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MARKETING

Cookie Monsters

All-natural cookie manufacturer successfully competes with the cookie classics.
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R. W. Frookies Inc. is betting its all-natural product can grab shelf space now occupied by such classics as Oreo, Fig Newtons, and Mallomars

This is just a suggestion, but if your're under 30 you might want to skip ahead to the 11th paragraph. It is there that the story of Richard S. Worth, and his plan for "reinventing" the $4-billion cookie industry, begins in earnest.

At that point we'll show you how his creation, the Frookie, came about; why he thinks a cookie sweetened with fruit juice, not sugar, will forever humble the likes of Nabisco Brands (maker of Oreo Cookies and Fig Newtons), Keebler (E. L. Fudge and Chips Deluxe), and Procter & Gamble (Duncan Hines cookies); and explain how a wealthy suburban kid became a farmer, then a jam maker, then ended up in the cookie business.

But before we can do that, we have to talk a little bit about THE SIXTIES. (When Worth says it, it comes out like that, all capital letters.)

Back in THE SIXTIES, Worth, scion of the Worth clothing store family, was a psychology major at New York's Hobart College and doing quite well, thank you. He liked school. He graduated near the top of his class, and by the standards of the times (tune in, turn on, drop out; don't trust anyone over 30; etc.) he was almost normal.

Almost. The problem was music. Like most people his age, Worth used the local rock-and-roll station to provide the soundtrack for his life. That was fine. After all, back then radio celebrated youth. And perhaps nothing was more celebrated than Woodstock, the 1969 rock concert that helped define a generation. Almost anywhere you went on the Hobart campus, you could hear the opening lines of THE SONG written to canonize THE EVENT.

I came upon a child of God, he was walking along the road

And I asked him, "Where you going," and this he told me

He said, "I'm going down to Yasgur's farm

I am going to join in a rock 'n' roll band

I am going to camp out on the land

I am going to try to get my soul free."

Now, most psych majors listened to "Woodstock" -- and the reference to Yasgur's farm, where the concert took place -- and said things like "neat" and "groovy." Then they went back to running rats through mazes. "Woodstock" was a very nice song written by Joni Mitchell, but that's all it was: a song.

Not to Worth, though. To him, "Woodstock" was a rallying cry. I mean, Worth asked at the time, how could you listen to the chorus ("We are stardust/We are golden/And we got to get ourselves back to the garden") and not understand that we had to return to a simpler life.

If you remember the times, people used to say stuff like that a lot, and some even acted on it. So only a few eyebrows were raised when Rich Worth, from Boston's posh Brookline suburb, the same little Richie Worth who had never even changed a flat tire, told friends he was going to Canada to buy a farm and live off the land.

And so he did. Oh, along the way there were some adventures, like the time a friend left him to look at an abandoned farm, then drove away, not to return for five days. There were the 12-hour days he spent unloading tuna boats to earn money to buy coffee and tea -- things he couldn't produce on the farm. And then there was the tree that fell on him before he learned the right way to cut them down. But for seven years, Rich Worth did live off the land. Joni Mitchell, if not Worth's parents, would have been proud.

With that, let's end the flashback and welcome back the under-30 set. (You'll recognize them. They're the ones who think Woodstock is Snoopy's fluffy yellow friend.)

There was Richard Worth, blueberry farmer, living off the land, and things were fine until January 27, 1978, the day Jonas Worth was born. As he held his new son, Worth had an amazing insight: Richie Worth was now a grown-up.

"I wasn't going to leave my son a farm that produced $3,500 a year," Worth recalls thinking. "On that day, both Jonas and Sorrell Ridge were born."

But while everyone knew what Jonas would grow up to be -- healthy, smart, handsome -- nobody knew what Sorrell Ridge would become. Named after the place Worth farmed, it would be a company, of course. But selling what?

Blueberries? Everybody did that. Blueberry pies? Boring. What else can do you with blueberries? Make jam, maybe?

Yeah. Jam.

So Rich and his then-wife, Suzanne, started making jams. But people who "have to get back to the garden" can't make traditional jams filled with sugar, corn sweeteners, citric acid, and sodium citrate. The Worths created a fruit-only wild blueberry conserve. Fruit-only peach and raspberry followed. Local supermarketers liked them. So did distributors, and within two years Worth was running a $1-million company. Sales quickly hit $2 million, then $3 million. Four years later, after listening to some major companies explain the benefits that would come from national distribution and bulk buying, Worth sold to Allied Old English Inc. for a bunch of cash and 3% of future sales.

He stayed until 1985, but without management control. It just wasn't fun anymore. So while still with Allied Old, Worth started looking for something else to do. He didn't have to look very far. Opportunity could be found in the next supermarket aisle.

During the time he was building up Sorrell Ridge, "all natural" had moved from the counterculture into the mainstream. As Worth meandered through grocery aisles in the summer of 1983, he found all-natural cereals, ice creams, hot dogs -- even dog food. In fact, the cookie section was the only place without an alternative to chemical- or preservative-filled products.

"It was," he says, "the classic opportunity, and one made for me. If I could sell all-natural jams, I could sell all-natural cookies." Worth, now 39, has never had a problem with self-confidence.

But while Worth was convinced he could do it, Allied Old wasn't. The company had no interest in an all-natural cookie.

Undaunted, Worth quit to develop one.

It took three years, but after thousands of batches and more than a couple of pounds added to his middle that he's still trying to lose, Worth had an all-natural cookie. One trick: it was sweetened with fruit juice instead of sugar. Hence the name. Fruit juice. Cookie. Frookie. (The official name is R. W. Frookie. The R. W. stands for Rich and Randye -- his second wife -- Worth.)

The nation's supermarkets did not exactly turn cartwheels when told about it. Here's how Worth's sales calls usually went when he started knocking on doors last August.

Supermarket buyer (often snarling): "We don't need an all-natural cookie."

Worth: "You mean to tell that me that the cookie aisle is different from every other part of your store where you have an all-natural alternative?"

Buyer: "Nobody likes fruit cookies."

Worth: "You're probably right, but this isn't a fruit cookie. It's only sweetened with fruit juice. And I bet you can't even taste the fruit. Frookies come in 'normal' varieties like chocolate chip and oatmeal raisin. There isn't a passion fruit in the bunch."

Buyer: "I've been to the health-food stores. All-natural cookies taste lousy."

Worth: "Eat this."

With that, Worth would shove a Frookie at the buyer, who would have to agree: the cookies are pretty good.

Buyer: "OK, but I don't have room to stock another cookie."

And that brings us to the heart of the marketing problem facing our hero. The supermarket buyer is right. Merely having a better product no longer guarantees you a spot on the aisle. Some background will help explain why.

Every year roughly 8,000 new food products are invented. Some come from people like Worth, but most are created by the big boys. For example, RJR Nabisco Inc., which owns 37% of the cookie aisle, has introduced as many as seven new kinds of cookies in a single month. The nation's resourcefulness when it comes to inventing snacks is endless. Supermarket shelf space, however, is not.

If Worth is going to get space, he will have to find new places within the store where his product can be sold or convince supermarkets to stock his Frookies instead of someone else's cookies. Ideally, he will do both.

Lord knows, Worth is trying. He has designed freestanding displays that can be placed at the end of the cookie aisle, and he offers to stage promotions that boost store traffic -- and Frookie awareness. When he got Cincinnati Reds rookie sensation Chris Sabo to appear at a suburban Ohio market, 3,000 people showed up, and both the store and Frookies were on the local TV news.

The intent is to get stores to give Frookies a try. If they do, Worth is prepared to make the most of it. Listen to Kroger's Sam Gingrich, who was the first supermarket executive to decide to carry Frookies.

"The packaging shows he can play with the big boys. The colors [soft purples and greens] are outstanding. They jump out at you. And he has done subtle things. The boxes are printed so that you can stack them either horizontally or vertically." Gingrich is so impressed with Frookie's sales that he is creating permanent Frookie shelves.

Given the extremely competitive nature of the cookie business, Worth will need all the friends like Gingrich he can get. And he is getting them, in part, by selling them one-third of the company cheap.

The idea is simple. Suppliers may treat you well, but partners will treat you even better. Says Worth: "A dis-tributor may handle 500 to 1,000 products, but if he's a shareholder you become one of the products he really devotes his time to."

A quick visit with Bob Schmitt, marketing manager of Shur-Good Biscuit Co., a distributorship, proves he's onto something. If you spend even five minutes with Schmitt, who owns 1.9% of the stock, you could get the impression that Frookies is the only thing his company supplies to supermarkets in Kentucky, Indiana, and Ohio.

Schmitt raves about how Frookies are perfect for people on diets that restrict sugar and cholesterol. He waves gushy letters praising the product, and he is especially proud of the promotions he has designed to entice supermarket executives. If a buyer takes enough cases, he gets a T-shirt that reads "I got 'Frooked' by Shur-Good Biscuit Co." (Worth and most of his colleagues like to use some form of the word Frookie as a verb.) If they order more, they can get Frookie watches and other premiums.

Worth is right. Partners are enthusiastic. Says Schmitt: "This is the most incredible product I have ever seen."

Partners are also understanding when it comes to getting paid. Consider Consolidated Biscuit Corp., Worth's baker, whose 5.2% ownership makes it one of the two largest shareholders. Consolidated gives Worth months to pay his bills, while Worth requires supermarkets to cut a check within 20 days. So to a large extent, Consolidated is financing Worth's operation.

All this helps explain why cash flow has been positive from the beginning.

Whatever money Frookies saves is going into advertising and promotion, all designed to get supermarket shelf space. It has to, because of a decision Worth made early on.

If you are going to market a unique, high-quality food product, you have two choices when it comes to distribution. You can sell through the Pathmarks, Winn-Dixies, and Alpha Betas of this world, or you can market through specialty shops.

In many ways, selling through the smaller stores is easier. The buyers are willing to try new things. They'll give you a bit longer to prove yourself, and perhaps most important, you can charge more. Most specialty cookies -- and Frookies, thanks to its all-natural ingredients and good-for-you-appeal, can easily be placed in that category -- sell for $2.99 for a six- to eight-ounce bag. Frookies' six-and-a-half- to seven-ounce boxes retail for $1.79 to $1.99.

"At $2.99, you are asking supermarket shoppers to think about the purchase," says Worth. "We are priced to compete with the likes of Oreo and Fig Newtons. If I went through the gourmet and specialty stores, I'd have a $2-million to $3-million business. Frookies can be a $100-million company."

That's not a ridiculous hope. At $100 million (wholesale), Frookies would represent just 3.33% of the entire cookie market. On average, "healthy alternatives" in any food category rack up 10% of sales.

But to achieve $100 million, Worth must get the product on the shelf, and that takes us full circle. He can't get $100 million in sales unless he has significant shelf space, and he can't get on the shelf unless he can prove Frookies will sell.

The problem is only bound to get worse because of a relatively new phenomenon in the supermarket industry: slotting fees, a practice that forces manufacturers to pay to get retailers to carry their product.

Here is how it works. Before a supermarket will accept a new product, it demands that the manufacturer pay for what the store describes as the cost of stocking the new product and taking an old one off the shelf. The fee can be seen as a form of insurance that protects the supermarket should the new product bomb.

The fees are rapidly becoming the norm. "Slotting allowances have become such an accepted part of doing business that the main concern of retailers and wholesalers involves getting their fair share from manufacturers," begins a recent article in Supermarket News.

Worth has firsthand experience. One supermarket chain in Connecticut told him that it would be happy to display Frookies in its 60 stores, if he paid $1,000 per store.

Worth, who raised just $500,000 to start Frookies, doesn't have that kind of money. That means -- once again -- he has to be resourceful. While slotting fees are spreading faster than kudzu after a rain, they are not yet universal. If he moves quickly, Worth can still get into some stores without them.

Worth's best hope, though, is to create so much demand for Frookies that supermarkets are forced either to waive the slotting fee or reduce it. "If we can get into one chain that doesn't have the fee and do well, we can force its competitor to take us in."

But again, Worth is forced to try to create a big demand without using big dollars. A general rule of thumb in the cookie business is that you must spend $10 million on national advertising to be heard. Worth hasn't spent anything on advertising, instead using promotions and point-of-purchase displays to get customers to try his cookies.

The initial results are encouraging. Customers are responding to the cookie's good taste and all-natural appeal in surprising numbers. In his first three months, Worth sold 70,000 cases of cookies. According to his business plan, that wasn't supposed to happen until the middle of year two. Numbers like those may make it easier for Worth to raise the $5 million he thinks it will take to make Frookies a national company. That money -- which will probably come from the sale of additional stock -- would go toward funding TV commercials and beefing up distribution. In the best of all possible worlds, that will increase demand and keep Frookies moving out the door.

Continued success raises an interesting question. What happens when the industry's cookie monsters notice that Worth is nibbling on their lunch?

Keebler officials say it takes them less than a year to create a new brand that responds to a competitive threat. And while Worth hopes his cookies can be found in half of all supermarkets by year's end, Keebler and its kith and kin don't have to worry about distribution.

"The giants are a problem," says Worth, taking another drag on one of the cigarettes he just can't seem to quit. "But we have a few things in our favor. We have about a nine-month lead time, and we are already working on new products that I would rather not talk about. Second, consumers tend to be loyal to the people who create a category. Third, the large companies have an interesting marketing problem. If they introduce a new, all-natural product, they are going into direct competition with their other less healthy products. And finally, if they do enter, I think they will increase the size of the category, and that can only be good for us."

On the surface, that sounds fine. But it sure would have been more convincing had Worth not popped an antacid right after he said it. Within arm's reach he keeps the largest jar of Tums we have ever seen.

You do have to wonder how much of his bravado is whistling in the dark. Worth's entire line of credit at United Jersey Bank is exactly $1.5 million, and three of his seven employees work for him part-time while they try to develop their own food products.

Yet the orders are coming in to his office in Englewood Cliffs, N.J., at an amazing rate. He has experience with a similar product, and he is contracting out almost everything that could cost him money: baking, packaging, and distribution. Perhaps most important, Frookies do taste good.

"This is a war, and even if I lose, I win," says Worth. "Say the big boys do come in and take over the market. They aren't going to get all of it. I'll be left with a $15-million or $20-million company at worst."

Maybe. But: can he get distribution? Avoid the slotting fees? Get established before the big boys respond?

Or will the Frookie crumble?

Getting back to the Garden is a wonderful idea. But -- as Adam and Eve found out -- you still have to deal with snakes.

For an update on this company, see Anatomy of a Start-Up Revisited: Snack Attack

Research assistance was provided by Leslie Brokaw.


EXECUTIVE SUMMARY

THE COMPANY

R. W. Frookies Inc., Englewood Cliffs, N.J.

Concept: Launch an all-natural "good for you cookie" sweetened with fruit juice, not sugar, in national, mainstream cookie market. Stay lean; operate only as marketing organization; outsource all manufacturing, packaging, product handling, distribution, and direct sales

Projections: First-year revenues of $944,000; more than $10 million in year five, with 14.2% pretax net. Eventual size of $100 million

Hurdles: Unknown consumer demand; getting and keeping shelf space in market dominated by big players; stimulating demand despite marketing expenditures drastically less than competitors'

THE FOUNDER

Richard S. Worth, 39, CEO

"What if Nabisco responds tomorrow; what happens if we have problems lining up distribution; what if we outstrip capital?" asks Richard Worth, as he anticipates a visitor's questions. "A company should be judged by how it has thought about the 'what ifs.' "

Worth has been thinking about them since college. Having decided there that he wanted to become a farmer, Worth worried he might run out of money while doing so. The solution? He first spent three years working. His résumé boasts that he increased sales by 100% in his four months as a bread salesman in upstate New York. He then started an underground-sprinkler company that quickly became "second in residential sales" in the Boston area.

All that time, Worth saved every cent he could, and it paid off. His eventual move to Canada led to a $10-million jam company. You can see the juxtaposition of struggling young man and successful businessman everywhere you look. While Worth is in the process of building an $800,000 house in Long Island's swank Amagansett, his office has a ragged couch and a gaping hole in the wall.

The ambivalence remains today. Worth refers to his company as a form of "social capitalism," with 35% of the stock being held by "partners in crime" -- the bakers, distributors, and professional-service providers who are helping launch Frookies.

After spending some time with Worth, you get the feeling that he is only partly joking.

FINANCIALS

R. W. Frookies Inc. projected operating statement

Year one Year five

Cases sold (@$11.80/case) 80,000 891,000

Sales $944,000 $10,513,800

Cost of Sales (@$7.08/case) 566,400 6,308,280

Gross Profit 377,600 4,205,520

% gross profit 40% 40%

Expenses

Start-up costs 53,750 0

Advertising & promotion (non-TV) 325,684 792,914

TV advertising 0 800,000

Product demonstration 47,184 262,756

Broker commissions 23,592 262,756

Payroll 53,400 205,800

Administration & miscellaneous 74,220 394,075

Interest expense (3,990) (7,011)

Total expenses 573,840 2,711,290

Net Profit Before Taxes (196,240) 1,494,230

% net profit (20.8%) 14.2%


WHAT THE EXPERTS SAY

CONSULTANT
CATHY ORR

Vice-president and founder of Shelf Watchers Inc., Orange, Calif., which verifies grocery product placement and inventory for manufacturers and brokers

Including the distributor in the profits of the company as a shareholder is interesting; it may help solve some of the basic problems that come up with distributors. But it won't work on a large scale. There are too many distributors. In Los Angeles alone, there are at least four or five that Worth would need. To get national distribution, Worth would have to include each one. I don't think a distributor is going to be too thrilled when he finds out somebody else got a cut and he didn't.

I'm also worried about Worth's marketing funds. If he selected 20 markets in the United States that he really wanted to cover -- the minimum for a national product -- then according to his year-five financials he'd be spending only $80,000 per market for advertising and promotion, including TV. That's way low. Manufacturers figure on spending $1 million per market to bring out a new product. That's a minimum.

But even with promotion like that, Worth could end up spinning his wheels. The name of the game is to be on the shelf, and shelf presence has to be constantly monitored and supported. Brokers and distributors won't do that, even if they tell you they will. How can they? They have far too many clients and products to look after. Keebler has its own salespeople and merchandising people -- they're trying to persuade store personnel to give them your space. And of course, because they're so big, they're getting more distributor/broker attention than Frookies to begin with. As far as store people are concerned, it's "out of sight, out of mind," and since Worth won't have his own people in the field, Frookies will be out of sight.

FINANCIER

DON STROBEN

Managing general partner, Princeton/Montrose Partners, Montrose, Calif., a $17-million venture fund with positions in consumer food products

I like Worth's experience. He's already had one success, and he stuck with it even after he sold it. So he has some idea of the continuing problems of growth and development. That experience is very meaningful.

If I were Worth, I wouldn't go national. I would pick New England or the mid-Atlantic region, stay in that area, and work to develop a very strong local and then regional brand. In absolute dollars, if you could build up a business doing between $5 million and $8 million in sales, you could then sell that business to somebody else who was more able financially to carry on the marketing effort. As people who invest in the field have seen, the grocery trade is now renting space -- and that means you have to have financial resources. Launching a new food product when you're also a new company -- such as Frookies -- is not quite impossible, but it's extremely difficult. There may be a slice of the market for a specialty cookie, but I don't think I would ever finance a cookie company.

You can't fight the big guys if you're an entrepreneur.

CUSTOMER

LEE SALO

Buyer and merchandiser for Raleys Inc., a $1.2-billion supermarket chain with 53 stores in northern California and Nevada

Would I carry it? I don't know. I'd want to have the first introduction from the company and not the distributor, because the distributor doesn't have enough knowledge. There'd have to be advertising in every geographic area where we have a store -- radio would be prime, along with coupons in the papers. There'd have to be money budgeted in each quarter for both those things, as well as in-store promotions. We don't like stand-up racks in the aisles -- we like to keep the aisles nice and wide for our customers.

I go by gut instinct. And my instincts say that Frookies is the wrong name, although I see its merit in the natural-foods market. I think it's priced too high. It's probably not as good as the products from Nature's Warehouse, another juice-sweetened cookie that we sell at $1.79 for eight ounces, compared with Frookies' $1.99 for six and a half to seven ounces.

FINANCIER

BILL MULLIGAN

General partner, Primus Venture Partners, Cleveland, a $105-million venture fund that has recently invested in consumer food products

The concept itself is intriguing. He's identified and is attempting to capitalize on a growing interest in healthful foods. And I haven't seen much that's been done with that trend in the cookie section. I wouldn't say it's actually a health-oriented product. The package says each Frookie is "the good for you cookie." I would take exception to that. It claims to have "no cholesterol." Well, a lot of cookies have no cholesterol. It delivers no more than 0.63 grams of dietary fiber; that's very, very low. And the calorie content is relatively high -- 45 calories per cookie -- so it's certainly not a diet treat by any means. I don't see it as a health food; I see it as a healthier junk food. That may ultimately force the company to position it a little differently.

I like the packaging, though. I think the name is good. And I think the pricing is very good. Keeping in line with Oreo will enable consumers to look at Frookie as a trade-off, a way to at least avoid some things, like sugar, without stepping up in price.

The way they're financing the business -- selling equity to the people they need to do business -- sounds, on one hand, very creative and low cost. But I think it will become very cumbersome. Worth is looking for follow-on financing right now, and I think that these people he's dragging around behind him are going to be an anchor. If we were to walk into this deal and see he had locked up relationships with a baker, professional organizations, and distributors -- who are literally the lifeblood here -- we'd be concerned.

In the event you have problems in the company and you have to do another round of financing, you suddenly have a number of people with different points of view on what created the problems and how they ought to be treated. Severance becomes tougher. What happens if a distributor in a key marketplace falls flat on his face -- yet he's a shareholder? You don't have the same degree of flexibility that you have if he's not a shareholder.

We always find with early-stage companies that things change daily -- suppliers change, customers change, methods of distribution change -- and for good reason: you become smarter in the business as you go along. Given that, I'd worry about being locked into so many things on day one.

I don't think Frookies is going to make it if Worth intends to sit back and merely be a marketing organization. Instead, he should focus on a few accounts -- like Kroger, which he has -- and not try to blow out a national program for 20 different supermarkets. Demonstrate the ability to sell in enough quantity to justify your position on the cookie aisle. Confirm that this product is in demand by the customer, that it can capitalize on this growing interest in healthful foods, and that its taste is at least not a barrier. Get that done in a couple of cases, and then you can take that success story and get positioned on the cookie aisle. If Worth makes some of those changes, I think he's got a good shot.

COMPETITOR

JOSEPH SIMRANY

Vice-president of marketing, Sunshine Biscuits Inc., Woodbridge, N.J., third-largest cookie manufacturer in the United States

I'm always amazed. Everyone wants to get into the cookie business -- Frito-Lay (Grandma's Cookies) and Procter & Gamble have tried -- and everyone is a marketing expert.

In Worth's favor, he makes a decent-tasting cookie, which appears to be made with excellent ingredients. Conceptually, he is going in the right direction. I say that because that is the direction we're going, and we got there first. People are concerned about the things they are giving to their children, so a year ago we eliminated all coconut oil from our products, and we are in the process of eliminating all saturated fats. Frookies may have thought it would have the field to itself, but it doesn't.

Last updated: Feb 1, 1989




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