What's for Dinner? Turnarounds and Trends in the Food Industry
MERU: To start off, we’d love to hear your perspective on trends affecting the food space.
Mike: There is a clear trend of upscaling food. There’s also a convergence of trends that our company is based on, with both millennials and baby boomers. Millennials are mission-driven, wanting to understand where their food comes from. It is important for them to know that the companies they support are responsible for their actions regarding the environment, the community they work in, and the people they employ.
Baby boomers are coming to the same place, but for different reasons. Baby boomers have recently become empty nesters, they have more disposable income, and as they are aging, they are starting to look at their health and what they put into their bodies.
Across most demographics, consumers are demanding taste, nutrition, quality, and transparency of where their food comes from. Weather patterns and changing climates have created many inconsistencies in supply and quality. The produce industry can only deliver the best available product at any particular time. As a result, the produce industry is misaligned with the demands of its consumers.
MERU: Right. And you think the Amazon / Whole Foods deal is responsive to that.
Mike: In my mind, there's a complete misunderstanding of why Whole Foods couldn’t compete with Kroger's organic section. The thought was, “Kroger is selling more organic than Whole Foods, therefore Whole Foods has to lower prices to compete with Kroger.” Yes, Whole Foods will lose some shoppers to Kroger, but what makes Whole Foods special is the shopping experience. Their ability to source unique items that are differentiated. It’s not just organic for the sake of organic, but getting the items that consumers can’t buy elsewhere. The consumer will pay more because they feel great shopping at Whole Foods. They want to support local farms. They feel that they are doing the right thing, putting good nutritious stuff in their body and their children's bodies.
That's the Whole Foods experience. And Amazon I'm convinced understands that in spades. So, I think the merger is a tremendous play.
I think Blue Apron needs to watch out. I think InstaCart should be shaking in their boots.
I think home delivery is going to be revolutionized. I think this has implications across the whole spectrum of adjacent derivative industries here, not just the retailers.
MERU: Let’s shift gears to turnarounds. Tell us about one of the food turnarounds you were involved in.
Mike: Sure. The situation that comes to mind was a national producer of sandwiches, sandwich components, and snacks. I want to be clear, it was a phenomenal team effort. Anyone who’s done this knows how important [having a great team] is.
The company was approximately $700 million in revenue, mid $20s in EBITDA with declining EBITDA margins. It was in bankruptcy. It went bankrupt for all the wrong reasons. They had a wonderful team in place that had been a bit demoralized.
The first thing we did was SKU rationalization. We quickly discovered we had over 2,600 SKUs, over 1,000 were unprofitable. We reduced our SKU numbers in half.
The next phase of the turnaround was a complete manufacturing and supply chain rationalization. We looked at the manufacturing plants we had and the portfolio of products we were going to be selling in nine months as we strategically exited SKUs. We figured out how many manufacturing plants and how many [manufacturing] lines we really needed, the best places for each line, and the right mix of high-speed manufacturing lines and slower lines that we used as changeover lines. And that's it. We restructured and rebuilt our manufacturing base and it didn't require that much capital at all.
The last phase was implementing a completely different go-to-market strategy. We focused on the highest-profitability SKUs, we put in a great R&D program and we introduced a bunch of new products. We got rid of all the non-productive SKUs and drastically changed the markets in which we were playing. As part of this, we really created the lunch sandwich category in Retail. We discovered that we had a product that we weren't taking advantage of, a microwaveable bun that tasted good. We coupled that with proteins we already had and created sandwich assembly plants. We became the ‘Jimmy Dean’ for the lunch category. This allowed us to play in a different space, much bigger than we were. We found this middle-market niche which allowed us to grow and acquire smaller competitors.
MERU: Talk a bit more about the mechanics of what you did on the supply chain rationalization.
Mike: It was a holistic approach. There is a smart way to get out of SKUs. You need to figure out where to raise prices, where to raise minimum quantities, and you let the customer self-eliminate. You take a 9-month exit strategy and you get out of all the SKUs you want in a clean way. If done correctly, you do it without losing the top line by converting the customer to other SKUs that are similar.
MERU: How important was changing management in all of this?
Mike: We took a bankrupt company and we brought the teams together – it was a functional and integrated effort, it wasn’t done in one year, we built on it. To build trust and turn an organization around all constituents need to be included. Private Equity owners were aligned with senior management and after a few easy wins, provided the necessary capital resources and allowed us to hire the people needed and place them in areas such as continuous improvement and product development. Over a 7-year period, revenue grew to over $2B, resulting in nearly 10x EBITDA improvement.
MERU: That’s an amazing accomplishment. Congratulations.
Mike: Thank you. As I said, it was a total team effort.
MERU: Thanks for your time.
Mike: Thank you.
Nick Campbell is a Managing Partner at MERU. He has over 15 years of turnaround experience including multiple years turning around food and distribution businesses.
Kyle Sturgeon is a Managing Partner at MERU. His decade of turnaround experience includes restaurants, retail entertainment chains, and over a year dedicated to the turnaround of a large dairy farm.
Mike Zelkind is the co-founder and CEO of 80 Acres Urban Agriculture. Over his career, he held executive roles with leading domestic and international companies, including Fortune 50 food & beverage, retail, and consumer packaged goods companies.