Gardenburger, Inc. History

Address:

1411 SW Morrison Street, Suite 400
Portland, Oregon 97205
U.S.A.

Telephone: (503) 205-1500
Fax: (503) 205-1650

Public Company
Employees: 320
Sales: $60.1 million (1999)
Stock Exchanges:NASDAQ
Ticker Symbol: GBUR
NAIC: 311412 Frozen Food Specialty Manufacturing; 422219 Other Grocery and Related Products Wholesalers

Company Perspectives:

Gardenburger, Inc. pursues visionary ideas that helping to sustain the health and integrity of our planet. We are committed to offering delicious and healthy whole-food choices to the world. Our objective is to develop products that are timely, yet futuristic; products that are made with compassion and a caring consciousness for the earth's fragile resources. We believe in the importance of producing only earth-wise products for all present and future generations.

Company History:

Gardenburger, Inc., headquartered in Portland, Oregon, is the largest producer of meat-substitute burger patties in the country. It makes and distributes GardenProducts, 'meat analog' foods which it wholesales to over 35,000 retail businesses, with markets in the United States, Canada, and Europe. Its chief customers are chain and independent grocers, club stores, restaurants, food-service cafeterias, and natural food stores. Its chain-restaurant customers include Applebee's, Back Yard Burgers, Denny's, Lyon's, Red Robin, Subway, and T.G.I. Friday's. Its club-store customers include Costo, Cost-U-Less, and Sam's Wholesale Club. The company's chief product, its signature Gardenburger, sold in eight flavors, is made from fresh vegetables and grains, soy beans, low-fat cheese and spices. The company also produces other natural, meatless foods, all manufactured at its plant in Clearfield, Utah, which it opened in 1998. Its research facility remains in Portland, its home base, but its production plant was closed there in 1999. In that same year, when Gardenburger's sales dropped to $60.1 million from the $100.1 million high from the previous year, there were speculations about a planned sale of Gardenburger, though company officials denied that any such sale was under consideration.

Wenner Founds Wholesome & Hearty Foods: 1981-85

The history of Gardenburger's meatless burger goes back to 1981, when the company's founder, Paul Wenner, created the first version of it at his Garden House Restaurant in Greshom, Oregon. As he explained in his cookbook, Garden Cuisine, Wenner became a dedicated advocate for meatless foods as a result of their beneficial effect on him. He suffered from asthma and tuberculosis in his youth, but his health began improving when he limited his diet to all natural, meatless foods, and initiated a program of vigorous exercise. Thereafter, when he was in his 20s, he started teaching cooking classes in college, focusing on health issues as well as methods of preparing foods. He subsequently opened both his Garden House Restaurant and his own cooking school.

At the Garden House Restaurant, with a fair amount of ingenuity and some leftover rice pilaf, Wenner patted together and grilled the veggie burger that would eventually become the signature product of Gardenburger, Inc., although with its ingredients much changed. Wenner's original version also used mushrooms, rice, onions, oats, and low-fat cheeses.

Despite the success of his burgers, Wenner could not keep his restaurant open. Oregon entered a recession soon after he started in operation, and the economic downturn forced him to close his doors in 1984. However, Wenner continued to make his patties, selling them to a widening circle of local stores. The growing demand for them encouraged him to found his wholesale business, Wholesome & Hearty Foods, Inc., which he incorporated in 1985.

Early Promise Gives Way to Bottom Line Difficulties: 1986-94:

Wenner gradually built his business up, creating other meat analog recipes and adding them to his line of foods. He was tapping into a fat-free, health food market that was rapidly growing as a health-conscious America was becoming increasingly receptive to low fat, low cholesterol foods. His prospective customers included reluctant vegetarians, people who had to give up eating meats not so much by choice as by dangerous cholesterol levels or other dietary concerns. The trick was to create passable look- and taste-alike substitutes for such old American favorites as hamburgers and hot dogs.

In 1986, to help publicize his foods, Wenner re-entered the retail market with a small cafeteria outlet at a natural foods trade convention, but he never again went into the restaurant business. He sought to extend his food line and customer base, which he managed to do with a fair degree of success, and in 1992 was confident enough to take the company public. At that time sales had reached $6.9 million, and the company was realizing a small net profit, but it soon became apparent that in its growth Wholesome & Hearty had hit a plateau. Although revenues were growing, their rate had slowed, and the company's earnings were stagnating. In particular, 1994 was a very disappointing year. The company's stock dropped to under $10 a share, down from as much as $14.50 in the previous year. Moreover, the company had a very low market profile and was simply limping along, generally outside much public notice. It was clear that Wholesome & Hearty needed some fresh thinking.

Expansion, Change, and Calculated Risks under Hubbard: 1995-98

Significant changes made in an effort to improve the company's image and to bolster sales and profits began in 1995, when Lyle Hubbard took the operating reins of the company as CEO. He came over from Quaker Foods, where he had worked for 15 years and had acquired a reputation as an imaginative innovator as head of Quaker's $500 million convenience-food division.

Hubbard was given carte blanche. Although founder Wenner stayed on as the senior chairman and as chief creative officer, a rather unique title, he stepped aside to give full operational control to Hubbard. It was a change that almost immediately brought positive results, for in 1996 revenues grew by ten percent, with sales of $39.63 million.

More of a business risk taker than Wenner, in that same year Hubbard began an expansion move with the acquisition of two companies: Gorilla Foods, Inc. and Whole Food Marketing, Inc. Wholesome & Hearty Foods purchased the former, a Southern California-based distributer of specialty foods, including Wholesome & Hearty Foods' products, for $350,000 in cash. Gorilla Foods was a manufacturer and distributer of wheat protein-based meatless foods, including a frankfurter called the GardenDog. Hubbard acquired it for 240,000 restricted shares of Wholesome & Hearty's common stock and $68,750 in cash. At the time, the common stock, trading at $6.875 per share, was worth $1.65 million, but it was to be held in escrow before being distributed to Gorilla's stock holders if the sale of its gluten products met negotiated threshold targets.

The expansion was almost immediately complimented by moves to improve the company's efficiency. To reduce costs and boost sales, Hubbard and his staff decided to stop manufacturing a few products with a sluggish sales record, notably the company's breakfast sausage and faux hot dogs. These were dropped from its line in 1997. Steps were then taken to improve the sales volume of remaining line of foods.

The first was a move to refurbish the company's image. Hubbard oversaw the company's name change to Gardenburger in October 1997, a change designed to enhance the company's marketing profile. It brought no objections from stock holders, who saw the impact potential of the new name, one that could stick in customers' minds. It was a vital first step in achieving Hubbard's primary goal, to turn Gardenburger's signature burger into a household name, accepted not only as a health item but as a regular staple.

The second step was to launch a major advertising campaign, one that started with print but moved onto radio and television, most notably with a spot on the much-ballyhooed, final episode of Seinfeld, the very popular situation comedy, which aired in May 1998. The campaign was first designed and managed by a team at Hal Riney & Partners, a San Francisco firm with a very good reputation for producing creative ads that greatly improved brand-name recognition. The campaign involved putting $17 million into Gardenburger's 1998 advertising budget, an increase of 300 percent over the previous year. It was clearly a monumental risk for a company that in that in that previous year had only logged $56.8 million in sales. At a cost of $1.5 million, the Seinfeld spot alone ate up almost ten percent of that inflated budget. It seemed a justified expense, however, for sales immediately picked up, and by the end of its 1998 fiscal year, Gardenburger's volume of sales climbed to over $100 million, almost doubling. The campaign's success led Gardenburger to change its advertising account to Rubin Postaer & Associates after the three principal members of the original Riney team went to work for that firm.

By the end of 1998, the company had become the nation's leading wholesaler of vegetarian burgers, holding a 41 percent share of the marker in the frozen, meat-analog burger category, rated as a $132 million business. The company's chief competitor, Worthington Foods, a larger company with a more varied line of products, trailed behind Gardenburger at a 30 percent market share. The increased sales were very encouraging, and, among other things, prompted the company to add five new products to its growing line.

Gardenburger had to contend with some niggling problems, however. From 1996 to early 1999, the company faced some PR and marketing difficulties when it was subjected to a nationwide boycott instituted by PCUN (Pineros y Campesinos Unidos del Noroeste), Oregon's farm workers' union. In 1992, PCUN had begun a boycott of all NORPAC products, including FLAV-R-PAC and Westpac frozen fruits and vegetables, because of

1981:Paul Wenner creates his vegetarian burger at his Garden House Restaurant.

1984:Wenner closes his restaurant but continues selling veggie burgers to other outlets.

1985:Wenner founds Wholesome & Hearty Foods to wholesale vegetarian food.

1986:Wholesome & Hearty enters retail market at a natural foods trade convention.

1992:The company goes public.

1996:Wholesome acquires Gorilla Foods, Inc. and Whole Food Marketing, Inc.

1997:Company changes name to Gardenburger.

1998:Gardenburger becomes the nation's leading wholesaler of vegetarian hamburgers; begins production at new plant in Utah.

1999:Company closes its plant in Portland.

NORPAC's reputed and documented ill treatment of farm laborers. Since Gardenburger had been buying and continued to buy farm produce from NORPAC, in 1996 PCUN added Gardenburger's own products to its boycott list. Facing mounting pressure from advocacy groups that had taken up PCUN's cause, after three years Gardenburger was finally forced to terminate its contractual arrangements with NORPAC. It did so on April 23, 1999, and PCUN immediately suspended its boycott of the company's products.

More importantly, despite the great increase in sales in 1998, the company continued to suffer bottom line problems. These began in 1997. Although Gardenburger's sales volume in that year rose to $56.84 million, an increase of almost 45 percent over the previous year, its increased operating expenses produced a net loss of $2.06 million. In 1998, when, driven by the ad campaign, sales increased by almost 76 percent, the net loss ballooned to $14.35 million. Growing sales simply could not compensate for increasing costs, not in the short run at least. Hope still ran high for the long run, however, especially in light of the tremendous increase in volume in 1998.

Bottom Line Realities Leave Future Uncertain: 1999-2000

Yet the situation even worsened in 1999, when, alarmingly, sales dropped back down by 40 percent, to $60.11 million, and operating losses, more than doubling, rose close to $30 million. That was bad news in a year in which the company had taken measures to ensure that it could meet the projected sales volumes based on the figures from 1998. Its most important expansion step was to move its production base to a new facility in Clearfield, Utah, a 120,000 square foot plant three times the size and product capacity of its old plant in Portland.

When it became obvious that the projected sales volume increase was not going to materialize, the company closed its old plant, leaving only its headquarters and research facility in Portland. It also began cutting back on some of its more aggressive expansion plans and marketing strategies.

By the second quarter of 1999, Gardenburger's net loss had already grown to $10.5 million. At that time, in July, Hubbard commented, 'We are changing our business model on a go-forward basis to emphasize near-term profitability over aggressive market growth.'

In September 1999, from change-of-control policy agreements filed with the Securities Exchange Commission (SEC), it appeared that Gardenburger might go on the auction block, but by the close of the year it had not been sold. At the time of the filing, Gardenburger's CFO Richard Dietz claimed that the company was not being prepared for sale, but, when asked, he also refused to divulge whether the company was pursuing a merger with another company. That led to speculation and rumor about Gardenburger's fate. Even so, the company had reason to hope that its future prospects might improve, thanks to such things as the FDA's October 1999 approval of claims that soy protein foods reduce the risk of coronary disease and the growing concern with obesity as a national and even a global problem, an issue widely publicized in the media in the early months of 2000.

Principal Competitors: Worthington Foods, Inc.; ConAgra, Inc.; Galaxy Foods Company; The Hain Food Group, Inc.; White Wave, Inc.

Gardenburger, Inc. History

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