Extending Its Reach

by James Dudlicek
HP Hood is poised to bring its innovative products to an even wider national audience.
Depending on where you live, there's an HP Hood you might know, and a Hood you might not know.
At least that's how chairman John Kaneb explains this apparent split personality of his growing Chelsea, Mass.-based dairy processing company. "Hood is really two companies in many respects," says Kaneb. "In New England and eastern New York state, we are a very well-known branded marketer of a wide variety of standard dairy products. In the New England states, we are number one in every category in which we compete, from fluid milk to cottage cheese to sour cream to ice cream."
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That's 14 categories in all; Hood also reports having 97 percent brand recognition in its markets.
But there's more, Kaneb explains. "Hood is also a national company
presenting itself under various brands for various products in either the eastern half of the United States or the entire United States, depending on the
product," he says.
Those products include Lactaid® lactose-free milk, made under license from McNeil Nutritionals; and more recently Carb Countdown™, a Hood-branded low-carbohydrate dairy beverage that carries the stamp of approval of Atkins Nutritionals Inc., promoter of the low-carb diet regimen currently sweeping the nation.
With around $1 billion in annual sales, Hood produces a vast assortment of branded, private label, licensed and franchised products, including milk, cultured products, frozen desserts, extended-shelf-life dairy, non-dairy and citrus products and specialty drinks.
"Our strategy in our home territory is simply to maintain our number-one market share in the branded products where we compete, and that is no small task," says Kaneb. "We have very vigorous and capable competition from a very large Dean affiliate and two very aggressive New England dairies, one in northeastern New England and one in southwestern New England, who do a very good job. On the super-regional and national scene, our aim is to achieve true significant growth each year, and we have been doing that. We also intend to maintain our number-one market rank where we have it, and that is in ready-to-drink flavored milks under the Nesquik® label, liquid non-dairy creamer under the Carnation Coffee-Mate® label and Lactaid lactose-free milks. And in categories where we're not number one, our aim is to be number one or number two."
A Bigger Playing Field
The latest step in Hood's strategy to stay on top of its game is the company's pending acquisition of Crowley Foods and Marigold Foods from Dallas-based National Dairy Holdings (NDH). Last year, Hood had planned to merge with NDH, created as a result of the Dean-Suiza merger in 2002.
But the deal, which would have created the country's second-largest milk processing company, came under intense scrutiny after 10 U.S. senators asked the Department of Justice to investigate the merger amid anti-trust concerns.
Plans for a full merger were dropped, but the association between the two companies led to the current arrangement. Late last month, Hood officials received approval from the Department of Justice to proceed with the acquisition of Binghamton, N.Y.-based Crowley and Minneapolis-based Marigold, which sells products under the Kemps® brand name.
"When we finish these acquisitions, we will have moved from a billion-dollar-sales company to a $2.5 billion sales company," says Kaneb. "Much more importantly than dollar sales, we will have acquired several hundred direct-store delivery routes that those two companies possess, that can move products such as Simply Smart™ (Hood's ultrafiltered milk product) and other specialty products into local distribution systems more efficiently than Hood can from its New England base."
Crowley is a roughly $700 million-a-year dairy manufacturer and distributor with a strong cultured business and plants in New York, Pennsylvania, New Hampshire and Tennessee. With similar annual sales, Marigold's Kemps brand holds a strong market position in the upper Midwest with
ice cream, fluid milk and cultured products.
Kaneb stresses that the acquisition is not a matter of consolidation. "We have not been an acquirer. These acquisitions are about extending Hood's reach, rather than consolidation," he says. "There are many ways to grow businesses. Dean Foods is an outstanding example of a brilliantly executed strategy of consolidation. Hood has a different approach. These acquisitions are about geographic reach rather than consolidation. I'm not saying we'll never close a plant or consolidate some routes. But we are about acquiring market opportunities for new products and gaining a bigger field in which to use our innovation capabilities and our extensive ultra-high-temperature processing and packaging."
Of course, such an acquisition brings obstacles in areas other than the regulatory arena. "The financial challenge that we're putting in front of ourselves by spending several hundred million dollars to acquire two dairy companies outside of our area — largely traditional dairy companies, with the lower margins that go with that business — is to sustain an exceptionally high return on invested capital," says Kaneb.
"Hood has a record of outstanding return on invested capital. We've been able to do that by innovation, building high-tech processing facilities that make products that typically have higher margins. In investing several hundred million dollars in traditional dairy companies, we've given ourselves a hill to climb, to keep our return on invested capital in the outstanding category."
Corporate At-A-Glance
Headquarters: Chelsea, Mass.

Plant Locations: Agawam, Mass. (milk, cream, juice drinks); Barre, Vt. (milk, cream); Oneida, N.Y. (UHT milk, cream, beverages and mixes); Portland, Maine (milk, cream, juice); Suffield, Conn. (frozen desserts and novelties); Vernon, N.Y. (cultured); and Winchester, Va. (ESL fluid dairy).

Annual Sales: About $1 billion.

Top Officer: John A. Kaneb,
chairman, president and chief
executive officer.

Employees: More than 1,600.

Products: A variety of branded,
private label, licensed and franchise products including milk, cultured products, citrus, extended shelf-life dairy, frozen desserts, non-dairy and specialty drinks.

Customers:
Chainsand independentretailers convenience stores, foodservice channels; home delivery customers in New England.

Market Position: No. 1 brand in
14 competitive product categories; enjoys97 percent brand recognition.

History:Founded in harlestown, Mass., by Harvey Perley Hood in 1846. Since then, the company has become one of the largest branded dairy operators in the United States, distributing numerous brands under license. Kaneb’s family business — The Catamount Cos., which also owns Gulf Oil — purchased Hood
in 1995.

Crowley Foods

Acquisitions:
In early 2004, Hood received permission from the U.S. Department of Justice to acquire the following companies from National Dairy Holdings:

Crowley Foods
Founded in 1904, Binghamton, N.Y.-based Crowley operates 19 sales divisions and 11 manufacturing facilities, as well as distributes and markets products in more than 24 states east of the Mississippi River. Its product categories include fluid milk, cultured dairy, frozen desserts, specialty dairy and non-dairy beverages, manufactured under several regional brand names. The company also provides private label manufacturing for a number of leading grocery chains and distributors. In addition to its own name, Crowley owns the following brands: Axelrod,® Green’s®, Hagan®, Heluva Good®, Maggio Cheese®, Penn Maid, Rosenberger’s and Weeks.

Marigold Foods
Minneapolis-based Marigold was founded in 1914 and has since grown into a leading producer of branded dairy products, with strong presence throughout the Upper Midwest and the Gulf States. Its products are marketed under the Kemps® brand name. Although often called “the ice cream people,” Kemps also offers milk and cultured products.

Leveraging the market opportunities brought by Crowley and Marigold is going to take a while, says Kaneb. "It's going to take two years, maybe three years, before we can hope to get our return on invested capital back to where it has been," he says. "Once we digest this and exploit the market opportunities, I believe we'll go back to outstanding return on invested capital with much more capital invested."
History of Innovation
In the meantime, Hood is enjoying more broad exposure with its new Carb Countdown dairy beverage. Now available at most major grocery retailers around the country, the Atkins-approved beverage is bringing the Hood logo to consumers who may have never before seen it.
But for Hood, Carb Countdown is part of a tradition of filling a consumer need. "Like everyone else, we saw this train coming," says Mary Ellen Spencer, vice president of brand marketing. "More and more people are following low-carb diet plans and they often struggle with dairy because of the carbohydrates. So, we developed Carb Countdown so we could get people back into dairy. The e-mails we're getting from people are saying, 'I cut dairy out because of the carbs, and now I can have it again. It tastes like milk, and it's great.' It really has become a solution for these people who have been struggling because they really love milk and they haven't been able to have it."
Spencer says Carb Countdown was well-timed, coming out ahead of most potential competitors. "Consumers have been very receptive to it," she says. "Just like Simply Smart, there was this unmet need out there and we tried to go grab it. We seem to be making those people pretty happy."
As with Carb Countdown, Hood hopes to gain a wider audience for Simply Smart as the Crowley/ Marigold acquisition takes shape.
"Simply Smart was a fun project to work on. It was our last big innovation in milk after the LightBlock Bottle™," explains Spencer. "At that time, there was a ton of research in the industry on what consumers were saying about lower-fat milks: 'I can only go so far, and then I don't want to drink this watery blue stuff anymore. So either I'm leaving the category or I'm drinking more fat than I really want in a glass of milk.'
"So we spent a lot of time trying to figure it out. We looked at many alternatives, including adding artificial colors and milk solids. We weren't quite satisfied with any of those, and that's when we came up with Simply Smart and the ultrafiltration technology, which allows us not to have to add anything to the milk. It just takes out some of the liquid, which gives it a richer consistency. Consumers have just loved this product. We get letters all the time like, 'I was never able to get my husband to drink fat-free milk, and now he will.'"
Spencer reports that two-thirds of consumers who try Simply Smart buy it again, a statistic she calls "unbelievable" considering it's an enhanced milk product sold at a premium price. "It really has been a huge success story for us. It delivers day in and day out on the proposition of fat free tasting like
2 percent and 1 percent tasting like whole," she says. "It's been growing for five years and hasn't bottomed out at all. The advertising right now focuses on this 'moment of truth' where you drink a glass and it really does taste that way, kind of this pleasant surprise."
The company looks at Simply Smart and Carb Countdown as stunning follow-ups to its success with LightBlock, Hood's first major innovation after it was purchased by the Kaneb family in 1995. The packaging technology, which keeps out light that can negatively impact taste and nutritional quality, was a way to add value to a premium-priced product.
"The LightBlock Bottle has worked well for us. It helped us differentiate our brand from the competition. We regained our market share and we've held on to that position," says Spencer. "Consumers really get it. We went out and we advertised very heavily to explain why we developed this bottle, and consumers now talk about Hood's LightBlock Bottle. It really became the icon for the company."
Staying On Top
It's this value-added quality that forms the bedrock of Hood's competitive strategy. "We don't try to compete on price," says Kaneb. "In fact, our prices are typically higher than our branded competitors, certainly higher than private label. Carb Countdown, for example, is a difficult and expensive product to make well. We compete on quality and customer confidence."
How does Hood go about achieving its goals — staying No. 1 in New England and either first or second with its national offerings? "It's having high-quality products and constantly keeping Hood or our licensed names in front of the public. We do that with our packages on shelves, media advertising and — last but certainly not least — our blimp," says Kaneb, referring to an aerial photograph of Hood's blimp over Boston's Fenway Park (Kaneb is a partner in the Boston Red Sox).
Spencer explains the company's overall message. "The umbrella message is that we are the dairy experts, we are innovators and we care about your family," she says. "On the next level, our advertising message becomes very product focused. Obviously underneath it all lies quality and trust, and the fact we've been around for over 150 years. But we're always trying to bring news, something for consumers to say, 'Oh, wow, here's the next great-tasting nutritious product from Hood that's meeting a need my family has.'"
Hood employs its "Answer Mom" spokeswoman in television and radio advertising to drive that message home. "She's on the Web site as well," says Spencer. "Because we have such a diverse product line, we use her as a 'mom expert' — someone who cares about her family but is also knowledgeable about our products. She's our consistency across the advertising, but yet we try to always give people information and product news — not let her be a salesperson per se, but someone who is conveying information. She's worked very well for us. Because we are a regional brand, we also do things market-specific that we need to do, such as newspaper advertising or event sponsorships."
Jim Walsh, senior vice president of sales, explains Hood has been focusing on developing products that are solution based versus feature-benefit based. "Solution-based products are products that provide clear solutions for consumers' needs. This strategy has put us in a leadership role in the specialty milk category throughout the United States," says Walsh.
"We are extremely pleased to have brands like Lactaid, Nestlé®, Atkins® and Carb Countdown in our portfolio that provide clear solutions for what our customers and consumers are looking for. We have developed a national sales organization that focuses on selling value-added products and providing our key retailers with the best support possible," says Walsh.
All these marketing efforts help the company keep a place on consumers' minds. "I think we achieve a high level of reminder to consumers that Hood is there," says Kaneb. "That's why we're taking the road we do. In the greater geography — the eastern United States or national — there's our quality, certainly. And national advertising — Lactaid, Nesquik and Coffee-Mate all benefit from that. But it's also innovation in formulations, packaging and new products. It typically has not been by acquisitions — that's going to change. Our growth has been, to use the Wall Street term, organic — internally generated. It's ideas out of our research lab, products, sophisticated modern plants, particularly ultra-high temperature packaging plants."
Treasure Trove
Hood conducts its product research and development at its laboratory and pilot plant in nearby Charlestown, a few minutes away from its Chelsea headquarters in suburban Boston. Here, at the company's original headquarters and plant that's now a business park shared with other tenants, Hood's food scientists come up with the formulations for Carb Countdown and other innovative products.
"I truly believe that our smallish but extremely productive research group is, pound for pound, one of the very best in the U.S. food industry," says Kaneb. "Hood's successful innovations in dairy go back many years before the Kaneb family bought the company. Since that time, it has been my privilege to nurture and challenge our R&D group.
"Dr. Margaret 'Peggy' Poole, vice president of R&D and quality control, is a worthy successor to the legendary Don Erickson, who retired some five years ago. She continues to build a deeper team of scientists and technicians whose goal is to keep HP Hood at the forefront of the industry. Supporting their efforts is expensive because so few projects result in long-term winners, but in my opinion, it's money very well spent."
It's this kind of research and innovation that Kaneb says offers the dairy industry its greatest challenge and also its biggest potential gain. "The milk can is a treasure trove of nutrition and flavor," he says. "The biggest challenge by far is to grab hold of and exploit that natural treasure trove of healthy, good-tasting food. As I think the industry has been learning, painfully, over the past 20 years, the sale of standard fluid milk in gallon jugs, to be consumed at home, is just not going to be the growth engine that the industry needs. At best, it's a maintenance battle, and it's a tough maintenance battle."
Of course, acknowledges Kaneb, this isn't anything that hasn't been said before. "The trick is to use research and technology to take milk apart and put it back together in ways that are healthy and good-tasting," he says. "What we're beginning to do in the dairy processing sector of the industry, using research and technology, is to break milk down a lot further into components that bring the consumer healthy food at a very economical price that can taste great. We have all this protein, all this calcium. What do the other guys have that have been taking our market share in fluid milk? Sugar, water and carbon dioxide. Or juice — sure, it's a healthy product, but does it compare with milk in terms of nutritional value?"
Kaneb points to Simply Smart and Carb Countdown as ways Hood has broken milk down and relaunched it as something new, adding that the company expects to follow Carb Countdown with a low-carb yogurt to be launched soon. "Others can do the same thing," he says. "We happen to be doing it very vigorously."
Kaneb describes as brilliant the University of Tennessee research linking consumption of dairy calcium to weight control. "The question is, how to educate the public about the claims," he says.
"We haven't come up with a crisp way of delivering the message. We plan to — we have a lot of ideas percolating. To get across how your particular product can be used, as opposed to other people's products, you need a message that relates to your product. Just saying, 'Milk does this, and here's our milk,' that isn't going to work. Taking the truth that's been revealed here and delivering it in a way that will help sell your milk or other dairy product is a bit of a challenge," says Kaneb.
But as this new health revelation gets off the ground, what does the future hold for the current low-carb diet craze? "We don't know," says Kaneb. "Some people think it's a fad. Some people, especially those in the forefront of low-carb leadership, believe it's a permanent change in the way many Americans are going to eat. We don't pretend to know the answer. But obviously we think there is a reasonable chance that enough people will adopt the low-carb way of eating as a permanent feature in their lifestyle. Are we possibly wrong? Yes. If so, we will have invested a lot of money fruitlessly. I'm not predicting success. I'm not predicting the change that some are predicting in the eating habits of many Americans. But I'm also hopeful that a sufficient number of Americans will stick with this way of eating so our considerable investments will bear fruit over the long run. We're going to find out. And I fully expect there to be a good deal of competition from the rest of the industry."
“The milk can
is a treasure trove
of nutrition and flavor.”
— John Kaneb, chairman, HP Hood
A key component in Hood's strategy to maintain a competitive edge is product licensing. Hood has agreements to market products under brand names including Lactaid, Nesquik, Coffee-Mate, Southern Comfort® Egg Nog and, of course, Atkins.
"Licensing relationships are a huge part of our business. We think we do them very well," says Kaneb. "We are the exclusive national licensee for Atkins for dairy beverages and yogurts. In making these licensing relationships work, the first thing you have to do is make an acquaintance. It so happens I met the COO of Atkins last spring at a nutrition conference. He said they were looking for a way to get into dairy, and the rest is history.
"We are negotiating other major licensing relationships right now. We've got a national distribution system. We ship all over the United States from our own warehouses. We have national and regional sales forces. These are highly competent folks who live all over the United States. We may not have plants in every corner of the country, but we have people and we have reach, anywhere a truck can go with an extended-shelf-life product in the lower 48."
Running Lean
Kaneb describes Hood's corporate management philosophy as "flat and lean." He elaborates: "You'll find Hood is not just a family business, in the sense that it is owned by a family. It is run like other well-run family businesses in that it is typically very flat with relatively very few layers between top management and people executing at the plant level, sales level and research lab."
Hood has virtually no support staff, notes Kaneb. "It has line staff, meaning Hood officers and executives have
specific operational duties, as opposed to gathering information from somebody and giving it to somebody else, which is, in my view, to be avoided. We are going to be challenged to maintain this management style as we grow," he says.
How does Hood plan to handle the management of the companies it's poised to acquire? "It's our plan to largely let them manage themselves the way they have in the past," says Kaneb. "They are flat organizations, and they are lean organizations. They don't need to be reinvented."
To that end, Spencer says it's the people who make Hood what it is. "What makes Hood unique and why we're so successful is because we're so team-focused," she says. "People pull together and really own what's going on here. There's a vested personal interest in being successful."
Kaneb offers his thoughts on what sets Hood apart from the pack. "Hood was founded in 1846. We believe it to be the longest-lived dairy processing company in the United States that also happens to be on the leading edge of innovation on the national scene," he says. "I don't think any company in this industry can say it has a 150-year history and can say it is also a significant innovator on a national scale."