ConAgra pretzel treats.

ConAgra pretzel treats. Photo by Courtesy Photo

The Trader Joe’s Peanut Butter Filled Pretzel weighs three grams, measures less than a cubic inch and consists, as its name suggests, of a thin pretzel shell stuffed with peanut butter. It was an unheard-of technological marvel when the Monrovia retailer started carrying them 26 years ago – “You haven’t lived until you’ve tried the two together,” famed food writer Ruth Reichl rhapsodized in an early review.

Millions of bags of the treat are now sold every year, stocking dispensing machines at tech startups and satiating late-night cravings of Hollywood celebs and strapped college students alike.

Today, the bite-size comfort snack is worth a lot of money – and at the center of a high-stakes struggle for control. The fallout includes accusations of a ruthless peanut butter pretzel monopoly, the breakup of a decades-long partnership and competing cross-country claims to the snack’s invention.

The trouble began in the fall, when Trader Joe’s allegedly switched suppliers of the product, cutting out Aliso Viejo’s Maxim Marketing in favor of ConAgra Foods Inc., one of the largest food packaging companies in North America. The jilted Maxim has not gone quietly, launching a legal fight alleging antitrust violations and breach of contract.

“We pioneered these items,” said Terry Kroll, Maxim’s owner and chief executive. “We took something from nothing and built it into their top-selling savory snack.”

The pretzel crack-up has also offered a rare public peek inside Trader Joe’s, a company that, for all its customer-friendly attitudes, maintains an obsessive secrecy about its products and is known for aggressive cost-cutting with vendors.

“It’s at odds with the image that the company has on the outside with customers, which is very folksy, friendly and casual,” said Mark Gardiner, a retail marketing consultant who has written a book about the company. “A lot of people would naturally assume that this kind of culture pervades the company, but it doesn’t.”

Trader Joe’s declined to comment.

ConAgra called the lawsuit without merit and declined to comment further.

Food of the times

The simplicity of the peanut butter-filled pretzel belies its pained and complex origins. The technology to make it didn’t even exist until the 1980s.

Kroll was running food distributor Maxim in La Verne in the mid-1980s when a business contact told him that a New Jersey pretzel manufacturer, J. Reisman & Sons, was working on applications for new technology and needed help. Kroll was a food industry veteran, having done stints at Standard Brands, Sunmark Cos. and Sara Lee; he even married a woman named Saralee. When he visited the plant, he saw something groundbreaking.

“They were working on co-extrusion with pretzels, which was unheard of at that time,” he said. “I didn’t know of anyone other than an outfit in Germany that was doing that.”

Co-extrusion is a process by which multiple layers of a food product are processed simultaneously. Visualize a pipe within a pipe, the outer one pumping out pretzel dough, the inner one pumping out a filling. The idea that Max Reisman, Reisman’s president, had was to pump out a strip of filled pretzel dough on a mechanized belt, slice it up and bake the pieces in the plant’s massive 100-foot ovens.

But there were challenges. The filling had to have enough liquidity to be pumped, but if it held too much water, the product would disintegrate. Adding oil instead would introduce a possible fire hazard if it seeped out.

Several fillings were experimented with before a peanut butter mixture with peanut oil was chosen. There were other pitfalls. If the pretzel was too thin or the filling too liquid, the product would explode.

“We had blowouts,” Kroll said. “If you really want to see a plant manager mad, get him to clean up a 100-foot oven full of peanut butter. We had to work and work on that.”

Also brought in on the project was Bruce Gutterman, a peanut butter expert in Kingston, Pa., who pioneered the introduction of peanut butter flavors into ice cream in the 1970s, and had become the go-to guy for pourable peanut butter.

“This ain’t no easy item. It’s a very intricate manufacturing process,” he said. “If the heat finds an open pretzel and enough peanut butter oozes out, it’s like a grease fire.”

Still, he added, “I knew something special had happened. I could tell by (Max’s) eyes, the machine he had come up with.”

A final system was worked out in which multiple strips were placed on the line at once – too few and the pretzels would burn, too many and they wouldn’t bake enough – cut, baked in the oven, dried out (the presence of water hardens pretzels, counterintuitively) then packaged while still warm and pliable to prevent breakage.

Kroll said he was instrumental in coming up with the product and working out the kinks.

With a working product, the next step was to find retail outlets. The first to give them a try was the growing Trader Joe’s.

Taking off together

In 1988, Trader Joe’s had 27 stores, all of them in Southern California. That same year, founder Joe Coulombe handed the reins as chief executive to John Shields, who made expansion a priority. Coulombe had opened the first Trader Joe’s in Pasadena in 1967, developing it into a chain of small neighborhood stores stocked with wines and exotic health foods, and continuing on as chief executive after selling the company to German billionaire Theo Albrecht in 1979. But he ran into expansion troubles, and asked Shields, a former fraternity brother, to take over.

When Maxim brought the product to Trader Joe’s that year, the company was already fast transitioning into an empire built on low-cost private-label products. Peanut butter pretzels tested well, according to Kroll, and Trader Joe’s asked Maxim to develop an exclusive line. The first order was for a few thousand bags.

It wasn’t long before the novel product took off, as did Trader Joe’s. Under Shields, Trader Joe’s grew to 174 stores and increased sales more than fifteen-fold before his retirement in 2001.

Kroll worked with other clients, including Costco Wholesale Corp., and his own in-house Pocket Pretzels brand, spending hundreds of thousands on marketing and in-store samples. In the mid-’90s, he moved his offices to Pomona and traveled along the West Coast in a 65-foot yacht named the Snack Attack, putting on guerilla marketing events involving surfing teams and local fire departments.

But Trader Joe’s, which is today an $11 billion company with more than 400 stores, remained his biggest customer. He claims that he sold $9 million a year in peanut butter-filled pretzels to the retailer, which turned around and sold the product at a gross margin of roughly 35 percent.

The relationships Trader Joe’s cultivates with suppliers like Maxim are crucial to its success. It keeps secret their identities, requiring most to sign a confidentiality agreement. The company was once dubbed by Fortune “the most secretive retailer in America” for this policy, and for its corporate policy of never speaking to the press. (There is also famously no sign at the corporate headquarters of what is now the largest private company in Los Angeles County.)

By operating as the largest client of some suppliers, and by limiting the variety of products it sells on its shelves, the retailer is able to order larger quantities of fewer products – and leverage bigger discounts. It’s no coincidence that since 1990, the price of a bag of peanut butter-filled pretzels has increased less than the rate of inflation.

Suppliers benefit, too. Despite a reputation as an aggressive negotiator, Trader Joe’s is generally not known for playing games. It has a reputation for paying bills on time and does not charge slotting allowances – a fee to place an item on the shelf – that’s standard at many supermarkets.

Ousted

But Kroll alleges the company’s push for a discount went too far.

He had long been a rare creature in the Trader Joe’s universe – a middle man that did not own his own manufacturing capabilities. The retailer almost always contracts directly with manufacturers instead of distributors to cut costs.

“They cut out middle men. They do no deal with distributors,” said Steve Kass, chief financial officer of Tofutti Brands Inc., a former Trader Joe’s supplier. “They buy full loads, they get cheaper pricing and that’s what they’re known for.”

But there aren’t many places to make a peanut butter-filled pretzel. Maxim contracted with Reisman until that company went bankrupt in 1995, after which it switched manufacturers to Anderson Bakery in Lancaster, Pa. Anderson got bought up by National Pretzel Co. in 1999, which bought up another major peanut butter pretzel manufacturer, California Pretzel Co. National Pretzel in turn was purchased by Omaha, Neb., food giant ConAgra in late 2011.

Suddenly, ConAgra was not only Kroll’s manufacturer, but the biggest peanut butter pretzel maker in the United States. But Kroll alleges that when peanut prices dropped last year – down 25 percent year over year during the summer – ConAgra didn’t pass on any price relief. Instead, he claims the company, armed with confidential information about the Trader Joe’s products, cut a deal directly with Trader Joe’s for less money in October. In one stroke, Kroll alleges, he lost his largest customer – and his ability to manufacture the products.

Gardiner said the allegations are unsurprising.

“This is a company that really plays hardball with suppliers,” he said. “I don’t think it matters to Trader Joe’s that Maxim basically invented the product and went on and had a long fruitful relationship. I think when someone else came along and said we can do that for a little bit less, Trader Joe’s was quick to jump at it.”

Losing Trader Joe’s as a client can hurt. Kass’ Tofutti was a manufacturer of its own branded goods at Trader Joe’s for 15 years but was phased out in 2011 when the retailer decided to prioritize its own private-label versions of similar products; Tofutti saw annual sales drop 19 percent. He maintained that Trader Joe’s is “honest and reputable.”

Kroll, for his part, is unhappy with Trader Joe’s, but he maintains that it is a good company and he sees ConAgra as the initiator. His company has been forced to switch to another pretzel manufacturer, but it doesn’t have the production capacity to meet orders from his other clients, many of them overseas.

Last month, Maxim filed suit in Los Angeles Superior Court alleging that “ConAgra and Trader Joe’s have engaged in an unlawful conspiracy to eliminate competition in, and ultimately to monopolize, the peanut butter filled pocket pretzel market.” The lawsuit seeks $60 million.

Rival claim

But Kroll’s is not the only accusation of conspiratorial backstabbing in the peanut butter-filled pretzel’s salty history. At least one figure doesn’t sympathize with Kroll’s claims to victimhood. That’s Gutterman, the Pennsylvania peanut butter broker.

Gutterman claims that he is in fact the creator of the peanut butter-filled pretzel, and that Kroll stole the business away. His alternative story is this: In 1983, he was dropping off a date in Kingston when he saw a set of car keys left dangling inside a car. He grabbed them and knocked on doors around the neighborhood to find the owner, who turned out to be Max Reisman, in town to visit his daughter. Weeks later, Reisman gave him a call – he had been experimenting with pretzel fillings and thought Gutterman’s pourable peanut butter might do the trick.

Gutterman said he developed the product and took it to California, where he linked up with Kroll and introduced him to the product. The two worked to place the product at Trader Joe’s and Costco.

At some point, Reisman’s company – which was riven by its own internal power struggles – conspired with Kroll to cut him out, Gutterman claims, leaving thousands of dollars of his inventory unused at the New Jersey factory. In the early ’90s, he recovered and launched a competing product at Anderson’s Pennsylvania factory, then sold that brand off to Nabisco. Later, he partnered with Ben & Jerry’s to put peanut butter filled pretzels in its ice cream.

“What he’s accusing ConAgra of doing, he did to me,” Gutterman said. “I’ve been living 20 years with pain inside me, watching. I delivered a great product to the food industry and I got kicked in the teeth a couple times.”

Kroll denied Gutterman’s accusations, saying Gutterman was just a broker. Kroll’s attorney said that he might still use Gutterman as a witness to establish basic facts in the case. Reisman died in 2012.

When pressed, neither man could articulate why exactly the product took off. Gutterman said it arrived at a time when sweet and salty snacks were rare; Kroll surmised it was driven by a consumer need for new tastes.

“I just knew,” Gutterman said of the product’s success. “I can’t defend where my mind goes, but I knew the mind of a peanut butter lover. I can tell you this: I knew.”

Kroll painted himself as less of a visionary.

“You develop new products and this one was different,” he said. “I’ve launched a lot of food products and snack items in my career, and you never know.”

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