445 State Street
Fremont, Michigan 49413-0001
Telephone: (616) 928-2000
Fax: (616) 928-2408
Wholly Owned Subsidiary of Sandoz Ltd.
Incorporated: 1901 as Fremont Canning Company
Sales: $1.26 billion
SICs: 2032 Canned Specialties; 2361 Girl/Children's Dresses & Blouses; 3069 Fabricated Rubber Products, Not Elsewhere Classified; 3089 Plastics Products, Not Elsewhere Classified
A longtime giant of the baby food industry, Gerber Products Company enjoys a solid reputation as the largest supplier of baby products in the world. Gerber has dominated the baby product market in the United States since its introduction of the first commercially successful baby food in 1928 despite serious and recurrent competition, such public relations crises as the glass scares of 1984 and 1986, and several failed diversification strategies. In 1994 Gerber was purchased by the Swiss pharmaceutical company Sandoz. The management of both companies planned to use the parent company's financial backing and international marketing expertise to make Gerber products as popular and profitable abroad as they are at home.
Early History as a Canning Company
Gerber traces its origins to the Fremont Canning Company, a small packager of peas, beans, and fruits in rural Michigan begun by Frank Gerber and his father in 1901. At that time, Gerber also served as a partner in his father's tannery. When the tannery closed in 1905, Gerber focused all his efforts on building the canning company. By 1914 he had expanded his plant to permit year-round production. Three years later, with the death of his father, Gerber became president of the company and saw its sales exceed $1 million for the first time. Following a brief postwar dip in profits, Fremont Canning experienced steady growth during the 1920s.
By 1926 Frank Gerber's son Daniel had risen to assistant general manager of the company. A year later Daniel's wife, Dorothy, made a suggestion: that Dan persuade his father to begin manufacturing and selling strained baby foods in order to end the tedious chore of cooking, mashing, and otherwise preparing solid foods for infants. Frank and Daniel undertook extensive preliminary research before launching the concept, thoroughly testing the products, contacting nutrition experts, distributing thousands of samples, and conducting follow-up market research interviews. The baby food line was introduced successfully in 1928, and the Gerbers' careful implementation of the idea, relying on both professional and public endorsement, established the foundation upon which the present-day business rests.
The key to Gerber's successful marketing plan for baby food was an advertisement placed in Good Housekeeping, which enlisted mothers of young children to participate directly in a coupon redemption program. The introductory offer--six cans of Gerber's soup and strained vegetables for $1.00 and the name of a favorite grocer--stressed the nutritional and time-saving value of Gerber's foods and sought to generate enough responses that the canning company could offer proof to grocers of the new demand for stocking baby food on their shelves. The campaign was overwhelmingly successful, resulting in national distribution within six months and first-year sales of 590,000 cans, with gross revenues of $345,000. In effect, the Gerbers had created a new industry, served previously only by pharmacists, and then only under special circumstances and at a high cost to the consumer. (Pharmacies typically priced 4.5 oz. cans at 35 cents each. The Gerbers, through mass production and marketing, were able to sell their cans at just 15 cents each, which was still a premium price compared to the cost of adult foods, but was nonetheless well within the reach of the average American household.)
The company's monopoly on the market did not last long. By 1935 more than 60 other manufacturers had introduced their own vitamin-rich, pressure-cooked, sealed baby foods. However, Fremont Canning held its commanding lead because of the widely held and well-earned perception that the Gerber name was synonymous with quality and expert-backed research. In addition, no other company possessed a logo approaching the appeal of the "Gerber Baby," which was already famous; or a research and education department that flooded the market with useful pamphlets on parenting, feeding, and child psychology; or such a model spokesperson as Dorothy Gerber, whose newspaper column "Bringing up Baby" held sway with thousands of mothers nationwide. During the difficult years of the Great Depression, the Gerbers underscored their strength and vision for the future by implementing a state-of-the-art agricultural program, expanding into the Canadian market, doubling their line of foods, and topping $1 million in annual sales.
An Industry Leader by the Mid-1900s
The 1940s marked the full maturation of the baby food producer. By 1941 the company, which was meeting a demand for a million cans of baby food each week, was renamed the Gerber Products Company. Two years later the company abandoned production of adult foods altogether and opened a second baby food plant in Oakland, California. Given the post-World War II baby boom, Gerber's timing could not have been better: by 1948 it was poised to channel all its resources toward satisfying a domestic demand that had swelled to two million cans daily. That same year, the company adopted its trademark slogan: "Babies are our business ... our only business."
The 1950s saw the addition of three new plants--in Asheville, North Carolina; Rochester, New York; and Niagara Falls, Ontario--and an official changing of the guard that occurred with the death of Frank Gerber in 1952. Under the leadership of Dan Gerber, the company embarked on a new mission of expansion and diversification. Highlights of this era, which extended until Gerber's relinquishment of the CEO position in 1971, included the launching of the Gerber toy line in 1955, a listing on the New York Stock Exchange in 1956, the opening of a Mexican subsidiary in 1959, and the introduction of a large line of baby-related products in 1965. At the time of Daniel Gerber's death in 1974 the company could boast that it was the world's largest baby-food manufacturer, with sales of $278 million and an enviable domestic market share of nearly 70 percent. This was all the more remarkable since Gerber Products was just concluding a five-year price war with its competitors, at the beginning of which it held only a 53 percent share.
Competition and Other Challenges: 1970s--80s
Ironically, at this high point the company had amended its slogan to read simply, "Babies are our business," a reflection of the company's slow drift away from the formative philosophy of the 1940s. In 1977 the company faced down a major threat when Anderson, Clayton, and Company, a food products firm based in Houston, launched a serious takeover attempt. Fortunately, the probability of a long legal battle dissuaded Anderson from further action and preserved Gerber's independence. Within two years, Gerber began in earnest a major campaign of diversification--in part to offset expected declines in birth rates--with the acquisition of CW Transport, a freight carrier based in Wisconsin. Although furniture, toy, and other subsidiaries followed, by 1989 Gerber had divested itself of many of these fringe ventures in order to refocus on its more profitable baby food, baby care, and clothing lines.
Perhaps the most serious threat to Gerber during the 1980s arose not from its broad policy of acquisition but from the public relations crises of 1984 and 1986. Gerber responded to the first of these two crises--involving reports alleging the presence of glass fragments in jars of baby juice--by recalling some 550,000 jars in a 15-state region. This cautionary action was viewed favorably by the public, and financial damage incurred by the company was limited to only a short-term, 4 percent drop in sales. The second glass crisis--which, like the first, sparked investigations that ultimately exonerated Gerber--involved some 645 complaints spread over 40 states. This time Gerber, headed by William L. McKinley, chose to remain silent and to take no action other than offer its cooperation with federal investigators. The decision proved unpopular and contributed at least in part to a drop in profits from $69 million in 1985 to $54 million in 1987; McKinley departed shortly after the resolution of the glass scare and was replaced by Leo D. Goulet.
Goulet's sudden death in 1987 forced the company's board of directors to seek new management from outside the company. Their search culminated in the hiring of David W. Johnson, who was perceived by many as a much-needed antidote to the company's apparent lack of direction and vitality. Johnson's aggressive reemphasis, through advertising and product development, on Gerber as a major food company resulted in a 46 percent improvement in earnings from 1987 to 1988. However, with Gerber at the threshold of $1 billion in annual revenues, Johnson left the company to become CEO of Campbell Soup. Johnson's replacement, former Carnation senior vice-president Alfred A. Piergallini, effectively sustained the Gerber reorientation through a "superbrand" development and marketing strategy, most notably with the introduction of the 16-product Tropical line of baby foods in 1991 and the 23-item Gerber Graduates line in 1992. As Piergallini wrote in the company's 1991 annual report, "Our ability to offer food, clothing, and care items for children from birth through three years of age under a single major brand sets us clearly apart from our competitors. We will leverage this advantage by expanding into new channels of distribution domestically and, over time, internationally, through the development of an infant and children's category approach for our retail customers." In 1991 Gerber entered foreign markets including the USSR, Thailand, Brazil, Chile, and Sweden, and in February 1992 purchased 60 percent of Alima, S.A., a Polish producer of food and juices. Of special significance to Gerber was the fact that although 98 percent of the world's births occur outside the United States, only 10 percent of Gerber's sales derived from this still largely untapped market.
The 1990s and Beyond
Curiously, although 1992 marked a record year of sales and earnings for Gerber, punctuated by a strong performance of its insurance subsidiary and a prudent streamlining of Gerber Childrenswear, the company approached 1993 with uncertainty. Since July 1992 Gerber had been attempting, unsuccessfully, to sell off Buster Brown Apparel, a once-profitable supplier of high-fashion clothing that had shown a trend toward declining sales. More importantly, Gerber was experiencing heavy competition in the form of a "discounting blitz" from H. J. Heinz Co. and Ralston Purina Co.'s Beech-Nut unit, which was undercutting Gerber's prices by as much as 28 cents per jar. Although the price-cutting storm had shown signs of abating by the end of 1992, Gerber's stock nonetheless suffered in December due to lowered earnings and food sales volume estimates for fiscal 1993. Commentators noted that Gerber might also have difficulty recapturing its baby food market share, which had fallen in September to 67.6 percent.
Gerber redoubled its efforts to vigorously promote itself both at home and abroad. In January 1994, Gerber announced a licensing agreement with Toy Biz, Inc., a partially owned subsidiary of Marvel Entertainment Group, to develop a line of toys and electronics for infants and toddlers. Gerber also sought to raise awareness of infants' nutritional needs with the help of a $15 million marketing campaign for Gerber Graduates, a line of foods for children older than fifteen months. Argued Piergallini: "U.S. consumption of baby food begins at about 5--6 months of age and falls off at about 16 months. This is not good. Babies' special nutritional and developmental needs are not met with adult foods and breast milk or formula alone." Although this claim was met skeptically by nutritional experts and many parents, the Graduates line generated revenues of $58 million in 1994, more than doubling its sales from the year before.
Nevertheless, analysts urged a takeover: Gerber, they reasoned, had expanded as far as it could domestically and needed the clout of a multinational parent to move effectively into international markets. Gerber agreed. After months of shopping for a suitable buyer, in May 1994 Gerber announced that it would be purchased by Sandoz Ltd., the Swiss pharmaceutical giant, for $3.7 billion. Gerber employees were relieved to see the company go to an international firm with minimal presence in the United States, rather than to RJR Nabisco or other U.S.-based firms that were rumored to be interested, as an international firm was considered less likely to effect consolidations that would result in huge job losses. Indeed, less than 100 employees were displaced by the acquisition. Some critics considered the purchase price for Gerber high at $53 a share, or 53 percent above the going price for Gerber stock, and 30 times Gerber's annual profit. "These are the highest acquisition multiples seen in the industry for ten years," said Robin Campbell, a London analyst for CS First Boston. "They're stratospheric."
Analysts also cautioned that the Sandoz/Gerber alliance was not necessarily a perfect match. Sandoz, which is primarily known for its pharmaceutical and chemical products, had limited experience in the nutritional arena. In addition, international growth could be a struggle for Gerber because parents outside the United States are frequently wary of pre-packaged baby food. While American parents consume about 49 dozen jars of baby food per birth per year, Japanese parents consume five dozen, Taiwanese parents four dozen, and Polish parents one dozen. Finally, it was noted that by moving Gerber products aggressively into Europe, Sandoz could set off a price war in a very fragmented market.
In 1995 Gerber made its first entry into the adult nutrition market in the United States, announcing the introduction of Resource, a nutritional supplement drink for adults 55 and older. The product on which Resource was based was originally marketed by Sandoz to hospitals and nursing homes. While the product would not be marketed in the United States under the Gerber name, Gerber officials speculated that future collaborations between Gerber and Sandoz could include a Gerber-branded line of children's pharmaceuticals.
During the next two years Gerber's sterling reputation was challenged. In 1996 the Center for Science in the Public Interest disputed some of the health claims made by Gerber advertising. Later that year, under pressure from consumers, Gerber announced that it would stop adding starch and sugar to 42 of its baby foods, with another 80 to follow. The following year the Federal Trade Commission accused Gerber of distorting the results of a survey in which, Gerber had claimed, four out of five pediatricians had recommended Gerber products. In reality, most respondents to the survey didn't recommend any specific brand; of the few who did, four out of five did recommend Gerber. The company apologized for any confusion and stated that the ads had been pulled a year earlier in favor of a new campaign. Gerber's settlement with the FTC barred the company from making unfounded claims in the future.
Principal Subsidiaries: Alima-Gerber, S.A. (60%); Buster Brown Apparel, Inc.; Gerber (Canada) Inc.; Gerber Childrenswear, Inc.; Gerber Family Services, Inc.; Gerber France, S.A.R.L.; Gerber Life Insurance Company; Gerber Polska; Gerber Products Company of Puerto Rico, Inc.; Gerber Products Company Singapore (PTE.) LTD.; Productos Gerber de Centroamerica, S.A.
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------, "Strained Peas, Strained Profits?" Business Week, June 6, 1994.
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