Little Hug Fruit Barrels propel turnaround at Verona beverage maker

Sweet-smelling fruity aromas waft through a Verona drink plant, as they have for several decades.

That is one of the few things that remain the same at 52-year-old American Beverage Corp., manufacturer of the 8-ounce Little Hug Fruit Barrel drinks that have appeared in children's lunch boxes since 1974. After the discovery of a multimillion-dollar accounting fraud in 2009, American Beverage's Dutch parent company, Royal Wessanen nv, put a new management team in place to overhaul nearly every department and put on hold a planned sale.

“You can't believe how scary it was in 2009. It looked like everything might melt down,” American Beverage President Kevin McGahren-Clemens said.

It discontinued some less profitable brands and its licensing business to focus on Little Hugs and Daily's cocktails, ready-to-drink frozen pouches with alcohol introduced in 2006.

The increase in Daily's sales helped solidify American Beverage and the company's planned sale is back on, albeit unofficially.

Last year, it reported total sales of $157.4 million, about half from the Daily's pouches.

“It's the No. 1 brand (of frozen pouches), and we have about a 60 percent share of the market,” McGahren-Clemens said.

In addition, sales of Little Hugs increased 40 percent this year from last year, he said.

American Beverage employs 556 people at its factory in Verona, warehouse in Blawnox and plant in Phoenix. About 76 percent of its workers are members of United Steelworkers 9445-2, said Michael R. Bartlett, vice president of human resources.

The changes to management and product focus improved workers' sense of job security, said union President Kurt Kalkstein.

“We recently signed a favorable four-year contract that has given us some security,” said Kalkstein, 47, of Penn Hills, a factory mixer for 21 years.

Union recording secretary Ashley Walker, 27, an equipment operator from New Kensington, agrees: “People seem to be more on the same page now.”

American Beverage spent money to make money, investing about $20 million in the changes and even advertising on cable TV channels for the first time, McGahren-Clemens said.

“We just had to clean up the company ... but we knew at that time we couldn't cut our way out of it,” he said.

Part of the turnaround was more closely aligning research and development and marketing to consumer preferences, he said.

Over the years, the company had diluted the flavor of Little Hugs in order to save money and “we had to add things back to make it good again,” he said. The company added vitamins B and E to Little Hugs, added straws to the packages and changed the packaging colors to highlight the drink's lower sugar content.

Nationally, high unemployment and demand for healthier drinks contributed to a decrease in soda sales at an average rate of 7.3 percent annually from 2007 to 2012, and a 5.9 percent decline this year to $16.2 billion, according to IBISWorld, a Santa Monica, Calif.-based market research company.

Even demand for fruit juice, which often has a high sugar content, is decreasing as health-conscious consumers switch to products such as ready-to-drink teas and energy drinks, IBISWorld says.

Sales of Little Hugs, which contain no fruit juice, are poised to benefit from the trend, McGahren-Clemens said.

“Little Hug is a refreshing, thirst-quenching periodic treat for kids, without unnecessary calories,” he said.

Since last week's decision by the Pennsylvania Liquor Control Board to sell Daily's cocktail pouches in state-run liquor stores, the pouches are sold in 48 states.

American Beverage's biggest competitors in the pouch business are London-based Diageo plc, which owns Captain Morgan and recently launched Parrot Bay Cocktails pouches, and Canandaigua, N.Y.-based winemaker Constellation Brands Inc., which began selling Arbor Mist frozen wine cocktails in pouches this year.

American Beverage is fighting to maintain its position. Last month, the company and its pouch maker, Pouch Pac Innovations LLC of Sarasota, Fla., filed a federal trademark lawsuit accusing Diageo of pirating its pouch design.

Royal Wessanen used to be one of the biggest companies in the Netherlands, said ING analyst Gerard Rijk. Over the years, it sold off North American businesses to focus on organic and health food businesses in Europe.

The 2009 delay of the sale of American Beverage followed the accounting fraud that led to a restatement of earnings and reporting of a $40 million loss.

With its overhaul, American Beverage in 2011 became the most profitable of Royal Wessanen's four segments, including grocery, health food and frozen food, but Royal Wessanen still plans to sell it. Wessanen is getting interest from other drink companies and private equity firms, spokesman Carl Hoyer said.

Tory N. Parrish is a staff writer for Trib Total Media. She can be reached at 412-380-5662 or tparrish@tribweb.com.