Executive Roundtable

Two generations of management discuss the growth and future of Old Home Foods.
The Hanson family has been part of the Minnesota dairy industry since 1912, when P.A. Hanson started the Rice Street Dairy in St. Paul.
Today, P.A.’s grandson, Rick Hanson, serves as chief executive officer, chairman of the board and third-generation owner of the company that evolved into Old Home Foods.
In September 2002, Geoff Murphy became the first person outside the Hanson family to lead the company when he was named its president. A veteran of Yoplait and Colombo, Murphy is poised to take the helm at Old Home after Hanson retires as CEO in March 2005.
During a recent visit to Old Home’s corporate headquarters, Dairy Field asked Hanson and Murphy for their thoughts on the company’s growth, future and success amid a field of much larger competitors. Responses have been edited for space.
Dairy Field: What kind of expansion opportunities do you see on the horizon?
Rick Hanson: We are either number one or number two in almost all the categories we’re in. I don’t know how much opportunity there is for us to push the market-share ceiling in this market. So I think our major opportunity is adjacent geography and outside of our primary marketing area.
Geoff Murphy: We do a lot more advertising than your average cultured dairy company, whether it’s bus sides or billboards, radio or television. We do a lot, and even though we have, for example, the number-one share in cottage cheese, every now and then we’ll hit on something that will garner us even more share. We’ve not put any low-carb products on the market — new ones, that is. But cottage cheese is low carb, so we highlighted that in an outdoor campaign and actually saw our share go up eight or nine points. If you’ve got a 45 share and your product is 30 percent more expensive than your next branded competition, that’s pretty good.
DF: How far do you see your market expanding?
Hanson: It just depends on what timeline you’re looking at. There’s no reason we can’t be another Ben & Jerry’s or what-have-you that’s national.
Murphy: That’s with our branded products. We are a national company. You can purchase products made here at Old Home in all 50 states, just not necessarily under the Old Home name. We have a number of branded co-pack customers.
Hanson: Also, in terms of potential growth, it has been a great opportunity for us to become familiar with cultured organic and soy, even though we don’t manufacture any of it for ourselves.
DF: What are some of your brand’s selling points you drive home to consumers?
Murphy: Quality and freshness.
Hanson: And I think we’ve earned it after almost 80 years now. We have done a better job of freshness than our competitors. Cultured dairy is our bread and butter, as opposed to a byproduct like it is for most sizeable dairies. As far as I know, we’re the only cultured dairy company that has its own DSD system that completely services the store shelves.
Murphy: For a number of years, our campaign was “the freshest place in the dairy case,” and I think our consumers relate to that. They know the product is made here locally and we bring it right to the shelves. Whenever we do focus groups, our consumers continually talk about the quality of our products, and they just wouldn’t consider purchasing another label for their family. And we don’t mess with the quality of our products. A good example is our vanilla yogurt — it’s made with a natural bourbon vanilla that just a few years ago was about $60 to $80 a gallon. The last purchase we made was $550 a gallon. But we’re not going to change the product. That’s what people expect. We’re fortunate that we can pass some of that price on to our consumers because they are loyal and they know they’re getting the best.
DF: How have infrastructure improvements enhanced operations?
Murphy: When I got here in ’98, the three cup fillers were all rotaries from the ’50s. All those lines have been replaced within the last five years, two within the last three years. That allowed us to do a number of things — most of our products were still in waxed paper, even just a few years ago. So we were able to transition out of that. We made a huge investment getting into beverages. We saw that as a good opportunity and completed the installation in the fall of 2002 before it really took off, which puts us in the nice position of having to turn away potential business for that line. We’ve invested a lot in capacity, both on the processing side and the packaging side. We replaced our entire refrigeration system. That’s kind of the turning point in our investment. In the recent past, we invested in capacity — probably doubled our capacity. Now we’re going to be investing more in efficiencies, to really drive cost out so we can be more effective.
DF: What are the biggest challenges for your company and the dairy industry as a whole?
Hanson: I think for the dairy industry, it’s being in a commodity business, hard to distinguish one branded product from the other. Of the 35 dairies that were around here 35 years ago, there’s now five. So we’ve been able to distinguish and market our product. Some of the other dairies are doing a lot of the stuff we’re doing, in terms of outdoor and media, but we’ve been doing it for many years, and it has paid off.  People are convinced our products are as good as they can get.
Murphy: I would agree with the commodity issue. It’s tough. Milk and dairy products are staples, and when you start raising the prices too much, you get Mom’s attention and you get legislative attention. But overall for the industry, I think the future’s very bright. The focus on childhood as well as adult obesity is really becoming magnified. I think the dairy industry is positioned very well because we are a healthful alternative compared to some of the products that are out there. For Old Home specifically, our biggest challenge is realizing our dream of getting our brand in other geographic areas. We’ve almost doubled the company in the last six years; we have a vision of tripling it again in the next five or six years. We’re not as small as we used to be, but we’re still a small company. Here, Old Home is like Betty Crocker — everybody knows what it is. But you go 300 miles from here, people don’t.
Hanson: Geoff and I had an interesting experience out in California. We were talking about our future, and he said it’s really going to be tough to get outside our primary marketing area because nobody knows Old Home. I said, I think we’re better known — you’d be surprised, just by virtue of people traveling and what have you. We went to dinner that night, and he’s got an Old Home jacket on. The waiter comes up and looks at his jacket and says, “You’re the guys who make that crab dip!  I wish we could get it out here!” Then I take him to the airport the next day, and this guy comes up to us and says, “I see you have a Minnesota license plate. Where are you from?” I say, “The Twin Cities.” And then he saw your Old Home jacket and says, “Are you the Old Home cottage cheese company? I’m from Luverne, Minnesota. I wish we could get that stuff out here.” Anyway, to take a brand and support it with marketing is hugely expensive. That’s why we have taken on contract packaging, to help us defray some of our investment costs so that we can put money into manufacturing that we wouldn’t be able to justify based on just our branded volume.
Murphy: And that’s a challenge itself, because we are a branded company and we want to remain a branded company. We don’t want to ever get into a situation where 60 percent of what we manufacture and sell is under another label [the split is about 70 percent own-brand products, 30 percent co-packed].
Hanson: Geoff, is our contract packaging growing at triple digits?
Murphy: Yes. And we’re being cautious about taking on additional customers. With some of the major customers, they’re so pleased with us that they’re launching new products, some that they’re even having us develop for them. So I think we’ll realize all the private label growth that we want with our existing customers. Which isn’t to say I don’t hope somebody calls us with some fantastic opportunity.
Hanson: I wanted to stay with the branded product because it’s the only place that you’re secure. When I brought Geoff on board, we visited several dairies and one of them happened to be Wells. Obviously, Wells’ Blue Bunny is a very successful brand name and, at the same time, they have a huge contract packaging business. That really turned me around mentally that you could do both successfully.
DF: How would you describe your company’s management philosophy?
Hanson: One of my major undertakings was to change our corporate culture from a top-down management — more inclusive, better communication, getting employees involved. We have employees from every department help us put together our business plan every year. And it’s really interesting to hear some of the astute observations that are made by people who are on the line. We have a weekly newsletter and we share a lot of our successes and failures. We have a “roving reporter” who walks around, and they get a lot of communication where you get one department thanking another department. I really think that’s neat. So much of what we do here is repetitive. It doesn’t have to be interesting. We try to get around that by involving the people and having them see that their department is not an island unto itself.
Murphy: We constantly, at the leadership team level, work on our team skills, and we’re going though it again right now with a series of off-sites with a professional coach, making sure that we interact and work well together as a team.
Hanson: All the officers own stock in the company at this point. My family has about 80 percent of the ownership. I believe in having the officers and key personnel have stock in the company. We have a program right now where we have authorized 800,000 shares, or about 20 percent in additional stock, to be earned by key personnel over the next eight years. To get that, they have to reach a certain profitability, a certain overall growth and a certain branded growth. If they ring the bell on all three of those, they will accumulate 800,000 shares. If they succeed, the company will succeed. So I hope they earn it all.
DF: Where do you expect the company to be five years from now?
Murphy: I think there’s a good likelihood we may be in a different location. We’re looking right now at moving our offices right across the street. If you walk around here, you see how crowded it is. There’s a lot of volume being pumped through here. Five years from now, we’ll be at least double in sales from where we are now. And given that, it’s likely we’ll be in a different location.
DF: What is your company’s most unique aspect?
Murphy: It’s fairly unique being independent. The few of us that are left get approached with some regularity by the big guys to convince us we should sell, but we have no interest in doing that. Also, there’s the fact we’re a full-line cultured dairy. There aren’t too many left that make all the cultured products. I think it’s fairly unique, too, that not only are we a full-line cultured dairy company, but we also are one of the largest cultured soy manufacturers in the nation and one of the largest organic manufacturers.
Hanson: I was going to mention our ability to attract some top-level management people. Sometimes you can’t afford not to have the best, especially when you’re in a growth mode like we are right now.
DF: Are they any plans to acquire other brands or companies?
Murphy: There’s nothing on the immediate horizon, but if something presented itself that really seemed to make sense, we’d take a hard look at it. We’re not actively out there knocking on doors right now, but we’re keeping our eyes open.
Hanson: I think we have so much low-hanging fruit that we haven’t leveraged or fully developed that I have more enthusiasm for growing internally than I have for acquisitions. That’s not to say I would turn it down if it was appropriate. But I really enjoy developing our own products and growing our products.  df