Snapple woes bring shareholder value struggle for Quaker; Student

CHICAGO -- "I clearly understand my role as CEO," William Smithburg, chairman and chief executive of the Quaker Oats Co. recently told Wall Street analysts. It boils down to "value-builder for shareholders," he said.

He got no argument from stock watchers. But whether the 58-year- old Smithburg, now in his 16th year at the helm, can deliver is a question that has haunted Quaker since it paid $1.7 billion for Snapple, the flagging front-runner of the "new age" beverage business.

Analysts estimate that Snapple will have rolled up more than $150 million in losses by the second anniversary of the acquisition. Quaker's shares are now more than 13 percent lower -- adjusted for a 2-for-1 split -- than they were when the agreement with Snapple was announced in November 1994, while the overall market has surged in the same period. And analysts say Quaker's stock, which closed on Tuesday at $32.25, down 25 cents, would look even worse were it not for some investors who are betting that the company will be taken over.

Snapple has so deeply stained Quaker that it has obscured several of the company's strengths, including Gatorade's impressive growth and a revival of that old workhorse, hot oatmeal. Worse, Snapple has preoccupied management and created financial strains that have limited the company's strategic flexibility.

"Over his tenure, Smithburg has made a lot of good decisions," said Michael Mauboussin, who follows the food industry for CS First Boston in New York. "Unfortunately, the bad decisions in the last few years have been huge."

Quaker got off on the wrong foot with Snapple by paying too much and then made matters worse with a series of management and marketing missteps. Two top officers were pushed to resign, including the president and chief operating officer, Philip Marineau, who had been with the company 23 years. And an ad campaign this year -- Quaker's first all-out effort to sell Snapple -- has been scrapped.

Now, the company is spending $20 million in a campaign built around giving away free samples to test just who likes Snapple, particularly outside the Northeast and West Coast, where it is most popular. Exasperated analysts recently told Smithburg that Quaker should have asked -- and answered -- that question long before buying the company.

Some of them believe Quaker will realize that there is no choice but to sell off some businesses, split the company in two or sell it entirely. Smithburg says only that he is considering all options. But analysts warn that they would be unenthusiastic about a Snapple spinoff unless Gatorade was included.

"The question would be: is Smithburg giving shareholders something they don't want?" said John McMillin, an analyst for Prudential Securities. Either way, said, Mauboussin of CS First Boston. "I don't think the company will look like it does today in 12 months."

While analysts choked on the price of the Snapple deal, they initially applauded the impulse behind it. Smithburg wanted to get out of low-margin, highly-competitive businesses with poor growth prospects -- like pet food -- and into more vibrant lines. If Snapple was not really "the best stuff on Earth," as advertised, it was unquestionably the leader in what had been a sizzling market.

"We believe Snapple's variety and breadth of appeal gives us even greater opportunity than Gatorade," Smithburg said in December 1994, after the deal was announced.

Quaker recognized that some alarm bells were ringing. Snapple's sales were tailing off after years of explosive growth, and profit margins that had peaked at nearly 20 percent had dried up.

Years of explosive growth had overwhelmed the East Meadow, N.Y., company's distribution and management systems. New competitors, ranging from upstarts like Arizona to giants like Coca-Cola, were elbowing onto shelves.

But Smithburg, an aggressive marketer with a taste for hazardous hobbies like helicopter skiing, thought the risks of staying out of the "new age" sector might be even greater than taking the plunge.

Profits at Quaker and other food companies had been under pressure as advertising and promotion costs soared, private label products became more aggressive and more popular with shoppers, and giants like Wal-Mart began demanding a larger slice of the profits. With price wars breaking out on everything from cigarettes to cereals, hot new products like Snapple held a special allure.

In the 1980s, by contrast, the entire food and packaged good industry was booming. Cost increases for ingredients and packaging were low and profit margins for most products expanded steadily. Merely average performers produced annual shareholder returns topping 30 percent, according to a recent study by McKinsey & Co. Quaker, which dabbled in toys and men's clothing, was a laggard then, too, but its average annual return still exceeded 23 percent and managed to make Smithburg very popular with shareholders.

In the less forgiving 1990s, the top performing food companies have been producing shareholder returns of about 15 percent annually, half the rate of the 1980s. The bottom 25 percent, as a group, have actually lost money for investors.

Quaker, which has emerged under Smithburg as an industry leader in logistics and other measures to wring costs out of production and distribution, produced returns of about 8.6 percent annually through June -- just below the average, despite the Snapple downdraft.

SEATTLE (AP) -- John Leonard collected his Pepsi points and now he wants his prize. A fighter jet. And he's not kidding.

The 21-year-old business student sued PepsiCo Inc. on Tuesday, demanding that the soft-drink maker give him a Harrier fighter jet like the one pictured in a Pepsi Stuff TV commercial.

"I am simply trying to take Pepsi up on an offer it made to the public," Leonard said.

Pepsi maintains the commercial was a spoof and says it has a perfect right to use humor in its advertising.

"If we have to put disclaimers on spots that are obviously farces, where does it end?" Pepsi spokesman Jon Harris said.

Leonard's lawsuit, filed in Dade County, Fla., Circuit Court, accuses Pepsi of breach of contract, fraud, deceptive and unfair trade practices, and misleading advertising.

In October, Leonard, a student at Shoreline Community College, saw a commercial about the Pepsi Stuff promotion, in which customers who had racked up points by drinking Pepsi beverages could claim a variety of prizes. Those who finish a 12-pack of 12-ounce cans, for example, earn five points.

As a joke, the company also "offered" the $70 million fighter jet for 7 million points. That means Leonard would have had to drink 16,800,000 cans of Pepsi to earn the Harrier -- except during August, when all point values double and he would have had to finish only 8,400,000 cans.

Leonard, who didn't want to drink that much Pepsi, said he called the company and was told he could buy Pepsi points for 10 cents each.

Leonard, of suburban Lynnwood, rounded up five investors who committed to put up the $700,000 he needed to claim his prize.

On March 28, Leonard delivered to Pepsi 15 original Pepsi Points plus a check for $700,008.50 for the remaining 6,999,985 points, "plus shipping and handling," the lawsuit says.

"Surprisingly, on May 7, 1996, Pepsi ... failed and refused to process the items, ... and more importantly failed and refused to provide the new Harrier jet to Leonard," the suit says.

Two more attempts to submit the Pepsi Points and check also were rebuffed, the suit says.

After Leonard threatened to sue, the company filed a pre-emptive suit July 18 in federal court in New York, seeking to have his claims declared frivolous and seeking reimbursement for the company's legal fees.

Leonard has denied his actions are a publicity stunt or an attempt to get Pepsi to settle out of court. He saw the plane as an entrepreneurial venture, saying perhaps he could take customers on thrill rides.

The sides met last week to try to resolve the dispute, but failed.

Copyright 1996
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