McKee Foods Corporation

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McKee Foods Corporation

P.O. Box 750
Collegedale, Tennessee 37315-0750
U.S.A.
(615) 238-7111
Fax: (615) 238-7127

Private Company
Incorporated: 1957 as McKee Baking Company
Employees: 4,250
Sales: $525 million
SICs: 2051 Bread, Cake & Related Products; 2052 Cookies & Crackers; 2043 Cereal Breakfast Foods

Family-owned and operated, McKee Foods Corporation is the David to such Goliaths as Nabisco Brands, Continental Baking Co., and Interstate Bakeries. McKee Foods’ threat to these and other food giants is the niche of snack cakes, the driving force behind the company’s 400 percent growth in sales since 1982. This figure is all the more remarkable when one considers the company’s comparatively low profile, lack of full-scale national distribution, and cautious approach to expansion. The secret to McKee’s success is its Little Debbie snack cake line which, in 1992, accounted for 52 percent of all snack cakes sold in the United States. By comparison, McKee’s closest competitor, Ralston-Purina’s Continental Baking, posted only an 18 percent market share. Nutty Bars, Figaroos, Oatmeal Creme Pies, Caravellas, Golden Cremes, Devil Cremes, Swiss Rolls—some 38 varieties in all grace the regular Little Debbie snack cake line. McKee Foods also markets granóla bars, granóla cereals, and other bakery products under the Sunbelt label.

The company was born during the heart of the 1930s depression. A young North Carolina couple, O. D. and Ruth McKee, lost their savings after a bank failure and moved from their home in Hendersonville to Chattanooga, Tennessee, in 1933. O. D. found work as a bakery salesman, selling Virginia Dare Cakes from Becker’s Bakery, a local establishment, for five cents each. By 1934 O. D. had purchased his own delivery truck. He then found out that Jack’s Cookie Company, another Chattanooga bakery, was up for sale. O. D. cashed in his truck and he and Ruth became owners and operators of their first business. According to the company publication The Story behind Little Debbie Snack Cakes, the two “were ideal business partners because her cautious, conservative nature was the perfect complement to his risk-taking, adventuresome spirit.”

In 1935 O. D. moved the business to a new location and began making soft cookies and cakes. A year later they handed the business to Ruth’s father, Symon D. King, and returned to North Carolina to launch a new bakery. Located in Charlotte and named Jack’s Cookie Company like its predecessor, the business was highly successful. In 1946, O. D., who “always had a gift for innovation and automation,” built a new, state-of-the-art plant. During this period he also invented a soft oatmeal creme pie, “the company’s oldest continuous product,” according to Milling and Baking News.

The McKees sold their Charlotte business in the early 1950s and considered retiring. However, they decided instead to return to Chattanooga and manage the original Jack’s, now called King’s Bakery and owned by Ruth’s brother, Cecil King. In 1954 O. D. and Ruth purchased the company stock and the foundation for the McKee Baking Company was born. As he had previously, O. D. served as salesman, inventor, and production manager while Ruth operated as purchaser, personnel manager, and office manager. In 1957, when they outgrew the Chattanooga bakery, the operation moved to nearby Collegedale. It was at this location that the company established its headquarters and grew into a major private corporation. The original Collegedale plant was expanded more than a dozen times before a sister plant was added. In 1982 the McKee family launched a third plant in Gentry, Arkansas; a fourth followed eight years later in Stuarts Draft, Virginia. By this time Ruth had passed away and O. D. had transferred management to his sons, Ellsworth and Jack, while retaining his chairmanship.

In 1960 the company made history in two ways. First, after having led the industry in mass production of small snack cakes, it conceived the “family” pack of twelve individually wrapped cakes sold as one multipack unit. Second, it began affixing the Little Debbie brand, named after Ellsworth’s daughter Debra, to its products. Both Little Debbie and the family pack remain the company’s most significant generators of sales. A proliferation of snack cake varieties since that time—including the introduction of the Sunbelt line in 1981—has only fueled the momentum of these two landmark events.

By 1982 McKee Baking, with $130 million in sales, ranked 22nd in the industry, behind such billion-dollar giants as Continental and Interstate. Sales at the time were concentrated principally in the Midwest, Southwest, and West. By 1987 the company was able to boast annual sales growth of ten to 15 percent since the advent of Little Debbie, a product line that had now expanded to 32 varieties available in 41 states. McKee succeeded in conquering Continental’s Hostess, Interstate’s Dolly Madison, and other major national brands through its low pricing. According to Forbes writer William Stern, the feisty competitor sells its products through supermarkets for 50 percent to 70 percent less than other comparable items. More surprisingly, the company’s net margins after such heavy undercutting are approximately six percent, while the average for the industry is 5.5 percent. “What’s to stop McKee’s giant competitors from matching its low prices?” queries Stern. “Common sense.... They are giant corporations with giant overhead, while McKee is a family business. And, even with lower prices, it would take them years to get the economies of scale McKee gets from its overwhelming market share.” McKee maintains its low overhead by employing an independent distribution system and by expanding production only to keep pace with demand. Another advantage it has over the competition is the long shelf life of its naturally preserved products—some three to four times as long as that of Hostess Twinkies.

Since 1980 McKee has enhanced its market share by selling to convenience stores as well as supermarkets and by periodically rolling out national television campaigns, the most memorable of which was launched in 1985 featuring impersonator Rich Little. New products, including Little Debbie Fancy Cakes and the Little Debbie Snack Favorite line, also serve as powerful inducements to buyers, at least half of which are age 15 and under. Now named the McKee Foods Corporation, the company markets to 44 states and has achieved sales of $525 million. Under chief executive officer Ellsworth McKee, the Tennessee bakery has preserved its highly private identity and strong family management (many third generation McKees hold high positions within the company). Although investment houses and bakery competitors, especially Continental, have hoped for the family to sell, Ellsworth has responded: “There’s no way we can be forced to.” With its present highly profitable status as the largest independently owned company of its kind in the country, and with consumer demand and snack cake share still rising, there would be little sense in doing so.