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L. Joshua Sosland, the president of Sosland Publishing Co., sat down with the leaders of Arbor Investments, a private equity firm specializing in the food business to produce this two-part series. In Part I, the Arbor team described how the firm grew from modest origins to oversee a portfolio of businesses that in aggregate are a business the size of TreeHouse Foods. Part II offers an in-depth look at a pivotal early blockbuster investment in the take-and-bake pizza category, as well as bumps the firm encountered along the way.
CHICAGO — Nearly from its start almost 25 years ago, Arbor Investments has followed a playbook the firm believes is key to ensuring its portfolio companies grow, infusing each business with talent, capital, a commitment to innovation and strategic focus. An early success helped the approach gel for Gregory J. Purcell, chief executive officer of Arbor Investments. The initial learnings together with some early missteps helped the firm hone its focus, setting the stage for a quarter century of dramatic growth.
Great Kitchens, an early Arbor investment, was established in 2000 by an entrepreneur who ran Cousin Foods, a manufacturer of meatballs and lasagna. Great Kitchens was a pioneer in the take-and-bake pizza category. When Arbor acquired Great Kitchens in 2004, Dennis Malchow, a senior operating partner at Arbor, was assigned to run the business.
Great Kitchens had begun selling a $5 take-and-bake pizza at Safeway supermarkets in California.
As Great Kitchens looked to other retailers to carry private label take-and-bake pizza, Mr. Purcell said Walmart showed interest in the product and challenged the company to reengineer the crust so that it would be “buttery but not too buttery” and able to handle freezing, ambient temperatures and cooking.
“These are the same types of requests we deal with today with our other food products,” he said. “So, we produced a better crust.”
Sales grew steadily at Walmart and other retailers. In a short time, Mr. Purcell said Walmart again challenged Great Kitchens to go further and “build us the finest take-and-bake pizza you can.” With an executive chef and a culinary team, Great Kitchens developed a pizza that Mr. Purcell said was extraordinary but would have cost $12 wholesale to produce at scale. He said it would have necessitated too high a retail price point for Walmart and other retailers.
“We deconstructed it,” Mr. Purcell said of a process of reformulating the pizza. “But what we never changed was the crust because the crust was the differentiator. Same thing with the cheese.”
Mr. Purcell said the final product raised the bar for pizza quality industry-wide. The effort did not go unnoticed. Great Kitchens was named “supplier of the year” for Walmart in 2007.
“We’re basically upping the competition to produce a better product,” Mr. Purcell said. “We’re introducing better price value and taste to America. This has been a common theme at Arbor for the last 25 years.”
The Arbor approach paid off for Great Kitchens. When Arbor acquired the company in 2004, annual EBITDA was approximately $3 million. In 2010, when Arbor exited the investment, EBITDA was approximately $27 million.
Today, the company (owned since 2020 by Brynwood Partners) sells its pizza at 9 of the largest 15 retailers in North America. It was a great success for Arbor, Mr. Purcell said.
“We basically took a company from probably $50 million in revenue to $300 million in a span of five years,” he said.
Reaching $300 million in sales would not have been possible without an investment in additional production capacity. Under Arbor’s ownership, a new 165,000-square-foot facility was constructed by Great Kitchens, a step Mr. Purcell said is unusual in the private equity universe.
“Why?” he explained. “They don’t want to take the risk. They don’t want to deal with the contractor. And if you’re only going to hold a company for five years, it might take you three years to build a plant. We say we don’t care about the end date.”
Capital investment has become a core competency at Arbor, and the firm has realized some of its greatest investment successes in portfolio companies that built new and heavily expanded existing plants, Alison B. Miller, partner and chief marketing officer, said.
Mr. Purcell and Carl S. Allegretti, president, emphasized an attitude at Arbor that focuses first on being in the food business with private equity a secondary focus. The prioritization of the food business has had a marked impact on how the firm has evolved, Mr. Allegretti said.
“The foundation of business is relationships,” he said. “Think about Greg spending almost 30 years in the food industry, completing over 80 deals. We have never hired somebody at Arbor using a headhunter. I’ve worked with him for 30 years. Alison worked for him. We bring in known commodities. Tim Fallon, our senior operating partner, was the CEO of Columbus Meats. Probably one of our most successful deals. Yianny Caparos was president of Gold Standard Baking. He’s now the president of Crown Bakeries. It’s the power of relationships and known talent. It’s something Greg stresses across the board. Who are you meeting? Who do you know?”
Mr. Purcell added, “When you have exceptional talent who understand exactly how we work, we want to hang on to those people. It works.”
Which is not to say Arbor, like every private equity firm, has escaped mistakes.
Calling food a “broad strategy,” Mr. Purcell said the firm has decided over time to focus principally on food manufacturing.
“It takes time to get really good, and we are not great at restaurant operations,” he said. “We’re not great in the fresh meat category. We’re not great at retailing in general. That’s not our core competency. We’re better manufacturers and distributors of exceptional food products.”
Mr. Purcell offered two examples from early Arbor companies to illustrate the learnings. Arbor owned for a time the No. 2 player (to Panda Express) in the quick-service Asian restaurant category.
“That was a chain of 70 Asian restaurants, and it just wasn’t our game,” he said. “And we were in wine retailing. We owned Sam’s Wines & Spirits. That’s not our game, and unfortunately the timing was wrong. Retail is a different animal.”
What’s key is to identify core competencies and invest resources — time and money — in those areas, principally food manufacturing and distribution, Mr. Purcell said.
“Fortunately, while we were learning, paying this tuition, we were able to make investments in other companies that were successful,” he added.
This success has also allowed the firm to grow and invest in larger EBITDA businesses.
With Mr. Allegretti named president of Arbor beginning in 2020, Mr. Purcell increasingly devotes his time to fine tuning the firm’s strategy. A recent trip to Asia was spent trying to identify flavor trends that will gain traction in North America in the coming years. Attentiveness to where the consumer is headed helped convince Arbor to avoid makers of meat analogs and to instead invest in Fontaine Santé, Inc., headquartered just north of Montreal.
“Fontaine Santé and its Lantana brand are built around healthy, delicious plants — hummus and dips, salsas and salads,” Ms. Miller said. “It’s a business segment we’ve always wanted to play in — better-for-you, healthy. We do think consumer trends are going there, but we never want to sacrifice taste. Greg is always the first to say we’re taste investors, so finding a business that was healthy products that also tasted great, we think is unique. Everyone needs to eat healthier — more fruits and vegetables — but people don’t want to sacrifice on taste. We think these products deliver on both.”
While focused almost exclusively on food investments, Mr. Purcell said Arbor will not make venture investments in the sector.
“That’s also a key learning — we never dabbled in it,” Mr. Purcell said. “We’ve missed out on some incredible venture, food-oriented companies. We turned down Kind bar. We turned down RXBAR. We’ve turned down a lot of things that were originally venture funded. That’s not our bailiwick — picking long-term winners from a couple of guys operating in their basement. That’s not our game. We’re better off taking an exceptional entrepreneur’s business up two or three levels. That is where we found our place in the world. Our story can cure insomnia, but it works. So as a result, we won’t do an A round venture. We won’t do a B or C round. We just don’t play there.”
Mr. Allegretti noted most startup entrepreneurs are looking to raise capital but aren’t looking to sell most or all of their business.
“We don’t make minority investments,” he said.
Mr. Purcell added venture startups would overwhelm the resources Arbor deploys in its portfolio companies. Startups often need massive help in marketing, human resources, research and development and all the areas in which Arbor has recruited internal talent. The firm currently has a staff of 28, overseeing portfolio companies with a total of 7,000 employees.
“You’re talking about applying this fantastic, gold-plated infrastructure of human capital to a company that might be $10 million in revenue,” he said. “I’m not saying there isn’t an opportunity. We could do Arbor Ventures. But we’ve elected not to.”
A testament to the firm’s track record and reputation is that it’s frequently able to purchase controlling interests in companies even when other PE firms are willing to pay more, the executives said.
“A lot of times we do buy 100%, but we also are looking for that partner because the entrepreneur knows the business,” Mr. Allegretti said. “We want their knowledge, and if we buy 70% to 80% of your business and are able to successfully grow it, the second bite at the apple on exit from us could generate a larger return for the entrepreneur than the first. That’s another big differentiating selling point for us.”
It is not unusual for Arbor to be clear with investment candidates that Arbor will be deeply involved in the acquired business, in a first meeting, Ms. Miller said.
“If they’re just looking for a check, they just need somebody to put capital in the business, we might not be that best partner,” she said. “Yes, we are going to bring capital. But we’re also going to bring this entire team of people who are dropped in to help you really turbocharge your company. So, we’re candid up front in saying we love to be involved in our businesses. Roll up our sleeves. We’re in there working alongside you.”
Mr. Purcell said it isn’t uncommon for Arbor to submit the third highest bid and still emerge as the winner.
“You might think, well, why would someone leave some money on the table?” he said. “To Carl’s point, they want to roll equity because they believe in the second bite of the apple. The Arbor track record says you should roll as much as you can because you might get more on this stake for your 20% or 30% piece than you got selling your 80% piece.”
Beyond the “second bite of the apple,” Mr. Purcell said more is in play in the minds of sellers than just landing the largest check.
“When you have something that a family has spent generations building, it is giving up the baby at the adoption agency,” Mr. Purcell said. “Who’s going to take it over is a big consideration. That’s No. 1. Second, maybe it’s an asset that has been a little under-invested. Maybe the family has lived on dividends for a while, and so they want to see their business get reenergized. That’s where we come in. It’s not that we’re going to buy you and close you down and plant consolidate you. It’s ‘we recognize and appreciate the differentiation that your business brings to the marketplace, and we’re going to invest an incredible amount of time, effort, money and talent behind growing your brand.’ And that is really an exciting and sometimes scary proposition for selling families.”
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