Many in Industry Doubt Firm Can Survive : For Ailing Knudsen, Bigger Wasn’t Better
In June, 1983, real estate investor Ted D. Nelson won a bidding war for Knudsen Foods and quickly let it be known that his ambitions didn’t stop there. He and his two stepbrothers, who paid $74.8 million for Knudsen, wanted to create a nationwide dairy company.
With the $50.1-million purchase of archrival Foremost Dairies last June, the trio were well on their way. With San Francisco-based Foremost, their company had milk plants in nine states and became overnight the largest dairy company in the West.
Now, just a year after completing the Foremost purchase, their company--Winn Enterprises, a business trust that is the parent of Knudsen Foods--is so short of cash that it has put all or part of itself up for sale to raise funds. It depends on a weekly $20-million infusion from its lender, Citicorp Industrial Credit Bank, to keep it going.
Winn Enterprises had borrowed heavily to buy both dairy companies, and by last September it was strained to make payments on debt totaling $266.2 million--a heavy load for a company that earned profits of $5 million in the year ending March 31, 1985.
Missed $18-Million Payment
Three weeks ago, the company failed to a make an $18-million milk payment to dairy farmers. The company faces an involuntary bankruptcy court action filed against it by three suppliers who say they are owed more than $5 million.
Few in the dairy industry believe Knudsen can survive. “The question is whether it will be a slow death or a quick death,” said Clare Berryhill, director the state Department of Food and Agriculture. Berryhill asked his staff to draw up contingency plans to process Knudsen’s milk so consumers won’t suffer shortages if Knudsen suddenly shuts down.
The 67-year-old dairy company was founded by two Danish immigrant brothers, Carl and Thorkild (Tom) Knudsen, who developed a new way to make cottage cheese from skim milk. Dairy companies in the 1920s threw skim milk away as useless after extracting the cream.
Knudsen’s first two products were cottage cheese and buttermilk, said Gene Knudsen-Hoffman, Tom Knudsen’s daughter. “I can remember my father delivering buttermilk in an old Ford truck to the Union Pacific Railroad. The railroad was his first customer.”
Though its products are sold only in the West, Knudsen is well regarded within the dairy industry as a trailblazer in the development of cottage cheese and buttermilk--the company’s initial products. The company, under founder Tom Knudsen, was regarded as “highly innovative . . . efficient,” said Frank Kosikowski, a Cornell University professor and an expert on dairy products. “Knudsen had a reputation far beyond California,” he said.
Knudsen didn’t enter the milk market until the mid-1930s, said Helen McGrath, who was Tom Knudsen’s longtime personal secretary. McGrath said he entered the market after promising two competitors, Adohr Farms and Arden Farms, that he wouldn’t offer home delivery. Instead, Knudsen catered to the small mom-and-pop stores and, later, the supermarkets, including Albertson’s, Hughes Markets, Stater Bros. and Alpha Beta.
Dream of a National Dairy
Tom Knudsen died in 1965. His family continued to own stock in the dairy business but was not active in running it. The company continued to expand in California. In the early 1980s, a group of Knudsen executives offered to buy the company. Six groups of bidders surfaced, and Nelson and Winn Enterprises won out.
Moving to act on the dream of a national dairy, Winn expanded at first. The company also pursued other companies, including Kern Foods, a maker of canned fruits and vegetables. Then came the Foremost purchase. Knudsen’s debts grew, and so did its financial problems.
As Knudsen’s financial position worsened last month, two supermarket customers, Albertson’s and Hughes Markets, transferred $30 million worth of milk business to other suppliers. Dozens of dairy farmers who supplied Knudsen for years switched to new customers.
The strain has thinned the company’s leadership ranks. During July, six top Knudsen executives--including the company’s chief executive and president--and two Winn trustees quit. The company said the resignations weren’t related, and last week it hired a management consultant to help run Knudsen.
Knudsen’s woes are sure to spread to some of the state’s dairy farmers, who are owed $36 million by Knudsen. Mary-Ann Warmerdam, an analyst with the California Farm Bureau, said 30% to 40% of the 400 dairy farmers who supply Knudsen face serious financial trouble, and some may fail.
“This is a very serious, serious situation,” said Berryhill, who wants to close Knudsen down if it misses another milk payment to farmers.
Surprising Deterioration
In some ways, Knudsen’s deterioration is surprising. The company sells one-quarter of the state’s dairy products and is a leading seller of milk, cottage cheese, yogurt and ice cream. After its merger with Foremost last year, its annual sales topped $1 billion. The Knudsen brand is familiar to generations of Southern Californians, who have purchased its products since the 1920s.
In recent years, however, Knudsen has been unable to translate its market leadership into profits. Consumer demand has slackened for many of Knudsen’s key products, including milk, cottage cheese and ice cream. Profits on dairy products are low, experts say, ranging from 1 cent for each $1 of milk sold to 2.5 cents for yogurt.
Knudsen’s parent, Winn Enterprises, has been hampered by high debt payments--it owes Citicorp about $150 million. Since the Foremost purchase, the company has been bedeviled with production problems and has lost customers--especially in Northern California--as a result of late deliveries and poor product quality, according to distributors.
Even without those problems, forging a national dairy company out of Knudsen and Foremost would not have been easy. Truman Graf, an agricultural economics professor emeritus at the University of Wisconsin, said Knudsen’s product line, with its heavy dependence on milk, was poorly suited for a national marketplace.
Since milk is highly perishable and too heavy to transport cheaply, a national milk company must spend thousands of dollars to situate milk plants near key markets around the country, he said.
National distribution of such products as yogurt and cottage cheese present similar difficulties. Since they spoil quickly, they can’t be shipped great distances.
“Distribution is limited by quality problems, and once you ship the product very far, there’s very little profit in it because of the freight costs,” said Kenneth Rosenthal, vice president of Johanna Farms, a unit of John Labatt Ltd., the Canadian company perhaps best known for its beer.
No Buyer for Dairy Units
So far, no buyer has surfaced for any of Knudsen’s dairy properties, and dairy industry sources say it’s not likely that a company will want to buy the whole company. A few companies, among them Dart & Kraft and Southland Corp., have shown interest in the properties but don’t seem close to making a deal, according to sources close to the situation.
Nelson, chairman of Knudsen, said through a spokesman that he was too busy last week to be interviewed for this story. He said previously that Knudsen had hoped to complete the sales by sometime this fall and hired First Boston Corp. and Allen & Co. to help it find a buyer. Philip Scaturro, a managing director at Allen & Co. and a Winn trustee, didn’t return telephone calls to his office.
Roger Kirkpatrick, Knudsen’s former chief executive, acknowledged in an interview that some Knudsen creditors, including Mid-America Dairymen, a giant dairy cooperative that supplies most of Knudsen’s Midwestern plants, wanted the company to proceed more quickly with the sales. During the week of July 4, Mid-America demanded to be paid cash on delivery for milk. The demand severely strained Knudsen’s already meager cash flow and worried its bankers and other creditors, Kirkpatrick said.
Eight days later, on July 15, Citicorp refused to advance Knudsen any more funds, and the company was forced to default on an $18-million milk payment to dairy farmers.
Since then, Knudsen has pledged a portion of its receivables to Citicorp in order to obtain enough money to continue its day-to-day operations while the company searches for a buyer, according to sources.
Gene Knudsen-Hoffman, who now lives in Santa Barbara, said she hoped a buyer would discontinue the Knudsen name. Knudsen Foods today, she says, no longer represents her father’s ideals. Although she has no connection with the company, she said, “I feel as if I keep having to apologize for it.”
McGrath, Knudsen’s former secretary, said she “almost cried” when she heard that Knudsen Foods faced a bankruptcy action, but she feels differently about the company’s future. “I hope they get through these problems and go on forever,” she said.
