The opportunity was big not just because Whole Foods would buy a lot of pork but also because pork has the potential to generate more profit than either beef or lamb. Pork has better gross margins than steak, and parts of the pig carcass can be used to make products such as bacon, sausages, and ham, whose gross margins far exceed those of the fresh meat. In addition, Niman Ranch was developing a business model for hog raising that was less capital intensive and potentially more profitable than the one it had for cattle. Hurlbut, who later became CEO, focused on the pork side of the business, working closely with Willis. Along the way, they put in place a set of strict protocols governing how the animals would be treated and what they would be fed, as well as an inspection regime to ensure the protocols were being followed and a rigorous tasting system. McConnell, meanwhile, was busy raising money.
It wasn't difficult. This was the era of the dot-com boom, and nowhere was the economy stronger, or the get-rich fever more intense, than in the San Francisco Bay Area. And Niman Ranch had all the hallmarks of a hot tech start-up. It was a fast-growing first mover with a strong brand and an apparently scalable business model. "It was a brand-new niche," says McConnell, who raised $11 million from 75 investors in three rounds from 1998 to 2004. Niman's share of the company shrank to about 12.5 percent. McConnell had a bit more, having persuaded his wife to sink the bulk of their savings into the venture.
"Suddenly, we thought we were rich," Niman says. "We stopped being careful and started spending money. I trusted Rob and Mike. I thought, What do I know? These guys are out in the business world seeing what other companies are doing. It must be the right thing. And I have to admit that I was seduced by the notion of becoming a really big company and having an impact on the industry. Right up to the end, the investment bankers were telling me, 'You'll probably get $30 million for your shares.' I was seduced by that, too. I was uninitiated and had to learn the hard way."
The new Niman Ranch is headquartered in a drab office building in Alameda, California, about a quarter-mile from the main runway at Oakland International Airport. Its offices are threadbare, perhaps because the senior executives are based elsewhere -- the CFO in Iowa; the vice president of sales in Colorado; and the CEO, Jeff Swain, in Pennsylvania. Swain happens to be in town the day I visit. A bearded fellow in a polo shirt, he seems on edge, and it's hard to blame him. Swain has sat through a number of interviews like this one, and he doesn't care for the articles that ensue, particularly those that cite Bill Niman's refusal to eat Niman Ranch beef. Nevertheless, he seems careful to say as little as possible that might appear to be critical of the founder.
"Everything we've done has been to preserve Bill Niman's legacy," Swain says. "We've brought practicality to his vision. We haven't touched the way the company does pork, lamb, or prepared foods. We've only addressed beef, because that was the crux of the problem." He insists, moreover, that he and his associates were absolutely clear about their plans before closing the deal to buy a controlling stake in August 2006. A majority of the existing shareholders, including Niman, voted to accept the offer.
The idea to acquire the company had been Swain's. He was a finance guy who later got into meat and poultry. After stints at Butterball Turkey and Foster Farms, he had become president and CEO of BC Natural Foods, in Golden, Colorado, and in that capacity helped orchestrate an industry roll-up of companies making "all-natural and organic protein products," as he calls them. One of them was Coleman Natural Products, a pioneer of the natural-beef business. From that perch, Swain became interested in Niman Ranch, which he regarded as unique in the industry. After leaving BC Natural, he teamed up with Hilco Equity Partners to make a bid for Niman Ranch.
The bid came in the nick of time. "We were at the cliff," Niman says. After eight years of pushing to increase sales and build the brand, the company had again run out of money. Granted, it was much bigger than it had been in 1997. Sales in 2006 were almost $60 million. But the net loss was more than $4 million. Swain says that, during due diligence, Hilco looked back five years, and Niman Ranch hadn't turned a profit in any of them.
But the brand had value, although how much the Niman Ranch board didn't know. In late 2005, its members decided that the time had come to find out. For the next six months or so, it entertained a parade of potential acquirers. All of them walked away except Hilco. So when it made an offer of about $5 million for 52 percent of the company and voting control, Niman, among others, was happy and relieved -- especially because the new owners and managers seemed to embrace Niman Ranch's values and philosophy. They even made his remaining as chairman and company spokesperson a condition of the sale. He agreed but negotiated an employment contract defining the terms under which he could later leave if he chose to.
Niman says he began to get a bad feeling about his new partners within the first month. By the following spring, he was shooting off memos warning that the new management team was putting the company's reputation at risk. What bothered Niman most was the decision to transport cattle over long distances, which he contends is inhumane. Close behind was the decision to approve the use in cattle feed of certain man-made antimicrobials. He also expressed concerns about the treatment of calves at one feedlot, the new practice of grading beef according to U.S. Department of Agriculture criteria, and on and on. The board looked into the charges. Its response, Niman says, was to bar him from staff meetings and forbid him from asking questions of employees or talking to customers without Swain's approval. (Swain denies this.) Niman quit in August 2007. "I said, 'I don't want to be the Colonel Sanders of Niman Ranch,' " he says.
