Interstate Bakeries Corporation Business Information, Profile, and History

Company Perspectives:

Baking has always been a simple business wrapped in a complex environment. The challenges to succeed in the past remain constant today ... perfect the basics. Provide consumers with products that connect with their lifestyle; when they want them and where they want them; delivering consistent quality and value day-in and day-out.

Premium bread, cake and baked snack treats fill important roles in today's lifestyle. Interstate Bakeries Corporation is one of the nation's premium providers of fresh baked foods to consumers and has been for more than four generations. Our Company's focus is to guarantee high-quality, great-tasting and consistently fresh bread and cake for today's active families. It has been our focus for some time. Perfecting the basics is a continual process.

History of Interstate Bakeries Corporation

Interstate Bakeries Corporation is the largest independent baker in the United States, producing breads and cakes in more than 60 bakeries across the country. The company distributes its products under a wide range of brand names, including Sunbeam, Dolly Madison, Wonder, and Hostess. Founded in the 1930s, the company grew by acquiring other regional and national bakers. In the late 1970s, it was purchased by a failing computer leasing firm, whose financial difficulties troubled the company well into the 1980s. By the start of the 1990s, however, after more than a decade of modernization, Interstate had recovered to take the lead in its industry by buying out its largest competitor.

Origins and Expansion: 1930s-40s

Interstate, a company based in Kansas City, Missouri, was founded in 1930 by baker Ralph Leroy Nafziger. Nafziger came from a family of bakers, and he produced wholesale bread loaves packaged in a distinctive country-gingham wrapper, which were resold in grocery stores. Seven years after its incorporation, Interstate merged with another, much better established Kansas City baker, the Schulze Baking Company, Inc., which had been founded in 1893. This move was the first of a series of acquisitions and mergers that Interstate undertook over the course of the next several decades, as the bread baking industry changed from a highly fragmented field, made up of a large number of small, independent, local operations, to a more consolidated industry, with a few big producers of national brands.

Interstate's next acquisition came at the end of 1943, when the company bought the Supreme Baking Company of Los Angeles, whose plant it had previously rented. Seven years later, the company also bought the O'Rourke Baking Company of Buffalo, New York. With the purchases, Interstate sought to extend its geographic coverage into new areas.

The Postwar Cake Boom

Interstate's growth through acquisitions remained steady throughout the 1950s. In 1951, the company bought Mrs. Karl's Bakeries, located in Milwaukee. Three years later, the company moved aggressively into the cake baking industry, purchasing the Ambrosia Cake Company, the Remar Baking Company, and the Butter Cream Baking Company. Four years later, Interstate also acquired the Campbell-Sell Baking Company, based in Denver, Colorado. At the end of the decade, Interstate added to its cake franchise when it purchased the Kingston Cake Bakery, in Kingston, Pennsylvania.

In 1960, the company strengthened its standing in the Midwest when it acquired Cobb's Sunlit Bakery, of Green Bay, Wisconsin. Over the next two years, Interstate purchased the Schall Tasty Baking Company of Traverse City, Michigan, and the Sweetheart Bread Company. Other important acquisitions during the 1960s included Hart's Bakeries, Inc. After its long period of steady expansion, Interstate also undertook a consolidation of its operations, closing some plants. The company's Buffalo bakery, once owned by O'Rourke's Baking Company, was sold. In addition, Interstate closed its Butter Cream Baking Company plant and its Schall Tasty Baking Company factory. At the end of that year, the company's net sales reached $191 million, up from $124 million in 1959, through a period of steady growth.

Interstate began to expand again in the late 1960s. In March 1968, the company bought the Millbrook bread division of the National Biscuit Company. This division included seven bakeries, located in upstate New York, which produced bread, rolls, cakes, and doughnuts for distribution throughout the region. In addition, Interstate took possession of a fleet of about 700 delivery vehicles in the acquisition. This brought Interstate's overall total of motor delivery trucks to about 4,000.

In August 1968, Interstate moved outside the baking industry for the first time, acquiring a food processor, the Baker Canning Company, and its subsidiaries, Shawano Farms, Inc. and the Shawano Canning Company, companies that canned peas, beans, and corn at three canneries in Wisconsin. Its products were sold mainly to institutions and were distributed through six warehouse facilities.

By the end of the 1960s, Interstate was baking bread in 30 different cities throughout the United States, in a total of 36 different plants. The company's regional strengths were in the Midwest, the West, and upstate New York. On July 25, 1969, Interstate changed its name to the Interstate Brands Corporation, to reflect the broader scope of its activities, which now included canning as well as baking. The company had become the third largest wholesale baker in America. Its best known products were the Butternut and Blue Seal bread brands, and Dolly Madison cakes, which were distributed across the country. Interstate sold its canning operation in 1974 and resumed acquisition of properties that fit in with its core line of business, baking. In December of that year, Interstate bought Nolde Brothers, Inc., for $500,000.

Hard Times in the 1970s

Then, in 1975, Interstate became the object of an acquisition itself. The company's unwanted suitor was founded in 1961 as the Data Processing Financial and General Corporation, based in Hartsdale, New York, a suburb of White Plains, where the International Business Machines Corporation (IBM) was located. Data Processing, which changed its name to DPF, Inc. in 1971, leased IBM computers to other businesses throughout the 1960s. In 1970, IBM introduced a new computer model, and DPF's equipment instantly became obsolete. The company lost $43 million over the next five years, until it finally got back on its feet in 1974 and began to look for a company to acquire that would allow it to diversify its activities, since the computer leasing field no longer seemed tenable, as IBM continued to step up its pace of new product introductions.

In 1975, DPF decided that Interstate Brands would be a good business to buy. 'We wanted a sober, solid, low-technology business,' DPF's chairman later told Forbes. In June, DPF offered to buy 43 percent of the outstanding shares of Interstate. Immediately, the baker sued to block the acquisition, but its request was denied. Interstate Brands then, in turn, announced that it would purchase Farmbest Foods, a dairy products processor, from Philadelphia-based I.U. International Corporation. Interstate planned to issue a block of 375,000 shares of common stock to purchase Farmbest, which would have reduced the amount of stock DPF could control to only 37 percent of the total outstanding shares. DPF sued to block this move, and finally, after additional wrangling, DPF acquired Interstate for $37 million.

In the wake of this purchase, Interstate's headquarters were transferred to Hartsdale, New York. The company's new owners set out to wring greater profits out of its operations by upgrading facilities. 'Almost nothing had been done here in terms of capital enhancement of the business for some years; some areas needed nothing more than a Band-Aid, while some needed major surgery,' one DPF executive told Barron's. To modernize Interstate's plants, DPF embarked on a program that saw 17 factories closed and 19 new properties purchased during the last five years of the 1970s.

As part of this program, Interstate announced in 1976 that it would undertake the construction of a new $5 million bakery in Montana. The following year, the company shed the Nolde Brothers subsidiary and purchased the Silver Loaf Baking Company. Other acquisitions during this time included the Eddy Bakeries division of General Host and Mrs. Cubbison's Foods, Inc., a bread stuffing maker.

On February 27, 1979, DPF fully completed its merger with Interstate. Two years later, the acquiring firm sold what was left of its computer operations to a group of former managers and changed the entire company's name to Interstate Bakeries Corporation. Although Interstate earned a $50 million tax break from the collapse of the computer outfit, ultimately, the bakery operations were left with a heavy financial burden to bear.

By the start of the 1980s, Interstate was operating 36 different plants, selling bread and cakes in 30 different markets. Seventy percent of the company's revenues came from bread, with 30 percent derived from cakes. Although sales of white bread had grown stagnant, as people became more health conscious, sales of variety breads, such as Interstate's Pritikin diet bread and Sun-Maid raisin bread, which carried a higher price tag and had a longer shelf life, had benefited from this trend.

In addition, Interstate looked to benefit from the general recession gripping the economy, since a poor economy, paradoxically, meant good news for bakers. As one Interstate executive explained to Barron's, 'Downturns in the economy always see people eating more bread than they might otherwise do.' Interstate's cake business, which was supported through heavy advertising, offered higher profits than its bread sales and also was relatively immune from the effects of a poor economy, since, some analysts noted, people tended to keep treating themselves to sweets when they could not afford more expensive luxuries.

Back on Solid Ground by the Late 1980s

With the separation of Interstate's computer business from the core baking operations, Dale Putnam, head of Interstate's bakery division, was named chief executive officer of Interstate in January 1982. Putnam moved Interstate headquarters back to Kansas City, its historical base of operations. The company then looked to focus all of its attention on baking, as well as on improvements in two areas: plant efficiency and market penetration. Although the company had already spent $100 million upgrading its manufacturing facilities in the late 1970s, it planned to continue its efforts in this area, in hopes of increasing its profitability to a level consistent with that of its two largest competitors.

Despite these efforts, Interstate struggled in the early 1980s. The company was saddled with the financial consequences of DPF's failed computer business, the declining demand for white bread, its staple product, and stiff competition from other national bakers. A proposed merger with another independent baker, American Bakeries Company, never materialized, and Interstate was forced to close additional baking plants that were no longer profitable. In May 1983, Interstate closed out a four-year period of declining financial returns with a loss.

The bad news continued in 1984, as Interstate racked up $4.2 million in red ink. At that time, the company appointed a new president, Robert Hatch, a veteran of General Mills, who came on board just days before Interstate's bankers demanded payment on $36 million worth of loans. In an effort to get the company out of the shadow of its computer-leasing losses, Interstate took another $21 million writeoff and cashed in its $37 million pension fund to pay off the banks. 'We're trying to put our financial house in order,' noted B.J. Hinkle, Interstate's chief financial officer, in Barron's. Termination of the pension plan, Hinkle reported, has 'given us time to slow down a little bit and evaluate our product line.' The pension plan was replaced by another retirement package.

Interstate next decided to emphasize strong brand marketing, rather than relying on price to differentiate its products from those of its competitors. The company, therefore, increased its spending on advertising by two-thirds. Interstate also attempted to sell its western operations to the Good Stuff Food Company of Los Angeles for $55.1 million, but this deal ultimately was abandoned.

As Interstate moved into the late 1980s, its efforts to recover appeared to be bearing fruit. Sales of white bread had stabilized, and the company also began to introduce new products, such as coffee cakes, pecan rolls, pudding pies, and a wider variety of breads. To keep manufacturing efficiency high, Interstate shut down five plants and spent $109 million to modernize 27 others.

In addition, in 1986, the company also made a series of acquisitions, in the hope of filling in marketing gaps. In May, it purchased the Purity Baking Company, of Decatur, Illinois, which made Sunbeam breads, and in December, Stewart Sandwiches of Utah was brought into the Interstate fold. Stewart Sandwiches sold frozen and refrigerated products, such as roast beef and turkey sandwiches.

Interstate reported $13.4 million in earnings for the year ended May 1987. Later that year, the company continued its string of acquisitions, purchasing Landshire Food Products, Inc. and Stewart of Northern California, Inc., the partner of its earlier acquisition. In addition, Interstate bought the Langedorf cake and cookie operations of the Good Stuff Food Company.

Interstate's most significant financial move during 1987, however, was its withdrawal from the financial markets through a leveraged buyout. IBC Holdings Corporation (IBC) was formed to buy up all of Interstate's outstanding stock, and Interstate was taken private by its management, with the help of a group of investment banking houses, in September 1987.

Following this move, Interstate parent IBC made a major acquisition, purchasing the ten bakeries of the Merita/Cotton's Bakeries division of the American Bakeries Company for $132 million. Shortly after this purchase, the president of Merita, Charles A. Sullivan, moved over to take command of IBC, becoming president and CEO. With the contribution of the new Merita unit, and its own revitalized operations, IBC's sales grew strongly in the last years of the 1980s. The company reported sales of $855 million for 1988, which rose to $1.1 billion by May 1989.

In May 1991, IBC Holdings Corporation changed its name back to Interstate Bakeries Corporation, before the company once again went public, selling stock on the market in July 1991. Through this move, Interstate was able to raise $250 million to pay down its debts, which were holding down the company's profits, despite the company's increased efficiency and sales. With increased cash flow and reduced debt level, Interstate was able to decrease its expenditures on interest.

National Brand Recognition in the Late 1990s

In the early 1990s, Interstate saw the popularity of its main product, bread, increase, as the federal government put forth new dietary guidelines. The company sought to take advantage of this new demand by decentralizing its operations, so that local facilities could run as efficiently as possible. 'With 31 bakeries across the country, you can't run a business from Kansas City,' Sullivan asserted.

By the mid-1990s, this strategy had succeeded so well that Interstate was in a position to make a major acquisition. In early January 1995, the company announced an agreement to buy one of its primary competitors, the Continental Baking Company, for $330 million and 16.9 million shares of Interstate stock. Continental, owned by Ralston Purina, produced the widely popular lines of Wonder and Wonder Lite breads, as well as the snack cakes, donuts, pies, muffins, and cookies marketed under the Hostess name. As Continental's plants were located in parts of the country not yet tapped by Interstate, the company could look forward to becoming a greater national presence. Moreover, Interstate had positioned itself to become the largest player in the baking industry, with anticipated annual revenues in excess of $3 billion. Thus, despite its checkered financial history of the last several decades, Interstate appeared to be well on its way to robust health in the coming years of the 1990s.

With the acquisition of Continental Baking Company, Interstate became the largest producer of wholesale bread and cake in the country. The company wasted no time taking advantage of the name value of its recently acquired brands, launching an aggressive marketing campaign in January 1996. A key part of the strategy involved airing a series of national television advertisements, including the first Wonder Bread ads in almost ten years, which employed the slogan 'Remember the Wonder.' The company also reversed Continental's ill-advised policy of shrinking the size of Hostess snack cakes, restoring them to their original sizes--in some instances even making them larger--without raising prices. This concentrated brand building resulted in 1997 sales of more than $3 billion, an increase of 11.6 percent over the previous year. During this time the company also introduced a number of new products, including fat-free Wonder and Butternut breads and Hostess Lights.

The Continental purchase evoked a certain amount of apprehension, however, within the U.S. Justice Department. Wary of potential antitrust issues, the agency ordered Interstate to divest itself of one of its other holdings. The company quickly complied, agreeing to sell the Butternut Bakery in Chicago in January 1997. This sale was followed in 1998 by the removal of Weber's brand products from certain markets in southern California.

The divestiture order did not stop the company's expansion entirely, however. During this same period the company broadened its holdings to include a wider range of products in certain key markets. In March 1997 the company acquired the San Francisco Bread Company, famous for its line of hearth breads, and in January 1998 it purchased the John J. Nissen Baking Company of Biddeford, Maine, thereby strengthening its position as a leading baked good supplier in the Northeast. The Nissen purchase soon was followed by other acquisitions in the region, including Drake's and the My Bread Company in New Bedford, Massachusetts. This growth allowed the company to diversify its product line, while at the same time simplifying its distribution process. With sales in 1998 once again surpassing the $3 billion mark, Interstate spent almost $100 million on new operations, including a 280,000-square-foot facility in Biddeford, Maine, one of the largest showcase bakeries in the world, and a Toledo bakery with a capacity of 250,000 loaves of bread a day.

Interstate's fortunes took a sharp nose-dive in October 1998, however, when the company announced that its second quarter earnings would fall below expectations. The investment markets were not kind; on October 30 Interstate stock plunged 25 percent in just two hours, after attaining a year-long high of $34.375 only three weeks earlier. A year later the company's stock was still stranded at $22.75, far below analysts' expectations of $30. Although there were no actual buyout inquiries, the company, fearing a possible takeover, created a shareholder rights plan designed to discourage possible predators.

Interstate announced another dramatic financial drop in 2000, with net earnings of $89 million, down from $126 million the year before. Organized labor troubles and rising fuel prices, along with the unexpected flooding of the Rocky Mount, North Carolina Merita baking facilities, were blamed for the decline. The company also suffered a setback of a different sort in August 2000, when a San Francisco court awarded $126 million to 18 Wonder/Hostess bakery employees who had filed a racial discrimination suit against Interstate. Still, despite this series of disasters, the company headed into the next century with full confidence that its 'Powerhouse Brands' would stimulate sales growth for years to come.

Principal Subsidiaries: Interstate Brands Corporation; Mrs. Cubbison's Food, Inc.; IBC Trucking Corporation.

Principal Divisions: Eastern Division; Central Division; Western Division.

Principal Competitors: The Earthgrains Company; Flowers Industries, Inc.; McKee Foods Corporation.

Chronology

• Key Dates:

• 1930: Interstate Baking Company is formed in Kansas City, Missouri.
• 1937: Interstate merges with Schulze Baking Company, Inc.
• 1943: Interstate purchases Supreme Baking Company of Los Angeles.
• 1954: Interstate acquires Ambrosia, Remar, and Butter Cream Cake Companies.
• 1969: Interstate changes name to Interstate Brands Corporation.
• 1975: DPF acquires Interstate Brands.
• 1981: Interstate Brands becomes Interstate Bakeries Corporation.
• 1987: IBC Holdings Corporation is formed; Interstate becomes private company.
• 1991: IBC Holdings becomes Interstate Bakeries again, goes public.
• 1995: Interstate acquires Continental Baking Company.