“Using His Noodle: Pasta pro Richard Thompson pushes the American Italian Pasta Company to number two with clever cost-cutting measures”

American Italian Pasta Company went from zero to $371 million market value in ten years by making inexpensive pasta using production efficiencies learned in Italy. This description of the company’s rise is based on a discussion with its founder, Richard Thompson.

Even though he heard the naysayers, Richard Thompson wasn’t listening. It was already too late. When they called his radical idea to manufacture pasta “crazy,” he shrugged it off. When investment analysts pointed out the risks, he investigated his options further. When they said there was no more room for small players in the North American pasta market, Thompson still believed his idea could turn profits.It was merely a decade ago when Thompson, a native New Yorker with a creative spirit, founded the American Italian Pasta Company (AIPC), a low-cost producer of spaghetti, rotini, rigate and nearly 100 other pasta shapes.

In the beginning, he admits, life in the pasta business, as he’d been warned, wasn’t always good. When AIPC broke ground on its first plant in Excelsior Springs, Mo., in June 1987, Thompson realized his small company would soon be competing directly with food giants Borden Foods, the largest pasta producer in North America, and the Hershey Foods conglomerate, which AIPC passed in market share in 1997 by inking a deal to manufacture pasta for the coveted Mueller’s brand name, the largest brand in America.

“There was stiff competition,” Thompson remembers. “There were a lot of well established companies there. It was tough getting started.”

He understood the concerns of his doubters. No one on this side of the Atlantic had ever tried such a cost-cutting approach to the pasta-producing process. He also understood the intimidating obstacles to success, a well-established group of competitors that included some of the largest, and richest, food producers in the world. However, even if the American pasta market was a tough jar to open, he’d seen similar methods succeed overseas.

Today the pessimists have long since been silenced, and AIPC is North America’s second-largest pasta producer with products sold in nearly every grocery store in the United States and Canada. Thompson no longer runs the day-to-day operations for AIPC, having turned his attention to his new startup venture, Thompson’s Pet Pasta Products Inc., which produces pasta-style pet foods, but he sits prominently on the board of directors. He is still the now-public company’s most notable investor and continues to reap big rewards for his self-confidence, as AIPC grows at a 20 percent annual rate.

Find Your Opportunities, Then Find Your Advantage

Thompson didn’t always have pasta on his plate. Prior to founding AIPC Thompson had invested in several North Dakota oil and gas properties. However, he found profits harder to come by as oil and gas costs soared. When prices got too high for him, he opted out and sold off his properties. At the time he had not even realized his pasta potential. “I was looking for something else to do,” he recalls. “I was standing on it.”

While tending to his North Dakota businesses, he came in contact with many wheat growers in the state, who turned him on to a new idea. Always an opportunist, he realized immediately that the North Dakota wheat growers provided easy access to all the resources he would need to produce pasta.

“I had access to all the raw materials — the state is the largest North American producer of durum wheat, the main ingredient in pasta. I set out and studied the industry here in America for about two years,” he says. “I understood the complexity of making it, what the future of pasta was in America, but more importantly, what it could become.” That’s when Thompson decided he would have to learn from the masters if he was to compete in a market in which he was inexperienced.

Boarding an airplane in New York City, he moved to Italy, where he lived for two years and studied the art of pasta making. He visited the most advanced pasta-manufacturing plants and found that the pasta tasted better than it did in the United States.

“I compared the way the Italians did it to what I had seen in America,” he reveals. “What I discovered was that the pasta business in America was very primitive. The Italians were much more high tech and much more cost efficient. They turned out better pasta because of their methods, and they were able to make it cost less for the consumer.”

Thompson found his niche. In the process he stumbled upon the secret ingredient that would eventually begin to supplant the established players from the industry’s market-share hierarchy.

Thompson’s business savvy led him to believe that the lower cost of production and distribution would allow his company to output pasta faster and in higher quantities and allow him to accept slimmer profit margins. Lower profit margins would allow for lower market prices, à la the cheaper cars Japanese auto makers were selling in America. Cheaper prices would also attract more customers in the service and processing sectors.

“I thought, if Honda and Toyota could come to America in the 1960s with high-efficiency car production and dominate the market, which I think we all agree they did, why couldn’t someone bring high efficiency to pasta making in America?” he says. “That starts with low-cost manufacturing, which would translate into lower-costing pasta that would attract customers, and the company would grow. It did.”

His plan for low-cost manufacturing was what he called “vertical integration.” It was a similar system to what he had witnessed while roaming Italy. He decided to produce low-cost and better-quality pasta by combining the manufacturing with the milling process, which American manufacturers usually contract to outside mills. Even more unusual was Thompson’s plan to build a manufacturing plant with a vertical milling structure built right into the plant itself.

Vertical integration is simply a vertical milling machine built atop the manufacturing line. The process mills the wheat and grain for the pasta at the same time the manufacturing process takes place, reducing time and cost. He would also become a supplier of pasta, as opposed to simply manufacturing it.

“My concept was to cut out the waste of money that happens by contracting a mill and a distributor,” he explains. “Basically, I tried to sell the banks on the unusual idea of two plants becoming one. That was radical, and they all said I was crazy.”

Persistence Pays Off

Set on moving forward with his idea, Thompson kept pestering the banks and anyone else who would listen, often explaining his intentions by passionately waving his arms for emphasis. In the process he won over Tim Webster, a young accountant who specialized in entrepreneurial projects for Arthur Young & Co.

With Webster on board and an initial $25 million invested, AIPC became a reality after one more battle with the banks. The bank supporting the plant construction wanted Thompson and Webster to build in Overland Park, an established corporate center in the Kansas suburbs of Kansas City. Thompson preferred the plot of land in Excelsior Springs on the Missouri side of the suburbs specifically because it provided direct access, via the Canadian Pacific Railroad, to his North Dakota wheat-growing acquaintances, who would provide raw materials. Thompson also chose the Missouri suburb because it provided equal distribution to both the East and the West. He perceived that the bankers were championing Overland Park because they thought a plant there would be easier to turn into warehouse space if AIPC failed. He believed they were hedging their bets.

Thompson explained the soundness of the idea to his financiers. He laid down the plan and identified who he thought he could eventually win over for accounts. By this time Thompson’s work had gone a long way in piquing the interest of his backers, who, like Webster, found themselves drawn to Thompson’s steadfast confidence in his plan. Thompson again laid down the facts and won the location battle, based on his commitment to cutting capital investments, a trend gaining rapid momentum among finance experts. Excelsior Springs’ proximity to the railroad, Thompson argued, would significantly cut shipping costs on both sides of the process, as it eliminated transport to and from the trains.

In the early going, the company had to carve out a customer base that would make up the difference in lower profit margins. They solicited smaller accounts, mostly in the form of discount grocery store brands and restaurants, that were attracted to the low cost of producing the pasta. As word spread, AIPC signed more supplier contracts and gained the business of pivotal companies, including Wal-Mart, Publix and General Mills.

“We had to start low and fight our way to the top, one customer at a time,” says the proud Thompson. “Now it’s a dream come true.” Webster assumed the helm of the operation, becoming president and CEO in July 1991. Early in Webster’s tenure, AIPC won a contract with Houston foodservice distributor Sysco Corp. to market a new brand of pasta called Pasta LaBella. The company has since developed and started marketing the Montalcino and American Italian Pasta brands.

The company continued to attract enough business that it expanded its manufacturing facilities, opening a second vertically integrated plant in Columbia, S.C., in 1995. The company rode Thompson’s idea and has become the second-largest producer in North America, churning out more than 300 million pounds of pasta each year and pulling in revenue estimated at approximately $121 million annually by the end of 1996. According to Nelson Information Inc., a Port Chester, N.Y., investment research firm, AIPC had market value of $371 million at the beginning of 1998 — more than 10 times Thompson’s initial investment.

Don’t Stop After One Helping

Under Webster’s direction the company has taken steps to ensure more growth. Webster’s hunch to build in South Carolina paid off when the company signed the papers in the fall of 1997 to supply pasta shapes for CPC International’s Mueller’s brand. Approximately 60 percent of Mueller’s volume is in the Southeast.

The contract will double AIPC’s production, which requires a substantial investment to expand both of its plants. The company initiated an $85 million expansion project shortly after inking the deal, which led to the public offering in September.

Webster’s decision to go public helped AIPC avoid the cost of borrowing money for the capital project, which it had done in years past. The stock offering will pay off AIPC’s existing debt of $15 million, pay for the expansion and set up a $150 million rotating-credit facility from which it can borrow additional funds at lower interest rates.

In going after the Mueller’s brand name, Webster and his team put together an effective plan for the coup, specifically selling their low-cost methods, and the public investment-backed rapid expansion plan, to CPC officials. The AIPC team felt confident enough with their state-of-the-art facilities to convince CPC that they could help the food giant drastically cut capital investments.

Lars Bergan, a food analyst for Argus Research in New York, says that food producers like CPC are actively looking for new ways to cut capital-intensive pasta making. The trend is expected to play right into AIPC’s hands, as the company continues to expand its production capabilities to handle mass distribution for larger accounts. Showing off its high-tech capabilities in producing the Mueller’s brand should help AIPC wrestle away other large accounts.

According to Jonathan Braatz, an equity analyst for George K. Baum & Co., a New York-based investment firm, AIPC’s rapid growth can be directly attributed to its low-cost manufacturing process, which has become highly demanded by a previously untapped market. He expects AIPC’s growth to continue at a rate similar to recent years because food companies, as in every industry, are making extra efforts to avoid capital expenditures.

Meanwhile, as AIPC sets up shop for what is expected to be an expansion that carries the company to the top of the pasta world, one of its main competitors made a surprising announcement. Last summer Borden Foods disclosed that it will begin closing its pasta plants, leaving the youthful AIPC, with Thompson’s state-of-the-art vertical integration process, at the top of the spaghetti pile.

About the Writer: Len Vermillion is a former contributing editor for Entrepreneurial Edge magazine.

All rights reserved. The text of this publication, or any part thereof, may not be reproduced in any manner whatsoever without written permission from the publisher. This article originally appeared in the Volume 2 1998 issue of Entrepreneurial Edge.