Keebler Foods Company

FOUNDED: 1853

Contact Information:

HEADQUARTERS: 677 Larch Ave.
Elmhurst, IL 60126
PHONE: (630)833-2900
FAX: (630)530-8773
EMAIL: attpost!klash@elves.attmail.com
URL: http://www.keebler.com

OVERVIEW

By leveraging the strength of its Elfin trademark Keebler Foods has become one of the giants of the snack-food industry. It is the second largest maker of cookies and crackers in the United States after Nabisco. Keebler is a major player in both domestic and institutional snack Markets, and its subsidiary, Bake-Line Products, is the leading manufacturer of private-label cookies and of cookies and crackers for the food service market. Keebler boasts a market share of about 25 percent in an $8-billion industry, in which companies compete fiercely with prices and new products and for valuable shelf space. The ubiquitous Ernie the Elf and "hollow tree" motif help to give Keebler a 98-percent brand-name recognition. It is estimated that 2 out of 3 households in the United States purchase its products.

COMPANY FINANCES

In 1997 total sales exceeded $2.0 billion, up from __BODY__.7 billion in 1996. Gross profit in 1997 was __BODY__.17 billion, up by $259 million from 1996. In addition to marketing initiatives, recent factors in Keebler's financial favor include decreased raw material and packaging costs, as well as streamlined manufacturing processes. Typically, Keebler does not pay dividends on its stock, which has been held publicly since early 1998. Rather, the company prefers to invest its earnings in growth and product development.

Keebler's initial public offering (IPO) in 1998 of approximately 13.5 million shares—with about three quarters sold in the United States—represented ownership of about 16 percent of the company. Upper management holds about 10 percent of the stock, and their annual bonuses are tied to its performance. Keebler is traded on the New York Stock Exchange, and options of Keebler stock are traded on the several option exchanges. The stock began trading at around 26 times expected earnings per share for 1998.

Long-term shareholder value is a central objective at Keebler. In 1998 the board of directors authorized the purchase of up to $30 million in shares of Keebler common stock in order to offset any dilution resulting from the exercise of management stock options. The company bolstered its board to complement the IPO, and Flowers Industries' vice chairman Robert Crozer was elected Keebler's first chairman.

ANALYSTS' OPINIONS

None of the proceeds from the IPO were received by the company, and shares in this mature industry (where 1997's growth was a mere 0.6 percent) are not likely to show the wild upward spurts that are more common in other industries, such as with cutting-edge software producers. Slow and steady growth are more realistic expectations as long as the company continues its trend of introducing viable new products. The company uses financial derivatives in order to hedge against increasing costs of ingredients, but not for speculatory investment purposes. Return on equity in 1997 was 25.7 percent

In 1998 Standard & Poor's raised its rating of Keebler's subordinated debt to double-'B'-plus from double-'B'-minus. The higher rating raised Keebler's corporate credit and bank loan ratings to triple-'B'-minus from double- 'B'-plus. The company's rating outlook is stable, and Standard & Poor's expects Keebler to hold its market position and to maintain a financial profile consistent with its current rating.

HISTORY

Keebler is one of the oldest American food companies. Its long lineage dates ultimately back to a small but popular Philadelphia bakery opened by Godfrey Keebler in 1853, and its larger-scale status dates back to 1927, when the United Biscuit Company of America was formed. By 1944 the United Biscuit Company of America comprised 16 bakeries from Philadelphia to Salt Lake City that made cookies and crackers under a variety of names that sold in all states excluding the West Coast. In 1966 the official company name was changed to Keebler Company. Product distribution was expanded to the West Coast in 1983. In 1974 Keebler was acquired by United Biscuits, one of the largest British food manufacturers. Keebler then operated under its own name as a unit of UB Investments U.S., Inc., the American holding company of United Biscuits.

By 1995, when the company was owned by UB Investments Netherlands B.V. (a Dutch subsidiary of Britain's publicly held United Biscuits Holdings PLC), Keebler was put up for sale. In 1996 Flowers Industries (an American baked-goods manufacturer), Artal Luxembourg S.A. (a private investment group), Bermore, Ltd., (another private investment group), and various members of Keebler's current management—all under the name INFLO Holdings Corporation—purchased it for $500 million. In 1997 INFLO was merged into Keebler Corporation, and the company's name was changed to Keebler Foods Company.

In 1996 Keebler bought G.F. Industries Inc.'s subsidiary Sunshine Biscuits, Inc. for approximately $172 million. Sunshine, then the third largest U.S. cookie and cracker maker, had had annual sales of approximately $600 million. At the time of the crucial acquisition, Keebler's president Sam Reed remarked, "A little Sunshine will make our Tree grow," referring to Keebler's trademark cartoon factory and headquarters.

STRATEGY

In 1996, citing increased competition, Keebler integrated the production, distribution, and administrative operations of its Keebler and Sunshine divisions. It shifted production among its plants and closed its facilities in Santa Fe Springs, California, and Atlanta, but did not discontinue any of its brands at that time. It also closed Sunshine's corporate headquarters in Wood-bridge, New Jersey. In 1998 plants were running at about 82-percent capacity.

With the purchase of Sunshine, Keebler started a plan to increase efficiency and to decrease costs. Cost-cutting measures included staff reductions throughout the company, the closing of various production centers, and the consolidation of distribution lines. These initiatives were completed in 1997. The enlarged entity has been able to lower its materials costs by buying in high volume.

INFLUENCES

In 1995 Keebler discontinued its frozen-food lines by selling the assets and stock of those wholly owned subsidiaries (e.g., Bernardi Italian Foods Co. and The Original Chili Bowl, Inc.) to Windsor Food Company. In 1996 it sold off its salty snack division, which had produced a wide variety of pretzels and snack chips. Much of those assets, including a factory in Bluffton, Indiana, were sold to Kelly Food Products, Inc. Such strategic moves have allowed Keebler to concentrate on competing with Nabisco in the more lucrative cookie and cracker markets. Any additional acquisition of a single competitor would be less significant than the purchase of Sunshine, so product development remains a key factor in expanding the company and increasing its revenues.

CURRENT TRENDS

Since the buyout from United Biscuits and the acquisition of Sunshine Biscuits in 1996, Keebler has focused on its distribution potential. Distribution is a critical step for any manufacturer, particularly at the national level, and Keebler is the only cookie and cracker maker besides Nabisco that has its own national distribution system. Keebler utilizes a "direct store delivery system" (DSD), through which nearly all U.S. supermarkets retail Keebler products. A 1,500-person field sales force visits 30,000 retail stores each week and tracks inventory and sales progress, as well as the appearance of merchandise displays. Keebler is thus able to monitor the products' development all the way down the line to the final point of sale, in addition to their viability as consumer items. DSD sales personnel use handheld computers. The company has incorporated the volume of Sunshine products into its DSD system, which has significantly reduced overhead costs. Keebler sees warehouse-club retailers, drug stores, and convenience stores as essential outlets for further revenue growth. In 1997, its deliveries to warehouse clubs, drug stores, and mass marketers such as Kmart and Wal-Mart increased by more than 30 percent each.

Keebler describes the cookie and cracker business as "impulse driven." Accordingly, it plans to continue its heavy advertising, including an introduction of television commercials for Cheez-It products, to help sustain its market share. Keebler spent close to $70 million in 1997 on advertising and "marketing programs," including a basketball-themed, instant-winner sweepstakes promotion for Cheez-Its. It reports that in-store displays increased by almost 40 percent between 1996-97.

For its Chips Deluxe brand chocolate chip cookies, Keebler has developed advertising aimed at children. Revenues for this brand, for example, increased by 25 percent following a promotional "Create Your Own Cookie Contest." In 1998 the company launched its "Rainbow USA" cookie line—cookies containing red, white, and blue candies—at the strategic time between Memorial Day and the Fourth of July in order to capitalize on patriotic feeling surrounding those holidays. Keebler's sales are seasonally influenced, with cracker sales being heaviest in the fourth quarter as a result of the concentration of food-oriented holidays. It has also used clever marketing to boost sales of Cheez-Its. In 1997 it was able to increase sales of the brand by almost 30 percent (to $213 million) by expanding the popular cracker's theme with new varieties and by improving the appeal of its packaging.

PRODUCTS

In recent years Keebler has narrowed the range of its food products. The company's output currently is limited to diverse ranges of cookies, crackers, ice cream cones, and pie crusts under such familiar names as Hydrox, Ready Crust, Wheatables, Hi-Hos, Zesta, Carr's brands, Town House Crackers, and Cheez-Its. The timeless Cheez-It is the largest-selling snack cracker in the United States. For this perennial favorite, Keebler makes its own cheese. In 1997 Keebler introduced 17 new products, including the successful Cookie Stix.

GLOBAL PRESENCE

International sales are not a significant part of Keebler's business, and historically the company has not pursued such markets very aggressively.

SOURCES OF INFORMATION

Bibliography

"Amex to Trade Options on Keebler Foods Company." PR Newswire, 29 April 1998.

Gottesman, Alan. "Got Cookies?" Adweek, Eastern Edition, 9 February 1998.

Husted, Bill, and Matt Kempner. "Keebler Co. to Shut Atlanta Bakery." Atlanta Journal and Constitution, 3 March 1996.

"Keebler Agrees to Sell Salty Snacks Brands." Supermarket News, 4 December 1995.

"Keebler Foods Company." Hoover's Online, 18 August 1998. Available at http://www.hoover's.com.

"Keebler Foods Company Announces Authorization of $30 Million Buyback Program for Common Stock." Keebler Foods Company Press Release, 10 March 1998.

"Keebler Foods Company Announces Initial Public Offering." Business Wire, 29 January 1998.

"Keebler Foods Company Announces Initial Public Offering." Keebler Foods Company Press Release, 29 January 1998.

Keebler Foods Company Annual Report 1997. Elmhurst, IL: Keebler Foods Company, 1998.

Keebler Foods Company Home Page, 18 August 1998. Available at http://www.keebler.com.

"Keebler to Merge Two Units." Supermarket News, 12 August 1996.

"Keebler's Subordinated Debt Rating Raised to BB+; Outlook Stable." Business Wire, 16 April 1998.

King, Sharon R. "Look Who's Leaping from That Hollow Tree." New York Times, 25 January 1998.

Molis, Jim. "New Jersey's Sunshine Biscuits Inc. to Merge with Keebler Co." Columbus Ledger-Enquirer, 6 June 1996.

Rees, Scott. "Not Such a Sweet Deal." Barron's, 26 January 1995.

"Robert P. Crozer Elected Keebler's Chairman of the Board; Five New Directors Elected to Expanded Keebler Board." Keebler Foods Company Press Release, 2 March 1998.

Schlegel, Jeff. "Sunshine Biscuits, Keebler Co. Parent Firms Said to Be Talking Merger." Asbury Park Press, 30 May 1996.

For an annual report:

write: Keebler Foods Company Corporate Office, 677 Larch Ave., Elmhurst, IL, 60126

For additional industry research:

Investigate companies by their Standard Industrial Classification Codes, also known as SICs. Keebler's primary SIC is:

2052 Cookies & Crackers