Aunt Jemima syrups and pancake mixes, and the Rice-A-Roni, Pasta Roni, and Near East side dish brands.

The product lineup was trimmed further via two divestments. Late in 2002 Quaker's U.S. bagged cereal business, which had generated 2001 revenues of $100 million, was sold to Malt-O-Meal Company. The deal included a line of 40 bagged cereals marketed under the Quaker brand, including Frosted Flakes, Marshmallow Safari, Apple Zaps, and Cocoa Blasts. The acquirer gained the right to temporarily use the Quaker name under license but converted the products to the Malt-O-Meal brand by early 2004. Early in 2003 Quaker's Golden Grain/Mission pasta brand was sold to American Italian Pasta Company for approximately $43 million plus inventory. Revenues for this divested business totaled $27 million in 2002. These divestments further reduced the revenues generated by Quaker Foods. By far the smallest of PepsiCo's four divisions, Quaker posted sales of just $1.47 billion in 2003, representing 5 percent of the parent company's total. Quaker was nevertheless solidly profitable, and its operating profit of $486 million comprised 8 percent of PepsiCo's overall figure.

Morrison remained in charge of Quaker Foods (and the Gatorade and Tropicana businesses) until February 2003, when he retired. Later in the year Mary Dillon was named president of Quaker Foods, having previously served as vice-president of marketing. In her former position, Dillon had overseen the successful launch earlier in 2003 of Quaker Oatmeal Breakfast Squares, a breakfast bar touted to have a "bowl of instant oatmeal baked into every delicious, moist square." A number of the new products introduced over the next two years were aimed at fulfilling consumers' demands for more healthful food options. Among the products launched in 2004 were Quaker Lower Sugar Instant Oatmeal, which contained half the sugar of regular instant oatmeal, and Cap'n Crunch's Swirled Berries, which included a third less sugar than regular Cap'n Crunch. In early 2005 Quaker Take Heart Instant Oatmeal debuted, with two features aimed at fighting heart disease: it included 50 percent more soluble fiber from whole-grain oats to help reduce cholesterol, and it supplied higher amounts of potassium to help lower blood pressure.

To at least some observers Quaker Foods was a poor fit for PepsiCo given that the parent company was predominantly a beverage and snack food company. They suggested that PepsiCo would do well to sell off the remaining Quaker brands. But PepsiCo had no immediate plans to do so, one reason being that Quaker enjoyed a reputation as a healthful brand, an important asset in the health-conscious early 21st century. Additionally, PepsiCo adopted a new strategy in 2004 whereby it began seeking ways of gaining growth by marketing the breakfast products of Quaker alongside the quintessential breakfast drinks of Tropicana. To aid in this effort, the juice maker's headquarters were shifted in 2004 from Bradenton, Florida, to Chicago, where Quaker Foods was still based. These developments nevertheless left open the possibility that PepsiCo might divest Quaker's side dish brands, Rice-A-Roni, Near East, and the like, which clearly did not mesh with the new strategy.

Principal Competitors: Kellogg Company; General Mills, Inc.; Kraft Foods, Inc.

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