The Schwan Food Company

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The Schwan Food Company

115 West College Drive
Marshall, Minnesota 56258-1747
U.S.A.
Telephone: (507) 537-8517
Toll Free: (800) 533-5290
Fax: (507) 537-8226
Web site: http://www.schwansinc.com

Private Company
Incorporated: 1948 as Schwan's Dairy
Employees: 22,000
Sales: $4.5 billion (2005 est.)
NAIC: 311412 Frozen Specialty Food Manufacturing; 311520 Ice Cream and Frozen Dessert Manufacturing; 311813 Frozen Cakes, Pies, and Other Pastries Manufacturing; 454390 Other Direct Selling Establishments; 454113 Mail-Order Houses; 722310 Food Service Contractors

A highly successful frozen food company, The Schwan Food Company is a manufacturer, marketer, and distributor involved in multiple food distribution channels through four main operating units. Based in the parent company's home city of Marshall, Minnesota, Schwan's Global Home Service, Inc. boasts one of the most extensive home delivery operations in the United States, with a truck fleet exceeding 6,500 operating from nearly 500 sales and distribution centers spread across the nation. The trucks deliver to three million households in 48 states a variety of frozen foods under the Schwan's and Impromptu Gourmet brands, including ice cream, pizza, meats, seafood, ethnic specialties, breakfast items, and desserts. Schwan's Global Consumer Brands, Inc., based in Bloomington, Minnesota, markets and distributes branded frozen food products to food retailers in North America and Europe. In North America, this unit offers Tony's, Red Baron, and Freschetta frozen pizzas; Larry's potato side dishes; and Asian Sensations snacks and appetizers. Schwan controls about a quarter of the frozen pizza market in the United States, just trailing Kraft Foods Inc., the market leader. In Europe, this unit operates across the continent with a significant presence in the United Kingdom, France, and Germany. Its product range includes the Freschetta line of products as well as the Chicago Town line, which includes frozen pizza, entrées, desserts, wraps, and snacks.

Headquartered in Suwanne, Georgia, Schwan's Global Food Service, Inc. markets and distributes frozen foods to schools, universities, in-store bakeries and delis, restaurants, healthcare facilities, convenience stores, and other outlets. This business offers dessert items under such brands as Mrs. Smith's, Edwards, and Heidi's Gourmet Desserts, and has long been one of the leading suppliers of pizzas to schools in the United States. Other product lines include Asian and Mexican specialty items, appetizers, snack items, and ice cream. Schwan Food Company's manufacturing operations are handled by a unit called Schwan's Global Supply Chain, Inc., also based in Marshall. Seventeen production plants are maintained in the United States, the United Kingdom, France, and Germany, including one in Salina, Kansas, that the company claims is the world's largest frozen-pizza manufacturing facility, encompassing more than 500,000 square feet.

From the 1960s through the early 1990s, revenues for the parent company doubled virtually every three to four years, thanks to a wise acquisition policy and a continually expanding truck fleet and sales force. Sales growth has since been more moderate, but steady, although the company appeared to be picking up steam in the early 2000s under the company's first outside leader, M. Lenny Pippin. The driving force behind most of the company's long and healthy history was consummate entrepreneur Marvin M. Schwan, who left behind a $1.3 billion estate when he died in 1993. The Schwan family still owns the company.

FAMILY ENTERPRISE FROM THE
START

Marvin's father, German immigrant Paul Schwan, entered the ice cream business following World War I when he accepted a delivery job with a creamery in the southwest Minnesota town of Marshall. In 1944 the elder Schwan was financially able to launch his own venture. That year he bought half interest in a milk bottling plant, which happened to be adjacent to the Marshall Ice Cream Company, his most recent employer. The new firm, Neisen and Schwan's Dairy, was a family enterprise from the start, founded on personalized delivery service to area homes. At the age of 14, Marvin accepted a milk delivery route and supplemented his income on weekends by packaging ice cream bars, fudgesicles, and popsicles. Realizing that he could boost his productivity by 25 percent, Marvin purchased a bag-opening machine with his own funds; his father recognized both the advancement in productivity and Marvin's initiative and reimbursed his son for the capital expenditure. By 1948 the business, which both supported local dairy farmers and provided a valuable service to households, was well known and respected. With the help of Marvin's own investment, Paul bought out his partner, renamed the business Schwan's Dairy, and opened a new plant in town. Paul's wife, Alma, assisted in the daily operations by running the Schwan's Dairy Store, a small restaurant that offered home-cooked meals and Schwan's dairy products. Marvin left Marshall at this time to attend a two-year college, but returned on weekends to assist with the business. His father, meanwhile, had begun experimenting with surplus cream and perfected his own recipes for chocolate and vanilla ice cream, which he soon began manufacturing in 2½–gallon containers.

Marvin's decision to return full-time to the business in 1950 was perhaps the single greatest reason for the modest dairy's development into a national concern. After barely weathering a retail price freeze on milk during 1951 and 1952, Schwan's swiftly rebounded when Marvin discovered that he could undercut the comparatively higher ice cream prices of neighboring towns. Experienced in home delivery and alert to the current rise in freezer purchases by rural families, he had only to purchase a truck and establish a route. Within a year, he added a second truck to his delivery operation and quickly began to promote the Schwan's name as synonymous with the best ice cream, available in a dozen flavors, in southern Minnesota. Distinctive yellow trucks, a simple cursive logo, round returnable ice cream containers, and courteous drivers helped attract a remarkably loyal and longstanding customer base.

COMPANY PERSPECTIVES

We at The Schwan Food Company strive to enrich the lives of our customers by providing convenient and delicious foods suited for all occasions. This core purpose is achieved through the efforts of Schwan employees who share five common values: hard work, enthusiasm, integrity, growth and helping one another.

By adhering to these values, Schwan employees have helped the company to become a powerhouse in the frozen-food industry.

By the mid-1950s Schwan, faced with the realities of high overhead for his growing fleet and sales force, positioned the company for greater profits and a greatly expanded market by adding first a depot in the southeast section of the state and then a freezer-warehouse in the central region. Schwan's faced its second major crisis in 1957 when the Redwood River reached flood stage in Marshall, severely damaging equipment in the central plant and halting operations for four days. A federal disaster loan allowed the business to recover, which it did rapidly under Marvin, who had effectively become the company's general manager. By the early 1960s sales had easily surpassed $4 million and the full-time workforce had swelled from the original five to well over 100. The company met the challenge of another crisis in 1962, that of a nearby fire that threatened to destroy the plant's north wall and with it a ten-ton condenser, and redoubled its efforts to grow into a stable, thriving company. The site of the auto dealership that was destroyed by the fire was soon purchased by Schwan's to allow for an expanded headquarters and by 1963, round-the-clock operations were initiated, elevating ice cream production to some 11,000 gallons daily.

1963: FIRST ACQUISITIONS

In Self-Made: The Stories of 12 Minnesota Entrepreneurs, authors Carol Pine and Susan Mundale accord special significance to the year 1963 for the company. Aside from marking the 15th anniversary of the business as a solely owned family enterprise, 1963 was the year in which Marvin adopted a long-term acquisition policy to ensure that the company could experience aggressive growth while remaining profitable. Among the first acquisitions were a prepared sandwich company and a condensed fruit juice company. In 1964 the Schwan family established a new holding company, Schwan's Sales Enterprises, Inc., for their food manufacturing and delivery businesses. Two years later, Schwan discovered that one of his Wisconsin salesmen had begun carrying Roma brand frozen pizzas on his route. With the rising popularity of prepared pizza, the small label promised additional diversity and sales for the delivery company and so Schwan signed a contract to market the pizzas in a four-state region.

By 1969, the year of Paul Schwan's death, pizza sales were approaching those of ice cream and, consequently, Schwan was eager to expand his territory. Prevented from doing so by Roma, Schwan placed an ad in the Wall Street Journal disclosing his interest in purchasing a complete pizza manufacturing plant. He received a response from Salina, Kansas-based Tony's Pizza. After determining that the Tony's pizza recipe required improvement, Schwan acquired the company in 1970, made the necessary alterations, and then launched the division with a somewhat new marketing scheme: selling the pizzas via a special fleet of trucks directly to retail stores rather than chain warehouses. As in his home delivery routes, the emphasis was on providing the customer with quality, freshness, and service. Each driver was given the latitude to enhance sales for his route and profits for each route were tallied daily, weekly, and monthly.

The pizza acquisition proved a resounding success and fueled much of the company's growth during the 1970s, despite heavy competition from Jeno's and Totino's. Another turning point for the company came in 1974, in the wake of a devastating fire that destroyed the original ice cream plant, the corporate headquarters, and a distribution center. Schwan saw the tragedy as an opportunity to rebuild in a more suitable location and almost moved his business. Fortunately for the citizens of Marshall (25 percent of whom worked for him), Schwan decided to recommit himself to the community that had helped him to prosper. In 1975 the company began selling Tony's pizza to schools, and the following year it introduced Red Baron pizza for grocery stores' frozen food sections. By the end of the decade, Marvin Schwan had built his delivery system into a 1,000-truck fleet. Ever conscious of the bottom line, he converted the entire fleet to liquid propane gas at this time to combat the rising costs for conventional fuel. Finally, he ended the decade by diversifying beyond the food business with the acquisition of Syncom Magnetic Media, a computer tape and diskette manufacturer based in Mitchell, South Dakota.

KEY DATES

1944:: Paul Schwan buys a half interest in a Marshall, Minnesota, milk bottling plant from which deliveries are made to area homes.
1948:: Schwan buys out his partner, renames the business Schwan's Dairy, and opens a new plant in town.
1952:: Schwan's son, Marvin Schwan, begins home delivery of ice cream to area homes.
1963:: A long-term acquisition policy is adopted.
1964:: Schwan's Sales Enterprises, Inc. is established as a holding company for the family's food manufacturing and delivery businesses.
1966:: Firm begins delivering frozen pizza.
1970:: Schwan's acquires Tony's Pizza, a frozen pizza maker based in Salina, Kansas.
1974:: Devastating fire destroys the firm's original ice cream plant and its headquarters.
1975:: Company begins delivering pizza to schools.
1993:: Marvin Schwan dies suddenly of a heart attack.
1994:: More than 200,000 people in 28 states become ill from salmonella poisoning after eating contaminated Schwan's ice cream.
1996:: The Freschetta brand of bake and rise frozen pizza becomes a runaway hit following its U.S. debut.
2001:: Schwan's acquires Edwards Fine Foods, producer of frozen desserts.
2003:: As part of a major reorganization, the company changes its name to The Schwan Food Company; the Mrs. Smith frozen pies and desserts brand is acquired.

As Schwan's entered the 1980s, roughly half of its sales came from pizza. The remaining half came from its line of home-delivered products, which had expanded to include meats, frozen fish, bread, frozen fruit, and french fries in addition to a full line of dairy products. While the ongoing success of the latter half of operations was virtually ensured, the former, represented primarily by Tony's, was pitted against serious Minnesota rivals Totino's (acquired by Pillsbury in 1975) and Jeno's. Totino's, benefiting from the Pillsbury name and a large sales apparatus, led the national market share with 22 percent, followed by Tony's and Jeno's, each with approximately 13 percent of the market. The competition between the big three had been fierce for several years, and in 1981 Schwan's launched a serious attack on the number one position with a highly controversial ad campaign, which playfully hinted that the other leading pizza manufacturers employed a glue-like substance in their cheese while only Tony's contained 100 percent real cheese. Despite outcries from its competitors, Schwan's benefited from the exposure, and the campaign went on to win the top Minnesota advertising award of the year. However, 1981 was also the year in which the company sustained its greatest personal loss, the death of an employee and the injury of eight others following an anhydrous ammonia leak at the main plant.

EXPANDING INTO
INSTITUTIONAL PIZZA

By the mid-1980s, with sales approaching $500 million, Schwan entered the institutional pizza market and quickly carved out his own sizeable niche, thereby circumventing the need for competing head-to-head, at high cost, in the retail grocery market. Schwan had discovered that cheese surpluses were being delivered to the nation's public schools by the Department of Agriculture. He reasoned, correctly, that the schools would be willing to trade their allotments for discounted school lunch pizzas, to be manufactured by Schwan's with the government cheese. Schwan greatly strengthened his foothold in this new market with the acquisition in 1986 of his major school lunch competitor, Sabatasso Foods. In 1988 he established a virtual monopoly with the additional acquisition of Better Baked Pizza. In the meantime, another 1986 acquisition, that of the Minh Food Corporation, moved the company into the field of frozen Asian foods. During this same period of rapid growth, Schwan had instituted a portable pricing and inventory system that squeezed even greater profit margins from his home delivery business. As always, Schwan's intent was to maintain his business as a self-financing operation, ensuring the private company's longevity and eminent profitability.

In 1982, Pine and Mundale wrote that although "almost every other kind of home delivery system has gone the way of the dinosaur, Schwan's Sales Enterprises has grown and prospered." The statement remained just as true more than a decade later, due to Schwan's business acumen, the quality of his products, and, probably above all, the effectiveness of his drivers. Although the job of driving for Schwan's was notoriously rigorous, involving long hours and considerable physical labor, Schwan was known as an extremely fair boss and, with one-third of all executives drawn from the Marshall workforce, employee loyalty was strikingly high.

In 1992 Schwan's acquired two more companies, bringing its total to 12. One, Monthly Market, was a for-profit food cooperative catering to fundraising groups; the other, Panzerotti, was a stuffed pastry business. Although no annual revenues were disclosed with either of the sales, both businesses would likely benefit by their integration with the Schwan's delivery system. Among the other Schwan's businesses at the time was a pastamaker. Also by this time, according to a 1998 article in Minneapolis St. Paul Citybusiness, the company owned three leasing companies: Business Credit Leasing, established in 1979, and Manifest Group, founded in 1988, both leased office equipment; while Secured Funding Source was established in 1991 as a lessor of medical equipment. These firms formed the basis for Schwan's leasing arm, Lyon Financial Services Inc. In March 1993 Schwan's expanded its pizza business through the purchase of San Diego-based Chicago Brothers Frozen Pizza, makers of deep-dish pizza.

IN THE NEWS

The normally secretive company found itself much in the news in the mid-1990s. First, Marvin Schwan died suddenly of a heart attack in May 1993 at the age of 64. Marvin's brother Alfred took over as chairman, CEO, and president. Alfred Schwan had been the company's director of manufacturing in Salina, Kansas, where Schwan's had a pizza plant. He soon had to contend with a public relations and litigation nightmare following a nationwide outbreak of salmonella poisoning in September and October 1994, an outbreak eventually traced to contaminated Schwan's ice cream, which the company quickly recalled. An investigation by state and federal health authorities concluded that a tanker truck containing pasteurized ice cream pre-mix had not been washed out after previously carrying raw, unpasteurized eggs. Officials later estimated that more than 240,000 people in 28 states became ill as a result of eating the tainted product, a figure that company officials disputed as being eight times too high.

The company was cleared of direct wrongdoing in the case as it had purchased the pre-mix from a supplier and an independent trucking firm had made the delivery. Nonetheless, before officials allowed the ice cream plant to reopen in early November 1994, Schwan's had to agree to change some of its procedures. The company began using only company-leased "dedicated" tankers to truck in the ice cream pre-mix, began pasteurizing the pre-mix on its arrival at the plant, and began testing the pre-mix and the finished product for salmonella. It was also reported that month that Schwan's had paid out almost $1 million to thousands of customers who signed a legal release stating that they would not sue the company. In February 1995 a tentative settlement was reached in a class-action lawsuit whereby Schwan's agreed to pay from $80 to $75,000 to customers who became ill after eating the contaminated ice cream. The amount would depend upon the severity of the illness. Schwan's estimated in 1996 that the total number of people filing claims would be about 30,000. By that time sales of the company's ice cream products had returned to previous levels, indicating that it had survived the crisis.

In March 1995 Ken Noyes was named president and chief operating officer of Schwan's. Noyes, a 12-year company veteran who had previously headed the company's leasing operations and its foodservice division, became the first nonfamily member in the post of president. Also in 1995 Schwan's leasing operations expanded through the acquisition of Universe Leasing, a lessor of tractor trailers. The company made further inroads into the financial world in 1995 when it established Spectrum Commercial Services Inc., a Bloomington, Minnesota-based private lender offering alternative financing for companies unable to have all of their needs met by a bank or other traditional lender.

Right on the heels of the salmonella crisis came a family feud resulting in more unwelcome publicity. Marvin Schwan's will left two-thirds of his 100 percent holding in Schwan's Sales Enterprises to the Marvin M. Schwan Foundation, a funder of conservative Lutheran religious and educational causes. It also called for the company to purchase the foundation's shares after his death. Alfred Schwan and the company board approved a plan to repurchase the stock through payments totaling $1.8 billion spread out over 15 years, with a final balloon payment of $600 million due in 2009. Four children of Marvin Schwan filed a federal lawsuit in May 1995 against Schwan's, Alfred Schwan, and Larry Burgdorf, the latter two being trustees of Marvin Schwan's estate. The suit contended that the amount being paid to the foundation was inflated by more than $250 million and jeopardized the financial health of the company. The deal also restricted the heirs' ability to cash in their company shares until after the 15 years were concluded; by that time, the children feared that Schwan's would be reduced to a shell of its former vibrant self. They also contended that the trustees had unfairly changed their father's estate plan. Alfred Schwan and Burgdorf countered that they were merely carrying out Marvin Schwan's wishes and had created a deal that was best for the company and its family owners. In November 1997 a settlement was reached in the lawsuit. While terms were not disclosed, it was reported that the descendants of Marvin Schwan remained the owners of Schwan's and that the plaintiffs were allowed to sell some of their shares in the company.

In February 1998 Noyes became the third CEO in company history when he replaced Alfred Schwan in that position. Schwan remained chairman. Schwan's, back in its more familiar reclusive mode, was looking for growth overseas in the late 1990s. It had established itself as a market leader in the frozen pizza sector in Europe, having entered the U.K. market in 1989. Schwan's then in 1997 acquired La Roue du Pays d'Auge, a French maker of wood-fired pizzas as well as pasta. That year the company began selling its Freschetta brand of bake and rise frozen pizza in Europe, after the product was a runaway hit in the United States following its 1996 debut. Schwan's also entered the Malaysian market in 1997 when it began selling Tony's pizza there, and the following year the increasingly international company opened a new pizza plant in Osterweddingen, Germany.

Schwan's ended the decade with another change in leadership. In April 1999 Noyes abruptly resigned as president and CEO. According to the company, the departure came about because of "conflicting opinions between Noyes and board members regarding leadership direction." Alfred Schwan reassumed the CEO position on an interim basis while the firm conducted a national search for a new chief executive. In November 1999 M. Lenny Pippin was brought onboard as Schwan's fourth CEO. Pippin had nearly 30 years of food industry experience, having just served as president and chief executive of Lykes Brothers Inc., a privately owned family corporation with divisions in the food, agriculture, transportation, energy, and insurance industries. Alfred Schwan continued to serve as chairman of Schwan's.

DIVESTMENT, ACQUISITIONS,
AND RESTRUCTURING

Under Pippin, the early 2000s was a period of significant change at Schwan's. Late in 2000 the company sold its leasing arm, Lyon Financial Services, which had $1.1 billion in assets, to U.S. Bancorp for an undisclosed sum. The divestment both heightened Schwan's focus on its food businesses and freed up capital for growth. Proceeds from the sale were used to open a new research and development center in Marshall, to upgrade the company's distribution centers and manufacturing facilities, and for acquisitions. Schwan's became a leader in the frozen-dessert category via two deals. In 2001 the company acquired Edwards Fine Foods of Norcross, Georgia. A firm with annual sales of about $200 million, Edwards produced frozen pies, cheesecake, cake, brownies, and ice cream products for the foodservice and retail industries. Early in 2003 Schwan's paid $240 million in cash to Flowers Foods Inc. for the Mrs. Smith frozen pies and desserts brand, which had annual sales of approximately $350 million. In the meantime, sales of Freschetta rising-crust pizza increased smartly into the early 2000s, reaching about $200 million by 2002 despite stiff competition from Kraft Foods' DiGiorno brand. Also in 2002, Schwan's delivery business launched its first comprehensive Internet web site.

At the beginning of 2003 the company began a major reorganization. Schwan's various businesses were restructured into three main, standalone units: Schwan's Global Consumer Brands, Inc., focusing on retail and club-grocery sales; Schwan's Home Service, Inc., the core home delivery business; and Schwan's Global Food Service, Inc., concentrating on the foodservice channel. At the same time the company changed its name in order to emphasize its focus on food. Schwan's Sales Enterprises thus became The Schwan Food Company. Also in 2003, the company set a goal of doubling in size within five years, seeking to increase revenues from the approximately $4 billion of 2003 to $8 billion by 2008.

Early in 2005 Schwan Food had to recall more than 350,000 pounds of frozen food products, including egg rolls, tacos, and pizza twists, because of concerns that they might have been contaminated with shards of glass. That same year, the company revamped its frozen Asian foods line. Its Pagoda brand, which centered on Asian side dishes, was replaced by a new brand, Asian Sensations, with an emphasis on snacks and appetizers, a sector the company felt had more potential than that of side dishes. Acquisitions remained on Schwan's menu as well. Late in 2005 the firm acquired T&N Foods, Inc., a Montreal-based manufacturer of frozen pizza and bread products distributed through the private-label brands of supermarket chains and foodservice outlets in Canada and the United States. Next, in early 2006, Schwan Food bought Holiday Foods, Inc., a Hollywood, Florida-based maker of specialty, handmade hors d'oeuvres and canapés distributed to fine hotels and country clubs throughout the United States. Continuing its growth drive, Schwan in June 2006 opened a new, $15.9 million distribution center in Salina, Kansas, that had the capacity to store 6.8 million pizzas. Two months later, the company entered into an alliance with renowned chef and restaurateur Wolfgang Puck to begin developing a Wolfgang Puck line of frozen food products. Clearly, the Schwan Food Company was determined to take an aggressive, multipronged approach to meeting its goal of doubling its revenues.

Jay P. Pederson

Updated, David E. Salamie