Cape Cod Potato Chip Company

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Cape Cod Potato Chip Company

100 Breeds Hill Road
Hyannis, Massachusetts 02601
U.S.A.
Telephone: (508) 775-3358
Toll Free: (888) 881-2447
Fax: (508) 775-2808
Web site: http://www.capecodpotatochips.com

Wholly Owned Subsidiary of Lance, Inc.
Incorporated: 1980
Employees: 200
Sales: $48 million (2007 est.)

NAIC: 311919 Other Snack Food Manufacturing

Cape Cod Potato Chip Company manufactures and distributes a leading U.S. brand of kettle chips. Kettle chips are harder, denser, and crisper than most mass market potato chips, with more texture and flavor resulting from being cooked in smaller batches using a different cooking process. Kettle chips represent only a small percentage of the overall potato chip market, yet Cape Cod chips command higher prices and more gourmet prestige than more widely distributed mainstream chips. The company's products include a wide range of kettle chips in flavors such as classic, barbecue, and sea salt and vinegar, three varieties of tortilla chips, two flavors of salsa, and Cape Cod's white cheddar popcorn. Cape Cod Potato Chip operates manufacturing facilities in Massachusetts, Florida, and Texas. The company has had several owners, from its entrepreneur founder to giant beer maker Anheuser-Busch. Since 1999, Cape Cod has been owned by North Carolina snack manufacturer Lance, Inc.

A HOMEGROWN OPERATION

Steven Bernard, founder of Cape Cod Potato Chip Company, had no background in food when he and his wife Lynn first began making their signature product in their home kitchen in 1980. Bernard claimed that his lack of preconceived ideas about how a food business should be run was an advantage. Against the advice of people who should know, he started the business in his own way, and was unexpectedly successful. Bernard was working in the auto parts industry in 1980 when he chanced on a magazine article about kettle chips. He learned that kettle chips were a kind of potato chip cooked in small batches in cookware that was last in vogue in the Victorian era. Before the prevalence of mass market snacks, people used to make potato chips at home, thinly slicing potatoes and cooking them in hot oil. Bernard had a yearning to leave auto parts behind, and suddenly kettle chips seemed the way to go. He did some onsite research at a potato chip plant in Pennsylvania, and he and Lynn experimented with various recipes and techniques at home.

On July 4, 1980, Bernard and his wife opened a new business, a little potato chip shop in the touristy Cape Cod town of Hyannis, Massachusetts. Bernard, his wife, and his brother worked together, putting in 16-hour days, cooking the chips in iron pots that seemed to belong to an earlier century. The small firm did no advertising and had never used anything like a focus group to determine what its customers would like. The chips sold well at the Hyannis store, and the company soon opened a bigger plant. Perhaps because Hyannis was a tourist spot, the fame of Cape Cod Potato Chips spread rapidly up and down the Eastern seaboard. People who had tasted the chips in Hyannis on vacation began asking for distribution in their home cities and towns.

The little potato chip shop quickly expanded to a multimillion-dollar business. Cape Cod's kettle chips sold for about 30 cents a bag more than conventional chips, but this was not too much for customers who enjoyed a premium brand. While the potato chip industry as a whole was huge, kettle chips were a tiny niche, with less than 10 percent market share. Yet this niche was growing rapidly. Cape Cod Potato Chip moved again to a larger facility, and by 1984 had wide distribution in the East. Sales climbed to around $7 million that year, and the company was profitable. Founder Bernard, still in his mid-30s, worked exhaustingly long hours in order to keep on top of his company's rapid growth.

UNDER EAGLE SNACKS

Cape Cod Potato Chip had grown in only four years from a tiny storefront operation to a regional company with enormous potential. So when it came time to consider a national rollout of Cape Cod chips, which necessitated another investment in a larger plant, the founder turned to a bigger company with deeper pockets. In 1985, Bernard sold Cape Cod to Eagle Snacks, a division of the beer giant Anheuser-Busch, for an estimated $7 million. Bernard stayed on as top manager for another five years, but the company was a cog in the food division of an industry behemoth. Anheuser-Busch, based in St. Louis, Missouri, was one of the nation's largest beer makers, but it was experiencing a stagnant market for its principal products. The company decided to balance its beer line with snack foods, and put together Eagle in 1979. The division sold Eagle brand chips, pretzels, nuts, and other salty snacks. In 1982 it bought Campbell Taggart, a maker of breads and cakes, and added that line to the division. With its purchase of Cape Cod in 1985, Eagle had what looked like a competitive array of snack products. Eagle was actually either second or third place in the salty snacks market, with a total market share of less than 10 percent. The industry was dominated by Frito-Lay, a division of soft drink maker PepsiCo which held over 50 percent of the total U.S. salty snacks market. Cape Cod was a coup for Eagle, as the kettle chip niche was growing fast, and the brand already had proven success in its Eastern market.

With Steven Bernard still in charge, Cape Cod grew into a national marketer within five years of its sale to Eagle. Revenue surged to around $40 million annually. By 1990, Eagle had built or bought kettle chip manufacturing facilities in California, North Carolina, and Tennessee, and the chips were distributed across 80 percent of the continental United States. Still small, with only 200 employees, the company was an essential part of Eagle's growth. Between 1988 and 1991, Eagle almost doubled its share of the potato chip market, from 5.5 to 9.4, according to data cited by beer industry journal Modern Brewery Age in November 1991. Kettle chips led the chip industry in growth, with the niche rising 18 percent in total sales in 1990, as opposed to 5 percent growth for potato chips as a whole. Eagle, only a year older than Cape Cod itself, had made quick inroads into the salty snacks market.

Yet by 1991, Eagle had still not shown a profit. It was in fact losing some $10 million to $20 million a year. Its losses were subsidized by its parent, Anheuser-Busch, who expected that the division would start making money in 1992 or 1993. Because it had made such a strong showing in terms of market share growth, the largest party in the industry, Frito-Lay, began to revamp its strategy to become more competitive. While kettle chips were a premium product, most of Eagle's line was competitively priced. Frito-Lay evidently began to notice Eagle's growing presence in the snack market, and it responded by reducing its costs. This allowed Frito-Lay to continue to sell at low prices, or even reduce its prices on some of its chips, while keeping its margins low. Eagle had little room to cut its own costs, since it was already operating on very low margins. Eagle's president vowed to secure the number-two spot in the salty snacks industry. Borden, Inc., was then ahead of it, with a 12.7 percent share, compared to Eagle's 9.4. The division eventually achieved that goal, but making Eagle a viable competitor against Frito-Lay proved more difficult.

COMPANY PERSPECTIVES

For over 25 years, Cape Cod Potato Chips has brought you all-natural goodness and fresh flavors with our hand-stirred kettle-cooked chips. The legendary crunch of our chips has made them a classic on the Cape and around the world.

Parent Anheuser-Busch, meanwhile, had its own woes. In addition to Eagle's losses, the company was having trouble making its theme park pay off, and it had other setbacks. Steven Bernard left his position at Eagle in 1990, and the Cape Cod brand was then managed along with the other Eagle chip products. It was put up against other national chip brands, instead of steered into the gourmet kettle chip niche. By 1995, Eagle was still not profitable and looking for another cash infusion from Anheuser-Busch. The parent company decided instead to sell the division. Despite a strong sales increase in 1994, Eagle was on track to lose roughly $25 million in fiscal 1995, and Anheuser-Busch threw in the towel. It had already spun off the Campbell Taggart baking division, and the brewer decided to get out of the snack foods area entirely by unloading Eagle. While Eagle had snagged the number-two ranking in the industry, market share had fallen to only 6.5 percent. Other players, such as Borden and Keebler, had left, and Frito-Lay still predominated, with over 50 percent of the market. The Cape Cod brand had not done well. Sales in the early 1990s had been at $40 million, but had fallen to around $12 million by mid-decade.

BACK TO THE ORIGINAL OWNER

Anheuser-Busch was unsuccessful in finding a buyer for Eagle, and in 1996, it simply discontinued the unit's operations. This opened up a new opportunity for Cape Cod's founder Steven Bernard. After he left Eagle, the Cape Cod brand had been run as if it were any other potato chip brand, which was not a successful strategy. Sales had slumped without his guidance. Bernard knew Cape Cod and he knew kettle chip marketing. He understood that Cape Cod should not be competing against low-end Frito-Lay products, but should be run more entrepreneurially, as a small premium brand appealing to the 5 percent of snack food consumers who routinely paid more for gourmet chips. In May 1996, Bernard, backed by the investment firm Stolberg Partners, bought the Cape Cod brand rights back from Eagle, as well as the large Cape Cod chip plant in Hyannis.

Under Eagle, Cape Cod chips had been distributed in about 80 percent of the United States. With Eagle's demise, Bernard had to rebuild distribution channels. He acted quickly to move the chips into markets all along the East Coast, as well as in the Midwest and in California. Cape Cod chips went international, too, with distribution in Canada, Spain, and England. Bernard also found another way to pump money out of the brand, by offering tours of the Hyannis plant. This was soon a very popular attraction in Hyannis, bringing in as many as 2,000 visitors a day at peak times.

Cape Cod bounced back quickly, once it was again a small company under private ownership. Sales reached over $30 million, and distribution was increasing. Yet it still faced difficulties. Under Eagle, the brand had been ignored or mismanaged, but it had had the advantage of Anheuser-Busch's extensive beer distribution network, with trucks, logistical support, and a natural customer tie-in between cold beer and salty snacks. Going it alone again, Cape Cod had to start again almost from scratch. While the brand had strong recognition, never having lost its distinctive packaging with its lighthouse logo, it was difficult for a small company to fare well against bigger and better organized competitors. In 1999, a North Carolina snack manufacturer, Lance, Inc., offered to buy Cape Cod for an estimated $30 million. Lance was a bigger company, with sales of close to $600 million. Lance ran a fleet of 2,000 trucks, it had an extensive vending machine network, and vast manufacturing space. Little Cape Cod could not resist the offer, and changed hands again.

KEY DATES

1980:: The company is founded as a small shop in Hyannis.
1985:: The company is sold to Anheuser-Busch's Eagle Snacks division.
1990:: Founder Bernard ceases managing the brand.
1996:: Eagle is dissolved; Bernard and partners buy back Cape Cod.
1999:: Company is sold to Lance, Inc.
2003:: Deal is brokered with major Irish snack food distributor.

EXPANDING MARKETS

Cape Cod regained some strength under Lance. By 2001, Cape Cod chips were being sold in 45 states and in England and Spain, rivaling the brand's distribution when it had been under Eagle. The company retained Boston-based advertising agency Irma S. Mann Strategic Marketing in 2001, to help the brand penetrate new markets. Cape Cod had not done much advertising in the past, but it hoped the agency would help boost sales. Sales did increase that year at a rate of between 5 and 10 percent. Cape Cod was a bright spot at Lance, which spent the early 2000s trying to improve profit margins and jump-start sluggish cracker, chip, and cookie sales. Lance was in a similar position to Eagle, competing against much bigger Frito-Lay in the snack market, and Nabisco in cakes and cookies. Lance had trouble adapting to changing market conditions, and suffered a sales downturn and stock price slump in 2003.

Nevertheless, Cape Cod was growing, and moving strongly into European markets. Lance had installed more kettle cookers at its plants, and by 2003, Cape Cod was producing some 150,000 bags of chips a day. That year, Cape Cod entered an agreement with Largo Food Exports Ltd., the largest snack food maker in Ireland. Largo began to distribute Cape Cod chips in five European countries in a deal that was predicted to bring multimillion-dollar sales growth. The European market was fragmented in terms of its snacking habits, with British consumers going for potato chips almost as often as their American counterparts, and Spaniards and Italians eating far fewer salty snacks. Yet the snack market was expected to grow in Europe, and Cape Cod was eager to have its Irish partner help it introduce products tailored to European tastes.

In 2005, Cape Cod Potato Chip Company celebrated its 25th birthday. The company used the occasion as a marketing ploy, giving away free chips to customers also celebrating a 25th birthday or 25th wedding anniversary, and raffling off a five-day vacation on Cape Cod. The company had gone through some extremes in its 25 years, starting small, going national with Eagle, almost disappearing from the market after Eagle's demise, and finally returning to national and international sales as a division of Lance in the 2000s. Distribution was as far afield as Hawaii and the Caribbean by around 2005, and sales were estimated at around $48 million.

A. Woodward