Odwalla, Inc.

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Odwalla, Inc.

120 Stone Pine Road
Half Moon Bay, California 94019
U.S.A.
Telephone: (650) 726-1888
Toll Free: (800) 639-2552
Fax: (650) 726-4441
Web site: http://www.odwalla.com

Public Company
Incorporated: 1985
Employees: 500
Sales: $59.09 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: ODWA
NAIC: 311421 Fruit and Vegetable Canning; 312112 Bottled Water Manufacturing

Youthful, hip, and fresh, Odwalla, Inc. went from backyard juicer to big business faster than you can say “Strawberry C Monster.” While an E. coli scandal in 1996 squelched its explosive growth, the company’s openness in response to the crisis, won it kudos and it remains today one of the country’s leading brands of fresh juice. Other popular varieties of its “Juice for Humans” include Mango Tango, Femme Vitale, and Serious Ginseng. In 1997 Odwalla converted most of its delivery trucks to run on compressed natural gas, for which it won a Clean Air Award from the American Lung Association.

Orange Juicing Origins

In 1980, 25-year-old George Steltenpohl and two fellow musicians, Gerry Percy and Bonnie Bassett, were in Santa Cruz casting about for ways to make money without much capital. They also wanted to contribute something positive to their community. A business guidebook gave them the idea of selling fruit juices and thus Odwalla was launched in a shed in Steltenpohl’s backyard in September 1980.

The company’s name came from a character in an Art Ensemble of Chicago song-poem called “Illistrum.” Odwalla delivered the “people of the sun” from the “gray haze.” The group set out to do the same with a secondhand, $225 juicer and a 1968 Volkswagen van. Local restaurants were the first clients for the fresh-squeezed orange juice.

Business was brisk. The company was incorporated in California in September 1985. It expanded into San Francisco in 1988. Steltenpohl, who earned a degree in environmental science from Stanford University, attributed Odwalla’s success to the fact that consumers were becoming more quality-conscious in general. In fruit drinks, this translated to the taste, nutrients, and enzymes available only in nonpasteurized, fresh juice. This utter reliance on fresh produce left the company somewhat at the whim of nature, though, and subject to unexpected losses.

In 1992, Inc. magazine reported on the pride and passion that rallied its 80 employees around the product. The company kept workers informed about the juices’ nutritional benefits and involved them in taste testing and product naming. A pint of juice (two for drivers) was part of the daily salary. The company marketed about 20 different types of juices at the time, which sold for about $1.50 to $2.00 a pint.

Into the IPO Zone in 1993

Steltenpohl aimed for more than simple enthusiasm through empowerment. “If you can take wage earners and instill an entrepreneurial drive, that translates into much greater productivity,” he told Nation’s Business. People were essentially trained to manage themselves, he said. Employees could also design their own jobs to an extent. Corporate headquarters a couple of blocks from the surf in Davenport, California also was considered a motivator.

Odwalla operated 35 delivery trucks in 1993, when sales were about $13 million a year. It invested in state-of-the-art hand-held computers for its drivers, who served as de facto PR reps as they escorted the juice along the “cold chain” to the “O-Zone”—the company’s distinctive in-store coolers.

The company launched its initial public offering (IPO) in December 1993, when it had slightly less than 200 employees. The RvR Securities (“risk-versus-reward”) arm of San Francisco investment bank Hambrecht & Quist Inc. had begun investing in the company in 1992, acquiring a 16 percent stake. The group was impressed by Odwalla’s strong customer loyalty and its distribution network. Soon after the IPO, the company expanded into the Pacific Northwest via the acquisition of Dharma Juice. It then bought Just Squeezed, based in Denver.

In 1994, Odwalla moved production to a renovated plant in Dinuba, California surrounded by produce fields. It moved its corporate headquarters to Half Moon Bay, California the next year. Odwalla by then dominated Northern California’s fresh juice sales, holding half the market. Its products were sold in 1,400 locations.

Odwalla began selling bottled water in the mid-1990s. It was supplied by Idaho’s Trinity Springs, whose aquifer held water carbon dated from the Stone Age, 16,000 years ago. This new line was very much the opposite of its highly perishable, unpasteurized fruit drinks. Water did not require refrigeration and could be sold in more outlets, offering a distinctive growth opportunity.

Revenues for fiscal year 1996 were $59.2 million. Odwalla supplied 4,000 locations in seven states (California, Colorado, Nevada, New Mexico, Oregon, Texas, and Washington) and British Columbia. Its largest customer was the Safeway grocery chain. The natural foods market was growing at a rate of 25 percent a year. Steltenpohl estimated that the company would reach $100 million in sales around 1999. He and co-CEO Stephen Williamson told shareholders: “Our objective, our passion, is to lead the fresh beverage revolution.” It spent heavily to get on Texas shelves in October 1996. Odwalla was on the verge of becoming a national brand.

1996: Disaster and Mitigation

As part of its sanitation process, the company cleaned its fruit with a phosphoric acid wash and whirling brushes. But this failed in October 1996. An outbreak of food poisoning caused by E. coli 0157:H7 killed a toddler in Denver and sickened 66 other people in the West, and the problem was traced to Odwalla apple juice. Pure apple juice accounted for a tenth of the company’s revenues; it also was used in blended drinks, which accounted for a majority of its business.

Investigators speculated that Odwalla may have been sent fallen apples (or “grounders”) that had come into contact with animal feces (the bug lives primarily in the digestive tract of cattle). Or it may have come from carrots harvested from the earth. The Seattle Times reported that Odwalla’s sanitation was substandard in the week the tainted juice was produced.

Odwalla officials stated that they believed this strain of E. coli, only discovered in 1982, could not survive in cooled, acidic apple juice. The microbe appeared to be evolving. Steltenpohl pointed out that it also could be spread on fresh lettuce. Even minuscule amounts of the germ could spread infection. This was the same virulent pathogen that in 1993 had killed three people in Washington State who had eaten insufficiently cooked hamburgers at the Jack-in-the-Box chain.

Odwalla responded by recalling its juices containing apples or carrots, which were processed on the same line. It offered to pay medical bills for consumers who the juice made ill. The public relations problem was serious. As Steltenpohl later told Forbes, “Children’s health problems are ranked as the worst thing that can happen to a company.” Damage control took many forms. Aside from holding press conferences and setting up an 800 number hotline, Odwalla used the Internet to disseminate information about the health problem and Odwalla’s response to it. Edelman Public Relations had a web site devoted to the crisis running on the same day Odwalla received word of the contamination. The site received 20,000 hits in the first two days. Links to authorities like the Centers for Disease Control helped firm Odwalla’s credibility.

Odwalla’s stock fell 40 percent. It would not be considered an attractive takeover candidate by the major fruit juice brands. Its brand name was damaged. There were also numerous lawsuits, which the company faced with $27 million worth of insurance and $10 million in cash. (The Jack-in-the-B ox E. coli lawsuits of 1993 cost Foodmaker $56 million in legal costs.) Most of the suits were settled within a year. Sales fell 90 percent in the immediate wake of the crisis. Odwalla laid off ten percent of its 650 workers by December 1996 and posted a loss of $11.3 million for the fiscal year ending February 28, 1997. In December Odwalla announced plans to flash-pasteurize its apple juice.

The crisis affected not just Odwalla; grocery store chains dropped other fresh juice producers as well. Growers across the country grappled with the issue of pasteurization as the FDA considered making it mandatory. Most felt that the process destroyed the freshness with which they differentiated their offerings, in addition to adding another set of costs. Some growers in the Apple Hill area of California were among the first to implement a 23-point quality assurance plan that, among other things, forbade the use of “grounders,” or fallen apples. These guidelines were referred to as Hazardous Analysis Critical Control Point (HACCP) rules.

Company Perspectives:

Odwalla has strived to make and deliver great products while nurturing our relationships with humans and the environment. Our beacon phrase, “Nourishing the Body Whole,” reflects a fundamental value of caring for all the communities that are touched by our business.

Fresh juice accounted for only two percent of the total juice market in the United States. Some producers resented attempts by Odwalla, the media, and government to deflect criticism to the industry as a whole. “Let’s not lose track of the real issue,” one told the San Mateo Times, “Odwalla got animal poop on its apples and failed to wash it off.” According to FDA statistics, the fresh juice industry overall reported only 447 illnesses (including the one fatality) for more than 500 million servings between 1993 and 1996. Nevertheless, the agency required juice marketers to label the following warning on fresh apple juice beginning in September 1998 (and all other fruit and vegetable juices by November): “WARNING: This product has not been pasteurized and, therefore, may contain harmful bacteria which can cause serious illness in children, the elderly, and persons with weakened immune systems.” Juice produced to the HACCP standard was exempt from the labeling requirement. The fresh juice industry naturally railed against the labeling, believing it would scare away consumers. They complained that it was “more aggressive” than that required even on raw pork.

Although Odwalla’s openness in the face of the crisis was commended by many, the company received the highest food injury penalty ever in what was reportedly the country’s first criminal conviction in a food poisoning case. It was levied a $1.5 million fine after it pled guilty to 16 counts of delivering adulterated food products into interstate commerce, a misdemeanor. At Odwalla’s suggestion, one-sixth of the fine was earmarked for the Safe Tables Our Priority charity and to researchers at the University of Maryland and Penn State University. Fortunately, the resolution of this case made Odwalla stock safe again for institutional investors, who owned about 28 percent of the company before the crisis. That would fall to a low of four percent in 1998.

Rebuilding in 1997–98

Product offerings proliferated as the company pulled out all the stops to win back consumers. A new type of liquid lunch debuted in May 1997. Odwalla’s Future Shake, designed to appeal to a younger market than that of nutrient-fortified Ensure, was marketed as a “drinkable feast” made from “real food” like oats, almonds, soy, banana, and mango. No diet drink(one pint contained 12 grams of fat), it offered a lunchtime alternative to fried fast food. These were offered in Inner Chai, Dutch Chocolate, and Cafe Latte flavors. Odwalla introduced an energy bar, its first solid product, in September 1998. This entered the company in a $900-million-a-year market. There was also a new line of “Nutritionals” enhanced with proteins, herbs, vitamins, and fruits. Redesigned packaging appeared in September 1999. The new bottles featured bolder graphics and a sturdier cap but held slightly less juice. Odwalla also introduced pasteurized versions of its citrus drinks.

Odwalla announced that it was again profitable by the third quarter of 1997–98, posting a profit of $140,000 versus the previous year’s $1.8 million loss for the period. Analysts reckoned there was still life left in its brand name. The company continued to expand geographically, entering Philadelphia and Washington, D.C. markets. This expansion was soon followed by entry into markets of Chicago, Detroit, Minneapolis, and Phoenix. Analysts felt it wise for the company to get a toehold in these new markets before someone else did, even if it came at the expense of bottom line profits. Odwalla’s revenues were up 12 percent in 1998, to $59.1 million.

“Odwalla is in the business of providing easy access to great-tasting nourishment,” CEO Stephen Williamson told the Wall Street Journal. It was still in business—sales were on track to reach $67 million in 1999, a rise of more than 12 percent. Nevertheless, a net loss was projected. One analyst estimated that the company would have been a $150 million-a-year, national business were it not for the E. coli incident.