Never Grow Old : Munchkin Relies on Innovation to Expand Line of Baby Products

When Steven Dunn’s daughter Beau was a baby, she frequently tried to grab one of the succession of Diet Cokes her father constantly drinks. One day Dunn fashioned a nipple on an empty soda bottle, poured baby formula into it and fed his daughter.

From this came a new business idea: Dunn reasoned that if he could snare the rights to soft drink logos, he could probably sell lots of baby bottles. Baby bottles are a high-profit-margin business, and demand is high given current U. S. birthrates of 4 million annually.

So in 1991, Dunn, a onetime venture capitalist, founded Munchkin Inc. with $2.5 million of his own resources and that of a few partners. The Harvard MBA, who had never run a company, secured rights to use Pepsi, Seven-Up and Dr Pepper logos and hired a manufacturer to produce plastic baby bottles shaped to resemble pop bottles.

Munchkin was in business, and in a short time the baby bottles and other children’s products were for sale in major chains, including Wal-Mart, K mart and Toys R Us.

Munchkin’s annual revenues rose from $3 million in 1992 to $15 million in 1993, he said, as the Munchkin baby bottles became a hot seller. Other products now include baby utensils with Crayola logos, and baby teethers shaped like cookies.

But after a fast start, the privately held Van Nuys company had a bad year in 1994 when it sustained heavy damage in the Northridge earthquake. Dunn says his sales fell last year, and Munchkin, which had $2 million in pretax earnings in 1993, slid into the red.

Today, Munchkin is on the mend and is trying to transform itself from a maker of novelty baby bottles by marketing a full line of infant-feeding products. Dunn predicts that Munchkin’s sales will rise to $20 million this year.

To do that, Munckin has to battle with the powers in the baby-feeding products market--Playtex, Gerber and Evenflo. Claudia DeSimone, editor of Juvenile Merchandising, a New York trade journal, said the baby-products business is tough for small companies because they usually cannot get retailers to give them much shelf space. Their only hope is to do what the bigger companies don’t do very often--come out with a constant stream of interesting new products. “A company like Munchkin has to keep innovative or it will be knocked off,” she said.

Munchkin agrees. “There’s no reason to come out with a me-too product,” said John Call Jr., Munchkin’s senior vice president of marketing and sales and a veteran of toy companies Mattel Inc. and Parker Bros.

So far Munchkin has come up with enough new products to help it stand out. “It’s been no secret to the trade what Steve (Dunn) is developing,” said Al O’Geary, president of New York Representatives Ltd., a manufacturers representative that sells Munchkin and many other baby-products lines. “They see (Munchkin) as a tremendous threat.”

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Although the major baby-products companies are considered a bit cautious, make no mistake--they will respond to a competitive challenge. Lewis Ammirati, president of Gerber’s baby care division, said he knew of Munchkin, and conceded there is room for a small company with new ideas. But Ammirati stressed that the dominant companies in his field “will move quickly to protect their franchises.”

If Munchkin’s sales continue to grow, some in the industry predict Munchkin will go the way of other independent firms and be acquired by one of the industry powers.

Dunn, 37, acknowledged he’s received queries about a possible purchase from bigger companies. “I tell them, ‘No thank you, we’re having too much fun.’ ” But he concedes, “If I received an offer too big . . . I’d have to consider it.”

If such a bid materializes, Dunn will be ready. He held positions in corporate finance at Bear Stearns & Co., and with Smith Barney’s venture capital group in New York. In the mid-1980s, he was a partner at Idanta Partners Ltd., a venture capital firm in which members of the billionaire Bass family of Ft. Worth are limited partners. Dunn left Idanta to become managing partner of a Los Angeles real estate investment group, in which he still owns an interest. His father, David Dunn, who is Munchkin’s chairman and owns 27% of the company, remains as managing partner with Idanta.

One of Munchkin’s new products, soon to be shipped to stores, is a disposable baby bottle liner called “1 Step.” Dunn claims that these liner bags, made with seamless plastic, will have fewer leaks than conventional, disposable baby bottle bags and will make them easier to insert into a bottle. Dunn hopes this product will challenge Playtex, which has an estimated 80% share of the $55-million-a-year disposable bottle liner business in the United States and Canada. “We think we’re positioned to be Playtex’s major competitor,” said Dunn.

Another new gizmo is a line of color-coded silicone nipples featuring varying nipple flow rates. A mother who wants to feed her newborn with a slow-flow nipple can easily identify one by its white color; in contrast, a fast-flow nipple suitable for feeding slightly older babies thicker liquids has a red bottom. Dunn claims these nipples are much stronger than others on the market and are less likely for babies to pull them out of bottles. Wal-Mart, K mart and Toys R Us are already selling this product.

And Munchkin hopes to keep the new products coming. Munchkin’s offices are whimsically decorated in bright colors, with stuffed animals and potential new products such as children’s toothbrushes, a new holder for disposable feeding products and a line of dental floss.

But it has taken the company a while to recover from the Northridge earthquake. The company was to start operations at the former Keebler baking plant in Van Nuys on what turned out to be the morning of the Northridge earthquake. Inventory was destroyed, and water sprinklers went off, ruining computers, files and furniture. Munchkin was without power for more than two weeks, and the company, which sustained $1.5 million in damage, had no earthquake insurance.

Before the quake, Munchkin had been talking with Merrill Lynch about an initial public stock offering that Dunn hoped would raise $20 million. Dunn had to postpone those plans.

If all goes well, the company may sell stock to the public in 1996. But first, he said, “We need to get a good solid year of growth.”