10.13-snapple

9-599-126 R E V : D E C E M B E R 5 , 2 0 0 3 ________________________________________________________________________________________________________________ Professor John Deighton prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 1999 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. J O H N D E I G H T O N You remember the ‘80s, Philip? – Of course. God hated the ‘80s. – He didn’t like anything? He liked Snapple. – God liked Snapple? Not all the flavors. — From a 1998 episode of “Chicago Hope,” a network television drama Arnie Greenberg, Leonard Marsh, and Hyman Golden had been friends since high school. In 1972, they went into business selling all-natural apple juice to health food stores in Greenwich Village under the brand name Snapple. By the late 1980s, their brand had achieved near-cult status on both coasts of the United States, with its iced teas particularly in demand. It had taken 15 years, they said, to become an overnight success. In 1994 Quaker bought Snapple for $1.7 billion. The vision had been to combine Snapple with Gatorade, an earlier and very successful acquisition, to form a powerful beverage business unit. Snapple, however, did not thrive: sales fell in each of the next four years, and in 1997 Quaker despaired and sold the brand to Triarc Beverages for $300 million. In the fallout that followed, both Quaker’s chairman of 16 years and its president resigned. Mike Weinstein, CEO of Triarc Beverage Group, reflected on the acquisition. “At $300 million, Snapple is not a steal by any means. It’s in decline, and when that happens to a brand it’s seldom that it comes back. We’re in a fashion business here, and when your imagery isn’t fashionable, often that’s the end. But we’ve talked to a lot of consumers and we did a lot of qualitative research, and we’ve decided that in this case the brand still has inherent strength. People feel good about it. It will respond to the right marketing stuff.” Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617-783-786 Es te d oc um en to e s u na d e la s 3 0 co pi as a ut or iz ad as p ar a ut ili za r e n el E m pr es a, B us in es s C om m un ic at io n, X ab ie r O liv er , 2 01 2- 20 13 , 2 01 2- 10 -1 0 599-126 Snapple 2 1972–1986: The Origins of the Brand Arnie Greenberg’s family ran a sardine and pickle store in Ridgewood in Queens, New York. His friends Leonard Marsh and Hyman Golden helped him in the store, and in turn he helped them to manage their window-washing business. In the climate of the 1960s, Arnie encouraged the family to stock health foods. The three saw the popularity of natural no-preservative fruit juices in the store, and teamed up with a California-based juice company to manufacture and distribute a bottled apple drink. Eventually they broke away from the California partner and founded their own company— Unadulterated Food Products—and the Snapple brand.1 “100% Natural” became Snapple’s mantra. The business grew slowly using internally generated funds. It outsourced production and product development and built a network of distributors across New York City. Where possible, it sought individual distributors working for their own account, and found as a result that the business needed to broaden the product line to keep distributors occupied. It added carbonated drinks, fruit-flavored iced teas, diet juices, seltzers, an isotonic sports drink, and even a Vitamin Supreme. Some succeeded and many failed, but premium pricing on the successful products covered losses on the failures. Revenues and profits grew with expansion of distribution into New Jersey and Pennsylvania. In 1984 annual turnover was $4 million and it doubled by 1986 to $8 million. In response to pleas from Snapple’s distributors, the founders commissioned advertising. Jonathan Bond and Richard Kirshenbaum, who managed the Snapple account later, described this early advertising as follows: When tennis star Ivan Lendl was featured in several ads, the idea didn’t quite come off. (He) kept mispronouncing the name as “Shnapple.” Luckily the ads were so bad that they didn’t do the brand any harm. Had those schlocky ads been just a little better, they actually would have been worse for Snapple. The ineptness of the ads actually came off as charming, just like the cluttered packaging.2 Snapple was just one of many small beverage brands aspiring to appeal to young, health- conscious urban professionals in the 1980s. Napa Naturals, Natural Quencher, SoHo, After the Fall, Ginseng Rush, Elliot’s Amazing, Old Tyme Soft Drink, Manly Sodas, Syfo, and Original New York Seltzer were some of the many contenders in what eventually came to be called the New Age or Alternative beverage category. 1987–1993: The Glory Years The vision of many entrepreneurial founders was to exit via acquisition. For example, the founders of SoHo—Connie Best and Sophia Collier—took sales to $25 million and then sold the company to liquor giant Seagram in 1989 for $15 million. They explained that they were handing off to a buyer with deeper pockets. Seagram expanded distribution and advertising, dismantling the independent distribution network in favor of its own wine cooler distribution chain. The Snapple founders, however, decided to cope with the next stage of growth by hiring professional management. They turned to Carl Gilman, a beverage industry veteran from Seven-Up, 1 Drawn from Cynthia Riggs, “Snapple Cracks Tough Pop Market,” Crain’s New York Business, August 14, 1989 and Cara Trager, “Niche Entrepreneurs,” Beverage World, October 1989. 2 Jonathan Bond and Richard Kirshenbaum, Under the Radar (New York: John Wiley and Sons, 1998). Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617-783-786 Es te d oc um en to e s u na d e la s 3 0 co pi as a ut or iz ad as p ar a ut ili za r e n el E m pr es a, B us in es s C om m un ic at io n, X ab ie r O liv er , 2 01 2- 20 13 , 2 01 2- 10 -1 0 Snapple 599-126 3 to run sales and marketing. Gilman used focus groups to tell him how to improve Snapple’s label design. He increased the advertising budget to $1 million and intensified the independent distributor system throughout the East Coast. He viewed expansion to the West Coast as premature and a dilution of effort. “The stronger we build the East Coast, the more the West Coast will want us.”3 The distribution system grew until Snapple had a network of 300 small, predominantly family- owned distributors servicing convenience chains, pizza stores, food service vendors, gasoline stations, and so-called mom-and-pop stores. A press story described the work as “salesman, truck loader, driver, heavy lifter and bill collector, all in one.”4 Distribution in Boston was in the hands of Ted Landers, who had married into a Boston beer distribution company and now employed 11 people and several trucks to serve what he called the up-and-down-the-street business in soft drinks: In 1985 we were distributing several brands of single-serve beverage, SoHo and others. We saw lots of excitement around Snapple, and Snapple was doing its own distribution in Boston—about 250,000 cases a year—so we went to them and offered to grow their volume, which we did, up to a million cases a year. We invested in coolers and vending machines for convenience stores, and talked up the product. We visited supermarkets, but they wanted slotting allowances and service calls, which can put a strain on my pocket book, so we stayed away from them in the main. Supermarkets were no more than 10% of my volume in 1994. Nationally, supermarkets accounted for about 20% of Snapple’s sales. Snapple’s promotion was an offbeat blend of public relations and advertising. The story of the three founders’ success in an industry dominated by multinational behemoths was told many times in many media. Advertising agency Kirshenbaum, Bond & Partners created a spokesmodel for the brand in the form of Wendy Kaufman, a former truck dispatcher with a brash New York attitude. Wendy received paid exposure in the brand’s advertising, but her eccentric personality also attracted unpaid media attention. She appeared on television shows such as Oprah and David Letterman, where she read Letterman’s “Top 10 Least Favorite Snapple Drinks,” and was interviewed by USA TODAY. At times she attracted 2,000 letters a week. She made appearances at retail stores, and accepted invitations to sleepovers, Bar Mitzvahs, and prom dates. In a similar vein, the brand sponsored the radio programs of two very popular 1980s exponents of shock radio. Howard Stern specialized in tasteless and often outrageously sexist humor, and Rush Limbaugh built a following as an advocate of right wing political and social ideas delivered in a style that combined protracted ranting with acid sarcasm. In exchange for sponsorships on both shows, the brand received on-air endorsement and sometimes became the subject of Stern’s banter and Limbaugh’s rants. Stern got to know the founders of the business personally and conveyed to his listeners a genuine and infectious regard for the products and the people behind them. Kirshenbaum, Bond adopted “100% Natural” not only as an advertising line, but as the test which all marketing actions had to pass: 3 Trager, op cit. 4 Glen Collins, “On the Front Lines of the Beverage Wars: The Life of a Snapple Distributor, Surviving Robbers, Illegal Parkers and the Usual Cutthroat Competition,” The New York Times, December 3, 1997. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617-783-786 Es te d oc um en to e s u na d e la s 3 0 co pi as a ut or iz ad as p ar a ut ili za r e n el E m pr es a, B us in es s C om m un ic at io n, X ab ie r O liv er , 2 01 2- 20 13 , 2 01 2- 10 -1 0 599-126 Snapple 4 Everything should and would be natural and real. We would use real people in real circumstances. Everything that happened on a Snapple shoot was real. And we would run on air only what really happened, even if it didn’t turn out the way we scripted it. We got a letter from a woman who claimed that her dog Shane came running every time he heard a Snapple cap being opened. We called him “Shane, the wonder dog.” But when we got there and tried it, nothing happened. The dog just sat there. So we ran the spot with the dog just lying there.5 On a summer day in Hempstead, Long Island, Snapple invited consumers to a Snapple Convention. Over 5,000 people sent the required $5 and 20 Snapple labels, and participated in a day of Snapple-themed fun and games. A Snapple fashion show was won by a woman in a dress made of Snapple caps. Growth in the Alternative beverage category was explosive, with Snapple leading the way. Snapple sales grew from $80 million in 1989 to $231 million in 1992 and $516 million in 1993. Competition grew commensurately, though Snapple’s share remained steady at about 30%–40% of the rather hard-to-define category. (See Exhibits 1, 2, 3, 4, and 5 for estimates of the growth and structure of the market and brand.) Brands like Clearly Canadian and Mistic appeared and Coke and Pepsi were rumored to be entering. Seagram, however, failed to benefit from the market’s expansion, and sold SoHo for an estimated $1 million in 1992. Efforts to replicate its wine cooler success in the Alternative category had been unsuccessful. Industry observers attributed its difficulties to raising price, to tampering with flavors, and to dropping the patchwork of small distributors in favor of large liquor wholesalers. Seagram’s president explained, “We are a large company and we should be operating large businesses.”6 In 1992, the three Snapple founders sold control of the company to a Boston private investment bank—the Thomas H. Lee Company—in a leveraged buyout and subsequent public offering. In 1994 with sales running at $674 million, Lee sold it to Quaker Oats for $1.7 billion in cash. 1994–1997: Quaker Takes Command Quaker in 1994 was a food company with four main areas of business: grain-based foods, bean- based foods, pet foods, and beverages. The first three were relatively mature, while the beverage business, consisting entirely of the Gatorade brand, had been growing vigorously. Gatorade contributed $1.1 billion of the company’s $5.95 billion turnover in that year. Gatorade’s origins were in a research project at the University of Florida in the early 1960s to find a way to replenish fluids lost during exercise. The product, an uncarbonated orange-flavored mix of water, salts and sugars, was tested on the school’s football team, the Gators. It came to the notice of the sports world when the Gators beat Georgia Tech in the 1969 Orange Bowl and Bobby Dodd, the losing coach, explained to Sports Illustrated: “We didn’t have Gatorade. That made the difference.” A small packaged goods marketing firm, Stokely-Van Camp, acquired the brand, took sales to nearly $100 million, and sold it to Quaker in 1983. Quaker took its sales to $1 billion in a decade. 5 Bond and Kirshenbaum, op. cit. 6 Eben Shapiro, “A Soda Seagram Didn’t Swallow,” The New York Times, March 21, 1992, p. 37. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617-783-786 Es te d oc um en to e s u na d e la s 3 0 co pi as a ut or iz ad as p ar a ut ili za r e n el E m pr es a, B us in es s C om m un ic at io n, X ab ie r O liv er , 2 01 2- 20 13 , 2 01 2- 10 -1 0 Snapple 599-126 5 Within the company, management attributed this growth to three main factors.7 First, Quaker expanded the line. When Quaker bought the business, Gatorade was sold in 32-ounce bottles. Quaker added a 16-ounce glass bottle for the convenience store trade and 64-ounce and gallon plastic bottles for sale in supermarkets, and expanded from three to eight flavors. Second, Quaker increased promotional support. The brand became more visible in the major sports leagues, with Michael Jordan of the Chicago Bulls basketball team as a spokesman, and touchline visibility in the National Football League’s televised games. Third, Quaker improved Gatorade’s distribution significantly. Internationally, it entered 26 foreign markets. Domestically, it improved coverage of the market and lowered its cost-to-serve by using the same logistics system that distributed Quaker’s breakfast cereals and snacks. It shipped Gatorade in full truckloads from Quaker-owned manufacturing plants to the warehouses of the larger supermarket chains and the wholesalers who serviced smaller retail chains and independent supermarkets. From these warehouses Gatorade was combined with other grocery products to make up full truckload deliveries direct to retail stores. Despite its success, some speculated that Gatorade could be an even larger brand in the hands of a company with more scale in beverages. Indeed there was speculation that Quaker, no stranger to takeover rumors, might be acquired for the Gatorade asset. In 1993 Quaker had explored a joint venture with Coca-Cola to develop overseas sales, but talks had broken down. Domestically, Quaker felt that Gatorade was weak in what it called the cold channel, comprising street vendors, delicatessens, restaurants, recreation areas and so on, and distinguished from the so-called warm channel comprising mainly supermarkets. About 60% of Gatorade’s sales moved through the warm channel. Quaker believed that there were two million points of availability for soft drinks in the United States, and Gatorade was represented in 200,000.8 The president of Quaker’s beverage division explained the decision to acquire Snapple: “Gatorade put Quaker in the beverage business; this substantially broadens our position. Quaker has the vision of becoming a very large beverage company.”9 Quaker’s chairman and CEO declared, “We expect to create the most innovative distribution system in the beverage industry, one which combines the very best of the two organizations and enhances the value to our trade customers through more merchandising, more points of sale, and more in-store refrigeration equipment. The great advantage to consumers is that you will be able to buy Snapple and Gatorade in many more locations than you can today.”10 Leonard Marsh of Snapple agreed, “Quaker has the resources and management skills to take Snapple to the next level of success.”11 Snapple was expected to benefit from Quaker’s packaging experience, supply chain expertise, and modern information systems capabilities. For example, Quaker sought to eliminate the substantial cost of middlemen in Snapple’s warm channel by shipping direct from factory to supermarket warehouses, while at the same time using Snapple’s middlemen to take Gatorade to the cold channel. 7 Kevin Francella, “Gatorade Takes the Heat: Interview with Quaker Oats Co. Gatorade Vice President for Sales, U.S. and Canada, David Williams,” ASAP, January 15, 1994. 8 Ibid. 9 Donald Uzzi quoted in Juline Liesse, “Quaker Ups the Ante by Buying Snapple but Food Giant Denies Move was Anti- takeover,” Advertising Age, November 7, 1994. 10 William D. Smithburg quoted in Andrew Kaplan, “Distribution Shifts Ahead for Gatorade/Snapple,” U.S. Distribution Journal, December 15, 1994. 11 Kaplan, ibid. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617-783-786 Es te d oc um en to e s u na d e la s 3 0 co pi as a ut or iz ad as p ar a ut ili za r e n el E m pr es a, B us in es s C om m un ic at io n, X ab ie r O liv er , 2 01 2- 20 13 , 2 01 2- 10 -1 0 599-126 Snapple 6 Gatorade’s market strengths in the U.S. South seemed to complement Snapple’s strengths in the Northeast and West Coast. It was clear to Quaker executives that Snapple’s imagery was different from Gatorade’s. Management talked of Gatorade as a “lifestyle” brand and Snapple as a “fashion” brand. They knew that consumers pictured Gatorade as a beverage for those who worked out or played vigorous sports, and such lifestyles were a relatively stable factor in the culture. The imagery of the Snapple brand was more fashion-sensitive, quirky and on the edge. But Snapple was now a brand with annual sales of $674 million, and the task of transitioning it from the edge to the mainstream, from fashion to lifestyle, seemed within reach. Quaker recognized the need to integrate Snapple’s entrepreneurial culture with its own. They retained Gilman and other Snapple senior management on short-term contracts. However, as a large corporation, Quaker saw ris