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STRATEGY

Take Two Company Founders. Add 10 Years of 80-Hour Workweeks. Fold in a Formidable Outside Ceo. Mix Carefully. Very Carefully.

How the food company Two Chefs on a Roll grew up, and really started growing.
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Two Chefs on a Roll has two things in common with Willy Wonka's candy company: a business model that depends on secrecy and one hell of an impressive plant tour. Over the past few years, representatives from some of the country's largest food companies have submitted to the twin indignities of hairnets and nondisclosure agreements in order to explore the company's Carson, California, factory, which is a showplace of agile manufacturing. Rich green cilantro hummus is churned in liquefier as tall as a man, and vivid red tomato sauce burbles in great vats suspended from a deck that looks like something an oil company might erect in the North Sea. Employees at satellite quality assurance stations measure salt levels and viscosity against metrics produced by a half-million-dollar computer system. Each room in the factory announces its purpose with a different powerful aroma--garlic, cumin, chocolate--and the scents change almost daily as new items are introduced and lines swapped around.

In other rooms, the company's human taste buds--chemists, food scientists, and chefs--labor amid a motley assortment of ovens, giant mixers, and other equipment meant to replicate the contents of clients' kitchens. The goal: to devise gold-standard products that send eyeballs rolling rapturously, and keep them rolling even when recipes are multiplied a thousandfold. On one recent afternoon, R&D manager Dan Fleischman is patiently testing the 66th iteration of creme brulee for a restaurant chain that demands both convenience and a luxurious "mouth feel." "Instead of making it fresh and baking it, we've given them this concept of having it frozen--all you have to do is heat it in a pot, pour it into a ramekin, put it into the refrigerator," says Fleischman. "So I'm working with different thickening systems, trying to get the texture I want." (Iteration 68 eventually won approval from both Fleischman and his client's executive chef.)

Such chefly creativity hasn't stopped Two Chefs from becoming a high-performance operation. The company manufactures a million pounds of products a month, in as many as 120 distinct SKUs. In one week it produces more than 100,000 pounds of dips and sauces for a major national food retailer and 50,000 pounds of customized sauces for two casual-dining chains, each with more than 250 restaurants worldwide. (Two Chefs is a private-label manufacturer and so does not name its clients. The customers approached for this story would not discuss the relationship.)

Almost everything the company makes it also develops--quickly. Operating in a notoriously trend-driven industry, Two Chefs has occasionally taken a product from concept to commercialization in as little as four weeks, although three to nine months is more usual. And its success rate for new products (success being defined as achieving a significant life in the marketplace) is 70 to 80 percent. In five years, the company's revenue has tripled to roughly $40 million, while head count has remained stable at about 200. Production has doubled, and the executive team has grown fat with pedigreed talent.

Some days, Two Chefs' founders find it hard to believe that this exceedingly capable grownup is their baby. The business looked very different back in 2000, the year Lori Daniel and Eliot Swartz--the eponymous two chefs--came to grips with the need to become two chefs and a CEO. With only some trepidation about yielding absolute control of their business and their destinies, they hired Jeffrey Goh, who as chief executive has transformed the company. He has recruited people with blue-chip resumes, mandated more selectivity in projects, and implemented the kinds of systems and processes he learned while introducing products such as Head and Shoulders and Cheetos to China. "Systems and processes," of course, is code among entrepreneurs for "the hard, boring stuff I have to do to grow."

Under Goh's leadership, Two Chefs has become adept at execution on a large scale. Meanwhile, Daniel and Swartz have been freed up to do the thing they love--which by the way is also the thing they do that most benefits the business: think and act like chefs. Founders often worry that hiring professional CEOs will leach the souls from their enterprises. But Daniel and Swartz found that ceding control of day-to-day leadership left them better able to protect the culinary creativity that was pretty much all they had going for them when they started.

And Two Chefs has no choice but to continue to be creative--its customers are also getting bigger and so require from their supplier infusions of innovation as well as efficiency. That is just the balance that is implicit in the company's name, which nods to both the founders' native artistry and the company's growth. (It is expanding 20 to 25 percent a year, on track with its five-year plan.) A largely right-brain business--creative, conceptual, opportunistic--has grafted on a process-oriented left lobe with minimal sacrifice of its goals and identity. How it did so--and how its founders found their place in the new order--is instructive to any company hungrily eyeing the next level.

First, the chefs. Lori Daniel and Eliot Swartz are foodies by nature (his parents owned delicatessens near Boston; her grandparents founded a series of candy stores in New Jersey) and by nurture (both trained at the prestigious Culinary Institute of America in Hyde Park, New York). In the early 1980s the pair, then recently married, fetched up in Redondo Beach, California, where they cooked at a California-style restaurant and debated starting a business selling wholesale desserts to hotels, caterers, and other chefs. In 1985 they took $13,000 of their $20,000 in savings and did what so many entrepreneurs had done before them: They traveled to Europe and spent four months eating cake.

"Guests at the restaurant were saying, 'Have you ever had patisserie in France? Have you ever had strudel in Germany?" says Daniel. "I needed to know what we were missing." The continental offerings did not prove intimidating. "The Europeans didn't have anything on us," says Daniel. "We realized we should be proud of our cupcakes and layer cakes and puddings. We decided to go for it."

Home from Europe, Swartz went back to sous-chefing to provide an income, while Daniel baked from 2 p.m. to 10 a.m. in the kitchen of an Italian restaurant that was open only for lunch. Her customers included restaurants that wanted to enliven their dessert menus and caterers serving Hollywood clientele. Daniel gave everyone something different, from a pecan pie as tall as a four-layer cake to miniature truffle cakes baked in geometric shapes. Photographs of those early concoctions adorn the hallway of their current factory, each framed in a gleaming cake pan or pie plate.

For the first few years Daniel and several employees made everything from scratch. Growth was limited by lack of capital. "The banks wouldn't lend to us because they said our customers were too volatile and the business was too seasonal," says Daniel. The banks finally came around in 1988, around the same time Swartz joined full time. In the '90s the company added savories to the mix and switched the business model to volume production for bigger customers, but volatility remained. Two Chefs' first large client was a specialty food retailer that wanted a fruit-and-spice cake for the holiday season--and stopped wanting it in February. "We thought it would be an ongoing item, but we learned even big customers weren't business you could count on," says Daniel.

The pair experimented with different channels including catalog marketing and an early Internet site on Prodigy. They also sold to the airlines: Five of the 15 desserts served to United's first-class customers in the early '90s were Two Chefs' creations. Over time, they winnowed their channels to two: retail and food service, with an emphasis on rapidly expanding restaurant chains. For those customers, Swartz and Daniel created signature items. For example, the chocolate souffle cake that for more than a decade has graced the menu of a popular 200-restaurant chain is one of theirs. Two Chefs ships 40,000 of them every month.

For the next few years, Two Chefs often had more work than it could handle. Opportunities knocked and the founders welcomed them all with open arms--not only for the money but because the jobs sounded fun. "We didn't know we could turn things down," says Swartz. As production volume grew, the company moved five times to larger and larger plants, accumulating employees and equipment somewhat haphazardly along the way. Ten years after starting the business, Daniel and Swartz were still working 80 to 100 hours a week.

Their difficulty keeping the business manageable was exacerbated, the founders agree, by their yin-yang personalities. The gregarious Daniel leads with her gut, a trait that sometimes frustrates the more cautious, show-me-the-data Swartz. In theory, those differing styles are complementary. In practice, neither founder could make a decision unilaterally with complete confidence that the other would agree. "We would try to put ourselves in each other's heads but that was hard," says Swartz. "It became almost impossible to travel because if only one of us was there to step up, the decisions wouldn't be as good."

In 1995 Daniel and Swartz separated. Four years later they divorced. Concerned about spooking employees, customers, and their bank, they told no one of their changed relationship, though word leaked out gradually over the years. "We saw a therapist together for a long time to try to preserve what was good about our relationship so we could continue to work together," says Daniel.

The business, meanwhile, marched along, earning profits, winning ever-larger customers, and attracting the covetous gaze of other companies, including Conagra, which wanted to make Two Chefs its skunkworks. But the growing volume was leaving stretch marks on production capacity. "We had all these opportunities we wanted to pursue, but we were kind of out of space," says Daniel. The need for a new facility--potentially two or three times the size of the existing one--loomed, and with it the need for millions in new bank loans. Exhilarated but exhausted, the founders wondered just how large and sophisticated an organization they should be planning for. Did they need 60,000 feet or did they dare to think larger? Was their labor force sufficient to run the new plant or would they require more experience, more skills?

Those questions weighed heavily on Daniel and Swartz when they sat down with their accountant one afternoon in 1999. "He told us, 'You could run this business just the way it is today and keep sales just where they are for the next 10 years and you'd have enough savings to live on for the rest of your life," says Daniel. "'Or you can put it all on the line and go to the next level.' Only one of those options was interesting to us."

To help chart a course, the founders assembled a board of advisers. Daniel and Swartz went in talking about recruiting talent and negotiating with banks and landlords--the outward-facing aspects of growth. But over several meetings they realized they needed help with the inward-facing aspects as well: what projects and customers to focus on, what direction to take, what shape the company should have. They also realized they had to lower the heat on themselves.

The founders didn't need someone to listen to them but rather someone to whom they would listen. By the third meeting it was clear, says Daniel: "We needed professional management."

For an under-the-radar outfit like Two Chefs, Jeffrey Goh was an impressive catch. He had spent the early part of his executive career in Asia, first helping Procter & Gamble launch its China operations and then serving as general manager for Frito-Lay in China and Hong Kong. He next became a partner in an investment firm with interests in China. Upon returning to the United States, he was recruited as CEO for an education start-up. An American of Japanese and Chinese descent, Goh spoke fluent Mandarin and held a degree in finance and entrepreneurship. He also knew a lot about food.

It was crucial that the new CEO establish his leadership."A lot of success has already taken place," says Jeffrey Goh. "And you're trying to figure out what needs to change. "

Daniel and Swartz had already interviewed five or six candidates, each over several days, when a member of their advisory board introduced them to Goh in 2001. The founders fell hard. They liked his detailed questions about the company's history. They liked how he spoke to workers on the plant floor. They even liked the way he put on a lab coat when entering the R&D kitchen.

But what the chefs liked most was the obvious respect Goh showed for what they had accomplished. "Other people seemed to think they could move us forward without asking how we had gotten here in the first place," says Swartz. "Jeff wanted to understand the history."

A leader with Goh's experience didn't come cheap, and Daniel and Swartz resisted making him a full partner. So instead the pair, with the help of the company's attorney, crafted an agreement, the details of which they won't reveal. "Let's just say it's a formula where as the value of the company grows, Jeff participates in that," Daniel says.

In Goh, Swartz and Daniel knew they had a first-rate ingredient; but they weren't sure how he would work in the recipe. The six weeks between Goh's hiring and his arrival were tense. Daniel, in particular, fretted: She was ceding to Goh not only her title--he came in as president and was made CEO a year later--but also her office. With space severely limited, she relocated to a building three miles away until the company's move to its new facility.

Daniel was also suffering, uncharacteristically, from a bout of performance anxiety. Specifically, she worried that Goh, once on the ground, would find the business--and its leaders--less sophisticated than he had expected. His ability to ask smart, challenging questions, which had so impressed her during the interview process, now seemed vaguely threatening. "He had a wealth of experience in very large, very structured companies and was used to being in a much more polished environment," Daniel says. "I was excited, but I was nervous about whether he would be happy in this environment."

More troubling, neither Daniel nor Swartz could picture quite how the leadership menage would look. The two were on the board and knew they would continue to be involved in setting direction. But the big picture wasn't big enough to fill their days, and everything else was a question mark. Looking for a model, the founders read about companies led by collaborative teams, paying particular attention to Wendy's, a fellow food business that at the time shared leadership among three people. But nothing reminded them of them.

Goh, meanwhile, had his own concerns. Not surprisingly, he worried about working with a divorced couple. More substantively, he pondered the best way to keep the founders deeply and visibly involved in the business. Daniel and Swartz were the culture's keystone, and their reputation was among Two Chefs' main selling points. At the same time, it was critical that he establish his leadership. "You have a strong personality coming in. A lot of success has already taken place. And you're trying to figure out what can be kept and what needs to change," says Goh. "Before we decided anything what we needed was regular, structured communication."

So starting in the first month, Goh set up a system. From Monday through Friday morning he ran the show. Daniel and Swartz would sit in on meetings, take notes, and coach him on relevant events from the past. On Friday afternoons the roles reversed: Goh would visit Daniel and Swartz in their offices, answer their questions and receive their feedback on the week's events and decisions. "Otherwise they would have worried about saying things in meetings that might affect my leadership, or I might not have listened to them," says Goh. That balance of power sat well with both founders. The arrangement continues to this day.

Chaos is like cholesterol: There's a good kind and a bad kind. From the first, Goh saw his job as eliminating the bad kind, which had squandered Two Chefs' energies on low-return projects while straining its people and production systems. For 15 years the founders had leaped into development and manufacturing with little advance planning. So when, for example, a retail customer once ran a promotion for a new bread and the order suddenly spiked, the founders, their entire production staff, and most of that staff's spouses had to work around the clock to get it out, taking catnaps on sacks of flour to ward off collapse. The next day Swartz found a machine that would quicken the process and--cost and future utility be damned--bought one immediately "so at least we could get home in the next 15 hours."

To eliminate that kind of crisis the new CEO set about erecting infrastructure. Goh recruited an executive team that combined food experience (the founders insisted on that) with backgrounds in either large or fast-growing companies. He revamped human resources and created new training, compensation, and employee orientation programs to make the business more attractive. He reorganized R&D as a separate department, with tendrils snaking into everything from sales to manufacturing. And he borrowed the money for a new plant big enough and modern enough to accommodate next-generation manufacturing. (See "Portrait of an Agile Manufacturer".) Swartz, with whom structure sits easy, managed some of the largest projects, including the move to the new plant.

At the same time, Goh wanted to nurture the good kind of chaos--the openness to exploration and ferment that kept the company innovative and its new-product pipeline primed. This became Daniel and Swartz's purview. Swartz, for example, was able to flex his creativity in the place where it did the most good--in front of customers. For the first time since Two Chefs' early days, he found time to go on sales calls, often meeting with the executive chefs of restaurant chains. While the account manager ironed out questions of price and scheduling, Swartz helped these clients come up with ideas by talking to them in chef.

"The language that a chef will use speaking to another chef is very similar to what a doctor might say to another doctor," says Swartz. "The understanding on both sides helps to generate ideas that build upon themselves." So, for example, the conversation on a recent call turned to how much food restaurants throw out. Swartz and his client began toying with ideas to reduce that waste, among them the possibility of creating a beurre blanc that is spreadable cold and so can be refrigerated after each use. Swartz punted the idea to R&D--and a spreadable beurre blanc just launched.

Two Chefs wanted to nurture the good kind of chaos--the openness to exploration and ferment that kept the new-product pipeline primed.

The chef-to-chef conversations have proved so fertile that when Swartz isn't available the company now routinely sends an R&D chef along with the account manager. Both founders also do stints in their clients' kitchens, scouting for ideas and insights as they work alongside the line chefs.

Swartz and Daniel scout for ideas not just among their customers but also out in the broader world, where thousands of next new things are waiting to be discovered. Few industries are globalizing as rapidly as food: U.S. restaurants offer everything from Spanish foams to Mongolian barbecue, while specialty retailers brand themselves as purveyors of the exotic. Under Goh, the company's annual travel budget is in the hundreds of thousands of dollars and managers have visited more than a dozen countries. (The only executives who rarely go anywhere are Goh himself and the CFO.) "Half the time I have a customer in tow so I can see how he or she responds to things firsthand," says Daniel, who last year spent 27 weeks on the road.

Two Chefs' transformation was not painless, of course. Most of the stress built up around people issues. Goh had determined to go the Good to Great route and assemble a top-notch management team before embarking on strategy. Specifically, he needed people accustomed to the kind of high-performance operation Two Chefs wanted to be. In some cases that meant big-business experience at places such as Unilever, General Mills, and Mars. In others it simply meant willingness to accept more structure and hierarchy.

But many employees fit neither criterion. Goh fired some; others fled what they perceived as encroaching corporatism. In 2003 and 2004 the controller, the director of sales, and 10 out of 25 key managers left. "Some people liked it better when it was smaller and we could all meet together in one room and decide things for the company," says Goh. "Other people discovered that we needed a higher skill level or a little more experience. That was just attrition as we moved to a much larger business." Still, he concedes, "it should have been less."

The hiring process, meanwhile, took longer than expected. Goh recalls sitting late one night in his office after firing a direct report and "thinking to myself, I have more vacancies on my executive team than positions filled." Haunted by the leafless branches of his org chart, Goh fought the urge to start hiring just to fill the slots, just to be done with it. He succeeded, though it meant he spent months searching for talent.

Daniel and Swartz accepted their colleagues' departures with stiff upper lips and sometimes trembling lower ones. And while they abided by Goh's hiring decisions, they didn't always agree with them. "We would have new employees in particular positions and I wouldn't see how they could be successful," Daniel recalls. "And Jeff would say, 'They're doing fine. Just let them be.' And I would say, 'I don't see how it's going to work, and if I don't see it, I don't see it."

Elsewhere in the company, changes were less seismic but still felt. The enterprise resource planning system, a behemoth brought in to manage processes as varied as resource planning and allergen management, altered the day-to-day work of whole swaths of the company. Approximately a quarter of the work force--many with very little computer experience--found themselves wielding scanners and pecking at keyboards as they processed more than 40,000 discrete "transactions" each month. Training remains a work in progress.

By contrast, the other huge disruption--moving to a new factory--emerged as change management at its best. Goh and Swartz made sure everyone interested had a say in designing the plant, and as moving day approached they and Daniel brought groups to tour the facility and hold parties in the new parking lot. Employees grasped one another's hands to see how far their human chain would stretch across the vast space. Some raced around the empty rooms on bicycles. "People cheered," Goh says. When the move at last took place in early 2003, Two Chefs didn't miss a day of production.

Exhilaration over the move has naturally abated, but morale is buoyed by the company's growth and rising industry profile, say the founders. And now that they've absorbed the shocks, Daniel and Swartz are punch-pleased with their own roles in the new regime. More than two decades after launching the business they finally have the luxury to think strategically. Relieved of his go-to-guy mantle, Swartz can follow his interests into any department and choose whether to participate or simply observe and advise. Daniel spends time just talking to employees, with whom she enjoys warmer, more relaxed relationships now that "we're no longer the bosses and the heavies." She's also emerged as the company's public face at industry events.

Perhaps ironically, the founders have come to embody the brand more than at any time since they were inventing four-layer pies in their tiny rented kitchen. On the conference circuit, in clients' offices and kitchens, and on their website (designed by Daniel) the two talk endlessly and animatedly about, not the business of food, but rather food itself. Their message is simple. Because the company is what it is, customers can count on 10,000 pounds a week of reheatable creme brulee. Because Daniel and Swartz are who they are, customers can trust it will be satin on the tongue.

People visit the plant to inspect its operations, says Swartz. But the first thing they always ask is, "Who are the two chefs?"

Leigh Buchanan is an Inc. editor-at-large.

Last updated: Aug 1, 2006

LEIGH BUCHANAN | Staff Writer | Editor-at-large, Inc. Magazine

Leigh Buchanan is an editor-at-large for Inc. magazine. A former editor at Harvard Business Review and founding editor of WebMaster magazine, she writes regular columns on leadership and workplace culture.




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