Schwan's Sales Enterprises, Inc. History

Address:

115 West College Drive
Marshall, Minnesota 56258-1747
U.S.A.

Telephone: (507) 532-3274
Fax: (507) 537-8450

Website: www.schwans.com

Private Company
Incorporated: 1948 as Schwan's Dairy
Employees: 6,000
Sales: $2.9 billion (1997 est.)
SICs: 2024 Ice Cream & Frozen Desserts; 2037 Frozen Fruits, Fruit Juices & Vegetables; 2038 Frozen Specialties, Not Elsewhere Classified

Company Perspectives:

"My vision for our future is a strong, well-managed, fast-growing, exciting, innovative company with high business ethics and an excellent reputation--a company that offers great opportunities, a place where people like to work."--Marvin M. Schwan (1991)

Company History:

A highly successful dairy and frozen food company, Schwan's Sales Enterprises, Inc. holds 90 percent of the national school market for frozen pizzas and boasts one of the most extensive home delivery operations in the country, with a truck fleet exceeding 2,000. The trucks deliver to customers in 49 states a variety of frozen foods, including ice cream, pizza, meats, vegetables, and juices. From the 1960s through the early 1990s, revenues for the holding company have doubled virtually every three to four years, due to a wise acquisition policy and a continually expanding truck fleet and sales force. Sales growth has since been more moderate, but steady. Schwan's is comprised of some dozen operating divisions, the most successful of which is Tony's Pizza, the number two frozen pizza in the United States, behind Tombstone. The driving force behind most of the company's long and healthy history was consummate entrepreneur Marvin M. Schwan, who left behind a $1.3 billion estate when he died in 1993. The Schwan family still owns the company.

Family Enterprise from the Start

Marvin's father, German immigrant Paul Schwan, entered the ice cream business following World War I when he accepted a delivery job with a creamery in the southwest Minnesota town of Marshall. In 1944 the elder Schwan was financially able to launch his own venture. That year he bought half interest in a milk bottling plant, which happened to be adjacent to the Marshall Ice Cream Company, his most recent employer. The new firm, Neisen and Schwan's Dairy, was a family enterprise from the start, founded on personalized delivery service to area homes. At the age of 14, Marvin accepted a milk delivery route and supplemented his income on weekends by packaging ice cream bars, fudgesicles, and popsicles. Realizing that he could boost his productivity by 25 percent, Marvin purchased a bag-opening machine with his own funds; his father recognized both the advancement in productivity and Marvin's initiative and reimbursed his son for the capital expenditure. By 1948 the business, which both supported local dairy farmers and provided a valuable service to households, was well known and respected. With the help of Marvin's own investment, Paul bought out his partner, renamed the business Schwan's Dairy, and opened a new plant in town. Paul's wife, Alma, assisted in the daily operations by running the Schwan's Dairy Store, a small restaurant that offered homecooked meals and Schwan's dairy products. Marvin left Marshall at this time to attend a two-year college, but returned on weekends to assist with the business. His father, meanwhile, had begun experimenting with surplus cream and perfected his own recipes for chocolate and vanilla ice cream, which he soon began manufacturing in 2-gallon containers.

Marvin's decision to return full-time to the business in 1950 was perhaps the single greatest reason for the modest dairy's development into a national concern. After barely weathering a retail price freeze on milk during 1951-52, Schwan's swiftly rebounded when Marvin discovered that he could undercut the comparatively higher ice cream prices of neighboring towns. Experienced in home delivery and alert to the current rise in freezer purchases by rural families, he had only to purchase a truck and establish a route. Within a year, he added a second truck to his delivery operation and quickly began to promote the Schwan's name as synonymous with the best ice cream--now available in a dozen flavors--in southern Minnesota. Distinctive yellow trucks, the simple cursive logo, the round returnable ice cream containers, and the courteous assistance of the drivers helped attract a remarkably loyal and longstanding customer base.

By the mid-1950s Schwan, faced with the realities of high overhead for his growing fleet and sales force, positioned the company for greater profits and a greatly expanded market by adding first a depot in the southeast portion of the state and then a freezer-warehouse in the central portion. Schwan's faced its second major crisis in 1957 when the Redwood River reached flood stage in Marshall, severely damaging equipment in the central plant and halting operations for four days. A federal disaster loan allowed the business to recover, which it did rapidly under Marvin, who had effectively become the company's general manager. By the early 1960s sales had easily surpassed $4 million and the full-time workforce had swelled from the original five to well over 100. The company met the challenge of another crisis in 1962, that of a nearby fire which threatened to destroy the plant's north wall and with it a 10-ton condenser, and redoubled its efforts to grow into a stable, thriving company. The site of the auto dealership that was destroyed by the fire was soon purchased by Schwan's to allow for an expanded headquarters and by 1963, round-the-clock operations were initiated, elevating ice cream production to some 11,000 gallons daily.

Acquisitions Began in 1963

In Self-Made: The Stories of 12 Minnesota Entrepreneurs, authors Carol Pine and Susan Mundale accord special significance to the year 1963 for the company. Aside from marking the 15th anniversary of the business as a solely owned family enterprise, 1963 was the year in which Marvin adopted a long-term acquisition policy to ensure that the company could experience aggressive growth while remaining profitable. Among the first acquisitions were a prepared sandwich company and a condensed fruit juice company, both of which were incorporated under the new holding name of Schwan's Sales Enterprises, Inc. Two years later, Schwan discovered that one of his Wisconsin salesmen had begun carrying Roma brand frozen pizzas on his route. With the rising popularity of prepared pizza, the small label promised additional diversity and sales for the delivery company and so Schwan signed a contract to market the pizzas in a four-state region. By 1969--the year of Paul Schwan's death--pizza sales were approaching those of ice cream and, consequently, Schwan was eager to expand his territory. Prevented from doing so by Roma, Schwan placed an ad in the Wall Street Journal disclosing his interest in purchasing a complete pizza manufacturing plant. He received a response from Kansas-based Tony's Pizza. After determining that the Tony's pizza recipe required improvement, Schwan acquired the company in 1970, made the necessary alterations, and then launched the division with a somewhat new marketing scheme: selling the pizzas via a special fleet of trucks directly to retail stores rather than chain warehouses. As in his home delivery routes, the emphasis was on providing the customer with quality, freshness, and service. Each driver was given the latitude to enhance sales for his route and profits for each route were tallied daily, weekly, and monthly.

The pizza acquisition proved a resounding success and fueled much of the company's growth during the 1970s, despite heavy competition from Jeno's and Totino's. Another turning point for the company came in 1974, in the wake of a devastating fire at the ice cream plant. Schwan saw the tragedy as an opportunity to rebuild in a more suitable location and almost moved his business. Fortunately for the citizens of Marshall (25 percent of whom now work for him), Schwan decided to recommit himself to the community that had helped him to prosper. By 1979 he had built his delivery system into a 1,000-truck fleet. Ever conscious of the bottom line, he converted the entire fleet to LP gas at this time to combat the rising costs for conventional fuel. Finally, he ended the decade by diversifying beyond the food business with the acquisition of Syncom Magnetic Media, a computer tape and diskette manufacturer based in Mitchell, South Dakota.

As Schwan's entered the 1980s, roughly half of its sales came from pizza. The remaining half came from its line of home-delivered products, which had now expanded to include meats, frozen fish, bread, frozen fruit, and french fries in addition to a full line of dairy products. While the ongoing success of the latter half of operations was virtually ensured, the former--represented primarily by Tony's--was pitted against serious Minnesota rivals Totino's (acquired by Pillsbury in 1975) and Jeno's. Totino's, benefiting from the Pillsbury name and a large sales apparatus, led the national market share with 22 percent, followed by Tony's and Jeno's, each with approximately 13 percent of the market. The competition between the big three had been fierce for several years, and in 1981 Schwan's launched a serious attack on the number one position with a highly controversial ad campaign, which playfully hinted that the other leading pizza manufacturers employed a glue-like substance in their cheese while only Tony's contained 100 percent real cheese. Despite outcries from its competitors, Schwan's benefited from the exposure, and the campaign went on to win the top Minnesota advertising award of the year. However, 1981 was also the year in which the company sustained its greatest personal loss, the death of an employee and the injury of eight others following an anhydrous ammonia leak at the main plant.

Expanded into Institutional Pizza in the Mid-1980s

By the mid-1980s, with sales approaching $500 million, Schwan entered the institutional pizza market and quickly carved out his own sizeable niche, thereby circumventing the need for competing head-to-head, at high cost, in the retail grocery market. Schwan had discovered that cheese surpluses were being delivered to the nation's public schools by the Department of Agriculture. He reasoned, correctly, that the schools would be willing to trade their allotments for discounted school lunch pizzas, to be manufactured by Schwan's with the government cheese. Schwan greatly strengthened his foothold in this new market with the acquisition in 1986 of his major school lunch competitor, Sabatasso Foods. In 1988 he established a virtual monopoly with the additional acquisition of Better Baked Pizza. During this same period of rapid growth, Schwan had instituted a portable pricing and inventory system that squeezed even greater profit margins from his home delivery business. As always, Schwan's intent was to maintain his business as a self-financing operation, ensuring the private company's longevity and eminent profitability.

In 1982, Pine and Mundale wrote that although "almost every other kind of home delivery system has gone the way of the dinosaur, Schwan's Sales Enterprises has grown and prospered." The statement remained just as true more than a decade later, due to Schwan's business acumen, the quality of his products, and, probably above all, the effectiveness of his drivers. Although the job of driving for Schwan's was notoriously rigorous, involving long hours and considerable physical labor, Schwan was known as an extremely fair boss and, with one-third of all executives drawn from the Marshall workforce, employee loyalty was strikingly high.

In 1992 Schwan's acquired two more companies, bringing its total to 12. One, Monthly Market, was a for-profit food cooperative catering to fund-raising groups; the other, Panzerotti, was a stuffed pastry business. Although no annual revenues were disclosed with either of the sales, both businesses would likely benefit by their integration with the Schwan's delivery system. Other Schwan's businesses at the time included a pastamaker and an egg roll company. Also by this time, according to a 1998 article in Minneapolis St. Paul Citybusiness, the company owned three leasing companies: Business Credit Leasing, established in 1979, and Manifest Group, founded in 1988, both leased office equipment; while Secured Funding Source was established in 1991 as a lessor of medical equipment. In March 1993 Schwan's expanded its pizza business through the purchase of San Diego-based Chicago Brothers Frozen Pizza, makers of deep-dish pizza.

Newsworthy in the Mid-1990s

The normally secretive company found itself much in the news in the mid-1990s. First, Marvin Schwan died suddenly of a heart attack in May 1993 at the age of 64. Marvin's brother Alfred took over as chairman, CEO, and president. Alfred Schwan had been the company's director of manufacturing in Salina, Kansas, where Schwan's had a pizza plant. He soon had to contend with a public relations and litigation nightmare following a nationwide outbreak of salmonella poisoning in September and October 1994, an outbreak eventually traced to contaminated Schwan's ice cream, which the company quickly recalled. An investigation by state and federal health authorities concluded that a tanker truck containing pasteurized ice cream pre-mix had not been washed out after previously carrying raw, unpasteurized eggs. Officials later estimated that more than 240,000 people became ill as a result of eating the tainted product, a figure that company officials disputed as being eight times too high. The company was cleared of direct wrongdoing in the case as it had purchased the pre-mix from a supplier and an independent trucking firm had made the delivery. Nonetheless, before officials allowed the ice cream plant to reopen in early November 1994, Schwan's had to agree to change some of its procedures. The company began using only company-leased "dedicated" tankers to truck in the ice cream pre-mix, began pasteurizing the pre-mix on its arrival at the plant, and began testing the pre-mix and the finished product for salmonella. It was also reported that month that Schwan's had paid out almost $1 million to thousands of customers who signed a legal release stating that they would not sue the company. In February 1995 a tentative settlement was reached in a class-action lawsuit whereby Schwan's agreed to pay from $80 to $75,000 to customers who became ill after eating the contaminated ice cream. The amount would depend upon the severity of the illness. Schwan's estimated in 1996 that the total number of people filing claims would be about 30,000. By that time sales of the company's ice cream products had returned to previous levels, indicating that it had survived the crisis.

In March 1995 Ken Noyes was named president and chief operating officer of Schwan's. Noyes, a 12-year company veteran who had previously headed up the company's leasing operations and its food service division, became the first nonfamily member in the post of president. Also in 1995 Schwan's leasing operations expanded through the acquisition of Universe Leasing, a lessor of tractor trailers. The company made further inroads into the financial world in 1995 when it established Spectrum Commercial Services Inc., a Bloomington, Minnesota-based private lender offering alternative financing for companies unable to have all of their needs met by a bank or other traditional lender.

Right on the heels of the salmonella crisis came a family feud resulting in more unwelcome publicity. Marvin Schwan's will left two-thirds of his 100 percent holding in Schwan's Sales Enterprises to the Marvin M. Schwan Foundation, a funder of conservative Lutheran religious and educational causes. It also called for the company to purchase the foundation's shares after his death. Alfred Schwan and the company board approved a plan to repurchase the stock through payments totaling $1.8 billion spread out over 15 years, with a final balloon payment of $600 million in 2009. Four children of Marvin Schwan filed a federal lawsuit in May 1995 against Schwan's, Alfred Schwan, and Larry Burgdorf, the latter two being trustees of Marvin Schwan's estate. The suit contended that the amount being paid to the foundation was inflated by more than $250 million and jeopardized the financial health of the company. The deal also restricted the heirs' ability to cash in their company shares until after the 15 years were concluded; by that time, the children feared that Schwan's would be reduced to a shell of its former vibrant self. They also contended that the trustees had unfairly changed their father's estate plan. Alfred Schwan and Burgdorf countered that they were merely carrying out Marvin Schwan's wishes and had created a deal that was best for the company and its family owners. In November 1997 a settlement was reached in the lawsuit. While terms were not disclosed, it was reported that the descendants of Marvin Schwan remained the owners of Schwan's and that the plaintiffs were allowed to sell some of their shares in the company.

In February 1998 Noyes became the third CEO in company history when he replaced Alfred Schwan in that position. Schwan remained chairman. Schwan's, back in its more familiar reclusive mode, was looking for growth overseas in the late 1990s. It had already established itself as a market leader in the frozen pizza sector in Europe, having entered the U.K. market in 1992. Schwan's then in 1997 acquired La Roue du Pays d'Auge, a French maker of wood-fired pizzas as well as pasta. That year the company began selling its Freschetta brand of bake and rise frozen pizza in Europe, after the product was a runaway hit in the United States following its 1995 debut. Schwan's also entered the Malaysian market in 1997 when it began selling Tony's pizza there. It appeared that the Schwan's of the 21st century would have an increasingly international flair.

Schwan's Sales Enterprises, Inc. History

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Company History:

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