Otis Spunkmeyer, Inc. History

Address:

14490 Catalina Street
San Leandro, California 94577
U.S.A

Telephone: (510) 357-9836
Toll Free: 888-ASK-OTIS; (888) 275-6847
Fax: (510) 357-5680

Private Company
Incorporated: 1977 as Otis Spunkmeyer, Inc.
Employees: 1,500
Sales: $200 million (1998 est.)
NAIC: 422490 Bakery Products Wholesaling; 422420 Bakery Products, Frozen, Wholesaling; 311821 Cookie & Cracker Manufacturing

Company Perspectives:

Otis Spunkmeyer is never in a holding pattern. The research and development team is always creating and testing new flavors, recipes and ingredients, always looking to enhance Otis Spunkmeyer products. We are dedicated to providing our customers with delicious baked goods.

Company History:

A rising contender in the foodservice industry, Otis Spunkmeyer, Inc. produces frozen cookie dough, muffins, bagels, brownies and other baked goods to more than 100,000 wholesale customers. Otis Spunkmeyer excelled largely because of its distribution system, comprising roughly 60 distribution centers and a fleet of freezer trucks. During the late 1990s, the company operated manufacturing plants in San Leandro, California; Pittsburgh, Pennsylvania; and Columbia, South Carolina. Internationally, Otis Spunkmeyer operated sales centers in the United Kingdom, Mexico, and in Canada. In 1999 First Atlantic Capital, Ltd., a private investment firm, acquired a majority interest in the company.

Origins of a Retailer Turned Wholesaler

Kenneth B. Rawlings and his wife, Linda, who opened their first fresh-baked cookie store in Oakland in 1977, founded Otis Spunkmeyer. For the name of their business, the Rawlings took the suggestion of their 12-year-old daughter, Kimberly, who came up with the Otis Spunkmeyer name, but their choice of what type of business to open was decidedly less whimsical. The Rawlings did their research, reading various marketing studies that consistently rated cookies as one of the most stable food items. Fresh-baked cookies, as a retail concept, also exuded another strength. They were highly popular, trendy food items, the appeal of which helped the Rawlings transform their Oakland store into a chain. By 1983, there were nearly two dozen Otis Spunkmeyer stores in operation, composing a thriving, fast-growing chain. Despite the signs of a regional chain about to spread its presence across the country, there were no more Otis Spunkmeyer stores opened after 1983. Rawlings was discouraged mainly by the high overhead costs that hobbled what otherwise would have been strident progress. His belief in the market strength of fresh-baked cookies, however, had not weakened, so he decided to approach the business from another angle. His strategic change in stance produced a far more powerful company than the retail chain that existed between 1977 and 1983.

Rawlings decided to abandon the retail market and moved headlong into wholesale. He sold the retail outlets and began marketing frozen cookie dough to hospitals, convenience stores, and corporate and school cafeterias, tapping into the demand for fresh-baked cookies by enabling his wholesale customers to tap into the demand. By 1985, the change in strategy had produced an entirely different sort of company than the Otis Spunkmeyer of the early 1980s. The company generated $8.5 million in sales in 1985, a total collected from the 5,000 wholesale accounts Rawlings had assembled. Nearly all of the company's customers were in California, with the balance divided between customers in Texas and Washington, but immediate plans called for penetration into the Midwest, and from there to regions in the eastern United States.

During the 1980s, Otis Spunkmeyer quickly emerged as one of the leaders in its industry, but the prolific rise of the company was not merely because of Rawlings's decision to switch from retail to wholesale. His move from one sector of the market to the other also came with an innovative approach to marketing frozen cookie dough to wholesale customers, making Rawlings an industry pioneer--later to be copied by competitors--and Otis Spunkmeyer distinctly different from other frozen cookie dough manufacturers. Rawlings supplied more than dough to his customers. His fresh-baked cookies program included the loan of a small, pre-set-temperature oven, pre-portioned frozen cookie dough, and branded displays and point-of-sale materials--the marketing tools that fueled impulse purchases of cookies.

By the end of the 1980s, the effectiveness of Rawlings's approach could be discerned by comparing the stature of Otis Spunkmeyer to its size in 1985. Sales were up from $8.5 million to $37 million. The number of wholesale customers had increased from 5,000 to more than 40,000. The true strength of the company, however, was not reflected in either of these remarkable increases. Underpinning the vitality of Otis Spunkmeyer was its distribution system, another unique characteristic of the company that distinguished it from its competitors. Unlike other frozen cookie dough manufacturers who relied on distributors to deliver their products, Otis Spunkmeyer operated a direct-store-delivery system (DSD) that gave it greater abilities in customer relations and service and greater control over the supply of its frozen cookie dough. Otis Spunkmeyer's DSD system included its own fleet of freezer trucks and, most importantly, a network of distribution centers that served as company sales centers. The effect of this distribution system on the company's success during the 1980s and its evolution during the 1990s was of paramount importance, representing the true strength of Otis Spunkmeyer. The first distribution center, fittingly, had opened during the company's turning point year in 1983, established in Sacramento, California. By the end of the 1980s, there were 41 distribution centers supporting the company's operation.

Product Diversification Begins in 1990

The value of Otis Spunkmeyer's distribution system was demonstrated during the 1990s, as the company used its established network to market products other than frozen cookie dough. The first such use of the company's vaunted distribution system occurred as the 1990s began, when Rawlings acquired Sweet Happenings, a $1-million-in-sales, Modesto, California-based muffin company, in January 1990. After the acquisition, muffins were fed into the same sales and distribution network that previously had marketed only frozen cookie dough. Otis Spunkmeyer tripled the sales volume recorded by Sweet Happenings management during the first year of muffin sales. By the end of 1991, muffin sales had swelled to $10 million, a total that was expected to jump threefold again after the construction of a new muffin plant in Dallas in January 1992.

As work was underway to introduce muffins into the company's distribution network, Otis Spunkmeyer added another product, acquiring a wholesale specialty coffee-roasting company based in Mountain View, California called Peter James Coffee Ltd. in 1991. The company began selling coffee in four flavors, with plans to introduce another 36 flavors at a later date, but while the development of these ancillary products was underway, Rawlings had not diverted his attention away from promoting the sale of Otis Spunkmeyer frozen cookie dough. In 1992, Rawlings made the ambitious leap into the international arena, introducing the company's frozen cookie dough into Mexico and Europe. Through a joint venture--Otis Spunkmeyer de Mexico--with a local pizza parlor operator, Otis Spunkmeyer opened a distribution center outside Mexico City in June. Overseas, the company leased office and warehouse space near Heathrow Airport in London, expecting to distribute cookie dough in England from its manufacturing plant in Pittsburgh. Once established in the United Kingdom, Rawlings planned to expand cookie dough distribution into mainland Europe, with muffins and coffee to follow, until eventually a manufacturing plant could be opened in Europe.

By the time international expansion was underway in 1992, Rawlings's confidence was at a new high. His sales goal for the end of the decade was nothing less than $1 billion, a lofty objective whose basis was predicated on the strength of the company's distribution system--an asset Rawlings was fully aware of. "We are no longer a cookie company," Rawlings proclaimed in the San Francisco Business Times in mid-1992. "We intend to be a distribution company that makes our own products and distributes them." There was ample evidence for adopting such a perspective. Muffin sales were expected to reach between $60 and $90 million in 1993, with further increases anticipated after another muffin manufacturing plant was opened, slated to be located in Atlanta. Similar growth was expected from the acquisition of Peter James Coffee, which had debuted as the company's newest product line, christened "Otis Spunkmeyer Classic Collection Coffee." The profits gleaned from funneling frozen cookie dough, muffins, and coffee through the company's DSD system had enabled the Rawlings, who shared adjoining desks at the company's San Leandro headquarters, to branch out into other businesses. The couple owned a burrito shop, a limousine shuttle, and their most visible property, 2 DC-3 airplanes that provided sky tours of the San Francisco Bay Area under the name "Otis Spunkmeyer Air." Each of the Rawlings was committed to expanding their business empire further. "We have no desire to take off and go to Tahiti," Linda Rawlings explained. Kenneth Rawlings underscored his wife's comment, saying, "Linda and I own 100 percent of the company, and that's the way it will be in our lifetimes. Our goal is to build a very big company."

At the time Rawlings articulated his goal to create a massive foodservice company, Otis Spunkmeyer already ranked as the world's largest manufacturer of gourmet frozen cookie dough, producing more than 2.5 million cookies per day. Sales, since the switch to wholesale in 1983, had grown at a robust pace, averaging 50 percent annual increases for the ensuing eight years. Rawlings wanted far more than being the world's largest producer of frozen cookie dough, however. He wanted to use the company's distribution network to market a host of other baked food products and thereby achieve $1 billion in sales, but the company had a difficult time making the transition from a fast-growing cookie dough producer into a diversified heavyweight in the foodservice industry. By the mid-1990s, sales had essentially flattened, despite steady increases in muffin sales. By the beginning of 1996, Rawlings was ready to look for help in lifting Otis Spunkmeyer to what he referred to as "the next level."

1996 "Baking a Difference" Marketing Campaign

Rawlings recruited a friend he had known socially for 15 years named John S. Schiavo. A senior vice-president of J&J Snack Foods Western Division, Schiavo joined Otis Spunkmeyer in March 1996, becoming the company's president and chief operating officer. Rawlings, who remained chairman and chief executive officer, saw his partnership with Schiavo as complementary, saying, "I have a management background. John knows production. He knows foodservice sales [and] brings several unique talents to the company." It was Schiavo's responsibility to identify growth areas for the concept Rawlings had created and to exploit the potential of the company's distribution system. "In watching the company," Schiavo explained, "I felt there were many opportunities that Otis Spunkmeyer had not fully realized. I felt the name Otis Spunkmeyer, in and of itself, was crying out for some fresh marketing."

Schiavo's influence on Otis Spunkmeyer materialized in the company's "Baking a Difference" marketing campaign, a program aimed at taking Rawlings's concept an evolutional step forward. The inspiration for the campaign struck Schiavo during his first few weeks with the company, when he was grappling with how all the pieces of Otis Spunkmeyer fit together and how the cohesive whole could be marketed with an integrated plan that maximized the company's potential. One facet of the Otis Spunkmeyer portfolio that Schiavo initially perceived as particularly incongruous was Otis Spunkmeyer Air. Rawlings had purchased the two DC-3 aircraft as a promotional vehicle for Otis Spunkmeyer, but Schiavo felt the two vintage planes did not fit into the core operation plan he was attempting to develop. His mind changed in an instant, however, one day while he was passing by photographs of vintage airplanes at Otis Spunkmeyer's headquarters. "I stopped dead in my tracks," Schiavo recalled in the January 1997 article "Cleared for Take-Off," "and said, 'Name. Plane,' and I thought about the Goodyear blimp ... maybe there's something we can do here."

The company hired The Laux Agency, a Wisconsin-based marketing firm, to flesh out Schiavo's idea into a creative and comprehensive marketing program. The Laux Agency took the image of the DC-3 and introduced a character, never to be seen, named "Otis Spunkmeyer," as the airplane's peripatetic pilot, perpetually in search of the greatest recipes and best ingredients in the world. Aside from developing an aeronautic theme that was extended throughout the Otis Spunkmeyer product line, The Laux Agency also developed new product ideas and marketing programs targeted to specific foodservice segments, such as schools, restaurant chains, and other wholesale customers. The "Baking a Difference" program was introduced to the Otis Spunkmeyer sales staff in November 1996 and to customers in January 1997, representing Schiavo's attempt to take the company "to the next level," which he identified as achieving an annual growth rate ranging between 15 and 20 percent. As part of the program launch, Otis Spunkmeyer introduced five new lines of cookies and a line of par-baked bagels marketed under the "Barnstormin' Bagels" banner. After this initial product expansion, the company planned to introduce at least two new major product lines annually.

Although Otis Spunkmeyer fell well short of Rawlings's goal to reach $1 billion in sales by the end of the 1990s, the company did achieve encouraging progress with its "Baking a Difference" program. Sales increased to $170 million in 1997, and by March 1998 the company had recorded double-digit sales growth every month since September 1996. Sales eclipsed $200 million in 1998, prompting company officials to aim toward doubling sales during the next three years. To achieve such growth, the company was concentrating on new baked goods, including breakfast pastries, rugelah, and miniature cakes, as well as looking to expand through the introduction of products to be baked on-premises for sit-down restaurants.

As Otis Spunkmeyer prepared for the future, hoping to exploit the strength of its distribution system, the company fell under new ownership and, with it, gained the financial wherewithal to actualize its expansion plans. In January 1999, First Atlantic Capital, Ltd., a private investment firm known for acquiring and expanding mid-size companies, acquired a majority interest in Otis Spunkmeyer. First Atlantic's majority stake led to management changes, with the private investment firm's managing director, Joseph Haviv, becoming chairman of Otis Spunkmeyer, Rawlings named vice-chairman, and Schiavo appointed as chief executive officer. As First Atlantic took charge of stewarding Otis Spunkmeyer's fortunes, it hoped to accomplish what Rawlings and Schiavo had been trying to achieve throughout the 1990s. The expansion of product lines and the possibility of future acquisitions provided the two avenues of potential growth as Otis Spunkmeyer entered the 21st century.

Principal Subsidiaries: Otis Spunkmeyer Air; Otis Spunkmeyer Plastics.

Otis Spunkmeyer, Inc. History

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