Doing it the Right Way

by Dan Malovany
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Nobody said the journey to be the best was ever easy. It requires tens of thousands of baby steps on the path of continuous improvement and a few game-changing milestones that often alter the ­direction of a business for years to come.

“When we take a step back and look at the past four years, it’s hard not to say, ‘Holy cow. No wonder I’m tired,’ ” said Brian McNamara, vice-president of sales and marketing, Hearthside Food Solutions, Downers Grove, IL.

In 2009, Hearthside Food Solutions began a series of acquisitions that has made it one of the nation’s largest co­manufacturers of snacks and baked goods. With the backing of Wind Point Partners, a Chicago-based private equity investment firm, the then newly created company acquired a substantial portion of the assets from Roskam Baking Co., based in Grand Rapids, MI.

Then in May 2010, in a swift, bold move, Hearthside purchased Consolidated Biscuit Co., based in McComb, OH, as well as the cereal division of Golden Temple, Eugene, OR. In 2011, it acquired another Roskam Baking facility in Grand Rapids that produced granola.

Hearthside’s latest milestone — one that propelled its annual sales north of $1 billion — came this spring with the merger of Ryt-way Industries, a Lakeville, MN, provider of contract manufacturing services and packaging equipment; it was also a part of Wind Point Partners’ portfolio of companies. Hearthside also sold off its Golden Temple division to Post Holdings for $158 million and used the profit to fund the Hearthside/Ryt-way merger.

To Rich Scalise, Hearthside’s  chairman and CEO, the merger of the ­complementary businesses makes perfect sense. Hearthside produces an array of snacks, cereal and baked goods, including cookies, crackers, croutons, stuffing, pretzels, rye bagel chips, popcorn, snack mixes, bread sticks, toaster pastries, muffins and more, and in a big way. The company, for instance, cranks out more than 3 billion cold-pressed and baked bars on an annual basis.

Ryt-way specializes primarily in co-packaging of dry foods. It also produces packaging equipment under the Cloud Equipment brand. Its expertise on the back end of the production line can open new opportunities for both businesses. Together, the combined company has 20 manufacturing facilities and 7,500 employees in seven states.

“As we look at our customer base and growth, packaging is playing a bigger and bigger role on the consumer side,” explained Mr. Scalise, a 35-year veteran of the food industry. “Day-part snacking is huge. There’s snacking at breakfast, lunch and dinner. All of a sudden, you’re seeing a proliferation of new products, packaging sizes and different shapes.”

While the increase of 100-Cal packs has softened, the demand continues to multiply for even smaller airline-pack snacks, individually wrapped bars and sandwich crackers in cups as well as to variety packs, club store bags and family-sized boxes of cookies. “Customized packaging is one of our solutions,” Mr. McNamara said. “With Ryt-way, we’re able to do it in a much more ­powerful way.”

In the co-manufacturing world, the ability to survive — and even thrive — relies on how a company  adjusts to constantly shifting trends while maintaining the ability to be fast and flexible yet drive value, according to Mr. Scalise.

“In order to win, we have to be faster at what we do,” he observed. “We have to be flexible, and we have to add additional value. And value is not just about price. It’s about the whole equation of quality, service and ­employee engagement.”

Redefining speed to market

Combining Hearthside and Ryt-way isn’t an idea that came out of the blue. Throughout the past few years as a part of Wind Point’s portfolio, the two companies’ management teams exchanged information about the challenges and opportunities they faced in their respective industries, and there was a growing realization that it might be a good idea to combine their businesses someday.

In several cases, they served the same customers, which make up a “who’s who” of multinational corporations that market many of the top-selling household brands in the snack, baking, food and retail industries. In other cases, the combined customer base provides potential new business for both Hearthside and Ryt-way.

“When we looked at our customers and how we do business, it just made sense,” Mr. Scalise said. “This is a perfect complement not only for the baking and ­snacking sides of our business, but there is also a bigger opportunity to serve our customer base. And there’s a whole other set of customers who are packaging products who we can service with other products that we can do.”

Moreover, Hearthside and its customers are redefining the role of the traditional contract manufacturer, according to Mr. Scalise. “When we started, we were great commercialization experts,” he said. “Our customers came to us with their base formulas, and we helped commercialize them through our production and packaging capabilities. Today, we are starting to evolve, and our customers are evolving, too.”

Instead of being considered part of the procurement process, Hearthside now strives to be acknowledged as part of a customer’s supply chain. It didn’t happen overnight. “It’s been very gradual, but it’s been a dramatic change from just four years ago,” Mr. Scalise said. “The great branded companies are going to market more quickly, but they need our help, so they’re going outside of their organization and reaching out to us.”

Open innovation opens up

In the past, Mr. McNamara noted, many potential customers took a “not invented here” attitude. If a branded company didn’t create a new product, the marketing departments often didn’t want to have anything to do with an idea from a smaller company or co-manufacturer.

Today, however, many of Hearthside’s customers are embracing the idea of open innovation. To further enhance speed to market, Mr. McNamara said they’re looking at their external supply chain partners like Hearthside to shorten the product development process, hold innovation fairs and offer new product ideas, line extensions to existing ones or even new packaging proposals. “They’re coming to us and saying, ‘We expect more from you when it comes to innovation.’ When we do it well, it will bring in rewards,” he said.

For a co-manufacturer, developing new products for customers can be tricky because many brands compete in the same cookie, cracker and snack categories. The key, Mr. McNamara noted, involves tailoring potential new product concepts to specific brands and product lines.

“It’s important to know the customers’ business well, what they’re looking for and where they are trying to grow. You need to come up with products that are specifically relevant to them,” he said. “Our partners have shared insights with us on the snacking business and where they see it going, and that guides us in developing new products for them.”

Such collaboration and transparency allows Hearth-side to get a jumpstart on potential projects, reducing the time for getting new products to the shelf by being involved during the early stages of the process. “It gives us the opportunity to build or buy the equipment, develop new technology and come up with line layouts for producing the products,” explained Dwayne Hughes, senior vice-president, supply chain.

Two years ago, for instance, Hearthside discovered a new oven to produce a different type of cracker for a major customer. “We built a hybrid oven with both indirect- and direct-fired capability, and we installed it prior to [the customer] wanting to produce the final product,” Mr. Hughes recalled. “We were working on it 12 months in advance. We eliminated the lead time to install the oven. We had it all there and just needed to put the packaging in.”

Next stage of its journey

By becoming more integrated with its customers, Hearthside can enhance the value proposition it offers. “We’re offering speed to market and scale,” Mr. McNamara said. “We’re offering new ideas to our customers. We’re here to simplify our customers’ business and give them new opportunities to drive innovation. That is a big change from the way co-manufacturing operated in the past.”

Since the May merger with Ryt-way, Hearthside has focused on leveraging synergies and enhancing the capabilities of the two companies to provide a one-stop shopping experience for its customers. “We envision more production in our facilities, so we’re not looking at plant closures or reduction in workforce as ‘how do we bring more business to our company,’ ” Mr. Scalise said. “It’s all about a growth portfolio.”

Four years ago, Hearthside’s objective was to become a $1 billion company. Today, Mr. Scalise noted, the goal is to become a $2 billion business three years from now.

And further down the line, the strategy is to go beyond the baking and snack industries.

“Five years from now, we would like to be in other categories of co-manufacturing,” Mr. Scalise said. “Maybe it’s frozen foods, dried grocery or the canning business. But today, we’re clearly focused on baking, and now we have the new frontier of new packaging for all types of products. That’s our next direction now; then we’ll look in other food categories.”

As in any journey, the destination always changes.    

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