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Small is beautiful at Ralcorp Holdings, the food industry's newest $1 billion company.

Ralcorp was created March 31 as Ralston Purina Co. spun off a handful of its smaller products, led by its cereal business and Beech-Nut Nutrition Corp. The thinking was that Ralston Purina's big pet food and Eveready battery divisions had stifled the needs of those two smaller but growing businesses.

"The old paradigm of scale being a positive-the bigger you are, the better you are-was the strategic direction most food companies took in the past," said Ralcorp President-CEO Richard Pearce. "But the downside is that managements get removed from the true businesses."

Under Mr. Pearce's leadership, Ralcorp is restructuring its businesses to think small and focused.

Ralcorp's model is Beech-Nut, where Mr. Pearce led a turnaround.

Gerber Products Co. controls the $1 billion baby food market with 70% of sales; most supermarkets carry a second brand, either Beech-Nut or Heinz USA's brand.

With about a 15% share, Beech-Nut is stronger on the coasts, with 11 markets accounting for 75% of its sales. In 1991, trying to keep up with Gerber, Beech-Nut had just introduced a TV campaign and Special Harvest, an organic baby food line. And the unit was losing money.

Rather than playing second fiddle to cereal for the Ralston Purina sales force, Beech-Nut created its own broker network. The company closed a plant and centralized production. About a third of the items Beech-Nut produced, including the lackluster organic line, were eliminated to focus on best sellers and higher-profit products.

With sales, distribution and marketing functions integrated rather than scattered throughout the Ralston Purina organization, Beech-Nut created "a business plan, not just a marketing plan," Mr. Pearce said.

"We had developed a nice ad campaign," he said. "That's the traditional market-leader thing to do, but not efficient or effective when you're a regional business."

Beech-Nut ended up "completely changing our marketing approach," said Susan Widham, VP-director of marketing. "If you have 92 million TV households and only 4 million with babies, how can you use mass media?"

Beech-Nut now uses print ads in parenting magazines, public relations and a direct mail program, via Cramer-Krasselt, Chicago.

Beech-Nut has gained 1.5 share points and is making money for the first time since the 1970s.

Mr. Pearce would like to work the same magic on Ralcorp's Ralston Foods cereal unit.

About 60% of the cereal it produces is private label, with the rest made up of the four Chex varieties, Cookie-Crisp and a handful of smaller brands. With a 10% share of the $9 billion ready-to-eat cereal industry, Ralston is the No. 4 player.

Though private-label cereal's growth has slowed, Ralcorp is optimistic. Only half of the branded cereals on the market have a private-label counterpart. Ralcorp now has 18 private-label products, having just introduced versions of General Mills' Kix and Kellogg USA's Froot Loops and its own Chex.

The segment of the cereal market dominated by Chex and Kellogg Co.'s Crispix was the largest to not have a private-label option. "It was a tough decision but the right decision," said Andrew Bresler, VP-director of cereal marketing. "If we didn't do it, someone else would have."

"We've had the luxury of having robust growth of private label to help our moderately declining branded cereal business," Mr. Bresler said. "But private label is not going to grow at those rates forever; mathematically it can't. So we want to maintain and grow our core Chex and Cookie-Crisp brands, opportunistically support our smaller brands, and in a targeted way look at new products."

Mr. Bresler admitted Ralston Purina's former tactic of "conservative retreat" on its branded cereals didn't work. Neither did the fragmented agency lineup and scattershot advertising; Mr. Pearce, a former adman, said he realizes clients need to fairly compensate agencies to get the best work.

Ralston Foods decided to consolidate its branded cereal advertising and then in October gave the business to D'Arcy Masius Benton & Bowles, St. Louis. In January, the agency will break a new campaign for Chex-with increased spending-that broadens the cereal's traditional adult appeal.

Following the Beech-Nut model, Ralcorp has split its cereal sales and distribution from Ralston Purina's pet food business and integrated sales and distribution with marketing.

In the spring, Ralcorp will move into headquarters separate from Ralston Purina, a symbol of its new and distinct personality. "We want the expertise of a big company with the responsiveness of a small company," Mr. Pearce said. "We need to live within ourselves-figuring out who we are and committing to doing that well."

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