|Smart Balance Keeps Tight Focus on Creativity |
Heart-Healthy Food Developer Outsources Manufacturing, Distribution to Target In-House Strength on New Produc
By JOANN S. LUBLIN
PARAMUS, N.J. -- The product-development laboratory at Smart Balance Inc., a food marketer keen to grow through innovation, contains chemical analyzers, lab benches and refrigerated cases. But there are rarely people.
"We don't have legions of white coats," explains Robert S. Gluck, Smart Balance's chief operating officer. Six of its staffers are charged with developing products, but they often work in suppliers' facilities nowhere near its headquarters here.
Smart Balance helps people stay lean with "heart healthy" merchandise, including low-cholesterol spreads, peanut butter, popcorn, cooking oil and milk. The company itself is lean as well, with just 67 employees and scant fixed assets. Its "virtual" business model outsources almost everything else, including manufacturing, product distribution and sales. The unusual approach is attracting attention, especially as recession-battered businesses slow new-product introduction
"We are a pretty aggressive innovator despite the economic downturn," says Chief Executive Steve Hughes. Smart Balance's revenue doubled last year to about $222 million, and the company reported its first quarterly profit in the first quarter. Mr. Hughes thinks revenue can reach $1 billion by 2014, with most of the increase coming from new products. Even then, he expects the company will employ only about 125 people.
Kara Gruver, head of the North American consumer-products practice for consultants Bain & Co. says Smart Balance's model "plays to their strengths," by keeping new-product development and marketing in house, while tapping outsiders for most other functions. (Smart Balance is not a Bain client.) She says more consumer-products companies are looking at outsourcing, as sales lag and capital remains scarce.
Smart Balance spreads were introduced in 1996 by GFA Brands Inc., a small food marketer that crafted a trans-fat-free margarine after licensing a patented blend of natural vegetable oils developed at Brandeis University. The blend raises a consumer's ratio of "good" to "bad" cholesterol. Retail sales grew quickly, spurred by studies showing that trans fats clog arteries and increase the risk of heart disease.
Recipe for Lean Innovation?
Steve Hughes, CEO of Smart Balance Inc., suggests these key ingredients for developing new products with little staff.
Establish a clear vision and long-range blueprint.
Outsource all activities someone else can do better.
Relentlessly commit to continuous improvement.
Develop a strong internal team and external business partnerships.
Create a focused new-product process mixing creativity and practicality.
Invest in building the brand, rather than physical assets.
Messrs. Hughes and Gluck, food-industry veterans, bought GFA Brands for $490 million in May 2007, and later changed the company's name. Their subsequent plunge into peddling milk illustrates their lean innovation method.
Peter L. Dray, executive vice president of product development for the company's operating unit, started tinkering with milk in 2005. He hoped to add Vitamin E and Omega 3 fatty acids, which are said to cut the risk of heart disease, cancer and arthritis.
The problem: Omega 3, which is derived from fish oil, "becomes rancid and tastes fishy very quickly," Mr. Dray says. He previously had solved that problem for Smart Balance peanut butter. But it's more challenging to add Omega 3 to a lower-fat product like milk, he says.
Mr. Dray enlisted help from a Brandeis scientist and a research-and-development consultant. When GFA's new owners made the project a top priority in 2007, Mr. Dray ran tests and trial production runs at a dairy processor. He hired an outside laboratory to assess nutritional claims. Another agency handled consumer taste tests, with some help. "I drank a half gallon every three days," Mr. Dray recalls.
Smart Balance began selling the milk in Florida grocery stores in October 2007. Sales hit $4 million in 2008. The company expanded into the Northeast in January. Mr. Hughes hopes to capture 2% of the nation's $12 billion in annual grocery milk sales by 2011.
"We are a pretty aggressive innovator despite the economic downturn," says Smart Balance Chief Executive Steve Hughes.
Mr. Dray believes the virtual model helps Smart Balance innovate. "There aren't as many roadblocks," he says.
Now, Smart Balance intends to hasten its innovation pace, with a new product or food category every year. Officials say they're eying heart-healthy ice cream, coffee creamers, salad dressing and sour cream.
Mr. Gluck says experienced product developers like Mr. Dray help Smart Balance succeed with a larger share of its innovations than the typical food and beverage business. But he concedes that its small staff means the company can't pursue every potentially good idea. He says he recently nixed marketing colleagues' suggestion for a low-oil snack chip.
"We'd have to compete with Frito-Lay," Mr. Gluck says. "There have been lots of big companies that tried to take them on -- and not very successfully."
Bain's Ms. Gruver says Smart Balance may be rolling out new products too quickly, before existing offerings reach their full potential. "Companies who launch products too quickly are likely not maximizing the profits of the entire portfolio," she says.
Mr. Hughes says the company can boost profits from existing products while adding new ones. Mr. Gluck says Smart Balance will add product-development employees as it grows, including more researchers and quality-control staffers.
Mr. Dray also knows he can tap an extensive network of experts, amassed during 25 years in the food business. "We have a big Rolodex here," he observes.