Gardenburger's Bad Bet If you borrow big and buy big ads, you could end up in big trouble.
(FORTUNE Small Business) – There it was, in the middle of 1998's "Must See TV" final episode of Seinfeld: Tiny little Gardenburger, advertising its quirky vegetarian burgers with a chubby animated character named Vern. That one 30-second ad (at a cost of $1.5 million) was sandwiched among the giants of the consumer world, names like Budweiser and the Gap. Godzilla, the ultimate meat eater, had rumbled onto the screen moments before on behalf of Sony. More than 100 Gardenburger employees, along with founder Paul Wenner and CEO Lyle Hubbard, were watching from Damon's, a sports bar near Gardenburger's headquarters in Portland, Ore. As the ad flashed up on the big screen, they sat rapt. Then, ignoring the last shenanigans of Jerry and his gang, they swept into party mode. It was a rousing kickoff to a bold ad blitz (with a $14.4 million budget) from a company that had only recently passed $50 million in sales. The small-company, bat-out-of-hell advertising campaign is a growth strategy that looks very familiar today (see the cover story, on page 38). Dozens of dot-com companies, low on profits and high on investors' cash, are spending millions for splashy campaigns. This fall's World Series was notable for the rash of expensive ads from companies you'd barely heard of. But that's the point: to create a dominant brand so fast the competition barely has time to blink. Ideally, it's a self-fulfilling prophecy: Advertise like an established brand, and you shall become one. It worked for Absolut and Evian. For Gardenburger, it has been a near-death experience. The strategy is very tough to execute, even for big companies with deep pockets. "One-shot advertising rarely works," says Gary Stibel, a Westport, Conn., marketing consultant. "It's a risky proposition at best." And it's an even bigger bet on borrowed money. Gardenburger, like the dot-coms, had raised millions in private capital to fund the ad campaign. "Raising equity to spend on marketing is like taking out a mortgage to go to dinner," says George Dahlman, an analyst at U.S. Bancorp Piper Jaffray. For observers like Dahlman, the Gardenburger story is a cautionary tale for small companies that have big ambitions. For founder Wenner, 52, this chapter marks the end of an era for the Gardenburger he created. That company has been gutsy from the beginning, built on an unlikely idea and lots of optimism. Wenner had a vegetarian gourmet restaurant in Portland in the early '80s. In 1985, he paid a call on Harry Merlo, then CEO of Louisiana-Pacific Corp., where Wenner's sister worked. Wenner's proposal: Merlo should finance the making and selling of the vegetable-and-grain concoction Wenner had whipped up in the restaurant. Merlo bit, and Gardenburger was able to turn a profit on his original $60,000 investment within 13 months. Wenner's combination of entrepreneurial energy and idealistic zeal made it work. A dedicated vegetarian, Wenner believes that Gardenburgers are a tangible means of getting people healthy and helping the planet. He sold his creation almost single-handedly, persuading skeptical restaurant owners to try the burgers and later flying around the country doing spots for local media. "There was lots of knocking on doors, sleeping in Motel 6's for $16.99 a night," says Wenner in a phone interview from his home in Honolulu. He made many converts: Gardenburger grew at an average rate of 90% a year, going public in 1992 and hitting $23 million in sales two years later. But by the mid-1990s, Wenner was burned out and eager to focus on his philanthropic ventures. Acknowledging that a founder is often the wrong person to expand a company, he stayed on the board but relinquished his executive positions. Chairwoman Kay Stepp (the former chief operating officer of Portland General Electric) and the board began looking for someone to lead Gardenburger into the mainstream. At that time, the only place you were likely to come across a Gardenburger was in a local restaurant or health-food store, although chains such as TGI Friday's and many warehouse supermarkets also carried it. To really grow, Gardenburger had to squeeze into the crowded freezer at the local Kroger or Safeway. It was Wenner who ran into Lyle Hubbard on a plane and recommended that the board hire him. After a six-month search, the board agreed and brought on the former Quaker Oats executive. Hubbard had actually looked at an alliance with Gardenburger in 1994. For Quaker, he had brought several niche foods out of health-food stores and into grocery stores. He added flavors such as caramel corn to bland, unfashionable rice cakes, for instance, and sold them in miniature (the "try it, you'll like it" model; one of Hubbard's first Quaker jobs was managing Life cereal). Hubbard had climbed the corporate ladder, but he seemed to have an entrepreneurial bent, crediting his success at Quaker to "operating as a small company with a highly collaborative management team." And Hubbard could identify with the consumers Gardenburger needed to reach--the 99% of the population that don't call themselves vegetarians. In an interview, he described himself as a "struggling balancer"--someone who tries, with difficulty, to eat healthy foods. (Over lunch recently at McMenamins, a Portland pub, he chose the Garden Dungeon, a version of Gardenburger on the menu that is dressed with grilled mushrooms and Swiss cheese. Granted, he didn't top it with Canadian bacon, the way some McMenamins' patrons have.) Hubbard quickly junked the company's name, Wholesome and Hearty Foods, in favor of Gardenburger, capitalizing on its already familiar product. He recruited top marketing talent, launched a print ad campaign, and scrapped plans to build an expensive new plant. (He bought and retrofit an existing plant instead.) The new team, Wenner says, also jettisoned much of his management philosophy, even editing down the company's socially conscious vision statement. The changes were costly, and even though the product was in national distribution by 1997, Gardenburger had a net loss of $1.4 million that year. But sales increased from $40.5 million to $57 million, and the company's share of the meatless-burger business was at 15.6%, up from 2.3% in 1995. It seemed to be the moment to really grab the public's attention. Hubbard told the board that Gardenburger needed to "get over the hump," as he put it. The idea was, power up to 50% market share, "then we could continue to grow it and continue to advertise." The key, says Hubbard, "was really to do TV advertising. And you have to do that at a breakthrough level." The ads ran on top-rated shows such as ER. The biggest gamble, on Seinfeld, made sense because the show had so many female viewers ages 25 to 54, exactly Gardenburger's target market. And Hubbard's marketers figured the ad would create some buzz. The only problem: how to pay for it. Hubbard went out to the market, frankly telling prospective investors that he needed the dollars to help build Gardenburger's brand name. "It's a higher risk, higher reward" type of investment, Hubbard says. "People understood that." Drawing on his experience at Quaker, he told investors it would be like buying into Gatorade, a Quaker success story now legendary among marketers. "If you had had the chance to invest in Gatorade [as a separate company] in 1984 when Quaker bought it," Hubbard would say, "and it grew from the $85 million in sales then to $1.6 billion today, gosh, what a home run." Dresdner Kleinwort Benson, an arm of the investment bank, signed on with $15 million. The first months of life after Seinfeld were mouthwatering. The publicity around the ads was even more than Gardenburger had hoped for. The Seinfeld spot snagged a page-one story in The Wall Street Journal, coverage on National Public Radio, and even that pinnacle of pop plugs: a joke from Jay Leno. By the height of the grilling season in August 1998, store sales had soared more than 300% from the same time a year before. (For the year, total sales would surge 84%, to $88.4 million.) Gardenburger, a product from the margins of the consumer world, seemed to be finding its place on the nation's plate. Eager for more, Gardenburger's board gave the nod to another ad blitz for 1999. In March of this year, Hubbard raised an additional $32.5 million, this time by selling preferred shares. And a few weeks later, the ads began running again, on top network shows. Almost immediately, Hubbard realized that something was wrong. In studying the weekly grocery-store reports, he saw that sales weren't picking up. The ads didn't seem to be drawing new Gardenburger eaters the way they had in 1998. When Memorial Day, the first big grilling day of the season, passed without a pickup in the numbers, Hubbard saw trouble. He went to the board and said it was time to reverse course. Stepp, the board chairman, credits Hubbard with acting quickly. "We realized we didn't have the internal resources to continue this investment," she says. For the fiscal year that ended on September 30, sales were flat at $88 million, and the company lost $29 million. Hubbard's team is still trying to figure out what went wrong. He is telling investors that Gardenburger will be profitable in 2000, but only because of drastic cost cutting. It has fired dozens of employees and, of course, slashed the ad budget. Meanwhile, Gardenburger stock has fallen from about $15 at the time of the Seinfeld ad to $8 a share at press time. And it is facing hefty new competition. This fall, Heinz Co. announced that it would take a stake in Hain Food Group, a maker of health-food products, and Kellogg Co. said it would buy the maker of the Morningstar Farms line of meatless foods, including burgers. Even Gardenburger's critics agree that the aggressive ad strategy helped to create a powerful brand. The company's big bet, like those that so many dot-com companies are making, may prove to be a good one. But many experts think otherwise. Gardenburger made a classic mistake, says consultant Stibel: "worshiping at the god of advertising." Specifically, says consultant Burt Flickinger III, Gardenburger got the formula wrong, with a "stratospheric" ad-to-sales ratio of 15%, rather than a more typical 5%. And the product, no matter how good, is too small a niche to support such a gamble. Maybe the ads didn't draw buyers this year because the category has maxed out--something Hubbard denies. In the end, says financial analyst David Kerdell, Gardenburger "acted like a big company that could spend millions, instead of a scrappy small company that has to use each dollar as efficiently as possible." Investor Dresdner Kleinwort declined to comment. None of this surprises Wenner. He sees Hubbard and the rest of the board as big-company types. Wenner is still on the board, but he missed one meeting when it agreed to big incentive packages designed to keep Hubbard and his team in place. Wenner was not happy about this move. But he isn't as grim as one might think, and he says he would be happy if the company, as rumored, were sold to a more powerful outfit. His bottom line: The more Gardenburgers sold, the fewer chickens and cows fed for slaughter, and the less strain on the planet. For his part, Hubbard remains confident. "We look at this as success with a pause," he says. "Look at where we were in 1995. Today we are hugely better off." The company is close to a "taste breakthrough" and may close a deal with a fast-food chain, he recently told investors. Another plus: The U.S. Food and Drug Administration has just endorsed soy protein (a key ingredient in several Gardenburger products) as a factor in preventing heart disease. When things get back on track, Hubbard might return to a tried and, he hopes, true strategy: Advertise like mad. |
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