Lucille Farms, Inc. Business Information, Profile, and History

Company Perspectives:

"Making top quality, natural cheese is 90% science, and 10% art," says Chairman, Founder, and Master Cheesemaker Philip Falivene. "But that 10% makes all the difference!"

History of Lucille Farms, Inc.

Lucille Farms, Inc. manufactures and markets cheese. It is currently making the transition from a medium-size regional maker of mozzarella, provolone, and Feta cheese, distributing its products to the foodservice industry, to becoming a larger and broader-based business that sells a variety of specialty cheese products to the foodservice industry as well as consumers under its own label. Lucille Farms maintains its corporate offices in Montville, New Jersey, with production facilities located in Swanton, Vermont. Its products are divided into two groups, conventional and nutritional. While conventional mozzarella, provolone, and Feta cheeses account for almost 90 percent of Lucille's annual sales, it is the company's nutritional cheeses that offer the most promise for future growth. The organic cheese line includes mozzarella, cheddar, Monterey jack, Jalapeno jack, Garlic & Herb, and Swiss cheese, and is sold to health food and gourmet stores in addition to supermarkets in the northeastern United States. Lucille also offers nutraceutical cheeses, which address specific health concerns, and include lactose-free mozzarella and fat-free and low-fat cheeses. Because the nutritional cheeses are considered premium products, they are priced higher than conventional cheeses and provide Lucille with a greater profit margin.

Founding of Lucille Farms: 1938

The founder of Lucille Farms, Philip Falivene, became involved in cheesemaking by necessity rather than by design. The son of Italian immigrants, he grew up in the Harlem section of New York City. As a high school student during the Depression years of the 1930s, Falivene had to work to bolster the family's finances. He found a job at a local Italian dairy, called a lattacini, where he learned the craft of making cheese. He soon married another Italian-American, who had immigrated to the United States as an infant. Her name was Lucille. Falivene was only 18 years old and because he now had his own family to support and cheese was the only business he knew, he decided to open his own lattacini. In 1938, the young couple moved to the South Bronx and opened a small storefront lattacini on Castle Hill Avenue. In honor of his bride, Falivene named the business "Lucille Dairy."

Falivene made his cheese, in particular mozzarella, during the day and with the help of Lucille ran the store. He produced such a good product that other stores began to buy his cheese for reselling. Falivene's cheese soon came to the attention of local restaurants and pizzerias, and he made them customers as well. In addition to cheese, Falivene featured non-dairy items in his store, such as homemade pork sausages and other traditional delicacies, plus imported Italian tomatoes and pasta products, and soon he began to also sell these products to the restaurants. His goal was to take advantage of sales volume in order to obtain a discount on his imports and gain a competitive advantage for his store by offering lower prices.

By the early 1950s, Falivene had built up such a business selling mozzarella and other products to Italian stores and New York City restaurants and pizzerias that he decided to become a full-fledged distributor. Lucille took over the running of the lattacini, while he took a lease on a warehouse on Devoe Avenue several blocks away. He also brought in his brother Gennaro to help with the distribution business. In the late 1950s, Lucille's health began to fail; she was no longer able to run the lattacini and as a result the original store was sold. A short time later Lucille passed away.

Falivene's son, Alfonso, joined the family business in 1965, and two years later the name was changed from Lucille Dairy to Lucille Farms. The company grew steadily, so that by the early 1970s it was selling close to 100,000 pounds of cheese each week to more than 600 accounts. Because no single source could provide enough cheese to service all of these customers, Lucille had to rely on a number of vendors, resulting in an inconsistent product. All too often, customers were dissatisfied and Lucille had to spend time and money retrieving poor quality product and making replacements. The Falivenes decided that if the business were to continue to grow, they had to return to cheesemaking in order to control the quality of the product they were selling.

Construction on Vermont Facility Beginning in 1973

In 1973, Lucille obtained a $1 million loan backed by the Small Business Administration and, in conjunction with the Target Area Development Corporation, began construction of an 18,000-square-foot production facility in Swanton, Vermont, in the heart of the state's dairy industry. Lucille also established a relationship with the St. Albans Creamery, which represented some 500 Vermont dairy farmers. Vermont's premium ice cream maker Ben & Jerry's was another major customer of the co-op. Ice cream and cheese proved to be a perfect combination for everyone involved, especially since both businesses were high volume customers. Ben & Jerry's used the cream and Lucille used the skim milk. Altogether, one pound of Lucille cheese required ten pounds of milk, so that Lucille actually purchased more product from St. Albans than the ice cream maker, even after Ben & Jerry's surpassed Häagen-Dazs in 1995 as the highest selling premium brand of ice cream in the United States.

After Swanton began production in 1975, Lucille was able to produce 250,000 pounds of cheese each week. In 1976, Lucille Farms was reincorporated in Delaware. Very quickly, it became primarily a cheese manufacturing operation with a sales force that covered the East Coast. One of its representatives made contact with a Pizza Hut regional franchiser, who liked Lucille's mozzarella cheese so much that he sent a sample to the parent company's Wichita headquarters. Lucille was then added to Pizza Hut's list of approved vendors. Much of Lucille's growth through the 1980s was attributed to its sales to Pizza Hut operations.

As a private regional company Lucille was a moderately profitable business. In 1991, however, one of its largest customers, accounting for 20 percent of all sales, was sold to a company that already had its own cheese supplier. The Falivenes not only found a way to make up for this loss in revenue, they saw a chance to take the next step forward in the growth of Lucille. Because his second wife, Margaret, became concerned about cholesterol, Philip Falivene decided to create good-tasting, low-fat and no-fat cheeses. Instead of using artificial substances like other manufacturers, he relied on all-natural ingredients. The family was so pleased with the results that it decided to market the new products, leading to a restructuring of the business. Philip Falivene, now 75 years old, stepped down as president and chief executive officer in favor of his son, while he and his brother continued to lead the board. Braff & Co. was hired to develop a marketing plan and soon the firm's principals, David Braff and David McCarty, who also recognized the potential of the light cheese lines, bought interests in Lucille and became involved in taking the company public. The company raised over $5.5 million in its 1993 initial public offering of stock at $4 per share, and subsequently began trading on the NASDAQ. Both Braff and McCarty also took on executive positions with Lucille to handle marketing, putting to use their extensive experience in the dairy industry. Braff had parlayed successful work with such brands as Chipwich, Dove Bar, and Frusen Gladje in order to create his own agency in 1984. With McCarty as his partner, he then handled public relations for such major accounts as Dannon Co. and Kraft General Foods.

Lucille devote $1 million of the money raised in the IPO to promote its new Tasty-Life and Mozzi-Rite mozzarella cheeses. The new management team firmly believed that future growth across the board in the food industry would take place in the exploitation of niche markets. They felt that with Americans becoming more health conscious, especially with the bulk of the Baby Boom generation entering middle age, light cheeses held great potential. Moreover, many Boomer offspring had been raised on skim milk and other low-fat products and would be more responsive to the new cheeses. Just as it took some time for light beer and other new age beverages to be accepted by the public, Lucille looked to position itself in the light cheese market and wait for the consumers to embrace its products. Low-fat pizza was thought to hold great potential, prompting Pizza Hut and others to test-market the idea. In 1994, the trade publication Pizza Today, named The Pizza Company's low-fat pizza using Lucille cheese the best in the country. Although consumers were receptive to the concept of low-fat pizza, they were not generally satisfied with the taste and consequently low-fat pizza did not catch hold as many had hoped. Taste was the primary concern about all light cheeses, and although Lucille-produced items were highly regarded, the company faced consumer resistance to the entire category because so many light cheeses on the market not only did not taste as good as regular cheese but also lacked the desired texture, failing to melt and stretch like traditional cheeses. Nevertheless, pizza companies continued to offer low-fat pizzas and supermarkets stocked light cheeses with the expectation that improvements in taste as well as changing needs of an aging population would ultimately result in a profitable niche business. In the highly competitive $30-billion-a-year pizza industry, furthermore, pressure to market new products would likely lead one of the major players to make a major push for low-fat pizza, forcing competitors to follow suit.

Late 1990s Price Swings Affecting Profits

As a public company focusing on a new business plan, Lucille was not as profitable as it had been during its private days. As a result, the company's stock attracted little attention in a market obsessed with high tech stocks, and its shares languished in the $1 to $5 range. Revenues that totaled $32 million in 1993 increased only to $35.2 million in 1995, with a loss of close to $1 million. In 1996, however, sales grew to $41.7 million and the company posted a profit of $773,000. The late 1990s saw extreme dairy price swings, which adversely affected Lucille's profits. In 1998, sales fell to less than $36.2 million, after having reached $44 million the year before, and the company lost more than $2.1 million. In 1999, sales rebounded to more than $46 million and Lucille realized a profit of $729,000. Lower cheese prices, however, would cause revenues to fall to $42.8 million in 2000, while Lucille posted a meager profit of $72,000. Because the prices of the company's bulk cheese business were set by the volatile Chicago Mercantile Exchange, Lucille began efforts to move into the retail cheese business, to sell its products directly to consumers in supermarkets, either through co-packaging ventures or by the acquisition of brands. Moreover, Lucille looked to exploit organic and nutraceutical, new specialty lines that offered promising growth. Both kinds of cheese catered to a highly desirable young and affluent demographic that would be willing to pay a premium price for the new products. While growth in traditional cheeses was flat, the organic market was growing at a 10 percent pace and nutraceuticals at 20 percent.

In 1999, Lucille also experienced the passing of an era when Philip Falivene died. His brother Gennaro remained with the company as chairman of the board and an executive vice-president in charge of quality control, and his son Alfonso continued on as Lucille's president and CEO. To pay off some debt as well as to fund expansion, Lucille arranged for a $5 million bank loan in 1999. Some of the money was used to complete a new 10,000-square-foot whey drying facility in Swanton. A residue produced in the cheesemaking process, whey had primarily been regarded as a pollutant requiring expensive disposal, but had in recent years developed into a valuable commodity. Not only was it being used in the manufacture of other cheeses, such as ricotta, it served as a high protein animal feed as well as a protein source for many fitness and diet supplement products. It was used in all manner of protein drinks and power bars, a market that was also showing strong growth.

Lucille began to sell its own brand of cheese to consumers, and in early 2000 it began to co-pack private label shredded cheese for some New England supermarkets. In 2001, it entered into a joint marketing agreement with Butternut Farms Organic LLC to coordinate marketing efforts and to expand both companies' organic cheese lines. Butternut Farms also agreed to supply Lucille with organic milk. Revenues fell slightly in 2001 to $41.4 million, and the company lost $1.5 million. Nevertheless, Lucille remained optimistic that its new emphasis on specialty cheeses and its expansion beyond the northeastern United States would pay off handsomely when the changing tastes of consumers caught up with the company's high quality products.

Principal Subsidiaries: Lucille Farms of Vermont, Inc.

Principal Competitors: Borden, Inc.; Century Foods; Galaxy Foods; Kraft, Inc.; Land O'Lakes, Inc.; Sargento Foods, Inc.; Sorrento, Inc.; Stella Foods, Inc.; Suprema Foods.

Chronology

• Key Dates:
• 1938: Philip Falivene opens his South Bronx "lattacini."
• 1967: The company name is changed from Lucille Dairy to Lucille Farms.
• 1975: The company opens a manufacturing facility in Swanton, Vermont.
• 1976: The company is incorporated in Delaware.
• 1993: The company is taken public.
• 1999: Philip Falivene dies.