Building A Company Warren Buffett Would Buy the pampered chef has great numbers, strong management, and a secret recipe. why wouldn't buffett love it?
(FORTUNE Small Business) – It may be hard to comprehend how a company that sells $3.50 vegetable peelers grew to $740 million in sales (or for that matter, why anyone would care). But give it a try, because the Pampered Chef has garnered one of the most coveted prizes in the business world: a stamp of approval from billionaire investor Warren Buffett. His company, Berkshire Hathaway, which owns stakes in big outfits like American Express and Coca-Cola, announced it would buy the kitchen-gear retailer last September, just days after Buffett reviewed its financials. "We are extremely excited by the Pampered Chef. Doris Christopher has created from scratch an absolutely wonderful business," said Buffett at the time, referring to the company's gracious 57-year-old founder.
How did Christopher turn a collection of apple corers, spatulas, and measuring cups into a company enticing enough to wow the Oracle of Omaha? For starters, the Pampered Chef has no debt, high profit margins, a gung-ho management team, and world markets to conquer. And the concept is simple. Christopher is selling dreams.
The Pampered Chef gets women to peddle mundane kitchen products like peelers and whisks through in-home parties, a direct-sales system that's been used for decades by companies like Tupperware and Mary Kay. The in-home parties, which the Pampered Chef calls "kitchen shows," are all about pushing product. But guests are also treated to recipes, utensil demonstrations, and homespun cooking tips. Still, the essential engine driving the company's success isn't any of these tangible business factors. It's simply that Christopher has figured out how to tap deeply into women's emotional pull toward home, hearth, and community.
Don't picture Donna Reed in a shirtwaist dress. The contemporary appeal of becoming a Pampered Chef kitchen consultant is to women who have opted out of the workforce to stay home with their kids--but who still want to make a few bucks. "Our women know what it took to work. It wasn't nine to five. It was more like eight to eight, seven days a week," says Christopher, whose mission is to strengthen family life through shared meals. "They are so appreciative of the chance to have some control over their careers. They can be at a cookie party at their kids' school, and no one is giving them a deadline." Adds Sheila O'Connell Cooper, 44, a former Mary Kay executive who became the company's chief operating officer in 2000: "The people who sell our product also want to do something that's joyful and that they can feel good about."
Immaculately groomed and elegant, Christopher looks every inch the powerful and poised executive she is. But sitting in a conference room in the company's brand-new office building in Addison, Ill., Christopher reveals a warmth and an unpretentiousness that make you feel you are talking to an understanding mom--not one of the world's most succesful businesswomen. Her spotless balance sheet and robust cash flow were undoubtedly among the first characteristics to charm Buffett. Between 1995 and 2001, the Pampered Chef's revenues grew 232%, compared with the industry's 49% gain. The company has never had any debt, apart from $3,000 that Christopher and her husband, Jay, borrowed against a life insurance policy to launch her business. Because customers pay for products before delivery, the company is a "very cash-positive business," says Alan Luce, president of Luce & Associates, a consulting firm in Orlando, who estimates pretax profit margins are above 25%. Buffett, who attended an Omaha kitchen show, where he participated in an apple-peeling competition, tends to be fond of companies with plain-Jane products like the Pampered Chef's.
Perhaps most important for Buffett, though, is Christopher's management style. Any idiot can run a proprietary, market-leading business, according to Buffett dogma. But only a skillful manager can extract growth and profitability from a tired retail concept like direct selling.
In 1980, Christopher was 34 years old and living in River Forest, Ill., when she began casting about for business ideas that would allow her to stay at home with her two young daughters, Julie, 8, and Kelley, 5. An enthusiastic cook and entertainer, she noticed that her friends often asked about her kitchen tools. Because she had been trained as a home economist at the University of Illinois, she knew how to find and use the best utensils.
Selling them seemed like a good idea--but how? A store would require too much capital and overhead. She mentioned in-home parties, and her husband, a marketing executive, latched onto the idea. Back and forth they went, Jay promoting the approach and Christopher pointing out its shortcomings. Finally he told her that she didn't have to do it the way everyone else was doing it. "I can say from the moment I realized that I could redefine the direct-selling technique, I plowed straight ahead," recalls Christopher.
Operating from a desk tucked next to her basement laundry room, Christopher decided that instead of a party at which women played silly games, she would put on a show at a friend's house to teach attendees how to use her wares. "At the first kitchen show I found people were hungry for this kind of information. Then I knew. This is easy," she recalls. Christopher staged shows once or twice a week for nine months, until a friend begged to be taken on as the company's first distributor. Gradually Christopher added more salespeople, tinkering all the while with how much to charge for the products, how to pay her kitchen consultants, and which tools to offer. The show concept, combining entertainment and education, turned out to be surprisingly powerful.
Still, by the late 1980s Christopher felt stuck. The company was growing rapidly, but only around Chicago. To jump the regional boundary, she took what felt like a drastic step: She traveled to Fort Worth, St. Louis, and other cities, where she ran shows and recruited local kitchen consultants by advertising. "I had to step outside my comfort zone, leave my family, drive to those places, stay in a hotel room, and figure out how to interview people in a safe setting," she remembers. "It took persistence. I think I went to St. Louis 12 times." Her persistence paid off. Today the company serves more than 12 million customers nationwide and boasts 71,000 kitchen consultants.
To get a handle on Christopher's business formula, we dropped into Paula Haughey's kitchen in Medford, N.J., where ten women gathered on a Friday afternoon in December. The mood is relaxed and social, as guests sip wine or soda and chat in the cozy kitchen before the show. It doesn't feel like a party, exactly, but everyone is wearing makeup and jewelry and is plainly happy for a chance to gather with a few friends.
Haughey, a slender, chic blonde with a big smile and chirpy voice, is one of the Pampered Chef's top 25 kitchen consultants, and it soon becomes clear why. After serving a warm spinach-and-pastry hors d'oeuvre, she whips together a turkey-and-cranberry wreath and a giant cookie topped with brown sugar using nine or ten of the company's utensils. "How many times have you pulled those brownies out of the oven to find that they are done around the edges but still not set in the middle?" she asks, as she lifts a 12-inch diameter cookie from the Pampered Chef's round baking stone. "On our stoneware the heat is distributed evenly, and your cookie will come out perfectly."
"Oh, she is good!" calls out a brunette, shaking her head in admiration. "Paula, you're going to make me want to start cooking again for my kids."
"It's too late for that," admonishes the woman next to her. Everyone chuckles and adds a little check mark next to No. 1370 Large Round Stone, $25.50, on the labyrinthine order forms Haughey has distributed. They've gotta get that. By the end of the show the guests have purchased $1,100 worth of tools, jotted down a couple of recipes, and privately vowed not to use preservative-laden cooking sprays.
With results like that, it's little wonder that the Pampered Chef has been able to attract a loyal band of kitchen consultants. In fact, more than 50,000 of its 71,000 consultants received commission checks this past November. Here's how it works. A host who opens her kitchen to friends for a party is likely to receive $250 to $300 worth of the Pampered Chef products for free. To become a kitchen consultant you pay $90 for a starter kit of tools, worth $350. Your commission on all sales is 20%, about average for a direct seller. Recruit more kitchen consultants, and you'll earn between 1% and 4% on their sales as you climb the ladder.
Top performers are treated particularly well. Cooper says the company gives out rewards to a higher proportion--75% to 80%--of its salespeople than other direct-selling companies. A consultant who sells $18,500 of gear this year, for example, will earn $3,700 in commissions but will be able to collect a certificate for a two-night stay at any of 120 hotels across the country. At the other end of the spectrum, salespeople who sell $70,000 worth of products can take a four-day trip to Hawaii for two, along with other top-selling consultants.
Now that she's sold her company to Buffett, Christopher has no plans to slow down. She sees plenty more room in Americans' kitchen cabinets for the company's food choppers and can openers, pointing out that Mary Kay has 600,000 salespeople, compared with the Pampered Chef's 71,000. The company has also begun to experiment with new products, including a line of ceramic serving pieces. Christopher is confident, too, that her family-mealtime message will translate well globally and has tiptoed into Britain, Germany, and Canada during the past few years. You don't have to be Warren Buffett to guess she's right about that. You may not cook elaborate meals and eat dinner with your family every night, but if you're a mom, you'd probably like to, no matter where you live.