Supply-Side Memo: A 'Bare-Naked' Success Story

Bryndon Synnott and Kelly Flately outside Stew Leonards' in Norwalk, Connecticut. (Photo: courtesy Bare Naked, Inc.)

Early one morning about five years ago, famed independent grocer Stew Leonard Jr., founder and president of the Stew Leonard's chain of superstores, came upon two young people--Brendan Synnott and Kelly Flately--waiting for him in the lobby of his Stew Leonard's Dairy store in Norwalk, Connecticut. The pair were holding a serving tray, which contained their Bare Naked brand granola, milk and a banana. They were waiting in the lobby to catch Leonard and pitch him on their homemade granola.

Leonard tasted the granola and loved it, talked briefly to the two young entrepreneurs, and ordered 20 cases of the hand-baked granola created by Kelly Flately for his store.

As mentioned, that was just five years ago. Late last year, Synnott and Flately sold their company, Bare Naked, to the Kashi division of food industry giant Kellogg Company in a $122 million dollar deal that also included Kellogg's purchase of natural foods company Gardenburger, which shared an investor with Bare Naked. Bare Naked is the number 1 selling granola brand in natural foods stores, and the number 2 selling brand in supermarkets.

In an article in today's New York Times, Stew Leonard says when he heard the two granola empire builders had sold Bare Naked to Kellogg's, and made bank on the deal, he was thrilled.

Just five years ago when the pair of struggling entrepreneurs got that 20 case order from Mr. Leonard, they had to spend the entire night baking enough granola just to fill the order. Just five years later, when they sold Bare Naked to Kellogg's last year, the company had sales of $65 million, and was growing by double-digits annually.

As the Times' piece explains, the company became a local success story in Fairfield County, Connecticut. This is do in large part to the way the pair marketed their granola products: lots of personal product sampling in local grocery stores, word of mouth advertising, community-event support, and using humor to create their brand, first among the locals and then nationally.

That humorous, fun approach has been key to the company's success. For example, there's a huge sign outside their corporate headquarters building in Norwalk, that reads: "Do You Get Bear Naked?" Additionally, their website is packed with puns on the "Bare Naked" name, such as "Get Bear Naked" and "Live Bear Naked." They also sell "Bare Naked Gear" like 100% percent organic cotton "Live Bear Naked" Tee-Shirts and similar themed items like hats and sweatshirts.

By using local and community marketing techniques, as well as having a quality product, Bare Naked has built up much support in the towns where they make their granola and have their headquarters.

Of course, with the sale to Kellogg's there's a bittersweet taste in the mouth's of many locals (and it isn't from eating Bare Naked Granola), who've followed the pair's story and route to success. However, any bittersweet feelings about losing the company headquarters and the 90 jobs that go with it (Kellogg's plans to close the production facility), pale compared to the abundance of good will expressed locally for the two and their success.

For Kelley Flately, who created the granola, and Brendan Synnott, the marketing and sales chief who gained its distribution, there's some uncertainty as to what the future will hold for both of them as well. Both are under contract with Kellogg's until February 1 as part of the buyout deal, according to the Times' story. After that, they're on their own.

We aren't worried about them though. They should have enough Kellogg's money to put a roof over their heads for a bit while they figure out their next venture. There are second acts for entrepreneurs, especially for those who aren't afraid to work hard and get "Bare Naked" in the process.

Read the New York Times story by Jan Ellen Spiegel here.

Tuesday Talking Points Memo

A Big Week for Natural Products Company Acquisitions

Are industry giants Kellogg and Clorox igniting a new round of deals? We offer analysis and what we think is coming up for the rest of this year and next.

Food industry powerhouse Kellogg Co. reported today it agreed to buy two natural foods companies: Irvine, California-based Wholesome & Hearty Foods Co., parent company of Gardenburger, and Norwalk, Connecticut-based Bear Naked, makers of the top-selling brand of granola in natural foods stores, and the no. 2 selling granola brand in supermarkets.

Kellogg Co. said it paid about $122 million for the two companies. Wholesome & Hearty Co. had sales this year of about $47 million, and according to analysts, has been experiencing some serious financial problems. For example, in 1997 the Gardenburger brand had sales of about $100 million, more than half of its current annual sales. Kellogg Co. has annual sales of $11 billion.

Natural granola maker Bear Naked is a different story however. Analysts predict the company will have sales of about $20 million this year, up a whopping 160% from 2006. Bear Naked is only four years old. The company was launched in 2002 by two 23 year olds, Kelly Flaley and Brendon Synnott, who are counting their Kellogg Co. cash this afternoon. In addition to granola, Bear Naked markets oatmeal, cereals and trail mix.

In another deal, Oakland, California-based consumer packaged goods company Clorox said last week it's acquiring natural products company Burt's Bees for $925 million. The popular Durham, North Carolina-based natural personal care manufacturer expanded its products from natural foods stores into the mass market beginning in 2003 and had sales this year of $170 million.

Although Burt's Bees is a much older natural products company than Bare Naked, the company has interesting entrepreneurial roots as well. It was founded in 1984 by beekeeper Burt Shavitz and waitress Roxanne Quimbly, to initially market Shavitz's handmade beeswax candles. It branched out, adding soap, perfume and lip balm to its product offerings. By 2003 Burt's Bees was a multi-line natural personal care company with sales of $55 million.

In 1999 Ms. Quimbly bought out Shavitz's half of the company. She then turned around in 2003 and sold 80% of Burt's Bees to investment firm AEA Investors for $155 million. AEA expanded the natural product lines to supermarkets, mass merchandisers and other retail formats from its primarily natural food store base, and in four years grew the company's sales to today's $170 million. Clorox paid close to $1 billion for the company, demonstrating the promise for growth the company sees in Burt's Bees.

Burt's Bees is the first natural products industry acquisition for Clorox, marketers of such mass market brands as Clorox Bleach, Fresh Step Cat Litter, Glad Plastic Bags, Kingsford Charcoal Briquets, Hidden Valley Ranch Salad Dressing, KC Masterpiece BBQ Sauce, Brita Water Filters, and a number of other household cleaning, food and consumer products brands.

Clorox has been moving into the "green" or environmental market recently. It's launched a major marketing and PR campaign for its Brita home water filtration system, joining up with activist groups and others who are against the environmental aspects of bottled water. Clorox has been an active part of this coalition, which argues that plastic bottled water bottles are creating a huge environmental mess. This "bottled water backlash" is a well organized campaign, with members ranging from environmental groups to city officials and companies like Clorox, which wants people to buy and use its Brita system at home on their water taps rather than buy bottled water.

Clorox also has been researching the green cleaning and personal care products market at its large research facility in Oakland. One result of this research is that the company will launch a biodegradable, plant-based cleaning line named Green Works in September, 2008. This new line gets the company into the fast-growing green or environmental segment of the household cleaning products category. The Burt's Bees acquisition will position Clorox in the booming natural personal care products category as well as a major player.

Our Analysis

These two back-to-back acquisitions of three natural products companies by two major international consumer packaged goods companies isn't surprising. Although there has been a bit of a slow-down in such acquisitions over the last couple years, that slow down was more due to mass market companies not being able to find suitable natural products acquisition opportunities rather than any lack of desire on their part to buy them.

The two acquisitions, Wholesome & Hearty and Bare Naked, fit Kellogg Co.'s core business very well. They're small brands in terms of sales by Kellogg's standards but the company sees huge growth opportunities domestically and internationally in the mass retail market for both brands. Kellogg also has the international distribution network which will allow the company to rollout the brands into the mass market relatively rapidly. It also has the budget to be able to promote the brands in print and broadcast media, something the former owners couldn't afford to do.

Kellogg Co. isn't new to acquiring smaller natural foods companies and brands. It acquired the Kashi cereal brand some years ago for example and has expanded it from its primarily natural food store base when it bought the brand, to supermarkets, mass merchandisers and even drug stores, today. Kellogg Co. also has acquired--and grown--the Morningstar Farms, Worthington and Loma Linda vegetarian foods brands.

More Acquisitions: What We See Coming

Natural and organic product company acquisitions by large consumer packaged goods and food companies have had two spikes in the last decade. The first was from 1997 to about 2002. A major reason for this spate of activity was do to the fact that the U.S. federal government passed the draft USDA organic standards in 1997. This brought smaller natural and organic product companies to the forefront of many large packaged goods and food company executives. Additionally, in 2002 those draft standards were implemented as federal law, creating a second wave of such acquisitions until about 2005.

The chart above shows many of the major acquisitions of organic products companies by major food and consumer packaged goods companies over the last ten years. The chart was created in July, 2007 by Dr Phil Howard, professor at the University of Missouri. The charts depicts only organic product company acquisitions, and not natural product, but it provides a pretty good overview of the landscape none the less. (You can view a larger version of the chart here.

From 2005 to the present, acquisition activity has been fairly slow. We believe that's about to change. We see the Kellogg Co. and Clorox acquisitions as not mere aberrations. Rather, we see these purchases as the beginning of a new spate of large mass market acquisitions of natural products companies. The mood was set in part earlier this year with the Whole Foods acquisition of Wild Oats and the sale of specialty foods distributor Millbrook to natural products distributor United Natural Foods, Inc. Although one is a retail acquisition and the other a distributor, both are major natural products industry players. They lubricated the acquisition wheels in the industry as a whole, if you will allow that mixed metaphor.

Whats next? We know of a number of large food and packaged goods companies that currently are looking hard for natural products company acquisition targets in the natural and organic foods categories and the natural and organic personal care and household cleaning categories. We also know of a number of natural products companies that are looking to be bought if the deal is right. It takes two to tango.

For example, in the food sector, Heinz, General Mills and Kraft (in addition to Kellogg) are all very interested in buying smaller natural and organic foods companies that fit their strategies. All three of these companies already own numerous natural and organic foods brands and have made major commitments to the category.

Clorox Co. isn't alone in wanting to get into the natural cleaning products and personal care markets either. Colgate, Kimberly Clark, Proctor & Gamble and a few others are all launching major green efforts and plan on developing (and likely acquiring) new green product lines for what their research shows them is the key emerging market in both categories. In many cases it's much easier for these companies to buy a small natural products company and then grow it through their vast distribution resources than it is to create a brand from the ground-up. Such acquisitions also are good ways to get a quick education in the category as a way to speed-up the learning curve so these huge companies can then start producing their own brands internally.

We don't have a crystal ball, nor are we in the business of predicting. However, we are fairly good at reading trends, based on observation and solid research. What we believe therefore is that these current acquisitions by Kellogg and Clorox will usher in a period of more active acquisitions of natural products companies by major international and national food and consumer packaged goods companies.

This buyout activity won't be overly dramatic for the rest of 2007, as we're entering the Thanksgiving and Christmas holiday season, a time when deal-making of any kind tends to fall off to hear-nothing. However, barring a serious recession or other similar global or U.S. economic meltdown, we see 2008 as being a year in which--like the Kellogg and Clorox deals this week--more large, mass market consumer packaged goods companies gobble-up smaller, natural products companies, as they increasingly realize the significance that the fast-growing natural and organic categories can have to the futures of their companies' success.