Beech Nut Nutrition Corporation Business Information, Profile, and History

Company Perspectives:

Beech-Nut has been feeding babies like yours since 1931. We consider it a special privilege, a trust. So from the beginning, we've been an industry innovator. Our company's goal has always been to develop and market superior products. We pride ourselves on using the highest quality, all natural ingredients to create great-tasting and nutritious items. If a product doesn't exceed our expectations, we won't sell it.

History of Beech Nut Nutrition Corporation

Beech-Nut Nutrition Corporation, a subsidiary of the Milnot Company, is the third largest baby food manufacturer in the United States, behind Gerber and Heinz. In the past, this century-old company produced foodstuffs ranging from bacon to chewing gum, but it has been exclusively engaged in the baby food business since 1972. Having overcome a highly publicized adulterated apple juice scandal and numerous changes of ownership, Beech-Nut has remained a major force in the baby food industry by introducing innovative products, including Beech-Nut First Advantage, a line of baby food that contains DHA and ARA. Docosahexaenoic acid and arachidonic acid, or DHA and ARA, are fatty acids found naturally in breast milk and are considered to be an important building block in central nervous system development. In 2001, Milnot and H.J. Heinz Co. abandoned merger plans after antitrust delays.

Company Origins in the 1890s

Beech-Nut was founded in 1890 by five residents of Canajoharie, New York: Raymond and Walter Lipe, John and David Zieley, and Bartlett Arkell. Company lore has it that the home-smoked hams of Raymond and Walter's father, Ephraim, were renowned in the small Mohawk Valley farming community for their unique nutty flavor. Ephraim, a wealthy miller, had no thought of marketing his curing process, but his two sons, and their friends the Zieley brothers, were looking to set up a business, and they managed to convince their father to lend them both the recipe and the $10,000 capital needed to get started. The elder Lipe, unsure of the business acumen of his sons, made one stipulation. The boys must bring in Bartlett Arkell, the 28-year-old son of a successful local businessman and already a budding entrepreneur himself with a partnership in a rug importing firm. Arkell agreed to join the new venture as president and suggested they call the company the Imperial Packing Co. after the Imperial Hotel where he had stayed on a visit to New York City.

Operating out of a rented room in a local store, the Imperial Packing Co. got off to a less than imperial start. By 1899, the Zieleys and Raymond Lipe had bailed out of the foundering firm, which owed the local bank some $60,000. Bartlett Arkell came to the company's rescue by selling his share of the rug business. In exchange for paying off the debt, Arkell took $60,000 worth of stock in the company that was reorganized with a capitalization of $150,000. On the advice of a friend, who said that "Imperial" was an undemocratic name for an American ham, Arkell renamed the firm Beech-Nut, evoking the beech trees that grew around Canajoharie as well as the smoky, nutty flavor of the company's hams.

Beech-Nut's first success came, not from the hams that inspired its founding, but from the unlikely development of vacuum-packed jars of sliced bacon. One of Arkell's first moves upon taking full control of the company was to hire engineers to perfect a vacuum seal for glass jars in which to pack the company's meat products. Against the advice of his friend and mentor, ham baron Philip Armour, who thought the fat content in sliced meats should be hidden inside cans, Arkell introduced transparent jars of bacon, sliced to "micrometer thinness to insure a crisp fry." Whether it was the thin slices or the novelty of bacon in jars, Beech-Nut's bacon was an immediate success, and by 1905 the company was grossing $1 million a year.

New Products in the 1920s and 1930s

The popularity of Beech-Nut's jarred bacon was short-lived as the invention of cellophane wrap, refrigeration, and inexpensive mechanical slicers took their toll. Nevertheless, by the 1920s the company had enough other food products on grocers' shelves to more than fill the void. Throughout the first two decades of the century, Beech-Nut manufactured a dizzying array of foodstuffs, including sliced meats, peanut butter, baked beans, jam, tomato sauce, coffee, mustard, ginger ale, spaghetti, biscuits, candy, gum, and canned fish bait. Many of these offerings, such as the ginger ale, spaghetti, and fish bait, had a limited appeal and were quickly dropped, but the peanut butter, tomato products, coffee, and candy had more enduring success.

It was Beech-Nut chewing gum, however, that would prove the company's second major product breakthrough. The idea of manufacturing gum came in 1910 from Arkell's brother-in-law, Frank Barbour, whose own brother had been involved with the founding of the American Chicle Co., the originator of Chiclets. Competition was limited in the gum business, in large part because of the difficulties involved in obtaining chicle, the rubbery sap of the sapota tree that grew only in the rain forests of Central America and was the key ingredient in chewing gum. Barbour made annual trips to Guatemala and Yucatan to ensure Beech-Nut's supply of the chewy sap, which was soon the life-blood of Beech-Nut's business. During the Great Depression, when Beech-Nut's higher priced products were passed over in the grocery stores, Beech-Nut chewing gum kept the company afloat, providing $11 million of the company's $18 million in sales in 1935.

The Baby Boom and Baby Food in the 1950s

Like most U.S. companies, Beech-Nut entered into war production during the early 1940s, earning the dubious distinction of becoming the country's largest producer of "K" rations. Rationing and controlled prices during World War II caused the company to drop production of a number of items, including candy, bacon, and tomato products. With the return to peace, Beech-Nut's line of products was limited to gum, peanut butter, coffee, and baby food. It was the last that would become the prime money maker for the company through the next half century.

Strained foods for babies were introduced in 1931 by Clark Arkell, who had succeeded his father Bartlett to the presidency of the company. According to his own account, Clark Arkell decided to enter the baby food market after a grocer, questioned about the sales of Beech-Nut products, held up a can of Gerber baby food and said, "We sell more of this stuff than all your line put together." Beech-Nut differentiated its baby food by packing the strained fruits, vegetables, and meat exclusively in glass jars rather than the cans used by most manufacturers. The company's jarred baby food did well from the start, but it was in the late 1940s with the advent of the postwar baby boom that sales took off, doubling between 1948 and 1950. By 1950, the 48 different types of jarred baby foods--produced in Beech-Nut plants in Canajoharie; Rochester, New York; and San Jose, California--provided more than a quarter of the company's $70 million sales volume.

In the Boat with Life Savers in the 1960s

In 1956, Beech-Nut reentered the hard candy market through a merger with Life Savers Corp. The merged company, called Beech-Nut Life Savers, sold coffee, tea, gum, baby food, and Life Savers candy. The famous multicolored candies with the hole in the middle had been perennial market leaders since their introduction at the beginning of the century. Although Life Savers Corp. was only one quarter the size of Beech-Nut when the companies merged, the candy's 25 percent profit margins offered an attractive addition to the Beech-Nut mix. By 1960, Beech-Nut Life Savers sales had climbed to almost $120 million. Providing about one-third of these sales was Beech-Nut baby food, which had become the second best-selling brand in the nation, behind industry founder and perennial leader, Gerber.

In 1962 the death of Clark Arkell marked the end of an era for Beech-Nut, which had been controlled by the Arkell family since its founding. Under the new directorship of chairman Alger Chapman, a former tax lawyer and Republican politician, Beech-Nut Life Savers began to look for growth through acquisitions outside the food processing industry. In 1964, the company acquired two cosmetics companies, Lander Company and Carlova, Inc., followed, in 1966, by a food service company, Dobbs House.

Merger with Squibb in the Late 1960s

In 1968, Beech-Nut Life Savers took a new direction when the company merged with pharmaceutical giant ER Squibb & Sons. The new company, called Squibb Beech-Nut, manufactured a huge array of products, including prescription drugs, cosmetics, tooth brushes, vitamins, Martinson brand coffee, Tetley brand tea, Life Savers candy, and Beech-Nut gum and baby food. Initially, Beech-Nut baby food provided the bulk of Squibb Beech-Nut's consumer products division, which in total delivered about one-quarter of the company's $578 million in sales in 1968. The baby boom of the 1950s and early 1960s had dropped off precipitously by the late 1960s, however, and a falling birth rate was disastrous for an industry that could hold its consumers for only a brief two years. Sales of Beech-Nut baby foods stagnated and, with their attention and capital absorbed by many more promising products, Squibb Beech-Nut management was unwilling to invest in the kind of marketing required to steal market share away from other baby food manufacturers. By 1970, management had become so disenchanted with the brand that it had halted distribution in the central United States and the company's archrival, H.J. Heinz & Co., slipped into second place behind Gerber in the baby food market, leaving Beech-Nut a distant third.

Control by Nicholas and Nestlé in the 1970s and 1980s

In 1973, Squibb sold the underperforming Beech-Nut baby food line for $16 million to a three-man partnership led by entrepreneur Frank Nicholas. With Beech-Nut gum left behind at Squibb, the 75-year-old firm was reduced for the first time to a single product manufacturer. Nicholas had planned to cross-market Beech-Nut strained foods with the infant formula of a company he had purchased the previous year, but when that company withdrew from the U.S. market he was left with an unprofitable company controlling a shrinking share of a stagnant market. Beech-Nut sales dropped from $70 million in 1973 to $54 million the following year and, for the first time since its founding, the company finished the year with a net loss. Nicholas scrambled to keep the company in business. During the early 1970s, nutritionists had begun to complain loudly about the amount of salt, sugar, and modified starch baby food manufacturers were putting into their products. Nicholas saw a potential opening for Beech-Nut products to gain market share if they could capitalize on these concerns. In the mid-1970s Beech-Nut announced that it was purging salt from all of its products and eliminating sugar from all but those clearly intended as desserts. Nicholas began touring the country promoting the "all natural" Beech-Nut baby food on radio and television talk shows by quoting nutritionists and playing up his own role as a father of three young children. Ironically, given the scandal that followed, it was during this nutrition-oriented promotion that Beech-Nut also introduced apple juice in single-serving glass jars. A parent could avoid filling a separate bottle by screwing a nipple directly onto the jar. Beech-Nut's apple juice sales quadrupled as the result of the new packaging and Nicholas's "Mr. Natural" promotional campaign saw total sales climbing back up to $65 million. In spite of sales increases, a lack of capital prevented Nicholas from extending his marketing and advertising program and the company could not recoup its losses. In 1979, Nicholas sold the struggling company to Swiss food giant Nestlé S.A. for $35 million, more than twice what he had paid Squibb for the company in 1973.

With $15 billion in sales and the leading position in the worldwide baby food market, Nestlé could afford to invest the kind of marketing and advertising budget that was needed to turn Beech-Nut around. Nestlé appointed Niels Hoyvald to serve as president of its new subsidiary, now renamed Beech-Nut Nutrition Corp. Hoyvald, a native of Denmark who had relocated to the United States in the early 1960s, already had a reputation for his ability to turn around troubled food companies. Under Hoyvald, Beech-Nut undertook an intensive push into new geographic markets and invested a hefty $60 million in advertising and promotion. In 1984, the company launched a new line of baby foods called "Stages," which used color-coded packaging to identify the age at which babies could start eating each type of food. The introduction of Stages, backed with a $22 million advertising campaign, appeared to be a huge success. By 1986, Beech-Nut had regained its second place position with a 20 percent market share, and analysts estimated that sales had risen to about $125 million.

Scandal in the Mid-1980s

Although appearances suggested that Beech-Nut had turned the corner on its lean years, the company in fact was deeply embroiled in one of the worst scandals in American business history. Back in 1977, when Frank Nicholas had been touring the country promoting the nutritional quality of the Beech-Nut brands and apple juice sales had quadrupled, the company signed a contract with a new apple concentrate supplier called Universal Juice Co., which sold its product at up to 25 percent below the market. Initial tests of the concentrate by Beech-Nut research scientists raised the possibility that it might be adulterated with corn syrup, but company executives, including head of operations John F. Lavery, chose to turn a blind eye to the possibility of a problem with the product's quality. With up to 30 percent of Beech-Nut's sales accounted for by products containing the concentrate, the already struggling company was saving millions of dollars by using Universal and a switch to another supplier could well have tipped the scales toward insolvency.

When Nicholas sold the company to Nestlé, Beech-Nut's director of research and development, Jerome LiCari, went once more to senior management to warn of problems with the concentrate, which further testing had again shown to be suspect. Lacking a definitive test for the purity of apple juice, however, LiCari could not prove absolutely that the juice was tainted, and without this proof Lavery and company president Hoyvald refused to take action.

In April 1982, that proof came in the form of a private investigator, Andrew Rosenzweig, who had been hired by the Apple Processors Trade Association to investigate claims of adulterated concentrate. Rosenzweig had staked out the processing plant where Universal claimed to produce their concentrate and found that the company was not just adding sweeteners to their mix, they were failing to add the apples altogether. Documents found in the plant's dumpsters revealed that the so-called apple juice was in fact nothing but water, sugars, flavoring, and coloring. According to the New York Times, Rosenzweig tracked a trailer truck full of the bogus concentrate from the Universal plant to Beech-Nut's facilities in Canajoharie and confronted Beech-Nut management with his findings.

It was at this point that Beech-Nut committed "a grave tactical error," as an attorney close to the case was later to tell Business Week. Instead of immediately recalling all of the products made from the synthetic concentrate, a recall that would have involved some 700,000 cases of inventory and might possibly have bankrupted the company, Beech-Nut began shipping the tainted juice out of the country clandestinely. Meanwhile, Beech-Nut lawyers stalled U.S. Food and Drug Administration investigators, who were asking for samples of the suspect product. It was October before fed-up FDA officials threatened a seizure unless the company issued a voluntary recall. Beech-Nut finally issued the recall in November 1982, but by that time all but 20,000 cases of the juice had been distributed overseas.

FDA investigators initiated an investigation into Beech-Nut's role in the sale of the phony juice and of the cover-up. In November 1986, a federal grand jury found that there was sufficient evidence to indict both Beech-Nut as a corporate entity as well as its two top executives, John Lavery and Neils Hoyvald, on 470 counts of violating the Federal Food, Drug, and Cosmetic Act for selling adulterated apple products. Beech-Nut pleaded guilty to 215 counts of the indictment and was fined a record $2 million. Lavery and Hoyvald both pleaded not guilty but were convicted for their involvement in what the judge in the case would call "the largest consumer fraud case ever." Both men were sentenced initially to a year and a day in prison and fined $100,000, but these convictions would later be overturned on a technicality and the sentences reduced in a retrial to probation and community service.

Ironically, the recall of the phony apple juice in 1982 never created the bad press for Beech-Nut that Hoyvald had so feared. Apple juice sales continued to grow during the four years of the FDA investigation. It was only after the indictments of the company in 1986, long after all bogus juice had been removed from grocery store shelves, that the scandal began to impact sales. The intense publicity that surrounded the trial and sentencing, however, was disastrous for the company. Market share dropped from more than 20 percent in early 1986 to 16 percent in 1987. Most of this drop was the result of plummeting apple juice sales, which fell about 20 percent within a few months of the indictment. Although Nestlé did not release sales figures for its subsidiaries, company sources told Business Week that Beech-Nut racked up near-record losses in 1987.

Beech-Nut quickly undertook a new promotional campaign that stressed the quality of the Stages line of baby food and was designed to appeal to the increasing number of older first-time mothers. All baby food manufacturers had long since followed Beech-Nut's lead in removing salt and artificial flavors from their products. Now Beech-Nut became the first major firm to purge their food of the modified starch that had long been responsible for the creamy consistency of most baby food. The company spent millions trying to recapture consumer confidence, urging mothers to read the labels of their products and compare them with their competitors. By 1989, Beech-Nut had succeeded in regaining some of its lost market share, but the cost of the campaign virtually wiped out profit margins, according to industry analysts.

Renewal with Ralston Purina in the 1990s

In September 1989, Ralston Purina Co. purchased Beech-Nut from Nestlé for an estimated $85 million, about half of the baby food's $150 million annual sales. Ralston Purina, better known as a pet food manufacturer, had a small but growing line of human food products, including Chex and Cookie Crisp cereals, and felt it was getting a bargain with the tarnished but still viable Beech-Nut. Ralston Purina continued to promote the Beech-Nut brand for its purity and in 1991 became the first major manufacturer to launch an organic line of products. Called Special Harvest, the new line was made entirely of food grown without synthetic fertilizers or pesticides. The concept of pesticide-free baby food was originally promoted by a small specialty firm called Earth's Best, which had quickly captured three percent of the baby food market. Beech-Nut was faced with a major problem in promoting its new line, however. Unlike Earth's Best, Beech-Nut could not play up the potential dangers of chemical residues without risking damage to its primary product line. Consumer interest in organic products failed to grow as expected and after a couple of years the Special Harvest line was dropped.

In 1994, Ralston Purina spun off its human food businesses as Ralcorp Holdings, Inc. Ralcorp continued to advertise the nutritious quality of Beech-Nut baby food, which received a boost in 1995 when an independent report conducted by the Center for Science in the Public Interest found Beech-Nut foods to be "nutritionally superior to Gerber and Heinz, using more whole foods, fewer fillers, and less added salt and sugar." During the mid-1990s, Ralcorp also undertook an aggressive campaign to widen distribution, including a price-cutting strategy that had some analysts speculating about the possibility of the century-old firm once more changing hands.

A Milnot Company in the Late 1990s and Beyond

That speculation rang true in 1998 when the Milnot Company purchased the baby food concern for $68 million. Privately held by Madison Dearborn Partners Inc., Milnot more than doubled its revenue with the purchase, which added the Beech-Nut brand to its arsenal of private-label food products. Milnot then looked to secure a stronger position in the U.S. baby food market. In 2000, it announced that it would team up with competitor H.J. Heinz Co. Upon completion of the deal, the Beech-Nut and Heinz baby food lines would be linked and would give the combined company up to a 30 percent market share. At the time, Gerber controlled the U.S. baby food market with a 70 percent share.

The proposed $185 million merger was met with opposition from the Federal Trade Commission. Antitrust regulators set plans in motion to block the deal, claiming it would create a duopoly, which in turn, could lead to future price fixing by the two firms. Beech-Nut and Heinz on the other hand, argued that Gerber was currently operating in a monopolistic state, and with the competition so far behind in terms of market share, the company was not forced to develop new products. Milnot's president Scott Meader claimed in a 2000 CNN Money article that "the combination of Heinz and Beech-Nut is in the best interest of American consumers because it is pro-competitive and will result in more innovation to reinvigorate the baby food industry." In April 2001--after a U.S. Court of Appeals put a temporary block on completion of the deal--Heinz and Milnot abandoned their plans to merge.

The failed attempt to link up with Heinz did little to curtail Beech-Nut's new product development. In 2002, the company was the first to launch a product that contained both DHA and ARA, nutrients found in breast milk that aid in the development of the central nervous system, specifically vision and mental development. The product line, Beech-Nut First Advantage, hit store shelves in 2002 in 13 different varieties. The company also began a new marketing program entitled the Beech-Nut Baby Club, which gave customers incentives for shopping at certain retail locations.

Having successfully emerged from scandal, changes in ownership, and a failed merger attempt, Beech-Nut stood in third place in the U.S. baby food market in the early years of the new century. With over 150 different baby foods to its name, Beech-Nut remained dedicated to infant nutrition and new product development. Whether or not Beech-Nut would remain a Milnot company in the years to come however, remained to be seen.

Principal Competitors: The Hain Celestial Group Inc.; H.J. Heinz Co.; Novartis AG.

Chronology

• Key Dates:
• 1890: The Imperial Packing Co.--the predecessor to Beech-Nut--is founded by five residents of Canajoharie, New York.
• 1899: The company incorporates as Beech-Nut Packing Company.
• 1905: The company grosses $1 million per year upon the success of its jarred bacon.
• 1910: Beech-Nut enters the gum business.
• 1931: Strained baby foods are launched.
• 1956: The company merges with Life Savers Corp.
• 1968: The firm merges with pharmaceutical giant ER Squibb & Sons.
• 1973: Squibb sells the Beech-Nut baby food line to a three-man partnership.
• 1979: Beech-Nut is sold to Nestlé S.A.
• 1982: The firm recalls its apple juice.
• 1986: The company and two of its executives are indicted on 470 counts of violating the Federal Food, Drug, and Cosmetic Act for selling adulterated apple products.
• 1989: Ralston Purina Co. purchases Beech-Nut.
• 1994: Ralston spins off its human food businesses as Ralcorp Holdings Inc.
• 1998: The Milnot Company acquires Beech-Nut.
• 2001: H.J. Heinz Co. and Milnot abandon merger plans.