Zen Management Makes Millions

In 1987, Stephen McDonnell was hungry to run a business. A successful management consultant, he was ready to be the one reaping profits from his business acumen. “I realized I really wake up when I’m at risk,” says McDonnell. “I wanted to be an entrepreneur.”

He took that risk when he bought Jugtown Mountain Smokehouse, a producer of nitrite-free bacon in Flemington, New Jersey, and something clicked. He’d tried to go vegetarian in college in an effort to eat healthier, but ultimately missed eating meat too much. “When I saw what the smokehouse was producing I thought, wow, I can have my cake and eat it, too,” McDonnell says. 

His purchase of the company was a gamble that the demand for natural meat products would grow—this was by no means a sure bet at that time. But it paid off. McDonnell changed the company name to Applegate Farms, and over the last 24 years, its line has grown to include over 100 products, including organic hot dogs, cold cuts, frozen foods, and dairy products. 

All its products come from animals raised humanely and without antibiotics or hormones. Applegate customers can even see exactly where their meat was sourced by plugging the packaging’s Barn Code into the company’s website, applegatefarms.com. 

The company, which moved to Bridgewater, NJ in 1990, has seen doubledigit growth each year since its founding, and the demand for natural and organic products increases with every new madcow or E. coli scare. In 2006, the company had $50 million in sales. In 2010, it was on track to have $100 million. For the first two decades of the company’s existence, McDonnell ran the business with no CFO, no human resources department, no board, and no consistent company policies or compensation structure.

As if that wasn’t unorthodox enough, he came into the office just one day a week, working from home the rest of the time.  By 2005, he knew he had to build a corporate structure to keep the company on track and growing. In the past few years, he’s brought on his first-ever president, VP of sales, and CFO; created his first board of advisors; and sold 20 percent interest in the business. 

McDonnell has shifted his focus from day-to–day operations to broader strategic matters, as well as working for legislation to promote environmental sustainability and investing in green start-up companies. He spoke with Lee Lusardi Connor about his idiosyncratic management style, and how his industry is riding the megatrends that will create jobs in the future. 

Lee Lusardi Connor: You’ve said you believe the natural foods industry is just getting started. Why do you think that? 

Stephen McDonnell: No one will believe how big it will get. The obesity rates and the illnesses that result from that point to how much junk food people are eating, and how much money is being wasted on nonnutritious food. 

The baby boomers have all passed 50, and you become more aware of what you’re putting in your body as you age. I don’t think anybody can say that a piece of pizza doesn’t look very different to a person after age 50. Also, there are kids with all kinds of allergies; there are gluten issues; and lactose intolerance issues that are making parents more conscious of what their kids are eating. And there’s the increase in type 2 diabetes. There are all these megatrends in medical and aging issues happening just as society becomes more conscious of how far we went in the wrong direction with food. Now we’re tipping back. 

Applegate, for example, sources from more than a thousand independent family farms. I’m an advocate of employing thousands and thousands of family farms producing natural meat. Natural and organic food is in a growth cycle, and let’s say the growth cycle is going to start leveling off around 2018, or somewhere around there. Organic yogurt is now 10 percent of the yogurt offered on the grocery shelf, organic milk is 10 percent of the shelf. Our industry, meat, is less than one percent. There’s a lot of growth still to come for us. 

Most of our business is in places like Whole Foods Market, Trader Joe’s, and individual niche markets, not really at Krogers or Safeway. I think that’s ultimately where we will expand. There and in food service— healthy school lunches, hospitals, etc. 

A Grassroots Business 

LLC: Take us back to the early days when you were first trying to get your product into stores. Did you have a sales staff? 

SM: I was the sales force. I remember when I first tried to get into Fairway Market on the Upper West Side: it was late on a Friday night, and they were willing to try 200 pounds of our smoked turkey. So it came out of the ovens, and before it was even chilled down to temperature, I had to drive it to the city. Going through the Lincoln Tunnel in my Ford Fiesta, with barely any air conditioning, I got it there at midnight, or whatever the deadline was. 

And I got a call the next morning saying, “Come pick this stuff up, it’s no good.” Smoked turkeys need to chill down and cool off before you can slice them properly. And because these hadn’t had time to cool down, they started falling apart on the slicer. It took me four years to get back into Fairway after that, and to this day they remind me of the incident.