Del Monte Foods Company

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Del Monte Foods Company

One Market Plaza
P.O. Box 193575
San Francisco, California 94119-3575
U.S.A.
(415) 442-4000
Fax: (415) 442-4894
Web site: http://www.delmonte.com

Private Company
Incorporated: 1916 as California Packing Corporation
Employees: 12,500
Sales: $1.55 billion (1996 est.)
SICs: 2033 Canned Fruits & Vegetables; 2034 Dehydrated Fruits, Vegetables & Soups; 2086 Bottled and Canned Soft Drinks; 2032 Canned Specialties

Among the largest canners of fruits and vegetables in the United States, the Del Monte Foods Company is less than half the size it was at the beginning of the 1980s as a subsidiary of R. J. Reynolds Industries. R. J. Reynolds became RJR Nabisco, which in 1988 was consumed by Kohlberg Kravis Roberts & Co. (KKR). KKR quickly divested itself of a number of RJR Nabisco properties, including Del Monte’s fresh fruits operations (purchased by British-based Polly Peck International) and its processed foods and Japanese rights (purchased by Kikkoman). Although Del Monte management and an investor group led by Merrill Lynch & Co. bought the company’s remaining businesses in early 1990, they were also forced to divest various branches of the company, including the Hawaiian Punch division, the European canned food divisions, the dried fruit operations, and the pudding division. Despite the loss of so many of its products, San Francisco-based Del Monte Foods remained intact and tied to its heritage, that of a quality marketer of canned fruit and vegetables under an internationally recognized—albeit increasingly confusing—brand name. In 1997, Fort Worth entrepreneur David Bonderman and his $2.5 billion Texas Pacific Group investment company approached Del Monte with an investment offer intended to help Del Monte get back on its feet following a period of declining sales and increasing debt.

Early History

Del Monte traces its origins to the pioneering 19th-century figures in West Coast canning, Daniel Provost and Francis Cutting. Along with the influx of settlers from the California gold rush came a need for new regional food manufacturers, and these men led the way. While Provost holds the distinction of forming the first foodpacking operation there, Cutting became the first of a long line of entrepreneurs to manufacture metal and glass containers—rather than having them shipped from the East—and the first to export California-processed fruit back to the East Coast as well as Europe. As the California orchard industry grew, so did the canning industry; a virtual boom in agriculture came to the region during the 1800s, following construction of the first railroad networks, and dozens of canneries were established.

One such business, the Oakland Preserving Company, was launched in 1891. At this time, uniformity in labeling and product quality, under the auspices of the recently established California Canned Goods Association, was becoming a foremost marketing concern. The intent of this service organization was to ensure that the label “California grown” stood for an uncommonly high standard; its efforts ultimately led to effective legislation governing the canning industry. Oakland’s own efforts in this area generated the Del Monte brand, a name that would soon become synonymous with exceptional value.

During this time the need arose for sustaining high consumer demand within an industry that now seemed to be rapidly outgrowing its economic limits. Talks of consolidation among canners eventually produced the California Fruit Canners Association (CFCA) in 1899. CFCA represented a historical merger of 18 separate canneries, including the Oakland Preserving Company. Upon consolidation, CFCA was so vast that it comprised approximately half of the entire California canning industry and ranked, in effect, as the largest canner of fruits and vegetables in the world. There were several key promoters of the CFCA consolidation, including Frederick Tillman, Jr., of Oakland Preserving; Sydney Smith of Cutting Fruit Packing Company; Robert and Charles Bentley of Sacramento Packing; and Mark Fontana and William Fries of Fontana & Co. By popular assent, Fries became the company’s president.

Given CFCA’s wide area of operations and the strong wills of its various principals, true integration of the canneries never materialized. Furthermore, the retention of a large number of name brands prevented CFCA from developing a strong, cohesive marketing presence during its early years. Nonetheless, the multidimensional cannery prospered, spreading beyond the borders of California with the acquisitions of the Oregon Packing Company and the Hawaii Preserving Company. Like the other canneries already within the fold, these continued to operate fairly autonomously. However, as William Braznell pointed out in his History of the Del Monte Corporation, “One notable concession made to corporate solidarity was the adoption of the Del Monte label as the association’s premier brand.” The brand name, courtesy of Tillman and the Oakland Preserving Company, derived from a coffee blend prepared by Tillman and a partner for the Hotel Del Monte in Monterey as early as 1886. Now the Del Monte label graced over 50 products, including squash, sweet potatoes, peppers, berries, jams, jellies, cranberry sauce, and olives.

Del Monte Precursor Formed in 1916

CFCA’s reliance upon commission agents to sell most of its produce led to a curious chain of events and, ultimately, the formation of the California Packing Corporation (Calpak), the immediate ancestor of the Del Monte Corporation. For some time, CFCA employed San Francisco-based J. K. Armsby Co., the West Coast’s largest wholesaler, as its exclusive agent. After CFCA terminated the arrangement, Armsby sought out the region’s second-largest manufacturer, Central California Canneries (CCC). This new arrangement soured when the Armsby brothers, J. K. and George, began rapidly accumulating stock in CCC. George, the more aggressive and visionaryminded of the two, had begun to conceive of a single, dominant food concern that would, at the very least, include the Armsby Co., CCC, and CFCA. Although CCC president William Hotchkiss managed to repel the takeover attempt, he eventually proved amenable to the idea of such a merger.

On November 19, 1916, after numerous meetings, disagreements, and compromises, George Armsby’s dream was realized and the monolithic Calpak was formed. Joining the three major companies in the merger were Alaska Packers Association and Griffin & Skelley. Save for Alaska Packers, all of the consolidated companies were headquartered in San Francisco within a short distance of each other. By 1917, a new headquarters had been established and a committee system of management adopted. J. K. Armsby and Fries were elected to serve as president and chairperson, respectively. Like the CFCA merger, the Calpak merger presented a host of organizational problems for the new management, not the least of which was establishing production consistency within the 71 plants in California, Washington, Oregon, and Idaho, as well as the territories of Alaska and Hawaii. According to Braznell, what held everything together was the understanding by the owners that “California Packing Corporation would present a solid front in the market place. There would be only one premium Calpak label—Del Monte. It would stand for products of uniformly high quality, and it would be promoted for all it was worth.”

A year after the merger, Calpak made promotional history by placing its first Del Monte advertisement in the Saturday Evening Post. Mass advertising was a new medium, and Calpak’s intent was to use it to create a national market for its Del Monte label. What the company hoped to overcome was the prevailing image among consumers that canned goods were “rainy day” items, adequate though not preferable replacements for fresh produce. The concept of brand loyalty was another potential stumbling block for the company, for most grocers at the time were “full service,” filling customers orders themselves and paying little attention to manufacturers or labels. Piggly Wiggly was among the first grocery chains to alter this practice. By the 1920s the evolution toward self-service supermarkets in the grocery industry was well underway, and the success of the Del Monte marketing plan was ensured.

However, Calpak entered the 1920s in a precarious situation. Although earnings were some $7 million on revenues of $85 million following record-high commodity prices, an agricultural depression loomed, made worse by the plight of many farmers who had heavily mortgaged their land to sink new capital into their operations. The company weathered the crisis better than many of its growers, strengthening itself through the establishment of a national sales network and the initiation of mass production, quality assurance, and other internal systems that both improved efficiency and enhanced the Del Monte brand. A major development came in 1925, when Calpak acquired Rochelle Canneries of Rochelle, Illinois. The purchase of this Midwest company signified Calpak’s expansion into corn and pea packing, then the two most lucrative segments of the vegetable canning industry. Related acquisitions included plants in Wisconsin and Minnesota. Several overseas ventures, in such countries as the Philippines and Haiti, also highlighted the decade.

Losses During the Great Depression

With the onset of the Great Depression, Calpak’s earnings crumbled. From 1930 to 1931 they fell from $6.16 per share to just 9¢ per share. In 1932, the company posted the worst losses in its history. Yet, within two years, earnings began to rebound and, after one more unfavorable year, the company was firmly back in the black. In addition to the poor economy and fierce competition from other major canners, Calpak also faced pressure at the time from a flurry of new canneries. Enormous changes within the industry also came about as a result of the agricultural labor movement. The International Longshoremen and Warehousemen’s Union (ILWU), after demonstrating its clout through well-planned strikes, eventually won the right to represent cannery workers in wage, plant safety, and benefit negotiations.

Having aided the Allied effort during World War II, while sustaining profit losses and the temporary closing of operations in the Philippines, Calpak emerged a much stronger company during the late 1940s due to the postwar expansion and rising per capita consumption of canned products. In 1948 the company acquired East Coast producer Edgar H. Hurff Co. Two years later Calpak moved into new headquarters, and in 1951 the company named its seventh president, Roy Lucks. Braznell characterized him as: “coolly logical, an avid student of management sciences… a leader who recognized no jurisdictional boundaries and no allegiances other than those owed to the corporation and its shareholders.” Under Lucks, wrote Braznell, “Calpak/Del Monte moved into the modern era.”

By 1951, Calpak had an estimated worth of $158 million and annual revenues of $223 million. Yet it remained an unwieldy business whose potential for growth had barely been tapped. Until the end of his presidency in 1963, Lucks drove the company forward not so much by acquisition as by a devotion to, marketing research, field sales, new promotions, new product introductions (including fruit drinks), and a consolidation of its operating units. Of course one merger did prove singularly beneficial to Calpak. This was the purchase of a two-thirds interest in Canadian Canners Limited in 1956. The $14-milliondollar deal attracted considerable attention from industry analysts, for it not only gave Calpak a controlling voice in the operations of the world’s second-largest fruit and vegetable canner, but it also ensured a dominant position for the company in the prized British trade bloc.

When Jack Countryman succeeded Lucks, he fortified Del Monte’s competitive advantages by establishing a highly efficient warehouse distribution system. In 1967, in an attempt to heighten the company’s profile and attract new management talent, he gave Calpak the name it had come to prize above all others, Del Monte. After streamlining its now famous shield logo, the Del Monte Corporation launched boldly into the new territory of soft drinks (which was abandoned after four years) as well as an entire line of canned fruit drinks (which survived until 1974). Other forays included potato chips, frozen french fries, fruit turnovers, frozen prepared entrees, and real estate. Only the last two held any real promise for the company. Strong earnings growth typified the period not because of these attempts at diversification but because of Countryman’s parallel commitment to international expansion. The president also proved astute in thwarting a potential takeover from United Fruit (now Chiquita Brands) by acquiring a Miami-based banana importer which, under a U.S. District Court antitrust ruling, nullified any such attempt. United would later sell its Guatemalan operations to Del Monte for $20 million, thus conferring status on the canner as a potentially major player in the fresh fruit market. Alfred W. Eames, Jr., assumed the reins from Countryman in 1968, just prior to a “canner’s recession.” Accordingly, profits during 1969 and 1970 dropped substantially.

Acquisition by RJR Nabisco in 1979

Profit Improvement Project, or PIP, teams dominated Del Monte corporate culture during the 1970s. U.S. Grocery Products, U.S. Subsidiaries, International Grocery Products, and Seafood were named as the company’s major divisions and decentralization became the guiding management philosophy. By 1978, Del Monte had weathered several economic crises—the devaluation of the dollar, rising manufacturing costs, and price freezes—to emerge with record sales of $1.56 billion. Through conservative management of its assets, it was positioning itself for a pivotal acquisition of large proportions that might render it less vulnerable to downswings in its core industry. However, the company’s balance sheets were beginning to look so attractive that its privately issued stock, which was once closely held but now freely traded among a widening circle of private investors, began unexpectedly ratcheting upward. In August 1978, J. Paul Sticht and Joseph Abely, Jr. of R. J. Reynolds Industries arranged a meeting with the new Del Monte president, Dick Landis. In a little over a month an agreement to merge, worth $618 million, was reached and then officially ratified in early 1979, with Del Monte becoming the acquired rather than the acquirer.

For the next ten years, Del Monte benefited from the added RJR Foods labels (Hawaiian Punch, Chun King, Patio, etc.) but also suffered from RJR managerial impulses. The company underwent at least four reorganizations, as well as a succession of managers, and saw its longtime San Francisco headquarters moved to Miami. All of this came to an abrupt end in 1988, when Kohlberg, Kravis, Roberts & Co. effected the biggest leveraged buyout in U.S. history, purchasing RJR for more than $24 billion. In order to reduce debt incurred by the transaction, substantial portions of Del Monte were auctioned off to overseas buyers.

A new Del Monte management team, led by Ewan Macdonald, who had served as marketing vice-president since 1985, salvaged the remainder of the business via another leveraged buyout in 1990. The cost of this acquisition was $1.48 billion, 80 percent of which was financed with outside capital. According to Fara Warner in Adweek’s Marketing Week: “Del Monte is one of the success stories to come out of the RJR leveraged buyout, despite the heavy debt load the current owners incurred in buying Del Monte from RJR; sales have grown annually by 9 percent during Macdonald’s tenure.” Most attribute the success to Macdonald’s strategy of advertising only in magazines. Yet, a $50 million dollar campaign to introduce the failed Del Monte Vegetable Classics, a considerable portion of which was earmarked for television ads, belied this strategy.

Struggling with Debt in the 1990s

Throughout all the turmoil, Del Monte maintained its good reputation. In 1992, it still ranked number one in brand preference in several categories and controlled 16 percent of the $3.5 billion canned vegetable market. However, heavy debt load gave the company little flexibility. Necessary computer upgrades had to be done on the cheap and advertising expenditures remained relatively low. To lighten the debt burden, the company sold off further divisions in the mid-1990s; its dried fruit division went to Yorkshire Food Group in 1993 and its pudding division went to Kraft in 1995.

Moreover, demand for canned foods had been declining throughout the 1980s and 1990s, as Americans sought to increase their consumption of fresh fruits and vegetables. To combat this trend, Del Monte initiated an advertising campaign aimed at 18 to 34 year olds. Using new print advertising, new packaging, and new products, the company appealed to young adult consumers, such as single parents and unmarried couples, who might not have time for preparing fresh fruits and vegetables.

Also during this time, the Federal Trade Commission ruled that a supply agreement Del Monte had with Pacific Coast Producers substantially reduced competition in the processed fruit market. The decision led Del Monte to pay out $4 million to settle an antitrust suit brought against them by Pacific Coast.

To offset this large debt, Del Monte’s owners sought a purchaser for the company, coming close to closing a deal in the mid-1990s. Del Monte had agreed to a $1 billion takeover by Grupo Cabal, a group of investors led by Carlos Cabal, in 1994. The deal would have reunited some of the Del Monte brands, since Cabal had already purchased Fresh Del Monte Produce from the liquidators of Polly Peck International in 1992. However, the deal fell through at the last minute when Cabal disappeared after being charged with illegally transferring money from a trade finance firm to his personal accounts.

As the canned foods market continued to decline and as debts continued to burden the company, Del Monte sought another buyer. In the meantime, it announced in 1996 that it would reduce its work force by 20 percent. The following year, another suitor appeared. Texas Pacific Group, a private investment partnership, had begun a food business shopping spree in 1995, and became known for buying up companies that most analysts regarded as trouble. Beginning with the purchase of Kraft Foods’ marshmallow and confections operations, Texas Pacific was soon the fourth largest U.S. candy and confections company. The Group also invested in Continental Airlines, Ducati motorcycles, and the ailing Oxford Health Plans Inc. Rumors placed their offer for Del Monte at $800 million but neither company would confirm the price when they announced their agreement in early 1997. As part of the transition, Richard Wolford, previously the president of Dole Foods, would take over the company as chief executive officer. While Del Monte’s success under the Texas Pacific corporate umbrella remained uncertain, the Del Monte name remained a familiar brand with a proud history on supermarket shelves.