This is the junk-food factory where Humpty Dumpty chips are made:
A large well-lit box of a building in Brampton, Ont., where the steady roar of machinery orchestrates the birth of a real Canadian potato chip. It only takes 15 minutes: Medium-sized potatoes are washed, scrubbed and sliced 1/20th of an inch thin, then fried in 360-degree Fahrenheit oil, genetically modified but trans fat free. The warm chips are transported up a conveyer belt to the seasoning stations, where they're powdered with dry flavours like ketchup, dill pickle, fries-and-gravy, smoked bacon and roast chicken, and then weighed on a computerized scale, dropped into multi-layered polypropylene bags and sealed shut. And there you have a potato chip -- 35% oil, 1% salt, the rest potato.

The manufacturing of potato chips hasn't changed much since the introduction of computerized scales 20 years ago. Sure, people are on a health kick these days, but nobody at Kitchener, Ont.-based Humpty Dumpty Snack Foods Inc. -- the only publicly traded chip company in Canada -- thinks it will affect the mouth-watering impulse to buy. Oil, after all, is what gives chips their flavour, says Terry Henderson, the snack-food veteran who runs Humpty Dumpty's manufacturing operations. He eats dill pickle chips just about every day. Low-fat chips? "We tried that," he says, on a tour of the plant where you can smell the cooking oil in the air. "It was a miserable product."

The business of the chip, however, has changed significantly in Canada over the last two decades, ever since the global snack-food monster, Frito-Lay, a division of PepsiCo Inc., with US$8.5 billion in revenue in North America alone, conquered the market. Frito-Lay has the powerhouse lineup of Lay's potato chips, Doritos and Tostitos, plus an awesome distribution machine. After making its big move in 1989, when it bought Canada's then-leading chipper, Hostess Foods Co., it didn't take long before Frito Lay Canada had gobbled up more than 60% of the market -- leaving comparatively small companies like Humpty Dumpty, with current annual revenues of about $170 million, struggling for shelf space. Humpty Dumpty, which also makes private-label chips for retailers and brand-name snacks like Cheese Twists and Party Mix, has grappled with the problem ever since: How to win back some of that vital retail real estate? It's a tall order: Half of all chips are sold in grocery stores, and Humpty Dumpty, the all-Canadian potato chip, can't get a sniff in Canada's biggest grocery chain, Loblaws.

Humpty Dumpty's chairman and CEO, Gerry Schmalz, is betting that a multi-million-dollar makeover -- of the flavours and the main man -- will do the trick. He's got his sales team pushing retailers hard, while at the same time speaking directly to consumers -- hoping that if more of them ask for Humpty Dumpty, more retailers will put the brand on their shelves. It's the latest assault in a campaign that started four years ago; one that has seen the company rev up its "explosive" flavours and rebrand itself, giving its venerable nursery rhyme icon -- who made his original chip-bag debut in 1948 -- a complete makeover. While higher costs for frying oil and the stronger Canadian dollar pushed the company to its first losses in five years in fiscal 2003, Schmalz does see signs of progress: Since introducing the new Humpty Dumpty logo and packaging last April, the company's market share in eastern Canada has risen to 12% from 7% in 2002. (It serves that market, as well as the northeastern U.S., with four manufacturing plants between Ontario and P.E.I., but has virtually no presence west of Ontario, where American-owned Old Dutch Foods Ltd. of Winnipeg is No. 2.) Such gains are a start, but with the Frito Lay snack monster lurking and overall revenue flat since jumping 10% in 2000, Humpty Dumpty remains in a tough spot.

Schmalz, a burly 55-year-old former goaltender, has built a career making potato chips, ever since he turned away a scout from the Detroit Red Wings nearly four decades ago after a teacher told him there was no money in hockey. Back in the 1980s, he bought several little Canadian potato chip companies and founded Small Fry Snack Foods Ltd. But it was also about that time, in 1989, that Frito Lay Canada -- already the No. 3 brand in Ontario and Atlantic Canada and No. 2 in Quebec -- bought Hostess. Over the next five years, Frito Lay deployed its powerful distribution machine to assume command of snacks in eastern Canada, reaching 50% market share. A few years later, it surpassed Old Dutch to become No. 1 in the West.

Being No. 1 is especially advantageous in a business like potato chips, where distribution is so important. Delivering potato chips directly to stores represents roughly one-quarter of a snack company's wholesale costs. Volume, however, gives Frito Lay a distinct advantage. When a Frito Lay truck pulls up to the grocery store, it drops off more snacks than its competitors, so Frito Lay pays less per delivery than its competitors do. In turn, the snack giant uses that advantage to fund more advertising and marketing that reinforces the brand in consumers' minds, which drives sales and helps convince retailers to give Frito Lay prime shelf position. No one has been able to break this circle. In 1989, for example, around the time that Frito Lay bought Hostess in Canada, Anheuser-Busch, the U.S. beer company, launched Eagle brand chips, betting hundreds of millions of dollars it could make a better potato chip than Frito-Lay. For a while it did, until Frito-Lay refocussed on chips. Eagle closed in 1996.

Schmalz, however, wasn't about to back down: "It became clear in this business you get big or go home," he said. His first move, in 1993, was to buy Olde Barrel, a P.E.I. chip maker, and three years later, Murphy's, an Ontario manufacturer and distributor. In between, in December 1994, Schmalz purchased Humpty Dumpty from Borden Inc. for about $32 million, funded by bank debt and money from Bain Capital and GE Capital Canada, and from Schmalz's own investment company. At the time, Humpty Dumpty had an 18% share in eastern Canada. "Somebody was going to buy Humpty Dumpty," Schmalz recalls. "Why not me?" He figured a little Canadian snack company could survive against Frito Lay: "It's like a mouse running under an elephant," he says. "There's lots of room down there. You just don't get stepped on."

Yet only four years later -- even after firing one-quarter of the staff -- Schmalz was in deep trouble. It was 1998, and his company, which sold chips under the Humpty Dumpty brand but was still known corporately as Small Fry, looked like it was about to replay the legendary egg's tumble off the wall. It recorded a net loss of $4.7 million on $160 million in sales. One problem was that the company relied heavily on making chips for retailer's private-label brands -- and private-label chip prices were dropping. Although the private-label business helped to keep the machines humming, margins became too thin for a company that was also geared to market and support a brand. On top of that, the branded business was weakening, too. In the 1980s, Humpty Dumpty had been No. 1 in Quebec and No. 2 in Ontario and the Maritimes. Now its market share had tumbled to under 10%. It and other small players were getting pushed to the sidelines by a couple of related trends, says Bain & Co. consultant Chris Dawson. First, retailers were consolidating, and as they gained power, they chose to buy more product from fewer suppliers. In response, consumer-product companies started consolidating to enhance their power with retailers. They also expanded their offerings to fill the shelves and entrench their positions as preferred suppliers. The end result: fewer suppliers with a more dominant presence on the shelves.

In Humpty Dumpty's case, it was Frito Lay that cut deals with retailers that effectively shut out the Canadian chip. These customer merchandizing deals or trade promotions, very common in the industry, are negotiated on an annual or even longer basis. Covering items like shelf space, display, promotions and advertising, they're a sophisticated version of the simple volume discount. While they don't explicitly shut out competition -- that would be illegal -- they can achieve the same effect by offering retailers financial rewards for hitting sales targets. Says Lynda Murray, Humpty Dumpty's vice-president of marketing: "Through good selling, [Frito Lay] got us de-listed, or kept us out of selling our chips at retail. So we [didn't] have the opportunity with many retail banners and therefore with consumers to sell our product." By 1998, the year Murray joined Small Fry as director of marketing, she says, "the question was, how do you survive against Frito Lay? We were in survival mode."

Murray, a vivacious and articulate marketing expert who previously worked at an advertising agency, was hired to turn things around. Her recommendation: put all of Small Fry's eggs in one basket by turning Humpty Dumpty into a "superbrand." That meant putting the Humpty Dumpty logo on all of the company's branded products (it had only been on chips) and bringing back the egg-man icon, which was abandoned when Schmalz bought the company in 1994.

Her first efforts were modest, hampered by a limited budget. She hired a local design firm to update the Humpty Dumpty icon, and the rebranding began in 1999. In early 2000, Small Fry bought the rights to Humpty Dumpty in the U.S., and, shortly after that, the company changed its name. The impact was immediate. Net sales grew 10% in 2000, hitting $171 million, due to increased sales of branded products and the move into the U.S. market, while earnings doubled to almost $1 million.

Even so, Murray knew she was just getting started. "People didn't know what Humpty Dumpty stood for," she says. She did some consumer research and listened to the kids. Their message was a killer: "We were the brand my mother used to buy." Then she got some good news: she found that consumers liked Humpty Dumpty's flavours. They tended to be stronger than Frito Lay's. Humpty Dumpty had a few unique ones, too -- like buffalo wings, barbecue and cheddar, and roast chicken. So maybe Humpty Dumpty could distinguish itself by highlighting its "explosive" flavour.

Next, Murray hired Thomas Pigeon, a branding expert with clients like Molson Canadian and Pillsbury, to zap the packaging. When you're talking about an impulse buy, packaging is crucial, says Murray. The shelf space ought to be a "massive billboard." But at that time, even though the original rebranding had helped, they concluded it still looked weak. Pigeon laid out all kinds of snacks in his Mississauga conference room, gaining 10 pounds as he studied the problem: How could Humpty Dumpty distinguish itself from Frito Lay's big brand, big logo and big colour? One thing, he noted, was that Humpty Dumpty himself looked like he was about to nod off. Pigeon's team decided to keep the bow tie but change the character. The new Humpty Dumpty, along with a new logo and packaging, debuted on snack lines in 2002 and on potato chips last spring. The difference is dramatic. "Now he's dancing and partying," says Pigeon of the new icon. "He's having a blast right now. He's the kind of guy you'd like to party with."

But there's still one big problem, and five minutes in your local Loblaws grocery store illustrates it perfectly. Walk down the snack aisle and what do you see at eye level? On your left, Doritos, Tostitos, with the salsa just below. On your right, the President's Choice line of snacks, including PC potato chips (made, ironically, by Humpty Dumpty). Step a little further, and on your left you'll see a wall of Frito Lay chips: Ruffles, Lay's, in all the flavours. Finally, well below eye level, you might spot a little offering from Humpty Dumpty: ke-tchup and barbeque Ringolos, Party Mix and Cruncheez. No potato chips. When you consider that snacks are a classic impulse buy, this is not a good location.

"If you can't get to the shelf, it's critical," says Murray. Right now, Frito Lay dominates the snack shelves in 90% of retail outlets that sell snacks. Humpty Dumpty snacks, or at least some of them, are sold in 60% of outlets, but they're often relegated to a lesser position. According to Loblaw spokesman Geoff Wilson, the grocer assigns shelf space on the basis of sales volume, sales growth and the appeal of something new. It usually stocks the top two brands, plus its own house brand. "We want to give our customers choice and great value," says Wilson. But so far Humpty Dumpty isn't one of the chosen brands at Loblaws.

Nevertheless, Schmalz is now making that chain, along with IGA (owned by Sobeys Inc.), his prime targets. "They say, what's different between your potato chip and Frito's?" Schmalz says, re-enacting his sales pitch. "We say, flavours. Our flavours are more regionalized. Canadian barbecue is spicier, whereas an American barbecue is a sweet, smoky flavour. Our cheese here in Canada is a sharp cheddar, whereas in the U.S. it's a buttery Velveeta." Their reaction? "They look at us sometimes as if we had two heads."

Blind taste tests, Schmalz continues, show that nine out of 10 consumers prefer the taste of Humpty Dumpty in 60% of its snacks. Nielsen data shows that its barbecue, dill pickle and ketchup chips outperform Lay's in stores where both are sold.

That's nice, the retailers say, but we only have so much space. Then Schmalz tells them about the space audit Humpty Dumpty did in the past year at one grocery store. The retailer had allocated 117 spots on the shelves for Frito Lay's Tostitos. Yet the store only sold 10 bags of Tostitos per day. "My comment was: You folks are inventory-ing, warehousing Frito's product, and you're paying for it." The grocer gave Humpty Dumpty more space, and the result, according to Schmalz, was impressive: in that store, over the past year, sales of Frito Lay, Humpty Dumpty and private-label all grew faster than the standard growth for snacks. "Needless to say, we're taking that to other retailers."

Whether it's the new sales pitch or the recent rebranding, the jump in market share in eastern Canada to 12% from 7% is a sign that something's working. Murray reports that Humpty Dumpty is making progress in winning back shelf space: Already sold at Sobeys, Provigo and A&P, Humpty Dumpty chips are now back on the shelves in Mac's convenience stores and the discount grocery store Food Basics. The company has started to supply Wal-Mart with snacks -- but not chips, except for special events such as Halloween. It's also signed an exclusive deal with Compass, which supplies food to business cafeterias and vending machines. Humpty Dumpty has also convinced Shoppers Drug Mart to test its snacks in a handful of outlets.

Continued sales growth is far from certain, however. According to Ryan Brain, a Deloitte consumer-products consultant, it depends on whether the company can convince retailers that they will be more profitable by stocking Humpty Dumpty products. "Humpty Dumpty needs to create a very distinct way of capturing the consumer's and retailer's attention, so its products are not only being carried, but put in a competitive distribution situation," Brain says. "Retailers don't care about flavour or market research unless it is very clear that they can win by stocking more product."

Schmalz's business plan raises questions, too. The private-label business, for instance, generates 20% of revenues, down from 35% when the rebranding began. Should Humpty Dumpty still be in the private-label business at all? In the snack business, "you can't build a brand and service private-label," says former Pepsi Canada president David Shaw. "You have to make the call: Is Humpty Dumpty private-label or brand? Until you make that call, you're trying to satisfy two constituencies." Yet plenty of big consumer-product brands do have some private-label business, because they know how to make the product and they know retailers want private-label, says Bain and Co.'s Dawson, adding that they do it "to improve capacity utilization" in their plants. "It may not be a core element of their strategy. It may just be a cost-reduction strategy."

Of more immediate concern, perhaps, is that despite the better sales numbers for branded chips, the company's overall financials have taken a big step backwards. Fiscal 2003 year-end numbers were scheduled for release December 18, but a $1.4-million net loss through the first nine months, on sales of $124 million, clearly means the job of renewing Humpty Dumpty is far from over. True, its main troubles -- a rising Canadian dollar and the skyrocketing price of frying oil -- are out of Schmalz's control. But if those conditions persist, he'll need to find a way to cope.

For many CEOs, this could add up to a lot of disgruntled shareholders. But in Schmalz's case, that won't be such a headache, as most of Humpty Dumpty's shares are closely held. Schmalz himself owns 17% of shares, while only 20% of the stock is in a public float. The company's share price has drifted between $2 and $3.50 for the past two years, closing at $2.40 on December 11.

For the few shareholders who might ask, the CEO says the answer lies in further growth. "We want to be a consolidator, buying more companies and getting bigger to take advantage of the economy of scale," he says. Specifically, Schmalz is eyeing some U.S. snack-food companies, and keeping tabs on the Minnesota family that owns Old Dutch. In the short term, he's bringing in another Canadian icon to help out. In February, shoppers will start seeing Don Cherry's image on Humpty Dumpty chip bags and displays. Murray hopes Cherry's face will boost sales, just as a similar Hulk promotion did last summer. "Cherry is bold and controversial," she says. "He believes in Canada and likes to work with the underdog. And we are the underdog."

SHELL GAME: Humpty Dumpty's latest makeover is but one in a long line. Here's the lowdown on his looks: 1995 Shortly after Gerry Schmalz's Small Fry Foods bought Humpty Dumpty, the 50-year-old brand's traditional egg-man icon was dropped. In his place: a toe-tapping potato chip in shades and a ball cap. Sales proved soggy.

2000 Small Fry renames itself Humpty Dumpty and revives the egg man, while deploying the Humpty Dumpty logo as a "superbrand" for all of its snack-food products. Chip sales take an immediate jump, though the dopey-eyed, chrome-domed icon with a wry smile bears little resemblance to Humpty's past.

2003 After hiring branding expert Thomas Pigeon to review its logo and packaging, Humpty Dumpty debuted its new look. Chip sales are impulse buys and strong branding is crucial, says marketing VP Lynda Murray. As for the new icon? "He's having a blast right now," says Pigeon. "He's the kind of guy you'd like to party with." Apparently, chip buyers agree: Since relaunching last April, Humpty Dumpty's market share in eastern Canada is up 5%.

© National Post 2004

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