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CASE NUMBER: M-305B

VERSION: 4/22/03

Victoria Chang prepared this case under the supervision of Professor Sonya Grier as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright © 2002 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business.

GARDENBURGER ADVERTISING STRATEGY (B)

THE SEINFELD SPOT In 1998, Gardenburger launched a $14 million advertising campaign (25 percent of 1997 sales of $56.7 million), created by Hal Riney & Partners. The campaign began with print in 1997, followed by print and TV in 1998 and 1999. Television spots began airing May 4, 1998 with two of three animated spots. The advertisements used humor to focus on three product attributes: great taste, healthfulness, and convenience. The third spot aired on May 14 1998, during the highly publicized last episode of NBC’s comedy sitcom, “Seinfeld.” Gardenburger paid $1.7 million for the 30-second “Seinfeld” spot, more than 11 percent of the company’s 1998 advertising budget. Some media analysts called the “Seinfeld” finale “the Super Bowl for Women” because of its incredible popularity, particularly amongst women aged 25 to 54, a key target audience for Gardenburger. The company used the tagline, “Eating good just got great.” The commercial spot featured a male hula dancer trying to woo a woman with promises of Gardenburgers at a luau. “If this is truly going to be a big category, somebody’s got to be there first,” said Paul Janus, Hal Riney’s creative director on the account. “This is where we stick our flag in the ground.”1 For the remainder of the year, the Gardenburger’s TV ads continued to air—1,500 times with 1.5 billion impressions. Only about 24 of the TV ads appeared on network television in prime time due to Gardenburger’s limited advertising budget. The remainder aired on cable, late at night, or on syndicated shows. The print campaign featured 100 insertions in 33 major publications (Exhibit 1). Gardenburger financed its TV campaign with $15 million in privately placed debt and sold the notes to Dresdner Kleinwort Benson (now Dresdner Kleinwort Wasserstein, a global investment bank). Gardenburger hoped to make that money back in sales. Gardenburger’s overall campaign was designed to take the brand from niche to mainstream, said CEO Larry Hubbard, who wanted to “brand the category.” Hubbard continued: “The biggest downside is that we make them [consumers] aware, but they don’t care. However, I’m not really worried—we already know that the product gets great repeat business. The issue will be getting enough people to try it.”2 1 Bill Richards, “Gardenburger Bets the (Soybean) Farm on the Last ‘Seinfeld,’ Wall Street Journal, April 13, 1998, p. A1. 2 Warren Thayer, “Gardenburger Aims for the Top,” Frozen Food Age, April 1998, p. 1.

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Some industry experts and competitors remained skeptical of Gardenburger’s advertising move. “These people [Gardenburger] are looking for a broad-based mindset change with a 30-second commercial,” said Mohan Sawhney, a professor at Northwestern University’s Kellogg Graduate School of Management. “TV is a lousy medium to do that.”3 Gardenburger’s key competitor, Worthington Foods, (Morningstar Farms label), also expressed skepticism: “If you go into a broad medium that isn’t already eating your products, that’s not terribly efficient,” said Donald Burke, executive vice president of marketing and sales. “Their slogan was ‘There’s a dog in the garden.’ They couldn’t have been more right.”4 Worthington claimed to have employed a different strategy by building consumer appetite for its products more slowly, using promotions such as coupons. Several research analysts, however, remained excited about Gardenburger’s prospects: “We believe Gardenburger is building a powerful brand franchise. With a stated intent to ‘brand the category,’ Gardenburger has established itself as the leader in the rapidly growing meatless burger category. For the past six months there has been a running debate as to whether or not the company’s high-stakes advertising gamble would pay off…the answer is ‘yes’! We expect sales to grow 45+ percent over the next few years,” said Hambrecht & Quist analysts.5 Preiser agreed: “The Seinfeld buy was very efficient based on the value of the PR it generated.” AFTERMATH OF ADVERTISING The actual “Seinfeld” episode drew 76 million viewers (one of the biggest television events in history). The episode ended up reaching 106 million, as Nielsen Media estimated that an additional 30 million had watched the show on videotape or outside of their homes. An online survey of 485 people after “Seinfeld” rated Gardenburger’s advertisement the second most memorable out of 28 ads—a Godzilla ad ranked first. Gardenburger’s commercial was also ranked third favorite commercial overall. Analysts expected the entire meat alternative category to grow by $15 to $20 million as a result of Gardenburger’s campaign. However, they expected half of the gain in sales to go to Worthington Foods, the market leader. David A. Goldman, an analyst at NationsBanc Montgomery, called the effect the “wind tunnel” effect, where the biggest player tended to reap the largest benefit from advertising splashes, while others made out more meagerly. A review of sales trends in the frozen meat alternative category showed upticks in sales whenever any one of the companies ran an ad campaign or introduced a new product. Sales growth of Morningstar Farms meat alternatives was three times what it was before Gardenburger’s advertising. For the week ended May 24, 1998, industry sales of meat alternatives jumped 73 percent from a year earlier, indicating that many new consumers had decided to try the products. Unit sales of Morningstar Farms meat alternatives had risen 31 percent in the four weeks ended May 17. Boca Burger also claimed an increase in sales of 108 percent during the four weeks following the “Seinfeld” finale compared with same week sales the previous year. Gardenburger said that in the week following the commercial, its sales jumped to nearly $2 million from $368,000 in the year-earlier week. In July 1998, the company reported a 91 percent

3 Bill Richards, “Gardenburger Bets the (Soybean) Farm on the Last ‘Seinfeld,’ Wall Street Journal, April 13, 1998, p. A1. 4 Ibid. 5 Bonnie Kramer Tonneson and Joe Norton, “GBUR Advertising Gamble Paying off Big,” Hambrecht & Quist, July 15, 1998.

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increase in sales for the second quarter. “Along with our other marketing and promotions programs, we invested over $40 million in discretionary marketing spending during 1998 which produced an operating loss for the year of $14.4 million,” said Hubbard. “However, fueled by this advertising and our new product introductions, sales grew 76 percent to $100 million over 1997.”6 The day after the Seinfeld episode, Gardenburger also reported 33,000 hits to its website. Prior to the commercial, at the end of 1997, Gardenburger owned 21 percent unit market share, compared with Worthington Morningstar’s 42 percent. Following the company’s TV advertising campaign, Gardenburger had nearly 52 percent of the market, while Worthington had dropped overall to 26 percent (although Morningstar Farms had increased unit sales in the four weeks ended May 17) (Exhibit 2). In a company press release, Gardenburger stated that brand awareness had also increased after its ad campaign from 22 percent of all households to 42 percent.7 TOPLINE GROWTH NOW, EARNINGS LATER Despite successful sales and unit share gain, skeptics worried that Gardenburger had strapped itself financially. They contended that the company had bet on the huge advertising campaign that, while it bulked up sales, had left the firm strapped for cash and burdened by debt. In December 1997, Gardenburger had no debt and cash of more than $2.6 million. At the end of September, however, the company had approximately $3 million in cash, but more than $30 million in short- and long-term debt. In January 1999, Gardenburger released its fourth-quarter numbers that substantially missed analyst estimates. The company posted net income of $320,000, or three cents a diluted share, compared with estimates of 10 cents a share. A year prior, the company earned $979,000 or 10 cents a share. Rich Dietz, Gardenburger’s chief financial officer, said “…this is not an earnings story right now, but a sales story. We’re trying to brand a niche and take it mainstream.”8 Simultaneously, the company had announced that its shares of the market increased to 55 percent for the week ending January 9, 1999, up from 24 percent share a year prior (Exhibit 3). INDUSTRY CHANGES By the end of 1999 the meat alternative category had reached $300 million. The health benefits of frozen soy and vegetable-based hot dogs and hamburgers drove growth in the category. Sales of soy-based vegetable burgers and hot dogs had been rising steadily in the wake of preliminary research suggesting that soy contained many life-enhancing benefits. The category received a boost in October 1999 when the federal government permitted food companies to make the claim that soy protein reduced cholesterol and the risk of heart disease. In addition, following Gardenburger’s TV advertising launch, several large food companies had acquired smaller meat alternative players. In September 1998, Worthington acquired the third largest player, Harvest Burger from Archer Daniels Midland for $9.3 million. The meatless

6 Gardenburger 1999 Annual Report, p. 4. 7 Gardenburger Press Release: “Gardenburger Captures Largest Share of Veggie Patty Category’s Strong Growth,” January 27,

1999. 8 Jeff D. Opdyke, “Heard in the Northwest,” Wall Street Journal, February 3, 1999, p. NW2.

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patties added Worthington’s Morningstar Farms name in January 1999.9 Worthington wanted to assert its category leadership with the purchase of Harvest Burger. In 2000, Kellogg acquired Worthington Foods for $347 million, bringing to the brand its distribution network and salespeople. Kellogg CEO, Carlos Gutierrez, described the acquisition of Worthington Foods as “part of our commitment to develop high growth earnings streams that complement our cereal and convenience foods businesses (namely the growing soy business).”10 Kellogg wanted to create greater product awareness and acceptability by marketing Morningstar Farms’ products more aggressively. It believed that it could boost the 15 percent household penetration rate of Worthington’s products as well as Worthington’s 18 percent repeat rate on its Morningstar Farms products. Kellogg also planned to use its extensive sales and distribution network to broaden Worthington’s products into new and existing retail and foodservice channels. Also in 2000, Kraft Foods acquired Boca Burger for $100 million. “With our resources in distribution, technology, marketing and sales, we can achieve the same aggressive growth for Boca Burger [compared to Kraft’s other buy-and-build businesses such as Capri Sun, Tombstone Pizza, and Altoids mints],” said Rick Searer, president of Oscar Mayer and Pizza Divisions of Kraft Foods. “In addition, we see significant new product potential and hope to further strengthen the marketing programs behind the business. Longer term, Boca Burger’s expert knowledge provides an excellent platform for a greater presence in soy-based products in the future.”11 COMPETITOR ADVERTISING EFFORTS Worthington Foods claimed it had a clear strategy for capitalizing on advertising by its rivals. For example, in 1998, it hired a service to print coupons for Worthington products on the receipts of shoppers who had bought other brands of meat alternatives. Consumers who purchased a Gardenburger or Green Giant Harvest Burger received $1 off the next purchase of Worthington’s Morningstar Farms. In January 1999, Worthington Foods launched new TV commercials to announce the addition of the Harvest Burger products to the Morningstar Farms line. The ads appeared on broadcast and cable programs. Also in 1999, Worthington Foods upped the ante with a $6 million TV campaign beginning May 24 for its Morningstar Farms brand. The TV ad included one spot for new Morningstar vegetarian Corn Dogs and one for vegetarian Buffalo Wings. The campaign featured two 30-second spots—“Surprise a Guy” and “Surprise a Gal”— that featured the products in a familiar, family setting. In the commercials, the main characters tried to surprise their friends with the new meat-free versions of their favorite foods. The commercials ended with, “Which is the bigger surprise…how good they are or how good they are for you?” The ad then ended with the new Morningstar tagline—“Enjoy Eating Better.” Ads aired on network and cable channels including Lifetime and A&E. Two 15-second spots, along with consumer and trade print supported the television campaign. Print advertising appeared in Shape, Cooking Light, Vegetarian Times, and Woman’s Day. “Our [advertising] spend is nowhere near Gardenburger’s expenditures, but we like making a profit,” said Randall Wollert,

9 Worthington initiated a $4 million consumer marketing program to launch the new brand. 10 Jane I. Mehring, “K: Tony the Tiger Goes Vegan?” Salomon Smith Barney, October 4, 1999, p. 3. 11 Kraft Foods press release, 1999.

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senior brand manager at Worthington.12 Worthington’s advertising expense was approximately $14,278,000, $11,248,000 and $8,999,000 for the years ended December 31, 1997, 1996 and 1995, respectively. This included advertising for all of Worthington’s brands, however. In 1999, it spent $6.7 million on advertising versus Gardenburger’s $17.3 million (Exhibit 4 and Exhibit 5). Boca Burger launched its first-ever advertising campaign in August 1998, emphasizing that its burger tasted like a real meat-based burger. Its print campaign read: “Not only do Boca Burgers have the great taste of a charbroiled burger, they’re also low in fat and calories.” “We’ve drilled to our point of difference, which is taste,” said Katie Torres, Boca’s vice president of marketing.13 The company spent $1 million on advertising on an annualized basis on print advertisements in Shape, Cooking Light, Vegetarian Times, Weight Watchers, and Eating Well. In 1998, it spent $500,000 on advertising. The ads targeted consumers who “lead full, active, healthy lifestyles.” The ads featured “infamous carnivores” that couldn’t differentiate between a Boca Burger and a beef hamburger. The ad’s caption read: “Even a die-hard meat lover has a hard time telling the difference between a real hamburger and a meatless Boca Burger.” (Exhibit 6 and Exhibit 4). Boca Burger continued to receive positive PR from talk show hosts such as Oprah Winfrey and Rosie O’Donnell. In June 1999, Boca Burger launched another advertising campaign. Chicago Creative Partnership created the $2 to $3 million-dollar print and outdoor effort. The company did not plan television advertising at the time: “Based on who we’re going after, the best way to reach them is through targeted print media and out-of-home in key markets,” said Torres.14 Boca’s print ads suggested that its burgers’ taste could appeal both to guys who ate everything in sight and the diet-conscious consumer. One execution featured a health-conscious woman and a beefy male construction worker. A picture of the two was framed by the pair’s differences. For the woman, bottled water and a healthy lifestyle were key. The construction worker tried to keep his mind off his body. Yet they both loved Boca Burgers. Outdoor executions featured the headline, “Vegetarians celebrate. Meat lovers salivate.” The campaign used the tagline, “Real taste that attracts all kinds.” The print campaign launched in June 1999 editions of female, lifestyle, and health-oriented publications. A SECOND TRY: GARDENBURGER’S YEAR TWO ADVERTISING Despite its increasing profitability issues, on April 12, 1999, Gardenburger launched a $15 million year two national television advertising campaign, designed to continue to drive its topline revenue to new heights as it did in 1998. Rubin Postaer and Associates planned to help Gardenburger create its advertisements. The company left Hal Riney & Partners to follow Bill Marks, the advertising executive responsible for Gardenburger’s first-year advertisements. Although Gardenburger planned to spend a similar amount in 1999 as it did in 1998, in 1999 it shifted media more heavily towards prime time with slots purchased on highly rated programs including “NYPD Blue” and “Touched by an Angel.” The three animated 30-second spots featured a voice-over by the actor Samuel Jackson and used the tagline, “Eating Good Just Got

12 Stephanie Thompson, “Morningstar Revs Vegetarian War with $6M New Product Push,” Brandweek, May 10, 1999, p. 10. 13 Trevor Jensen, “Boca Burger Bites Back,” Adweek, August 24, 1998, p. 8. 14 Aaron Baar, “Meatless Rivals Battle,” Adweek, May 24, 1999, p. 2.

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Great.” The company still planned to target women aged 25 to 54. “We’re taking mainstream what had been a niche product,” said Bill Marks at Rubin Postaer. “We’re still in the trial phase. We had pretty significant awareness gains, but you have to keep after people.”15 Hubbard claimed results for second year advertising were promising. The first five days of Gardenburger’s campaign showed that national alternative meat grocery-store sales, which had been up 26 percent so far in 1999 on a per unit basis, jumped further to show a 45 percent increase after the ads had begun running. Gardenburger’s unit sales, which were up 66 percent in 1999, jumped to an 88 percent increase over the prior year’s sales after the ads started running on “NYPD Blue,” “Chicago Hope,” and “20/20.” Gardenburger’s share of the alternative meat market in grocery stores was 45 percent, compared with about 8 percent in 1996. TROUBLES CONTINUE During the second quarter in 1999, Gardenburger abruptly lost momentum. In July 1999, the company said its net loss widened to $10.5 million or $1.29 a share, from $6.2 million or 72 cents a share a year earlier. Sales fell 14 percent to $22.2 million from $25.7 million. The company’s shares fell 20 percent dropping $1.50 to $5.875. According to ACNielsen, Gardenburger’s year-over-year increase in unit sales slipped to 2 percent in the quarter from 69 percent in the first quarter. After touting the success of the company for several years, research analysts followed suit, rating Gardenburger’s stock a “strong sell.” They believed that the company lacked the capital it needed to fight off stiff competition. One analyst described the situation in July 1999: “It is now evident that the [year two advertising] campaign has failed to provide sales momentum in Gardenburger’s primary and only feasible growth channel—supermarkets. At the end of the quarter, as per ACNielsen data, Gardenburger experienced a paltry plus 2 percent growth unit sales and plus 9 percent growth in dollar sales. For the same period, the veggie burger category declined 1 percent in unit sales while growing 6 percent in dollar sales. Latest results show that Gardenburger holds 49 percent of the market—relatively flat from the pre-advertising time period….In our view, this is a big setback for Gardenburger—as 1999 and 2000 topline growth was almost wholly dependent on generating new consumer trial (as opposed to further distribution gains).”16 Gardenburger management believed that the insufficient level of consumer trial in Q2 1999 could have been due to the following: 1) a saturated consumer base—all interested target consumers had already been persuaded to try Gardenburger products in 1998, and 2) an ineffective advertising campaign that grew stale and didn’t resonate with consumers the second time around. Hubbard addressed the issues in the company’s 1999 annual report: “As sometimes happens with rapidly growing new categories, we hit a bump in the road in 1999. Our advertising and marketing efforts, and those of our competitors, failed to achieve the same kind of dynamic category growth we experienced during 1998. For the first 10 months of calendar 1999, the meatless burger category in the grocery channel was down 1 percent in dollars and 2 percent in units from the same period in 1998. Gardenburger fared better during this same

15 Trevor Jensen, “Gardenburger Readies 2nd Year,” Adweek, April 5, 1999, p. 2. 16 Bonnie K. Tonneson, “Gardenburger,” Hambrecht & Quist Branded Consumer Research Note, July 26, 1999, p. 2.

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period—up 7 percent in dollars and 6 percent in units—but did not achieve the growth needed to continue our efforts to reach our goal of $200 million in sales by the end of 2000. What we did achieve was the more than doubling of our sales since 1996 and the positioning of Gardenburger as the number one meatless burger in all channels of distribution with a 46 percent share in the grocery channel in 1999 and consumer awareness of the brand more than 60 percent higher than our nearest competitor.”17 As a result of its challenges in 1999, Hubbard and the Gardenburger team “right sized” its business structure by reducing its workforce, reducing its finished goods inventories, and planning a significant reduction in Gardenburger’s discretionary marketing expenses in 2000, meaning cutbacks in advertising and coupon spending. Hubbard continued: “With a 46 percent share of veggie burger sales in grocery and an estimated 60 percent in food service…we believe we can successfully reduce advertising and couponing and still maintain a significant leadership position while we continue to pursue product innovation that will return us to rapid and profitable sales growth.”18 (Exhibit 7). DECREASE IN ADVERTISING On August 4, 2000, Hubbard resigned as Gardenburger’s president and CEO. James Linford, Gardenburger’s senior vice president of operations, was named interim president and chief executive officer while the company conducted a national search for Hubbard’s replacement. Gardenburger decided to eschew TV and print advertising and revert to the grassroots efforts from which the brand was born. While a major push into mainstream media helped nearly double sales for Gardenburger between 1997 and 1999, the increased marketing expenditures also contributed to plunging profits. “Our challenge, like any business today, is trying to grow top line; and at some point you have to return to profitability to keep shareholders and maintain viability as a company,” said Linford.19 Linford’s new strategy led to improved financials—at least in the short term. It recorded $1.1 million for the quarter ended June 30, 2000 compared with an operating loss of $16.1 million for the comparable quarter in 1999. Sales declined from $89 million to $71 million in fiscal 2000. Gardenburger’s losses narrowed sharply in 2000 from $31 million in fiscal 1999 to $2.7 million. The savings came mainly from measured media. “I credit TV advertising as the reason we have a strong, viable brand right now, but going forward, given the challenges we have from a business standpoint, we’re going to have to rely on grassroots and creative ways to keep our message viable with consumers,” said Wendy Preiser, vice president of marketing.20 Gardenburger’s shift in advertising strategy came at a time when Gardenburger’s competitors had begun to receive increased marketing dollars from new corporate parents. This affected Gardenburger’s sales. For example, Gardenburger’s sales dropped 14.5 percent to $56 million for the 52 weeks ended July 16, 2000, while Morningstar Farms’ sales grew 3.3 percent to $42 million and Boca Burger grew 33 percent to $23 million. As of December 2, 2000, Gardenburger’s market share in the grocery channel was 28.9 percent, a decline of 8.4 percent 17 Gardenburger 1999 Annual Report, p. 5. 18 Gardenburger 1999 Annual Report, p. 11. 19 Stephanie Thompson, “Gardenburger Goes Grassroots,” Advertising Age, August 28, 2000, p. 6. 20 Ibid.

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from 1999. The company attributed this decline to the increased competitive spending of Kellogg’s Morningstar Farms and Phillip Morris/Kraft’s Boca Burger. In the meantime, Gardenburger sought publicity through PR efforts surrounding FDA approval of the claim that soy products could help reduce the risk of coronary disease. It discussed the soy benefits of its products through press releases. For its new Flame Grilled veggie burger, Gardenburger developed a virtual “sample” of the product on its Website. In addition, in 2000, Gardenburger moved into other meat alternatives, such as a soy and wheat- gluten-based “chicken” called Chik’N Grill and GardenSausage products. This product extension move was an about-face strategy from the company’s previous strategy. Gardenburger also worked on meatless meatballs and faux-pork ribs, as well as a meat-free “sausage” frozen pizza. Some analysts remained skeptical: “They’ve got to get away from the hockey puck,” said Peter Golbitz of Soyatech, a soyfoods consulting firm in Maine. “They just keep reinventing the patty, and now they’ve just reinvented the chicken breast. But they aren’t thinking, ‘What can we do to get in a completely different area of the store?’”21 A NEW CEO On January 15, 2001, Gardenburger hired CEO Scott Wallace. Wallace had arrived at Gardenburger with two decades of experience in food, packaged goods, and consumer products companies. Previously, he had served as CEO of Mauna Loa Macadamia Nut Corporation and was formerly a vice president of sales for E.J. Brach Corporation. “I think Gardenburger hired me because I had experience working in tough financial environments in the past and also had experience managing in leveraged buyout situations,” said Wallace. “In addition, in the past, I had been a part of two financial turnarounds.” Wallace commented on Gardenburger’s previous strategy: “The goal was to sell Gardenburger to a larger food company—to convince someone that we had a viable business that a larger company with the wherewithal in terms of resources and time could expand nationally. We, as a small company couldn’t do that and this is fundamentally why a small company would sell to a big company. If you assume this, you had to call into question a lot of the strategies that were put into place. For example, the company didn’t necessarily need to go national in order to accomplish its goal. You can build the business in certain regional markets that you feel confident that you’re able to support and explain to the large food company that these are the geographies that you’re able to manage the business in because of your limited resources and that the food company would be more equipped to bring the company nationally. By going national on our own, we obligated ourselves to building our awareness nationally. Even under those circumstances, did we need to build it as much as we did? Probably not [by 2002, Gardenburger had an 86 percent awareness due to earlier efforts]. I’m still not sure whether our 86 percent awareness was from consumer advertising or from the fact that our name is on thousands of restaurant menus all over the country.” Wallace shifted Gardenburger’s focus on introducing new products into the strongest markets, including Seattle, rather than the “get big fast” strategy of a prior time. “Some of the markets where the company took the Gardenburger product weren’t ready for it yet, and no amount of time and energy was going to make them ready. We decided to take a common sense strategy of going into those markets where the

21 Drew DeSilver, “Flipping Focus of Gardenburger,” The Seattle Times, July 1, 2001, p. D1.

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consumer would be most receptive to our products and where we thought we could be successful,” said Wallace. “When I first joined Gardenburger, I wasn’t too concerned about the business because I believed the company had a solid business model, but it had just gone off track a bit,” said Wallace. When Wallace arrived at the company he established three main priorities: 1) bring spending in line with the amount of cash going into the business or financial management, 2) correct the positioning of the brand and the company, and 3) adjust the product line. First, Wallace’s was concerned about the company’s debt load. In addition to the $15 million in notes to launch the first “Seinfeld” advertising campaign, a year later the company had sold $32.5 million in preferred stock to four other investment firms. Interest on the notes and required dividends on the preferred stock had led to high debt levels. By July 2001, the company had $62.6 million in short- and long-term liabilities and assets of just $22 million. “We overspent on infrastructure. In addition, typically in this type of situation when management comes in, the reason they come in is a payoff that occurs when there is a successful transaction. The way this company was run was that there were smaller payoffs [bonuses] along the way. Typically you don’t want to do that because you want as much of the cash that the business is generating to drop to the operating income line and to be counted in EBITDA because the way big food companies typically buy small food businesses is on a multiple of EBITDA.” On the profitability issue, “I’m not quite sure why the company made the conscious decision to not just not break even, but to lose money. In my mind, it makes it exceedingly difficult to sell the company and in fact that’s what made it difficult to sell the business in 1999. If you’re a big company and you have the resources, you can spend a large percentage of sales on advertising for a few years if you wanted to. But when you’re a small company like Gardenburger, you just can’t do it,” asserted Wallace. Wallace cut costs by selling Gardenburger’s Portland manufacturing plant and trimming its workforce from 205 to 180. “We have made the necessary financial changes in the company to allow the business to continue forward on a stand-alone basis,” said Wallace. “We now [October 2002] generate a 16 percent EBITDA, which give us many more options. We have access to lower interest rates, capital, and exits that we didn’t have access to in the past.” Second, Gardenburger shifted its focus back to cultural creatives: “It was an easy decision for two reasons. The consumer for this brand originally was cultural creatives,” said Wallace. “It made sense to move back and project an image to those consumers that we were still this small company before all the television and packaging. Also, Boca and Morningstar both focused on the health positioning that we had begun to focus on in the late 1990s. That gave more credence to why we needed to move back to the cultural creatives because we didn’t want to go head to head with either of those players. It’s important to note that we could not have moved back to cultural creatives unless that was what Gardenburger had already stood for.” Preiser commented: “Cultural creatives are a psychographic segment that, though smaller in numbers represent more total usage occasions than the more mainstream target. As the only remaining independent company of the larger veggie burger brands, Gardenburger is uniquely positioned to speak to this consumer”

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Finally, Wallace simplified Gardenburger’s main veggie burger line and planned to introduce new products in fiscal 2002 such as Meatless Meatballs and Riblets. “The burger products plateaued, but the non-burger products in the meat alternative category were experiencing robust growth. The category today [2002] is 45 percent burger and 55 percent non-burger. Burger is growing at 4 to 5 percent and non-burger is growing at 20 percent. We used to be 100 percent burger so we were positioned incorrectly. We had too many variants of the veggie patty. In the future, you’ll see those reduced,” said Wallace (Exhibit 8). 2001-2002 ADVERTISING AND PROMOTIONS In 2001, Gardenburger did not conduct any media advertising. In 2002, Gardenburger launched a print campaign as well as a price promotion campaign: “We’ve tried to do a balance of marketing and not just do pure consumer advertising. We also shifted to something that we thought would be more appealing to cultural creatives in magazines such as Oprah and Real Simple. One of them was an image of a woman who was a cultural creative. It talks about the burger connecting with your soul the same way that your first kiss did,” said Wallace. The advertising campaign tried to appeal to consumers who liked to see themselves as saviors of the environment. The copy stated that Gardenburger came “with plenty of karmic extras,” including “environmental goodwill” and “planetary well-being.” Another ad in the same campaign depicted a young female cultural creative carrying a baby, both staring at a Gardenburger floating above them. The copy read: “Decrease your odds of coming back as a cow.” (Exhibit 9). In the summer of 2002, Gardenburger also conducted price promotions directly with retailers and couponing. “What we’ve found is that there’s such heavy price promotion from our competitors that going forward, out of necessity we’ll have to forego all media advertising in favor of price promotions,” said Wallace. “The two major competitors on a combined basis are dropping in the neighborhood of $450 million in high value coupons annually. In 2002, we only dropped $40 million. We don’t think we need to be equal to them, but at least somewhat comparable. We can accomplish this and plan to conduct price promotions in the future to defend our business and to buy back some of the consumers that switched over to competitor brands in the past. The four coupon drops that competitors did were during the New Year, Memorial Day, Fourth of July, and Labor Day. Those are typically important dates in our industry.” THE FUTURE Despite Gardenburger’s efforts to improve financials and expand its product line, by July 2001its situation had not yet improved. Sales continued to decline, market share sank, debt continued to accrue, and its stock—which hovered around 86 cents—had been kicked off the NASDAQ stock exchange. For the fiscal year 2001, Gardenburger’s sales declined to $59.6 million from $71.0 million in 2000, due mostly to Wallace’s move to shift products away from grocery markets, which were deemed nonstrategic. However, its losses narrowed from a $32.7 million net loss in fiscal 2000 to a $7.2 million net loss in fiscal 2001. Management commented on 2001: “Over the past five years, following ups and downs, rapid expansion, and strategic contraction, Gardenburger has at last come back to rediscover its original purpose. We have arrived where we began, as a company that first and foremost creates food products that are healthier for people

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and healthier for our environment. The difference is that today we are more experienced, smarter, leaner, and better prepared to sustain success in our business. The past fiscal year was one in which we dramatically reduced our fixed costs; made progress toward stabilizing our sales in the Grocery, Food Service and Club Channels; and improved upon a more focused product line.”22 In addition, the company focused on the Food Service and Club channels (e.g. co- branded products with Costco’s Kirkland brand). By the end of 2002, however, management was optimistic: “In 2001, our sales declined 16 percent. In the year ended 2002, our sales grew 20 percent,” said Wallace. “Even with all of the challenges, Gardenburger has survived and we’re now financially strong. One of the things we’re doing is introducing products that are not identical with the products that competitors sell. We’re trying to provide the consumer with a little more in terms of innovation and in terms of convenience. Our Riblet is our best success to date in accomplishing that. What it provides is the sauce with the product and so it is ready to eat right after heating. All of the new products that we introduced have been successful, granted with varying degrees of success, but nonetheless successful.” Wallace commented on the company’s challenges: “One challenge is how to continue broadening the business with the limited resources that we have. We have $80 million dollars in debt, but we have been servicing the debt that we need to service this year, which is the first time that we’ve done that in five years. Thirty million dollars of our debt is coming due in a few years and we are determining how to pay that off. Running the business is much simpler. The business itself is running fine and it is very extendable into other categories. As we look at those opportunities, we have to determine whether it’s best done by us or by a company with better resources.” Wallace reflected on Gardenburger’s roots: “This company stood for something [in its early days]. They preached the value of the product versus mad cow disease, hormones used in raising cattle, the health benefits instead of eating a burger and benefits on the environment. The corporate management that came in took those sharp edges off the company. I think it was a mistake.”23

22 Gardenburger 2001 Annual Report, p. 1. 23 Shelly Strom, “Gardenburger Chief Sets His Turnaround Strategy,” The Business Journal of Portland, August 3, 2001.

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Case Study Questions (B): 1. Evaluate Gardenburger’s advertising strategy and execution in 1998, including the “Seinfeld”

advertisement. 2. Evaluate Gardenburger’s advertising and execution in 1999. 3. Identify factors that contributed to Gardenburger’s challenges in 1999? 4. What could the company have done to overcome its challenges? Could management have

prevented the company’s problems? 5. How should Gardenburger position itself strategically going forward? 6. What should Gardenburger’s advertising strategy be in the future?

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Exhibit 1 Gardenburger Print Advertising 1998

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Exhibit 1 (Cont’d.) Gardenburger Print Advertising 1998

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Exhibit 2

Unit Market Share Following Seinfeld Ad Meat Alternative Category

Brand Before TV Advertising Campaign 12/26/97

After TV Advertising Campaign 6/27/98

Gardenburger 21% 52% Worthington Foods 42 26

Harvest Burger 16 10 Boca Burger 7.0 6.5 All Others 13 5.6

Source: AC Nielsen Data measuring supermarket sales. Bonnie Kramer Tonneson and Joe Norton, “GBUR Advertising Gamble Paying off Big,” Hambrecht & Quist, July 15, 1998.

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Exhibit 2 (Cont’d.) Meat Alternative Category Market Share

Total U.S. Supermarkets $2 Million and Over 52-Week Period

Millions

Sales % Sales % Sales Unit Sales % Unit Sales % Unit Sales 1998 1998 1997 1997 % Change 1998 1998 1997 1997 % Change Total Category $ 135.1 100% $ 86.1 100% 57% 44.7 100% 29.2 100% 53%

Gardenburger $ 56.6 42% $ 18.3 21% 209% 18.9 42% 6.3 21% 201%

Morningstar Farms $ 40.1 30% $ 35.8 42% 12% 13.3 30% 12.3 42% 8%

Harvest Burgers $ 14.7 11% $ 13.7 16% 7% 5.2 12% 4.7 16% 11%

Boca Burger $ 12.1 9% $ 7.6 9% 60% 3.5 8% 2.0 7% 71%

All Others $ 11.6 9% $ 10.6 12% -8% 3.8 9% 3.9 13% 2% Source: AC Nielsen and Case Writer analysis.

Meat Alternative Market 2002 Total U.S. Supermarkets $2 Million and Over

52-Week Period Ending 2/24/02 Millions

Sales

% Sales

%Change Unit Sales

Unit Sales %Change

Total Category $198.0 100% 8.0% 58.9 100% 4.2% Kellogg/Morningstar

Farms $111.8 56% 11.9% 33.6 57% 7.4%

Kraft/Boca Burger $45.2 23% 22.8% 13.5 23% 37.2% Gardenburger $32.7 17% -26.4% 9.5 16% -29.5%

Source: Refrigerated & Frozen Foods, June 2002.

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Exhibit 3 Gardenburger Financials

Thousands

Revenues Gross Profit

Sales & Marketing G&A

Operating Income

Net Income

1998 100,120 49,550 58,513 5,387 (14,350) (10,042) 1999 60,106 25,772 48,021 5,064 (29,997) (22,146) 2000 71,043 34,906 28,288 7,304 (686) (32,653) 2001 59,557 26,999 22,392 4,997 (390) (7,156)

Source: Gardenburger 10-K’s. The Morningstar Farms brand had sales of $103MM in 1998 and $120MM in 2000. Harvest Burger had sales of $15MM in 1998.

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Exhibit 4 Packaging

Gardenburger Packaging 2002

Morningstar Farms Packaging September 1999

Morningstar Farms Packaging 2002

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Exhibit 4 Packaging (Cont’d.)

Boca Burger Packaging 2002

Source: Bocaburger.com

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Exhibit 5 Advertising Expenditures

1998 1999 2000 2001 Gardenburger $19.9MM $17.3MM $316K $1.1MM

Morningstar Farms N/A $6.7MM $13.2MM $5.3MM Source: Company 10-K’s. Gardenburger advertising costs included media advertising, couponing, and other advertising, which were all included in sales and marketing expense. Boca Burger spent $1M on an annualized basis.

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Exhibit 6 Boca Burger Print Advertising 1998

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Exhibit 7 Gardenburger Stock Price History

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Exhibit 8 Gardenburger’s Product Line

1998

Description Key Ingredients Size (oz) Low/No Fat Calories Veggie-Grain Based Products Gardenburger Original

Veggie-grain based patty Common ingredients 2.5 Low fat 130

Gardenburger Sub Sub-shaped

patty Common ingredients 3.1 Low fat 170

Gardenburger Zesty Bean

Spicy, Mexican flavor patty

Red and black beans, Anaheim chilies, red and yellow bell

peppers, cilantro 2.5 Low fat 120

Gardenburger Veggie Medley

Vegetable emphasis patty

Soy cheese, broccoli, carrots, red and yellow bell peppers 2.5 No fat 100

GardenVegan Vegan patty No animal or soy 2.5 Low fat 140

GardenSausage Breakfast patty Maple syrup, natural seasonings 2.5 Low fat 120 Gardenburger Savory Mushroom* Gourmet patty Portabella mushrooms, wild rice 2.5 Low fat 120 Gardenburger Fire Roasted Vegetable* Gourmet patty

Roasted garlic, sun-dried tomatoes 2.5 Low fat 120

Gardenburger Classic Greek* Gourmet patty Kalamata olives, feta cheese 2.5 Low fat 120 Soy-Based Products Gardenburger HamburgerStyle

Hamburger analog Soy, wheat gluten 2.5 No fat 90

Gardenburger HamburgerStyle with Cheese

Hamburger analog

Soy, wheat gluten, mozzarella and cheddar cheese 2.5 Low fat 110

*March 1998 new product introductions. Source: Gardenburger 1998 10-K.

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Exhibit 8 (Cont’d.) Gardenburger’s Product Line

2001 In fiscal 2001, the Company introduced its Chik'N Grill™ product, which imitates the taste and texture of chicken; Riblets, which imitate the taste and texture of boneless pork ribs; and soy-based Meatless Meatballs.

Retail Grocery Products

From the Garden Products Product

Description

Characterizing Ingredients

Fat

Calories

The Original Gardenburger Veggie-grain

style burger Mushrooms, brown rice, onions,

rolled oats and low-fat cheese 3g 120

Gardenburger Santa Fe

Spicy,

Mexican flavor burger

Red and black beans, Anaheim

chilies, red and yellow bell peppers, cilantro

2.5g

130

Gardenburger Veggie Medley

Veggie-grain style burger

Soy cheese, broccoli, carrots, red

and yellow bell peppers

Gardenburger Savory Mushroom

Gourmet burger

Portabella mushrooms, wild rice

2.5g

120

Gardenburger Fire Roasted Vegetable

Gourmet burger

Roasted garlic, sun-dried

tomatoes

2.5g

120

Off the Grill Products

Product

Description

Characterizing Ingredients

Fat

Calories

Gardenburger Hamburger Style Classic

Hamburger analog burger

Soy, wheat gluten 1g 90

Gardenburger Flame Grilled Hamburger Style

Flame grilled

hamburger analog burger

Soy

120

Gardenburger Chik’n Grill

Flame grilled analog

chicken

Soy, wheat gluten

2.5g

100

Gardenburger Riblets

Analog pork rib with

sauce

Soy, wheat gluten

210

In the Kitchen Products

Product

Description

Characterizing Ingredients

Fat

Calories

Gardenburger Meatless Meatballs Analog meatball

Soy 4.5g 110

Source: Gardenburger 2001 10-K.

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Exhibit 8 (Cont’d.) Gardenburger’s Product Line

2001

Club Channel Products Product

Description

Characterizing Ingredients

Fat

Calories

Kirkland Signature Gardenburger Veggie-grain

style burger Soy 5g 200

Gardenburger Flame Grilled Hamburger Style

Flame grilled

hamburger analog burger

Soy

160

Gardenburger Chik’n Grill

Flame grilled

analog chicken

Soy, wheat gluten

120

Food Service Products

Product

Description

Characterizing Ingredients

48/3.4 oz. Original Gardenburger 60/2.5 oz. Original Gardenburger 72/3.4 oz. Original Gardenburger

Veggie-grain style burger Mushrooms, brown rice, onions, rolled oats and low-fat cheese

48/2.75 oz. Garden Deli Sub Veggie-grain style burger Mushrooms, brown rice, onions, rolled oats and low-fat cheese

48/3.4 oz. Gardenburger Veggie Vegan 60/2.5 oz. Gardenburger Veggie Vegan

Veggie-grain style burger Soy cheese, broccoli, carrots, red and yellow bell peppers

48/3.4 oz. Gardenburger Santa Fe 60/2.5 oz. Gardenburger Santa Fe

Spicy, Mexican flavor burger Red and black beans, Anaheim chilies, red and yellow bell peppers,

cilantro 48/3.4 oz. Flame Grilled Soy Flame grilled hamburger analog

burger Soy

36/5 oz. Garden Steak Veggie-grain style burger Mushrooms, brown rice, onions, rolled oats and low-fat cheese

48/3.4 oz. Gardenburger Fire Roasted Vegetable

Gourmet burger Roasted garlic, sun-dried tomatoes

80/2.0 oz. Hamburger Classic Hamburger analog burger Soy, wheat gluten 106/1.5 oz. GardenSausage Sausage patty analog Soy, wheat gluten 4/2.5# Meatless Crumbles Hamburger analog burger Soy, wheat gluten 53/3.0 oz. Chik’n Grill Flame grilled analog chicken Soy, wheat gluten 1/10# (220 Nuggets) Chik’n Nuggets

Breaded nuggets of analog chicken

Soy, wheat gluten

Source: Gardenburger 2001 10-K.

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Exhibit 9 Gardenburger Print Advertising 2002

Source: Gardenburger.