Monterey Pasta Company Business Information, Profile, and History

Company Perspectives:

Monterey Pasta Company's family of quality pastas and sauces is the most exciting approach to refrigerated, fresh pastas and sauces in the marketplace today. With their unique fusion of traditional Italian and California cuisines, Monterey Pasta Company products set the standard for innovation in the category, with vibrantly colored doughs, gourmet fillings, and outstanding shelf life.

History of Monterey Pasta Company

The Monterey Pasta Company is a leading producer of prepared gourmet foods. It offers more than 200 frozen and canned dishes, including a wide variety of classic Italian entrees, such as ravioli, tortellini, tortelloni, and gnocchi, as well as borsellini, stuffed pizzas, calzones, soups, Italian sauces, and pierogies. Monterey Pasta is also the producer of Nate's Polenta and Emerald Valley Hummus, Salsa, and Dips. All Monterey Pasta products are prepared using fresh ingredients and Monterey Pasta's own proprietary recipes, and contain no preservatives. In 2003 Monterey Pasta's products were sold in nearly 9,000 retail outlets throughout the United States, Canada, Mexico, the Caribbean, Taiwan, and Japan, including Wal-Mart Supercenters, Safeway, Fred Meyer, Kroger, Raley's, Trader Joe's, A&P, Albertson's, King Soopers, Publix, and QFC. Warehouse club stores such as Costco Wholesale, Sam's Club, and BJ's also constituted an important source of Monterey Pasta sales. Customers are able to place orders directly at Monterey Pasta's online store. Monterey Pasta has been slowly making inroads into markets outside the United States. Canadian sales totaled $1.03 million in 2002, an increase of nearly 500 percent from 2000. Sales in Mexico have grown rapidly as well, reaching $768,000 in 2002.

Humble Origins in the 1980s

The Monterey Pasta Company (MPC) was founded by Sarah and Floyd Hill, a married couple who lived in Monterey, California. In 1987 the Hills, with a third partner, opened a 500-square-foot shop in which they produced gourmet pasta for area restaurants. The business caught on quickly. By 1989 the company was selling its products in grocery stores along the California coast between Monterey and San Francisco and was generating annual sales of $3 million. Monterey Pasta was incorporated in 1989. Its successes in Northern California continued and in the early 1990s attracted the attention of Lance Mortensen, a self-made millionaire who had made his fortune first manufacturing and retailing aquatic equipment and later building fully furnished mansions in the San Francisco Bay area. Mortensen was initially attracted to Monterey Pasta as an investment opportunity, but he envisioned a grandiose future for the company, and before long he had persuaded the Hills that, under his direction, it would be attainable. In 1993 they let him assume the strategic management of the company, first becoming MPC's chief financial officer and then its CEO.

Rapid Expansion in the Early 1990s

Although he had no experience in the food industry, Mortensen had sweeping plans for the company. In addition to enlarging its distribution base among supermarkets, in August 1993 he launched a chain of Monterey Pasta restaurants. Mortensen planned that after gaining a foothold in California, he would expand throughout the United States. To aid him, he sought out staff members who had food and restaurant experience at companies like Nestlé, Bennigan's, and Boston Market. To finance the new restaurants, a public stock offering of more than two million shares was arranged for December 1993. As the date of the IPO approached, optimism ran high among investors despite the company's obvious risks. First, supermarkets constituted an extremely competitive market, in which Monterey Pasta was battling much larger and better-financed competitors, including Kraft's DiGiorno line and Nestlé's Contadina brand sauces. Second, Monterey Pasta's retail sales were overly dependent on two large customers, Costco and Safeway. Mortensen brushed aside these reservations, predicting that within a year half of MPC's sales would come from its restaurants. Critics countered that restaurants were an even riskier venture than supermarkets, particularly when the CEO had no restaurant experience.

However, investors felt that Monterey Pasta's promise outweighed the risks. Its stock opened on the NASDAQ at $6 and jumped 58 percent to $9.50 the following day. By the end of 1993, the company had opened five "quick service gourmet pasta restaurants," and had more under construction in California. In January MPC closed deals to build additional restaurants in six locations in Denver, Boulder, and Colorado Springs. With the announcement that it would open its first stores outside California, Mortensen predicted Monterey Pasta would open another 30 restaurants by the end of 1995. In early 1994 the company acquired Lucca's Pasta Bar, a chain of pasta restaurants in Seattle, and was considering additional sites in Phoenix and Portland, Oregon.

MPC continued to expand its grocery store base in January 1994, adding four major chains in Southern California: Ralphs, Vons, Hughes, and Gelson's. These developments just added fuel to MPC's already blazing NASDAQ performance. By the end of January investors had driven the stock price up more than 125 percent from opening day to $13.5, making it the sixth-best-performing new stock of the last quarter of 1993. Flushed with success, Mortensen revised his predictions for the restaurant chain, telling reporters the company would have not 30 but 150 outlets across the country by the end of 1995, and that he was building a management team that would be able to support up to 1,000 units. He was moving fast, but speed was of the essence in Mortensen's view--MPC had to roll out its restaurants in the choicest locations before another pasta chain was able to mimic the concept and get there first.

At the core of that concept was creating an alternative to hamburgers, pizza, and other fast food that was tasty, healthy, and inexpensive. Monterey Pasta offered an ever-expanding range of one-of-a-kind menu items--such as snow crab ravioli, sweet red pepper fettuccini, smoked salmon ravioli, sun-dried tomato cream sauce, gorgonzola and roasted walnut ravioli, and Monterey clam and mushroom sauce--that with salad and bread cost less than $5. To keep prices down, pastas and sauce were cooked, portioned, and frozen at the MPC production facility in Salinas, California, before being shipped to individual restaurants, where they needed simply to be reheated. The chain had only one chef, at its central kitchen. Not everyone was sold on the idea. Despite its trendy ceramic tiles and curved-glass deli display cases, MPC was just one more among myriad pasta and fast food restaurants, and it was not clear that its upscale recipes would appeal to taste buds outside the San Francisco Bay Area. As if to scoff at such doubts, in February 1994 Monterey Pasta cut a deal with Sysco Corporation to use its food service network to get MPC products into restaurants and schools under the Sysco name. That deal alone, it was reported, would add more than $18 million to Monterey Pasta's annual sales.

In 1994 the company expanded quickly, into Sacramento and Dallas. Costco began selling MPC ravioli and sauces on the East Coast in stores in Florida, Maryland, and Virginia. Later in the year the Stop & Shop chain in Connecticut and Massachusetts also agreed to stock the MPC line. In the summer of 1994, MPC introduced pasta carts at two Bay Area sports arenas, Candlestick Park (the home of the San Francisco Giants and 49ers) and the Oakland Coliseum (the home of the Oakland Athletics and Raiders). Around the same time, MPC began actively searching for potential franchisees who would purchase exclusive rights to open and operate Monterey Pasta restaurants in specific geographical areas. To keep up with projected demand, in August 1994 the company announced plans to triple the floor space of its plant in Monterey.

Sudden Decline in the Mid-1990s

By the beginning of 1995 Monterey Pasta had impressive numbers. It had more than 650 employees, was operating more than 40 restaurants, and claimed that 1994 revenues were approaching $18 million. However, those figures disguised endemic system-wide losses that were plaguing the company. In fact, almost none of the MPC restaurants was making money, and many were deep in red ink. The average annual income for the chain was $250,000 per restaurant, only half of Lance Mortensen's original predictions. "A shortfall of this magnitude is unheard of, and speaks to the viability of the concept," observed one analyst in the San Francisco Chronicle. The stock, which had peaked the previous March at 19, had dropped to less than $8 a share. It was reported that some fund managers were selling the stock short, a sign that the market had lost faith in the company. Monterey Pasta tried to blow away the dark clouds with an announcement that it had found its first franchise partners in Colorado. Analysts saw the news as further reinforcement that MPC was on the ropes--it had after all taken the beleaguered company more than six months to sign its first franchisees.

The reputation of the company suffered further when CNBC reported in March 1995 that the Securities and Exchange Commission (SEC) was investigating illegal leaks possibly made by Monterey Pasta's former investor relations officer. The company itself denied knowledge of an SEC investigation and claimed there was no basis for an inquiry. Between its plunging numbers and its increasingly soiled image, the company's stock price fell another 19 percent. Monterey Pasta was reeling, its very existence in danger. Drastic measures were in order. In August 1995 management announced a major restructuring plan in which MPC would sell or close 20 restaurants in California and Texas. CEO Mortensen assured the press that Monterey Pasta had no plans to exit the restaurant business, but industry insiders could see the writing on the wall. "From the beginning this is a company that never had sufficient infrastructure to be competitive," one told Nation's Restaurant News. "They basically opened restaurants without experienced restaurant people and began expanding without having the necessary controls in place." A day after the news broke that it was closing restaurants, Mortensen announced that he had begun a search for his own replacement, someone with more experience in the industry.

MPC found its new CEO in Norman Dean, a long-time food industry veteran who had worked at Nestlé Beverage Company and Hills Bros. Coffee Company. Under Dean the divestiture of Monterey Pasta's restaurants continued. Thirty were closed in fall 1995, and in February 1996 the firm sold its Upscale Food Outlets subsidiary, a chain of 11 restaurants, to Lance Mortensen, who planned to change the restaurants' names. By March 1996 Monterey Pasta could report improvements in its grocery business: its products were being stocked by 1,600 new stores, they were available in a total of 29 states, and the company could claim an 8.2 percent share of the national fresh pasta market.

As the company fought its way back to liquidity, controversy struck once again when three MPC board members and Norman Dean, who had been CEO for barely a year, resigned suddenly. Rumors of a purge circulated in the trade press. However, a letter from Dean submitted to the SEC described a Monterey Pasta board of directors that was completely at odds with the new management team. "We were not forced to do so," Dean wrote, "by anything other than the knowledge that our vision for the Company's success would be severely crippled by the Board's unwillingness to change." Just weeks later MPC's chief financial officer, hired a scant four months earlier, resigned himself, and Monterey Pasta severed ties with its auditor, Deloitte & Touche LLP. It soon emerged that the auditors felt they should revise statements in Monterey Pasta's previous annual report in order to reflect "possible substantial doubt regarding the company's ability to continue as a going concern," as Deloitte & Touche told the SEC. The outlook continued to deteriorate with the news that two Monterey Pasta directors, founder Floyd Hill and former CEO Lance Mortensen, had violated company policy in trading MPC stock.

Recovery at the End of the 1990s

With losses continuing at an alarming rate, at the end of 1996 Monterey Pasta closed its San Francisco headquarters and opened new offices at its plant in Salinas, California. It wasn't until mid-1997 that a new CEO was found in R. Lance Hewitt, another food industry veteran from spice makers McCormick & Co. Under Hewitt, MPC divested itself of all its remaining restaurants and quickly made inroads into new markets and grocery chains. A number of Sam's Clubs in California, Nevada, Utah, New Mexico, and Arizona began stocking MPC products in the summer of 1997. In December 1997 Kroger stores in Ohio began carrying six MPC items. The following year Monterey Pasta added a number of Costco outlets on both the East and West Coasts, followed by the Safeway chain in Portland, Oregon. In July 1998 the company started selling its fresh pasta products and sauces in outlets in Puerto Rico, the Cayman Islands, and the British West Indies. The growth of its grocery store base continued strongly into 1998 with penetration into Kentucky and Illinois.

In January 1999 Monterey Pasta launched an online store featuring kitchen utensils and other cooking paraphernalia in addition to refrigerated fresh pasta. By September 1999 Monterey Pasta was well on its way to a stunning comeback. It had added a variety of new items to its product roster, including a line of fresh soups and restaurant-size ravioli and tortelloni. After dropping to a low of 75 cents, the firm's stock had begun a long upward climb to respectability with nine consecutive profitable quarters. Monterey Pasta products were being sold in 4,000 of the 30,000 supermarkets in America. An obviously impressed Wall Street Journal reported that the company "has reinvented itself in an image closer to its mom-and-pop roots." Monterey Pasta was not out of the woods yet, the Journal wrote. It was still overly dependent on its large customers, Costco and Sam's Clubs, which together accounted for a whopping 75 percent of business. However, the improvements it had made were stunning.

Continued Growth in the 2000s

Growth continued as Monterey Pasta purchased Frescala Foods, a producer of the Arthur's brand of lower-priced pastas based in San Antonio, Texas, for $1.35 million in cash. The acquisition gave MPC a broader share of the pasta market with items at both ends of the price spectrum. At the end of 2000 the firm acquired the Nate's brand of refrigerated polenta from Elena's Food Specialties, Inc., of South San Francisco, for approximately $500,000. The purchase was a significant addition and complemented Monterey Pasta's product line; it also added about 700 stores to the company's customer base. In November 2002 Monterey Pasta bought yet another firm, Emerald Valley Kitchen, an organic food manufacturer in Eugene, Oregon, for $5.74 million in cash. Emerald Valley's founder, Mel Bankoff, a pioneer in the natural foods industry, remained at the helm. The purchase added organic salsa, bean dip, and hummus to Monterey Pasta's product line. As 2002 and 2003 progressed the company continued to develop new products, such as three flavors of stuffed ravioli, three flavors of stuffed potato gnocchi, and a new line of premium sauces. As the fall of 2003 approached, Monterey Pasta was nearing its 26th consecutive quarter of profitability.

Principal Competitors: Armanino Foods of Distinction Inc.; Kraft Foods Inc.; Nestlé USA, Inc.; San Francisco Foods Inc.; Campbell Soup Company; Harry's Fresh Foods; Maple Leaf Foods Inc.; ConAgra Foods, Inc.

Principal Subsidiaries: Monterey Pasta Development Company.

Chronology

• Key Dates:
• 1987: Sarah and Floyd Hill found Monterey Pasta Company.
• 1989: The company is incorporated.
• 1993: Lance Mortensen becomes CEO; first restaurants are opened.
• 1993: Monterey Pasta completes IPO on the NASDAQ.
• 1994: Company acquires Lucca's Pasta Bar of Seattle.
• 1995: Company begins franchising.
• 1995: New CEO Norman Dean begins divesting restaurant chain; resigns abruptly.
• 1996: Company opens new headquarters in Salinas, California.
• 1997: Lance Hewitt becomes CEO.
• 1999: Company launches on-line store.