Phillips Foods, Inc. Business Information, Profile, and History

Company Perspectives:

Phillips is determined to serve the finest quality seafood products in a casual, comfortable and friendly atmosphere. Anchored in tradition, Phillips is driven by a family style management and staff that is committed to overall guest hospitality and satisfaction. Phillips is determined to remain a leader in both the restaurant and food service industries through synergy between our seafood sources, purveyors, employee strengths and guest relations.

History of Phillips Foods, Inc.

Phillips Foods, Inc. is the world's largest manufacturer of blue swimming crabmeat and products, operating 13 processing plants in the United States and abroad. A family- owned and operated company, Phillips Foods is the processing and wholesale side of the Phillips family's involvement in the seafood industry. The family also operates seven restaurants in the eastern United States that are controlled by Phillips Seafood Restaurants. Phillips Foods and Phillips Seafood Restaurants share the same management. Phillips Foods' processing facilities are primarily located overseas, scattered throughout southeast Asia and South America. The company has plants in Baltimore, Maryland, Vietnam, Thailand, the Philippines, Indonesia, East Malaysia, India, and Ecuador. Phillips Foods produces crab and other seafood products for Phillips Seafood Restaurants and for sale to retailers and other restaurants. More than a half-dozen regional sales offices serve more than 11,000 accounts in the United States, selling a range of value-added seafood products made by Phillips Foods.

Origins

For multiple generations of the Phillips family, the production and sale of crabs defined their lives. "The story is the growth of a small family-run company into a monolith," an industry observer noted in a November 30, 2002 interview with Daily Record, referring to the rise of the Phillips family in the seafood industry. The company began operating in 1914, when the patriarch of the family, A.E. Phillips, opened a crab packing plant on Hooper's Island in Maryland's Chesapeake Bay. Phillips, the great-grandfather of the generation in charge of Phillips Foods in the 21st century, made his livelihood processing blue crab, a species found in abundance along the Atlantic and Gulf coasts of North America. Phillips's company, A.E. Phillips & Sons, thrived on Hooper's Island, becoming a fixture in the area. For four decades, the extent of the Phillips family enterprise consisted solely of the packing plant established in 1914. The business's development into a "monolith," began modestly 42 years after A.E. Phillips began processing crab. A second generation of Phillips family members, led by Shirley and Brice Phillips, were responsible for the business' first diversification, an offshoot that eventually became a multimillion-dollar-in-sales component of the Phillips's seafood conglomerate.

The Phillips family's entry into the restaurant business began with a $2,000 investment. The initial aim of the diversification was to create sideline business. "We just wanted to sell off some of the crab from our packing house in Hopper's Island," Brice Phillips was quoted as saying on the company's web site. In 1956, Brice and Shirley Phillips moved to Ocean City, Maryland, settling in the small, resort town at a time when businesses were only open in the summer. Brice and Shirley Phillips aspired to live a leisurely paced life selling surplus crab from the family's processing plant while they raised their two sons, Steve and Jeffrey. They paid $2,000 to establish a carryout shop, a four-seat crab stand they built in the north end of Ocean City. The popularity of the crab shack soon demanded more time than Shirley and Brice Phillips anticipated, as tourists flocked to the location, prompting the Phillipses to open a dining room in time for the second season of business. This first restaurant, known as Phillips Crab House, became the foundation for a small chain of restaurants operated by the Phillips family, eventually expanding into a 1,200-seat dining facility.

The family's packing plant served as the source of the crab used by Phillips Crab House, as it would serve for additional restaurants opened by the family. A second dining establishment was opened in 1973, when Phillips-By-The-Sea, also located in Ocean City, debuted. A third Ocean City restaurant opened four years later, an establishment called Phillips Seafood House, which featured three dining rooms, two kitchens, and seating for 350 patrons. After 20 years of exposure in Ocean City, where three restaurants served to broadcast the association of the Phillips name with crab, the family was ready to expand outside of Ocean City. Many of the visitors to Ocean City were tourists from nearby metropolitan areas such as Baltimore, Philadelphia, and Washington, D.C. The family made the natural deduction that those who frequented its restaurants in Ocean City might enjoy the Phillips brand of seafood in their home cities. Accordingly, in 1980 the family opened Phillips Harborplace in Baltimore's newly revamped Inner Harbor. In 1985, the family opened Phillips Flagship in Washington, D.C. Shortly after the Washington, D.C. restaurant opened, the processing side of the family business--in operation for more than 70 years by that point--was about to undergo significant changes, making its development the highlight of the Phillips family's business activities in the 1990s and the early 21st century.

Processing Capabilities Increase During the 1990s

Shirley and Brice Phillips were responsible for leading the family into the restaurant business. Their son, Steve, was responsible for leading the family in a new direction on the processing front. By the late 1980s, when the company's restaurant business was steadily expanding and enjoying increasing business, Steve Phillips was becoming worried about the supply of crabs. The family's restaurants received all their crab from the family's processing activities, but Phillips foresaw the day when the family would not be able to feed its restaurants with a sufficient supply of crab. "The problem," Phillips reflected in an August 2000 interview with Seafood Business, "was that I couldn't get crab in the wintertime. I needed a supply for the crab product that we are famous for." During the late 1980s, he began searching for a solution to the problem, and found one overseas, in southeast Asia, where the blue swimming crab was found in abundance. In 1990, Phillips Foods opened its first overseas processing plant in the Philippines, the first of a string of foreign processing plants that extended Phillips Foods' presence into Thailand, Indonesia, east Malaysia, India, and Ecuador.

Phillips Foods Entering Retail Business: 1996

Between 1990 and 2000, Phillips Foods opened ten overseas processing facilities. Eventually, nearly all of the company's raw product came from Asia and South America. The expansion made the company the largest producer of blue swimming crabmeat in the world, providing an abundant supply of product that would be needed during the decade, as Phillips Foods began to record an unprecedented, exponential rate of growth. The spark that ignited the company's growth was its foray into the retail business, a move made possible by its innovative work in developing a way to pasteurize fresh crabmeat and quick-freeze it, enabling the company's signature crab cakes to retain their freshness, consistency, and taste for up to a year. For the first time, the company could entertain the idea of shipping its seafood products great distances, something it began to do when it entered the retail business in 1996. The company relied on a sales force comprising chefs and managers from its restaurants to promote Phillips Foods' seafood products to a national audience. By 2000, the company had established six regional sales offices in the United States and one office in London, England.

The impact of Phillips Foods' entry into the retail sector was enormous, causing an explosive rise in annual sales. In 1996, the year the company began selling its crab cakes to retailers, Phillips Foods posted $7 million in sales, a figure that excluded revenue generated by Phillips Seafood Restaurants, the restaurant arm of the Phillips enterprise. During the ensuing five years, the company's revenue volume swelled by nearly 1,000 percent, eclipsing $130 million in 2001. As the company's involvement in the retail sector increased, it looked toward expanding its line of value-added products, or those products whose sale price--their value--was increased by applying manufacturing processes to a raw material. Crab cakes, for instance, commanded a higher price than raw crab. By the beginning of the 21st century, Phillips Foods' roster of value-added products included crab and spinach dip, crab cakes, and crab slammers, which were a mixture of crabmeat, cream cheese, and spices. Steve Phillips intended to expand the company's offering of value-added products, believing such diversification offered an important avenue of revenue growth. As the company entered its ninth decade of existence, plans were underway to introduce a full line of fish, lobster, and scallop products, as well as pre-grilled or stuffed tuna, mahi mahi, grouper, and snapper.

The desire to introduce more value-added products combined with the growth of the family's restaurant business--there were seven restaurants operating by the beginning of the 21st century, forced Phillips Foods to look for a new, larger headquarters and manufacturing complex. "We're shoulder to shoulder at our plant (in Baltimore)," the company's president, Mark Sneed, said in an April 4, 2002 interview with Daily Record. "We can't introduce any new products." After a two-year search, the company settled for the site of a former Coca-Cola syrup manufacturing plant in south Baltimore. The $20 million facility, slated to open in the fall of 2002, was expected eventually to triple the company's daily output of crab cakes, replacing its existing 80,000-square-foot facility with a 270,000-square-foot office, manufacturing, and freezer complex. The new facility, once a third line was added, would be capable of producing 600,000 crab cakes per day and preparing 2,000 gallons of soup. The company expanded overseas in 2002 as well, purchasing a 25,000-square-foot processing plant in Vietnam, Phillips Foods' 13th production facility.

As Phillips Foods prepared for its 100th anniversary, the company was gearing up for expansion. Plans were unveiled in early 2004 for a new breed of restaurants to operate in what was known as the "fast-casual" segment of the restaurant industry. The format for the new units, to be operated under the name Phillips Famous Seafood, was a smaller version of the company's full-service restaurants. The fast-casual units occupied 2,500 square feet and were designed to seat 125 patrons. (The company's full-service restaurants served between 600 and 1,200 diners). The company had one Phillips Famous Seafood unit, located in a shopping mall in Rockville, Maryland, in operation by 2004, with plans calling for five more units by the beginning of 2005 and as many as 500 units by 2014. The company was using its longstanding branding partnership with HMSHost Corp., a Maryland-based airport and travel concessionaire, to test the market viability of the concept. As part of its relationship with HMSHost, Phillips Foods also was planning to market its seafood products to restaurants in more than 30 airports by the end of 2004.

Phillips Foods second century of business promised to bring continued growth if its plans to expand came to fruition. Growth in one area of the company's business fueled growth in other areas of its business, with expansion of the company's restaurant business necessitating the expansion of its processing business. One aspect of its business not under its control was the supply of crabs, the one crucial unknown with the potential to influence future growth. The company sales were somewhat limited by the lack of crabmeat. It was not uncommon for the company to be fulfilling less than 50 percent of its orders. Provided its was supported by a sufficient supply of crabs, Phillips Foods appeared destined to enjoy a lucrative future.

Principal Subsidiaries: Phillips Foodservice, Inc.

Principal Competitors: Bumble Bee Seafoods, L.L.C.; Bui Family Crab Company; Landry's Restaurants, Inc.

Chronology

• Key Dates:
• 1914: A.E. Phillips & Sons begins processing crab.
• 1956: The Phillips family opens a carryout shop in Ocean City, Maryland.
• 1977: A third Ocean City restaurant is opened.
• 1980: Phillips Harborplace, located in Baltimore, is opened.
• 1985: Phillips Flagship, located in Washington, D.C., is opened.
• 1990: Phillips Foods opens a processing plant in the Philippines, its first overseas facility.
• 1996: Phillips Foods enters the retail market.
• 2002: Phillips Foods opens a new headquarters and manufacturing complex in Baltimore.
• 2004: Phillips Foods announces plans to open a chain of small foodservice outlets under the name Phillips Famous Seafood.