Sweetheart Cup Company, Inc.

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Sweetheart Cup Company, Inc.

10100 Reisterstown Road
Owings Mills, Maryland 21117
U.S.A.
Telephone: (410) 363-1111
Toll Free: (800) 800-0300
Fax: (410) 998-1828
Web site: http://www.sweetheart.com

Private Company
Incorporated: 1926 as Maryland Baking Company
Employees: 8,050
Sales: $1.2 billion (1999 est.)
NAIC: 322215 Paper Dishes Made from Purchased Paper or Paperboard; 326199 Other Plastics Product Manufacturing

Sweetheart Cup Company, Inc. manufactures disposable paper, plastic, and foam products for the foodservice and dairy industries as well as for consumer use. Customers of the Food-service Division include schools, entertainment and recreation facilities, and independent and national restaurant chains, especially fast-food restaurants. Sweetheart’s Packaging Division produces containers for ice cream, sour cream, yogurt, and other dairy products and provides packaging equipment designed for the containers. The Consumer Division produces disposable cups, plates, bowls, and eating utensils for retail distribution. The company’s brands include Sweetheart; Trophy; Lily; Preference; Jazz; Simple Elegance; Silent Service; Guildware; and private-label brands.

From Ice Cream Cones to Paper Cups

Sweetheart Cup Company began in 1911 as an ice cream cone bakery operated by four Russian immigrants, the Shapiro brothers, led by Joseph Shapiro. With a bakery outside Boston, the Shapiros decided to move the business to a warmer area where people consumed more ice cream. In 1919 Joseph and another brother took the train from Boston to the first stop south of the Mason-Dixon line and Baltimore became home base for the company, renamed the Maryland Baking Company. One brother managed the existing bakery, while Joe Shapiro opened a bakery in Owings Mills, Maryland. The fresh-baked cones were too delicate to ship long distance, so other family members established a network of ice cream cone bakeries in other cities. This method of expansion placed the company close to its customers, mostly candy and tobacco stores, for better service.

During the 1930s Maryland Baking Company used the net-work of family businesses as support for production and sales of related products, including drinking straws, matchbooks, and other paper products. The first Sweetheart brand product was the drinking straw. The brand derived from the image of two children sharing a milkshake, each drinking from a straw and their heads forming the two curved arcs of a heart. The Shapiro family expanded the facilities at Owings Mills for the production and distribution of new products.

The company began to produce paper cups after World War II. Actually, a family vote of 14-to-l decided against expansion into production of paper cups, but Joseph Shapiro proclaimed a majority of one in favor. The Maryland Baking Company made its first paper cup product, a seven ounce cup with wax coating and adopted the name Maryland Cup Corporation. The decision proved to be lucrative. As the mobility of Americans increased, vending machines which used paper cups began to appear in offices, gasoline stations, ballparks, and schools. Maryland Cup found customers among all of these businesses, as well as hospitals and nursing homes. Also, highway expansion led to the proliferation of fast-food restaurants which also used paper products and McDonald’s became an important customer from the mid-1950s.

Innovation, Customer Service, Good Timing Spur Growth: 1960s–70s

The company continually developed new disposable products, including foam and plastic products, to address the growing market for convenience foods. In 1957 Maryland Cup began to produce plastic containers which dairy product manufacturers purchased for packaged items, such as cottage cheese, sour cream, and yogurt. In 1961 the company introduced a heavy-weight paper cup for over-the-counter hot drinks. Maryland Cup expanded its production capacity to support growing sales. The company opened a plant in Cambridge, Massachusetts, for the new paper cup; consolidated paper cup manufacturing and warehousing in Baltimore; and opened a plant in Wilmington, Massachusetts, to produce throwaway plastic products.

In 1961 the Shapiro family combined their 32 business operations to form one company in preparation for an initial public offering of stock. Merrill Bank, Joseph Shapiro’s son-inlaw, became president and two nephews took the lead of the company’s major divisions; Samuel Shapiro headed the plastics division and Henry Shapiro headed the McDonald’s Hamburgers division.

In 1962 Maryland Cup started a new division to cultivate the Sweetheart brand of disposable cups, plates, and eating utensils for the consumer market. Disposable products came into everyday use with more casual lifestyles and higher incomes. Previously seen as summertime products, used for picnics and out-door activities, disposable paper and plastic tableware began to sell in supermarkets year-round. The company developed new consumer products, such as the Tumblet brand of clear, plastic glasses, and the Casual Cups brand of cone-shaped plastic, hot drink cups which inserted into reusable holders. Sales of the company’s consumer products more than doubled between 1964 and 1969.

Another dimension of the casual lifestyle involved the expansion of fast-food restaurants. Maryland Cup found customers in such chains as Dairy Queen and A&W Root Beer as well as independent restaurants. With product development an essential ingredient in customer service, the company developed clamshell foam containers for McDonald’s hamburgers and the flat yellow banana split dish. New customers also included entertainment complexes such as Disneyland, and sports arenas, such as the Orange Bowl.

Institutional sales also increased during the 1960s as a labor shortage in foodservice and increases in the minimum wage made disposable dinnerware an attractive option to hiring a dishwasher. The disposable products proved to be a cost saver, reducing payroll and payroll tax expense as well as the expense of soap, hot water, and replacement of ceramic dinner-ware. By 1970 the company sold disposable products to 500 institutional users.

Product development was also instrumental in the growth of sales to hospitals, plant cafeterias, and airlines. In 1969 Mary-land Cup introduced a stronger, dual-ply plastic plate which looked like china and provided a rigid support. The company addressed the problem of waste disposal by working on the biodegradability of the molecular structure with plastic producers and on the development of better after-burners which reburned the ash left when a hospital burned the plastic plates.

To support its growing sales, Maryland Cup initiated a capital investment program to expand production capacity in the late 1960s, spending approximately $20 million a year from 1967 through 1970. The company added a drinking straw fac-tory, through the acquisition of Flex Straw Company International in 1969, and two new paper cup manufacturing facilities. Through a joint venture with General Industrial Plastics Ltd., Maryland Cup opened a plant in the United Kingdom to produce disposable plastic containers for ice cream and other dairy products. The company opened a 65,000-square-foot plastic plant in Manchester, New York, in 1970 for the production of injection-molded plastic containers for the food and dairy customers as well as for plastic cups. At this time Maryland Cup operated 27 plants in major metropolitan areas throughout the United States, including Los Angeles, Chicago, Dallas, St. Louis, Atlanta, and Pittsburgh.

Maryland Cup took a total system approach to customer service and customers did not mind paying a premium for the company’s products. Maryland Cup produced high-speed pack-aging equipment designed for filling the company’s plastic containers and then loaned the equipment to its customers without a fee. The Flex-E-Fill filled various size containers with ice cream or sherbet. Hospitals, which served fruit juice up to five times per day, used the Liquid-Fill machine to fill and seal plastic cups of juice. The company also produced the Twin-Filler, which filled ice cream cones and wrapped them in paper packaging. Customer service included assistance with packaging design, promotional programs, and ideas for new products.

Maryland Cup experienced two decades of steady growth as the demand for convenient disposable products continued to grow. During the 1960s sales increased steadily, from $39.2 million in 1960 to $170 million in 1970. Annual revenue in-creases ranged from ten percent to 20 percent, while earnings grew steadily. During the 1970s the demand for vending cups decreased, but soda fountains at convenience stores generated new business. The popularity of yogurt as a health food increased demand for plastic dairy containers. New consumer products involved usability in microwave or conventional ovens.

By 1980 sales at Maryland Cup reached $580 million with 14 disposable products factories, ten ‘Eat-it-All ice cream cone bakeries, and international joint ventures in the United Kingdom, the Netherlands, Japan, and Canada. The company be-came more efficient, installing a semi-automated, 231,000-square-foot distribution center in Owings Mills. In the Nether-lands, new manufacturing equipment for the production of paper cups helped the company meet increased demand from fast-food restaurants there. A new distribution center opened in Gosport, England. Maryland Cup continued to produce equipment for the foodservice industry and improved its Liqui-Fill machine for the institutional market.

Company Perspectives

Our dedication to teamwork, quality, and customer service have made Sweetheart Cup the leading force in the industry.

Winstead, the company’s research subsidiary, focused on improvement of resource materials and lowering production costs. In 1980 Winstead installed new equipment for thermo-forming plastic products by a more energy- and resource-efficient process. The technology used a new hydraulic and electro-magnetic method to form plastic. Winstead also developed a new material for coating paper products, making them more durable and less expensive to produce.

Maryland Cup adapted to new consumer demands with new products. The company worked with fast-food chains to create packaging, such as a domed-lid salad container and “ovenable” containers for carry out pizza. In the early 1980s the fast-food industry accounted for about 30 percent of the company’s sales, with McDonald’s accounting for approximately ten percent of sales. As convenience stores added foodservice to compete with fast-food chains, Maryland Cup assisted in the development of display materials. Maryland Cup generated demand for plastic containers by helping dairy customers to formulate desserts for distribution to the consumer market.

Deterioration of Values, Revenues: 1980s

The Shapiro family still held a majority of company stock, but as members of the Shapiro family neared retirement, they had to decide the future of the company. After the death of Samuel in 1982, the family decided to sell the company. In 1983 Fort Howard Paper Company purchased Maryland Cup for $536 million in cash and stock. Fort Howard found Maryland Cup an attractive acquisition due to its excellent marketing and sales skills, presence in Europe, and complementary line of products. Fort Howard planned to bring its expertise in material cost management to Maryland Cup.

The merger between Fort Howard and Maryland Cup proved to be a fiasco as the company cultures clashed from the first executive meeting. Fort Howard replaced Maryland Cup’s values of service and quality with an emphasis on profit and more profit. Fort Howard’s methods of reducing overhead conflicted with Maryland Cup’s emphasis on employee and customer relations. Maryland Cup treated employees as family, Fort Ho-ward treated them as an expense, reducing the number of employees by over 2,000 people. Many high level employees quit and Fort Howard fired several high level managers. At the time of the acquisition, the top five executives had been with the company an average of 45 years. By 1986, key employees had become employees of major competitors, selling disposable products to customers of Maryland Cup. Fort Howard’s purportedly contentious approach to sales alienated many customers, losing their trust as well as their willingness to pay a premium for Sweetheart products. While Fort Howard invested over $250 million in factory improvements, especially the large Owings Mills facilities, and cut costs drastically, the reduction in sales made factory efficiency an irrelevant achievement.

Fort Howard sought to boost revenues and fill unused fac-tory capacity with the acquisition of the Lily Cup Company in 1986. Lily Cup added its popular Trophy brand of thin-walled, foam cups, however, the strategy failed to achieve its purpose as many of Lily Cup’s products were obsolete. Also, the acquisition of Lily Cup resulted in further decreases in revenues, as customers who had used Lily Cup as a secondary supply source began to use James River Corporation, the maker of Dixie cups, as a secondary source. In 1988 sales of the combined companies should have reached close to $2 billion, adjusted for inflation, but Fort Howard Cup realized only $858 million in sales.

Employee morale also suffered. Fort Howard had already damaged morale by firing employees and cutting funds for employee picnics and sports leagues. Morale suffered further as Fort Howard cut medical benefits for retirees and liquidated the employee pension fund. In 1986 the pension fund maintained a surplus value of $6 million, but by 1991 had been reduced to a $17 million deficit.

Morgan Stanley Group, Inc., which had taken Fort Howard private through a leveraged buyout in 1988, decided to spin off Fort Howard Cup in 1989. R.P. Silver and D.G. Horrigan, executives at Continental Can Company, formed Sweetheart Holdings, Inc., which then purchased the company from Morgan Stanley for $532.5 million. They renamed the disposable products company the Sweetheart Cup Company and relocated from Green Bay, Wisconsin, to Chicago. In reality Morgan Stanley’s Leveraged Equity Fund II owned Sweetheart Holdings.

CEO Silver tried to renew Sweetheart’s sales and quality service by hiring new salespeople and providing them with better incentive and benefits packages. Sweetheart continued to founder, however, with annual losses in the millions of dollars. As debt hampered the company, Sweetheart lost a large regular sale in 1990 when McDonald’s stopped using the styrofoam clamshell container due to environmental concerns. In 1991 Sweetheart generated gross revenues of $105 million, compared to $210 million by Maryland Cup in 1983.

Key Dates

1911:: Four Russian immigrants start an ice cream cone bakery firm.
1919:: The business relocates to Baltimore and becomes Maryland Baking Company, incorporating seven years later.
1957:: Company begins making paper cups; changes name to Maryland Cup Company.
1957:: Company begins production of plastic containers.
1961:: Shapiro family combines their businesses into one company, in preparation for initial public offering.
1969:: New dual-ply plastic plate increases sales to institutional market.
1980:: Sales reach $580 million after two decades of steady growth.
1983:: Company is acquired by Fort Howard Paper Company.
1989:: Business is spun off as Sweetheart Holdings, Inc. with Sweetheart Cup as a subsidiary.
1993:: Sweetheart Holdings is acquired by American Industrial Partners.
1997:: Company sells ice cream cone operations.
1999:: Sweetheart merges with Fonda Group.

In 1993 Morgan Stanley sold Sweetheart Holdings to American Industrial Partners, Inc., (AIP) a private investment group, for $441 million. AIP owned 66.3 percent of the company and General Motors Corporation employee benefits plan owned 33.7 percent. Funds from the acquisition relieved the company of nearly half of its debt, bringing the net worth of the company to $100.5 million, but annual interest payments still amounted to $37.5 million. AIP planned to spend more than $40 million annually to update Sweetheart’s manufacturing facilities and hoped to take the company public when finances stabilized.

Sweetheart Cup posted its first annual profit in five years for fiscal 1994, with sales at $845.5 million and net earnings of $9.2 million.

In May 1994, AIP named William F. McLaughlin, formerly of Nestle, as the new president and CEO of Sweetheart Cup Company. McLaughlin immediately began to reduce overhead as he cut salaried staff by ten percent and closed outdated manufacturing facilities or laid off factory workers. He planned to reduce total employee count from 8,500 to 7,000, telling workers that 7,000 jobs were better than no jobs if the company did not rebound. He also instituted a training program to reestablish the service skills and commitment to quality for which Maryland Cup was renowned. Toward that end McLaughlin found new business in the designing and printing display advertising for the company’s customers, focusing on promotions with a short lifecycle and requiring small batches of materials.

McLaughlin restructured company operations to focus on its six categories of customers: foodservice distributors, such as Kraft and Sysco; national fast-food chains, including Wendy’s and Taco Bell; ice cream cone customers; customers for dairy and ice cream containers; Canadian customers; and McDonald’s restaurants, which accounted for 13 percent of annual sales. Sweetheart Cup no longer used a linear work-flow, from scheduling to manufacturing to shipping, but utilized central coordinating offices to bring interdepartmental efficiency into the company. The coordinating offices operated at each of the company’s 14 locations. McLaughlin opened a satellite office in Baltimore for the customer relations, data processing, research and development, and engineering departments. The Owings Mills plant had grown to 1.5 million square feet with 13 facili-ties by this time.

McLaughlin’s goals for 1995 involved finding new customers in the foodservice industry; expanding the market for Lily Cup brands; and expanding the ice cream cone business. He confronted difficult challenges as rising costs of the company’s major resources, plastic resin and paper, led to a 20 percent increase in the price of paper products and a 27 percent increase in the price of plastic products. Sweetheart continued to close and consolidate facilities for more efficient operations. In October 1997 Sweetheart Cup sold Eat-It-All ice cream cones and reinvested funds into improved efficiency. The company restructured again, creating the Foodservice, Packaging, and Consumer Products Divisions.

In 1998 AIP sold 48 percent of the voting stock of Sweet-heart Holdings to Fonda Group, a manufacturer of paper plates, napkins, trays, and tray covers. Through a stock swap the Fonda Group and Sweetheart Holdings formed SF Holdings Group, the new parent of Sweetheart Cup. Dennis Mehiel was named CEO and chairman of the board.

Entering a New Century, Returning to Old Values

In a return to Maryland Cup’s innovation to serve customer needs, Sweetheart became involved in the development of environmentally sound packaging, which came to fruition in late 1999. The company had been working with Ben & Jerry’s Ice Cream since 1996 to design a container which did not use the environmentally destructive bleached paperboard. The new container used a clay-coated, unbleached brownkraft paper-board, which Ben & Jerry’s began using for its quart containers of vanilla ice cream.

With McDonald’s, Sweetheart formed the EarthShell Corporation to produce environmentally friendly foodservice pack-aging. EarthShell created hinged-lid containers with a “new-tothe-world” material, a composite of limestone, potato starch, water, and a protective coating. The material was produced with clean, energy efficient methods and resulted in a biodegradable material which disintegrated in water and decomposed quickly. EarthShell installed additional production lines in April 2000 to produce the containers for McDonald’s. EarthShell planned to make bowls, plates, and cups from the material as well.

Sweetheart continued to develop new products to meet cur-rent foodservice needs. New products included a chicken bucket, a Trophy brand 24-ounce foam cup for hot drinks, a frozen dessert cup with dome lid, and an award-winning wax-coated paper French fry cup.

In February 2000 Sweetheart began construction on a one million-square-foot distribution center 15 miles from the Owings Mills site. The $23 million project consolidated distribution operations in Maryland and Massachusetts. With 80 to 125 trucks per day transferring stock from Owings Mills manufac-turing facilities, Sweetheart planned to use the center to serve the mid-Atlantic and northeastern United States. Sweetheart also relocated its company headquarters to Owings Mills.