The Quaker Oats Company Business Information, Profile, and History

Company Perspectives:

Our goal is to be the undisputed leader in the food and beverage industry. We intend to do this by making Quaker a winning company--a place where talented people have opportunities and are rewarded for contributing to an exciting, profitable growth story. Winning means that our products will be those for which consumers hunger and thirst. Winning also means that we outpace our competitive set with consistently strong financial results.

History of The Quaker Oats Company

The product of a rocky union between three 19th-century millers, The Quaker Oats Company maintains a portfolio of strong branded products within the food and beverages sectors. Although the company originally centered around oats, it is the Gatorade sports drink&mdashquired in 1983 as part of Stokely-Van Camp--that has become the company's largest single brand, accounting for more than 38 percent of overall sales. Quaker's other main brands include Quaker oatmeal; Cap'n Crunch, Life, and other ready-to-eat cereals; Quaker rice cakes and Quaker Chewy granola bars; Rice-A-Roni, Pasta Roni, and Near East flavored rice and pasta side dishes; and Aunt Jemima mixes and syrups. Of total U.S. sales, 92 percent are derived from brands that are number one or two within their product categories. Quaker's overseas sales efforts are centered around Latin America, Europe, and China, generating about 18 percent of total revenues.

Oatmeal Battles in the 19th Century

Ferdinand Schumacher undertook an ambitious project in 1856 when he organized his German Mills American Oatmeal Factory in Akron, Ohio. His mission was to introduce steel-cut oats to the American table at a time when oats were considered an inappropriate food for anything but horses. German and Irish immigrants were his initial customers, since they were accustomed to eating oats and unused to the high cost of American meat. Oat milling was a low-cost operation, and competitors quickly appeared as oats gained acceptance as a food.

One competitor with an innovative approach to business was Henry Parsons Crowell of nearby Ravenna, Ohio. Crowell purchased the Quaker Mill in Ravenna, gave his oats the Quaker name, and packed them in a sanitary, two-pound paper package with printed cooking directions. He also advertised in newspapers with German, Scottish, and Irish readers, a practice which was at that time associated with disreputable showmen. Crowell became the first marketer to register a trademark for cereal, registering his Quaker symbol in 1877. (The Quakers--that is the Society of Friends Christian sect&mdash+ayed no role in the development of the Quaker Oats Company.) Soon Crowell's success impinged on Schumacher's business, with urban customers often specifically requesting Quaker brand oats.

Another competitor, Robert Stuart, emigrated with his father from Embro, Ontario, to establish a mill in Cedar Rapids, Iowa, in 1873. Eventually he helped finance the building of a new oatmeal mill in Chicago and expanded the original mill. Under the same label the two mills established markets throughout the Midwest, especially in Chicago, Milwaukee, and Detroit, carefully avoiding territories dominated by Schumacher or Crowell.

In 1885 Crowell and Stuart joined forces in a price war against Schumacher's larger operation. An attempt to form the Oatmeal Millers Association that year failed when Schumacher refused to join. One year later Schumacher's largest mill burned to the ground; Crowell reacted by immediately raising his prices. Because Schumacher had been uninsured, he finally agreed to join Stuart and Crowell in their venture. Crowell became president of the Consolidated Oatmeal Company, Stuart was vice-president, and Schumacher, the former oatmeal king, was treasurer.

Consolidated, however, only made up half of the trade, and the other half was determined to destroy it. Competitors built mills they did not want, knowing Consolidated would purchase them simply to keep them out of production. Half of Consolidated's earnings were spent this way, and in 1888, under financial and legal pressure, it collapsed.

A third and finally successful attempt at consolidation came that same year, when seven of the largest American oat millers united as the American Cereal Company. Schumacher ended up with a controlling interest, and he appointed himself president and Crowell vice-president. The company doubled production in two years by consolidating operations into the two major mills at Cedar Rapids and Akron, Ohio. The concentration of facilities gave them the strength to survive the depression of the 1890s.

Crowell promoted Quaker Oats aggressively during the decade. Schumacher, however, insisted that his own brand, F.S. Brand, be sold alongside Quaker, blunting the success of the better-selling Quaker. Then Stuart crossed Schumacher, the company's treasurer, by purchasing two food companies at bargain prices and investing in machinery for the Cedar Rapids mill. Opposed to both actions, Schumacher requested and secured Stuart's resignation in 1897. The following year he also voted Crowell out of the organization.

The ousted Crowell and Stuart, who together owned 24 percent of American Cereal, quietly began to buy available shares. In 1899, after a proxy fight, Schumacher lost control of the company to Stuart and Crowell. Stuart immediately built new facilities and diversified the product line while Crowell increased promotional efforts. Quaker was now producing wheat cereals, farina, hominy, cornmeal, baby food, and animal feed.

Early Years As Quaker Oats

In 1901 American Cereal became the Quaker Oats Company, with sales of $16 million. Twenty years of growth followed, including a wartime peak of $123 million in sales in 1918. With the 1911 acquisition of Mother's Oats, Quaker owned half of all milling operations east of the Rocky Mountains. (The federal government filed a suit against the purchase, but eventually withdrew its last appeal in 1920, when national interest in trust-busting had faded.) An interest in finding a use for discarded oat hulls led to the establishment of a chemical division in 1921. Although a profitable use for furfural (a chemical produced from oat hulls that has solvent and other properties) did not appear until World War II, postwar sales of the product would exceed oatmeal sales into the 1970s.

Also in 1921 the company weathered a grain-surplus crisis; dealers had been caught with an oversupply and prices fell rapidly, leading that year to the company's first reported loss. Stuart's eldest son John became president of Quaker the following year. John Stuart immediately changed Quaker's retail sales strategy to one of optimum, rather than maximum, sales. The growth of the grocery chains helped to encourage a system of fast turnover rather than bulk purchasing.

Early in the century Crowell and Stuart invested in foreign markets by establishing self-supporting overseas subsidiaries. These subsidiaries operated mills in Europe and sold oats in South America and Asia. Under John Stuart's company reorganization in 1922, foreign operations became a corporate division. Approximately 25 percent of Quaker's sales were derived abroad. During John Stuart's 34 years as CEO, the company increased its toehold on the growing market of ready-to-eat cereals with Puffed Wheat and Puffed Rice. Quaker further diversified its product line by purchasing name brands that were already established, such as Aunt Jemima pancake flour in 1925. Similarly, the company entered the pet food industry through the purchase of Ken-L-Ration in 1942. Internal attempts to develop a cat food failed, and the company eventually purchased Puss 'n Boots brand cat food in 1950.

In 1942 sales reached $90 million. Wartime demand for meat and eggs pumped new life into the sagging animal-feed division as well as boosting sales of the company's grains and prepared mixes. Quaker's furfural became important in the manufacture of synthetic rubber, and during the war Quaker built and ran a bomb-assembly plant for the government.

Postwar Growth and Diversification

In the years that followed World War II, Quaker's sales grew to $277 million generated by 200 different products, a broad product line requiring heavy promotion. John Stuart's younger brother, R. Douglas Stuart, studied under Crowell and assumed control of promotions when John Stuart became CEO. After World War II he adopted the then-radical policy of using more than one advertising agency. The Stuart brothers recognized that the grocery industry would continue to expand into pet foods, convenience products, and ready-to-eat cereals, and matched the company's product line and promotions accordingly.

The company's first outside manager, Donald B. Lourie, rose to CEO in 1953. Under Lourie, Quaker retained the atmosphere of a family company with personal leadership; the company needed external support, however, for its increasingly complex marketing decisions. National advertising for the Aunt Jemima brand came at a price of $100,000. The cost of introducing Cap'n Crunch in 1963 was $5 million.

For many food companies, the 1960s were a period of automatic growth as consumer demand for convenience increased and brand recognition grew. For Quaker, however, sales rose just 20 percent and profits only ten percent as long-term development absorbed earnings. Quaker expanded in the industry's fastest-growing areas: pet foods, convenience foods, and ready-to-eat cereals. By the end of the decade growth rates had increased, but not as much as hoped. Robert D. Stuart, Jr., became CEO in 1966. The decade's slow growth and a general corporate trend toward diversification prompted him to make acquisitions outside the food industry for the first time since 1942. Many of these acquisitions were eventually sold, but Fisher-Price Toy Company, purchased in 1969, was held for more than two decades and grew beyond expectations. Within ten years, it made up 25 percent of Quaker's total sales.

Late in 1970 Stuart restructured Quaker's organization around four decentralized businesses: grocery products, which now included cookies and candy; industrial and institutional foods, which contained the newly acquired Magic Pan restaurants; toys and recreational products; and international. Sales in 1968 had been frustratingly low at $500 million, but with Stuart's acquisitions, the company reported $2 billion in sales by 1979.

Economic recession during the 1970s kept sales down. A second toy company, Louis Marx Toys, was purchased in 1972. During 1974 and 1975, Marx, which was purchased as a 'recession-proof' company, drove earnings per share from $2.04 to $1.45. Magic Pan Restaurant's profits fell for four consecutive years. The chemical division reported a net loss of $7 million when a cheaper substitute for furfural came onto the market. This introduction took the company by surprise, as it expected earnings from that division to climb steadily.

Looking to expand its foreign market in grocery and pet foods, Quaker made seven acquisitions of foreign companies during the decade. But while the company focused on diversification, product development slipped. Between 1970 and 1978, only one new major product, 100 Percent Natural Cereal, was introduced. Shelf space in major grocery chains did not increase. Stuart had successfully lessened the company's dependence on grocery products, but profits also dropped, to a low of $31 million in 1975.

By the end of the decade, however, a turnaround was in sight. Quaker's least profitable areas were limited to its smallest divisions, and since the entire industrial and restaurant industries had been weakening, the company was already preparing to divest its holdings in that field.

William D. Smithburg replaced Stuart as CEO in late 1979. Smithburg aggressively increased Quaker's sales force and advertising budget, improvements that were badly needed. The company also refocused on its core food business. Quaker had two new successes as the 1980s dawned: Ken-L-Ration's Tender Chunks became the second best-selling dog food in its first year, and Corn Bran had a commendable 1.2 percent share of the ready-to-eat cereal market. In addition, Fisher-Price sales had increased tenfold since 1969, to $300 million. Quaker planned to expand the division by building plants in Europe, raising its target age group, and lowering unit selling prices.

By 1979 Quaker had a return on invested capital of 12.3 percent--higher than the industry average, but well below competitor Kellogg's 19.4 percent. The company still needed to divest its interests in companies that absorbed profits.

Gatorade and Golden Grain Come Aboard in the 1980s

In the first half of the decade, Quaker sold Burry, a cookie maker; Needlecraft; Magic Pan restaurants; its Mexican toy operations; and its chemical division. During the same period, the company made several acquisitions. Like many food companies at the time, Quaker entered specialty retailing, with such purchases as Jos. A. Bank Clothiers, the Brookstone mail-order company, and Eyelab, all purchased in 1981; all would be sold in late 1986. By then, Smithburg had decided that the price for retail chains was inflated and that Quaker could get a better return on food. He proved himself right. By 1987 Quaker's return on shareholder equity matched Kellogg's. Quaker confirmed its new path with its 1983 acquisition of Stokely-Van Camp, the maker of Gatorade sports drink and Van Camp pork and beans. By expanding Gatorade's geographic market, Quaker made the drink its top seller in 1987.

Quaker's revival came about through the strong potential of its low-cost acquisitions. Golden Grain Macaroni Company, the maker of Rice-A-Roni, gave the company a base to expand further into prepared foods. Anderson Clayton & Company, purchased in late 1986, gave Quaker a 15 percent share of the pet-food market with its Gaines brand, effectively challenging Ralston Purina's lead in that market.

With the purchase of Anderson Clayton, financed by the sale of its unwanted divisions, Smithburg managed to strengthen Quaker's position in existing markets and improve its product mix without overloading the company with specialty products. Products with leading market shares made up 75 percent of 1987 sales and over half came from brands that Quaker had not owned six years earlier.

The late 1980s tempered that success, however. Pet food sales were flat throughout the industry, and Quaker took $112 million in charges related to its recently expanded pet division. The corporation was a rumored takeover candidate because of its high volume of shares outstanding and its strong branded products. In response, the company announced in April 1989 that it would repurchase seven million of its nearly 80 million outstanding shares, and that July, Smithburg reassigned some managerial duties. The company also decreased its advertising and marketing expenses.

Refocusing on Food and Beverages in the 1990s

Despite some setbacks, Quaker entered the 1990s with 14 years of unbroken sales growth. The company concentrated on three major divisions: American and Canadian grocery products; international grocery products; and Fisher-Price toys. Still, Quaker continued to streamline its operations into the early 1990s, spinning off Fisher-Price Toys in 1991, a move which made Quaker solely a packaged-food company for the first time in over 20 years. Sales that year hit a record $5.5 billion, and over 70 percent of the products in Quaker's portfolio held either the first- or second-share position in their segments. Quaker's international sales continued to be a significant percentage of the company's total, and in 1991, the company restructured both its European and Latin American operations to focus marketing on a continental, as opposed to a country-by-country, basis.

As it divested itself of its nongrocery products, Quaker continued to expand its packaged foods portfolio. Its concentration was on healthful food brands, such as Near East rice and pasta products, Chico-San rice cakes, and Petrofsky's bagels, all acquired in 1993. The buying spree continued through 1994 and into 1995 with the acquisitions of Proof & Bake frozen bagels, Maryland Club coffee, Arnie's Bagelicious Bagels, and Nile Spice Foods, a maker of dried soups, pasta, and beans.

Quaker's largest acquisition was its 1994 purchase of Snapple Beverage Corporation, a maker of ready-to-drink juice beverages and teas, for $1.7 billion. Some industry experts considered the price too high for this upstart company with annual sales just below $1 billion, but the purchase boosted Quaker's share of the non-alcoholic beverage market significantly. With combined sales of over $2 billion, Quaker was now the nation's third largest producer of non-alcoholic beverages.

On the international front, Quaker continued its aggressive Gatorade marketing drive, and by 1994 the beverage was available in 25 countries across Latin America, Asia, and Europe. The company also strengthened its foothold in the Latin American food products market with the 1994 acquisition of Adria Produtos Alimenticos, Ltd., Brazil's top pasta manufacturer. Although much of Quaker's expansion was through acquisitions, the company also sought to grow its products portfolio internally, especially in its historically strong rice and grains category. Between 1992 and 1995, volume in that category tripled with the addition of new products such as Quaker chewy granola bars and flavored rice cakes. Companywide sales in 1994 hit $5.95 billion, a record high for the 19th consecutive year.

Despite its record sales figures, Quaker's overall financial outlook was not so bright as it entered 1995. Due to the acquisition of Snapple, Quaker held a high debt to total capitalization ratio and felt it necessary to divest itself of a number of businesses in early 1995. In March, H.J. Heinz Company acquired Quaker's U.S. and Canadian pet foods operations for $725 million. The following month, Quaker's European pet foods division was sold to Dalgety PLC for $700 million. Other 1995 divestitures included a Mexican chocolates business and the Wolf/VanCamps bean and chili businesses. The selloff continued in 1996 with the sale of the company's U.S. and Canadian frozen food business to Van de Kamp's for $185.8 million.

While Quaker worked to pay down debt incurred with the Snapple acquisition, it also almost immediately found that it had paid dearly for a faltering brand. In hindsight, it became clear that Quaker had bought Snapple just as the brand reached its peak. Imitators were quick to enter the tea drink market, including Arizona Iced Tea, Mystic, and Nantucket Nectars. Even worse, soft drink giants Coca-Cola Company and PepsiCo, Inc. entered the sector through alliances with Nestea and Lipton, respectively. By the end of 1996 Lipton had claimed 33 percent of the market and Nestea 18 percent, while Snapple was left with only a 15 percent share. In addition to the increased competition, Snapple was also hurt by distribution problems and failed marketing campaigns.

By early 1997 Quaker Oats had suffered Snapple-related losses and charges of more than $100 million. Unable to turn the brand around, and facing pressure from angry shareholders, Quaker sold Snapple to Triarc Companies, Inc., owner of RC Cola and the Arby's restaurant chain, for $300 million. It also took a $1.4 billion pretax charge--essentially the difference between the purchase and selling prices. This led to a net loss for the year of $930.9 million. The Snapple debacle also led to the departure of Smithburg, who was replaced as chairman, president, and CEO by Robert S. Morrison, a former head of Kraft Foods' North American operations, in October 1997.

Almost immediately, Morrison took several decisive measures. Feeling that for a relatively small food company Quaker had an overall complex management structure, Morrison eliminated an entire layer of top management then elevated ten managers to head the company's main brands, with each reporting directly to the new CEO. He also initiated a number of restructuring moves, including a consolidation of U.S. sales operations, a streamlining of the worldwide supply chain, and the realigning of Quaker's overseas units. These and other moves led to $65 million in savings during 1998. Morrison also took a hard-line approach to the company's brand portfolio, jettisoning those product lines identified as underperforming. Four such brands were sold during 1998 for a total of $192.7 million: Ardmore Farms juice, Continental Coffee, Nile Spice, and Liqui-Dri foodservice biscuits and mixes. The sale of the troubled Adria pasta brand followed in 1999.

While some analysts predicted that Morrison was getting Quaker Oats in shape for a sale, such a turn of events was not in the immediate offing. Morrison planned to center the company around the fast-growing Gatorade brand, which accounted for about 38 percent of overall sales in 1999, a figure the company expected to increase to more than 50 percent by about 2004. Approaching the turn of the millennium, Quaker Oats appeared to be a company on the rebound, with net income increasing from $284.5 million in 1998 to $455 million in 1999. In late 1999 the company announced a ten percent workforce reduction, equivalent to about 1,400 employees, as part of a cost-saving plan centering around Quaker's slower growing cereal operations. At the same time the company said it would increase production capacity for Gatorade through a $230-$245 million expansion program. In addition, as part of revitalized new product development initiatives, Quaker Oats in early 2000 was planning the introductions of a Gatorade-branded bottled water called Propel (which included some of the beneficial nutrients featured in Gatorade but with one-fifth the calories), Gatorade energy bars, and a juice drink dubbed Torq, which was heavier in carbohydrates and calories than Gatorade.

Principal Subsidiaries: The Gatorade Company; Gatorade Puerto Rico Company; Golden Grain Company; Grocery International Holdings, Inc.; QO Coffee Holdings Inc.; Quaker Oats Asia, Inc.; Quaker Oats Europe, Inc.; Quaker Oats Holdings, Inc.; Quaker Oats Music, Inc.; Quaker Oats Philippines, Inc.; Quaker South Africa, Inc.; Quaker Spain, Inc.; Stokely-Van Camp, Inc.; SVC Equipment Company; SVC Latin America, Inc.; SVC Latin America, LLC.

Principal Competitors: Borden, Inc.; Campbell Soup Company; The Coca-Cola Company; ConAgra, Inc.; ERLY Industries Inc.; General Mills, Inc.; The Hain Food Group, Inc.; H.J. Heinz Company; International Home Foods, Inc.; Kellogg Company; Kraft Foods, Inc.; Malt-O-Meal Company; Mars, Inc.; McKee Foods Corporation; Nabisco Holdings Corp.; Nestlé S.A.; PepsiCo, Inc.; Ralcorp Holdings, Inc.; Unilever plc.

Chronology

• Key Dates:

• 1856: Ferdinand Schumacher organizes the German Mills American Oatmeal Factory in Ohio.
• 1873: Robert Stuart establishes an oatmeal mill in Iowa.
• 1877: Henry Parsons Crowell--owner of the Quaker Mill in Ravenna, Ohio--becomes the first marketer to register a trademark for cereal: the Quaker symbol.
• 1886: Schumacher, Stuart, and Crowell join forces as the Consolidated Oatmeal Company.
• 1888: Seven of the largest American oat millers--including the Consolidated principals--unite as the American Cereal Company.
• 1899: Schumacher loses control of American Cereal to Stuart and Crowell, who diversify the product line.
• 1901: American Cereal changes its name to Quaker Oats Company; sales stand at $16 million.
• 1911: Mother's Oats is acquired, giving Quaker ownership of half of all milling operations east of the Rocky Mountains.
• 1925: The Aunt Jemima brand is acquired.
• 1942: Company enters pet food industry through purchase of Ken-L-Ration brand.
• 1963: The Cap'n Crunch cereal brand is introduced.
• 1969: Fisher-Price Toy Company is acquired.
• 1979: William D. Smithburg is named CEO; overall sales reach $2 billion.
• 1983: Quaker acquires Stokely-Van Camp, maker of Gatorade sports drink.
• 1986: Quaker acquires Golden Grain Macaroni Company, maker of Rice-A-Roni.
• 1991: Fisher-Price is spun off.
• 1993: Company acquires the Near East rice and pasta product brand.
• 1994: Snapple Beverage Corporation is acquired for $1.7 billion.
• 1995: U.S. and European pet food operations are divested.
• 1997: Snapple is sold to Triarc Companies, Inc. for $300 million; Robert S. Morrison replaces Smithburg as CEO.