Carnation Company

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Carnation Company

5045 Wilshire Boulevard
Los Angeles, California 90036
U.S.A.
(213) 932-6000

Wholly owned subsidiary of Nestlé S.A.
Incorporated: 1916 as Carnation Milk Products Company
Sales: $2.65 billion

The 1984 Nestlé takeover of Carnation was at the time the largest acquisition outside the oil industry. The $3 billion deal allowed Carnation to renew its focus on consumer foods and pet foods and reduced its traditional reliance on its dairy division’s cash flow. Carnation once had a reputation for conservative yet effective marketing, capturing small markets before advancing to larger. Today it markets more aggressively, acting like an independent company while sharing risk with its Swiss-based parent. As a unit of Nestlé’s U.S. holding company, Carnation focuses on domestic sales.

Elbridge Amos Stuart knew almost nothing about the evaporated-milk business when Thomas E. Yerxa persuaded him to join in the purchase of a bankrupt condensery in Kent, Washington in 1899. Having grown up on a farm in Indiana, however, Stuart was acquainted with dairying, and as the former proprietor of a general store in El Paso, Texas and later a wholesale grocery in Los Angeles, he recognized the value of sanitary milk at a time when fresh milk was neither universally available nor always potable. Although both of his prior ventures in food sales failed, Stuart had developed a knack for marketing and publicity, which proved to be an important factor in the success of the Pacific Coast Condensed Milk Company, as he and Yerxa called their partnership.

They put John B. Meyenberg, the Swiss inventor of evaporated milk, in charge of the condensery, and paid him $25,000 for his patented technology. (Evaporated milk is made by heating fresh milk quickly to kill harmful bacteria and then sealing it in an airtight can. Distinct from condensed milk, which Gail Borden developed in 1856, evaporated milk contains no sugar preservatives and more closely resembles fresh milk.) Before signing on with Yerxa and Stuart, Meyenberg had helped establish the Helvetia Milk Company in St. Louis, Missouri—the maker of the evaporated milk Stuart had stock in his El Paso store. Meyenberg’s former employer, later renamed Pet Milk Company, soon faced growing competition from Pacific Coast Condensed Milk.

Stuart chose the name Carnation after a brand of cigars by that name. Despite the memorable name and a bright red-and-white label, consumers were slow to buy Carnation evaporated milk at first, and the company lost $140,000 in its first year, prompting Yerxa to sell his interest to Stuart. After this inauspicious beginning, the company seldom lost money again. Soon it found a sizable market among Alaskan gold prospectors who valued evaporated milk because it was nonperishable and easily transported. As business picked up, a sales office was established in Seattle, another plant was opened in Forest Grove, Oregon, and state-of-the-art canning and homogenizing equipment was installed.

While early newspaper advertisements emphasized that Carnation milk was safe for babies, a product formulated especially for this use called Sanipure was abandoned after a disappointing reception in the marketplace. Stuart expanded distribution cautiously at first, and insisted on capturing a 65% share of existing markets before penetrating new ones. But competition in much of the West was thin, so Pacific Coast Condensed Milk extended its territory systematically. By 1911, condenseries in Wisconsin were supplying the Midwest and East with “milk from contended cows,” as the famous slogan introduced in 1907 said. The company had already rejected two purchase offers, including one for $1 million from its much larger competitor, Borden.

In 1909 and 1910, Stuart established Carnation Stock Farms on 750 acres of lush land in Washington’s Snoqualmie Valley. He made the farms into a company showpiece by spending lavishly, buying prized Holstein-Friesian cattle and hiring animal husbandry experts. The investment paid off as Carnation cows set numerous records for milk and butterfat production and won the acclaim Stuart sought. In 1915 a second farm was purchased near Oconomowoc, Wisconsin where, a year earlier, the company had located its eastern division offices. The farms did not significantly reduce Carnation’s reliance on independent dairymen, but they did contribute to a smooth rapport with suppliers, whose cows were crossbred with Carnation’s, thus greatly improving the productivity of their stock.

Relations with the dairy industry were sometimes less friendly. In 1916 the company introduced a lower-cost alternative to condensed milk in which coconut oil was substituted for butterfat. The new product, called Hebe after the Greek goddess of youth, was seen as a threat by dairymen, who lobbied successfully to have it banned in Ohio. Carnation fought the prohibition to the Supreme Court but lost when the Court found that Hebe had been misleadingly sold as pure milk. Subsequently, in 1923, the government passed the Federal Filled Milk Act, which outlawed the shipment of adulterated milk across state lines.

Sales of Carnation evaporated milk were surprisingly brisk in the Midwest and the East, where older companies such as Borden and Pet dominated the market. Reflecting this expansion, the company reincorporated in Maine in 1916 and changed its name to the more geographically neutral Carnation Milk Products Company. To keep pace with its burgeoning eastern business, it opened an office in Chicago, built a can factory in Oconomowoc, and acquired several condenseries, including two in Canada. By 1919 it operated 20 facilities that produced approximately 530 million pounds of evaporated milk annually, up from 16 million pounds in 1915.

Carnation and other American milk companies helped alleviate severe shortages in Europe during World War I by contracting to supply European firms such as Nestlé. But when the war ended, Carnation found itself wallowing in surpluses. Therefore, Carnation took advantage of a loophole in the antitrust laws and opened an overseas affiliate with Pet Milk Company. Branches of American Milk Products Corporation, as the joint venture was called, were opened in Paris and Essen, Germany. When the French imposed prohibitively high tariffs on imported milk in 1923, the partnership converted an old creamery in Carentan, France into an evaporation plant, and thus avoided the new tariffs. Later a condensery was built in Germany to circumvent similar import barriers there. Despite the fact that Pet and Carnation competed domestically, American Milk Products Corporation was an enduring success; in the 1930s and the 1940s it added condensing and canning facilities in the Netherlands, Scotland, South Africa, Peru, and Mexico. The partnership thrived until 1966, when Carnation bought Pet’s share for $42 million.

At home, Carnation diversified into related businesses through acquisitions. It brought the Malt-A-Milk Company in Kansas City in 1922, adding Cho-Cho malted milk to its product line. It entered the fresh-milk business in 1926 with the purchase of six dairies in Seattle, and over the next decade Carnation developed its dairy operations as methodically as it had its evaporated milk operations, again securing one market before advancing to another. It acquired dairies in Oregon, California, Texas, Oklahoma, and Iowa in this way.

Carnation’s first step outside the dairy business came in 1929, when it bought Albers Brothers Milling Company in Seattle, a well-established manufacturer of cereals and a pioneer in soybean livestock feed. That same year, recognizing that it was no longer just a milk company, officers renamed the company simply Carnation Company.

When Elbridge A. Stuart retired in 1932, he was succeeded by his son, Elbridge Hadley Stuart, who had advanced through the organization since his college graduation. The younger Stuart took over a company on its way to losing more than $660,000—its worst year ever. But by extensive cost cutting he put Carnation into the black the next year, with earnings of more than $1 million. Remarkably, Carnation did not lay off any of its 4,000 employees during the Great Depression, although wages were sharply reduced.

E. H. Stuart shared his father’s penchant for publicity. In 1931 Carnation began sponsoring “The Contented Hour” on NBC network. The program was broadcast nationally from 1932 until 1951, when Carnation began sponsoring the “Burns and Allen” television show. Carnation advertising also commanded the public’s attention. In 1934, Carnation inaugurated a massive promotional campaign that featured the Dionne quintuplets. Carnation arranged to have the celebrated babies reared on its new vitamin D-enriched evaporated milk and at the same time worked closely with pediatricians to position its product as the formula ingredient for healthy infants.

While Carnation’s public relations people were working to gain doctors’ endorsements, nutrition specialists from Albers Milling were at Carnation stock farms testing a new livestock feed that increased an animal’s consumption and thereby improved its productivity. The feed, known as Calf Manna, was introduced in the early 1930s specifically for dairy cows, but was found to benefit other stock animals as well. By 1936, it had become a staple on farms around the world. Albers research scored another success in 1934 with the introduction of Friskies, the first dry dog food. Marketed under Carnation’s familiar strategy, Friskies was first sold in the West and then spread eastward city by city. Its sales got a boost during World War II when many competitors had to limit dog food production because of tin rationing.

Domestic demand for evaporated milk rose substantially during World War II, reaching a peak of 86.8 million cases in 1945. Although Carnation’s sales advanced, price ceilings and government rationing held earnings steady. Nevertheless, Carnation enjoyed unparalleled prosperity immediately after the war. In 1946, profits topped $3.2 million, versus less than $2.5 million the year before. By the company’s fiftieth anniversary in 1949 profits had climbed to a record $7.76 million—more than double what they were in the first postwar year. Also in 1949 Carnation opened new corporate offices on Wilshire Boulevard in Los Angeles. Before that, Carnation managers had been scattered across the country at the company’s general offices in Seattle and Milwaukee; at the evaporated-milk division in Oconomowoc; at the fluid-milk and ice cream operations in Los Angeles; at Albers Milling, in Seattle; and at the vastly expanded overseas collaboration with Pet, now known as General Milk, in New York City.

This consolidation of the executive offices brought more cohesive management and more comprehensive planning. Carnation had long had a reputation for conservative marketing, but in the 1950s it became even more cautious. Before introducing a new product or pushing into a new region, the company invested heavily in market studies. Product development, an area in which Carnation’s record had been mixed, became a specialty. In 1953 it opened a new research laboratory in Van Nuys, California and increased that facility’s staff over the next two decades from seven to 170. Product development went hand in hand with market analysis; the company focused on new items that could be sold under the well-known Carnation brand name and distributed through existing networks. When Carnation did finally bring out a new product, it did so decisively and with a generous promotion budget. Sometimes several years elapsed before an investment began to pay off, but the returns—sales gains and enhanced consumer recognition—were substantial.

The move into powdered milk illustrates the advantages as well as the pitfalls of Carnation’s approach. Consumption of evaporated milk fell dramatically in the United States after World War II. Meanwhile, demand for economical nonfat dry milk soared. Americans bought 2.4 million pounds of powdered milk in 1948 and 94 million pounds in 1953, despite the product’s annoying tendency to cake, its thin flavor, and its inability to dissolve easily in water. Reluctant to sell a product with these disagreeable qualities and convinced that they could be eliminated, Carnation lagged behind the other major milk companies in introducing powdered milk, until its reservations became too costly. Finally, Carnation capitulated and began to make its own brand of the same product. It was about to begin distribution when it learned that David Peebles of the Western Condensing Company had patented a powdered milk that had none of the unpleasant characteristics of other brands. Carnation abandoned its plans and formed the Instant Milk Company with Western in 1954 to sell the superior formula under the Carnation name. Carnation spared no expense in advertising and eventually forced Peebles’s underfinanced company to bow out of the partnership. Sales were strong from the outset, but because of the heavy start-up costs, the enterprise did not show profits until the 1960s.

Success with dry milk inspired Carnation researchers to develop more powdered foods. Instant cocoa was introduced in 1956, followed in 1961 by Coffeemate, today the leading non-dairy lightener. When a study commissioned by Carnation in the early 1960s revealed the increasing popularity of convenience foods, the company developed Instant Breakfast, a milk fortifier derived from the Peebles technology. A dietetic version called Slender came out in 1966, but had to be reformulated in 1969 when cyclamates were banned. By the mid-1960s, Carnation had converted numerous condenseries to the production of instant foods, which had replaced evaporated milk as the profit generators.

Another lucrative field in the late 1950s and the 1960s was pet foods, which grew with the explosive growth of the pet population in the United States. Again, product development was instrumental in Carnation’s success. In 1956 it introduced Friskies cat food to complement its dog food of the same name. Canned versions of Friskies for both dogs and cats came out in 1959, followed by puppy food in 1962. Buffet was introduced in 1967 in response to a Carnation report suggesting that many consumers preferred single-serving, premium-quality cat food. A similar, very profitable product for dogs, Mighty Dog, reached the shelves in 1973.

E. H. Stuart became chairman of the board in 1957 and was replaced as president by A. M. Ghormley, who, like many other Carnation executives, had spent his entire professional life working for the company. Ghormley became vice chairman in 1963, but during his brief tenure was largely responsible for an impressive expansion of Carnation’s product line. His successor as president in 1963 was H. Everett Olson, an accountant and another career Carnation man; in 1964 E. H. Stuart’s son Dwight became vice president.

Under Olson, Carnation made a number of significant acquisitions. In 1963, it bought Contadina, the California-based processor of canned tomatoes. Trenton Foods, one of the country’s biggest suppliers of canned meats and sauces to institutional customers, was purchased in 1966. In the 1970s Carnation acquired Pronto Pacific and the Western Farmers Association processing plant, expanding the line of dry and frozen potatoes it had launched in 1959 with Trio instant mix. Reliable Tool, bought in 1970, fit neatly with Carnation’s substantial tin-can business, and the purchase of several firms engaged in genetic research and the artificial insemination of livestock was logical, given the company’s experience in breeding.

In 1971 Olson became chairman when E. H. Stuart retired at the age of 83. Stuart died the next year, and in 1973 his son Dwight L. Stuart became president of Carnation. In a stab at diversification reminiscent of food companies a decade earlier, in 1973 Olson purchased Herff Jones, a manufacturer of school rings, graduation garb, and other scholastic products, and announced that Carnation would buy Timpte Industries, a truck-trailer company. When Carnation’s stock dropped dramatically in response to these moves, however, the Timpte purchase fell through.

In 1976 the company was the second-largest producer of pet foods. Evaporated milk was an ever-shrinking market, but Carnation’s new businesses, especially its instant products, pet food, and international divisions made up for the loss.

Olson’s leadership was enigmatic in many respects. Under Stuart, Carnation had maintained a policy of strict corporate secrecy, disclosing little more about the company than what was legally required. This policy began to change after the Timpte announcement and subsequent stock-price crash, but not much. Product development, Carnation’s lifeblood in the 1960s, slowed in the 1970s, and in the late 1970s advertising was even cut. There was some speculation that the Stuart family holding company pressured Carnation to squeeze money out of the company rather than invest for the long term. The company’s closed-door policy also led to negative governmental action. Carnation was periodically cited during the 1970s with violations like price-fixing, illegal campaign contributions, and illegal payments to foreign governments. But overall, Carnation’s sales and earnings hardly suffered—the company’s unbroken string of annual earnings increases stretched back 28 years in 1980.

That year Olson also persuaded the Stuart family trust, which controlled nearly half of the company’s shares, to dissolve itself, a move which allowed family members to sell their stock if they wished. This done, the pace of product introductions increased noticeably. However, the company’s market share in pet foods slipped to fourth by 1981 and a lack of dairy-product introductions hurt its core business cash flow. In 1982 Carnation—in line with Slender, introduced in the mid-1960s, and 2% and nonfat evaporated milk, introduced during the 1970s—opened its first Health & Nutrition Centers, which offered formal diet programs, to a very good response.

Carnation’s growing pile of cash, despite increased dividends, increased capital investment, and a share buy-back program to counteract the effect of share sales by the Stuart family began to attract attention. Rumors of a deal with Nestlé surfaced as early as 1980, but nothing came of them. Barring a major acquisition by Carnation, the company looked ripe for takeover.

In 1983 Timm F. Crull succeeded Dwight L. Stuart as president of Carnation. The next year, the long-rumored takeover finally took shape. Formal negotiations with Nestlé began in July, 1984, and by September the two companies had agreed on a $3 billion, $83-per-share friendly takeover. The acquisition formally took place in January, 1985. There was some controversy, however, over Carnation’s repeated denials of merger talks even as they were taking place. Carnation settled a shareholder suit for $13 million in 1987, and as a result of Carnation’s handling of its deal, the Securities and Exchange Commission issued new rules that required company statements addressing unusual market activity to acknowledge any merger discussions underway.

The deal left Carnation’s management largely intact. Nestléquickly sold Carnation’s non-consumer-products divisions and many of its international operations. At the time of the deal, Carnation’s sales were $3.7 billion, but Nestlé’s cuts brought sales down to $2.1 billion.

Nestlé incorporated Carnation into its U.S. holding company, which includes Stouffer Corporation, Libby McNeil & Libby Inc., and Beech-Nut Corporation. Carnation, however, still reports directly to Switzerland. After spinning off unwanted divisions, the purchase of Carnation increased Nestle revenue 20% to $13.5 billion, giving the parent company more product lines (pet foods were new to Nestlé) and improved market shares.

In 1985 Olson retired after leading Carnation for 20 years. Crull succeeded him as CEO. Carnation’s new status as a subsidiary allows more long-term planning as well as access to Nestlé’s extensive research-and-development facilities. Carnation’s new areas of emphasis are ice cream novelties and its Contadina fresh pasta and cheese products. Carnation has invested nearly $100 million in Contadina alone, and Nestlé will also stress food sectors like Carnation’s food-service and potato-processing lines, and Carnation’s emphasis on pet foods will continue.

Carnation today is more heavily involved in higher-margin food processing than it ever was before. The Nestlé purchase makes possible a reversal of prior approaches, in which dairy and nonfood production were emphasized over food-processing lines. Today Carnation is entirely involved in domestic sales of food products and pet food. What was once a conservative, short-term growth company is now a risk-taking one positioned for the long term.