Campbell Soup marks 50 years as Pepperidge Farm's parent

This month, Campbell Soup Co. is commemorating 50 years of owning Pepperidge Farm Inc., the baking company still based in Norwalk, Conn., where it was founded in 1937.

That history makes Pepperidge Farm an anomaly for Camden-based Campbell, which in the second half of the 20th century built itself into a food conglomerate with well-known brands such as Swanson, Vlasic, Mrs. Paul's, and Godiva, as well as long-forgotten restaurant chains and even pet food.

Pepperidge Farm, purchased in January 1961, is the only free-standing U.S. business remaining from that era of diversification. Campbell bought V8 vegetable juice in 1948, but long ago integrated V8 operations into its soup plants.

By contrast, Pepperidge Farm has not only kept its separate headquarters, but as a baking operation it also has its own plants - including those in Downingtown and Denver, Pa., where 150 million Goldfish tumble out of the ovens daily - and even its own distribution system.

Why, after a long period of scaling back to be more focused on soups, sauces, and beverages, has Campbell held on to Pepperidge Farm instead of selling it, as it did so many other businesses?

It's simple.

"We have a great growth story here at Pepperidge," Pat Callaghan, the bakery's president and a 31-year company veteran, said in an interview at the Norwalk headquarters, where founder Margaret Rudkin is revered - perhaps even more than condensed-soup inventor John T. Dorrance is in Camden.

Named after a tree that lined the driveway of Rudkin's farm in Connecticut, Pepperidge has become increasingly important to Campbell financially in the last decade.

In 2000, its $800 million in revenue accounted for 12.3 percent of Campbell's overall revenue. Since then, Pepperidge Farm's sales have climbed 88 percent, reaching $1.5 billion, or 19.5 percent, of the company's $7.7 billion in sales for the fiscal year ended Aug. 1.

Douglas R. Conant, Campbell's president and chief executive officer, sees Pepperidge Farm - along with a baked-goods subsidiary in Australia - as integral to Campbell's foundation.

"Pepperidge Farm is one of the jewels in the crown here. It's a great business," said Conant, who this month marked 10 years as CEO and is expected to be succeeded in the summer by chief operating officer Denise Morrison.

But John Stanton, a professor of food marketing at St. Joseph's University and a longtime observer of Campbell, is not convinced that Pepperidge Farm is as integral as Conant suggests.

The key difference between Pepperidge Farm and the businesses Campbell has sold, Stanton said, is that it is a "good, steady brand that probably generates cash for Campbell's," as opposed to being a drain on money and management attention.

That could change, Stanton warned.

"I think this whole bakery industry is going to get a lot more competitive with Bimbo coming in," he said, referring to the Mexican firm with U.S. headquarters in Horsham. Grupo Bimbo already owns such popular brands as Stroehmann, Arnold, and Thomas' and is trying to get bigger by purchasing Sara Lee.

Right now, top Campbell executives have enough trouble with the soup business.

Conant had revived the company's soup portfolio during the first half of his tenure, especially the condensed-soup business, which many considered a lost cause. But soup sales this winter are expected to disappoint for the fourth year in a row, according to a research note by JPMorgan Chase & Co. food analyst Terry Bivens.

Price competition from General Mills Inc.'s Progresso brand has been brutal, and supermarket soup sales in general have been weak, down 3.6 percent in dollar terms during the 52 weeks ended Dec. 26, a report by Janney Montgomery Scott L.L.C. analyst Jonathan Feeney said.

"It is a tough market right now for consumers," said Conant - they are eating more meals at home than they have in years, but they are also buying fewer items and spending less money.

"This is not easy. There is heavy lifting in this industry," he said.

At least one analyst has suggested that difficulties in the soup business should lead to some serious contemplation by the Campbell board of drastic measures, such as selling out.

But descendants of Dorrance, the company's founder, still own about half of Campbell Soup's shares, and they keep their intentions to themselves. They could decide to sell, but the tremendous income Campbell generates could stifle that urge.

In the last three fiscal years, the company has paid a total of $1 billion in dividends, with each year's dividend higher than the previous year's. About half of that money went to members of the Dorrance family.

Conant is confident that the U.S. soup business will turn around and that the company's three-year-old efforts to build soup and broth businesses in China and Russia will pay off.

"We've been in the soup market for 100 years. This is a way to make sure we're in the soup business 100 years from now," though it will take decades for the business to reach critical mass in China and Russia, he said.

Even at Pepperidge Farm, not all is rosy. "Cookies as a category have struggled a little bit over the last four to five years," Callaghan said.

To increase sales, the company has to take market share from others with a steady stream of new products and variations, such as Milano Melts, due in stores next month.

Perhaps the most powerful force at Pepperidge Farm is the little Goldfish cracker - "tinies" in the parlance of the Denver bakery, where a web of vibrating conveyors and corkscrew shoots leaves visitors feeling like they have entered Willy Wonka's factory.

Callaghan recalled his early days at Pepperidge Farm, when Goldfish were considered a bar snack and racked up about $10 million in annual sales. In the 1990s, the company discovered that mothers buying them accounted for 40 percent of sales.

The company started selling them as a kids' cracker and sales took off, reaching about $600 million in annual retail sales, Callaghan said.

"I think it can be a billion-dollar brand," he said, though he would not predict when.

Founded: 1937 by Margaret Rudkin, who started baking bread from stone-ground whole-wheat flour for her son with allergies because she was dissatisfied with bread available at the store.

Headquarters: Norwalk, Conn.

Employees: 5,000, including

350 in Downingtown and 735 in Denver, Pa.

Top-selling products: bread (Raisin Cinnamon Swirl); crackers (Goldfish); cookies (Milano)

SOURCE: Pepperidge Farm.

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