Plucky Monterey Pasta Steps Gingerly Into Acquisitions Market

SALINAS, CA—Monterey Pasta (PSTA), now healthy after a stock scare two years ago, is cautiously stepping into the acquisitions market and is aggressively developing new product.

The 10-year-old company, founded in Monterey, CA, by Floyd and Sarah Hill, initially produced pasta for restaurants. The Hills then expanded the company’s product line and distribution to include refrigerated deli cases in local markets and, with $3 million in yearly sales, took the company public in 1993.

Monterey Pasta quickly became Wall Street’s pet. Its initial stock price was $6, but it rocketed to $19.25/share within two months. The company continued to create new products and announced that it was getting into the restaurant business.

Soon, Monterey Pasta had 40 mall-based restaurants and 650 employees. However, most of the restaurants were money losers, and by 1996 PSTA reported nearly $35 million in losses.

By late 1997, the stock had dropped to $.75/share. PSTA, once al dente, was severely overcooked.

Company officials reacted by downsizing, closing or selling all its restaurants and cutting staff. By the second quarter of 1997, PSTA had returned to profitability.

Enter Lance Hewitt. Under Hewitt’s guidance, PSTA has shown a profit for nine consecutive quarters, with a 12% growth in sales in 1998 and a 300% growth in net income. The stock price hovers around $3/share.

Hewitt, with a food background that includes spice maker McCormick, was brought in as CEO to complete PSTA’s turnaround and come up with a growth strategy. His plan is four-pronged:

n focus on your core strength;

n be very aggressive in new-product development;

n increase distribution, with a focus on retail;

n make acquisitions.

Hewitt’s strategy realizes that Monterey Pasta’s real strength is in the refrigerator deli case.

Also, as he points out, “We’ve got quite a bit of flavor expertise here.” Which is why PSTA feels comfortable going into the soup market. The company launched a refrigerated soup line in September after doing focus-group studies that concluded that consumers think PSTA’s flavor expertise can translate into soups.

That’s good news for PSTA because, Hewitt notes, soup is a $2 billion per year market, and refrigerated soup is the fastest-growing category, at over 20%.

Also, Hewitt says, refrigerated soups are in the deli case, “right in our basic area of the store.”

Monterey continues to launch new pasta products, with four to five new items debuting each quarter. Their competition is Nestle’s Contadina brand, which controls 40% of the market, and DiGiorno, a Kraft Foods label.

The company’s niche is the gourmet part of the refrigerated pasta market, or what Hewitt calls the “flavor market.” “Gourmet is really what gets us our customers,” he says.

And yet, 75% of PSTA’s distribution is in two warehouse store chains: Costco and Sam’s Club. Hewitt says he would like to even out distribution to more retail chains.

That doesn’t necessarily include natural foods stores. “We’re somewhat limited in our ability to service natural foods stores because many don’t have large refrigerated deli cases,” Hewitt says. “We see ourselves as a mainline company, but with products that are all-natural, because it’s the right thing to do.”

PSTA launched its soup line in three San Francisco stores—Draeger's, Lundardi’s and Mollie Stones —but outside of the nearby northern California area it limits most of its natural foods store distribution to the big chains. PSTA’s products are sold in one-third to one-half of all Wild Oats (OATS) and Whole Foods (WFMI) stores, Hewitt says, although he would like to expand that to 100%.

He also plans to grow the company through acquisitions. In March, PSTA made its first acquisition under Hewitt, buying San Antonio-based Frescala for $2.4 million. Not only does Frescala give PSTA inroads into the lower-priced pasta market with its Arthur’s brand, it also has distribution in five major chains in OR, TX and CO that don’t carry Monterey Pasta products.

“Our first acquisition was small by design, to prove that we could integrate a new company,” Hewitt says.

PSTA wants to make another acquisition within the next seven months to a year. Hewitt says he’s looking at pasta companies with $4 million to $20 million in yearly sales.