Mr. Coffee, Inc. History

Address:

24700 Miles Road
Bedford Heights, Ohio 44146-1399
U.S.A.

Telephone: (216) 464-4000
Fax: (216) 464-5629

Wholly Owned Subsidiary of Health O Meter Products, Inc.
Incorporated: 1968 as North American Systems, Inc.
Employees: 993
Sales: $174.13 million (1995)
SICs: 3639 Household Appliances, Not Elsewhere Classified

Company History:

Best known for its pioneering and market-leading automatic drip coffeemakers, Mr. Coffee, Inc. also manufactures iced and hot teamakers, coffee filters, and other small household appliances. In the late 1980s and early 1990s, the company hoped to capitalize on its well-known brand name through new product introductions. In 1992, Mr. Coffee launched the Potato Perfect potato baker, a countertop appliance that gave two potatoes oven-baked flavor and texture in half the time of conventional baking. Other new product introductions followed in rapid succession: the Mr. Coffee Juicer (1992); The Food Dehydrator by Mr. Coffee (1993); and The Breadmaker by Mr. Coffee (1994), and the Mrs. Tea hot teamaker (1995). By 1995, new products contributed about one-third of Mr. Coffee's total annual sales of $174 million. Privately held from its inception until 1987, the company thrived in the late 1970s and experienced agonizing losses in the late 1980s. Mr. Coffee endured a leveraged buyout and two significant changes in ownership before being acquired by Health O Meter Products, Inc. in 1994. Notwithstanding its difficulties, Mr. Coffee brought two important, yet intangible, assets to the table: its extremely well-recognized brand name and its highly praised distributor network. The new parent hoped to parlay those strengths to the benefit of its Health O Meter and Pelouze brand scales.

Mr. Coffee's odyssey began in 1968, when Vincent G. Marotta, Sr., and Samuel Glazer founded North American Systems, Inc. Friends since high school, the two had owned and operated a real estate development company since 1949. Launched with a $500 loan from Marotta's father, the pair's Glazer-Marotta Co. had started out as a lumberyard, then began building garages in the car-crazed post-war era and moved on to residential and commercial construction in the 1960s. But when the lending climate went sour in the late 1960s, the partners sought a new business interest.

Glazer and Marotta started North American Systems (NAS) as a coffee delivery service. According to a December 1983 biography in Cleveland Magazine, Marotta came up with the idea for the Mr. Coffee automatic drip coffeemaker "in 1970 while recuperating from an operation on a benign brain tumor." The key to his appliance was the water: it percolated through the coffee grounds at 200° Fahrenheit, as opposed to the boiling water that roiled through grounds in the traditional percolator. Marotta enlisted the talents of two former Westinghouse engineers, Edward Able and Erwin Schulze, to handle the technological aspects of the product's development. Although Marotta would later bill himself as the inventor of the automatic drip coffeemaker (and even compared his creativity to that of Michelangelo in a 1979 Forbes piece), Able held the patent on the original device. Able signed over his commission rights to NAS, and the company began production of the coffeemaker in 1972.

The Mr. Coffee machine was an instant hit; NAS sold one million units by April 1974 and seized ten percent of the American coffee-making business. Investment house Bear, Stearns & Co., Inc. later called the device "one of the first convenience appliances that revolutionized food preparation in the 1970s and 1980s." NAS acquired the Fairfield Coffee Filter Division of Tomlinson Industries, Inc., moved into that firm's suburban headquarters that summer, and established a factory in California in 1975. Growth continued throughout the decade, as evinced by employment that more than tripled from 300 in 1974 to 1,000 in 1975 and 2,300 in 1977.

Aside from its revolutionary brewing method, several factors contributed to Mr. Coffee's spectacular success. In the mid-1970s, Marotta hired baseball hero "Joltin' Joe" DiMaggio as the Mr. Coffee spokesman. The brand's close, enduring association with this widely-recognized sports figure helped establish an astounding 82 percent rate of brand recognition. Bear, Stearns analogized that "Mr. Coffee is to ADCs [automatic drip coffeemakers] what Gillette is to razors and Black & Decker is to power tools" in a 1990 report. The company's nationally-televised commercials helped establish the product as a textbook case of "forced distribution," where nationwide customer demand drove retail orders. In order to fulfill these requests, NAS developed a widely-praised national retail distribution system of commissioned sales representatives. It didn't hurt that potential rivals like General Electric, Proctor-Silex, Norelco, and Sunbeam didn't enter the ADC market until 1973 and 1974.

NAS and its star product peaked in 1979, when annual sales topped $150 million and Mr. Coffee mastered over half of the automatic drip coffeemaker market it had pioneered. According to an October 1979 Forbes article, NAS was producing 40,000 units each day.

Mr. Coffee's prosperity drew increased competition and market maturity in the early 1980s. Under pressure from competitors like Norelco, General Electric, Proctor-Silex, and at least 20 others, coffeemaker prices eroded while corporate expenses continued to climb. Introduced at a retail price of about $40, by 1982 the basic (and most popular) Mr. Coffee model sold for $16. Marotta was willing to launch brand extensions like coffee filters, Mr. Coffee Jr. (which made only two cups), and a water filter, but was reluctant to stretch his brand beyond coffeemaking. In October 1979 he told Geoffrey Smith of Forbes that "Coffeemakers are the main show. How can we go to other things when the coffee thing was so good to us?" But Marotta had changed his tune by the time Forbes reporter Anne Field caught up with him again in 1982, when Mr. Coffee was readying the $150 "Mr. Pasta" pasta-making machine for market. While this appliance would have been a hot product in the early 1990s, it was a flop in the early 1980s. The rebuff sent Marotta back to his core interest, but his attempt to extend the Mr. Coffee brand to a line of gourmet, decaffeinated, and pre-measured ground coffees was thwarted by intense competition and declining coffee consumption. The company continued to offer its branded coffees through the mid-1980s, but began to phase them out late in the decade.

As if competition and market maturity were not enough, Mr. Coffee was also beset with myriad legal problems in the early 1980s. The company showed vigilance against subtle trademark infringers who tried to sell "Mr. Automatic" and "Mrs. Coffee" coffeemakers and "Mr. Replacement" substitute carafes. But Marotta soon learned that the biggest threat to his company's success--and his hard-earned personal reputation--would come from within its own ranks.

Although Samuel Glazer continued to hold a half-interest in NAS, Marotta had taken center stage at the company. Having made his fortune, Marotta began to seek fame in the late 1970s and early 1980s. His "rags to riches" story won him a Horatio Alger Award in 1975, and his philanthropic endeavors earned tributes from several groups. But these accolades apparently didn't satiate what Edward Whelan of Cleveland Magazine called "a consuming drive...to seek honor and tribute at nearly any cost." By the early 1980s, this aspiration had manifested itself in a campaign to be appointed U.S. Ambassador to Italy.

Marotta found a willing aide in his quest for notoriety in Vincent J. Menier, head of NAS's Fairfield Filter Division. Menier orchestrated award dinners, organized fundraisers for the election campaigns of such influential national politicians as President Jimmy Carter and John Glenn, and ostensibly made appropriate contacts in support of Marotta's pursuit.

According to Whelan's December 1983 article, it seemed to Marotta that they were making all the right moves: Menier had apparently even garnered contacts with New Mexico Senator Pete Domenici and Presidential Appointments Secretary E. Pendleton James. But in 1982, Marotta discovered that Menier had enlisted at least two individuals to pose as those influential officials and convince Marotta that his appointment was forthcoming. This personal betrayal was only the tip of the iceberg. A subsequent investigation showed from 1979 to 1982, Menier had siphoned off $1.3 million from NAS, and spent about $900,000 of that "slush fund." Menier was found guilty of embezzlement in 1983 and sentenced to ten concurrent five-year prison terms. Although Menier contended that Marotta condoned the "slush fund," NAS's president was never proven guilty of anything more than a certain level of gullibility.

North American System's sales declined from about $150 million to less than $105 million during the early 1980s, as its share of the automatic drip coffeemaker market slid from over one-third to about one-fourth. During the latter years of the decade, industrywide unit sales of coffeemakers declined from about 13 million to less than 11.5 million. A 1988 article in Crain's Cleveland Business noted that the company was "lagging behind its competitors in product innovation and in trying new marketing campaigns." Even international expansions into Europe and Asia failed to turn the company around.

In 1987 Marotta and Glazer sold NAS to John "Jack" Eikenberg and McKinley Allsopp Inc., who kept the company private. A Connecticut native, Eikenberg had spent his entire 28-year career in the housewares industry, most of them at RevereWare Group, manufacturer of copper-bottomed cookware. The 15 percent stakeholder was quickly elected president and chief operating officer. The leveraged buyout piled $80 million in debt on the company and ushered in several years of turmoil. Before the year was out, Eikenberg renamed NAS for its most famous product, hired a new advertising agency (Meldrum & Fewsmith Communications, Inc. of Cleveland), and focused the company's efforts on product diversification with an emphasis on upscale markets.

In January 1989, Mr. Coffee launched its "first-of-a-kind" Iced Tea Pot. This appliance, which could brew and chill tea in less than ten minutes, helped the company achieve its first annual profit since 1986. The Iced Tea Pot also helped even out seasonal cycles by adding a summer-oriented product to the company's coffeemakers, which traditionally sold well during the holiday gift-giving season. It constituted about $19 million of Mr. Coffee's 1989 sales and was generating $52 million annually by 1990. Other products launched during Eikenberg's reign included: coffeemakers in a range of colors, espresso/cappuccino machines, coffee bean grinders, and the Mr. & Mrs. Coffee, an automatic drip coffeemaker that could brew two different kinds of coffee, decaffeinated and regular, for example, at the same time. In 1989, Crain's Cleveland Business reported that "The innovations at Mr. Coffee under Mr. Eikenberg, after many years in which the company made few new product introductions, impressed industry observers."

In the meantime, however, Eikenberg's emphasis on new product development combined with Mr. Coffee's heavy debt service to produce two consecutive annual losses totaling about $8 million and forcing the company to default on its debt obligations. Thus, while some of his ideas helped Mr. Coffee return to profitability, Eikenberg was ousted in early 1989.

He was succeeded by Peter C. McC. Howell, a 39-year-old British native who had served as Mr. Coffee's chief financial officer since 1988. Howell's advancement came just two months after McKinley Allsopp sold its majority stake in the company to a diverse group of investors. Building on Eikenberg's new product introductions, Howell increased sales by 60 percent, from $128 million in 1989 to $173 million in 1990; made an initial public offering of 59 percent of the company's stock to pay down high-cost debt; and quadrupled profits from $1.1 million to $5.7 million in the process.

Mr. Coffee slid back into the red in 1991 under pressure from mass marketers like Wal-Mart and KMart. These powerful retailers forced Mr. Coffee and other housewares manufacturers to make price concessions in exchange for their volume purchasing. Sales declined to $158.8 million in 1991, and the company suffered a $1.4 million loss.

Demand for coffee and coffeemaking products began to rebound in 1992 and reached its highest level in nearly a decade by 1994. By 1994, Mr. Coffee's market share had risen from a low of around 20 percent to 34 percent. The company's retention of 75 percent of the profitable iced teamaker market also contributed to its steadily rising sales and profits, which reached $175 million and $5.5 million, respectively, in 1993.

After two years of speculation that Mr. Coffee was ripe for takeover, the housewares company was acquired by Health O Meter Products for $186.5 million in June 1994. The purchase price included $134.3 million ($15.50 per share) for outstanding stock, $27.5 million to retire existing Mr. Coffee obligations, $12.5 million to retire Health O Meter debt, and $12.2 million in fees and expenses. According to HFD--The Weekly Home Furnishings Newspaper, one industry observer characterized the deal as "more of a LBO considering how the debt was restructured." In fact, the pricetag more than doubled Health O Meter's fiscal 1993 revenues of $67.6 million. The financing, which was coordinated by Health O Meter's largest shareholder, the Thomas Lee Co., included a $97.5 million loan from Banque Nationale de Paris, a $70 million bond offering, and a $19 million stock sale.

Howell assumed Health O Meter's chairmanship and chief executive office, while former Health O Meter leader S. Donald McCullough became president and chief operation officer. Health O Meter hoped the union would effect the distribution and marketing efficiencies necessary to compete in the hotly-contested small appliance industry of the 1990s. The combination consolidated the two companies' headquarters at Mr. Coffee's Bedford plant and reduced their work force by 14 percent, from a combined, pre-merger total of 1,159 down to 993 in fiscal 1995. Health O Meter appeared to be "getting its bearings" that year, considering its rather meager $712,000 net income on post-merger revenues of $267.89 million.

Mr. Coffee, Inc. History

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