Reaping Healthy Profits in Food NichesShansby Group Targets the Growing Mexican and Natural Foods Markets

Since 1987, Shansby Group, a San Francisco-based private investment fund specializing in the build-up of branded consumer product companies, has been gobbling up food and other consumer products companies. Although one of its early acquisitions may be its most well-known – Famous Amos Chocolate Chip Cookie Corp. – the company’s acquisitions mainly have focused on two niche markets – organic and natural foods and authentic Mexican foods. Tastes and Eating Styles Add Complexity to the Market Although the two businesses center on very different kinds of foods – healthy, organic foods versus high-fat, high-sodium Mexican foods – both niches are similar in that they are highly fragmented and fast-growing. Companies in these sectors more often than not are run by their founders, who generally lack the capital and professional management to grow beyond entrepreneurial businesses. And, adds J. Gary Shansby, general managing partner of Shansby Group, “most are too small to show up on the radar screens of big, diversified acquisition funds or food conglomerates,” so there is less interest in them from the big food consolidators. Shansby says that his company doesn’t chase big deals but rather prefers to acquire smaller companies in specialty areas. In the Mexican food market, the company has made five acquisitions in key geographic markets of manufacturers and distributors of authentic Mexican foods catered primarily to Mexican-American consumers. Shansby-led Authentic Specialty Foods Inc. is now the largest firm focused exclusively on authentic Mexican foods. Shansby explains that when doing build-ups in this niche it is important to keep in mind the distinctive culinary preferences of the Mexican-American population. Mexican food in the eyes of a Mexican-American, he notes, “is not Taco Bell or Pace.” Mexican-American consumers tend not to be concerned about fat content; most authentic Mexican food is cooked in high fat, many times lard, and the sodium levels of the foods are high. In addition, at-home eating occasions are very important to Mexican-Americans. They spend a proportionately higher amount of their disposable income on food than any other population, they are intensely brand-loyal, and they tend to be “quality” rather than “price” buyers. “Their eating styles make this a very attractive business,” he says. Favorable Demographics Make The Industry Very Attractive The demographics are appealing, too. According to the U.S. Census Bureau, the Hispanic population is growing faster than the total U.S. population. By 2010, Hispanics will make up the largest minority group in the country. That segment’s greatest growth will be in three market areas: Texas, California, and Chicago. Currently, 30% of the populations of Texas and California is Mexican-American. There are also geographic concerns to address in this market. The state of Texas, explains Shansby, is a local-market state, in which the Dallas-Fort Worth area, for example, has a different profile than Houston, or Austin, or San Antonio, and the Mexican-American populations in those areas tend to be loyal to local producers. Buying habits in those markets are much different from buying habits in California, where bigger brands cross different geographic regions, he says. To be successful in Texas, he says, a company can’t acquire just one brand and cover the state easily; it has to be in four or five markets and have strong local brands in each of those markets. In 1992, Shansby Group acquired its first Mexican food company, Dallas-based Calidad Foods Inc., a leading supplier of tortilla chips, meats, cheeses, salsas and sauces, peppers, and other fresh and shelf-stable products to grocery stores in Texas and nearby states. The company’s name was changed to Authentic Specialty Foods in 1997. Shansby Enters Key Markets And Steadily Builds Its Business Four years later, Shansby Group added La Victoria Foods Inc., a 50-year-old Mexican sauces and salsas company based in Los Angeles which distributed its products mainly through grocery stores in California and other western states. Despite being a regional brand, La Victoria’s salsas and taco sauces were high-quality that outsold many national brands. The La Victoria acquisition added another strong brand of Mexican food products, expanded the company’s presence into a new area with a large Mexican-American population, and broadened the company’s extensive product line. Shansby Group managed to negotiate a sale that was elusive to many food industry giants. When the company first targeted La Victoria, the business was in decline, following the death of the owner. Ownership of the business was then split between the owner’s son and daughter. Although the business revenues slowly declined, product quality remained high. Campbell Soup, H.J. Heinz, and ConAgra are a few of the companies that were highly interested in acquiring La Victoria, but a sale was always blocked by the brother. Shansby said that his company wanted La Victoria so much that it bought the sister’s 50% ownership, hoping to later convince the brother to sell his share. He did sell. Shansby Group used La Victoria as its base in the salsas, sauces, and shelf-stable products end of its Mexican foods business – the biggest and most important part of its business, Shansby notes. It had 1996 net sales of more than $38 million. In September 1997, Shansby Group took Calidad Foods and La Victoria public together in a $32 million IPO under the Authentic Specialty Foods name. Shansby Group now owns approximately 20% of Authentic. Several weeks after the IPO, Authentic expanded into southern Texas with its $2.75 million acquisition of La Monita Mexican Food Products. La Monita, the leading tortilla chip manufacturer in Houston, gave the company entry into a large Hispanic market and provided a brand that the local people preferred. The company generated $6 million is sales last year. Authentic’s next acquisition, in October 1997, was San Antonio-based Sauces Unlimited Inc., a manufacturer and distributor of salsas and sauces sold primarily in food service and private-label channels. Authentic consolidated most of Sauces Unlimited’s manufacturing with La Victoria’s and took the La Victoria and Sauces Unlimited brands national in the food service market. The January acquisition of Tortilla King Inc., a manufacturer of brand-name tortillas and chips located in Victoria, Texas, is Authentic’s latest acquisition in the Mexican foods area. It had 1996 net sales of nearly $9 million With this acquisition, Authentic blanketed the state of Texas with local brands and distribution. Shansby Group will continue to make select acquisitions in Texas of direct store delivery companies, but its primary focus, Shansby says, is to get bigger in the whole region from California to Texas and up to Chicago in salsas, sauces, peppers, and other products. He says the company currently is looking at acquisitions worth more than $400 million in revenues, and expects to acquire about $100 million in businesses in the next 12 to 18 months. “There isn’t a company in Texas and California that we are not aware of, and we have visited most of them,” he says. He explains that 80% of the Mexican food market is made up of companies with less than $10 million in revenues and that there are about 700 of those kinds of companies in those two states alone. “How does a big food company go about making acquisitions? How do you deal with companies that are primarily owned by 2nd and 3rd generation Mexican-Americans? The trust level’s not there,” he says. But now that Shansby Group has created a public company, it has an exit to offer entrepreneurial owners who want to cash out. If they want liquidity, which they can’t get easily, then they can sell to Authentic Specialty Foods. We’re used to putting together these small businesses.” Since the companies in this highly fragmented niche are small, mom-and-pop types of companies, Shansby doesn’t foresee much interference in its game plan by bigger consolidators. “These are small businesses that fit perfectly for us, but not very well for other people.” Value-Added Product Extensions Beef Up Acquired Businesses Shansby emphasized that the strategy for Shansby Group’s natural foods business most likely will mirror that of its success in the Mexican food business. Shansby Group had been tracking the growth of the natural foods business for years. Several years ago, there were very few natural foods stores in the country. Most were family-owned stores or vitamin shops. Gradually, natural foods became more mainstream. Still, the industry is small but fast-growing, highly fragmented, and has very few big players. As the market broadened, more specialized natural foods markets popped up. Whole Foods Market Inc. is a good example. It opened shop with 3,000- to 4,000-square-foot stores and quickly evolved into 20,000-, 30,000-, and 40,000-square-foot supermarket-size stores. Even with the burgeoning of Whole Foods, there was still only a handful of substantial companies in the business. Shansby Group saw this as a real growth opportunity. The company’s entry into natural foods came with its 1994 acquisition of a controlling interest in organic farming company Arrowhead Mills, a pioneer in the natural and organic cereal and grain business. Arrowhead, based in Hereford, Texas, was a natural ingredients company supplying natural food products that people would use to bake from scratch. Shansby Group quickly moved the company into more value-added foods, such as prepared meals, and other new categories, such as dessert mixes. The company had 1996 sales of $24 million. Long Island, N.Y.-based DeBoles Nutritional Foods, a 60-year-old company with the leading brand in natural dry pasta, was also added to the fold in 1994. Shansby Group converted DeBoles’ manufacturing facility into an organic factory that could produce both organic and natural lines of pasta. New product introductions after the acquisition included rice pastas, which are good for people who have wheat allergies, and prepared meals. After being operated separately for about a year, DeBoles was merged into Arrowhead Mills. Shansby Group continued its build-up in natural foods with its 1995 acquisition of Dana Alexander Inc., a Brooklyn, N.Y.-based maker of Terra Chips, colorful chips made from potatoes and other root vegetables, such as sweet potatoes. The founders had been working as chefs at a New York restaurant and moonlighting as partners in a catering business. Business exploded when their chips were “discovered” in several grocery outlets spotlighted during the New York Fancy Food Show. When business became too much for the owners to handle, they sought out Shansby Group, which bought a controlling interest in the company. Shansby Group expanded the base business by adding new product lines, such as cinnamon and spicy sweet potato chips, and using a new kind of potato, the Yukon Gold, which is smaller and more flavorful than regular potatoes. The chips are now the No. 1-selling premium salty natural-food snack. Shansby Snatched Up the Popular Blue Chips in Its Latest Acquisition Continuing its ongoing strategy to consolidate companies in the natural foods industry, this past January, Shansby Group acquired Garden of Eatin’, the maker of organic blue corn tortilla chips based in Los Angeles, Calif. The company is known for its 1986 introduction of the renowned Blue Chips, the first corn chips made from stone-ground Native American blue corn. Garden of Eatin’ provides high-quality products made from organically grown grains, beans, and vegetables. The company had sales of approximately $15 million in 1997. Shansby Group plans to merge it with its other natural foods businesses. It is preparing a prospectus for a possible public offering later this year. The four natural food companies have combined revenues of more than $60 million and EBIT in excess of 12%. Despite some similarities in the Mexican and natural foods businesses, Shansby Group intends to run the businesses separately. Although both natural and Mexican foods can be found at regular grocery stores, Authentic Specialty Foods seeks primary presence in outlets in regions of the country with the highest concentrations of Mexican-Americans. Shansby Group also follows a focused distribution strategy for its natural and organic foods operations by primarily targeting natural food stores. Shansby explains that while there may be some natural food presence in regular grocery stores, it still represents only a small portion of the stores’ business, whereas in a Whole Foods market, natural foods makes up 90% of the store’s business. He believes that the best way to build a business is to be the dominant player in your category and in your primary distribution channel, then other channels eventually will pick up your product. “If you try to be all things to all people in all channels all at once, you’re probably going to end up with very little success,” he says. “We see the Mexican foods as going primarily into the authentic Mexican markets, but they are going to cross over to other markets in the years ahead. The same is true for natural foods. There’s an evolution going on in the industry, and soon natural foods will be in virtually every kind of grocery, club, and mass-merchandising store.”