The Revenge Of The Fortune 500
Mark Sherman is a man obsessed by a radical marketing vision. The onetime proprietor of Gathering Winds, a tiny natural-foods company in upstate New York, he set off a year ago to seek a far more lucrative niche among the upscale shoppers of suburban Washington, D.C.
"As an entrepreneur, I go where the opportunities are," said the slender, 35-year-old Sherman as he inspected a supermarket kiosk stocked with prepared gourmet dishes -- Sole Veronique, Chicken Salad Jacques -- from his Today's Taste line. "There's a huge need for natural-food products for a market segment that isn't being served yet. Eldridge Cleaver used to say that you're either part of the solution or part of the problem. Here I'm effecting a solution in terms of fresh foods and the needs of the market."
Should this unrehabilitated child of the '60s, as Sherman calls himself, succeed in his mission, the effect could be revolutionary indeed for the nation's booming $11-billion specialty-foods industry. By offering fresh, low-fat, low-salt prepared foods at the supermarket counter, Sherman would pose a major challenge to the delicatessens, gourmet shops, and restaurants that have been fattening themselves on a market now growing some 20% a year.
The real threat, however, is not Sherman's messianic marketing concept, but the power that stands behind it. For while Sherman considers himself a small-business man at heart and calls Today's Taste "a university for entrepreneurial learning," the people paying the tuition -- and Sherman's fat consultant's fee -- hail from one of America's most venerable corporate institutions: Campbell Soup Co.
Some executives at the Camden, N.J.-based giant, which had sales of $3.7 billion last year, think its prepared gourmet food experiment might blossom into a $100-million business over the next few years. And Sherman's pilot project is just one part of the company's wide-ranging drive to expand outside its mainstream grocery business -- and into product lines hitherto dominated by small companies.
Much of this drive revolves around what Campbell marketing research director Tony Adams calls consumer "hot buttons" -- buzzwords like "fresh," "healthful," and "high quality." Fresh Chef, for instance, a project now being test-marketed in the Denver area, offers a line of salads that, like Today's Taste, could end up competing with thousands of specialized food packagers, stores, and restaurants.
"There's a sense of entitlement [among consumers] for top-quality food that entrepreneurs have captured really well," explains Adams. "If we're not participating in this type of business, we could end up competing for only 50% of the food dollar. We cannot stick with our traditional business alone. We must find new directions."
"IT'S LIKE GULLIVER IS GETTING UP"
"New directions" is an innocuoussounding phrase, but make no mistake: When a company the size of Campbell changes direction, small companies don't want to be in its path. And it isn't only food companies that need to look over their shoulders these days.
What is happening at Campbell reflects a broader trend among the Fortune 500 toward a more sophisticated form of giantism. By marrying the inherent advantages of bigness with the customer-oriented marketing savvy characteristic of small organizations, these increasingly intelligent leviathans are threatening the long-range health of literally thousands of small entrepreneurial companies.
"I don't think a company can stay small today and survive," says veteran Florida-based consumer product developer Wilson L. Harrell (see "Profile of a Compulsive Entrepreneur," April, page 78). "Any major company today knows more about the niche business than the entrepreneur running the company. Used to be the major companies had a syndrome: If they didn't think of it, it couldn't be right. But so many new products in the past decade came out of small companies and big companies have found that buying or imitating is easier than developing internally."
Harrell, of course, is overstating the case. Not every large company in America has learned the art of niche-marketing, and many small companies have found ways to survive onslaughts by the giants (see sidebar, page 41). What's more, the much-ballyhood notion of "intrapreneurship" -- the attempt to apply entrepreneurial techniques within large organizations -- is no more than a fad in many companies and, like most fads, it may fade before it has much lasting effect.
When a major corporation does develop an entrepreneurial intelligence, however -- or even an approximation of one -- entrepreneurs in the same industry have serious cause for concern. One obvious example is microcomputers. Just a few years ago, Adam Osborne scornfully predicted that IBM Corp. could never adjust to the fast pace of the personal computer business. Yet within three years of setting up its separate Personal Computer business unit in Boca Raton, Fla., IBM established a dominant 40% market share in the $6.6-billion industry, helping to drive many smaller competitors, including Osborne's company, into bankruptcy.
And some innovation-conscious giants are doing more than just attacking markets created by smaller companies. Increasingly, they are introducing new product lines before their entrepreneurial competitors can get out of the starting gate.
Twenty years ago, the conventional wisdom was to ignore niche markets until someone else had proved there was a large business to be had. Former Faberge Inc. executive Bob Berglass, for example, remembers pleading with Faberge management to get into the men's hair-coloring business in the late 1960s. "They told me it wasn't a big enough category," recalls Berglass, now president and chairman of DEP Corp., a Rancho Dominguez, Calif., cosmetics manufacturer with sales last year of $18.7 million. "They said, 'Real men don't color their hair.' So out of the blue comes Grecian Formula, and all of a sudden, there's a $20-million-to-$25-million business, and they own half of it."
Today, Berglass has firsthand evidence that large companies are much more aggressive. Early in 1984, DEP -- a company based largely on a line of hair-styling gels -- found itelf competing with the styling mousse, a product introduced by cosmetics giant L'Oreal and soon followed by similar products from the likes of Revlon Inc. and Alberto-Culver Co. Despite its smaller size, DEP could not beat the giants to the punch.
"The big companies now realize they have to go into every possible category that can grow," Berglass says. "It's scary that the sleeping giants have woken up. It's like Gulliver is getting up -- and the Lilliputians are getting nervous."
"WE WERE SCARED OF GETTING WIPED OUT"
What woke Gulliver up? What inspired a company like Campbell to move away from almost total reliance on its established product lines and toward a marketing strategy that challenges entrepreneurs for control of the food industry's key growth areas?
"We were scared of getting wiped out," explains Campbell president R. Gordon McGovern, the lanky 58-year-old marketer who was promoted five years ago from the company's Pepperidge Farm Inc. subsidiary. "We sensed the world was changing. If we didn't pick up what the entrepreneurs were doing, we figured we'd end up like the dinosaurs."
Extinction might seem an unlikely fate for such a large and well-anchored company. Yet when McGovern became president in 1980, there was ample cause for concern.
For decades, Campbell had relied on its superb manufacturing technology, its easy access to domestic and international raw materials, and its marketing and distribution power to dominate the condensed-soup market (in which it accounts for some 80% of U.S. sales). In addition -- through in-house development or acquisitions -- it had established itself as either the first or second player in such mass-market areas as canned beans, vegetable juice, pickles, and TV dinners.
By the early 1980s, however, many of these categories seemed to be losing consumer appeal. From 1975 to 1981, shipments of Campbell's classic line of "red and white" soups dropped from 55.5 million cases to 49 million; sales of the company's Swanson TV Dinners dropped from 16.4 million cases in 1975 to 10.5 million in 1982. In fact, over the past two years, sales of dry grocery items in general have been steadily decreasing, while other food sectors -- notably restaurants and refrigerated items -- have expanded. Meanwhile, sales of high-quality specialty foods are up from an estimated $6.8 billion to more than $11 billion since 1980, and -- according to Frost & Sullivan, a New York City -- based market research firm -- they could hit $20 billion by 1990.
These trends helped keep Campbell's annual growth at 8% during the past 10 years, far below the industry average of 12% to 13%. Not surprisingly, the company's stock remained fairly flat throughout the period. "Campbell was very, very conservatively run -- kind of like a utility company: low growth, low profitability," says William Leach, an analyst for the New York City -- based securities firm Donaldson, Lufkin & Jenrette. "A friend used to say that following Campbell was like sitting and watching the grass grow."
Yet upper management seemed ill-prepared to switch gears. Harold Shaub, McGovern's predecessor, bristles at the suggestion that McGovern was brought in to revitalize a company in trouble, pointing out that Campbell remained dominant in its key markets and maintained exceptionally high bond credit ratings throughout his eight-year reign. "Stodgy? Ok, let's accept that," says Shaub, now retired, who was known as a tight-lipped, production-oriented executive. "But the company served its consumers, its employees, and its stockholders very well. . . . I didn't think we needed a change, necessarily."
When McGovern -- who was Shaub's personal choice as a successor, and who claims that Shaub did see problems on the horizon -- took charge, this defensive attitude began to shift. "Before, our whole world was Camden," recalls Martin B. Buchalski, a 17-year company veteran who now runs the refrigerated-foods business unit. "McGovern changed all that. Our strategy became tied not just to what was happening here, but to what was happening in the outside world."
"When I got here, we were driven by the consumer about 5%," McGovern says bluntly. "We made the tomato soup and you bought it." If the company had not changed, he believes, "We would have lost units; we would have lost market shares; we would have been chasing cost advantages that would have been eroded by reduced volumes.
"I'm a biologist," he continues -- he has an A.B. in biology from Brown University to go with his Harvard MBA -- "and I think that ultimately, either you're growing or you're dying."
LOOKING FOR THE ENTREPRENEURIAL ITCH
Convinced that Campbell was missing the action in the food business, McGovern began looking for inspiration, not from within his own 116-year-old company, but from entrepreneurs like Murray Lender of Lender's Bagel Bakery and Mo Siegel of Celestial Seasonings Inc. "Both those guys taught me a lot," he says. "They had the right feedback systems. They were quick to act. It takes us too long to get things through management."
To overcome that weakness, McGovern broke Campbell into some 50 independent business units -- averaging $50 million in sales -- and gave each a charter to develop its own products. Each business unit has its own general manager who, as effective chief executive officer, has under him a marketing director, controller, and product development staff.
"McGovern lets the managers play on their own until he hears the glass break," observes one company insider. "Everyone goes out, comes up with ideas, and competes for resources. Each unit is run like an independent company except that McGovern plays the banker."
This decentralized system represents a dramatic shift from a past in which Campbell's research and development department in Camden worked in splendid isolation from the line managers charged with marketing their creations -- a process that, not surprisingly, led to the development of products that were incompatible with actual market conditions. For instance, McGovern recalls the time that the R&D staff approached him at Pepperidge Farm with a frozen cheesecake they had been working on for two years. The cake was good -- except that it tasted exactly like the competing Sara Lee product.
Now, innovation seems rampant at Campbell. In 1984 alone, the company introduced 92 new products, bringing its five-year total to 334 -- far more than such larger competitors as Beatrice, Nestle, and General Foods. And although not all the new products have been clear successes (some, such as Pepperidge Farm's Star Wars cookies, were notable failures), others have reaped spectacular rewards. Two new products introduced in 1983, Prego Spaghetti Sauce and Le Menu Frozen Dinners, already contribute a combined $450 million a year to Campbell's coffers.
From 1980 to 1984, the company's sales rose 43% while earnings climbed 57%. Its 11% sales growth last year was more than twice that of such competitors as General Mills, General Foods, and Nabisco Brands. Campbell's stock price has more than doubled in the past two years, to nearly 40 points above its highest level in the '70s.
These strong results, along with a flood of favorable publicity in the business press, have helped McGovern recruit a new cadre of tough, marketing-oriented executives. These young managers -- who McGovern sees as central to the company's drive into new markets -- are also the reason why Campbell is currently revising its compensation schemes along more entrepreneurial lines. Eventually, top executives may receive up to 50% of their pay in the form of incentive bonuses.
"We are looking for people who are not so crazy as to sell their house or their mother-in-law to start a business; we are looking for someone who has that kind of [entrepreneurial] itch, but doesn't want to go all the way," McGovern explains. "Can you succeed in these markets with that kind of person? I think you can."
SOUPING UP THE SOUPS
Real entrepreneurs -- the kind who do go all the way -- might well be skeptical: There are serious questions as to how fast Gordon McGovern, or anyone else, can change the culture of a corporate behemoth, assuming he can do it at all. Even if the changes are slow, however, and even if Campbell can never be truly entrepreneurial, a half-awake giant is more dangerous competition than a sheeping one.
McGovern's new breed of manager is most visible on such trendy projects as Today's Taste. Yet even in the supposedly safe soup area, Campbell's president -- concerned about inroads by such specialty companies as Ogden Corp.'s Progresso Quality Foods and scores of smaller businesses -- has brought in younger people with the marketing flair to deal with niche-oriented upstarts.
Larry A. Carpenter, a 29-year-old senior marketing manager in the soup business unit, epitomizes the sort of quasi-entrepreneur now in ascendance in Camden.Clean-cut and immaculately pin-striped, Carpenter once considered launching his own company. Lured instead to Campbell from Procter & Gamble Co., he now claims that he is enjoying "the best of both worlds" -- the autonomy and new-production orientation of a start-up combined with the security that comes from working at a huge, multinational corporation.
"Everybody in this age has that entrepreneurial desire," Carpenter says. "But I like the security of a company that's been around since 1869 and has sound financials."
Equally important, Campbell has given Carpenter major responsibility for the revitalization of a product line that last year accounted for nearly $1 billion in sales. During the past year, he has presided over an array of new product introductions, including several premium lines, such as Creamy Natural Soups. "This place is a marketer's dream," he says. "What mom-and-pop operation could give you these resources to develop new products?"
For Carpenter, it may be a dream -- but for small soup companies, it is a nightmare come true. By going after regional, gourmet, and health-food markets, Campbell threatens to annex the few inches of the soup shelf it doesn't already control.
"Things seem to be happening at a frantic pace at Campbell," says a concerned Jody Graves, president of Real Fresh Inc., a Visalia, Calif., food packer that makes a line of specialty soups called Andersen's. "It's affected our business -- and not in a positive way. It's getting tougher all the time to get that shelf space."
It is not hard to appreciate Graves's predicament. Campbell still has the same basic size advantage that has long made it the dominant force in soups. Now its new lines are competing for the same upscale customers who have been buying Andersen's Split Pea, Split Pea with Bacon, Tomato, and Cream of Potato soups.
Under such pressure, Real Fresh, whose sales slowed in 1983 and '84, has been forced to beef up its marketing operation, concentrating on its California base. "These days, it seems Campbell wants to be everywhere," observes Real Fresh district sales manager Don Wagner, who projects well under $10 million in sales for the Andersen's line in 1985 despite a recent upturn. "They have the bread-and-butter of condensed soups. They have the chunky soups. They have the new creamy natural and the summer soups coming up.
"It's clear they want to be Mr. Soup, and they're marching out their specialty soups to do it. What can I say? Good marketing."
IF YOU CAN'T BEAT 'EM, BUY 'EM
In soups, obviously, Campbell has an edge; all it has to do is identify the niches and move in. But what happens when it goes after niches it knows nothing about, where the odds might favor David over Goliath? The easiest thing may be for Goliath to buy David, fatten him up, and turn him loose on any other upstarts in the neighborhood.
Acquisitions have helped increase the percentage of food-industry assets held by the 50 largest players from slightly more than 30% in 1950 to almost 60% today. From 1981 to 1984, there were more than 250 recorded mergers in the industry, with a total price tag of roughly $15 billion. Media attention has focused on the large-scale mergers. Yet just as significant, perhaps, has been the giants' increasing interest in small companies. Over the past two years alone, some of the most promising entrepreneurial concerns -- including Celestial Seasonings, Hain's Pure Food, Lender's Bagel Bakery, Haagen-Dazs, and rice-cake maker Chico-San -- have been swallowed up by larger companies eager to cash in on fast-growing niches.
"Companies are getting bought very early in their histories, with sales usually well under $50 million," observes Tomi Simic, vice-president of research for W.T. Grimm & Co., a Chicago firm specializing in mergers and acquisitions. "Will we ever see someone build another Campbell? I don't know. It's terribly hard to build a large company like that anymore."
Gordon McGovern agrees. In fact, given the new marketing acuity of the giants -- as well as their long-standing financial and manufacturing leverage -- he believes that small growth companies in the food industry now have three basic options: stay small, get acquired, or get crushed.
"We look at them once they come up on our screen," McGovern says. "Once they get anywhere, they'll have five people offering them 25 times earnings. If they stay independent, they'll get crushed. Mid-size is the danger point. There won't be any small regional business puffing along on the margins anymore."
Many in the food industry think McGovern is right. If he is, things will get a lot tougher for entrepreneurs like Joseph Unanue.
Unanue is president of Goya Foods Inc., the nation's largest Hispanic-owned food company, based in Secaucus, N. J. Long the dominant player in its niche, with 1984 sales of just under $200 million, the family-owned Goya suddenly found Campbell in its backyard last year when McGovern's company acquired Casera Foods Inc., a longtime Goya competitor with sales of roughly $50 million. "When the news came, we all thought about it," Unanue admits. "When they do whatever they do, they'll come hitting hard -- Campbell is a very good company and a very profit-minded company."
Yet despite his respect for Campbell, the Brooklyn-born Unanue radiates an almost eerie confidence. For one thing, he believes Hispanics will remain loyal to "the foods they grew up with." He also suspects that large companies will have trouble penetrating the network of small markets, or bodegas, that account for up to half the food purchases by Spanish speakers in such cities as New York. Finally, Unanue believes that as a public company, Campbell lacks the patience to expand Casera's market presence -- now largely concentrated in Puerto Rico -- onto the mainland. "Will [Campbell's] stockholders be happy about this," he asks with a shrug, "if it doesn't bring in the money right away?"
Unanue, however, may be living in the past.Under the type of managers who dominated large corporations in previous decades, there may have been a tendency for a company like Campbell to give up at the first sign of trouble. But Gordon McGovern is no green-eyeshade bean counter, unable to see beyond the next quarterly statement. He has shown a remarkable willingness to endure short-term losses for the promise of long-term profits.
Nor is it wise to underestimate the resources Campbell brings to Casera. For one thing, Campbell offers a ready-made national distribution system that can penetrate mainstream supermarkets across the country. In addition, Campbell has year-round access to high-quality raw materials at prices no smaller company can match. And using teams of manufacturing experts, Campbell has cut Casera's production costs by as much as 2% in one year -- allowing it to hold the line on prices and appeal to budget-conscious consumers.
"Casera provides the authenticity, and they know the Hispanic market. We provide the new equipment, the operations experience, the industrial engineering," explains Kirk W. Leighton, the group general manager at Campbell with responsibility for the Casera operation. "They have all the makings of a predominant player, and we think we can help get them there."
THE IMPORTANCE OF BEING CAMPBELL
Casera may not get there overnight; it may be years before Goya Foods feels the pressure. But one of the most frightening things about a Campbell-size company is that, unlike a smaller competitor, it doesn't have to win in the short run. And it is Campbell's willingness to make mistakes and sustain losses, finally, that makes it such a threat to entrepreneurs.
When the company decided in 1981 to start marketing pure fruit juice, for example, it expected to emerge quickly as a dominant player. The competition consisted largely of small health-food companies and independent packers; none of Campbell's fellow leviathans seemed about to come out with the same product.
Yet Campbell's push into the blended fruit juice business -- which grew 25% from September 1983 to September 1984 -- has been plagued by a series of major marketing mistakes. For one thing, the company rolled out production so cautiously that the JuiceWorks program has yet to achieve national distribution. And such major competitors as Welch Foods Inc. and Libby, McNeill & Libby Inc. had their own products out before the people in Camden knew what hit them.
"The concept was one of the best ever -- to create a product that could compete with Hawaiian Punch and still be good for kids," recalls Gary Hess, general manager of Campbell's beverages business unit. "But we goofed around with it so long that we were no longer the first in the market."
"Doing things with Campbell has been hard," says Terry Simmers, president of Juice Bowl Products Inc. -- a Lakeland, Fla., company acquired by Campbell in 1982 -- who has been involved in the JuiceWorks project. "Working in a small company, you're used to making quick decisions. But it takes so much trouble to move products through all the layers of decision making that sometimes you forget what you're deciding. I'm still trying to learn about that bureaucracy so I can get around it."
Other problems grew out of the company's inexperience with marketing fruit juices. Distribution was slowed because Campbell -- used to being the big boy on the block -- refused at first to give direct shipment discounts, and offered supermarkets lower-than-normal price promotions with higher-than-normal volume and advertising requirements. The strategy backfired when stores refused to be bullied: They didn't need Campbell for juice the way they did for soup. "We tried to impose our product without listening," admits Hess, who assumed control of the beverages unit in November 1984. "We shoved it down their throats, and they shoved it right back."
As a result of the delays, marketing blunders, and other problems, JuiceWorks is expected to reach only half the $80 million to $100 million in sales originally projected for 1985. Yet despite losses estimated to be in excess of $4 million, Hess and his team of young managers have been assured of continued corporate support -- including a projected $20-million marketing war chest -- for the JuiceWorks line.
To a student of large-company behavior, the decision looks like an admirable commitment to a long-term marketing vision. But to a smaller company seeking a sip of the juice business for itself, Campbell's persistence looks like nothing but trouble.
"They have so much money, they can toss those products out in the marketplace without understanding it," says Gary Scaife, vice-president and director of marketing of International Beverage Importers Inc., a tiny Westlake Village, Calif.-based concern that started marketing natural juices in 1980. "Sometimes just throwing money at problems doesn't solve them, but it sure doesn't hurt. Hell, I could probably retire with all the money they've spent learning the business."
Scaife's frustration with Campbell's ability to absorb its blunders is understandable.After selling his previous company, he put together some $300,000 to launch International Beverage. Seeking a marketing ploy to compensate for his limited budget, Scaife called his product Popeye Punch, licensing the trademark from King Features Syndicate. Unable to finance his own manufacturing, he had the new juice supplied by a local packer; as is customary for smaller companies, he sold it through food brokers. But soon his plans began to unravel.
Even as Popeye Punch was being introduced, Libby, Borden, and Campbell entered the same product category. Then came the kind of error a start-up with major competition simply cannot afford. A defect in the punch's blend caused a white ring to form around the edge of each juice bottle. Forced to pull his product off the market, Scaife spent several months looking for another formula, a process that cost him two seasons' worth of orders. Sales for 1984, which he had hoped would hit $2 million, failed to reach the $1-million mark. Losses mounted, and for the time being, Scaife has all but given up trying to penetrate the mass market.
"We have a good product," he complains, "but in many cases we can't even get onto the shelves. I hate hearing the supermarket guy say, 'I'd love to sell your product and I know it will sell, but because Campbell has a million dollars to market JuiceWorks, you don't have a chance."
At first glance, Mark Sherman's Today's Taste project appears more misguided than JuiceWorks ever did -- another example of the difficulty giant corporations have breaking into specialized markets. Indeed, Sherman's competitors seem to view it as something of a joke.
"The idea is very creative, but it is not going to work," scoffs Dominique D'Ermo, proprietor of Washington's swank Dominique's Restaurant, who recently branched out into canned gourmet soups. D'Ermo says that Today's Taste dishes -- prepared in the early morning hours at a kitchem in Alexandria, Va., and costing as much as $7.95 each -- run a high risk of deterioration during their trip to the supermarket. He doesn't believe they will ever achieve the quality demanded by upscale consumers. A Washington Post review echoes this concern, panning Sherman's Pasta Primavera as "gummy enough for any child to turn it to Play-Doh," and commenting that Today's Taste's Chicken Salad Jacques "led you to wish you tasted it yesterday."
"You simply can't industrialize the process like that," agrees Jeffrey Cohen, who maintains a kitchen at each of the two Washington, D.C., area locations of his Sutton Place Gourmet. Cohen credits much of the success of his own operation, which last year grossed some $9 million, to his personal involvement as owner-manager. "It has to come right out of your guts," he says. "You have to be the kind of person who would build his own house to get the view he wanted."
Maybe so. Maybe what Cohen calls "the entrepreneur's touch" is still the absolute key to turning opportunity into gold. But it is also true that entrepreneurs can't afford to be complacent anymore -- because whatever happens with Today's Taste, Campbell isn't conceding the specialty-food market to anyone.
From one point of view, Sherman's Washington experience has been a financial and artistic disaster. The return rate on some Today's Taste entrees reached 40%, and losses have been severe. "I would not say it's a successful project," says Herbert Baum, president of Campbell's U.S. divisions."It's a learning experience we can use for the future."
But use it Campbell will: As with JuiceWorks, the company hasn't been deterred by early failures. With the first trial completed, Sherman is leaving Washington; he will continue as project director, reporting to Marty Buchalski of the refrigerated-foods unit. In six months or so, a revised version of Today's Taste should be ready for another test. And smaller competitors have plenty of reason to fear that Campbell's awesome ability to withstand setbacks -- and equally important willingness to adjust products to meet consumer preference -- will win out in the long run.
"When you go to the casinos in Atlantic City," says Buchalski, "they have a 2% edge over the customer because they have more money. Well, that's the same with us. We have the wherewithal to keep rolling the dice. The entrepreneur has to put up his house."
Additional reporting for this article was provided by Nell Margolis.