Lecturer Bill Fanning prepared this case study as the basis for class discussion rather than to illustrate either effective or ineffective handling of

an administrative situation. Exhibits are authentic slides from the company, used with permission.

Copyright © 2014 by The Regents of the University of California. All rights reserved. No part of this publication may be reproduced, stored, or

transmitted in any form or by any means without the express written permission of the Berkeley-Haas Case Series.

Date: March 3, 2014

B ILL FANN ING

Annie’s: Growing Organically

It was a grey day in February 2012 as the train pulled out of the Amtrak station in Berkeley, California

and headed east. John Foraker, CEO of Annie’s, Inc., a rapidly growing natural and organic food

company, sank into his seat and began to unwind from the stream of meetings and decisions that

consumed his day and moved into a part of the day that he anticipated—a chance to look out the

window and think about his business at a higher level. Big things were in the works for Annie’s and

there were key decisions to be made over the next few months in terms of entering a new category.

Annie’s had been enjoying strong and steady success in the marketplace with their healthy offerings in

shelf stable prepared foods across three product categories (Meals, Snacks, and Dressings), led by the

Meals category (macaroni & cheese), with Snacks (Cheddar Bunnies, Fruit Snacks, Pretzels, etc.), and

Dressings (condiments and dressings) following respectively. But the company was about to make

significant moves in terms of expanding into new categories.

Annie’s had strong investor support due to increasing sales and profits over the past few years (net

sales had increased from $76.8 million in fiscal 2008 to $141.3 million in fiscal 2012) and it was

likely they would be moving toward an IPO soon. They had also achieved a significant level of

success competing in non-traditional ways in very traditional CPG (consumer packaged goods)

categories. As a Berkeley-Haas School of Business graduate (MBA’94), this was particularly

satisfying to Foraker. Less certain was whether Annie’s could continue to achieve this level of

success in new categories while playing by their own set of rules.

As the team assessed expansion options, they kept two primary goals in mind. The first was to age up

the franchise—Annie’s had developed a strong following among younger kids and their moms. The

kids liked the taste and saw the products as fun, while the moms appreciated the fact that they could

provide healthy products for their kids that the kids actually liked. But there was an inherent

challenge with having such a strong, positive franchise with younger kids. At some point, they would

outgrow the brand.

The second goal was to broaden the target audience. Annie’s success to date had been driven largely

by a group they identified as “Core Consumers”. This group felt very strongly about making healthy

choices for their families, and was comfortable with the extra effort and money required to do so.

They were committed and loyal, but their attitudes were outside the mainstream. To grow the

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ANNIE’S 2

business, the Annie’s team felt they needed to broaden their target and attract more mainstream

consumers to the brand. They set their sights on a group they called “Prime Prospects”, who valued

healthy alternatives to the extent they were available and convenient, but were more moderate in their

attitudes (Exhibit 1).

Background

Annie Withey and Andrew Martin started Smartfood in Boston in 1982 with their first and best known

product, a cheesy popcorn snack. They sold the company to PepsiCo in 1986 for $15 million. A few

years later, Withey took essentially that same cheese sauce and used it in Annie’s Homegrown Shells

and Cheddar, a stovetop macaroni & cheese dinner, and in 1989, Annie’s was born.

Over time, the company grew through new products as well as greater acceptance of its existing line.

Annie’s was able to appeal to consumers seeking healthy/natural/organic choices as well as more

mainstream food products, and felt they were in a sweet spot that allowed them to grow their healthy

food business by taking share from traditional CPG brands as well as the organic/natural sector. As

such, their product line and their growth efforts were focused on both areas (Exhibit 2).

Financially, the company was in good shape. In 2001, the same year Foraker joined Annie’s, Solera

Capital, a New York women’s private equity firm, acquired a major stake in Annie’s and that support

continued to fuel their growth. Sales and profits had been growing steadily as Annie’s was able to

maintain their price points even as they competed with larger, more heavily supported brands with

lower price points. Trends and projections were strong and investors remained bullish (Exhibit 3).

Annie’s Culture

Like many small companies, Annie’s was strongly driven by its culture during the early days. And

Annie’s was fiercely determined to preserve their culture as they grew. Annie’s was a company that

was passionate about food, people, and the planet, and their actions needed to reflect that orientation.

For example, the company was careful about the suppliers it worked with, preferring to seek out

smaller, local farmers whenever possible. They were also committed to non-GMO (genetically

modified organisms) products. Although Annie herself was removed from the business operations

and living on her certified organic farm in Connecticut, the Annie’s team made an effort to integrate

her persona into products and marketing efforts whenever possible. 1 And they also viewed corporate

social responsibility as something that needed to be integrated across all the company’s activities.

According to Foraker: “Social responsibility is part of the Annie’s brand DNA. We’ve always tried to

do things differently and set an example for the broader world.”

Growth

Annie’s had developed a core proposition that included four pillars: authenticity, social responsibility,

great taste, and simple, healthy ingredients (Exhibit 4) that positioned them well for growth over the

long haul. The Annie’s team felt that this core proposition could be effective in a number of areas in

the grocery store. It was a proposition that made sense in terms of broad consumer trends as well as

distribution patterns that would address those trends.

Annie’s management team was not content to rest on their successes and simply grow with the

category as consumers moved steadily toward healthier options, in particular organic. They felt that

1 http://www.annies.com/about-annies#Our-Roots.

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ANNIE’S 3

Annie’s could lead that charge rather than sit back and simply ride the wave. To be sure, there were

also a number of offsetting factors that represented hurdles, mainly a still sluggish economy. Despite

the continuing slow recovery from the recession, which could affect the willingness of consumers to

purchase premium products, Foraker felt the time was right for growth. The core business was strong

and there was a window of opportunity in terms of available funding for the company so a few months

earlier they had decided to make their move.

Frozen Foods

For a variety of reasons, the Annie’s team felt that their next area for growth was in the frozen foods

category, a huge category of $12 billion in retail sales. And this was not just an attempt to get

placement for one particular product line, but an assault on the entire section of the supermarket.

They had a plan in place for a series of new product launches in frozen foods, and it began with frozen

pizza.

The decision to move into frozen was not an easy one. Natural/healthy/organic foods as a segment

was not well developed in the frozen section, due to a combination of factors, including:

 A general perception of frozen foods as less healthy  Strong consumer demand in the frozen section for desserts and snack items  A limited number of “doors” in the frozen section

In addition, Annie’s Core Consumers were not big users of frozen food items. But Foraker and his

team had an “aha moment” on this issue when they realized that their success in the frozen category

might also be good for their retail partners if they could convince more Core Consumers to shop the

frozen section, thus creating a “win-win” situation for both Annie’s and their partners.

Within the frozen category, multiple opportunities existed and the Annie’s team had a plan in place to

expand into each area, but they had to decide where to start. There were numerous areas that made

sense in terms of both potential volume and fit with Annie’s. For example, frozen entrees seemed like

an obvious fit based on their success in macaroni and cheese. However, frozen pizza was also

attractive, and represented some opportunities beyond the obvious, and the decision was made to start

there. Sarah Bird, Chief Mom Officer for Annie’s said: “We know that cooking a meal from scratch

can be a challenge for busy families. Annie’s frozen pizza was a convenient solution for parents who

wanted to provide great taste as well as better ingredients they can feel good about giving their

families.”

Frozen Pizza

Product

Once the decision had been made to move forward with frozen pizza, there were tough marketing mix

decisions to be made. The first was around the product itself. The initial product developed was an

all-organic product, which meant that 95 percent of the ingredients were certified organic. The USDA

had very strict definitions for products using any type of organic terminology, as well as restrictions

governing where on the package these claims could be made. But would enough consumers respond

to the idea of Annie’s offering frozen pizza, or would it be seen as too extreme in a category not

generally known for healthy offerings? And how would the channel react?

The alternative would be to come out with a “made with” option, meaning the product was made with

organic ingredients, such as the cheese, tomatoes, crust, etc. The “made with” organic option needed

to have 70 percent or more of total ingredients as organic.

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ANNIE’S 4

Some within the team felt the “made with” organic was the better option. They felt it would still

allow for the positive imagery connected with organic products and remain consistent with the

Annie’s brand, but at the same time, this strategy would take the product line closer to the mainstream

and to their competitors in the frozen pizza section.

The product had been tested successfully in Whole Foods in the San Francisco market. The version

tested was organic and there were four flavors in test: Four Cheese, Supreme, Spinach & Mushroom,

and Pepperoni. Although discussion continued about whether this was the right mix, the plan was to

move forward with these same four flavors.

Distribution

Closely linked to the product decision were issues about distribution. Annie’s products were sold

through the natural foods channel in chains like Whole Foods, as well as mainstream supermarkets

such as Safeway and Dominick’s. Annie’s also enjoyed a strong relationship with Target, as well as

other mass merchandisers. Their current business was divided roughly equally across these three

channels (Exhibit 5).

If Annie’s decided to launch their frozen pizza product with the all-organic product, would it sell at

Safeway or Target? On the flip side, would a “made with” approach be right for natural retailers? A

bigger distribution question was whether Annie’s would even get distribution in Safeway. Although

mainstream supermarkets had begun to create separate areas in the frozen section for healthy

offerings, progress had been slow, and there was some question whether it was really an advantage to

be located in these sections and away from the rest of the category.

Restricting distribution to natural retailers did not seem to be an option, as it would not meet their

volume goals or their goal of engaging Prime Prospects. Grocery still did the lion’s share of business

in frozen pizza, but that percentage was declining and the growth was coming from the natural and

mass channels (Exhibit 6).

A longer-term issue was rattling around in the back of Foraker’s mind. As mentioned, Annie’s had

been successful in achieving a delicate balance amongst three different channels—mainstream

supermarkets (Safeway, Dominick’s), natural retailers (Whole Foods), and mass merchandisers

(Target). But as the company’s volume grew and covered more categories, would they be able to

maintain that balance?

Each channel had demands and expectations. Target in particular had a tendency to take brands under

their wing in the food section of their stores and often chose upstart independent brands like Annie’s

rather than those owned by major CPG companies. Although the Annie’s team had worked hard and

been effective to date in keeping all channels happy, this was clearly an area of sensitivity and had to

be monitored carefully going forward.

Annie’s also had a strong partnership with natural retailers that had been in place from the beginning.

And although traditional grocery relationships were newer and growth was slower in this channel, the

big volume over the long haul was still going to come from traditional grocery (Exhibit 7).

Pricing

The pricing decision was also tightly tied to the product and distribution issues. Annie’s products had

competed successfully in other categories at significant price premiums relative to the competition (Exhibit 8). Consumers had bought into Annie’s philosophy of simple, quality ingredients providing

a healthy option that kids liked, and were willing to pay more for it.

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ANNIE’S 5

Certainly, Foraker and his team’s intent was to carry that philosophy forward into frozen pizza and

other categories in the future, as it was a philosophy that not only worked with consumers, but also

with the bottom line. But frozen pizza was new territory, and had a very different competitive

landscape. There were many competitors—strong national brands, smaller national brands, and

regional competitors (see next section). The price points for these competitors were all over the map.

More importantly, the category was heavily deal driven, and the reality was that new product trial

appeared to occur primarily as a result of a promotional offer. “I’m really excited about that product.

I’ll try it the next time I see a coupon” was a typical response from consumers talking about new

products in the category (based on focus groups conducted in early 2012) 2 .

Competition

As mentioned earlier, a competitive landscape that was fragmented, aggressive, and price-driven was