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Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
Attune Foods - Challenging the Goliaths in the breakfast cereal market
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Attune Foods - Challenging the Goliaths in the breakfast cereal market

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Have you ever asked yourself how small healthy food companies grow and grab market share from food giants? This business case study explains how the small but ambitious breakfast cereal producer …

Have you ever asked yourself how small healthy food companies grow and grab market share from food giants? This business case study explains how the small but ambitious breakfast cereal producer Attune Foods challenges huge multinational companies like Kellogg and General Mills.

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  • 1. CASE: SM-200 DATE: 09/15/11 ATTUNE FOODS: CHALLENGING THE GOLIATHS WITH AUTHENTICITY They are full of sugar! These guys are not helping slow down the obesity epidemic! — Rob Hurlbut, as he spat out the cereals with the “good for you” labelRob Hurlbut was the CEO of San Francisco-based Attune Foods, a company focused on sellingfood products whose digestive health benefits were its major attraction. Most of Attune‘sbusiness was in breakfast cereals, although it also produced crackers and snacks.Attune‘s products were positioned in what is often called the ―good for you‖ segment. Itsproducts were not only rich in fiber, allergen-free ingredients and probiotics, but they were alsolow in sugar, and ingredient processing was reduced to a minimum—in short, they were the bestproduct an American could get to start the day, Hurlbut thought. While some of his competitorsshared a similar vision for truly healthy cereals, others were less fussy about health content. Andthey were much bigger: with its $13 million in revenue, Attune had to fight against food giantslike Kellogg and General Mills.Hurlbut sighed. He felt a little overwhelmed, though he liked this ―David against Goliath‖pressure. In his previous job as the CEO of Niman Ranch, one of the leading U.S. producers ofall-natural meat, he managed to grab market share in the U.S. meat industry with better-for-youproducts. Why wouldn‘t he be able to repeat the success story in the cereal business?The key question was, how could Attune double sales over the next four years? Digestive healthwas not exactly a popular conversation topic at most family dinner tables, so Attune‘s small teamwould have to be creative and find the right edge to attract consumers‘ attention.Xavier Lederer and Professor Glenn Carroll prepared this case as the basis for class discussion rather than toillustrate either effective or ineffective handling of an administrative situation.Copyright © 2011 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To ordercopies or request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu orwrite: Case Writing Office, Stanford Graduate School of Business, Knight Management Center, 655 Knight Way,Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrievalsystem, 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. Every effort hasbeen made to respect copyright and to contact copyright holders as appropriate. If you are a copyright holder andhave concerns about any material appearing in this case study, please contact the Case Writing Office atcwo@gsb.stanford.edu.
  • 2. Attune Foods: Challenging the Goliaths SM-200 p. 2PROBIOTIC CHOCOLATE BAR: THE RISE AND FALLAttune began as a concept within Brand New Brands, an incubator of functional food andbeverage ideas. The two founders investigated a range of functional food and beverage conceptsthat they felt had the potential to define new categories in the food space. They started out with75 ideas, distilled them down to a dozen, did concept testing and validated consumer interest,refined them further down to four, and eventually assembled individual companies around eachof these four product platforms. One of them was a probiotic chocolate bar sold under theAttune brand name.Probiotics: A Promising Market in 2006 …Probiotics are bacteria that are beneficial to a persons health, through protecting the body againstpathogenic bacteria, assisting in recovery from an illness,1 or enhancing digestion. Probioticslive within the digestive system and, when present in sufficient numbers, they can reinforce theimmune system. Probiotics are commonly consumed as part of fermented foods with speciallyadded active live cultures, such as in yogurt, or as dietary supplements.2Hurlbut got involved in May 2006, right after the first consumer tests indicated clear consumerinterest in probiotics. He recalled: The probiotic space was really quite interesting then. It was right when there were a lot of people poking around in the U.S. The probiotics category, particularly in the dairy aisle, had evolved quite extensively both in Europe and in Asia but in the U.S. had not really done much. In October of 2006 Dannon launched the Activia brand in the U.S., which gave us a higher level of confidence, thinking, ‗Here‘s somebody spending $100 million a year on television to educate consumers around digestive health and the role that good bacteria can play in your overall health.‘ We saw it as a good indicator that it was less risky to launch with this radical concept than it might have been otherwise.3Attune‘s first product was a probiotic-rich chocolate bar with 6.1 billion CFUs4, a portable andtasty alternative to yogurt. It promised to deliver the probiotics of yogurt in a convenient bar andwas positioned to improve digestive health.Attune, incorporated in October 2006, had a successful nationwide launch with Whole Foods inJanuary of 2007, and rapidly moved into Safeway, Publix, and HEB. Within just 14 months afterlaunch, Attune was present in about 4,000 stores all over the U.S.1 The Free Dictionary, http://medical-dictionary.thefreedictionary.com/probiotic (accessed 8/23/11).2 Probiotic, in Wikipedia (http://en.wikipedia.org/wiki/Probiotic, accessed 8/23/11).3 Quotations are from interviews with the author unless otherwise specified.4 CFU: Colony-Forming Unit, a measure of the number of cells.
  • 3. Attune Foods: Challenging the Goliaths SM-200 p. 3… Hit by Recession Two Years LaterAttune‘s rapid evolution was badly hit by the 2007 recession, considered ―the worst recessionsince the 1930s‖5 (Exhibit 1). Hurlbut commented: We quickly built a very broad national footprint, which included the number two and three retailers in the grocery category. They were excited about the potential, but then they, too, realized that people were very reticent to spend dollars outside of the absolute necessities. That was particularly the case with Publix in Florida, where the economy reached a sort of ground zero.Attune‘s products also apparently found difficulty in fitting into established categories.Hurlbut explained: On top of tough economic times Attune faced a structural challenge: it offered a new ingredient (probiotics) in a new form (the chocolate bar) which was merchandised in a new location in the store (the refrigerated section of the dairy aisle). Consumers can‘t deal with novelty that well. We also asked consumers to adopt a behavior that they were already doing but they‘d really never thought about, which was eating chocolate every day.As a result Attune‘s revenue dropped from about $3 million revenue to less than $1 million.Hurlbut concluded: ―We decided that spending big dollars to grow a product of this typeduring challenging economic times was going be a very expensive effort.‖ATTUNE 2.0 Attune took several initiatives to rebound. It shrunk its distribution back to the core, the naturalfoods channel, where it had good traction. Hurlbut observed, ―Certainly, natural food shoppersare a much more adventurous group. They‘re open to trying new ideas, and they also havegenerally more discretionary income to spend on food.‖The crisis also precipitated some general rethinking of the company‘s strategy. Hurlbut and histeam launched what they called Version 2.0 of Attune Foods. This reorientation built on the ideaarticulated in the original business plan: be a broader digestive health platform, providing notjust probiotic bars but probiotic and digestive health beverages and other digestive health foodsthat met the needs of a very specific consumer niche.As its CEO put it, Attune‘s ambition was to be the ―leading digestive health brand in the country.Americans have been seeking additional fiber in their diet forever, so this isn‘t a new idea. Butwhat we‘re trying is to build a positive association with the idea of your gut being in goodworking condition and eating foods that promote overall gut health.‖5 Danielle Cadieux and David W. Conklin, ―The Great Recession, 2007-2010: Causes and Consequences,‖ Harvardcase study, Prod. # 910M08, Jan 15, 2010.
  • 4. Attune Foods: Challenging the Goliaths SM-200 p. 4Accordingly, Attune also broadened its product base in December 2009 by acquiring U.S. Mills,a company specializing in natural, organic, and specialty cereals, cookies, and crackers. Twobrands in its portfolio attracted Attune management‘s attention: Uncle Sam and Erewhon.Uncle Sam was one of the very first cereals introduced in the U.S. market. It was launched in1908 specifically to address digestive health and was marketed as a laxative cereal even up untilthe 1970s: Uncle Sam Cereal was invented by a constipated Omaha-based businessman named Lafayette Coltrin. At age 76, Coltrin was told by doctors he had only 6 months to live. The diagnosis: acute abdominal ulcers aggravated by chronic constipation. The doctors prescribed flaxseed oil to ease his constipation. The ailing man took the doctors recommendation but hated the taste of flaxseed oil, so he took what he thought were his last days on earth to create a cereal that would make flaxseeds more bearable. The result of his trials was wheat flakes sprinkled with flaxseed and celery powder. Not only did the cereal taste fine, it also eased his constipation more than flaxseed alone. He called the new product Uncle Sam Breakfast Food―named so because Coltrin resembled the character Uncle Sam.6Today Uncle Sam‘s recipe is still based on wheat flakes and flaxseed.Erewhon,7 one of the nation‘s first organic brands, was founded by Michio Kushi, a Japanesephilosopher, writer and spiritualist, who had been ―deeply impressed by the atomic bombing ofHiroshima and Nagasaki … and decided to devote his life to world peace and harmony.‖8 Kushiwas considered to be ―the father of modern Macrobiotics, a prophet, a man of vision, ofcompassion and dedication to the ideals of the United Nations.‖9 Erewhon started in 1966 as asmall natural foods retail store in Boston, and soon contracted with farmers to produceorganically grown food. It also became one of the first U.S. companies to establish a ―Charter ofQuality Standards for Natural Products‖ for its product line, banning synthetic preservatives,artificial colors and flavors, hydrogenated oils, and only accepting natural sweeteners such ashoney, maple syrup, and molasses.10Both products had experienced very little evolution in terms of ingredients and recipes and theyhad a very loyal customer base. Hurlbut said: Erewhon was a $10 million business in 1972, and it‘s since gone through all kinds of changes. At one point it had 600 SKUs under the Erewhon brand, and what6 http://www.mrbreakfast.com/cereal_detail.asp?id=1190 (accessed 9/4/11).7 Erewhon is derived from the 1872 novel of the same name. In this satirical novel by Samuel Butler, Erewhon (ananagram of ―nowhere‖) is a utopia in which individuals are responsible for their own health.8 ―Biography of Michio Kushi‖ (http://www.michiokushi.org/bio.php, accessed 9/4/11).9 Extract from the citation when Kushi was awarded the Award of Excellence of the United Nations Society ofWriters (see http://www.michiokushi.org/honors.php) on 9/20/1994.10 William Shurtleff and Akiko, ―History of Erewhon: Natural Foods Pioneers in the United States,‖ 2006(http://www.soyinfocenter.com/pdf/Erewhon.pdf) andhttp://en.wikipedia.org/wiki/Erewhon_Organic_Cereal#cite_note-test-0 (accessed 9/4/11).
  • 5. Attune Foods: Challenging the Goliaths SM-200 p. 5 was left of it was about 30 cereal SKUs, many of them gluten-free. So, really, we viewed the opportunity not only in the organic but also in the gluten-free segment. We consider gluten-free as part of the broader allergen avoidance market, which is another big part of digestive health.Combined, Attune and U.S. Mills represented $13 million in revenue at the time of theacquisition.When Attune acquired them, both brands had very different customer profiles and their brandimage was considered old-fashioned. Typical customers‘ reactions to the products were: ―UncleSam? Yeah, my grandfather eats that!‖ while Erewhon was considered an ―old hippie brand.‖MARKET AND INSTITUTIONAL CONTEXTNutrition in the U.S.Many adverse health conditions were believed to occur due to inappropriate nutrition in the U.S.In fact, in 2008 poor nutrition was thought to be responsible for the doubling obesity anddiabetes rates over the previous 25 years (Exhibit 2).―The real tragedy is that overweight and obesity, and their related chronic diseases, are largelypreventable,‖ said Dr. Robert Beaglehole, WHO Director of Chronic Diseases and HealthPromotion. ―Approximately 80 percent of heart disease, stroke, and type 2 diabetes, and 40percent of cancer could be avoided through healthy diet, regular physical activity and avoidanceof tobacco use.‖11 People suffering from nutrition-related diseases had to adapt their nutrition(e.g. reduce sugar consumption, eat gluten-free). These diseases include digestive diseases,diabetes, and celiac.By the first decade of the twenty-first century, digestive diseases affected 60 to 70 millionAmericans, and were the underlying cause of more than 236,000 annual deaths. This cost theU.S. health care system about $86 billion per year 12 (see Exhibit 3 for statistics broken down bydigestive disease).Diabetes is a disease in which blood glucose levels are above normal.13 Of total diabetes cases,90-95 percent were type II diabetes, which is associated with older age and obesity. Diabetesaffected an estimated 25.8 million Americans, out of which 7.0 million were undiagnosed. Ontop of that ―35 percent of U.S. adults aged 20 years or older had prediabetes (50 percent of adultsaged 65 years or older),‖ according to the CDC. Diabetes was reported to be the underlying11 World Health Organization, ―The World Health Organization warns of the rising threat of heart disease and strokeas overweight and obesity rapidly increase‖, September 22, 2005.12 ―Opportunities and Challenges in Digestive Diseases Research: Recommendations of the National Commissionon Digestive Diseases,‖ Bethesda, MD, National Institutes of Health, U.S. Department of Health and HumanServices, 2009.13 ―National Diabetes Fact Sheet, 2011,‖ Centers for Disease Control and Prevention (CDC), 2011.
  • 6. Attune Foods: Challenging the Goliaths SM-200 p. 6cause for 71,382 deaths per year in 2007 and to generate about $116 billion direct cost to theU.S. health care system.Celiac disease is a chronic intestinal disease caused by intolerance to gluten. Celiac diseasecannot be cured; affected people have to follow a lifelong gluten-free diet.14 Three millionAmericans were estimated to be affected, the vast majority of which were undiagnosed. On topof that an estimated 10-15 percent of the population (approximately 30 to 45 million Americans)were reported to be non-celiac gluten intolerant (NCGI).15In line with the growing health concerns of the American population, the sales of labeled ―free-from‖ products increased about 15 percent per year between 2008 and 2010. The gluten-freesubcategory increased 18 percent per year (Exhibit 4). Following the same trend, gluten-freecereal grew 19 percent per year to an estimated $22.2 million for the same period.16The Organic Food Market17The organic market experienced strong growth in the first decade of the 21st century: U.S. salesof organic food and beverages grew from $1 billion in 1990 to $26.7 billion in 2010. Sales in2010 represented 7.7 percent growth over 2009 sales. Organic food and beverage salesrepresented approximately 4 percent of overall food and beverage sales in 2010.In 2010 mass market retailers (mainstream supermarkets, club/warehouse stores, and massmerchandisers) sold 54 percent of organic food. Natural retailers (e.g., Whole Foods, TraderJoe‘s) were next, selling 39 percent of total organic food sales. Other sales occurred via farmers‘markets or community supported agriculture (CSA), mail order, or specialty stores.The production of organic food experienced a similar strong growth. However, organicproduction remained marginal. ―Overall, certified organic cropland and pasture accounted forabout 0.6 percent of U.S. total farmland in 2008,‖ according to the U.S. Department ofAgriculture. Organic fruits and vegetables, which had been developing for decades in the U.S.,represented a larger share of the pie: 5 percent of U.S. apple acreage was organic, 8 percent oflettuce, and 13 percent of carrots. Organic livestock represented ―2.7 percent of U.S. dairy cowsand 1.5 percent of the layer hens managed under certified organic systems‖ in 2008.18Cereal Market and CompetitionThe breakfast cereals market in the U.S. was huge: a study revealed that 85 percent of Americansreported eating cold cereal for breakfast in the prior three months.19 As one can expect from a14 National Center for Biotechnology Information (http://www.ncbi.nlm.nih.gov/pubmedhealth/PMH0001280/ andhttp://www.ncbi.nlm.nih.gov/pmc/articles/PMC1435993/, accessed August 30, 2011).15 www.foodreactions.org, quoted by Mintel. It is important to note that a real diagnosis is difficult to obtain,leading some to think that part of the rise of NCGI is just a fad (see for instance http://www.foodrenegade.com/the-rise-of-gluten-intolerance/).16 ―Food Allergies and Intolerance – U.S.,‖ Mintel, October 2010 (figures for natural supermarkets only).17 Organic Trade Association (http://www.ota.com/organic/mt/business.html, accessed August 23, 2011).18 U.S. Department of Agriculture (http://www.ers.usda.gov/data/organic/, accessed August 23, 2011).19 ―Breakfast Cereal—U.S.,‖ Mintel, August 2007.
  • 7. Attune Foods: Challenging the Goliaths SM-200 p. 7market that had reached such a level of maturity, growth was insignificant (Exhibit 5): annualgrowth over a 10-year period was expected to be 0.5 percent.20Within the cereal market the organic sub-segment was growing much faster though: the marketfor organic grain products (bread, cereal, and pasta) was expected to grow at 12 percent annually(Exhibit 6) and to amount to $941 million by 2010.21In the organic cereal business, Attune faced several competitors: some were owned by largeprocessed food conglomerates, like Kashi (owned by the Kellogg Company), Cascadian Farms(owned by General Mills), and Barbara‘s Bakery (owned by Weetabix), and others wereprivately owned, like Nature‘s Path. Kashi was considered the largest competitor, followed byCascadian Farms and Nature‘s Path. Barbara‘s Bakery and Attune were the smallest of the largemarket players.Kashi, Cascadian Farms, and Barbara‘s Bakery all started as small private companies rooted inthe counterculture; each developed a strong image in the organic/good-for-you segment. None ofthem prominently referred to their powerful mother companies in their consumer communicationafter their acquisition, probably because ―organic-food buyers tend to eschew conglomeratesfamous brands.‖22 Yet, being part of larger groups allowed them to leverage the scale anddistribution power of their respective mother companies.Kashi23 was founded in 1984 in California by the Tauber couple who were ―seeking anutritionally balanced breakfast. They began experimenting with different whole grains andseeds, trying to create a pure blend that would satisfy their own health-conscious lifestyle, aswell as others.‖24 Acquired by Kellogg in 2000, it was an organic food company that marketed abroad product portfolio ranging from cereals to frozen pizzas. Its tagline, ―7 whole grains on amission,‖ reflected the company philosophy to provide nutritious whole grain foods to a growingnumber of people.25 Kashi employed about 70 people.Cascadian Farms was started by Gene Kahn in 1972, as a small organic farm in the CascadeMountains of Washington.26 ―Gene was an idealistic 24-year-old grad-school dropout fromChicago, who just wanted to make a difference in the world. He recognized the delicate balancebetween nature and humans … and wanted to go back to the land and farm in a way that wouldnot harm the natural beauty of the earth or her inhabitants.‖27 The farm is still there but theproduct portfolio broadened significantly to include organic frozen fruits and breakfast cereals.20 ―Breakfast Foods: The Market – U.S.,‖ Mintel, November 2008.21 ―Organic Food – U.S.,‖ Mintel, October 2008.22 Kevin Helliker, ―In Natural-Foods Sector, A Big Name Isnt Tasty ‒ Buyers Often Eschew Well-Known Brands,‖The Wall Street Journal, June 10, 2002.23 According to ―The Kashi Yearbook,‖ the name Kashi was inspired by Michio Kushi, ―the Japanese philosopher,writer and spiritualist who helped introduce the macrobiotic diet to the U.S.‖ and who in 1966 launched Erewhon,which later became one of Attune‘s main products..24 Kashi‘s website (www.kashi.com, accessed 9/4/11).25 Kashi‘s website (www.kashi.com, accessed 9/4/11).26 Cascadian Farms‘ website (http://cascadianfarm.com, accessed 9/4/11).27 http://cascadianfarm.com/Mission.aspx, (accessed 9/4/11).
  • 8. Attune Foods: Challenging the Goliaths SM-200 p. 8In a cereal blind tasting competition in San Francisco in 2006, Cascadian Farms‘ cereals werevoted into the Hall of Fame, the competition‘s highest honor.28 It was taken over by SmallPlanet Foods, which in its turn was taken over by General Mills in 2000. According to the WallStreet Journal: When it was bought by General Mills, Cascadian Farms was a small maker of organic frozen fruits, vegetables and entrees. It had never produced a breakfast cereal. General Mills, a close rival to Kellogg to be the largest U.S. cereal maker, wanted a larger share of that category in the natural-foods market. General Mills‘ officials concluded their companys reputation meant less to natural-foods customers than a brand known to be organic. ‗To the organic customer, the heritage of Cascadian Farms has more equity‘ than the image of General Mills, says Marc Belton, a General Mills senior vice president.29Barbara‘s Bakery30 was launched in 1971 in the San Francisco Bay Area by 17-year-old BarbaraJaffe who ―found her calling in real food and opened a small natural bakery in NorthernCalifornia. She had a simple plan—make wholesome food taste incredibly delicious. Inspiredby good health, family, and the kitchen table as the cornerstones of the good life, she used wholegrains and oats just as nature intended.‖ Forty years later Barbara‘s Bakery had become awholesale business offering products including cereals, snack bars, cookies, crackers, and cheesepuffs. Its philosophy was to offer the ―best-tasting natural products free of artificialpreservatives, hydrogenated oils, and refined white sugar.‖31 It was acquired by U.K. breakfastgiant Weetabix.Nature‘s Path, started in 1985, was a privately held, family-owned company that producedorganic breakfast foods and snacks.32 Based in British Columbia (Canada) it employed 350people and sold in 40 countries. According to Mintel, Nature‘s Path ―leads the gluten-free coldcereal sub-segment with $9.4 million in sales for the rolling 52 weeks ending June 12, 2010. Thecompany is generally regarded as being exceptionally well run, with a history of launchingproducts that consumers want, which has proven challenging for many entrants.‖33 Nature‘sPath claimed to be always organic and to have a strict non-GMO policy. In its ―Minifesto,‖34stating its mission and values, Nature‘s Path reported to ―aspire to advance the cause of peopleand planet, along the path to sustainability. And we like to think we put our money where ourmouth is.‖35 For instance, Nature‘s Path ―reduced the size of its boxes by 10 percent, whilekeeping the contents the same, contributing to ‗global sustainability‘.‖36 Another example of the28 Carol Ness, ―Two brands of raisin bran voted into Hall of Fame,‖ March 22, 2006.29 Kevin Helliker, ―In Natural-Foods Sector, A Big Name Isnt Tasty ‒ Buyers Often Eschew Well-Known Brands,‖The Wall Street Journal, June 10, 2002.30 www.barbarasbakery.com (accessed 9/4/11).31 http://www.barbarasbakery.com/about/ (accessed 9/7/11).32 Natures‘ Path website (www.naturespath.com, accessed 9/4/11).33 ―Food Allergies and Intolerance – U.S.,‖ Mintel, October 2010.34 ―Spelled ‗Mini‘festo because ‗it delivers our promise in a bite-size format thats easy to digest‘,‖ (post onNature‘s Path Facebook page, 9/7/11).35 http://www.naturespath.com/company/minifesto (accessed 9/7/11).36 Marian Burros, ―Idealism for Breakfast,‖ The New York Times, January 11, 2006.
  • 9. Attune Foods: Challenging the Goliaths SM-200 p. 9quality of Nature‘s Path‘s products, a New York Times article cited an ―undated article onmenshealth.com declar[ing] Natures Path Optimum Power Breakfast the ‗best high-fibercereal.‘‖37 Nature‘s Path philosophy is probably best summarized by Arran Stephens, presidentof Natures Path in 2002, commenting on the recent reduction in sugar content of one of Nature‘sPath cereals: ―Theres lots of junky stuff out there. Were offering a much healthieralternative.‖38AUTHENTICITY―Digestive health is a pretty big business opportunity but is not something that Americans reallywant to talk about,‖ said Attune‘s CEO. ―So our challenge is to develop a brand approach that isgoing to make this topic more accessible.‖Daniel Wiser, Stanford MBA ‘07 and marketing director at Attune, continued: We call ourselves a ‗digestive health‘ food company, but consumers do not look to food to provide such clinical benefits. They want food to be food―not medicine. We instead articulate the meaning through our brand promise of ‗What Matters Most Is What‘s Inside,‘ which spans across multiple product categories― fiber for Uncle Sam, allergen (including gluten) avoidance with Erewhon, and probiotics with Attune. We promise products that have ‗Simple Ingredients‘ and that are ‗Simply Made,‘ using recipes that have been around for (in some cases) over 100 years. We focus on providing better-for-you foods that consumers trust to help them feel their best from the inside out.At the core of Attune‘s brand strategy, Hurlbut and his team developed the concept ofauthenticity. According to Wiser: Authenticity means transparency and truth in what the brand promises. A brand is nothing but a promise. An authentic brand communicates to consumers what it stands for in a transparent and honest way. Honesty and transparency are particularly important today: 30 years ago it was easier for brands to say something but be something different. But today, particularly with the Internet and the emergence of new media like blogging and online social media, there‘s just so much more information for so many more people that, if youre not telling the truth and if youre not being transparent and honest about who you are and what you are, youre going to be called out and that erodes your brand instantly. It‘s very important for us to do as we say and say as we do. We have nothing left, if not our word.The basis of Attune‘s approach to authenticity was its old and ―unspoiled‖ products: Attune‘scereals products had been around for several decades, and their recipes and production methods37 Andrew Adam Newman, ―For Those Who Want Their Cereal Extra Manly,‖ The New York Times, July 23, 2009.38 Betsy McKay, ―The Organic Myth ― That Pesticide-Free Product Isnt Always Healthiest Pick; Anyone forNatural Cheetos?‖ The Wall Street Journal, December 26, 2002.
  • 10. Attune Foods: Challenging the Goliaths SM-200 p. 10were still very similar to the original ones. Wiser explained: ―People have an inherent trust inthings that have been around for a long time. If something has been around for over 100 years, ifit hasn‘t changed, there‘s an implicit assumption that there has to be something special about it.You can imagine how few food products from 1908 are still on grocery shelves today. Sincethen there have been dozens of food fads, diets that have come and gone, countless trends thathave dominated consumers‘ purchasing habits, and thousands of new product failures. ThatUncle Sam has survived since then is a badge of honor that he needs to continue to wearproudly.‖ Among other advantages of old brands, Attune‘s consumers are reportedly highlyloyal. Finally, taking over these existing brands gave access to a broad portfolio of distributionchannels: Uncle Sam was distributed by more than 3,000 retailers across the U.S.Attune prided itself in putting on the market products with unadulterated ingredients: UncleSam‘s recipe was simple, as Wiser explained: We take whole wheat berries and then steam, toast, and flatten them. We flavor them with a tiny bit of barley malt and sea salt. We then add whole flaxseeds, and that‘s it. Our process keeps the ingredients unadulterated and preserves the natural fiber and nutrition of the whole grain. The vast majority of cereals on the market are made with flours which are turned into batters and slurries, and then pressed through a machine to form what appears to be a flake (or another shape like an O). It was because of these modern ways of making food products that the government required cereal (and other grain) manufacturers to fortify their products with b-vitamins. Not enough of the natural vitamins that were present in the raw grain were seen in the finished product. Fortification is no longer required, but it is still commonly practiced with cereals. In fact, Uncle Sam was fortified until 2010 when we decided to investigate why. We tested the presence of b-vitamins in a non-fortified finished product, and compared them to what was present in the raw grain. We found that our minimal processing preserved the integrity of the b-vitamins. As a result, we stopped fortifying our cereal.This willingness to be transparent carried over to many other fields. One instance waspackaging: Attune had recently redesigned its packaging with the objective to create a classic,old-fashioned but still modern look and feel to the brand. Annelies Zijderveld, online communitymanager, explained: ―One of the things that was important to us when we were taking thephotographs for the new packaging was using the actual product: we didn‘t use lots of Photoshopto make it look different. A lot of times if you look at cereal products on the shelf it looksperfect. The thing with food is: food is not perfect. Food is food.‖Attune‘s willingness to be true to its word went beyond what the best informed consumers wouldever know. When talking about the importance of being consistent with the brand when sourcingingredients, Wiser told this anecdote: We just found out that a small portion of our flaxseed came from Canada. There‘s nothing wrong with Canada.39 Obviously I love Canada: it has great agricultural systems and a trustworthy food supply chain. It‘s fine, except that we sell a39 Wiser is Canadian.
  • 11. Attune Foods: Challenging the Goliaths SM-200 p. 11 product called Uncle Sam which has a lot of American heritage built into the brand and perception. We thought, ―If not Uncle Sam, who else would use only American grown grains?‖ So we just made it a small point to source 100 percent U.S. flaxseed. Is that something that the consumer is ever going to know? Never. Ever. We don‘t say it on the box, and there is no place on the ingredient panel to list the source. It‘s just an important principal that is part of our brand promise. We apply the same principles to our partners: the partners that we choose are ones that are consistent with our mission and our brand.CommunicationBesides products, communication was considered by Attune‘s staff to be another key pillar ofauthenticity: ―Today‘s customers are definitely becoming much more interested in figuring outwhere their food is coming from and how is it made,‖ said Zijderveld.Next to in-store activities, social media played a key role in Attune‘s communication: ―Socialmedia helps us be more authentic because it allows more transparency and more depth ofinformation. And we can leverage a key resource, which we can‘t in other ways: our verypassionate fan base for our products, who recommend them,‖ according to Zijderveld.Social media also offered a way to communicate a different message. Zijderveld continued:―Our big competitors have very loud speakers out there and you have this little speaker in theback that‘s saying something different from this sea of loud music. There‘s no point in us evenbothering to compete there. So instead, we have very clear target consumers and we‘re doingour best to reach them in a way that is authentic, real, and true to our message. Being onlineallows us to be very targeted in terms of who we reach.‖CHALLENGES OF A GROWING ORGANIC FOOD COMPANYDistributionGetting access to the final consumers was one of the main challenges of small food companies.Attune sold mainly in two ways: directly through supermarkets (e.g., Wal-Mart, Trader Joe‘s,Publix, Kroger, and Safeway) and through distributors (e.g., United Natural Food and Kehe),which in their turn sold to retailers in their portfolio. Attune‘s products were sold through 400supermarket chains across the U.S. Steve Bernier, Attune‘s director of sales, explained how hedealt with account management: The decision to add or keep an account [supermarket chain] is made through a cost/benefit analysis. Some accounts are more costly to work with than others. What make an account more costly are among others spoils and damages. Also the pathway [whether it is a direct customer or a distributor customer]: additional costs are incurred through a distributor, because you have to pay a mark-up. Some accounts also charge participatory ad packages or other fixed costs, which increase the cost-thresholds of these accounts. Finally in some cases you need to
  • 12. Attune Foods: Challenging the Goliaths SM-200 p. 12 meet minimum volume thresholds to get in a new account: for instance Wal-Mart has a higher volume threshold than other accounts. Our large competitors throw millions of dollars up against their brand to support them. We don‘t have that luxury. In dealing with supermarkets, this is definitely a challenge because dollars really speak to them.Not only money but also time was a challenge in Attune‘s relationships with supermarket chainsand distributors. Hurlbut said: ―In some accounts we can see a category buyer once a year.When you get 30 minutes at the most once a year, you just don‘t have a lot of time to actuallymake change and get things going.‖On the other hand, Attune had some strong arguments, as Bernier explained: A lot of our accounts have been carrying Uncle Sam and Erewhon since before many competitors were even out there. We‘ve been true to our brand all the way through: that‘s definitely one of our strengths, it is our legacy. One of the biggest questions of supermarkets is, ‗What kind of volume and dollars [price] are you going to bring?‘ They don‘t want products that aren‘t going to move and take up shelf space. Uncle Sam‘s and Erewhon‘s high customer loyalty is a key argument here. Also our products drive a higher price premium for the supermarkets: we are from 10 to 25 percent more expensive than non-organic products, depending on the retailer and whether we sell directly or through a distributor.Supermarkets wanted to take advantage of the rapidly growing ―good-for-you‖ segment in thefood industry. Attune‘s products were well positioned in this niche, as Bernier explained: ―Ourargumentation towards supermarkets is about our very straightforward and non-GMO ingredientpanel, our clean products, and product-specific characteristics like gluten-free and organiccertification.ProductionProducing organic food creates additional challenges for a food company, as explained by LindaLam, in charge of operations at Attune: Most of our ingredients are organic and all are non-GMO certified, which makes them more expensive. The cost difference varies by ingredient: the cost difference between regular and organic raisins is very small whereas the difference between organic and non-organic milk may be up to 50 percent. Being organic increases the administrative burden: each of our ingredient suppliers and our co-packers, which produce our products, has to go through a certification audit every year. We have about 100 ingredient suppliers and four co-packers: maintaining the certificates can be a painful process. On top of that some of our products are gluten-free, which we have to test in a lab after each production batch.
  • 13. Attune Foods: Challenging the Goliaths SM-200 p. 13 Availability is also a challenge, as the number of suppliers is limited for some ingredients. For instance we use a very specific organic corn grit that not many producers supply. The same applies to co-packers: some co-packers don‘t want to go through the process of getting certified and having the continuous audits. For one of our small chocolate products there is only one co-packer in North America that can make our product. It makes production cost so high that we are discontinuing that product. And, of course, there is a timing issue with organic ingredients: if you need stuff in February but the organic crop is later in the year, you have a problem. That makes the production planning a bit more challenging. Finally, organic products are more difficult to export. When we want to export to Canada or Japan, our products need to be Canadian or Japanese certified. Each country has different organic certification guidelines. That‘s an added challenge.LOOKING FORWARDHurlbut sat back and thought for a minute. The past 18 months had been intense and challenging:the small Attune team managed to bring together Uncle Sam and Erewhon with Attune‘sinnovative mindset. They had aligned branding and packaging around the concept ofauthenticity, reduced the number of SKUs, and drastically reduced costs to make operationsprofitable.The time had come for the next step: leverage the strengths of Attune‘s renewed productportfolio in order to grow. Hurlbut‘s objective: double sales over the next four years. In agloomy economy and a mature cereal market, this was going to be a challenge. Hurlbut knewthat he could count on Attune‘s unique strengths and strong team. Yet questions remainedunanswered.For example, what were the pros and cons of the company‘s focus on authenticity? Should itadapt its marketing and sales approach, and if so, how? Also he was concerned about thesustainability of some customer segments, like gluten-free: some experts thought it was just afad; how could Attune take advantage of this rising market, keeping in mind that the markettrend could reverse in the coming years?
  • 14. Attune Foods: Challenging the Goliaths SM-200 p. 14 Exhibit 1 Growth of the U.S. Real GDP Growth of the US Real GDP (%) 25 20 15 10 5 0 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 -5 -10 -15Based on data from the U.S. Bureau of Economic Analysis (BEA)
  • 15. Attune Foods: Challenging the Goliaths SM-200 p. 15 Exhibit 2 Increase in Obesity and Diabetes in the U.S.Source: Centers for Disease Control & Prevention (Department of Health and Human Services)
  • 16. Attune Foods: Challenging the Goliaths SM-200 p. 16 Exhibit 3 Burden of Selected Digestive Diseases in the United States, 2004 Digestive diseases Number of deaths in the U.S. Direct cost to the U.S. health (2004) care system ($ million) (2004)Digestive cancers (e.g. colorectal, 135,107 $8,441.5pancreatic)Liver disease 36,090 $2,532.0Viral hepatitis 5,393 $1,300.5Gastrointestinal Infections 4,396 $1,343.4Peptic Ulcer Disease 3,692 $2,599.9Pancreatitis 3,480 $2,546.2Diverticular Disease 3,372 $3,569.3Abdominal Wall Hernia 1,172 $5,698.9Gastro-esophageal Reflux Disease 1,150 $12,125.0Gallstones 1,092 $5,763.6Inflammatory Bowel Disease 933 $1,071.0Appendicitis 453 $2,310.6Functional Intestinal Disorders 423 $3,661.2Hemorrhoids 14 $775.8Other 39,397 $31,960.8All digestive diseases` 236,164 $85,699.7Source: ―The Burden of Digestive Diseases in the United States,‖ Dr. James E. Everhart, U.S. Department of Healthand Human Services, Public Health Service, National Institutes of Health, National Institute of Diabetes andDigestive and Kidney Diseases, 2008.Note: The direct costs represent charges for hospital services, physician services, prescription drugs, over-the-counter drugs, nursing home care, home health care, hospice care, and outpatient endoscopy.
  • 17. Attune Foods: Challenging the Goliaths SM-200 p. 17 Exhibit 4 [Natural] Supermarket Sales of Gluten-free and Dairy-free Foods, 2008 - 2010 ($ million) 2008 (ending 2009 (ending 2010 (ending CAGR 2008- June 14) June 13) June 12) 2010 (%)Dairy-free:Beverages 68.7 74.7 76.9 5.8%Frozennovelties anddesserts 16 19.6 22.8 19.4%Yogurt andkefir 9.3 10.8 13.5 20.5%Gluten-free:Snacks 50.5 57.4 68 16.0%Baking mixessupplies andflour 20.4 24.3 27.8 16.7%Bread andbaked goods 17 21.6 27.2 26.5%Cereal 15.7 18.9 22.2 18.9%Pasta andpizza 12.9 15.5 17.9 17.8%Total 210.6 242.8 276.4 14.6%Source: ―Food Allergies and Intolerance – US,‖ Mintel, October 2010.
  • 18. Attune Foods: Challenging the Goliaths SM-200 p. 18 Exhibit 5 Market Size and Growth of Cereal Sales in Supermarkets (2003 - 2013F) Cereals in Supermarkets - Market Size ($ million) and Growth (%) 8,000 2.0% 1.5% 6,000 1.0% 0.5% 4,000 0.0% $million % change -0.5% 2,000 -1.0% -1.5% 0 -2.0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (est.) (fore.) (fore.) (fore.) (fore.) (fore.)Based on data from: ―Breakfast Foods: The Market – US,‖ Mintel, November 2008.
  • 19. Attune Foods: Challenging the Goliaths SM-200 p. 19 Exhibit 6 U.S. Sales and Forecast of Organic Grain Products (2003 - 2013F) Organic Grains Products ‒ Market Size ($ million) and Growth (%) 1400 25.0% 1200 20.0% 1000 15.0% 800 $million 600 % change 10.0% 400 5.0% 200 0 0.0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (est) (fore) (fore) (fore) (fore) (fore)Based on data from: ―Organic Food – US,‖ Mintel, October 2008.Note: Includes sales of organic food through FDMx (Food, Drug, and Mass distribution) and Natural channels. Doesnot include Wal-Mart or Trader Joe‘s. Does not include private label products. Grain products include bread, cereal,and pasta.

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