The Quaker Oats Co.

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The Quaker Oats Co.

founded: 1877

Contact Information:

headquarters: quaker tower
321 n. clark st.
chicago, il 60610-4714 phone: (312)222-7111 fax: (312)222-8323 url: http://www.quakeroats.com

OVERVIEW

The Quaker Oats Company is a worldwide marketer of food and beverage products and has one of the most trusted brand names in the food business. Its products include Quaker Oats, Rice-A-Roni, and Gatorade. In many ways, Quaker's recent history has been a tale of two beverages: Gatorade and Snapple. Quaker's 1983 purchase of Gatorade was very successful, and it became the company's top selling brand. Quaker's late 1994 acquisition of Snapple, the "new age" beverage marketer, proved to be disastrous, costing the company well over $1 billion. Snapple was sold at a huge loss in March 1997, a fact that led to the resignation of longtime chairman, president, and CEO William Smithburg in April 1997.

Quaker has bought and sold many different businesses throughout its history, each time changing the profile of the company. In the early to mid-1980s, Quaker sold off its non-food operations in toys, men's fashion, and other retail and restaurant businesses. At the same time, it began making new acquisitions in the food business. The most important purchase was Stokely-Van Camp in 1983, which included the Gatorade sports beverage.

Through effective marketing, Quaker increased Gatorade sales from $93 million in 1983 to $1.5 billion in 1997, which amounted to 28 percent of Quaker's total sales. Gatorade also produced $187 million in profits, about 32 percent of the company's total 1997 profits. In 1997, Gatorade held a commanding 82-percent share of the sports beverages market.

Quaker purchased Snapple in 1994 for $1.7 billion with the idea of pairing it with Gatorade as a "good for you" drink. However, many market analysts agreed that Quaker overpaid for the brand by about $1.0 billion, since Snapple sales were slipping even during the acquisition and the brand faced major new competition from the Coca-Cola Company and PepsiCo. Quaker experienced major distribution problems with the brand and falling sales. In March 1997, Quaker agreed to sell Snapple to Triarc Companies, owner of RC Cola and Arby's restaurants, for just $300 million. Quaker also took a charge against earnings of $1.4 billion to complete the transaction.

While the Snapple acquisition obviously hurt Quaker Oats financially, the company still had a strong line of other products. For example, in 1997 the company had food sales of $3.2 billion and Gatorade sales of $1.5 billion. Also, continued publicity about the health benefits of oats helped improve the sales of its oldest product, Quaker Oats. As of 1997, Quaker's major food lines included ready-to-eat cereals, institutional foodser-vice, hot cereals, grain-based snacks, flavored rice, pasta side dishes, and other grocery products.

COMPANY FINANCES

In 1997, Quaker Oats reported sales of $5.0 billion, compared to $5.2 billion in 1996, a decrease of 3.5 percent. During the same period, the company reported a loss of $931 million, as opposed to a profit of $248 million in 1996. Quaker Oats stock ranged from a high of $60 to a low of $42 over a 52-week period. Selling off some product lines, including Snapple, was the explanation given for declining sales and profits for 1997. For the segments retained by Quaker Oats, food sales were up 4 percent in 1997, international foods sales up 5 percent, beverage sales up 8 percent, and international beverage sales up 19 percent. Quaker Oats received 64.4 percent of sales from foods and 30.3 percent from beverages in 1997.

ANALYSTS' OPINIONS

In early 1997, market analysts were focusing on Quaker's costly and unsuccessful acquisition of Snapple, but noted that the company still had several strong points. Many analysts agreed that the acquisition and management of Snapple was a complete disaster. The company paid too much for a company with too many competitors and declining sales. Quaker Oats completely disrupted Snapple's distribution system and failed to listen to previous Snapple sales, marketing, and management staff on how the corporate culture worked. Wall Street cheered when Quaker Oats sold Snapple, and cheered even louder when Quaker Oats' CEO, William Smithburg, resigned.

Some analysts pointed out that should Quaker sell its Gatorade brand, the company would be a relatively small $3.3 billion grocery company. With 82 percent of the sports beverage market, analysts agreed that Quaker Oats should vigorously support the brand. The company agreed, spending heavily to guarantee NFL sponsorship with Gatorade.

Analysts were watching to see what new CEO Robert Morrison, formerly with Kraft Foods, would do at Quaker Oats. Some applauded the restructuring Morrison began in early 1998. The foods and beverages division were no longer separated into North American and International, and layers of management were removed. It was pointed out that Quaker Oats is a relatively small company and therefore didn't need multiple management layers.

HISTORY

The Quaker Oats Company traces its roots back to the mid-1800s, when four oatmeal business pioneers formed a company that would become Quaker Oats. Ferdinand Schumacher, John Stuart, George Douglas, and Henry Parsons Crowell were all involved in producing and selling oatmeal to a then-skeptical public. Crowell had purchased the Quaker Mill Company in Ravenna, Ohio, the founders of which had chosen the name "Quaker" for their brand.

In 1888, seven of the largest oatmeal millers in the United States (including these four men) joined forces to form the American Cereal Company, which used the Quaker trademark. Disagreements among the founders led to a battle for control of the company, which was eventually won by Stuart and Crowell. In 1901, they incorporated the Quaker Oats Company in New Jersey.

In the early decades of the twentieth century, the company expanded sales of its oatmeal products and introduced new ready-to-eat breakfast cereals. In the late 1940s, the company introduced Aunt Jemima mixes for muffins, cookies, and gingerbread. In the 1950s, the company introduced Quick Cooking Quaker Oats, Aunt Jemima Frozen Pancakes, and other products. Cap'n Crunch and Instant Quaker Oatmeal followed in the 1960s. Also in the 1960s, the company sold its animal feed division and purchased other consumer product brands, such as Celeste Pizza and Fisher-Price Toys (Quaker spun off Fisher-Price in 1991 to become a grocery products-only company).

In the 1980s, Quaker Oats acquired Stokely-Van Camp, which included the Gatorade brand. Two other important acquisitions in the 1980s were the Golden Grain Macaroni Company and Anderson, Clayton & Co. (Gaines Pet Foods). In the mid-1990s, Quaker sold its frozen food plant and licensed the frozen food breakfast brands, in part to pay off debt incurred in its acquisition of Snapple.

STRATEGY

The goal of the Quaker Oats Company was to develop and maintain a high-growth, high-margin portfolio of leading brands purchased by health-conscious consumers. This portfolio focuses primarily on beverages and grain-based foods, including cereals and grain-based snacks, rice and pasta, food service products, and beverages.

Toward this end, new CEO Morrison wasted no time trimming unprofitable lines from Quaker Oats. Instead, he wanted the company to focus on three areas: cereals, beverages, and snacks; with continued expansion overseas for some products, most notably cereals.

Gatorade has been the star brand for Quaker Oats, one the company doesn't want to dilute. Quaker Oats reached an agreement with the National Football League, extending the current endorsement deal through the 2003-2004 football season. It is reported the company will pay almost $21 million per year, making the six-year contract worth $125 million. For Quaker Oats it's money well spent, as Gatorade continues to hold off rivals in the sports drink market.

In 1998, Quaker Oats launched two major campaigns geared toward shoring up market positions. The company had planned to introduce a new fruit and oatmeal bar for the so-called "grab and go" market. Its newer entry, Cap'n Crunch Bars, were met with disappointing sales. Quaker Oats was the leader in the rice cake category in the late 1990s, with a 65.2 percent market share, yet saw sales decline 11 percent for the products over a two-year period. The new advertising campaign, reported to cost $15 million, will focus on the new rice cake's taste and low fat content, as opposed to no fat.

FAST FACTS: About The Quaker Oats Co.

Ownership: The Quaker Oats Company is a publicly owned company traded on the New York Stock Exchange.

Ticker symbol: OAT

Officers: Robert Morrison, Chmn. & CEO, 1998 salary $950,000, bonus $1,000,000; Robert S. Thomason, Sr. VP & CFO, 1997 salary $379,486, bonus $451,700

Employees: 14,000 (1997)

Chief Competitors: Quaker Oats competes against companies that manufacture cereals, beverages, and snack foods. Some competitors include: Borden; Coca-Cola; General Mills; The H.J. Heinz Co.; Kellogg; Nestle; PepsiCo; and Unilever.

INFLUENCES

The Quaker Oats Company has long had strong brand awareness among the general public, largely because of its famous brand name and trademark: Quaker. The name was first chosen because it projected values of honesty, integrity, and strength. The trademark for the company's product (the figure of a man in Quaker clothing) became America's first registered trademark for a breakfast cereal. The Quaker name has since become an American icon, and still greatly benefits the company's plan to identify its foods as "healthy" and "good-for-you."

From its early days in the mid- to late 1800s, the company was a pioneer in marketing and advertising its products directly to the public. Early marketing and advertising efforts helped the firm grow quickly. Packaging oatmeal in individual containers instead of selling it from barrels also helped increase sales. In the early 1900s, the company introduced new ready-to-eat cereals, such as puffed wheat and puffed rice, expanding the appeal of its products beyond its core oatmeal line. The company also established a successful animal feeds division, which contributed to the company's sales growth.

The Quaker Oats Company continued to be a marketing and advertising leader throughout the twentieth century, pioneering or enhancing such devices as packaged premiums, giveaways, and celebrity endorsements.

CURRENT TRENDS

In the 1980s, medical studies showing that consuming oats can reduce cholesterol helped increase sales of oats and oat products. In early 1997, that fact brought an official endorsement from the U.S. Food and Drug Administration, which gave clearance for limited health claims for oatmeal in product advertisements. The Quaker Oats Company stood to benefit greatly from this change, since it produced both oatmeal and ready-to-eat cereals containing oats. Grocery retailers expected further increases in sales of hot cereals as a result of the new policy.

Another trend affecting Quaker Oats in the mid-1990s was price competition in ready-to-eat cereals. In 1996, four major cereal companies—Kraft Foods' Post unit, Kellogg Company, General Mills, and Quaker Oats—all reduced cereal prices to bring their list prices closer to those of private label products. However, according to Supermarket Business magazine, this move had no impact on sales for the 52-week period ended September 8, 1996. Post's sales fell by 4.0 percent, Quaker Oats by 8.1 percent, and Kellogg sales dropped by 8.4 percent. General Mills sales were up a slight 0.4 percent.

PRODUCTS

Quaker Oats has hundreds of brands, with 90 percent of them number one or two in their markets. Top brands are Gatorade, Quaker Oatmeal, Quaker ready-toeat cereals, Quaker Rice Cakes, and Golden Grain rice products, such as Rice-A-Roni.

New products for 1998 included Fruit & Oatmeal Cereal Bars in strawberry, blueberry, and apple cinnamon; Peanut Butter Crunch Cap'n Crunch Bars; and two new rice cake flavors, Caramel Chocolate Chip and Peanut Butter.

CHRONOLOGY: Key Dates for The Quaker Oats Co.

1877:: The Quaker symbol is trademarked by Henry Crowell
1888:: Seven of the largest American oat millers combine to form American Cereal Company, selling Quaker brand cereals
1901:: American Cereal incorporates as Quaker Oats Company
1921:: A grain surplus leads to lowered prices and Quaker's first financial loss
1925:: Purchases Aunt Jemima pancake flour
1942:: Purchases Ken-L-Ration pet food
1963:: Introduces Cap'n Crunch cereal
1969:: Purchases Fisher Price Toy Company
1983:: Acquires Stokely-Van Camp, owner of Gatorade
1985:: Purchases Golden Grain Macaroni Company
1986:: Purchases Anderson Clayton & Company
1991:: Spins off Fisher-Price
1994:: Purchases Snapple Beverage Corp.
1997:: Snapple Beverage is divested

CORPORATE CITIZENSHIP

The Quaker Oats Company has long been active in philanthropy. In 1964, the company approved its first "Social Progress Plan," and in 1967 it began a tutoring program in which employee volunteers traveled to housing projects to teach minority students. Quaker also became one of the first companies to join the President's Plan for Progress, a program initiated in 1964 to encourage minority economic opportunities. The company was still involved in the program in the late 1990s.

For fiscal 1995, the combined cash contributions and product donations of both the company and the Quaker Oats Foundation were $11.6 million, which represented 1.1 percent of the company's pretax domestic income. The primary areas for direct grants from the Foundation, which was set up in 1947, were nutrition, hunger, health issues, and minority education. The Quaker Oats Company also donates substantial amounts of food each year to the Second Harvest National Food Bank and other programs.

GLOBAL PRESENCE

As of 1996, Quaker Oats had two divisions focusing on international markets: Latin American and Pacific grocery products, and European grocery products. However, according to one market analyst, Quaker's international operations have not produced the kind of growth experienced by almost all other multinational food companies, despite Gatorade's domination of the sports drink market in Italy with a 90 percent share. Latin America was Quaker's strongest international market in the mid-1990s. The company planned to spend $66 million from 1997 to 2002 in Venezuela and Colombia, mostly to expand plant capacity in the face of strong competition from Kellogg Company and Kraft Foods' Post brand cereals. As of 1996, Quaker's European business consisted of hot and cold cereals and Gatorade, and both areas had relatively low market shares according to one market analyst's report.

SOURCES OF INFORMATION

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