Tone Brothers, Inc. History

Address:

2301 S.E. Tone's Drive
Ankeny, Iowa 50021-8888
U.S.A.

Telephone: (515) 965-2711
Fax: (515) 965-2801

Website: www.burnsphilp.com/au

Wholly Owned Division of Burns Philp & Company Limited
Incorporated: 1873
Employees: 1,000
Sales: $841 million (Burns Philp North American operations 1996)
SICs: 2099 Food Preparations, Not Elsewhere Classified

Company Perspectives:

The industrial/food service market is the fastest growing segment of the world food industry and provides us with opportunities for solid growth. Our research and development efforts, marketing and customer service initiatives are being directed toward achieving this.

Company History:

Tone Brothers, Inc. is the country's oldest spice company, as well as its second largest, behind industry leader McCormick & Company, Inc. Still based near Des Moines, Iowa, where it was established in 1873, Tone is noted for being the first company west of the Mississippi to sell roasted coffee (in the 1880s), and for introducing clear plastic, hermetically sealed packages with flip-top lids for spices (in the 1980s). By the late 1990s, Tone produced more than 250 varieties of seasonings and mixes. Under the ownership of Burns Philp & Company Limited in the mid-1990s, Tone also became the distributor of Durkee Spices, Fleischmann's Yeast, and Spice Islands products. Tone is also the leading supplier of spices to national warehouse club chains. Through the 1980s and 1990s Tone and its employees faced several challenges as the company passed through several owners, each of whom changed the company's focus and then quickly sold it. In the mid-1990s, Tone became part of the American operations of parent Burns Philp; in 1997 Tone came under the auspices of the newly created Burns Philp Foodservice division, existing as a brand name only.

A Pioneering Company in the Nineteenth Century

In 1873 Jehiel Tone, who was born in New York and had worked for a coffee and spice company in Michigan, convinced his brother I.E. Tone to head west with him and start their own business. The brothers came to Des Moines, Iowa, which had just become the state capital, and chose it as the home of Tone Brothers, Inc. At first, the company sold only coffee and spices, and the original staff consisted of Jehiel Tone, I.E. Tone, Aunt Mary, and "Mother." For the next century Tone would continue as a family business, even as it greatly expanded in size.

Within its first 25 years, Tone had set up a sales force that marketed coffee, tea, and spices. It had become the first company west of the Mississippi to sell roasted coffee, which before that time had consisted of whole green beans that were roasted over wood stoves at home. (The notion of selling ground roasted coffee beans came years later.) And it had become the first company in the United States to sell pure ground pepper, as opposed to the widely used blend that contained ground olive stones and lamp black for added color. Tone's also introduced the concept of individual packages for spices, and began to sell them in orange-and-black boxes.

The New Century Brings New Ideas

In the late 1890s, I.E. Tone's son, Jay E. Tone, Sr., graduated from the Massachusetts Institute of Technology as a chemical engineer. He brought this knowledge to the family business, and soon the company was selling extracts as well as coffee, tea, and spices. Lemon extract was the most popular of Tone's extracts. The company, still based in Des Moines, began to sell its products in other Midwestern states.

By the 1930s Tone's was importing coffee, tea, and raw spices from several countries. Jay Tone, Sr. became company president in 1939, and soon afterward he and his brother Fred introduced a new product: "pressure packed" ground coffee in cans, which eliminated the common problem of coffee spoilage. Jay Tone, Sr. remained president of Tone for 30 years and continued to work in his office regularly until the age of 96. In 1969, soon after his son, Jay Tone, Jr., assumed the presidency, the company's family ownership came to an end, when it was sold to Mid-Continent Bottlers, another Des Moines company. Jay Tone, Sr. died four years later, at the age of 100. He had been born the same year that Tone's was established, and lived to see its entire first century.

Tone Ground Up by New Owners

During the 1970s Tone's new owner, Mid-Continent Bottlers, initiated major changes in the business, while retaining a Tone family member as president (first Jay Tone, Jr., and then Jay Tone III). Coffee and tea sales were discontinued, and Tone concentrated completely on spices. While a new company headquarters was set up in Des Moines, annual sales remained stagnant at $4 million, and the new owners decided to change the company's old approach of dealing only with a few large customers. Instead, products would be sold in a wider market. In addition to selling to retail customers, a new division was established to market Tone's products to foodservice distributors and chefs.

But, as the 1970s closed, Mid-Continent Bottlers itself was caught up in the corporate acquisition frenzy of the times. In 1978 Universal Foods, of Milwaukee, bought Mid-Continent. Shortly thereafter, Tone found itself on the market again, and in 1979 it was acquired by a group of Des Moines investors. The first person outside of the Tone family to become president of the company was Hal Ashby.

Under this new ownership, sales at Tone jumped to $12 million within two years. The company began to make inroads in the area of technological innovation, such as its development of a process to cryogenically grind spices (freezing and grinding them at extremely low temperatures, up to 200 below zero) and its use of clear plastic, hermetically sealed spice containers with flip-top lids. Sales rose sharply to $25 million in 1984. The following year, another new president, F. Christopher Kruger, was named.

In the 1980s Tone's became acknowledged as a leader in the foodservice industry, as well as the leading spice supplier to warehouse clubs. Consumers became interested in new spices, particularly blends with an ethnic twist. Tone developed a new line of products, including fajita and taco seasonings and a 13-spice Italian blend. Its annual sales neared $50 million as the 1980s drew to a close, and it moved to more modern facilities in Des Moines. And once again Tone became attractive to a new buyer.

Sale to Rykoff-Sexton in 1989

In early 1989 Tone once again found itself in the hands of new owners, this time Rykoff-Sexton, Inc., a manufacturer and distributor of products for the food service industry. Rykoff-Sexton itself had recently been formed by the merger of S.E. Rykoff & Co. (in Los Angeles) and Sexton (in Chicago). The new conglomerate became heavily involved in mergers and acquisitions.

Under Rykoff-Sexton's ownership, Tone's operations once again were redefined. All sidelines, such as candy and pasta, were eliminated. A joint venture was formed with Devon Plantations, in India, to assure that Tone's would have a reliable source for the five million pounds of pepper it purchased each year. A new line of salt-free and MSG-free spice blends for health-conscious consumers was created. Tone's emerged as the supplier of virtually all spices to the growing number of warehouse clubs throughout the country. By this time, the company produced more than 250 different seasonings and mixes, requiring it to build a new, technologically advanced plant in Ankeny, Iowa, which was completed in 1994. Annual sales that year reached $90 million.

Sale to Burns Philp in 1994

At this point, employees of the increasingly successful Tone probably should not have been surprised to find that, once again, their company was to be sold to a new owner. In mid-1994 Rykoff-Sexton announced its plans to sell Tone to Burns Philp & Company Limited, an Australian leader in the manufacture of food ingredients. According to Rykoff-Sexton's president, Mark Van Stekelenburg, his company sold Tone's in order to focus on its core foodservice and distribution operations. Burns Philp, on the other hand, wanted to expand its industrial spice business, and acquired Tone along with several other food product businesses in the United States. These acquisitions made Burns Philp the world's second largest producer of spices, behind McCormick & Co., Inc. It set up a new North American division, and managing director Ian Clack clearly envisioned a race to make Burns Philp the world's largest spice company.

The transition from Rykoff-Sexton to Burns Philp parentage was not smooth. Shortly after the sale was announced, Tone had to recall almost six tons of ground nutmeg that had been contaminated with aflatoxin. Then, Burns Philp initiated arbitration proceedings against Rykoff-Sexton, claiming for reasons not fully disclosed that events occurred prior to the acquisition that had reduced Tone's value. This matter was not settled until late 1996.

Meanwhile, Burns Philp decided to merge all of its North American operations in Iowa, requiring immediate construction of yet another new plant at a cost of over $12 million, and resulting in the closing of facilities in Nevada and Pennsylvania that Burns Philp had just purchased. This new state-of-the-art facility, completed in 1996, was designed for production and distribution of Tone's products, as well as several for other newly acquired Burns Philp products, such as Durkee Spices and Fleischmann's Yeast. It also would serve as the research and development facility for all of Burns Philp's spices and food ingredients.

Spice Wars

Burns Philp definitely underestimated the response of the spice industry leader, McCormick & Co., Inc., to its new competitor. Suddenly Burns Philp found itself in the midst of a nasty situation that several analysts described as a spice war. McCormick began to pour millions of dollars into an attempt to keep retailers from stocking its competitor's spices. In 1995 it spent $210 million on "shelf space agreements," under which retailers would carry only McCormick products for a set time period (often several years). In return, the retailers would be paid "slotting fees" for carrying McCormick spices, which sharply reduced the actual price they paid for these spices.

The effect on Tone's sales and on Burns Philp was immediate and devastating. Tone's 1995 profits dropped 47 percent, from $58 million to $31 million. The year 1996 was a financial disaster for Burns Philp, with losses of almost $62 million largely attributed to the spice war. In that year's annual report, managing director Ian Clack acknowledged that the company had underestimated the competition in the international market, as well as the effort it would take to manage a worldwide food business.

By early 1997 it was obvious to Burns Philp that its acquisitions program had been a huge mistake. Only a little over two years after buying them, Burns Philp announced its intention to sell all of its North American spice operations, including Tone's, Durkee, Spice Islands, and other operations. In a May 1997 letter to Burns Philp shareholders, chairman Alan McGregor succinctly noted that, "we do not have the time or resources required to generate the returns necessary from the herb and spice businesses." Instead, Burns Philp would regroup and refocus on its still-profitable yeast business, using proceeds from the sale to reduce its debt and to take advantage of unspecified "current opportunities."

Burns Philp also announced that managing director Ian Clack, who had initiated the company's purchase of Tone's and its entry into the global spice business, had decided to retire. And, two days later, Burns Philp publicly disclosed that the U.S. Federal Trade Commission was investigating the spice industry for possible anti-competitive activity. Burns Philp executives claimed that the investigation centered on McCormick's use of "slotting fees," which had set off the spice war. However, they acknowledged that the FTC had subpoenaed Burns Philp's records as well.

Future Outlook

In July 1997 Burns Philp announced that Tom Degnan, former vice-president at Universal Foods Corporation (a global food company based in the United States), would become its new managing director. Degnan would bring with him extensive experience in global operations and in the yeast business, which Burns Philp hoped to make its core operation once it had sold its other holdings.

As of August 1997 no definite buyer for Tone's had stepped forward, although one analyst suggested that major food companies such as Nestle Food Co. or H.J. Heinz Co. might be interested. It was unclear whether Burns Philp would sell Tone's as part of a package of several companies or on its own, or perhaps it would reconsider the sale altogether. Moreover, Tone's was faced with another problem more far-reaching than business mergers and sales. In July 1997 pepper prices rose to their highest level ever, rising 70 percent since May alone. This increase was due to the combined forces of market speculation and (more seriously) drought conditions in Brazil and Indonesia, two of the major producers of pepper. This event was expected to cause a major long-term expense for a company that purchased several million pounds of pepper each year. Tone's, a well-known name in spices, faced an uncertain future.

Tone Brothers, Inc. History

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