Storm drain? Folgers fights not to lose lead

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Only months after seizing leadership of the mass coffee market, Procter & Gamble Co.'s Folgers brand has had to put retailers on allocation and is scrambling for a place to produce its product after Hurricane Katrina shut down its main processing and storage facilities in New Orleans.

Though coffee accounts for only about 2% of P&G's $56.7 billion in annual sales and insurance is likely to prevent any earnings hit, the disaster comes at a critical time for Folgers, which just last year wrested the No. 1 brand position from Maxwell House. While it is considering the use of outside manufacturers to produce its coffee, those co-packers aren't currently able to mimic a P&G packaging innovation-a freshness seal-largely credited with giving Folgers a final boost to overtake the Kraft Foods brand.

As of last week, P&G was still sorting options as it came to grips with the tragedy, which shut down four facilities that account for 60% to 70% of the production and storage of its Folgers and Millstone brands, according to analysts. By Sept. 8, the company had accounted for all but 25 of 550 employees. "We're doing what we can with shipping on allocation," a spokeswoman said.

Privately, P&G executives presented a move to produce Folgers and Millstone as easily done, according to people familiar with the matter. But that option raised questions among analysts and industry experts about whether there's enough or the right capacity in the U.S. to handle the load.

Other options

Three days before Katrina hit, a fire broke out at P&G's No. 2 coffee-processing facility in Kansas City, Mo., which produces primarily for food-service markets, but the spokeswoman said that fire had been easily contained by P&G and the plant remains operational. P&G also has a third plant in Sherman, Texas, that processes primarily decaffeinated coffee and single-use packs such as coffee pods.

"They're going to have to use co-packers," said Dan Cox, president of Coffee Specialties, a Burlington, Vt., coffee-industry consultancy. The problem, however, is that other companies aren't set up to pack coffee in the plastic AromaSeal canisters with screw-on lids P&G adopted in 2003.

It takes "millions of dollars" to outfit a plant for the AromaSeal packages, and once P&G does so, it may opt to stay with that outside plant rather than restarting New Orleans operations, he said. He believes there may not be enough capacity to meet all of P&G's needs in the U.S., though it could turn to Central or South America easily. The other option would be for P&G to return to metal cans.

Worse still for P&G, though flood waters wouldn't affect finished packages in New Orleans, the Food and Drug Administration may prevent their shipment anyway, or P&G may simply declare them a loss.

Besides its own facilities, P&G also lost use of New Orleans-based Silo Cafe, a company that handles sorting critical to allowing use of low-cost green beans imported from such markets as Vietnam, Mr. Cox said. Finding a replacement for Silo Cafe could prove harder than finding co-packers, he said.

Helping hands?

"They're going through quite an emergency drill," he said. "My heart really goes out to them." He believes other branded-coffee processors would be willing to help under the circumstances, though he doubts Kraft would be among them.

With coffee having long ranked near the bottom of Chairman-CEO A.G. Lafley's priorities for P&G (he admitted he didn't understand the business in a February Fortune interview), evergreen rumors that P&G would like to sell the business are swirling again, too. Several food and beverage companies recently have expressed interest in the business, according to one investment-banking executive. And the search for co-packers is also putting P&G in touch with potential buyers.

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