A plain-vanilla company? Well, in a way.
“We make multiple vanillas—double strength, pure, organic,” says Mark Jacobs, who runs Winona-based J. R. Watkins, Inc., for his father, famed Minneapolis entrepreneur Irwin Jacobs. “Vanilla is about 30 percent of the company’s revenue.” But the company’s history, turnaround, and potential for growth, like its CEO, are anything but vanilla.
Chief executive since 1998, Mark Jacobs has grown revenues by nearly 90 percent over the past five years. He expects them to more than double over the next five years, to $250 million.
Not coincidentally, Jacobs and Watkins have initiated a multi-year strategy of putting the firm’s long list of products through a tedious reformulation process to achieve “all-natural” certification from the Natural Products Association, in Washington, D.C. Watkins also has introduced dozens of new products, such as aloe and green-tea shampoo and body wash, fragrance-free laundry detergent, citrus bathroom cleaners, and lemon all-purpose wipes—while dropping numerous low-demand items.
And there’s a third factor behind Watkins’ renaissance: expanding sales channels. Though the “Watkins man” (and, more and more, “Watkins woman”) still sells directly to customers, Watkins now also markets many of its products through some of the nation’s largest retailers, including Target, Wal-Mart, and Whole Foods.
This is helping the company reach a significantly larger number of customers—building upon an aging, mostly rural foundation to include younger consumers and those in cities and suburbs who are increasingly demanding green products.
The company’s brand is strong in many parts of the United States, but not so much in many others. Founded in 1868 by Joseph Ray Watkins in Plainview, a southern Minnesota town about 20 miles northeast of Rochester, the company’s first product was a liniment to console aching muscles. Made with camphor and capsaicin (the chemical that makes chili peppers “hot”), the liniment remains one of the company’s biggest sellers. Its label now features an endorsement by Major League Baseball pitcher Johan Santana, a former Minnesota Twin.
A year after introducing his liniment—and perhaps to distinguish his product from the numerous and spurious “patent medicines” on the market at the time—Watkins created the “Trial Mark” bottle, believed to be the country’s first-ever money-back guarantee. The Trial Mark line can still be found on almost all J. R. Watkins products. It allows customers to return a product as long as the bottle’s contents are still above the mark.
By 1885, Watkins moved his growing company to Winona. “By the turn of the [last] century, 3,000 horse-drawn wagons were selling our products door to door,” says Jim Yenish, vice president of operations, who has worked at Watkins for three decades.
In 1912, the company constructed a 10-story office and manufacturing building designed by famed Prairie School architect George Washington Maher. (Today, the building is on the National Register of Historic Places.) By the 1920s and ’30s, the company had 128 product offerings and operations in eight U.S. and Canadian cities.
The next three decades were rockier for Watkins. Competition increased from the vast number of consumer products introduced following World War II. “The company failed to see the changing demographics of how consumers purchased products, and the prominent role women played in the marketplace,” Yenish says.
It wasn’t until the 1960s that Watkins began to recognize that things were changing. By that time, it was too late. Women were already entering the work force in large numbers. By the 1970s, the iconic “Watkins man,” briefcase in hand as he sold from door to door, increasingly found that no one was home.
Watkins’ revenues had fallen to $5 million by 1978. “The family had no more money for operating capital,” Mark Jacobs says. “It had no focus. They didn’t know who they were. They were putting their name on everything.” At that time, the company’s product offerings were close to 300, scattered across numerous categories.
That year, Irwin Jacobs bought the company in bankruptcy proceedings. “I believe there was speculation that he was buying it for a quick turnaround sale,” his son says. “But [my father] loved the brand and direct selling, which was extremely entrepreneurial.”
Despite a rocky start, Irwin Jacobs kept the company. Between 1978 and 1995, it had four different CEOs. In 1993 and 1994, Watkins lost money for the first time since Jacobs owned it. He sacked all the top managers in 1995, except Yenish.
“My dad said, ‘Would you and Tricia like to move to Winona?’,” recalls Mark, who was helping oversee Watkins sales department from New York City, often commuting to Minnesota. His wife, Tricia, was working in a SoHo art gallery.
“I called my wife hoping she would say no,” Jacobs says. But she jumped at the chance. “At that time, there was no Internet, no cell phones. We went from a life in Manhattan to Winona. It was a culture shock.”
For the first year, Mark Jacobs refused to take a title, and the company ran without a CEO for several years. “I wanted to earn respect and spend time learning the business,” he says. “After one year, my focus was more and more on the sales side, so I became vice president of sales.” A bit superstitious that the CEO slot was a seat of doom, he waited until 1998 to claim the title.
Seeing that the company’s brand awareness was slipping and that its customer base was aging, Jacobs faced his first major challenge: expanding brand awareness. Yenish says, “Because we relied exclusively on our independent contractor network, we were a well-kept secret, and no one knew how to get access to our products.” Watkins’ independent sales contractors were comfortable with that arrangement. Mark Jacobs wasn’t.
“We wanted to protect our direct selling business,” he says. “We saw retail as a way to grow the entire company and create brand awareness to help grow direct selling.”
In 2004, Watkins tested a few of its classic products—Double Strength Vanilla, Menthol Camphor chest rub, and Petro Carbo first-aid salve—in a Winona Hy-Vee supermarket. Sales were so promising that the company prepared to extend its retail efforts.
Then Jacobs faced his second challenge. This one came from his father.
Beyond the “Man”
My father and I had a philosophical discussion,” Mark recalls. “I saw that the company had huge potential, and he did, too. But he didn’t want anything to hamper our direct selling business.”
The younger Jacobs reassured his father. By 2006, Watkins bath products were being sold in some Target stores, and Wal-Mart was testing Watkins chest rub and vanilla nationally. “Liniment is one of our most popular products, and it went into Wal-Mart in the winter,” a period of high seasonal demand, Jacobs notes. “That’s when we realized we could manage multiple distribution channels.”
Since opening the retail channel, the company says that its direct sales associates have noticed a 10 percent increase in sales. With stores like Wal-Mart (which carries a selection of Watkins’ extracts) and Target serving smaller cities, residents in those areas are exposed to the company’s products at their local stores and via the Internet, not just through a direct sales rep. They may see or purchase a product at Target, then order or reorder it through their representative. Or they may hear about a product from a neighbor or friend who purchased it at retail.
But however strong the sales of traditional products like liniment and vanilla were, Jacobs and his management team knew that Watkins had to offer more items. And they knew they had to have products appealing to newer generations.
In 2008, Watkins launched two new lines primarily for retail distribution: Natural Apothecary personal care and Natural Home Care. “Home care is one of the fastest-growing categories we have right now,” Yenish notes. The category includes cleaners, dish soap, and hand soap.
Two other new lines are expected to launch in mid-2010. One comprises products for infants, including baby oil, booty balm (for sore infant backsides), lotion, and head-to-toe wash. The second, for pets, will include wipes, shampoo, dog treats, and odor remover. Watkins also recently expanded its personal care line to include foot creams and scrubs, bath soaks, and cleansing creams.
Since introducing the new lines and expanding into retail distribution, Watkins has experienced tremendous growth. “Sales in direct selling have been stable, but the retail side has grown dramatically,” Jacobs says. “We hit a wall in 2009 with the economy, but in 2010 we should be up 20 percent over 2009.” Retail penetration also has increased. Last year, the firm had at least one product in 9,000 stores. By the end of this year, it expects to have products in 14,000.
Watkins also has begun selling its products in retail channels in Taiwan, and will soon launch in South Korea, and Hong Kong through an Asian distributor. It doesn’t plan to introduce the direct selling model in Asia, nor does it plan to start manufacturing products there.
The company’s sales strategy carries some risks. “As Watkins moves into multi-channel distribution, it has the opportunity to reach more people, but it could start to weaken its relationship with its direct agents,” says Dave Brennan, codirector of the marketing department at the Institute for Retailing Excellence at the University of St. Thomas business school in Minneapolis. Longer term, Brennan believes the distribution strategy might create “channel friction” that could result in lower sales for independent agents, making it harder to attract people to those positions.
Still, remaining dependent solely on independent sales agents would also have been risky, Brennan notes. “It takes more work, time, and expense dealing with thousands of independent agents than it does these large retail chains,” he says. At the same time, for a small product manufacturer, concentrating on a limited number of retailers also presents possible pitfalls. “The retailers hold the cards,” Brennan says. “They could drop you or exert increased, intense pressure in terms of price.”
Watkins’ retail strategy also means something else—going head to head with powerful players on the competitive home- and personal-care products battlefield.
Those competitors include the superpower of the industry, Cincinnati-based Procter and Gamble. But many of the smaller ones, particularly in the growing green-products market, are well-known to consumers both urban and rural. They include Seventh Generation (based in Vermont), Method (San Francisco), and Burts Bees (North Carolina, and now owned by California-based Clorox). Closer to home, there’s Caldrea, the Minneapolis-based soap and cleaning products company that has been emphasizing its Mrs. Meyer’s Clean Day brand—backed by the marketing power of Wisconsin-based S. C. Johnson.
Having a larger arsenal of products associated with the brand is part of Watkins’ competitive strategy. So is another weapon that Jacobs has been pushing to develop: Increasing the “purity” and the “all-natural” content of Watkins products.
“All-natural” products claim a small but growing portion of the markets Watkins sells to. Though numbers are difficult to pin down, the home care category provides a glimpse at the growth that’s occurring. According to London-headquartered research firm Mintel International, environmentally friendly products accounted for just 3 percent of the $5 billion cleaning-products market in the U.S. However, Mintel predicts that green products will have gained a 30 percent market share by 2013.
According to Yenish, there is actually no legal definition for either “pure” or “natural.” The in-house definitions at Watkins: “Natural” ingredients are derived completely from natural sources, and there is little or no processing to alter their properties; “pure” products don’t contain artificial ingredients, but they can be subject to processing that alters their makeup.
Forty-five Watkins products have acquired the Natural Products Association’s “all-natural” certification, which is given only to products whose ingredients by volume are at least 95 percent “natural” (as opposed to synthetic) and nontoxic. Fifteen years ago, Yenish notes, Watkins products generally contained only about 75 percent natural ingredients. Most of Watkins’ personal-care products are NPA-certified; it’s working on certifying the rest.
While the company’s focus has always been on natural ingredients, Yenish explains that the chemical revolution of the 1920s, ’30s, and ’40s meant that these ingredients often were hard to get. “‘Natural’ wasn’t a merchandising emphasis back then,” he notes. Extend that challenge across 350 product formulations.
J. R. Rigley, the fortuitously initialed vice president of sales and marketing who joined Watkins in 2005 after careers at Procter and Gamble and Baltimore-based spice company McCormick, notes that “natural fragrance is 20 times more expensive than a synthetic fragrance and is a good example of why many companies don’t go natural.” Getting product consistency is also more difficult when using essential oils instead of synthetics for fragrance.
“It was a lot more work than we expected,” Jacobs says of the company’s efforts. “It took a lot more research, and it has been very expensive to reformulate. But it’s who we are. Since 1910, Watkins has been bragging about being pure and clean and natural.”
Not all of the costs of reformulation and certification can be recouped from the marketplace. Jacobs and Rigley agree, however, that trading some profit margin for certification is a sound long-term strategy. “Consumers are more sophisticated and cost conscious, and they see through marketing gimmicks,” Jacobs says.
As part of its marketing, Watkins has begun running ads in a variety of magazines, from natural-living publications like Kiwi to female-centric publications including InStyle and US Weekly that reach different income demographics.
Watkins still manufactures all of its products in its 1912 building. While much of the facility is antiquated, using flexible, portable manufacturing equipment that can be moved from floor to floor has allowed Watkins to continue making its products there. A nearby distribution center was built in 1992.
Jacobs estimates that the company can handle about 50 percent more capacity using its current facility. “It’s a gorgeous building, but we had to retrofit it for the Internet and air conditioning,” he says. The company has no plans to use a third-party manufacturer. Jacobs says he is committed to his Winona operations and that land is available to expand at the current site.
“As fast as we’ve wanted to grow, we are lucky we haven’t grown too fast, because growth is hard to manage,” Jacobs says. If the company does exceed its ability to manufacture in Winona by outgrowing its labor force or facilities, Jacobs would face a new set of challenges. But brand awareness shouldn’t be one of them.