Daring to be Different
March 1, 2004
Daring to be Different
Always innovate. Never duplicate. By following that philosophy and taking calculated risks, Poore Brothers is building a diverse portfolio of $20 to $50 million niche brands to complement its competitors' offerings and expand the category as a whole.
by DAN MALOVANY
When it comes to serving the snack food industry, Poore Brothers dares to be different. In fact, it double dares and even triple dares itself to roll out truly unique brands and new products that are designed to transform both consumers and customers into raving fans.
"We don't have to conquer the world to be successful," says Eric Kufel, president and CEO of the Goodyear, Ariz.-based company. "Our strategy is to provide retailers with innovative, unique brands that help drive consumers looking for something new and different [passing through] their doors."
Make that "intensely different," which is the snack producer's trademark slogan as well as its underlying philosophy for how it fundamentally operates. While many food companies prefer to roll out their own versions of proven, successful products, Poore Brothers strives to stand out of the pack.
Take Crunch Toons, its line of 3-D potato snacks launched last year. Under a multi-year licensing agreement with Warner Bros. Consumer Products, Poore Brothers was granted exclusive snack category brand licensing and promotional rights for Looney Tunes characters. Additionally, the company reserves the right to develop new characters or license other ones in the future.
During the initial launch, the Crunch Toons line comprised an original-flavored Bugs Bunny, a Cheddar cheese-flavored Tweety and a nacho cheese-flavored Tasmanian Devil. This spring, Poore Brothers is rolling out BBQ-flavored Scooby-Doo snacks, which happen to be Warner Bros.' No. 1 licensed character. The goal is to eventually create a kid-friendly snack brand with $20 to $50 million in annual sales.
While Crunch Toons grabbed the limelight, its T.G.I. Friday's line was the real story over the last year. As the company focused nearly all of its energy and resources on launching Crunch Toons, the adult-oriented line of unique snacks modeled after some of the casual restaurant chain's top-selling appetizers continues to perform extremely well. In fact, the T.G.I. Friday's line, which includes potato-skin snack chips in Cheddar-and-Bacon and Sour Cream-and-Onion varieties, accounts for nearly 60% of the company's revenues.
"T.G.I. Friday's continues to grow thanks to increased consumer acceptance and expanded distribution," Kufel says. "Same-store sales continue to grow in almost every channel with virtually no consumer marketing support. This is a strong consumer driven brand proposition."
Last year, the company added two new salted snacks to the line, Mozzarella Sticks and Onion Rings, which are "flankers" to the potato skin products that had performed well during what Kufel calls "exhaustive" consumer testing. The new products replaced its previous Nachos and Quesadillas snacks that didn't meet sales expectations. When it comes to innovation, Poore Brothers is anything but risk-averse.
"We had good learning with our early products, even though they didn't perform well," Kufel explains. "However, taking risks as an innovator is a key part of our being an 'intensely different' company. We don't expect everything to succeed. A big part of our culture is the ability to take prudent risks."
Proven Track Record
Poore Brothers can afford to take risks because it has assembled a veteran senior management team with a strong track record of performance. The team has not only improved the balance sheet year over year, but also built an infrastructure that can support the national rollout of its intensely different brands. They include executives who have experience working at some of the nation's largest consumer-branded companies, ranging from Coca-Cola and Kellogg Co. to Frito-Lay and Dial, but who prefer a more entrepreneurial environment and high-performance culture that Poore Brothers offers.
"We are a team of passionate associates who thrive in a fast-paced entrepreneurial environment," Kufel says. "Our culture is about delivering great results and we take great pride in doing so by creating an environment that brings out the very best in one another. We specifically recruit for high caliber associates who are dissatisfied in large bureaucracies." (For more information on Poore Brothers' management style, see "Intensely Differently People.")
Since Kufel joined Poore Brothers in 1997, the company has steadily transformed itself from a regional producer of flavored chips under the Poore Brothers, Boulder Potato Chip and Bob's Texas Style labels into a marketer of niche brands on a national scale.
To survive in the snack food industry, Poore Brothers constantly monitors what Plano, Texas-based Frito-Lay is doing and figures out how it can complement, rather than compete, with what the category leader is doing.
"One of biggest trends in the salted snack category is Frito-Lay's increased innovation. They have done a wonderful job with new products over the last year," he says. "As a company that hangs its hat on innovation, I think they've made a step-change in their push toward delivering innovation on a variety of fronts."
"The snack food industry is by far the most competitive category that I have worked in because of the dominance of one player," he says. "Most categories have two or three major players. As opposed to complaining about the reality of our category, we view it as an opportunity by trying to find that segment or niche that's not being filled by the dominant national competitor, nor would they want to fill it because of its size."
"We believe we can be successful with a lineup of $20 to $50 million brands that national competitors wouldn't want to compete with because they don't provide the appropriate scale. That's the heart of our role as a niche marketer, adding value to retailers without directly competing with the leading national brands."
Poore Brothers' balance sheet reflects how it has executed that opportunity so far. Over the last five years, its sales have increased at compound annual growth rates of 33%. Specifically, its top line has risen to $66.4 million in 2003 from $12.3 million in 1998. Today, Poore Brothers is well on its way to accomplishing its most-immediate goal of being a $100-million company.
Investor interest in the snack producer drove up the small cap's stock price to upwards of $5 last year on the NASDAQ listing of small cap companies before it settled down in the $3-$3.50 range earlier this year. Currently, four analysts follow Poore Brothers, up from one analyst at the beginning of last year.
"We have spent considerable time over the last year building awareness for the company in the investment community, and our institutional ownership has increased dramatically," Kufel says. "We are well positioned for growth in that we have the infrastructure in place. Our goal now is to create winning new brands that leverage our substantial organizational capabilities."
The Road Less Traveled
To become a national player, Poore Brothers is certainly taking a road less traveled. For the overall snack food industry, some 55% of sales come from the grocery channel, while 18% comes from mass merchandisers, club stores and drugstores. Convenience stores account for another 18% of snack sales while revenue from vending machines and the foodservice channel make up the remaining sales.
Unlike the industry in general, Poore Brothers is strongest not in grocery channels, but in alternate ones. Grocery stores, for instance, accounted for only 38% of its revenues last year, and the bulk of those sales came from its regional chip brands.
Instead, its nationally distributed T.G.I. Friday's and Crunch Toons lines have found a home in the non-grocery channels. Specifically, 30% of its total sales come from mass merchandisers, club stores and drugstores. Vend/foodservice markets make up 25% of sales while C-stores comprise the remaining 7%. Kufel calls the convenience store channel a "rising star" for the company.
"Over the last year, we've increased convenience store counts from 4,500 to approximately 18,000 C-stores," he says. "We expect it will continue to grow. There are more than 100,000 C-stores in the United States, and the brand is performing well there."
This year, in order to heighten its presence in the grocery channel, it's re-launching the T.G.I. Friday's brand in supermarkets in a more affordable, 6-oz., form/fill/seal flex bag that retails for $1.59 to $1.69. Previously, the snack line was available in a more expensive, stand-up re-sealable pouch that retailed for between $2.29 and $2.49 for a 7-oz. package.
"We're reducing the bag size and price point to create more attractive trial-oriented price points. That's not to say that we might not bring the pouch back, but we believe we can attract more consumers into the franchise with a better trial-oriented pricing strategy," Kufel says.
"We're just beginning to re-enter the grocery channel in earnest with the T.G.I. Friday's brand," he adds. "We deliberately established alternate channels first to build critical mass. The brand has done extremely well there thanks to the fact it has delivered consumer preferred innovation."
To spark trial of its Crunch Toons line, the company distributed its first nationally free-standing insert (FSI) with a cents-off coupon. It also spent approximately $3 million on its first national television and marketing campaign last year to promote brand awareness of its Crunch Toons line among kids. Kufel acknowledges that's a huge investment for a company its size. However, he adds that studies have historically shown the most effective way to communicate with children is through the television medium, and the risk/reward is tremendous. Kids spend $2 billion a year of their own money, and they influence billions more in purchases as well. And it appears they're quite effective persuaders. Studies show they get what they want in a grocery store 77% of the time.
Poore Brothers aired the commercials last fall to coincide with the debut of the Warner Bros. movie, "Looney Tunes: Back in Action." Although the film didn't perform as expected at the box office, which resulted in a less-than-anticipated bump in Crunch Toons sales, consumer research shows the commercials did improve brand awareness.
"That was obviously a big risk for the company to take, but we have a balance sheet that allowed us to take that risk," Kufel says.
Currently, Poore Brothers has what Kufel calls "a first-class relationship" with Warner Bros. The snack producer is rolling out its Scooby-Doo version of Crunch Toons to coincide with the March 26 release of Scooby-Doo 2: Monsters Unleashed. The sequel to the blockbuster hit, Scooby-Doo, reunites the popular Mystery Inc. crew for another groovy adventure.
"We feel honored as a $60- to $70-million company to have the ability to earn a license like Scooby-Doo along with the Krafts, the Kelloggs and the Heinzs of the world," Kufel says.
"However, we're not launching brands to take advantage of a movie date," he adds. "We're launching brands coinciding with movies to take advantage of the awareness generated around the movie to drive trial for the Crunch Toons brand. We look to partner with 'ever-green' licensed properties that remain popular with or without motion picture support. We plan to continue to bring innovative new items to market each year, but we don't plan to do a complete rehaul of the brand every year. Scooby-Doo is a solid ever-green property. It's Warner Bros.' No. 1 licensed character."
Learning from Risk-Taking
Rolling out innovative new products is a risk-taking proposition that can often be a humbling experience. In fact, Kufel recently told analysts that the Crunch Toons line geared at kids fell "short of our expectations." However, he has no regrets. He still would have done basically the same things, including launching a multi-million advertising campaign, because the product has such a high entertainment value with kids and TV is the best medium to reach that audience.
"We know we have a great-tasting product that has high play value. We made a bet that the Looney Tune characters were going to see a strong resurgence following the movie," he says.
"One of the learnings from Crunch Toons is that we felt it was very unique to have a 3-D potato chip, but the child's perception of the category is that there is little distinction between a 3-D potato chip and a 3-D cracker, and the onus is on us within the child's perception of the competitive set to make sure our item is as distinct and compelling as it can possibly be," he adds. "It has to deliver not only on the right taste and right texture, but it also needs to have the right brand personality."
Another lesson learned was that kids like to play with multiple characters. Despite these lessons, Poore Brothers isn't going back to the drawing board. Rather, it's simply tweaking the concept.
First, instead of offering Bugs Bunny in one flavor, Tweety in another and Taz in a third, the new packages will include Bugs, Tweety or Taz with three or four "friends" or other Looney Tune characters. The goal is to give kids more opportunity to interact with the product.
Second, the company's revamping the packaging to give it more focus. Previously, the packages had a high-impact cartoon design that, according to research, was confusing to consumers.
"Kids want to understand not only the character, they need to have a very clear understanding of the product's texture, flavor, size and shape," Kufel explains. "Our packaging is more concise and does a much better job of explaining the product benefits. There's now less entertainment focus and more product focus."
Poore Brothers is also making several other changes as far as rolling out new products. This year, instead of rolling out a concept nationally, it plans to test market two or three concepts on a local level. Kufel thinks the move is prudent, especially considering the amount of money it takes to launch a brand on a national level compared with rolling out new products on a regional basis.
"One of the big shifts for us as we continue to grow is finding the right balance of marketing intuition with product and concept testing," he says. "Five years ago, we were on the higher end of leveraging intuition, and through being humbled more than once by the category, we now do significantly more research — still not going over the top — but at the same time, ensuring we're bringing the right amount of strategic discipline into our processes while maintaining our entrepreneurial edge and ability to take risks."
In addition, the company plans to support all of its products instead of funneling most of its time and energy on launching a specific brand. In fact, look for it to add a couple of new flavors to its Poore Brothers and Boulder chip lines this year.
"We haven't put enough resources into building our potato chip brands over the last three years because we were focused on T.G.I. Friday's and Crunch Toons. We plan to put more emphasis on all brands. It's important to us to grow our regional potato chip business because sales have been relatively flat since we began launching national brands and we want all facets of our business to drive growth through innovation," Kufel says. "Historically, we had so much upside growth from T.G.I. Friday's that it was appropriate for us to spend the majority of our resources on our national brands. We are not going to take our eye off the ball with our regional potato chip brands."
Poore Brothers is also exploring acquisitions, specifically of those brands that have the potential to be within the $25 to $50 million range in sales and still fit into its "intensely different" strategy. In fact, some of its new brands or potential acquisitions might be outside the chip or salted snack category.
"As a company, we're exploring broadening our definition of snacks outside of the salted snack category," Kufel explains. "We're looking for other opportunities, and that's a new notion for the company. The rise of convenience foods, ethnic foods and health considerations are the three consumer trends that we are exploring opportunities in."
Poore Brothers' new strategy is mainly a response to a continued shift in consumer behaviors. The company must continue to evolve as consumers adjust their eating occasions, product preferences and snack habits. Kufel believes that businesses need to constantly adapt if they are going to survive.
"The beauty of being a small-cap stock is that it gives us the flexibility to pursue new opportunities so long as we pursue them with discipline and excellence," he says. "We spend a great deal of time determining what the snack industry may look like three to five years from now so we can begin positioning ourselves to take advantage of emerging trends. As a company that hangs its hat on innovation, we know that we have to test several different avenues of growth to find the winning combination. We make bets on which way the curve is going, and we hedge our bets with several opportunities knowing that one or two are going to do extremely well, and some of them aren't. That's part of being an innovator."
For Poore Brothers, innovation is all about daring to be "intensely different."
Intensely Different People
When Eric Kufel meets with his senior management team, they spend a lot of time talking about "nines" and "tens." That's the way Jim Collins in his book, "Good to Great: Why Some Companies Make the Leap and Others Don't," describes the need to have the best people in the right positions to lead a company to greater success.
"We spend a great deal of time making sure we have the right people on the bus," says Kufel, president & CEO of Poore Brothers. "We believe our single most important asset is our people, and we believe we can gain a competitive advantage by focusing on having the right people in the right seats."
Kufel, who worked at Coca-Cola and Kellogg Co. prior to joining the snack manufacturer in 1997, notes that he spends considerable time researching successful entrepreneurs, recognizing that success comes to those who can thrive in a fast-paced, fluid environment where change is virtually constant.
"One of the hidden stories that I don't spend a lot of time talking to [Wall Street] analysts about is the culture that we have created here," he says. "I'm a student of how to build a high-performance team and a high-performance culture. Those who have done so successfully very often are quite successful."
Poore Brothers' management team includes Tom Freeze, senior vice president and CFO, who has worked at Apollo Computer, NEBS and Andersen; Glen Flook, senior vice president of operations and a veteran of Frito-Lay and Dial Corp.; Tom Tierney, vice president of grocery channel sales, who worked at Sunbeam and Dial Corp.; Craig Grace, vice president of alternate channel sales, who's a veteran of Kellogg Co. and Gardetto's; and Lisa Schommer, vice president of supply chain management, who also worked at Dial.
Kufel adds that he's a big proponent of the concept touted by author Robert Greenleaf in his book, "The Power of Servant Leadership." It's a management philosophy that the Poore Brothers' team practices.
"Our job as leaders is to bring out the very best in our 250 associates," Kufel explains. "Our culture is not about being harsh or authoritarian. It's about being team-based. It's about treating others with respect. It's about highly competitive and talented people coming to work every day to make a difference and deliver world-class results, but with a smile on their face because they actually like what they do and who they work with. Our values and culture are non-negotiable because great people expect and deserve a great work environment."
At a Glance
Company: Poore Brothers, Inc.
Headquarters: Goodyear, Ariz.
2003 Sales: $66.4 million
No. of Employees: 260
Plants: 60,000-sq.-ft. facility in Goodyear, Ariz., and 140,000-sq.-ft. plant in Bluffton, Ind. 200,000 sq. ft. in total space, or enough to support up to $150 million in annual sales.
Brands: T.G.I. Friday's, Crunch Toons, Poore Brothers, Boulder Potato Chip, Bob's Texas Style, Tato Skins
Products: "Intensely different" fabricated potato snacks, kettle and continuous-processed potato chips.
Pres. & CEO: Eric Kufel
Sr. V.P. & CFO: Tom Freeze
Sr. V.P. Operations: Glen Flook