Farley's & Sathers Candy Company, Inc.

1 Sather Plaza
Round Lake, Minnesota 56157
U.S.A.
Telephone: (507) 945-8181
Fax: (507) 945-8343
Web site: http://www.farleyandsathers.com

Private Company
Incorporated: 2002
Sales: $250 million (2003 est.)
NAIC: 311340 Nonchocolate Confectionery Manufacturing

Farley's & Sathers Candy Company, Inc. manufactures and distributes a wide variety of non-chocolate confections and snacks. The company's headquarters is housed in a packaging and distribution center located in the small town of Round Lake, Minnesota. Of Round Lake's 450 residents, 350 are employed by the candy maker. In addition, Farley's & Sathers runs a packaging and distribution center in Chattanooga, Tennessee, and a manufacturing plant in Des Plaines, Illinois, and maintains a fleet of some 80 semitrailer trucks. The company owns or has licensed the rights to a number of well-known brands, including Chuckles, Hot Dog!, JuJyfruits, Now and Later, RainBlo, Super Bubble, and Wunderbeans. Products are sold in a variety of sizes in bags, tubs, and boxes and are also produced in variety mixes. Farley's & Sathers is privately owned by Catterton Partners, a Greenwich, Connecticut, private equity firm.

Roots of Company Date to 1800s

The Farley's and Sathers' names boasted separate legacies until the two candy companies were combined in 1996. The older of the two is Farley's, which dates back to 1870, when Gunther Farley and two brothers established the Gunther Chocolate Company in Illinois. In 1891, the business was merged with a candy company owned by a relative, creating Farley Candy Company. A third generation of the Farley family, Preston Farley, took over in 1951, when the company moved to Skokie, Illinois. Majority control passed out of the hands of the Farley family in 1968, when it was sold to Raymond Frank Underwood, a Nebraska native who held an MBA from Harvard Business School. Underwood worked in sales management for Farley before assuming the presidency in 1962. He held that post until 1974, when he sold the business to William H. Ellis. Under the guidance of Ellis, Farley enjoyed 20 years of strong growth, concentrating on the children's confection market. In 1981, the company acquired a Chicago Peter Paul-Cadbury plant, where it made a full line of chocolate candies, a variety of candy coated peanut treats, and gummi, jell, and starch confections. Other operations were added so that by the mid-1990s Farley operated four Chicago-area manufacturing facilities, plus distribution centers located in Illinois and on the West Coast. In 1996, Ellis sold the business to Lincolnshire, Illinois-based Favorite Brands International. He took a 15 percent equity stake in Favorite Brands and stayed on for a short while to run the unit. Under his leadership, Farley had grown from annual sales of $3.8 million to more than $300 million.

At the same time, it acquired Farley, Favorite Brands also picked up Sathers Inc., founded in Round Lake in 1936 by John Sather after his grocery store burned down. He started out by bagging cookies that he bought by the trainload and sold to other grocers in southwestern Minnesota. In 1946, he was joined by his son Ken, who had just finished a stint as a bomber pilot in World War II. Ken was instrumental in the company, adding almond bark and other candies to the bagging operation and expanding distribution to five Minnesota counties. A major turning point for the company came when its sales force quit en masse over low salaries. In addition to taking orders, the salesmen were also required to deliver the products and stock the shelves. Sathers responded by contacting customers and offering a discount if they would order by phone and stock their own shelves. The response was favorable, leading to the creation of one of the first telemarketing systems in America. Another innovation, credited to Ken Sather, was the introduction of the packaged "pegboard" from which Sathers' bags of treats were hung. The system became an industry standard for the selling of general-line candy. By the 1960s, Sathers was selling to a territory that encompassed five states, and by 1970 the company's reach doubled in size to ten states. It was at this time that Sathers experience a major breakthrough, becoming a supplier to Kmart, which at the time was rapidly expanding across the country and was permitting local managers to make many of their own buying decisions. Ken Sather was able to convince some Kmart managers to give the pegboard candies a try, retailing at the attractive price of two bags for $1. The ploy was a success and caught the attention of Kmart's corporate headquarters. In 1972, Sathers began to distribute to Kmart on a national basis, gaining half of the retailer's national account. Sathers picked up the rest of the account in 1983 by purchasing Chattanooga, Tennessee-based Kitchen Fresh.

In the mid-1980s, Sathers became involved in manufacturing as a way to secure sources of supply. (Earlier, during the 1960s, it acquired a nut-roasting operation.) At that time, the major supermarket chain A&P closed a candy plant, opting instead to buy from outside suppliers. Re-baggers like Sathers were now in an uncertain position, fearful that their suppliers might drop them in favor of serving A&P. In what was essentially a defensive move, Sathers bought the Bayou Candy unit from New Orleans-based The American Candy Co. in 1985, followed by the 1991 acquisition of Powells Candy Co., a Hopkins, Minnesota, candy maker. Also in 1991, Sathers added a Rogers, Minnesota, packaging company. Now, Sathers was capable of producing half of its product line. By the end of 1991, with plants in five cities, the company was generating revenues in the range of $130 million a year. It remained a family-owned business until 1996 when the Sathers agreed to sell the company to Favorite Brands.

Favorite Brands Created in 1995

Favorite Brands was created in late 1995 to acquire the branded caramel, marshmallow, peanut brittle, and dinner mints business of Philip Morris subsidiary Kraft Foods. Favorite Brands was launched by private equity group Texas Pacific Group—which itself was founded in 1992 by David Bonderman, James Coulter, and William Price—along with a smaller private equity firm, InterWest Partners. Favorite Brands paid a reported $200 million for the Kraft product lines, which were no longer a good fit for Kraft. As part of the deal, Favorite brands was allowed to sell caramels under the Kraft label for two years. Because Kraft caramels was the undisputed leader in the category, Favorite Brands enjoyed some immediate success. However, the new company was overly ambitious and too eager to grow the business, despite a lack of expertise in the candy field. Favorite Brands' chief executive officer was Al Bono, formerly the CEO of Gardenia Foods and California Gold Dairy; his head of sales and marketing came from the health and beauty industry. Bono told Crain's Chicago Business, "Business is business, whether it's dairy or chocolate or confections or selling lamps." Bono and his management team, however, would soon learn that the candy business operated under its own peculiar set of rules.

After adding Sathers and Farley in 1996, at a total cost of $400 million, Favorite Brands over the course of the next year acquired Dae Julie Inc., an Illinois seller of candy in bulk; Kidd's, a marshmallow manufacturer; and Trolli, a gummi candy manufacturer. In a very short time, Favorite Brands became the number four candy company, with $800 million in annual sales, trailing only the likes of Hershey Foods Corp.; Mars, Incorporated; and Nestlé USA, Inc. Texas Pacific hoped to take the company public, but it became apparent that Favorite Brands rollup strategy was fundamentally flawed. For one, the company paid too much for its assets and took on too much debt. Next, the acquisitions did not fit well together—featuring different operations, different products, and different customers—thus leading to severe difficulties in integrating the operations and achieving any benefits from the company's size. Moreover, when executives from acquired companies left, Favorite Brands lost an incalculable amount of trade relations and knowledge of the candy business, which had a debilitating effect on business. Some orders were now delivered late or only partially filled, providing an opening for competitors to seize all-important shelf space.

Losing the Kraft label for caramels also hurt. Farley's Original Chewy Caramels simply lacked the same brand appeal, and competitors such as Hershey and Brach's Confection's increased their marketing efforts to gain product share. Revenues for the company fell off, dropping to $764 million in fiscal 1998. Texas Pacific brought in turnaround specialist Steven F. Kaplan, but in March 1999 Favorite Brands filed for Chapter 11 bankruptcy protection. According to its filing, the company had assets of $805 million and $699 million in debts. Management attempted to line up new financing, but Texas Pacific soon put the business up for sale. Although Brach was reported to be interested in Favorite Brands, it was Nabisco that landed the company, paying $475 million in cash.

Kraft Foods acquired the Favorite Brands division from Nabisco in 2000, thereby regaining its marshmallow and caramel lines as well as the Farley's and Sathers companies, which were overlooked and undermanaged by the huge conglomerate. In March 2002, Kraft agreed to sell the unit to Catterton Partners, a Connecticut private equity firm focused on consumer industries. It was founded in 1990 by J. Michael Chu and Frank M. Vest, Jr. Just as Texas Pacific attempted to do with Favorite Brands, Catterton hoped to use Farley's & Sathers as a rollup vehicle for neglected brands, but unlike Texas Pacific it brought in management with experience in the field. Former Nestlé and Famous Amos executive Keith Lively was hired as the company's CEO.

Company Perspectives:

We are "A New Company with a Long History."

Hershey Brands Acquired in 2002

Farley's & Sathers wasted little time adding to its business. In May 2002, it acquired the rights to Chuckles and bought several Hershey brands that originated with Henry Heide, Inc. The best known were Gummi Bears, Jujubees, JuJyfruits, Mexican Hats, Wunderbeans, and Red Hot Dollars. Like many candy makers, Heide boasted a long history. The founder of the business, Henry Heide, was born in Germany in 1846, emigrated to New York City 20 years later, and started the Henry Heide Candy Company in 1869. He would run the business until his death in 1931, after which one of his sons, Andrew Heide, assumed control. The company first started producing Jujubes and JuJyFruits in the 1920s. Red Hot Dollars debuted during the Great Depression of the 1930s. The company enjoyed particular success selling its products in movie theaters and five-and-dime stores. A third generation of the Heide family, Philip Heide, joined the company in the 1960s. He would be the last family member to own the business, which he sold to Hershey in 1995.

Also in 2002, Farley's & Sathers bought the three brands of Kraft's taffy business: Mighty Bite, Intense Fruit Chews, and Now and Later. As was the case with Heide, Now and Then possessed a proud heritage, with roots that reached back to Italian immigrant Charles Cari. Cari learned to make toffee at W.F. Schrafft's & Sons in Boston and then moved to New York to launch his own candy business, concentrating on taffy products. In 1953, he sold his company to a father and son partnership, Harry and Joseph Klein, who named the enterprise Phoenix Candy Company. They enjoyed some success producing Atlantic City-style Salt-Water Taffy, peanut brittle, and Halloween candy. Because the business was too seasonal, centering on Halloween, the Kleins in 1962 decided to make a product that could be sold year-round. The result was Now and Later taffy candy bars, which proved popular enough to allow the company to enjoy steady growth over the next 15 years. (The intent of the name was to suggest to children that they could eat some of the candy now and save some for later.) In 1978, the Kleins sold out to Beatrice Foods, which five years later sold the business to Finnish company Huhtomaki Oy. In January 1986, Huhtomaki Oy merged it with Leaf, Inc., which later in the year sold off the unit to a Finnish investment firm, Korui Capital. Now known as Phoenix Confections, Inc., the Brooklyn-based company operated independently until December 1992, when Nabisco acquired it and folded the assets into its LifeSavers division. Shortly after Kraft's taffy lines were sold to Farley's & Sathers, Now and Later's Brooklyn plant was closed down.

Farley's & Sathers continued to rollup candy brands in 2003. From Hershey it bought four gum brands—Fruit Stripe, Hot Dog!, Rain-Blo, and Super Bubble—adding $30 million in annual sales. These lines were also long-time favorites. Fruit Stripe was established in the early 1960s as Fruit Stripe Zebra, part of the Beech Nut gum line. RainBlo bubble gum was created by Leaf Confectionery in 1940; featuring an unusual hollow center, it was the first gumball to have flavoring inside. RainBlo proved to be an enduring product in the ever-changing gum category. Along with several other Leaf brands, it was sold in 1967 to W.R. Grace, then was reacquired by Lead in 1983. Huhtamaki Oy acquired RainBlo when it bought Leaf in 1983. Hershey then bought Leaf in 1996. Supple Bubble was developed by the Thomas Weiner Company shortly after World War II in the 1940s. The five-cent product was a huge success, but in the face of increased competition the company brought out a one-cent version in 1948. General Mills picked up Super Bubble in 1969. The gum line was later sold to Leaf and was acquired by Hershey in the 1996 acquisition of Leaf.

In a matter of just 18 months, Farley's & Sathers had grown into a company generating a quarter of a billion dollars in annual sales and was listed as number 36 on Candy Industry's roster of Global Confectionery companies. The company's goal was both ambitious and simple: to become the largest non-chocolate candy sales and manufacturing company in America. Given that the non-chocolate market was estimated to be as large as $2 billion, Farley's & Sathers was involved in a promising business. It was also proving successful in bringing resources to develop orphan brands and squeezing out greater results than larger corporate owners had been able to achieve. The company was very likely to add more brands to its portfolio and create even greater synergies.