Too Hot To Handle
ON THE BIGGEST DAY IN A.J. Canfield Co.'s 63-year history, Alan Canfield could think only of his vacation.
He was sure that the sudden interest in one of the company's products, Canfield's Diet Chocolate Fudge soda, would translate into a "slight bump" in sales and nothing more. "Taking a sip of the stuff," Chicago Tribune columnist Bob Greene had written over the weekend, "is like biting into a hot fudge sundae." A nice review, Canfield thought, but so what? In 13 years, the soda had generated only listless sales. As he drove to work on January 14, a bitterly cold Monday in 1985, Canfield's mind focused on his upcoming retreat to a Jamaican villa.
All over the city, though, people were thinking of Canfield's Diet Chocolate Fudge soda. The company's phone lines were jammed by consumers who craved it. "That afternoon, things just went crazy," says Jerry Vance, vice-president of sales.
Canfield wasn't impressed. A turbulent month, he figured, and that would be the end of it. So he left for Jamaica a few weeks later. Vance called before Canfield could stick his toe in the water: sales are still going up, he said. The next day: sales in the last two days were higher than all of last year. The next day: I've got to ration the soda. As Greene's column appeared in more than 200 newspapers, bottlers jammed the long-distance lines looking for distribution rights. Retailers wanted truck-loads right away. Reporters from all the major television networks camped out at the company's headquarters.
"you've got to come back and handle some of this stuff," Vance pleaded. It's only temporary, Canfield responded; you people just aren't used to being busy at this time of year. Besides, the senior vice-president said, somewhat annoyed, I'll be back soon.
By the time Alan Canfield returned two weeks later, the third-generation family business was practically unrecognizable. The company was like a can of its own soda. Bob Greene had shaken it, then pulled the tab. Now Vance was tied to the phone, taking orders from retailers. Every time he signed a new customer, he marched into the hallway and shouted the city and state. Cleveland, Ohio. Denver, Colorado. Boise, Idaho.
Alan could hear it from his office. "Oh, my God," he thought. "What on earth do we have here?"
Most small companies only dream of inventing and marketing a product that creates more demand than they can fill. But when that fantasy actually comes true, it often turns out to be the company's undoing. A hot product is like a dangerous and sophisticated weapon. Instead of learning how to use it, many small companies end up wounding themselves -- sometimes fatally (see the boxes on the following pages).
In 1958, Wham-O Manufacturing Co., a small sporting-goods concern, sent teenagers to TV-station parking lots to demonstrate the uses of its new toy. The ploy worked, and the company sold millions and millions of the toys that year. To fill the overwhelming demand, it invested in new manufacturing facilities and warehouses. Soon, though, the public tired of hula hoops, and Wham-O's sales wiggled away. Saddled with massive inventory and exorbitant overhead costs, the company nearly went under; years later, it reappeared with another national success, the Frisbee. "Wham-O lost a lot of money," says Robert Shook, who has written about hot products. "Most companies make the same mistake. They start thinking their hot product is going to last forever." As a result, they add new production capacity that they can't support when the fad ends. Unfortunately, excess inventory and huge fixed costs don't disappear as handily as demand often does.
Hot products can also cause a quick and ill-considered shift in strategy. Some small companies reach for an acquirer as a life-line others run for cover to the public markets, still others sacrifice control of their own product by striking arcane marketing agreements. "You do get picked up and carried away with the momentum of it," says Joseph DeKama, whose company, Nature's Organics Plus Inc., went down the drain as smoothly as its hit shampoo. "There's nothing more exhilarating than having a product take off."
Some companies mistakenly believe that one hot product must lead to another. Few companies hit the jackpot twice, and many are surpassed by an improved version of their hit. "It's inevitable that while you're going crazy trying to meet demand, you'll get scooped on the next model," notes William Parket, a consultant with The New Directions Group, in Norwalk, Conn.
But few companies worry about that -- or much else -- at the time. Many of them let the hit product lift them up and carry them away. Like a twister, it can drop them back to earth abruptly. "A company that produces a hit product is not very different from a rock star who earns a lot of money and develops a lifestyle that costs a lot of money," says Parker. "If record sales stop, he can't afford that lifestyle anymore. He goes broke in a hurry."
The A.J. Canfield Co. nearly went broke once in the 1930s. Founder Arthur J. Canfield, whose main product was ginger ale, was on the rocks. The government was rationing sugar, forcing him to idle many of his trucks. In a last-ditch gambit that worked, he pawned his three-and-a-half-karat diamond ring for a truckload of beer to sell.
The company has retained its founder's streetwise survival instincts. Thirty-five years ago, there were about 100 soft-drink makers in Chicago. Canfield is now one of around 5. By investing in advanced technology, it is also one of the lowest-cost producers in the industry. Most of Canfield's flavors don't challenge the gaints of the $38-billion retail industry head-on. It concentrates on such flavors as Hula Punch, Swiss Creme, and Honee Orange. And it is a bottler of Canada Dry, Sunkist, and Jolt beverages.
Canfield, though, hasn't been content to settle for just a sip of the industry's sales. In 1976, Alan Canfield tried to create a hot product with a banana-flavored drink called Anna Banana. He hired an artist to produce an original, signed painting for the can, and shipped 100 pounds of bananas to each of the key supermarket buyers. Women wearing bananas on their heads, Carmen Miranda style, publicized the drink. Airplanes flew above local highways, beaches, and football stadiums announcing the drink's arrival. Only one problem arose. "Nobody bought it. But nobody," says Canfield.
Canfield always had more modest hopes for Diet Chocolate Fudge. In 1971, he handed chief chemist Manny Wesber a pound of fudge, asking him to create a diet drink duplicating that taste. The company launched Wesber's creation, which does not contain chocolate, a year later in its modest marketing region: Illinois, Indiana, and Michigan. Diet Chocolate Fudge attracted a loyal core following. Canfield discovered the nature of its appeal in 1972. That year, the company spent $1 million to introduce all of its 24 flavors in Wisconsin. But the competition was fierce. So in 1974, Canfield went home. Diet Chocolate Fudge stayed behind, though. Without a single marketing dollar, it continued to sell at the same level for 13 years.
As Wisconsin went, so went the other states. Diet Chocolate Fudge sold some 60,000 cases every year. Thirteen years straight.
Until January 14, 1985.
Bob Greene has been a columnist about as long as Diet Chocolate Fudge has been on the market. For his syndicated column on January 13, 1985, Greene was planning to interview someone, but the subject canceled at the last minute. "What can I do fast that won't embarrass me?" he wondered, as his eyes fixed on a can atop his desk. Since he'd been on a recent diet, he had been drinking the two-calorie soda. Why not give the local company a call? "I thought of it as a throwaway column," Greene admits.
One man's throwaway was another man's fortune. In the nine days that followed Greene's column, A. J. Canfield sold more Diet Chocolate Fudge than it had in all of 1984. It was shipping as many as 20,000 cases a day three months later, more than 100 times the normal amount.
When Chocolate Fudge exploded, A. J. Canfield did not have Coca-Cola's armies of managers on hand to deal with it. The three top executives split responsibility. Alan Canfield, who is aggressively outgoing, would handle marketing; his older brother Art, the president and numbers whiz, would secure additional manufacturing and personnel; and Frank Westerman, the executive vice-president, whose father had worked for 40 years at the company, would cut deals with out-of-state shippers. On any major decision, the three of them must agree.
Arthur Canfield sometimes sits in on those meetings, but he rarely says much. The elder Canfield, 72 is chairman of the board and the company's sole stockholder. He does not make any day-to-day management decisions. When asked for advice, he often responds, "That's your problem, not mine," and leaves it at that. "I think his philosophy is that he hires people to work for him and lets them make the decisions," says Alan, who refers to his father as "our owner." The elder Canfield hasn't given any timetable as to when the company will pass to his sons. "My brother and I work very hard for the company," says Alan, 46. "We hope it will be ours someday."
Though he didn't interfere, Arthur Canfield had long before set down some rules that defined broad company strategy. The company was not for sale. It was not going public, either. He didn't care how fast it was growing. He wasn't about to saddle himself with a board of directors, stockholders, or long-term debt.
The first month of the soda craze did not call for any major decisions. The three factories had plenty of capacity during the winter months, when most softdrink makers keep busy by sweeping out their closets. The Iowa plant, which made only private-label products, added Diet Chocolate Fudge. The Indiana plant also boosted production. In Chicago, the plant started running 24 hours a day, seven days a week, and employees often worked double shifts. Factory managers brought on employees as fast as they could. "If people walked in and they were warm, we hired them," says Canfield. In the 18 months following Greene's column, the work force increased by about 15%.
With actors Mickey Rooney and Burt Reynolds calling for soda, it was easy to drink in the company's sudden fame. "It's a nice thing for your ago," says Alan, who spent 10 hours a day on the phone. Jerry Vance, who started out camera-shy, grew more comfortable before the microphones. One evening, he took a call from a man who identified himself as a reporter for ABC's "Nightline." Mr. Vance, he said, we would like you to appear on tonight's show. We want you to tell the story of Diet Chocolate Fudge to 6 million American households. Can you do it? You bet, Vance said, sure can. "I got excited and told everybody we would be on," Vance recalls. It turned out to be a co-worker's practical joke. "We got carried away with ourselves," he admits. "I was primed for it because we had so much exposure."
For the first three months, Alan didn't realize that he had a drinking problem on his hands. Convinced that the soda was a shooting star, he hadn't made any longterm decisions. "We didn't react quickly enough," he says. "We thought we could handle it because we are nice guys who are good at what we do." The three executives, who lunch together every day in the company's cramped cafeteria, began hearing disturbing stories from truck drivers and factory workers.
The stories centered around one theme: exhaustion. After about 45 days, the Chicago factory operated two 10-hour production shifts. There was barely time to maintain the machinery, never mind train recruits. One day in April, a production worker marched into Art Kolk's office. The man had been an employee for more than 25 years. He sat down, then said to Kolk, who is vice-president to manufacturing: "I can't take it anymore." He had been forced to cancel his winter vacation and had been in the factory for the past 29 days straight. He didn't care about the money. It was wrecking his home life. He quit.
That story shocked Canfield, as did tales of tempers flying in the factories, where workers sometimes put in 16 straight hours. "We didn't realize that you can't push people that hard for that long," says Canfield. "We finally got together and said, 'We cannot expect to run seven days a week, or we are going to kill somebody."
Canfield also began hearing from angry retailers. Walt Lagestee, founder of Walt's Foods Center, a three-store supermarket chain, has been buying from the Canfield family since 1937. Alan made deliveries to the store when he drove a truck about 25 years ago. It was only natural for Lagestee to walk over and greet Canfield, who was wandering the aisles of the South Holland, Ill., store one winter's day in 1985. "I have been carrying your product for a long time," Lagestee began, "and now I don't have any." Canfield began his usual spiel: how the company prides itself on service, and how things were a little hectic just now. Just then a Canfield truck pulled up behind the store. Alan spoke to the driver. "Give this guy all the Diet Chocolate Fudge you've got," he whispered. That turned out to be a measly five cases. Lagestee got mad. "If you don't get me a 500-case display by Monday," said the raspy-voiced septuagenarian, standing toe-to-toe with Canfield, "don't bother coming back here when the craze is over." He got the display.
It got so bad that Alan dreaded picking up the phone. "People were calling up and saying, 'I have been dealing with you for years, and your truck showed up without any product today," he recalls. "What do you tell a guy like that? That you just sent 10 trucks to Denver, to a guy who never bought your product before, and never heard of you 30 days ago?" Not all retailers were satisfied once they got the product, either. To mollify some persistent West Coast retailers, Canfield had a truckload of Diet Chocolate Fudge driven out to California. By the time the truck got there, the cans had rubbed against each other for so long that they had started leaking. There was only so much friction that the product could take.
The same was true of Canfield himself. That spring, he called his brother and Westerman together. Something had to give. We are, he announced, not taking any more new customers. The company simply couldn't stretch its production and distribution systems any farther.
The Canfield executives had a precious liquid asset, and they were mismanaging it. "We thought we had it covered, but we were kidding ourselves," says Alan, who was ready to acknowledge for the first time that he had a hot product on his hands. Well-respected companies such as General Cinema Corp. and a Seven-Up bottler expressed interest in taking on Diet Chocolate Fudge. "These are not fly-by-nights," Alan figured, "so maybe there is more to this than we had thought." The drink had turned A. J. Canfield into a national company, ready or not.
But what more could they do to meet demand? They agreed to add a total of more than 350,000 square feet to their three factories. But that extra capacity still would not meet demand; nor would running the Chicago factory for 20 hours a day.
At full production, the company could handle only the 14 midwestern states -- still a big increase from the 4 it was serving a few months before. Beyond the Midwest, freight rates would make Diet Chocolate Fudge more expensive than Coke. The executives talked about building a new plant. "Build a plant?" Canfield responded. "For a product that has been successful for 90 days?" An efficient plant, which costs about $10 million, must product about 20,000 cases a day just to break even. What about buying an existing plant? "No time or people to look," objected Westerman.
There was simply no way around it: A. J. Canfield was a strong regional bottler. A hot product could not make it a national company. Not without the company incurring grave risks.
But there might be another way. Why not let others shoulder the risks? Other bottlers could make, distribute, and promote the beverage outside of the Midwest. Granting the franchises, Canfield theorized, "would put millions of dollars into our coffers." One businessman in Texas was offering to pay $1 million just for the Lone Star State's franchise. There were also groups of investers who wanted to buy a franchise, then resell it to bottlers. All of this worried Westerman, though. Many potential investors didn't know anything about the beverage business, or even about manufacturing. So the three agreed that Westerman would talk only to existing bottlers.
All they had to do was slap a price tag on the franchises. The logical method was to look at the size of each market and at historical sales information. But no significant data existed. How could they use the past 90 days as a model? "The bottlers didn't know, nor did we know, whether it was going to continue, and so we couldn't put a dollar figure on what it was worth," Westerman explains. Besides, he soon realized, haggling over a price could go on for months. If they wanted the product in the hands of trusted bottlers, there was only one way to do it. They would have to give the franchises away. The franchisees would pay only for the concentrate.
With that, Alan laid a map and pushpins down on the floor of the lunchroom. Less than a week earlier, Westerman had talked to Bill McNamara, president of Columbine Beverage Co., a Denver bottler. Now, he got on the phone and told McNamara to meet him in two days at Chicago O'Hare International Airport. Ninety minutes and one handshake after the pair sat down, Columbine became the first Canfield franchisee.
By midsummer, the map looked like a pincushion. Now 11 bottlers covered all 50 states, and three foreign countries would soon follow. A. J. Canfield sells them "very profitable" concentrate, but gives some money back for marketing. Franchisees can draw money for, say, floating a blimp over a football stadium or setting up supermarket sampling booths. "Once you start franchising, it's important to keep that zing going," says Canfield.
Some of that zing may already be gone, which makes A. J. Canfield's approach to its hot product look that much smarter. The company sold about $80 million of Diet Chocolate Fudge in the two years since Greene's column appeared. But demand has begun to drop off. Industry observers say sales could fall as much as 50% this year. "That product took off like a scared rabbit," says Walt Lagestee, the supermarket founder. "Now, it's a so-so deal."
Alan Canfield and his two colleagues sometimes wonder if they added enough fuel to their rocket. "If we could've had a staff of 25 more key people, we could've grown faster, flown higher, and made more money," Alan says, almost wistfully. "Once in a while, you dream about something like this," adds Westerman. "But our concept was always to be a strong regional company."
As a result, they didn't compromise the future to make the most of the soda's popularity. "We never lost control of our business," says Canfield. "For a while, we lost control of the direction we were running in because we were running in so many directions."
A. J. Canfield stretched existing resources, rather than adding so many employees and so much additional production capacity that it would get into trouble once the soda passed its peak. For instance, Canfield's production employees often worked 12-hour shifts. They have now returned to 8-hour stints. There have been no layoffs, although some production workers have taken up sales positions. And while Canfield did add offices and warehouses, it was low on space even before Diet Chocolate Fudge exploded.
Unlike Wham-O, which was left sitting on a huge inventory of hula hoops, A. J. Canfield isn't stuck with a lot of slow-selling soda, either. By enlisting franchisees, it spread the expense of packing, shipping, and billing, as well as the cost of inventory. The 11 bottlers, after all, are in the capital-intensive end of the business with their trucks and filling equipment; Canfield sells just syrup and advertising support.
The company's strategy does involve risks. It has given up some control of the product to the franchisees. In a temporary lull, the franchisees might panic and drop the soda Or they might ignore it in favor of a new hot item. So far, though, none of them have jumped ship. "There's a niche out there for the product," says McNamara, of Columbine Beverage. "Di don't see it dying off."
Alan Canfield admits that the company might have made "big money" if it had taken the soda national itself or sold the franchises. But the company saw its own limitations; even though it wanted the soda to be a national product, it settled for a regional share of it.
"You can't get greedy," says Alan. "There just aren't too many people who can take on the world and survive."