July 1, 2005
By Barbara Young, Editor-In-Chief
Summertime may be the top season for marketing hot dogs, but VA-based Specialty Foods Group enjoys a year-round peak season thanks to its link with the Nathan’s brand.
Creating a new business in the meat industry fashioned from established acquisitions may seed such an enterprise, but fuel for growth and prosperity depend upon vision, insight, and the ability to not only plan for unforeseeable market forces but also to cope when they hit.
As the chief executive of Specialty Foods Group (SFG), a VA-based public company whose stock is traded in Canada, Tom Davis is no stranger to the successes and pitfalls of running a business dedicated to producing and marketing processed meat products. SFG, born in 1999 from a series of strategic acquisitions, is the brainchild of a team of experienced managers who earned their stripes at other meat-industry companies with whom they may now compete.
“We have a strong group of people with many years experience,” Davis says. “The depth of our management is a critical asset. We have an open-minded, progressive, and creative group. Ideas in our company are not stale and that drives change in our organization.”
SFG headed in a new direction with its Initial Public Offering (IPO) culminating in March 2003 under Davis, who previously held a key position at VA-based Smithfield Foods. Other initiatives involved the reorganization of business units and relocating company headquarters from Kentucky to Newport News, VA.
“We were rather fragmented in our Kentucky base in that top people were scattered in different parts of the country,” Davis says. “We have put a new team together and consolidated our corporate offices. We were in constant transition due to our acquisitions. We are done with that now and things are flowing rather smoothly.”
SFG also consolidated its manufacturing operation by reducing the number of plants from seven to four by shutting two and selling the other. Since 2002, SFG has invested $23 million to modernize and maintain its processing facilities and related equipment.
The company chose to issue its company shares in Canada because of higher stock valuation, which translates into higher dividends.
“We are an American company with capital from Canada,” Davis explains. “The size of our company made this the best fit for our purposes.”
That may be, but the aftermath of the decision negated a honeymoon period. “Going public took a year out of our [business] life,” Davis notes. “We were ready to move forward when we were hit by mad cow disease [bovine spongiform encephalopathy], and then pork prices took off last year adding insult to injury with raw material prices. Predictably, stock prices fell impacting our earnings. We began paying twice as much for raw material and we could not pass all of that along.”
Although Davis notes that SFG is not alone in battling such marketplace hits, he recognizes that getting through tough times calls for innovation and creativity.
“We needed to find new ways to attract consumers, coupled with enticements to generate higher prices for our products,” Davis explains. “We did that and have pushed through price increases enabling us to get pricing in line with raw material costs.”
Much of the recent margin gains came from the sale of Nathan’s hot dogs, which increased by slightly more than 18 percent in a 13-week period in 2005.
“Nathan’s is our biggest hot-dog brand generating the best return [on investment],” Davis reports. “Volume is up substantially.”
As a brand, Nathan’s is positioned as the best selling beef frank in New York City where it commands about a 10-percent dollar share and 9-percent volume marketshare. The entire line includes premium franks, corned beef, smoked sausage, and hamburgers. Recent line extensions include beef cheese franks, corn dogs — beef franks with a sweet batter dipped coating, and all-beef loop sausage in both kielbasa and smoked flavors. AC Nielsen ranks Nathan’s beef franks as the third-best seller in America in its category. The recent addition of cheddar cheese beef franks provided additional muscle to the Nathan’s hot-dog line. SFG also offers cheddar cheese beef sausage.
“Cheese dogs are not new market items, but they are new for us,” Davis notes. “We started producing them at the request of one of our big customers. All of our new products are performing quite well, however.”
Nathan’s joined the SFG family of retail brands in a 2000 acquisition of Specialty Meats Group Inc. (SMG) — a spin-off of John Morrell & Company. Other national brands from the same acquisition include Mosey’s and Liguria along with Scott Petersen, a regional brand. SFG’s other national brands include Swift Premium, Alpine Lace (both under license agreements), and Mickelberry’s. Field and Fischer’s are regional brands.
Nathan’s products are available in more than 6,000 retail outlets nationwide plus select foodservice venues including movie theaters. SFG also earned the right recently as the exclusive supplier of Nathan’s hot dogs at New York Mets and New York Yankees baseball games and Indiana Pacers basketball games.
Nathan’s brand equity dates back to 1916, when Nathan Handwerker first sold hot dogs, originally featuring natural sheep casing for a distinctive snap on first bite, at a Coney island, NY, stand for a nickel.
John Morrell brought the hot dogs to the retail arena in a retail package sales agreement with Westbury, NY-based Nathan’s Famous Corporation, owner of the signature product. SFG markets Nathan’s hot dogs to its retail customers in an exclusive licensing arrangement requiring it to produce the product for retail food stores and also supply franks to Nathan’s Famous Restaurants.
“We still have a lot of markets to go after with Nathan’s,” Davis says. “Foodservice is growing tremendously and the surface has barely been scratched.”
Although the Nathan’s line represents a sizable piece of SFG’s profits, its other branded products also contribute their share to the bottom line. The three major lines of business in 2004 — measured on a percent of sales basis — included Nathan’s, Field, and private label brands.
“Field is a strong regional brand of a full line of meats including franks, ham, bacon, lunchmeats and various other products,” Davis says, adding that distribution is strong in Tennessee at Nashville and Memphis and Louisville Kentucky. “Field and Fischer’s brands, which compete in similar markets, are either number-one or number-two in most categories in those markets. Our emphasis this year is on expanding marketshare of bordering markets to further-consolidate our leadership in these regions.”
Net sales for Nathan’s represented 23 percent of total 2004 sales and 18 percent in 2003. Meanwhile, Field contributed 21.8 percent of total sales in 2004 and 22 percent the year before. Private label accounted for 14.8 percent last year and 19 percent the previous year.
Total contribution translates into annual sales of more than $300 million with help from 1,298 employees and four manufacturing facilities strategically located throughout the company’s primary geographic markets in Chicago, Humboldt, IA, Owensboro, KY, and Williamston, NC. Dry sausage (salami and pepperoni) is produced in Humboldt. Meanwhile, the Owensboro facility produces the company’s widest assortment of products including bologna, lunchmeat, ham products, roast beef, corned beef, and an assortment of specialty products.
Now SFG is preparing for future growth with a definitive product-development plan whose cornerstone is the ethnic food category.
“We are not just talking Hispanic cuisine because we are taking the category to a different level with Cuban flavored products in addition to traditional Mexican fare,” Davis explains. “There will be no taco beef, but beef, pork, and poultry products targeting dinnertime.”
The goal, Davis adds, is to develop fully cooked meat entrées designed to reduce preparation time and kitchen labor costs.
‘We are not aiming for big business but rather to capture the niche consumer,” Davis says. “We like small business niches without much competition. Large, upscale regional retailers are our focus where we can be of more service than larger processors.”
To be sure, creating new business is an SFG strength.
“We are not interested in slugging it out with the big guys,” Davis concludes. “Margin growth is our goal, not volume growth. We like dollars rather than pounds. Now that we see the light at the end of the tunnel with respect to raw material prices, we are very optimistic about the future.” NP