Horizon Organic Holding Corporation

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Horizon Organic Holding Corporation

6311 Horizon Lane
Longmont, Colorado 80503
U.S.A.
Telephone: (303) 530-2711
Fax: (303) 530-2714
Web site: http://www.horizonorganic.com

Public Company
Incorporated: 1997
Employees: 230
Sales: $84.8 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: HCOW
NAIC: 112120 Dairy Cattle and Milk Production; 311421 Juices, Fruit or Vegetable, Fresh Manufacturing; 311511 Fluid Milk Manufacturing; 311513 Cheese Manufacturing

Horizon Organic Holding Corporation operates a dairy that provides fluid milk and more than 60 dairy products produced with raw milk from organically raised dairy cows. Horizon’s products include yogurt, butter, cheese, and sour cream as well as eggs and fruit juices. Milk products include nonfat, low-fat, reduced fat, and whole milk, low-fat chocolate milk, and cream. Horizon products can be found in natural foods markets, conventional supermarkets, and health food stores in all 50 states.

The criteria for organic dairy certification involves the nourishment and treatment of dairy cattle. A cow is certified for organic milk production after feeding on organic feed for one year; chemical pesticides, herbicides, fungicides, or fertilizers cannot be used for growing animal feed for three years. For one year before certification the cows cannot be treated with antibiotics during sickness or with synthetic hormones to increase milk production. Restrictions for humane treatment include uncrowded pasture grazing and nighttime housing in barns. Organic certification requires that organic milk not be mixed or come into contact with conventional milk. Horizon’s organic dairy farms produce about half of the company’s supply of raw milk and more than 200 independent dairy farmers provide the balance.

The Early 1990s: Finding a Niche in the Organic Foods Market

Two veterans of the natural foods industry started Horizon Organic Dairy in 1991: Mark Retzloff, cofounder of Alfalfa’s chain of natural food grocery stores, based in Boulder, Colorado, and Paul Repetto, former president of Vestro Foods, national marketer of Westbrae, Little Bear, and other brands of organic foods. Retzloff and Repetto witnessed the growth of the organic foods industry in the 1980s and saw a potential market for organic dairy products. They each invested $100,000 and managed the company without pay for the first year and a half. Their vision was to produce and sell a national brand of organic dairy products. Mark Peperzak, owner of Aurora Dairy Corpo-ration in Colorado, provided knowledge about the dairy industry as a silent partner.

Originally named Natural Horizons, the company launched its first product in April 1992, certified organic yogurt available in six flavors—plain, vanilla, strawberry, raspberry, peach, and cappuccino. Due to the higher cost of organically produced foods, Horizon sought to make its product accessible on a per-unit basis by offering the yogurt in six-ounce cups at a price comparable to conventional yogurt in the standard eight-ounce cups. A cooperative of 12 dairy farmers in southwestern Wisconsin provided organic milk to produce the yogurt. Certified organic fruit and a white grape juice concentrate sweetener came from organic sources in the Pacific Northwest. Processed at a facility in Madison, the equipment was thoroughly cleaned before making Horizon’s organic yogurt. By the end of 1992, Horizon sold the yogurt to 2,000 stores, including Alfalfa’s markets, as sales reached $460,000.

Whereas the dairy industry has handled milk as a commodity, combining milk from several regional sources into one tank, Retzloff and Repetto wanted Horizon to be a dairy with its own farm. In 1993 Retzloff and Repetto initiated a stock swap with Aurora Dairy as the first step toward integrating a dairy farm into the company. Pepezak leased an inactive dairy farm, in Paul, Idaho, to Horizon during the transition to organic certification. At this time the company adopted the name Horizon Organic Dairy.

Horizon successfully introduced organic milk into the Los Angeles area through the Ralph’s chain of supermarkets in September. The supply of nonfat and two-percent-reduced fat organic milk did not meet demand, however, even at 40 cents more per half gallon than conventional milk. Horizon’s timing of the launch happened to occur a few months before the FDA approved a genetically engineered growth hormone, rBGH. Concerns about the possible dangers of the hormone to the health of milk drinkers stimulated sales of organic milk products. As the milk supply increased, Horizon introduced organic milk into natural food stores and supermarkets in Colorado, the Midwest, and the East Coast a few months later. The milk was processed and pasteurized at a facility in Des Moines and transported across the country in milk tankers.

Horizon secured $1.5 million in venture capital financing in 1994 and applied the funds toward the transition of the Idaho dairy farm, purchasing cows and organic feed. In July Horizon opened the organic dairy farm in Idaho with 1,000 head of Holstein cows. Unlike a factory farm, the cows grazed on pesticide-free pastures and spent the night in barn stalls; the cows were milked three times a day by special equipment for squeezing gentler than that of ordinary milking equipment. The 4,000-acre farm, the first organic dairy farm of its size in the United States, cost $5 million to bring to organic standards and held the capacity for 3,000 more cows.

With a new supply of organic milk, Horizon expanded distribution. By the end of the year Horizon milk, yogurt, and sour cream sold in 76 percent of King Soopers, Safeway, and Albertson’s stores in metropolitan Denver, in five of the six major grocery store chains in the Los Angeles area, in areas of New York City, and in natural food stores across the country. Horizon became the first national brand of organic dairy products, garnering $3.7 million in sales in 1994.

The Mid-1990s: Fantastic Growth But No Profits

Growth had its problems as Horizon tried to keep production in pace with demand. The farm in Idaho did not produce enough organic cow feed, so Horizon contracted with more local farmers. Originally, 19 organic farmers supplied pesticide-free feed; that number increased to 97 farmers on 50,000 acres in three states. Another problem involved finding enough facilities to process and pasteurize organic milk in Des Moines. In addition, most of the milk products sold on the West Coast, requiring long-distance travel in any weather to transport products with limited shelf-life. Retzloff and Repetto solved the problem by building a plant in Petaluma, California, and at the farm in Idaho. The company also began to process milk at the Robinson Dairy in Denver, transporting raw milk in tankers from Idaho, to arrive at the facility 12 hours later. Robinson processed the milk after midnight, when the equipment was usually dormant. Horizon also contracted with processors in Minnesota, Nevada, and New Jersey. New processor contracts supported the introduction of butter, cream cheese, half-and-half, and 1% low-fat milk.

Additional processing capacity enabled Horizon to expand its sales territory to conventional grocery store chains in San Francisco, Seattle, Portland, Chicago, Atlanta, Boston, and New Jersey. The typical consumer of Horizon products tended to be an adventurous female, 20 to 50 years old, who had completed a course of higher education and who may have children. While many of Horizon’s customers earned a higher than average income, education played a larger role in the decision to pay the higher price for Horizon products. Due to the costs of operating an organic dairy farm, Horizon priced a half gallon of milk at 25 percent to 50 percent more than conventional milk. Horizon’s plans for advancement called for additional leadership and experience at the top. In October 1995, Horizon hired Barney Feinblum, former chairman of Celestial Seasonings tea company, as president and CEO of Horizon. Retzloff became vice-president of sales and Repetto became vice-president of operations. Venture financing provided $2.5 million for expansion.

In November 1996 Horizon launched a line of four organic cheeses with seven new products. Horizon introduced packages of eight-ounce, wax-dipped aged cheddar, reduced-fat aged cheddar, Monterey Jack, and low moisture/part skim mozzarella cheese. Shortly afterward, Horizon offered organic Parmesan cheese, available in wedges, shredded, or grated. Milk for the cheese came from organic dairy farms in Wisconsin and, later, from the Idaho farm, which doubled the herd to 2,000 cows.

With sales of $16 million and a loss of $5 million in 1996, Horizon had not made a profit yet. The transition to organic agriculture, public education about the benefits of organic foods, and the high cost of gentle milking equipment kept operating expenses high. Human labor involved one person for every 40 cows at Horizon’s Idaho dairy farm, compared with one person for every 75 cows on a conventional dairy farm. Because Horizon did not use antibiotics on sick cows, the company implemented preventative health care measures to reduce the risk of infection, such as cleaning facilities 24 hours a day. Horizon employed homeopathic methods to treat sick cows and culled extremely ill cows from the herd. The company paid nearly 50 percent more for organic feed than conventional dairy farms paid for nonorganic feed; Horizon also devised its own feed mix, which included alfalfa hay, canola, and cotton-seed meal. In addition, the company paid a high price for raw organic milk, at $18.00 per 100 pounds, compared with $12.00 for conventional milk.

Company Perspectives:

Horizon Organic Dairy’s mission is to be the leading world marketer of branded organic milk, dairy and dairy-related products by producing and selling the highest-quality organic foods to customers and consumers who are concerned about food safety, the environment, animal welfare, and health and nutrition for themselves and for their families.

With additional venture financing of $7.25 million, Horizon completed the three-year transition of the Idaho dairy farm to organic certification for animal feed in July 1997, allowing the company to increase the herd to 4,000 cows. Horizon bought the farm from Aurora Dairy at this time. The company also began to develop an organic dairy farm in Maryland to supply milk for the East Coast. With a herd of 556 cows, the Maryland dairy began to ship organic milk for processing in early 1998. Horizon expected the farm to be certified organic for animal feed in 2000.

Horizon continued to focus on growth along the East Coast, adding eggs to its list of products. A 1997 licensing agreement with Glenwood Farms of Jetersville, Virginia allowed that company to distribute eggs under the Horizon brand, using a happy chicken logo similar to the flying cow. The distribution area stretched along the East Coast from Virginia to New York. The April 1998 acquisition of Juniper Valley Farms in Roxbury, New York expanded Horizon’s reach in metropolitan New York. Horizon planned to transfer brand products from Juniper Valley Farms to the Horizon name.

1998: The First Public Organic Foods Company

Horizon became the first publicly owned organic foods company with a June 1998 stock offering. Horizon expected to sell at $ 11.00 per share, but trading began at $ 13.13 per share. In a concurrent private placement, Brazilian conglomerate Suiza Foods acquired 1.1 million shares, a 12.5 percent ownership of the company. The offering raised $46 million, which Horizon used to pay debt, with $24 million available for acquisitions.

Horizon’s corporate approach to organic food production drew criticism from small organic dairy farmers. Small dairy farms carried 40 to 80 cows, compared with Horizon’s herd of more than 4,500, prompting the question of whether a large-scale farm can protect the animals and the environment as well as small organic dairy farms. Despite critics’ concessions to the fact that the productivity of corporate farming met the demand for organic milk products, corporate farming entailed a different cultural attitude. Horizon countered that the productivity of the company had led many grain and dairy farmers to convert to organic methods.

In September 1998, Horizon introduced a line of organic fruit juices—Organic Orange Juice, with or without pulp, and Organic Ruby Red Grapefruit. Horizon used organic Valencia oranges and other oranges from Florida and California. Despite a retail price of approximately $4.79 per half gallon, sales were higher than expected. The juice containers featured the “Happy Cow” logo.

Horizon garnered its first profit in 1998—$486,000 from $49.4 million in sales, as lower operating costs improved profit margins. Horizon’s association with Suiza facilitated distribution to the East Coast through Garelick Farms and processing of chocolate milk and cottage cheese at Suiza plants reduced over-head. Economies of scale through maximum use of Horizon’s infrastructure and the maturity of the Idaho dairy farm also contributed to improved profit margins. Horizon products sold in 8,100 natural food and conventional grocery stores nationwide.

Horizon pursued international expansion through a licensing agreement for milk products in Japan and acquisition of an organic dairy in Wales. In April 1999 Horizon signed a distribution agreement to cobrand organic dairy products with Takanashi Milk Products Ltd. of Japan, beginning with organic yogurt. Horizon shipped organic feed and dairy ingredients to Japan until Takanashi developed its own supply of organic milk.

Expansion to the United Kingdom involved the acquisition of Rachel’s Organic Dairy in Aberystywth, Wales, through which Horizon planned to introduce organic milk to the United Kingdom and Europe. Horizon retained the previous owners, Rachel and Gareth Rowlands, to act as liaisons between Horizon and local dairy farmers, assisting in the conversion to organic methods.

Horizon purchased the Organic Cow brand of dairy products from H.P. Hood for $10.9 million. Organic Cow of Vermont was the leading brand of organic milk products, with a strong customer base in Boston. Horizon intended to continue to sell dairy products under that brand.

Horizon used a variety of strategies to expand its reach as well as its product line. The company signed a licensing agreement with Nu-Cal Foods to distribute organic eggs under the Horizon brand. Horizon planned initial distribution for northern California, with later expansion to western states. A method of cobranding involved a coffee drink by Flavor Organics, which used Horizon milk; the packaging featured Horizon’s “Happy Cow” logo. In October 1999 the company launched a line of yogurt flavors with added nutrients such as beta-carotene and vitamin C. Horizon began to sell some products in larger containers, with new gallon-sized jugs of milk and 24-ounce containers of yogurt in plain, vanilla, and honey flavors.

Key Dates:

1991:: Company is founded.
1992:: Organic yogurt in six flavors is introduced.
1993:: Company launches organic milk products in Los Angeles market.
1995:: Barney Feinblum, of Celestial Seasonings, is hired as CEO.
1997:: Idaho dairy farm completes transition to organic certification.
1998:: Initial public offering of stock; first profit is recorded.
1999:: Company acquires Rachel’s Organic Dairy in Wales.
2000:: Company is honored by Council on Economic Priorities with a Corporate Conscience Environmental Stewardship Award.

The successful expansion of organic dairy products increased competition for Horizon milk from some of the company’s first customers. King Soopers supermarket launched a private label organic milk, followed by a Safeway grocery store brand. Whereas conventional grocers accounted for two-thirds of Horizon’s sales volume, Retzloff thought the store brands were indicative of positive change and that the market niche had room for competitors. Nevertheless, Horizon increased its advertising campaign expenditure in 1999, involving in-store pro-motions and product sampling and continuing to advertise in parenting magazines. Horizon also sought to increase consumer awareness of the benefits of organic agriculture and of the Horizon brand through the company’s web site.

Finding processors for its products continued to be a priority as the volume of fluid milk in 1999 increased 47 percent over 1998. With contracts for seven new dairy processors, Horizon attempted to expedite a faster pace of distribution, from cow to processor to grocery store shelves; in many places this often took place within 24 hours. Through a management and supply agreement with Aurora Dairy, Horizon augmented its organic dairy capacity with 1,150 cows at a farm in Platteville, Colorado.

Leadership Changes Directed to the Future

Sales in 1999 reached $848 million, yet garnered a net profit of only $1.4 million. At the end of 1999 a spurt of growth increased revenues, but Horizon found it difficult to keep expenses down as the company’s tracking techniques proved be outmoded for the higher level of activity. Other costly activities involved market expansion, new product launches, and integration of the Organic Cow brand. Horizon hired a consultant to assist with the organization of the business.

Organizational changes occurred naturally as Feinblum announced his intention to leave Horizon to seek new opportuni-ties. The company named Charles Marcy as president and COO in November 1999 with the expectation of his succession to CEO. Previously employed with Sealright, Quaker Oats, Kraft, and General Foods, Marcy brought experience in brand promotion and management. Feinblum decided to leave early, placing Marcy in the position of CEO in January 2000. Retzloff took a new position, president of international operations; Repetto re-tired, but remained on the board of directors.

The company continued to expand its production capacity, winning the bid for a long-term lease of an 865-acre dairy at the U.S. Naval Academy in Gambrills, Maryland. Horizon planned a visitor and education center as well as a working dairy farm at the site. Horizon worked with state and local agricultural and wildlife organizations to develop programs that teach visitors about the relationship between agriculture and the natural environment. Named Horizon Organic Farm and Education Center, plans included the Organic Discovery Barn, a petting zoo, and a vegetable garden.

In March 2000 Horizon completed the acquisition of the George Dairy in cooperation with the Nature Conservancy of California, a nonprofit organization. The agreement between Horizon and the Nature Conservancy involved integration of the 605-acre dairy farm, located in south Sacramento County, into the 40,000-acre Cosumnes River Preserve. The plan protected the dairy farm from urban development or from becoming a vine-yard, as many northern California dairy farms had in recent years. Dairy farms provided valuable habitat for sandhill cranes and other wildlife that cannot survive in a vineyard. Horizon sold conservation easements to the Nature Conservancy for $1 million, paid by state and federal grants, bringing the actual purchase price down to $1.5 million. Under the agreement, Horizon set aside a 110-acre freshwater marsh on the dairy farm as habitat for the endangered giant gaiter snake and for wastewater treatment. The previous owners had not used synthetic fertilizers so the land was already certifiably organic. The dairy included 350 cows and potentially supported 2,700 cows. Horizon planned to raze the milking facilities and build a modern plant.

Horizon began expansion of Rachel’s Dairy, adding a new plant in Aberystywth to increase production capacity there by 75 percent. New Rachel’s brand yogurt products included a rich, Greek-style yogurt with honey, whole milk yogurt with maple syrup, and a low-fat vanilla yogurt. Obtaining a supply of organic milk proved easy enough as a depressed agricultural market in the United Kingdom prompted fanners to change to organic practices, being persuaded by the premium price paid for organic milk and cow feed. Horizon also acquired two organic product makers: Meadow Farms in Devon, the largest supplier of store-brand milk in the United Kingdom; and Organic Matters, producer of a variety of organic dairy products.

With the company’s products in more than 27 percent of supermarkets in the United States, Horizon set a goal to add another ten percent of the country’s supermarkets to its customer list. Horizon hoped to raise brand awareness through increased marketing and public relations. New products in 2000 included a 64-ounce organic apple juice and lemonade, as well as orange-carrot juice from concentrate. Single-serving, 16-ounce organic fruit juices were offered in orange juice, orange-carrot juice, orange juice with added vitamin C, and lemonade. The company began to explore the possibility of introducing new cheese products, but did not plan to produce organic ice cream. In the future Horizon expected to provide organic dairy products to restaurants.