Reed, a 62-year-old former Keebler Foods Co. CEO who has done a grocery aisle's worth of deals in his career, wanted to expand TreeHouse's portfolio of private-label dry grocery products. Sturm, a leader in private-label powdered drink mixes, fit the bill -- thanks in no small measure to the investment that Kraft Foods Inc. has made to build its Crystal Light brand, which Reed's new business cheerfully undersells.
"Kraft has the lion's share of branded business in the category and has been quite innovative in ... establishing in consumers' minds that [Crystal Light] is a product worth paying a premium for," says Reed. "What we're trying to do is be a fast follower of national leaders who have far more intensive R&D and larger innovation budgets than us."
In other words, let the big guys do the heavy lifting, then swoop in with a similar private-label product. The strategy has served TreeHouse well, especially in a recession that has consumers trading down. The Westchester, Ill., company saw its stock price rise 41% in 2009 on $1.5 billion in sales. Sturm will add a further nearly $350 million in revenue.
Founded in 2005, TreeHouse could have been named Clubhouse. Reed and his lieutenants have worked on dozens of deals together. President David Vermylen and Harry Walsh, president of TreeHouse subsidiary Bay Valley Foods LLC, have been working with Reed since 1991. General counsel Tom O'Neill joined in 1996, when the team guided Keebler through a $450 million leveraged buyout and an eventual sale to Kellogg Co. for $4.5 billion in 2001.
"At the culmination of that, we decided we wanted to do one more deal together," says Reed. It took four years, but the partners dealt their way back into food, investing in and leading the $700 million spinoff of the specialty foods division of dairy giant Dean Foods Co.
Today, TreeHouse manufactures and distributes private-label brands -- think Whole Foods Market Inc.'s 365 and Safeway Inc.'s O Organics -- for the top 25 grocers in North America.
Acquisitions are key to TreeHouse's growth strategy because the more pickles, creamer, infant formula and salad dressing it can load on a truck, the lower its costs and the greater variety it can offer customers. Since 2006 it has acquired the private-label soup business of Del Monte Foods Co.; salsa maker San Antonio Farms; dressing, jams and spreads maker E.D. Smith & Sons Ltd.; and a handful of smaller businesses.
Despite a fragmented industry and robust growth projections for private-label brands, consolidation has been slow. Ralcorp Holdings Inc., a maker of branded and private-label goods, has completed one private-label deal in two years. Sturm, meanwhile, was TreeHouse's first acquisition since October 2007. Reed expects M&A will pick up now that credit markets have loosened.
Today, private-label product sales account for 17% of food channel sales. You can bet that grocery retailers, who see their brands as a way to build store loyalty and differentiate themselves from Wal-Mart, will do what they can to boost that percentage, from hosting in-store promotions to premium product placement for their brands. That will hold true, says Reed, whether the economy is "booming or in the doldrums."
As Reed sees it, TreeHouse's challenge is not maintaining sales as the economy improves. It is continuing to invest in the people and technology that allow TreeHouse to meet the increasingly complex product, manufacturing and packaging demands of customers.
"We started out with just a couple of us doing all the strategic thinking on an entirely intuitive, qualitative basis with skills learned several decades ago," says Reed. "We have supplemented that with younger minds and better analytical techniques and data."
Reed isn't stepping back, though. He has about six targets on his shortlist and estimates TreeHouse will have up to $250 million in cash available for acquisitions in 2010. "I believe we have the opportunity to build value here for a long period of time." Nothing shameless about that.