O'Connor, 50, a native Australian, had been vice-president of food service at The Gorton Group, a fish-processing company in Gloucester, Mass. He was brought aboard a conglomerate that was highly leveraged, fast growing, and in the hands of a president preparing for semiretirement in the backwoods. Sands wanted to adopt the role of chairman of the board, and check in on his growing conglomerate every month or so. In the meantime, the Johnson-Middleby operations, antiquated and long neglected, needed infusions of capital for major renovations. In fact, the entire company required more capital for increased operational expenses. O'Connor arranged a $3.5-million working-capital loan at 1.5% over the prime rate, which then hovered at 8%.
For Sands, it still looked like clear sailing. Commodities needed for the company's operations, such as sugar, cocoa, wheat, and soybeans, remained cheap. Interest rates were stable. Profits appeared certain. At the time, in late 1976, when asked about new markets, Sands was quoted in a regional business magazine as saying: "We are nowhere near saturation, even in the baking industry."
But in 1977, Sands made a move that plunged the company into quicksand. He submitted a bid and won a two-year distribution contract with a buying group for nearly 200 Dunkin' Donuts Inc. stores in New England. The bid was about 80 cents per unit, which meant that Sands, Taylor & Wood would receive that amount for every bucket of syrup, bag of flour, or case of coffee it delivered. Over two years, this was supposed to amount to $18 million a year. Operating costs were expected to amount to roughly 75 cents per unit, but Sands reasoned that although profits would be marginal (they turned out to be nil), he would still improve cash flow, double his volume, and consequently strengthen his bargaining position with his suppliers.
To handle the added volume of goods, the company bought a lease on a warehouse in Andover, Mass., and transferred its corporate headquarters there. The warehouse had to be refitted, a fleet of trucks had to be rented, the Dunkin' Donuts distribution system had to be mastered. But the company had reached almost $45 million in sales, and Sands never lost his optimism. He made yet another acquisition in 1978, paying less than $100,000 for Goodhue Products Inc., a $300,000 maker of frozen bread dough. He even toyed with the idea of putting out frozen dough under the King Arthur name. The scheme never materialized, though, because shortly after the Goodhue purchase, things started to unravel.
In the late '70s, the company was clobbered by three concurrent developments in the national economy. First, commodities prices, which had been depressed, began to turn around, and such essential ingredients as sugar doubled in cost. Second, the energy crisis hit. "When we bid on the Dunkin' Donuts contract [in 1977], gas was 60 cents a gallon," says Sands, noting that one of the major expenses for a distributor is gasoline. "Two years later, it was $1.20." Finally, interest rates began an upward trend that almost brought the company down. In 1981, Sands, Taylor & Wood exhausted its line of credit, prompting the banks to raise interest on the $3.5-million capital loan from 1.5% over prime to 2% over prime. The company found itself paying 22% interest on a loan it had first obtained at 8%; payments had risen from $200,000 a year to $750,000.
Meanwhile, the company was pumping about $2 million a year of its increasingly scarce capital into the distributorship just to keep it running. Operational costs had mushroomed, and it took $450,000 a week merely to fund receivables. The company was losing around $150,000 a year on the deal.
According to Peter Linneman, professor of finance at The Wharton School, over-reaching is a common mistake made by entrepreneurs who seek diversification. "Too many small businessmen overestimate their expertise," he says. "Their company experiences rapid growth and suddenly they think they can do anything. Just because you know flour doesn't necessarily mean you know dough, and just because you know dough doesn't mean you know doughnuts."
In 1978, in the midst of this turmoil, Sands took off for Vermont. The company lost $130,000 that year, the first substantial loss in its history.
Sands remains defensive and unrepentant over his decision to move. "My family came first," he says. "And it still does. Maybe if I had stayed everything would have worked out. But sometimes, you just have to say the hell with it and summon the courage to do what you want."
Nevertheless, the loss shattered Sands's sky-is-the-limit ethos, and he finally realized that the company was out of focus. Cost-cutting measures became imperative. Sands, Taylor & Wood immediately closed Goodhue's inefficient and aging manufacturing plant, saving $60,000 a year in upkeep. An outside manufacturer was contracted to produce the same goods under specification, and the products were then passed to Goodhue for marketing and distribution. He also tightened control of inventory management by trimming down the distributorship's inventories. And, he retired a large part of the company's crushing bank debt by selling off the Andover building and moving back to the old building in Brighton.
Still, it was obvious that the crisis called for harsher measures, so Sands hired out side managers and solicited advice from students working under the direction of his former mentor at the Harvard Graduate School of Business Administration, Ray Goldberg. The first thing they told him was to get rid of the Dunkin' Donuts distribution side of the business and concentrate on manufacturing. In 1979, to no one's dismay, the Dunkin' Donuts distributorship was dropped.
Of Sands, Goldberg says, "Frank was an apt pupil, and what he did made sense on paper. He wanted to minimize cost by adding more products to a distribution line and minimize risks by diversifying those products. In reality, the savings made by adding products were offset by being burdened with new items that weren't unique.
