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Shameless exploitation in pursuit of the common good.” This case was prepared by Professor James E. Austin with assistance from Dr. Catherine Overholt to serve as the basis for classroom discussion rather than to illustrate effective or ineffective administration. Copyright © 1998 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 1 Newman’s Own, Inc. “Shameless exploitation in pursuit of the common good.” -Company motto Paul Newman, distinguished actor and social entrepreneur, recalled in August 1998 the seeds that gave birth to his food company about twenty years earlier: We used to take the kids out and sing Christmas carols for the neighbors. One Christmas I decided to take old empty wine bottles and fill them with my salad dressing, put ribbons around them, and give them to the neighbors. Then about the middle of January there were all these people beating on my door, saying, “Where’s my refill!” So I thought it would just be fun to throw it into a couple of local delicatessens and sell it. We had no aspirations for it. Nothing big time. From this inconspicuous beginning, Newman’s Own grew into a multi-product company with 1998 sales projected at nearly $100 million. More distinctively, however, Newman donated all of the company’s after-tax profits to charity. Over its life this social enterprise had distributed about $90 million to nearly 1,000 nonprofit organizations. The entrepreneurial undertaking had achieved impressive and unexpected results commercially and socially, but faced significant challenges for the future. Andy Crowley, President of Ken’s Foods and the bottler of Newman’s original salad dressing, put forth a basic challenge: “Paul has to figure out what to do to perpetuate this.” 399-052 Newman’s Own, Inc. 2 Company Origins Newman recounted the first step, “When I got the idea to put this stuff out, I turned to “Hotch” (A.E. Hotchner), who had written my first really critically successful television show, was a neighbor in Westport, Connecticut, and whom I’d known since 1955. Hotch did a lot of the early leg work.” Hotchner recalled, “If ever there was an accident that turned into a beneficial undertaking, this was it. For years Newman had been making his own salad dressing. Even in restaurants he would sometimes embarrass us by asking the waiter to bring olive oil, vinegar, mustard, and what not to the table, and he would mix it up. When he said, ‘Why don’t we get a proper bottler and put a few bottles out,’ I thought, well, I’ll just humor him and the thing is going to evaporate. But he sort of persisted.” In seeking advice from the president of a major marketing corporation, Hotchner learned that big companies that launch a new product do consumer panels in multiple markets. They stand to lose a million dollars in the first year of a new product launch. Newman proposed that they just use friends for a taste test, invest $40,000, buy some bottles, and put them out. “We will have lost that, but at least we will have been in the business.” After encountering considerable difficulty in obtaining a bottler, Newman recalled, “It went from just a lark to some kind of real challenge.” In the process Hotchner got connected with David Kalman, a food broker. Kalman stated, “Because it was a small company consisting of an actor and a writer, they didn’t have the business acumen for selling food. They knew they wanted to get involved but didn’t know how to get there.” Kalman approached a small bottler of salad dressing, Ken’s Steak House in Boston (Ken’s Foods), that sold its regionally marketed product to Leonard’s Supermarket in Norwalk, Connecticut, a Kalman client. Kalman recalled the bottler’s first response to the proposal was, “Are you crazy?” Andy Crowley, Ken’s President, commented on his reaction then: “I wrote a memo to my father and business partner asking, ‘Do we want to get involved with an actor, race car driver, and part-time cook?’” They decided to play it out and see what would happen. Crowley indicated that over the next year they prepared many different samples and often waited months to get a reaction from Newman who was away making a movie. According to Crowley, there was “mounting frustration on all sides.” Stu Leonard, owner of the Norwalk supermarket, finally arranged a meeting with Newman and Crowley on November 17, 1978 at his supermarket. They had a blind taste test of salad dressings using employees, and Newman’s sample bottled by Ken’s Foods ranked high. Leonard said, “Let’s pack 2,000 bottles. You take 500 and I’ll take the rest. You’ll do it, right?” Crowley agreed. With the bottler signed on, they turned to the label creation. When one of his associates asserted to Paul that “You will not be able to sell one bottle until you put your face on the label.” Newman replied, “The chances of that are infinitesimal.” The project hit a major roadblock. Newman explained how this deal-killer was averted: “When the face came on the bottle, I knew that the profits would have to go to charity. To make money off that would be so tacky. From this came the concept of circular exploitation. I allow my celebrity status to be exploited in order to sell stuff from which I then in turn channel the proceeds into good causes, hence the slogan of our company: ‘shameless exploitation in pursuit of the common good.’ It’s a reciprocating engine.” The label with Newman’s likeness was drawn by the daughter of one of his buddies who was part of Newman’s Formula One power car racing team. Newman’s Own was officially incorporated in 1982 as an S corporation with Newman as the sole stockholder.1 They functioned for the first six months out of Newman’s lawyers office and then set up a small office in Westport. Newman recalled, “We were closing down our pool and so I took the pool furniture, umbrella and all, and put it in the office, where it still is today. A Ping-Pong table 1 S corporation profits are incorporated into the owner’s total personal earnings and taxed accordingly. Newman’s Own, Inc. 399-052 3 served as our conference table. It was all kind of a family operation.” Hotchner managed the office and the staff of three. He pointed out, “The real challenge was that obviously Newman wasn’t a businessman nor was I, so very quickly, not only did we have to become businessmen, but we had to learn something about the food business, about the whole supermarket business, which is very complicated and ruthless. If you make a mistake, you can really get burned.” Newman’s Own contracted Advantage Food Marketing, in which David Kalman was a partner, to serve as its master broker. Advantage managed all the sales and distribution functions, including recruiting independent brokers throughout the nation’s main markets, negotiating and invoicing the supermarkets, managing the shipments from the company’s manufacturers, and providing quality control of all products and processing facilities. Advantage received a 7% commission on sales net of trade discounts of which half was passed on to the independent brokers. Kalman stated the basic goal: “When you’re a food broker, volume is the name of the game. We’re looking to do more sales so that Newman can give out more money.” To finance operations, the company borrowed from the bank with Newman’s personal guarantee. Later the bank no longer required this. Newman’s also negotiated a 20-day payment term from its contract manufacturers and a 10-day term from the supermarkets, although in practice these clients took about 18 days to pay. The manufacturers held the inventories and billed Newman’s Own when they shipped to the supermarkets. Product Development & Growth From the original salad dressing, the company expanded its product line over the years to include other dressing varieties, spaghetti sauces and salsas, popcorn, lemonade, ice cream, and organic foods (see Exhibit 1 for timeline of product development and Exhibit 3 for sales data). Hotchner described the product genesis process: “We don’t really have a plan for a line of foods and when they will be introduced. We just get these ideas and then if something clicks, perhaps we’ll go ahead.” Newman continued to be heavily involved with tasting and approving every product: “We kind of do it on a case by case basis, but the products that seem to work best are the ones that people think that I could have somehow created in my kitchen.” Kalman added another dimension, “Quality in food is the most important thing. We’ve always aimed to have the best in the category.” Salad Dressings When Newman’s first salad dressing was introduced it was the only olive oil vinaigrette on the market with more than 51% olive oil. However, one New York Times food critique stated that it had a metallic taste. They quickly determined that was due to the use of dehydrated garlic and onions, a standard industry practice. Newman switched to fresh ingredients and, counter to industry people’s assertions that it would spoil, this resulted in an even more novel and well-received dressing. Sales took off and the $40,000 original investment was recouped in a matter of months. Gross sales the first year were about $3.2 million, generating pre-tax profits of $373,000. Andy Crowley commented on the process of developing the salad dressing line, “You can’t market anything that Paul doesn’t like, although you’re not dealing with an ego and that makes him very easy to approach. He’s been very intuitive and very prone to taking gambles. To tell him ‘You really can’t do that,’ his immediate response is ‘Why not.’ For example, the industry wisdom is that labels should have a family appeal. His labels don’t. The legends on the back labels are Paul. Each product and label are characters all to themselves.” Hotchner described the label creation process, “I usually write something and then Paul will poke around with the original. It is fun doing them and people get a chuckle out of them.” (See Exhibit 2 for label legend examples.) After the initial adjustment to the ingredients, nothing further was done in salad dressings until the company agreed in 1990 to an exclusive placement of Newman’s Own dressing in Burger King’s 399-052 Newman’s Own, Inc. 4 salad section. Burger King also wanted to have ranch, French, light Italian, and blue cheese varieties in addition to the original, so Newman worked with a food consultant and his bottler, Ken’s Foods, to develop these new formulations. These arrangements were made at very high levels and, according to Crowley, did not make the Burger King purchasing agents very happy because the Newman’s dressings cost significantly more than generic alternatives. Newman’s Own labels were displayed prominently in the salad bars. This relationship represented an important revenue source and continued for about 4 years. After it ended, Newman’s Own added the ranch dressing to its bottled line, because it had been so well received by Burger King customers. However, the bottled versions did not measure up to the quality of the Burger King offering. That unbottled form was more like a refrigerated fresh delivery system with a three-month turnover in comparison to the bottled supermarket sales that spent up to 12 months on the shelf in nonrefrigerated conditions. Newman’s added Caesar in 1994 and balsamic vinaigrette in 1996, although the original Oil & Vinegar dressing remained the company’s top seller. Salad dressings accounted for 38% of Newman’s Own total revenues in 1998. Crowley discussed the salad dressing market: “The market has grown from $300 million to $1 billion since we began and expands about 2% annually. The novel varieties are where the growth is, although that is a coastal phenomena. In the heartland you still pave the street with ranch. Ranch, Italian, thousand island are 85% of the market. Ken’s produces 40 dressings under its own label, of which the biggest sellers are light Caesar and light raspberry walnut. In a consumer focus group that we did for our products we discovered that people consistently placed Newman’s Own in the high quality segment.” In the 52-week period ending April 19, 1998, Newman’s six salad dressings sales were $30.5 million, up 16.5% from the previous year, and amounting to a 2.6% market share (with an average unit price of $2.36). This compared to Kraft’s market share of 29.5% (average price of $2.05), Wishbone’s 17.2% ($1.94), Hidden Valley’s 13.6% ($2.86), five other brands each at 5% or less, including private labels and Ken’s at 4.6% ($1.26). Crowley indicated that “We’re also a competitor of Newman’s but we go to market differently. This does create tension at times with some people, but where are they going to go? They could go to some fringe players, but with us Newman’s has never ever been in trouble with one of its products. And when we negotiate with our glass supplier for 8 million 8-ounce jars, his million jars are right there with ours. When we are shipping out a truckload to Stop & Shop and he has only three skids, his go out at the truckload rate. He derives the benefit. Over the 16 years our unit price to Newman has increased only 9%. It’s two way. It’s not a short-term situation. There’s a mutual sense of loyalty, and Newman is a very loyal guy.” Newman commented, “It’s a long-standing relationship which is 99% friendly and 1% competitive. To some extent they use their profits that they make from us to create another competitive line which is troublesome, although we do try to stay out of each other’s price range.” Since 1982 Ken’s Foods grew from a $10-million company to $220 million. Newman’s Own sales reached 18% of Ken’s total business at one point and in 1998 constituted about 5%. Crowley commented on the relationship, “Monetarily they are significant but emotionally they’re also very important to us. He forces you to get involved. You don’t just pack for Newman and not give back. We’re closer to him today at 5% than we were at 18%.” Newman’s also used a California bottler to handle its salad dressing production for the West Coast. Sauces About six months after the first salad dressing was launched the second product category of spaghetti sauce was developed. Hotchner recalled the beginning, “Newman called me up one day and said that he’d just come home and found a bottle of spaghetti sauce that he tried out and he said ‘it’s absolutely terrible; all full of sugar and preservatives, and it’s got more chemicals in it than anything else. Why don’t we come up with a spaghetti sauce that’s full of fresh stuff?’ Nobody had ever put out a sauce like that before. And we even had the audacity to call it ‘Industrial Strength Spaghetti Sauce.’ The naysayers said you have to put something like garden fresh on it, but they Newman’s Own, Inc. 399-052 5 were proven wrong.” But again, Newman’s Own needed to find someone who would manufacture and bottle the product. David Kalman approached Ed Salzano, Executive Vice President of Cantisano Foods, Inc., a private label contract packer in Rochester, New York and one of Advantage’s clients. Salzano recalled, “David, being a very tenacious and brash guy, stuck a bottle of Newman’s Own in front of me and says, ‘Look what we’ve done for this. If you guys could make a great product, we could sell it.’ So I came back at him and said give me Newman’s recipe for his spaghetti sauce. We played with it to see how we could commercially adapt it and were sending samples back and forth for Newman to taste. David would come back and say ‘Paul likes it, but try to change this.’ We didn’t know where we were going with it. One day David said to go buy Time magazine. Newman’s picture was on the cover and there’s an eight-page article about him and his company starting to give profits to charity. And there was one line in there that his next product will be his Industrial Strength Venetian Style Spaghetti Sauce. That’s how in 1983 we found out that we were packing spaghetti sauce for them.” Salzano indicated that many personalities had approached the company to make a sauce, licensing their name to Cantisano for a royalty. “The difference with Paul Newman is that he took title to the goods and then he resold it. So the fact that he was willing to put his money at risk made us feel that this man was really committed to this program. The relationship with Newman is one that is very unique, because we started to partner with him from the standpoint of looking at the good things that he was doing and said, here’s someone that has a tremendous name and a tremendous heart. And if we can help his business grow, we always felt that it was in our business’s best interest. We took a whole different approach to Newman’s Own. The initial Newman’s Own sauces were the first of the chunkier, all natural types of sauces introduced to the market place. Cantisano played a supportive role in this development process, testing out recipe ideas from Newman and sharing theirs. Salzano commented, “We looked at Newman’s as a place where we brought a new idea to first. We also tried to be proactive in analyzing for them the categories that we compete in because we have a greater level of sophistication in the food business.” After producing several varieties of spaghetti sauce, Cantisano proposed developing in 1991 a very different type of salsa as a new product category. “By that point we had a good feel for what Paul’s tastes were like: spicy, chunky, with a bite.” In 1997 Newman’s added three more salsa varieties. Newman’s also sold in foreign markets a small pasta line produced in Italy. Cantisano chose not to develop its own products in the premium end because “we felt why compete with a key customer.” They also refused the request to pack a sauce for Frank Sinatra because they deemed it would be a conflict of interest. Salzano stated, “Any connections that we had with the trade, we were willing to share with Newman’s Own because of the good that he’s doing. It really came down to the cause and the mission. We would even play on the strength of our relationship with the major grocery executives and say, ‘Hey, the more money Newman gives you, the less he can help other people. It’s easier to beat up corporation XYZ because they’re in it for the money. Newman’s in it for the love.” Salzano indicated that the impact of Newman’s on Cantisano Foods was significant: “It allowed us in our early stages of development to go forward and reinvest into our business because we looked at his brand as stability because of our commitment to Newman and his to us. Newman is an extremely loyal individual. It has been very good all the way around. Our company has grown much more than tenfold.” The total U.S. sauce market grew in size similar to that of dressings. Premium sauces constituted 25% of the total pasta sauce market. Newman’s Own six sauces held a 7.3% share of the premium segment behind Classico (38.6%), Five Brothers (29%), and Barilla (16.2%). Newman’s sauces were the lowest priced brand in the premium segment, being 13% below Classico, 8% under Barilla, but 19% above the mainline segment. Sauce sales accounted for 31.7% of the company’s 1998 revenues. 399-052 Newman’s Own, Inc. 6 The salsa products produced 11.5% of the company’s sales. Salzano indicated that sales of private label brands were increasing, particularly in the premium segment. Popcorn Newman stated, “I’ve always been a popcorn freak, so that was a natural.” But developing a product turned out to be difficult. Hotchner recounted, “That was the longest pursuit. Either the popcorn didn’t pop right or taste right. It took us two years until we found a grower that produced a hybrid especially for us.” The result was a higher pop ratio and a fuller bag that earned a Number 1 ranking in a consumer magazine. They developed kernels in jars in 1984 and then a microwave version in 1986 as that form became more dominant. Newman’s offered four popcorn varieties, which accounted for 8.8% of company sales in 1998. Lemonade The idea for the lemonade came from Joanne Woodward, renowned actress married to Paul Newman. In 1986, she provided a family recipe from her native state of Georgia. The concentrate for the lemonade was produced by a contract manufacturer in California and then shipped to dairies around the country. This first entrant into the beverage category accounted for 4.2% of sales. Ice Cream Unlike the other products, the manufacturer, Ben & Jerry’s Ice Cream Company proposed this product. Ben Cohen collaborated with Paul on various social sector undertakings. Newman noted, “We’ve had lots of products from manufacturers whom we’ve turned down because they didn’t come up to quality or our taste.” Ben & Jerry’s paid Newman’s Own a royalty and handled all the ice cream production and distribution. Tom Indoe, Newman’s Own current Chief Operating Officer, indicated that this type of licensing arrangement derived a smaller contribution than the other products marketed directly by Newman’s Own. Newman’s Own Organics One of Newman’s five daughters was very interested in organic foods and had the idea. Newman recalled, “Nell came to me with a friend of hers who had been in the swimming pool business, and proposed that they create the organic food subsidiary. So, they educated themselves and were on partial salary for some period of time to figure out what products they wanted to come out with.” They produced pretzels as their main product. They became the dominant player in this small niche market. They also made an organic chocolate candy bar. Sales for the first seven months of 1998 amounted to $1.3 million. An organic cookie to be called FigNewmans followed. Because of possible trademark infringements, Paul Newman wrote the president of Nabisco and asked for permission to use the name, indicated that it would not be competing against Nabisco’s Fig Newtons, and that the proceeds would go to charity. The president wrote back indicating that they could not give permission because of the precedent it would set, but if Newman’s would pay a royalty, say $1, then it could be arranged. Newman agreed and thanked him for his generosity. The cookie was launched in 1998 and sales for the first seven months were $751,000. Newman commented, “It’s just delicious to watch the organic business grow.” Tom Indoe explained the relationship of the Organics operation to Newman’s Own: “It’s almost like a division. They’re part of the S corporation and they have to survive on their own. We do their administrative stuff, help with quality assurance, and provide sales support, although they’re more Newman’s Own, Inc. 399-052 7 into health food stores than grocery stores. Through our relationship with K-Mart we got them into that chain. If they need help, they’ve got it, and if we ask them to do something, they usually oblige.” Philanthropic Activities In 1997 Newman’s Own generated gross sales of $62.6 million, producing a before-tax surplus of $8.5 million. These annual flows had enabled Newman to contribute over $90 million to charities since the inception of the company. (See Exhibit 4 for balance sheet). Philosophy Newman observed, “I wish I could lay claim to some terribly philanthropic instinct in my base nature, but it was just a combination of circumstances. If it had stayed small and had just been in 14 local stores, it would never had been charitable. It was just an abhorrence of combining tackiness, exploitation, and putting money in my pockets, which was excessive in every direction. I believe that people who acknowledge luck in their lives are more generous than those who only acknowledge their own rugged individualism. I am moved by the benevolence of luck in my life and the brutality of luck in others. One thing that really bothers me is what I call “noisy philanthropy.” Philanthropy should be anonymous, but in order for this to be successful you have to be noisy. Because when a guy walks up to the shelf and says, ‘Should I take this one or that one?’ You’ve got to let him know that the money goes to a good purpose. So there goes all your anonymity and the whole thing that you really cherish. Publicize the generosity in order to become more generous. That’s been the most difficult part of it.” Beneficiaries Hotchner was involved since the beginning with Newman in deciding to whom to give their social surplus. He explained an important juncture, “After some years, Paul said, ‘We really ought to have our own charity. We don’t have one that we’re identified with. We’ve been getting a lot of requests from parents of children stricken with cancer. Why don’t we set up a really unusual camp for these children where we can give them a wonderful time.’ That was the beginning of the Hole in the Wall Gang2 Camp in Connecticut.” The camp was built in 1987 at an initial cost of $10 million and now there are 5 associated camps in the U.S., Ireland, and France, which have benefited 15,000 children. Each camp had its own board of governors and is largely financially independent of Newman’s Own, although Paul helped found each one and remained personally involved. Other leaders had been attracted to the cause; for example, General H. Norman Swarzkopf was a Co- Founder of the Florida camp. (See Exhibit 5 for the camp association’s mission statement.) Hotch, who is on the Connecticut camp’s board of directors, remarked, “It’s wonderful for these kids. That’s been the major source of satisfaction for me and I’m pretty sure for Paul.” Newman added, “It’s certainly a big joy, but buying a bus for migrant farm workers in Florida can make the whole year work for them. And the ten grand that you give to some soup kitchen or the $25,000 that goes to a program for wayward kids make huge differences, but we’re very whimsical about how we choose these.” 2 The camp’s name is derived from the Paul Newman – Robert Redford movie “Butch Cassidy and the Sundance Kid.” 399-052 Newman’s Own, Inc. 8 Grant Process Newman’s Own has one of its 15 employees dedicated full time to handling the unsolicited grant requests. They receive hundreds weekly. Applicants can call the company’s voice mail day or night to request an application. Hotchner, heads the charity operations and discusses with Newman any requests that need immediate response. The majority of the requests are accumulated in a looseleaf book broken down by category (arts, education, health, environment, children, elderly, animal protection, women’s issues, and peace/human rights). Each page describes a charity, its request, and its overhead as a percentage of program costs. Usually in November, Newman and Hotchner sit down and go through the book, making their choices. They designate the remaining $3-$4 million not already allocated to preferred charities that receive annual repeat donations or to some organizations endorsed by their friends. Newman noted, “If their requests are worthwhile, why not let your friends use your money.” There are no rigid allocation formulas, but they tend to spread the donations across different sectors, geographically, and favor smaller nonprofits that would have greater difficulty raising funds. Hotchner explained, “Overall our bent is towards the very young and the very old, who really don’t get funded enough. We don’t do much in the mainstream.” Involvement of Business Associates Newman noted that “All of our partners have been very, very generous in terms of helping the camps and providing sponsorships.” David Kalman recalled, “I was there when they announced the camp and I never knew that kids had cancer. I called my partner and said ‘We now have a charity.’ My partners and I have given hundreds of thousands of dollars to the camp because we want to. Nobody told us to.” Andy Crowley said, “We rent the Big Apple Circus for a day in Boston and invite 1500 kids from the oncology wards. We do considerable fund raising for the camp. Last year we raised over $150,000 squeezing our vendors. You wouldn’t be a vendor if you weren’t involved. It is a form of being loyal back. Everybody should do something. I could do it on my own or I could work at this.” Ed Salzano spoke similarly, “We’ve made the Hole in the Wall Gang Camp our charity of choice, and I sit on the board of the Camp. It has also exposed me personally and my associates to what a true philanthropist and what social consciousness is all about. It’s different than organizations sponsoring things for the advertising value. Being involved in giving away $90 million to help other people and children with cancer is something that I could have never dreamed about.” The supermarkets also were involved. David Kalman pointed out that “Newman’s Own’s social purpose meant we have something to talk about other than price. What do you do when you walk into a chain store and you’ve got ten guys behind you in the waiting room all selling the same item? They bring the money bags with them and say, ‘Okay we’re going to put in 10 SKUs’3 and drop down $100,000. We can’t do that.” Newman’s Own encouraged supermarkets to make suggestions of charities in their own communities. They called these “goodwill alliances.” Newman had 85 such alliances in 1997 and contributed around $750,000 to these charities which returned funds to the communities from which they originated. MANAGEMENT TRANSITION With the growth of the company came the need to strengthen the company’s managerial resources. Newman explained, “About five years ago the company got to be around $60 million and was getting really complicated, yet it had a writer and an actor running it. We didn’t have the marketing skills, the computer skills, any of the necessary skills. We really had to get a COO.” The first operating executive the company hired was an individual with extensive consulting background 3 SKU: Stock Keeping Unit refers to product category and subcategory, e.g., Salad Dressing, 16-ounce & 8-ounce. Newman’s Own, Inc. 399-052 9 but not in the food industry. Hotchner remarked on the transition, “It turned out to be difficult because this is no ordinary company and it doesn’t go by ordinary rules. It requires a certain amount of imagination and certainly has to do with a relaxed attitude, and yet you have to watch the bottom line. One of our mottoes on the wall is ‘If we have a plan, we’re screwed,’ so we never had a plan. It was just sort of follow your nose and try not to make any major mistakes that would put you out of business.” The new executive, who was engaged in late 1997, was Tom Indoe, whose whole career had been in consumer goods and food marketing. He commented on the challenge of taking charge, “You’ve got to establish credibility with Paul and everybody here. And I guess you have to have a small ego.” The New C.O.O. Tom Indoe worked in sales and marketing for about three decades, first for Sterling Drug, then for RJR, which acquired Delmonte, Morton Frozen foods, and Nabisco. Next he ran a $20 million food company. Newman commented on what he was looking for in a manager, “someone with a lot of marketing skills, who could run a business, was intimately connected with the grocery business, and really good with people. Tom fit the bill. I liked his personality – outgoing and straightforward. And Tom has made some sacrifices from a salary standpoint. It’s not like you’re working for a completely for-profit enterprise.” Indoe commented on his motivation in joining Newman’s Own as Chief Operating Officer and Senior Vice President, “First, they had potential for tremendous growth. The second thing was the social benefit. I think everybody at one point says, at the end of the day, what am I going to be known for? What did I really contribute? Is it that we put more Planter’s Peanuts on the store shelf? So, here I get to run a consumer company that does a lot of good things.” After joining Newman’s on December 1, 1997, Indoe took actions in several areas. Planning When Indoe arrived he was “shocked” to discover that the company had never had a budget, so he and the staff constructed one for 1998. He remarked, “We didn’t know how well or poorly we were doing in specific areas so that we could focus against some of those. So we started to develop a game plan of what we were going to improve in our business.” This plan encompassed several of the following initiatives. Distribution In order to manage the company’s network of 69 independent brokers4 more effectively, the four regional managers who worked under Advantage Food Marketing’s operation were brought onto the Newman’s Own payroll under the supervision of the C.O.O. Newman’s was a very important client for Advantage and this shift of responsibility and authority caused some initial friction. However, David Kalman of Advantage remarked, “We’ve always wanted someone who understands the food business and knows what you’re trying to say. We’re on the same wave length and have the same aspirations to get the job done as Tom. But Paul is still boss.” Indoe’s analysis of the distribution data revealed that all the supermarkets did not stock some products, e.g., 16 ounce balsamic vinegar. “If we could get every store stocked up to 60%, it would mean an incremental $6 million in revenue.” He organized his regional managers into a major effort to jack up distribution, paying the supermarkets “slotting allowances.”5 The result was a doubling of 4 In addition to the grocery stores, Newman’s had significant accounts with K-Mart (5.6% of 1998 sales), Amwayforeign markets (3.3%), the military (1.2%), and other sales to non US markets (1.9%). 5 Slotting Allowances are like shelf space rental charges to get one’s products into the stores. 399-052 Newman’s Own, Inc. 10 distribution in nearly every salad dressing. Before there were only two Newman’s Own dressings in the grocery stores’ top 100 sellers, and by August ‘98 there were 5. For the sauce line, effort was concentrated on the best selling products in the company’s 15 core city and state markets. Product Development Newman’s Own Ranch and Lite Italian dressings were not performing up to expectations and deemed to be inferior to competition in quality. New and improved products were launched. A Parisienne Dijon Lime salad dressing was developed in collaboration with a French chef and was being market tested. The Steak Sauce was based on a recipe that Newman had discovered in California, and Indoe, whose previous work had exposed him to the attractive margins of steak sauce, pushed the product through to production by their California bottler. It was launched aggressively with $1 million in slotting allowances and other retailer discounts and coupons (Exhibit 6). Sales for the steak sauce for the first seven months of 1998 were over $2 million. Packaging Two focus groups of 24 current consumers of Newman’s Own products, all females, revealed that the quality of the pasta sauces were considered equal to competition but the packaging did not convey a premium sauce image. Working with Cantisano and the bottle vendor, Indoe improved the packaging without any incremental cost. Indoe also noted in his strategy plan that “the naming and labeling of pasta sauces have been very artistic by Newman and Hotch over the years with names like Sockrooni, Bombolina, and Say Cheese. We need to develop labeling that tells the consumer what is in the jar such as Tomatoes with Basil in the case of Bombolina.” A labeling change was effected by August. Statements about Newman’s charity efforts were placed on the labels and lid tops. A simple redesign of the labels was done to have consistency of Newman’s face and some uniformity across all products. Indoe indicated that when he proposed the changes to Newman, Paul said, “I don’t think this is a big deal. Use your own discretion.” Consumer Promotion The consumer focus groups revealed several surprising findings to management: (1) only about 35% knew that Paul Newman donated all the profits to charity; (2) no one knew that over $90 million had been donated since the company’s beginning; (3) less than 25% knew that the products were all natural; (4) many were surprised by the broad range of products in the Newman line. In response, Indoe delivered hand tags to the brokers to place on the salad dressings that indicated the $90 million in donations and some of the charities benefited. In response, 33 million Family Supplement Inserts with coupons, product picture, and the charity message appeared in Sunday newspapers in June (Exhibit 7). Trade Promotion The company spent in 1997 $6.9 million on 52 week discounts to the trade to create everyday low pricing to customers and another $6 million on advertising allowances. Indoe doubted the effectiveness of these discounts and allowances in terms of stimulating extra push by the trade and so he was reconsidering them. Newman’s Own, Inc. 399-052 11 Future Challenges As Newman’s Own moved into the twenty-first century it faced several challenges and issues related to competition, advertising and promotion, products, and philanthropy. Competition Tom Indoe asserted, “The biggest challenge we have as a smaller company is how do we compete with Kraft? And there’s Barilla, Unilever, and Campbells. These are billion dollar companies.” Hotchner added, “The competition is so demanding, we have to work hard just to keep running in place. The minute that we try to sit back on what we’ve got in the way of products or management or anything else, I think we’re in trouble.” Newman reflected, “My father ran a great sporting goods store in Cleveland, and although I worked there a lot as a kid, I never could find the allure of it. It wasn’t until I got into the salad dressing business where the competition makes a killer out of you, could I understand what people mean by growing just for the sake of growing. There’s no question there is a great romance to it. Our challenge is survival - just to stay alive in a competitive environment.” Ed Salzano pointed to the supermarket environment: “These chains today are so hungry that they really don’t care whether they sell the product or not. When a new item comes out, manufacturers have to pay for the privilege of slotting that item on the shelf. Supermarkets look at what the profit is that supposedly this real estate generates and they secure that profit up front through slotting fees. If the product doesn’t achieve the target sales figure within six months, it’s discontinued. So they keep reselling these slots. There’s product proliferation within categories, so there’s always another manufacturer trying to come out with new things.” Advertising & Promotion Newman contended that “One of the reasons this company really works is that we don’t advertise. When the host of Good Morning America pulls our salad dressing out of his briefcase and talks about it, what do you need to advertise for? We penetrated the market very quickly because we didn’t need to get name recognition.” Hotchner added, “The expense of advertising for a company as small as ours is almost prohibitive today.” Salzano asserted, “You get to a point in a product development and a brand development that you either go up or down. You cannot stand still. And momentum is critical. The level that Newman’s is at now, they must get the consumer to realize why they are on the shelf, why they’re priced the way they are, and to make a consumer feel good about why they’re buying that product. Not only does it taste good but they’re doing good. But Newman has been extremely shy about tooting his own horn about his charity work.” Newman commented, “I’m not a very public person and all the public aspects of promotion are very difficult.” Crowley added, “All the other personality brands have profit motives. He has a distinctive difference: a good product at a fair price and all the profits go to charity. You had the Frank Sinatra spaghetti sauce, boom, gone. Paul is all on his own in this regard.” Products The company needed to decide what actions were necessary regarding its product line. Was this the right mix? Should some be emphasized more than others? What new products, if any should be developed and how? 399-052 Newman’s Own, Inc. 12 One new product possibility was brought to Newman’s attention by fellow actor Alan Alda who discovered it while doing a documentary. It was a candy developed by a Yale doctor that helps treat the sores that develop inside the mouths of many people who have chemotherapy. Newman indicated, “We’re toying with the idea of finding a candy manufacturer who would be willing to give up its profits and then possibly distributing through one of the pharmaceutical companies.” Tom Indoe added, “In a normal company, you’d probably never be exposed to such a proposition. But at the end of the day, wouldn’t it be neat to have this candy that takes pain away from these poor kids that have to go through chemotherapy.” Tom continued, “This is really two companies, one that makes money and the other that gives it away. A big challenge is how do we measure ourselves.” New Philanthropic Initiative Newman had been concerned for some time about the need to have corporations increase their philanthropic giving. He was joining with several other leaders, among whom were John Whitehead, the former Chairman of Goldman Sachs, Paul Volcker, former Federal Reserve Chairman, David Rockefeller and Walter Shipley, past and present Chairmen of Chase, Ralph Larsen, Chairman of Johnson & Johnson, Peter Malkin, a new York real estate developer and Ben Cohen of Ben & Jerry’s, to create a nonprofit center for promoting corporate philanthropy. Corporate contributions declined in inflation-adjusted dollars from a high of 2.3% of pre-tax profits in 1986 to 1.3% in 1996. The center’s objective was to advocate for a 2% national goal. Corporate donations up to 10% of pre-tax income are tax deductible under existing laws. The center’s founders viewed corporate philanthropy as “a strategic asset which contributes to improving stockholder value.” They sought to represent the interests of shareholders of public companies who believe their companies should provide greater support to nonprofits. Achieving the 2% target would provide an additional $4 billion to the nonprofit sector. Newman commented on the rationale, “The thing that makes the United States such an enviable place to invest in and to be in is that it’s so stable. The more the gap starts to increase between the haves and have-nots, the rich and the poor, the employable and the unemployable, the less stability you’re going to have, and the very great strength of the nation erodes. So if it’s happening in your community today, you may be next week’s victim. The whole sense of leadership is not to deal with things when they become crises, but to deal with them when they are problems. The second they become crises, they may not be manageable.” Vision In looking to the future, Newman asserted that he would “like to see the company reach $250 million in sales and be able to support new philanthropic initiatives like the corporate philanthropy center. I don’t want this thing to just dribble along and be a clearinghouse for a lot of people to collect salaries.” Continuity was on the minds of others. C.O.O. Tom Indoe stated, “Paul is 73, and unless he has a lease on life that nobody else has, he’s not going to be here at some point.” Ed Salzano echoed the concern, “If something happened to Paul, what happens to this business? The only threat there is to Newman’s Own is not staying true to their mission. It’s still a family-owned business, and how do you perpetuate a family-owned business?” Newman’s Own, Inc. 399-052 13 Exhibit 1. Newman’s Own Product Introductions 1982 Oil & Vinegar Dressing 1983 Marinara Sauce Marinara Mush 1984 Jar Popcorn 1986 MicroWave Popcorn – Butter & Natural Sockarooni Sauce (August) Lemonade 1990 Diavolo Sauce (January) No Salt MicroWave Popcorn (June) 1991 Lite Butter/Lite Natural MicroWave Popcorn (April) Hot, Medium, Mild Salsa (April) 1993 Organic Pretzels 1994 Ranch Dressing (April) Bambolina Sauce (April) Caesar Dressing (June) 1995 Organic Candy Bar 1996 Say Cheese Sauce (October) Balsamic Vinaigrette Dressing (November) 1997 Garlic & Pepper Sauce (September) Pineapple Salsa (September) Peach Salsa (September) Roasted Garlic Salsa (September) FigNewman’s 1998 Steak Sauce (April) Parisienne Dijon Lime Dressing (May) 399-052 Newman’s Own, Inc. 14 Exhibit 2. Newman’s Own Label Legends Balsamic Vinaigrette In 1602, in Modena, two brothers of the Vinegar clan, Balsa and Mick, due to a piddling insult, duelled to their deaths. Their grieving mother, Violetta Vinegar, who was pressing a new grape from their vineyard, named it in their memory – Balsa-Mick Vinegar. Thanks to Newman’s Own, their names live on.© Sockarooni Spaghetti Sauce Sackarooni/Sock-it-to ‘em Spaghetti Sauce all alone, by itself, just sitting there naked, will blow your socks off! Take yourself back to 1833 when Neapolitan adventures in St. Louis concocted this specific sauce, ingesting same, gathering strength, courage, endurance and wit to wrassle 1000 pound bears. 150 years later I fortify myself with Sockarooni to wrassle my own private bear – which is “jist gittin’ through the day.” © All Natural Salsa Take some paper, take some glue, Build a plane of balsa. It won’t fly as fast you Can go on Newman’s salsa. © Old Fashioned Lemonade The marathon in Africa…I’m halfway out and barely chugging. Mountain coming! Liquid needed! What’s around? Water’s bitter! Beer’s flat! Gator, Blah, Blah!…Fading fast. Then a vision-sweet Joanna!-tempting me with pale gold nectar…lemon is it? By golly! Lemonade? No, Lemon Aid!…Power added! Asphalt churning…Cruising home to victory! Hail Joanna! Filched the nectar (shameless hustler!)-In the market- Newman’s Own!© Picture Show Popcorn I’ll tell you how bad it is. Nobody gets trusted with popcorn-except me. That includes the FBI, the IRS, Tiffany’s and concessionaires of any ilk. A good flick arrives on the local screen, you see ol’ Newman scuttling across the lobby with a greasy brown paper bag of his homemade popcorn in one hand and – you guessed it – a machete in the other. Who’s who lists a lot of one-armed people in my hometown. They got caught trying to muscle their way into my greasy brown paper bag. The way I feel – they got off easy. They should have been strung up.© Newman’s Own All Natural Ice Cream In 1777, in the Alpine village of Uberotte, Baron “Buzz” Newman (The Original Newman from whence all subsequent Newman’s sprung) was tending his herd of cows when a fierce, unforgiving ice storm flash-froze the entire herd and left them stark-stiff in their tracks. In the spring when the cows thawed, Buzz milked them like always. What came out Buzz sold as Iced Cream. Every winter after that, Buzz froze all his cows stark-stiff in order to satisfy the growing demand for his Iced Cream. It was not until 1883 that Buzz’s grandson, “Bubbles” Newman, the Rotter of Uberotten, invented the cuckoo clock and also hit upon the revolutionary idea of freezing the milk instead of the cows. He also created flavors by tossing in Alpine fruits like Elderberry, Youngerberry, and Berri-Berri. The current Newman is not only proud to carry on the family tradition, but also honored to fulfill the exalted pledge of his ancestors: “100% COW! NO BULL!!” © Newman’s Own, Inc. 399-052 15 Exhibit 3. Sales ($000) 1982 3,204 1995 57,859 1996 60,498 1997 65, 699 1998 January-July (a) By Product: Dressings Sauces Salsas Popcorn SteakSauce Lemonade Pasta 17,864 14,900 5,510 4,125 2,045 1,954 539 Gross Margin 48.4% 41.6% 44.2% 50.1% 66.7% 43.2% 20.2% (b) Total Sales 46,937 Trade Allowances 9,908 Cost of Sales 25,276 Gross Profit 11,751 Directly Attributable Expenses 4,918 G&A 2,204 Misc. Income 435 Misc. Expenses 54 Pre-tax Surplus 4,999 Exhibit 4. Statement of Assets and Liabilities as of 7/31/98 ($000)* ASSETS LIABILITIES Current Assets Accounts Payable 2,429 Cash & Securities 2,442 Commissions Payable 352 Accounts Receivable 2,141 Other Payables 610 Inventory 1,964 Advance to N.O.Organics 26 Prepaid Coupons 394 Total liabilities 3,417 Other 213 Total current assets 9,781 CAPITAL Fixed Assets Capital Stock 10 Furniture & Fixtures 398 Capital Surplus 1,000 Less: Depreciation 314 Retained Earnings 1/1/98 815 Total fixed assets 84 Operating Surplus 7/31/98 4,908 Other Assets 285 Total capital 6,734 Total assets 10,150 Total capital & liabilities 10,150 *Includes Newman’s Own Organics: Assets - $820,000; Liabilities - $772,000; Capital - $820,000 399-052 Newman’s Own, Inc. 16 Exhibit 5. Hole in the Wall Gang Association MISSION: The mission of The Association is to foster The Hole in the Wall Gang Camp program for children who have cancer, leukemia and other serious diseases, and who, because of their illnesses, its treatments, or its complications, cannot participate in ordinary childhood activities. With all the amenities of traditional summer camps, each of these centers provide support and education for children and families, and the volunteers, health professionals, and policy makers who serve these children. PHILOSOPHY OF CARE: The Hole in the Wall Gang philosophy holds that arts and adventure programming engages participants socially, emotionally, and physically, challenging them to grow beyond perceived limits, and enhancing their self-esteem – important for coping with a difficult present and future. The Hole in the Wall Gang centers provide 24-hour medical supervision and are recognized by doctors as important medical facilities for children who otherwise could not leave the vicinity of a local hospital or participate in ordinary childhood activities. Newman’s Own, Inc. 399-052 17 Exhibit 6 Coupon Advertisement for Steak Sauce 399-052 Newman’s Own, Inc. 18 Exhibit 7 Sunday Newspaper Advertising Insert SSH!400!(a):!!Newman’s!Own!Case!Study! ! “It$started$out$as$a$joke$and$got$out$of$control”$ "!Paul!Newman! ! A!Harvard!Case!Study!of!the!Newman’s!Own!social!enterprise!has!been!distributed! via!PDF!to!those!registered!in!SSH!400!(a).!!Students!are!asked!to!read!the!case! study!and!answer!the!following!three!questions.!!Please!use!12!point!Arial!font,!1.5x! spaced,!and!the!total!document!you!submit!(consisting!of!the!answers!to!all!three! questions)!should!be!no!longer!than!five!(5)!pages.!!That!is!not!five!pages!per! questions,!but!five!in!total.! !! While!students!are!free!to!bring!in!outside!sources!in!their!analysis!of!the!case,!the! main!intent!of!the!exercise!is!not!to!demonstrate!research!prowess!but!to! demonstrate!the!students’!analytical!abilities,!critical!thinking!and!ability!to!present! a!reasoned!argument!(in!case!studies,!there!are!rarely!“right!answers”).! ! These!case!study!questions!are!due!by!4!PM!on!Monday,!October!19.!!Students!are! asked!to!deposit!a!printed!copy!of!their!paper!in!the!drop!box!on!the!seventh!floor!of! Jorgensen!Hall!on!or!before!that!time,!clearly!noting!on!the!cover!page!the!name!of! the!course!and!instructor.!!! ! Questions! ! Q1.!!! Please!discuss!the!role!(or!lack!thereof)!of!research!in!the!creation!and! launch!of!Newman’s!Own,!addressing!what!specific!areas!of!research!do!you! think!they!should!have!addressed!prior!to!launching!their!first!product?! ! Q2.!!!!While!sales!of!a!growing!range!of!products!are!a!main!focus!of!the!venture,!so,! too,!is!giving!the!net!proceeds!to!charity.!!What!types!of!research!would!you! recommend!that!the!venture!do!to!increase!the!impact!of!this!important!part! of!the!operation?!! ! Q3.!!!What!do!you!think!the!biggest!challenge!is!that!venture!faces!right!now?!! What!would!you!suggest!they!do!to!mitigate!it?!