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

History of United Foods, Inc.

United Foods, Inc., is a major processor and marketer of frozen vegetables in the United States. With facilities for processing and cold storage in Bells, Tennessee; Ogden, Utah; and Santa Maria, California, United Foods markets nearly 70 percent of its output under the Pictsweet brand, which it built into a national brand during the 1990s. While the company owns and operates mushroom farms in Utah, Oregon, and California, most of its raw vegetables are supplied by independent growers located across the country.

Like other companies in the frozen food industry, United Foods' revenues and profitability are subject to the normal cyclical conditions and risks inherent in the agricultural industry. Adverse weather conditions and excess inventories can cause substantial reductions in the annual volume of product processed in the company's facilities, in which case the unit cost of that year's production increases substantially, resulting in reduced profit margins for one or more years. On the other hand, unit costs decrease when there is a bumper crop, but selling prices will also generally be depressed.

During the company's 1996 fiscal year, 72 percent of United Foods' sales were to retail outlets (grocery chains, independent food stores, and military commissaries), 18 percent to institutional outlets (restaurants, hospitals, schools, hotels, and federal and state government agencies), and eight percent to other food companies. Approximately two percent of the company's revenues were derived from rental and miscellaneous income. Trucking services accounted for less than one percent of overall revenue. During the year the company's five largest customers were the Defense Personnel Support Center, Food Lion, Inc., The Kroger Company, Kenneth O. Lester, Inc., and J.R. Simplot Company, Inc.

1950s Origins as a Texas Grain Storage Company

United Foods was incorporated as United Industries Company, Inc., in Texas in 1956. With headquarters in Houston, and its principal business the warehousing of grain under contract with the Commodity Credit Corporation, the company became established in the grain storage business when it acquired the Santana Grain Storage Co., Inc., and the Southwest Grain Storage Co., Inc. in 1958. These two companies were merged into United the following year.

In 1961, the company adopted its present name and went public, listing its stock on the American Stock Exchange. Operations during this time included subsidiaries engaged in freezing and packing vegetables and shrimp, and supplying bananas, feed, and market-fattened cattle to packers in the Houston area. The company also operated a cold storage warehouse in Brownsville, Texas. In 1961 United Foods had net income of $.4 million on revenues of $4.8 million.

By the end of the 1960s United Foods was committed to freezing and packaging vegetables, shrimp, and fruit as its principal line of business. During the decade it had made numerous acquisitions of frozen food processing companies, including Western Frozen Foods of Watsonville, California, in 1963; Colonial Cannery, Inc., of Independence, Louisiana, in 1964; and Sodus Fruit Exchange, Inc., of Sodus, Michigan, in 1966. In 1966 it divested itself of its small business investment company, First United Capital Corporation.

In 1967 United Foods made four major acquisitions in the frozen food business: Trappe Frozen Foods Corporation of Trappe, Maryland; Othello Packers, Inc., of Othello, Washington; Dulany Foods, Inc., a subsidiary of Green Giant Co.; and the frozen food business of California Consumers Corporation. For its 1968 fiscal year United Foods had net income of $57,216 on revenues of $28.8 million.

Relocation in the Early 1970s

Through a stock swap United Foods acquired the John Inglis Frozen Foods Company of Modesto, California, in November 1970. During the 1970s this would become one of the company's two major operating subsidiaries, with processing plants in Salinas and Modesto, California. Following the acquisition, founder John Inglis joined United Foods' board of directors and soon became the company's chairman and chief executive officer.

The second major operating subsidiary, Winter Garden Freezer Co., Inc., of Tennessee, was acquired in November 1971. Following the acquisition, United Foods moved its headquarters from Houston to Memphis, Tennessee. Before the end of the decade, United Foods would again move, establishing headquarters in Bells, Tennessee, located in West Tennessee about a hundred miles northeast of Memphis.

During the 1970s United Foods' revenues hovered around the $100 million mark. Depending on weather conditions and the supply of raw vegetables, the company would either show a net profit or net loss. In 1975, for example, it had net income of $3.3 million on revenues of $106.5 million. Then in 1976 and 1977 it posted net losses of $2 million and $.6 million on revenues of $99 million and $98.5 million, respectively.

By 1977, when John Inglis retired, the company was one of the largest processors and marketers of frozen vegetables in the United States. It produced all major vegetables except potatoes and offered the broadest line of any frozen vegetable processor. It operated 11 processing facilities in California, Washington, Tennessee, Utah, and Texas, providing the company with a wide geographical source of supply within the major vegetable growing areas of the United States. Five of the plants were located in the fertile growing areas of California, including the San Joaquin Valley, the Salinas Valley, the Pajaro Valley, the Santa Cruz Coastal Area, and the Santa Maria Valley. Moreover, the Bells, Tennessee, facility was located near the productive farmlands of the Mississippi Delta, and the Brownsville, Texas, facility was located near the rich Rio Grande Valley. At this time United Foods' marketed its produce under the major brand names of Dulany, Prime Froz-n, and Winter Garden. The company was also a major packer of frozen vegetables for retail grocery chains sold under their own private labels.

A new management team was put in place at United Foods in March 1978, led by J.O. Tankersley, chairman and CEO, and James I. Tankersley, president and chief operating officer. During 1978 the company posted net income of $3.3 million on sales of $108.3 million. After two years of net losses it had returned to profitability, but it would not attain that level of net income again until 1983.

Diversification in the Late 1970s, Early 1980s

In 1979 United Foods had record revenues of $122.2 million, but a disappointing net profit of only $.6 million. The company cited pressures from inflation on manufacturing and distribution costs, and it was not able to recover these costs through higher selling prices.

Given the seasonal nature of its vegetable business, United Foods began to consider diversifying into other areas of agribusiness to add stability to future profits. In 1980 the company announced it would undertake a program of acquisitions to diversify its operations within the field of agribusiness. Former U.S. Secretary of Agriculture Earl Butz and Tennessee Lieutenant Governor John Wilder were added to the board of directors to help guide United Foods in its diversification program.

Faced with a choice of expanding its eastern farming operation into a larger corporate farming operation or getting out of farming altogether in the eastern United States, the company terminated its eastern farming operation and disposed of its farming assets in December 1978. In fact, during the next two years it ceased all farming operations and disposed of related farming equipment, finding that independent growers were inherently more efficient than corporate farms, which had been providing about eight percent of the company's raw product needs. In December 1980 United Foods also discontinued its western farming operations.

During this time, inventories continued at significantly higher levels, causing higher interest and storage expenses and depressed selling prices. Continuing inflation and a slowing growth rate in the mature industry of frozen foods made inventory management and the proper matching of selling prices to current costs even more important to the company.

To meet these challenges, United Foods implemented cost reduction plans, intensified its management of inventories, implemented tighter operating control systems, added more depth to its management base, and announced a major repositioning of underutilized assets.

The company was soon successful in reducing its inventories of frozen vegetables by approximately 45 percent. Adopting a defensive posture toward inflation--implementing programs of cost reductions, lower inventory levels, and tighter management controls--the company enjoyed considerably improved operating results.

Improving Profits 1982

During this time United Foods was taking a slow and deliberate approach in its acquisitions program. It planned to complete its first diversification in the summer of 1982 with the acquisition of Freezer Queen Foods, Inc., of Buffalo New York. Freezer Queen produced and marketed frozen entrees in two-pound trays and five-ounce "cook-in" pouches.

The company's improved profits, up about 80 percent from 1981 to 1982, was attributed to stronger market prices, selective reductions in low margin business, improvements in production costs, and reductions in average inventory levels in the Frozen Food Division.

A newly formed Land Division was designed to develop a source of raw product which would allow United Foods to grow and process a portion of its West Coast vegetables in Tennessee. It acquired approximately 7,100 acres of land on the Cumberland Plateau in East Tennessee. The company noted that the cost to ship a pound of vegetables from California to the East Coast continued to escalate due to higher fuel costs. With the items being produced in Tennessee, the company could cut its freight costs in half. Like others in the frozen food industry, United Foods was implementing a program to move a significant portion of its vegetable production to the central United States from the West Coast. In 1983 the company leased approximately 2,300 acres of the land it had acquired in Tennessee to independent farmers.

By June 1982, United Foods had completed its acquisition of Freezer Queen Foods, Inc. In October of that year, the company bought the $50 million frozen vegetable division of Stokely-Van Camp. Included in this purchase were vegetable processing plants in Fairmont, Minnesota, and Albany, Oregon, which were added to United Foods' frozen food division. As a result, United Foods began selling frozen vegetables throughout the United States under the Pictsweet and Stokely brands and in the Midwest and South under the Everfresh brands. The acquisitions were financed with borrowed capital, and annual revenues were expected to surpass $200 million the following year.

The market presence of United Foods was becoming more widespread, as its brands included Dulany (Eastern region), Tennessee and Everfresh (Midwest and South), Prime Frozen, Soup Ladle, Freezer Queen, Stokely (licensed), Pictsweet, and Winter Garden.

As expected, the company had record sales in 1984, due primarily to the acquisitions of Freezer Queen and Stokely-Van Camp. However, the company also experienced an unexpected decrease in earnings. Competitive market conditions resulted in depressed selling prices throughout the fiscal year. Sales volume was lower than expected in the fourth quarter due to adverse weather conditions, which caused the company to deplete its stocks of certain key vegetables. Operating expenses were up to $31.7 million from $27 million the prior year. These were largely attributed to additional staff and expenses associated with the expansion of the frozen food product line.

Like other processors, United Foods was moving its operations out of the traditional growing areas of California and the Pacific Northwest to be nearer the eastern population centers, allowing for lower distribution costs. Since, the remaining western processing capacity far exceeded that needed to serve western population centers, some western processors began to lower their prices, even while many key vegetables were in short supply.

In response, United Foods led an industry realignment, investing capital to increase the capacity of its Tennessee and Minnesota processing and distribution facilities. It closed five plants located in California and the Pacific Northwest, while its remaining western processing capacity was brought into line with demand there.

Freezer Queen operated above expectations in 1984: its profitability surged and market share was gained in the frozen entree categories in which it participated. A new line of twin-pouch single-serving entrees was developed for introduction to several test markets by the end of 1984. This was considered one of the fastest growing areas of the frozen food industry.

The Effects of Streamlining in the Late 1980s

However, overall revenues at United Foods would not reach 1984 levels again until the early 1990s. During this period the company cut back its processing facilities and consolidated its brands. At the end of February 1986 it sold the assets used in the Freezer Queen Division for $35.6 million to James Crean of Ireland, using proceeds to reduce the company's long-term debt. Freezer Queen had contributed approximately $44 million in revenue in 1986, $39.9 million in 1985, and $34.8 million in 1984.

Moreover, the company began experiencing labor problems in the summer of 1986 that would grow more severe over the coming years. Citing the need to reduce labor costs to remain competitive, the company noted that wage rates paid by competitors had declined during the year and that wages paid in Mexico were lower than U.S. rates. When its union contracts expired, United Foods attempted to negotiate lower wage rates, resulting in strikes in 1986 and 1987 at the company's Fairmont, Minnesota; Modesto, California; and Salinas, California, facilities. During 1987 and 1988, United Foods permanently replaced its striking workers at the Modesto and Salinas facilities. Decertification elections were held, with employees at both plants voting against the union. Then, in 1991 the company closed its plants in Modesto and Salinas and consolidated the frozen vegetable processing and cold storage operations at a leased facility in Santa Maria, California, effective June 28, 1991. The closing of the Salinas plant put 250 people out of work.

As a result of these closures, in 1992 the company operated from three frozen vegetable processing plants and cold storage warehouses located in Bells, Tennessee; Fairmont, Minnesota; and Ogden, Utah. It leased one processing plant and cold storage warehouse facility in Santa Maria, California, which it would later purchase.

United Foods also owned and operated three mushroom farms located in Utah, California, and Oregon, acquired in 1987 when United Foods was the high bidder in bankruptcy proceedings for certain assets of Mushroom King, Inc. The assets were purchased for $1.4 million, and the farms proved profitable for United Foods.

By the late 1980s United Foods' brand names had been consolidated into Pictsweet (a national brand), Dulany (sold in the East), Tennessee (available in the Midwest and South), and Winter Garden (marketed in the Southeast). In the beginning of 1988 the company launched Pictsweet Express, a new line of vegetables for the microwave, and by 1991 Pictsweet and Pictsweet Express were the company's two dominant brands. During the 1990s the Pictsweet brand was developed into a national brand in order to distinguish the company's products on a basis other than price.

Facing Strong Competition in the 1990s

In December 1992 United Foods closed its Fairmont, Minnesota, facility, leaving it with three processing plants and cold storage warehouse facilities. To offset the loss of these facilities, the company entered into a reciprocal supply agreement with another food processing company, with deliveries to begin in 1993. The other company would supply products that were previously processed in Fairmont, while United Foods would supply it with frozen vegetables processed at Bells and Santa Maria.

Throughout the 1990s United Foods faced extremely strong competition, especially from owners of the Birdseye and Green Giant brands, who spent large amounts of money in a fight for the number one position in branded sales. Other competition came from private, regional U.S. vegetable processors and privately-owned Mexican vegetable processors competing for volume. Such competitive pressures, combined with low overall growth, resulted in weak market pricing. United Foods management expected this condition to continue for several years.