The Apprenticeship of Irwin Simon
An Inc profile by Hesh Kestin
"My father wasn't a risk taker, and that held him back. Today, taking a risk is something I'm willing to do, and that's probably from seeing what my father didn't do in life."
In 1802 when William Wordsworth wrote, "The Child is father of the Man," how could he not have been thinking of Irwin Simon? In the prime of manhood at 43, Simon runs a company closing in on half a billion dollars in revenues, with a market cap twice that, up from next to nothing eight years ago. Yet there is no question, not even a lingering doubt, that this smooth operator proudly pressing the starter button at Nasdaq on the eighth anniversary of his company's IPO, surrounded by his top managers, the usual anxious PR handlers, and the dozen pleased analysts, and varicose institutional investors who have benefited from his success as surely as they will turn their backs on him should he falter -- no, there is not even the shadow of a lingering doubt that this is the same Irwin Simon stocking bottles of Heinz ketchup at age 10 in his father's 900-square-foot grocery, in Glace Bay, Nova Scotia, 800 miles and a lifetime distant from Simon's Park Avenue digs and his summer place in the Hamptons, a grocery that remains, always and indelibly, a continual reminder of where he comes from and what drives him on.
"Glace Bay? A little fishing village. My father had Simon's Dairy, a grocery with a candy counter. In the back he cut kosher meat. As a family, five kids, we all worked in the store, and my father taught us work ethics, how to treat people and work with people. My father, he was probably not a good businessman, but I've seen him with people who owed him money -- he'd give credit, and if we didn't have milk in the store that evening, he would take money out of the cash register, because they had young kids, so they could go to another store to buy milk. On the other hand, I would look at my father as a businessman, and I'd say, 'Why aren't you doing this, why aren't you expanding, why aren't you ...?' Even at 13, 14 years old. But my father wasn't a risk taker, and that held him back. You know, if anything, today I think taking a risk is always something I'm willing to do, and that's probably from seeing what my father didn't do in life. He was a loved man, but there were times when I was a kid and I made $2,000 in the summer, cutting grass -- in Glace Bay it wasn't a long summer. I would have to help my father out with that couple thousand dollars when he was overdrawn at the bank."
Simon's Hain Celestial Group Inc. is the market leader in the kind of foods made of stuff that only a decade ago most people didn't consider food at all. They're weird bits of once-orphaned vegetation that have been transmogrified into some 29 brands and 1,500 individual products: soy smoothies, organic crackers, natural cereals that surprise you by tasting good -- exquisitely balanced on the other end of the taste scale by a line of fake meat that includes such Star Trek-ian improbabilities as Veggie Breakfast Links, actually not bad; a Veggie Pizza Pepperoni, with all the palatability of Silly Putty; and a pure monstrosity called Veggie Ground Round Italian, a product that manages to simultaneously libel high-end hamburger and an entire European country. More typical is a panoply of teas that could have been conceived only by people who wear Birkenstocks, live in wind-powered log houses, and practice a religion symbolized by a peace sign the size of Mama Cass. But be patient. Simon doesn't just acquire brands -- he revs them up.
Just as the Celestial tea line (acquired in 2000 for $332 million) was goosed to develop new products and expand internationally, that line of meat (and cheese!) analogs -- Yves Veggie Cuisine Inc., acquired last year for $34 million -- will probably undergo an upgrade as well. Hey, Hain Celestial's soy milks and other suspect fluids lead their category because they've broken new ground in flavor and diversity (though from a purely culinary angle, they still retain a bit more oo than moo). That's Simon's thing: taking the products of already profitable companies, improving their taste, extending the line, and then marketing the hell out of them as they begin the long migration from the shelves of the nation's 18,000 health-food stores to its 100,000 grocers and 33,000 supermarkets.
The last is often where non-health-food addicts bump into some of Simon's most popular crossover brands, like Terra Chips, conceivably the world's most successful marriage of tubers and hot oil, and Earth's Best organic baby food, described by one mother as the Rolls-Royce of toddler stuffing -- the latter line acquired from Heinz in 1999 as part of a deal in which Heinz got a 19.5% stake in Hain, the same Heinz whose ketchup little Irwin used to stock in Glace Bay. Both brands share a label common to Hain Celestial products: kosher. Sure, Simon's father was a kosher butcher catering to Glace Bay's handful of Jewish families, but this play is not nostalgic. It's demographic: America's Jews and Muslims are significant customers.
"At 17 I'm off to school in Halifax, St. Mary's University, and I wanted to go there because it was good and it was small. I could be effective, and just like in high school I was a B and C student but very involved -- student council, senate, ran for president. I was paying for my schooling with campus-police jobs and desk-clerk jobs and I became a don in residence, in charge of a dorm, so that was free housing, and being a don, the Moosehead Brewery rep used to give me like 10 cases of beer each week to give out as samples. I said, 'Wait a minute, I can't give this away.' "
It should now be clear that even then Simon was not some kind of burlap-shirted nutrition nut whose vision of creating America's leading and most aggressive natural-foods company would lead accidentally to his taking home more than $5 million last year (in salary, bonus, and traded shares), to say nothing of his ownership of stock worth some $80 million.
Nope, Simon -- the sight of whom wolfing down a huge steak-and-pepper hero might send Veggie Bacon enthusiasts into shock -- hardly came to the natural/organic industry out of ideology. He simply observed that the health-food stores metastasizing in half the malls in America were onto something, then parlayed that into an aggressive and well-run business through shrewdness, charm, good luck, and wisdom gained from a solid apprenticeship in specialty foods. In fact, the only two brands he worked with before setting off on his own were H?en-Dazs, which, with Ben & Jerry's, actually invented its own unique subniche in specialty foods -- call it frozen sin -- and Slim-Fast, which grew fat sending backsliding high-calorie-ice-cream noshers back to the supermarket for contrition. Beyond his flair for finance and branding, Simon was able to recognize that good-for-you doesn't have to taste like it: a typical Simon product can best be described as the synthesis of sin and atonement in the same shiny wrapper.
"I didn't have the marks to go to law school, so I was recruited for an insurance company, in sales. I spent the summer training, but when it came time to write the test, I failed. I just was not into it. I didn't want to do it. Things happen for a reason. Six months later I got a job in Toronto -- my three sisters were living there; my father and mother and brother were still in Glace Bay -- at a company that was a Canadian licensee for H?en-Dazs, and did very well with them in sales and marketing. So I lived in Toronto for three years. My family was there, and I was living with a lovely woman from a very, very wealthy family. Her father kind of inspired me because he had started out from scratch. One day he said, 'You know, marry my daughter and you probably won't have to worry the rest of your life.' "
Though better-for-you foods is one way Simon describes his category, no one really knows whether a daily diet of soy smoothies and spelt flakes really improves human innards: fed enough of this stuff, lab rats may or may not sprout green leaves for ears. Hain Celestial's message is thus directed to the cerebrum's nodus guiltus: eat as much of this stuff as you like, because it won't hurt you -- and to prove it's better, note the price.
"I never wanted to be a bought person," says Simon. "So when I was offered a job in New York for H?en-Dazs, I jumped. It was just a great move in my career." With a telling beginning. Simon flew to New York to find that his new bosses had neglected to lay on transport to their headquarters in New Jersey. The airport cabbies wouldn't go there. Simon noticed a limo driver holding up a sign with someone else's name on it. "That's me," he told the driver.
That would hardly be the last time Simon saw opportunity in taking a ride on an underutilized name. Simon himself conflates a good name with a good brand. "In a small town, what was important was maintaining the reputation of the family name -- that's the thing you'll have till death," he says.
Many natural and organic foods cost more than their nonorganic cousins, but the higher prices often merely reflect the higher costs of smaller and less efficient manufacturing. But in this niche a really good brand name, even a new one, can practically set its own price -- regardless of costs. A six-ounce bag of Terra Chips -- taro, cassava, sweet potato, batata, and parsnip -- cost this writer $4.79 at a New York-area supermarket -- or about 8?iece. The only chips more expensive are made by Intel. In a supermarket in the Hamptons, close by Simon's summer spread, any illiterate can pick up a box of name-brand nonorganic pasta for as little as 69?pound; it takes a truly discriminating shopper to pay a cool $3.62 for a pound of Simon's DeBoles organic brand. At these prices, Simon's products had better be good for you.
At these prices, they've certainly been good for Irwin Simon.
"I was lonely in New York, a real hard adjustment. I was totally an outsider, but at the same time I was not going to give up. Many nights I put my head down on my pillow, and there were tears. I missed my family and thought maybe I should scrub this and go back. I was 23, 24. But I loved what I was doing, working for a major brand, creating growth, learning a lot. I was maturing -- plus I was making American dollars. Things at H?en-Dazs went well. I went up through the ranks in sales and marketing, working with H?en-Dazs in Europe, running operations for our retail stores. But there was just something missing that I couldn't put my finger on. I was frustrated. I wasn't being challenged. Things moved much slower than I wanted. A new product took two years. It was almost as if somebody was in control of my destiny, how much I was going to make, what I was going to do."
Control is a big part of Hain Celestial, whose gross margin for its last fiscal year was 43%. Simon is just plain good at maintaining quality under tight cost controls. Example: Hain has just built a plant in New Jersey that nearly tripled its production of Terra Chips using a patented technique for vacuum frying. Aside from being a great potential enlivener of high school physics and leaving the chips tasting more like a vegetable and less like oil-soaked construction paper, the low-temperature process reduces the amount of fat absorbed by the chips and saves money because the remaining oil lasts longer. Here in one potato chip is a good deal of the Simon savvy: better tasting, more healthful, and produced economically -- though in truth the only reason Hain Celestial produces the chips itself is that it hasn't been able to find quality packers with enough capacity. That being the case, the company moved quickly to turn the vacuum-frying technology into a profit center by licensing it through a European joint venture. In most cases, however, Simon will buy a company with the intention of selling off its manufacturing facilities, whose operators often become Hain's suppliers. Simon then uses the proceeds to pay down the debt incurred in the acquisition. About half the company's production is farmed out, and that figure would be 100% were there enough dependable quality suppliers.
"The other thing is that here I was, 26, 27, and I was going out and terminating people in their fifties, which is not only difficult to do -- they have kids in college -- but, you know, I didn't want to be there one day in the same situation. They'd replace these people with younger people that made less and had a lot more energy, and they'd burn those guys out too. I said, 'This can't happen to me.' I went to Slim-Fast."
Though Simon has managed to hold on to many managers during his eight years, he is not sentimental about making changes among the staff at Hain. He's on his third chief financial officer, for instance. But the second is now head of operations. Simon, sitting in his ground-floor Long Island office, which overlooks a parking lot and contains a desk and conference table that appear to be the unsold orphans of some yard sale, explains: "Because of our growth we go through people. But if people can learn new talents, you should help them instead of throwing them out. So you move these people around." Though Simon has thrown out plenty, a lot more remain to move around. The company has grown to 1,400 employees, with about 10% of them at its headquarters, which recently moved into larger offices near Hain's former base. Simon took his low-rent furniture with him -- "I'm superstitious: that's my lucky desk," he says -- as well as a recently acquired corporate-style human-resources director who replaced one who Simon felt may have been too friendly with the staff. "I no longer fire anyone," Simon says. "She does."
"Slim-Fast was a fast-growing brand but totally opposite to H?en-Dazs. Disastrous -- no structure, no strategic plans. You had no authority. You had a meeting with the top guy, and the next day you would start to do what you were told, and he'd come back and say, 'Why the hell are you doing that?' 'You agreed to it.' And he'd say, 'So why'd you listen to me?' What I learned there went against what I learned from youth. People were treated badly. Slim-Fast would hire people when things were good -- the philosophy was, When things get bad we'll just fire them. They would call people over the PA system, and everyone knew what it meant: come down and be fired. They didn't value people -- at Hain we've never had a reduction in force; what I try to do is hold back on hiring until we're absolutely stretched -- and they didn't value the brand. With my father in the store, it was Campbell's soup in that red can, that was always in our store, and Heinz ketchup -- these were products you always had to have in the store. Pillsbury, Coca-Cola, Canada Dry. They stood for something. At Slim-Fast they thought the brand could go on anything and sell: salad dressing, popcorn, cookies. Probably one of the most valuable things I learned at H?en-Dazs was brand equity, brand equity. Slim-Fast would put their brand on toilet paper if they thought it could sell $5 worth. I hated it."
Rather than growing Hain by stretching a single brand until it snaps, Simon has collected a portfolio of brands sufficiently balanced that should one ship go down it won't sink the fleet. He learned that much in 1995, when 40% of his revenues came from the rice cakes flying off the shelves in the wake of a $35-million marketing blitz by Quaker Oats Co. -- until the fad collapsed.
Simon believes in gently stretching each brand. His Earth's Best baby food now has a line called Earth's Best Kidz (infants tend to grow), but it's unlikely he'd put the brand on disposable diapers or baby bottles. Simon's brands work more like a patchwork quilt -- each piece delicately overlapping the next -- than like a jigsaw puzzle. On a recent visit to a supermarket-size Whole Foods health-food market in Manhattan it was actually a trick to walk down an aisle and not bump into Hain Celestial: here soups, here cereals, here soy milks, here cold soy beverages, here snacks, and here baby foods. To Dean De Santis, a Whole Foods manager, that was no secret. "Hain? No rival, not even close," he says. "Everything they put their name on is top-notch. And they own everything."
"In 1991 I got married. The next 10 years of my life would be crucial. I had to establish myself. If I wanted to do it, I had to do it now, in my thirties. I had a severance package. If they fired me, I would get a year. I tried everything to get pushed out. So at the same time I was at Slim-Fast, I was looking for a job just in case, I was looking for a business deal, and I was looking to get fired, which you had to do right, because it couldn't be for cause. My plan was to find a business, find products, find brands, find money -- and '92 was rough times."
In the end Simon didn't have to find another job. He got fired -- his former boss was recently surprised to learn that that had not been Slim-Fast's idea -- and found his business. Actually, several businesses: a company making soy ice cream and soy "meat" pockets, a line of soy pizza, a tiny weight-loss competitor to Slim-Fast, and a company selling frozen kosher foods. Only the last was profitable.
"I thought, 'If I can put these [businesses] together and generate $3 million to $4 million in revenues, enough cash flow to pay the bills and take these brands and grow them....' So I took my own money and put down deposits on each one, and I went out and sold my story to these people, that I was going to raise money and build this big company, that I knew what I was doing, that I was a great marketer, that I was a great visionary, and I guess it worked because people liked me and had confidence in me, but really I didn't have a clue. I'd never before had to worry about money because I had worked for companies with deep pockets. I never had to raise money. I never had to meet payroll. But I convinced all four of these people that I had the other companies, and that I had the money. Next I had to go raise the money. Knocked on the doors of banks, VC firms, everywhere -- they all absolutely thought I was just whacked out."
Ah, the satisfactions of success: Fleet Bank, which wouldn't lend Irwin Simon $100,000 after he had risked everything he owned -- gutting his $106,000 in savings and mortgaging his apartment for another $150,000 -- recently competed to hand Hain Celestial a line of credit worth $240 million. That early period in the capitalization-free zone no doubt explains two things about Simon: (a) why his company is virtually debtless, and (b) why he spends up to a third of his time taking care of shareholders and the analysts/soothsayers who now consider Hain Celestial a buy but tomorrow might shift it to hold ... or worse. When he heard that one New York analyst was in a quandary about private schooling for her child, Simon invited her to call his wife: "Daryl's been through that -- she knows it all," he told her.
Simon knows what it's like to gasp for cash: when he finally got a small underwriter to do a public offering, all that was left after the costs of acquisition, underwriting, accounting and legal fees, and repaying bridge loans was about $235,000 -- a pittance. On aggregate annual sales of $3.8 million, the new company, with its four brands, was bleeding $600,000.
"Once I went public, I got rid of all these people, all this overhead, and in the first couple of months I turned it profitable. We needed to sell more, and tighten up. Meanwhile, I knew we had to get bigger -- so where was the next risk? There was a company called Hain Pure Food Co. -- a great name, around since 1926 -- which was up for sale by Pet Inc. Hain Pure Food had $50 million in revenues. Lo and behold, I was out there in St. Louis bidding -- and I was the last bidder. I convinced Pet, a $1.5-billion company, to sell it to me, me with this little public company, and I sold them that I can do it, I can raise the money. And all I'm thinking on the plane back is, 'How the hell am I going to get $21 million?' "
At this point the past rolls quickly into the present. "On Hain Pure Food, we sold bonds, and a bank put up $14 million when they shouldn't have given me 14?Simon says. With future acquisitions the technique would be the same, though the numbers would keep going up. Over the next six years, in order to acquire companies, Simon would sell equity or borrow, and then cut costs and sell off manufacturing facilities. Then he'd improve and expand the brand and push it into new markets.
That bank was right after all: Simon did know what he was doing. But each time he took a risk there was more at stake. "Every time I went out and did another deal, I risked the company, because I was borrowing $30 million to $40 million, and I never cashed out. The question that always came back, always, was, Do I just stay this small little company, do I have a bigger percentage of the company, or do I go out and take a risk by putting more debt on the company and become bigger, with the chance of it all blowing up?" he says. "And I always just felt bigger is better, and I always knew I was betting the firm."
But isn't there some point where it is stupid to bet the firm?
In bumper-stickerese: ORGANIC WASTE HAPPENS. Simon's biggest acquisition, Celestial Seasonings Inc., brought a whiff of just that when Hain's due diligence failed to reveal that Celestial's sales channels were overstuffed. Bad enough that those heightened revenues may have encouraged Simon to overpay, but with Celestial's distributors holding too much product, the tea line's sales quickly dropped. As did Hain's share price and Simon's net worth. Still, worse things could happen: for all the variety of its products, Hain Celestial is essentially a one-trick natural/organic pony. According to Nutrition Business Journal, growth rates for this sector are expected to slip steadily from a 2001 high of 8.9%, to 8.1% in 2002, 7.4% in 2003, and 6.6% in 2004. Should this trend bump into a long, deep recession, Simon could take a hit. Now consider the hypothetical worst: in the midst of an E. coli scare, what happens when 60 Minutes does a nasty piece on the kinds of fertilizer that make produce organic in the first place? Lordy, there must be some point where it really is stupid to bet the firm.
Simon's mouth softens for a moment. He looks away, and at once you know that he is back in Glace Bay, carefully arranging those bottles of Heinz ketchup, and his father is in the back cutting meat for the Passover rush, and outside the Nova Scotian wind is whipping up off the North Atlantic, and little Irwin is thinking about growth and risk, and growth and risk, and why his father refuses to take that risk. And then finally it comes out, the grown man saying it, saying it straight out with the kind of relief his own father must have known, that there is a point in life where no gain is worth the loss of what you have, little as it is, big as it is.
"Today," says Irwin Simon, "it would be stupid to bet the firm."
In just a week Simon is off to Europe to close a $20-million deal for a Belgian company -- Lima NV -- whose CEO, Philippe Woitrin, admires the aggressive businessman who is Irwin Simon. ("Irwin? Irwin is a pusher!" Woitrin says.) Just before Simon leaves, 10 adult male Jews convene in an office overlooking a Long Island parking lot for the brief memorial service that is traditional on the anniversary of the death of a loved one, in this case of the late chairman, president, and CEO of the tiny business empire that was Simon's Dairy, one Nathan Simon, of blessed memory.
As he recites the Hebrew words the eyes of Nathan's boy grow moist -- then tear.
Author and consultant Hesh Kestin never met a bad-for-you food he didn't like.
Copyright © 2002 Hesh Kestin
Irwin Simon, 43, head of the $413-million Hain Celestial Group Inc.
HOMES: New York's Park Avenue; the Hamptons in the summertime
COMMUNICATIONS TECHNOLOGY: In order of efficiency -- eye contact, telephone, BlackBerry
LAST BOOK READ: Jack: Straight from the Gut, by former General Electric chairman Jack Welch
LAST VACATION: Casa de Campo, Dominican Republic: "Couldn't get my satellite phone to work."
FAVORITE FOOD: Officially, the Good Dog, Hain's soy frankfurter. Unofficially, doesn't sneer at steak.
FAVORITE DRINKS: Bottled water. Club soda. Beer.
QUOTE: "Never could understand the Internet -- where was the business? Hey, I'd rather be lucky than smart."
ACCOMPLISHMENT: Smart and lucky, in eight intense years he bootstrapped virtually nothing into America's leading natural/organic-foods company. Risking everything he owned to get a stake, he risked that again and again to add and expand quality brands.
STRATEGY: Looks at dozens of possible brand acquisitions each week. "I'm always looking for the Six Got-to's: (1) Got to be in a growth category -- a great brand in the wrong category won't work. (2) Got to be first or second in market share -- other people know how to create brands, I know how to take it to the next step. (3) Got to feel in my gut we can add value, make it better. (4) Got to be big enough -- it costs the same $5 million to improve a $100-million brand as a $10-million one. No comparison in the payoff. (5) Got to complement our product lines -- bring something we don't have. (6) Got to be so unique we can demand a premium price. The Six Got-to's."
FIRST MAJOR HIRE: Tireless head of operations who still needs only three hours of sleep a night.
LAST MAJOR HIRE: New chief financial officer. CFO's task: "Keep Irwin in line."
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