New Gardenburger CEO wants to refine marketing strategy, boost its revenue
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The two cartoon characters starred in a 1998 TV commercial for Portland-based Gardenburger, part of a $16 million advertising campaign the meatless-patty company launched that year. The campaign's centerpiece was a $1.5 million, 30-second ad on the "Seinfeld" series finale, with Vern and Edna extolling Gardenburgers (rather than roast pig) as luau food.
The time seemed right for a big national marketing effort. Gardenburger was riding a wave of consumer interest in meat alternatives, sales were rising smartly, and the stock seemed solidly ensconced in the $10-$15-a-share range.
Meat alternatives are even bigger today than three years ago. But Gardenburger has fallen off the gravy train: Sales have declined. Market share is shrinking. The company is heavily in debt, and its stock - which closed at 86 cents Friday - has been booted off the Nasdaq stock exchange.
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"Some of the markets where the company took the Gardenburger product weren't ready (for it) yet, and no amount of time and energy was going to make them ready," said Wallace, who took over in January after leading Mauna Loa Macadamia Nut for six years.
And to lessen dependence on its namesake patties, Gardenburger is moving into other meat alternatives, such as, in October, a soy- and wheat-gluten-based "chicken" called Chik'N Grill.
While that's encouraging, said Peter Golbitz of Soyatech, a soyfoods consulting firm in Bar Harbor, Maine, Gardenburger will have to think outside the freezer case if it's to prosper.
"They've got to get away from the hockey puck," Golbitz said. "They just kept reinventing the patty, and now they've just reinvented the chicken breast. But they aren't thinking `What can we do to get in a completely different area of the store?' "
Outgrowing health-food stores
For decades, mock meats and other "natural" foods were the province of small health-food stores. No more. According to Soyatech, nearly $500 million worth of frozen and refrigerated meat alternatives were sold in the United States last year, the majority in supermarkets.
Sales of natural and organic foods are growing at double-digit rates, said Patrick Rea, research director of Nutrition Business Journal, a San Diego-based publication. Sales of conventional foods, on the other hand, are barely keeping pace with population growth.
Gardenburger grew out of the old natural-foods culture. Founder Paul Wenner developed the original mushroom-and-brown-rice patty for his Portland vegetarian restaurant, the Garden House. After it closed in 1984, Wenner started selling his patties to other restaurants; he formed Wholesome & Hearty Foods a year later, and took it public in 1992.
Surging public interest in healthful eating led the company, which renamed itself after its main product in 1997, to stake its future on a major marketing blitz in the mid- to late 1990s. The strategy would have been familiar to any dot-com investor: Spend heavily on marketing, get a lot of people to try your product, build market share and worry about profits later.
"Establishing the equity of the Gardenburger brand is our highest priority," wrote Lyle Hubbard, who took over as chief executive in 1996, in the company's annual report that year. "Earnings, in the short-term, will be secondary. We will spend profits to brand the category and grow revenue."
In many ways, the effort succeeded. "Gardenburger" has almost become the generic term for veggie burgers, and the company's patties are sold in 66,000 outlets nationwide, from supermarkets such as Albertsons and QFC to fast-food chains like Subway. In 1998, sales reached $100.1 million, nearly double the previous year's.
But once the barrage of ads ceased, sales fell back. Last year, Gardenburger's revenues were $64.9 million; the company has lost money every quarter since the end of 1998.
Gardenburger also is losing market share to its two main rivals, Worthington Foods, which makes the Morningstar Farms line of products, and Boca Burger.
According to Information Resources, a Chicago-based research company, Gardenburger's share of supermarket sales in the frozen meat/meat substitute category fell from 10.7 percent in May 2000 to 6.4 percent last month. Worthington's share dipped from 10.7 percent to 9.5 percent; Boca's rose from 4.4 percent to 5 percent.
Gardenburger ran into the key conundrum of the faux-meat business, Golbitz said: While some people have no interest in meat and simply want something to put on a bun, others want products that look, chew and taste as much like meat as possible.
Gardenburger historically was strongest among the first sort. But when it started advertising nationally, it attracted more of the second.
"They boosted awareness tremendously among consumers, but when consumers tried it and it didn't meet their expectations they said `OK, what's next?' " he said.
Around the same time, the competition got far deeper pockets. Worthington was bought by Kellogg in December 1999 for $80 million; Kraft Foods, a majority-owned subsidiary of Philip Morris, snapped up Boca two months later for about $100 million.
Gardenburger shopped itself around in 1999, Wallace said, but no deal materialized. Although Wallace's contract provides for a bonus if the company is sold, he said it's not now being "publicly marketed."
Instead, he said, Gardenburger is busy developing new products. Besides the Chik'N Grill, the company is working on such fare as meatless meatballs and faux-pork ribs, as well as a meat-free "sausage" frozen pizza.
Cost-cutting efforts
Wallace's other big concern is Gardenburger's debt. To fund the marketing campaign, the company in spring 1998 sold $15 million in notes to Dresdner Kleinwort Benson. A year later, it sold $32.5 million in preferred stock to four other investment firms.
Interest on the notes and required dividends on the preferred stock have caused Gardenburger's debt load to soar. According to its most recent quarterly report, the company had $62.6 million in short- and long-term liabilities and assets of just $22 million.
"That absolutely has to be addressed," Wallace said.
The company also has moved to cut costs, selling its Portland manufacturing plant and trimming its work force, from 205 a year and a half ago to 180.
Given all that, the Nasdaq delisting is the least of Gardenburger's concerns. In February shareholders authorized a reverse stock split - a move designed to bolster the share price and stave off delisting - but the company never went through with it.
"Right now they're not worrying about pleasing shareholders," Nutrition Business Journal's Rea said. "Instead of looking quarter to quarter or even one year out, they're looking for a sustainable business model over three to five or even 10 years."
Added Wallace: "What will make the stock more valuable is for us to fix some of the problems with the company, reverse the negative sales trend and make the business profitable. If we can address those, the value follows."
Despite its many challenges, observers say, Gardenburger has too many strengths to dismiss. But, they warn, it will take a healthy dose of creative thinking and pinpoint execution.
"When they first came out, they were two steps ahead of everybody else," Soyatech's Golbitz said. "They need to think two steps ahead again: What is the next thing consumers are looking for?"
Drew DeSilver can be reached at 206-464-3145 or at ddesilver@seattletimes.com.