The rise and fall of Vlasic Pickles: How a $3 deal led to bankruptcy

If you're an American, you've been to a supermarket, you should recognize this. It's a jar of pickles from the Vlasic Pickle Company. And in 1988, Vlasic had an incredible 36% of the United States pickle market. They were doing $200 million in sales of jars of pickles just like this one. But just 3 years later, the whole brand was bankrupt and it was sold for pennies on the dollar. Well, this video is about the rise and the fall of the Vlasic Pickle Company and why it all happened and the lessons we can learn from it as business owners. My name is Michael. I tell stories about the rise and fall of business and the things we can learn about them from the perspective of business owners. So if you aspire to be a business owner someday or you are one today, do me a favor and click follow or leave a comment below. It'll help the algorithm show this stuff to you in the future and share with other people, and it'll make me feel good about walking around in a drainage ditch with a can full of pickles. It's a prop. Our story begins with recent immigrant Frank Vlasic. He had recently immigrated to the United States and found his way in Detroit, as many people were at the time, because the automotive industry was booming. And Frank did something that, well, he had learned at home, which was how to make pickles. And he started to produce them like many other kind of craftsmen did at the time and jarred them up and sold them to his fellow immigrants. And the business did just fine and kind of limped along. Until something magical happened in the 1960s, and Frank's son Bob entered the picture. And whereas his dad was somebody who was basically a pickle artisan, made pickles like crazy, Bob was an artist, but in a very different vein. He didn't care much for pickles. What Bob really liked was marketing, and it was a perfect time for a young, ambitious man who loved marketing to enter the picture. And back in the 1960s, branding was still very much in its infancy. If you've watched shows like Mad Men, uh, you would see that many of the brands that we know and love today Gatorade, Pringles, Barbie. They were all started in this 1960s era when technology and the changes in media started to allow companies to invest and create really big, valuable brands. Companies would spend money on TV ads, radio ads, promotions with stars, newspapers and magazines with ads as well. And what these things did was build a customer preference. The customers would learn what the brand stood for, what it was all about, and why it was a safe choice for them. and that would create loyalty. And eventually that loyalty where people would come back and buy your product over and over again would basically create a really valuable company that could get really big. And Bob understood what few in the pickle industry understood at all, which was that advertising works, uh, and marketing works and paying for new customers. It's a valuable high ROI thing for businesses to do. And I often see companies, by the way, who have no marketing budget whatsoever. They don't spend on getting any new customers. And then they're surprised when sales don't go up. Uh, it turns out marketing works. And Bob went all in on building this brand. Uh, he pulled out every trick in the book, newspaper advertisements, TV commercials, radio, you name it, he did it. He even created a Mickey Mouse of pickles. It was a stork. Uh, and by 1977, this investment in advertising and growth created a brand that was doing 26% of the United States pickle market and over $100 million in sales. Just incredible. Oh, and by the way, he was spending more on advertising than all of his pickle competitors combined. Just crazy. And at this time in the late '70s, pickles was still a growth market. You had a lot of recent immigrants, you had young people, and a lot of the new trends that had happened around diet hadn't hit yet. And pickle consumption was growing. And Bob, who had turned a commodity product in the name of pickles where most people couldn't tell you one pickle manufacturer from another, Bob had created a very valuable, unique brand with a loyal following. So noticing the success, the Campbell Soup Company, the ones who make that tomato soup in a can, they came calling. And in 1978, they bought the brand for $35 million from the Vlasic family. And they owned the brand for a while. Things went well. Pickle Market was growing. It was a perfect time to continue doing what had worked in the '60s and '70s with advertising. And eventually by the 1980s, the brand had reached $200 million in annual sales. And just as things felt like they couldn't go wrong for pickles in the US, things started to shift. In the '90s, you started to see a shift to consumer preferences. We started to hear things from the Surgeon General and people like that, that salt was bad for you, that low-fat diets were the thing to go, that you need to eat high grain, just all this stuff. And it turned out pickles weren't really a part of that. And so growth started to stall. In the pickle market, and the Vlasic business wasn't growing like it once was. This was bad for Campbell's, and hired gun CEOs and folks like that without a big ownership stake in the business, they have a habit of making very short-term decisions. And it turns out that stock markets were telling the Campbell's Corporation, we want to see you growing, and you need to get rid of these things that aren't growth industries. We want to see a big bright future because it makes our financial models work for our investment. If your stock price is going to keep going up because it's going to keep growing, and a slow growth or a thing like Vlasic didn't have room in the portfolio. So Campbell's management's answer to this was to spin out Vlasic and some other no-growth assets into their own company. And they did it in a way that basically created a ticking time bomb inside of the Vlasic Corporation with some really perverse incentives to do some things that were dumb for the long term. So the way they did it was to spin out these assets into a new public company. And the first thing they did was pay themselves $500 million for the privilege of doing so. And the way they did that was by borrowing a bunch of money and putting $500 million of debt on the new Vlasic Corporation, which would be spun out into its own independent entity. And the Campbell's management tapped an insider, a man named Rob Birkenstock, to come run the new company. There was a couple of problems with this. The new Vlasic Corporation fundamentally was a turnaround situation. This business wasn't growing and Rob was going to be expected to fix that. The second thing was Rob had never been a CEO before. They just picked one of the insiders from their corporation and said, well, he'll figure it out. Tough situation. And if you do the math on that $500 million in debt, based on the previous year's performance before spinout of the Vlasic Corporation, a little over half of the profits from the company were going to go just to pay the interest on that debt. In other words, Rob was getting into this tough turnaround situation with one hand tied behind his back because of all this cash going out the door just to service the debt. So on one side, Rob is getting pestered by the new shareholders in his new company, Vlasic, which is publicly traded because they want to see their share price go up and they know the way to do that, which is Vlasic needs to grow. And on the other side of it, Rob looks up at his balance sheet and realizes he's going to pay all this debt on this interest every year. Well, there's a solution for all that. So Rob realizes, I need to figure out how to make Vlasic start growing again. So Rob and his executive leaders, they put out the call. We need to figure out how to make ourselves start growing again. And the staff listened and started to come up with ideas. And one of those ideas came from a guy named Pat Dunn. And Pat Dunn at the time was the guy in charge of selling into Walmart. And he came up with an idea working alongside with a Walmart buyer, which was they were going to create something that had never been seen before. Or even done before in the world of pickles. And Pat and Walmart wanted to make something never done before, which was a gallon jar of pickles. And the twist was they were going to sell it for a price nobody imagined, $2.97, just shy under $3 for a gallon jar of pickles. And to put that in perspective, the jar of pickles I showed you at the beginning of this video, that's a quarter of that size. It's a quart of pickles and it's a huge jar. It'd take us forever to eat that many pickles. And at its core, Vlasic was offering a premium brand of pickles at a ridiculously low price. And it seemed like a win-win for Walmart and Vlasic. They were going to sell a lot more pickles on the case of Vlasic, and Walmart was going to do something that brought in a ton of people to buy, well, just this crazy, amazing, over-the-top deal. Vlasic and Walmart rolled out the jar of pickles promotion to a few stores to test it, and customers absolutely loved it. They just found it amazing. You could get an entire jar of pickles for $3. It was like went into these stores and came out with a trophy buck that they had been hunting. Like, that was just a total killer. So what did they do? Well, they went all in and they rolled it out to 3,000 Walmart stores at the time. Uh, and customers absolutely loved it. They could get this premium jar of a gallon of pickles, a trophy buck for under $3. They could go home and tell everybody how awesome they were. And the scale was incredible. Eventually they got to where they were selling 240,000 gallons of these pickles each and every week. And things were growing incredible. They had entire farms dedicated to produce cucumbers to build pickles for the Vlasic Corporation. The sales growth— well, that problem was suddenly solved until they started to realize what they'd done. And the first thing they started to realize was they weren't making any money. See, a typical jar of pickles might run at a 25 to 30% gross margin. A pickle jar that's a gallon like this, priced at $2.97, they were breaking even, maybe. Vlassic was maybe making 1 or 2 cents per pickle jar. That's no way to build a business. The second problem was brand erosion. Before this scheme, people had seen Vlassic as a premium brand they were willing to pay up for. Remember all that advertising in the '60s? People thought Vlassic was better than other pickles, even though it might just be the same. But when you started to do a deal like the one with Walmart, well, suddenly there's brand erosion. People look at it and they're like, well, maybe this isn't a premium brand anymore. And I was getting screwed all along early up. And this is fine in the near term, but in the long term, when you have brand erosion like this, people start to question whether they're going to be your customer anymore. And all that work you did in the '60s and '70s to build up that premium brand can go away in a flash. The third problem was the realization that pickles don't go bad quickly. I mean, a pickle was designed to put a cucumber in brine water, salt water, and have it last forever. And when you sold somebody a year's worth of supply in a gallon jar of pickles, that means they're not going to do something else. They're not going to buy more pickles from you like that size that I showed you before. So suddenly you're selling at a discount and replacing all of the sales of your profitable pickles by having this giant gallon jar promotion priced super cheap. And the fourth and biggest realization that they made, and perhaps the scariest one, was Vlasic looked up and they were entirely dependent on Walmart. Over 30% of their sales were suddenly going through the chain. They had entire farms producing cucumbers just to go through and be produced for Walmart. So now Vlasic Corporation looked up. They were killing their brand with this promotion. They weren't making any money on the volume, and suddenly their business had become very scary. If Walmart decided to change their mind or do something different, they were in trouble as a corporation. So seeing this problem, the executives for Vlasic, they flew out to Bentonville, Arkansas, which you do when you want to sell to Walmart, and they asked Walmart, hey, This isn't sustainable for us anymore. We need to stop doing this. And guess what Walmart said? Tough. We're not changing anything. And even worse, Walmart told them, you either keep doing our deal for the gallon jar of pickles, uh, or we're going to cut you off entirely. See, Vlasic at this point had pickles, but they also had some other stuff as well. And they were trying to sell pickles through Walmart at these kind of quart jar size and make money with the different varieties and stuff like that. And Walmart said, look, you're either going to keep doing business with us and do this big gallon jar promotion, or we're going to cut you out entirely and remove you from all of our shelves. So Vlasic decided to wait them out and see if eventually Walmart would change their mind. Uh, and eventually Walmart did because they saw something happening too, which was they had aisles full of pickles that they wanted to sell. And suddenly with the gallon jar promotion, they weren't selling any of those profitable pickles. And seeing this, that they were in effect killing the category on their own by offering this promotion, they were ruining their pickle business. Walmart finally relented and they let Vlasic come in, change the promotion to go to a half-gallon jar and sell that for $2.79. And that provided, well, some relief for everybody. And while Vlasic was making a bit of money on the new scheme, you know, it wasn't the 25 to 30% they'd been making under their old model. And eventually things caught up to the company. Uh, in the effort to try to chase all of this growth and build their business and pay off the debt, uh, and settle the interest with it each and every month, well, basically the time of reckoning came for Vlasic. And as is usually the case with debt, when you need the money the most is when it's not available. And cash-strapped, running out of money and unable to service its debt, uh, the beautiful once kind of esteemed plastic corporation, filed for bankruptcy in January of 2001, less than 3 years after they started this whole gallon jar experiment with Walmart in the hope for growth. And in this type of bankruptcy, it's very common to sell off assets in order to pay creditors. And in this case, the auction happened, and in a sad and somewhat embarrassing end, The buyer for the Vlasic pickle assets and some of the other stuff was the number 2 pickle maker and the biggest rival, H.J. Heinz, the maker of ketchup and other assorted stuff, who bought the business and assets for a measly $195 million, which is a far cry from the $500 million in debt that was put on the business just 3 years earlier. And fast forward to today, the Vlasic pickle brand is still around. So that's how I was able to buy the jar. And it's endured a lot of ups and downs of the pickle and food industry, uh, as you can imagine. Uh, but all of that is of course a saga for another video. There's a lot of lessons about this story. I mean, everything from chasing growth at all costs to the dangers of debt and the dangers of financial engineering. But for me, the biggest lesson is things usually finish in a way that you can predict at the start. And in the case of this spinout, when they put $500 million of debt, on the business and put in a first-time CEO into a turnaround situation, uh, you can kind of see where it was going to end up. And that end up was not good. And that's it for this video. Let me know what you think about the story, lessons learned for you. Do you eat pickles? And, uh, also in the comments below, let me know what you think I should do with this giant-ass jar of pickles. I don't know how I'm gonna eat all these. This is a quarter gallon of pickles. It's a lot of pickles. All right, talk to you soon. Thanks for being here.