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posted: 10/14/2013 6:03 AM

It's not just about cough drops with Smith Brothers overhaul

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By Leslie Patton
Bloomberg News

Can't sleep? Dehydrated? There's a cough drop for that.

Smith Brothers Co., known for 1800s-era black-and-white bags featuring its bearded founders, is reinventing the medicated lozenge.

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Bought out of bankruptcy in 2010 by York Capital Management, the 166-year-old company is trying to inject fresh thinking into a $7.23 billion U.S. cold-remedy market dominated by Halls and Procter & Gamble's Vicks.

The new products include Night Time drops with melatonin and chamomile to aid sleep, as well as electrolyte-laced Restore lozenges to help people recover from the flu or a marathon.

Leading the charge is Chief Executive Officer Steven Silk, a veteran food-industry hand whose efforts to shake up a staid category and company culture includes pushing out executives, axing the iconic Sen-Sen brand and focusing more on health and wellness -- moves that have left some analysts skeptical.

Smith Brothers lacks the name recognition of rivals, said Tim Barrett, a Chicago-based analyst for researcher Euromonitor.

"Unless you're Halls or Ricola, you're going to have a hard time getting anybody," he said in an interview. "Why go with something new when you're used to something else?"

In 1847, James Smith began selling cough candies in Poughkeepsie, N.Y. Fueled by newspaper ads, the brand gained popularity in the Northeast and sales boomed. His sons, William and Andrew, who inherited the business, put their own pictures on packages to thwart copycats. The Bernard Fox family bought the brand in 1926 and established F&F Foods Inc., according to the company.

By the time York Capital acquired F&F for $10 million in 2010, it was "tired and bankrupt," said Zalman Jacobs, a partner at the New York-based private-equity firm, which manages about $16 billion in assets.

"It was very undermanaged, with this iconic brand just sort of sitting there," he said.

York pumped in another $6 million and renamed F&F Smith Brothers. It's planning to put in $7 million more.

Silk was hired based on his track record at ConAgra Foods Inc., where he helped revive Hebrew National hot dogs and Eckrich sausages. Upon joining in 2011, he found a factory operating at less than capacity and an entrenched culture hostile to new ideas.

One of his first acts was firing two long- tenured employees -- one in sales and one in operations. He also shook up middle management and brought in a Procter & Gamble veteran to run research and development.

Smith Brothers is run out of a brick building on Chicago's Southwest Side, which includes a warehouse and cough-drop and candy factory where as many as 250 workers toil during busy season in August and September.

The factory recently got new floors, lights and a quality-control facility where lab-coated employees check the sugar and moisture content as candies and drops roll off the production line.

Outside, two silos house about 200,000 pounds (91,719 kilograms) of corn syrup and liquid sugar that's later pumped into the manufacturing area.

Silk has shifted the focus from making candies for other companies to expanding Smith Brothers' health and wellness segment, which along with the Sen-Sen and Fox's mints brands, generated just 12 percent of the company's $25 million in sales last year.

More recently, Silk axed slow-selling Sen-Sen, licorice-flavored breath fresheners that had been around since the 19th century. He's also considering ditching Fox's mints.

While Silk argued that Smith Brothers' apothecary vibe will appeal to consumers looking for natural products, the refocus into health and wellness was a big strategic shift and not without risk, said Chief Financial Officer Carol Hennessy.

"Smith Brothers cough drops were more secondary," she said. Because they were mostly sold in dollar stores, "I was a little skeptical about getting the volume."

She has since reconsidered because sales are projected to increase 44 percent this year to $36 million as the company pushes into more stores and works on a national TV ad campaign.

The goal is to "gently expand the brand, but stay within the consumer perception of what the brand should be," Silk said in an interview at the company's headquarters.

Another aim is to transcend the traditional cold and flu season, he said. Hence, a throat-warming apple-pie lozenge that in the coming weeks will start selling for $2.29 a bag at Walgreen Co. stores. The company is also experimenting with such flavors as green tea, pomegranate and strawberries-and-cream, as well as vitamin chews.

The throat-warming drops contain small, coated pellets that heat the mouth. The technology was created by Mane, a French maker of favors and fragrances for food and body care products.

Smith Brothers' lemon-lime moisturizing drops contain jambu oleoresin, an extract from a flowering herb native to tropical areas, that's supposed to increase salivation.

Sales of cough and cold remedies jumped 9.3 percent to $7.23 billion in the year ended Aug. 3, compared with 2.7 percent growth the year before, according to Nielsen data. Cough drops and lozenges make up about 8 percent of category sales, the data show.

"Consumers are responding to healthier claims" and are looking for more convenient ways to take medicine and vitamins, said Todd Hale, senior vice president of consumer and shopper insights at Nielsen.

Smith Brothers' competition isn't sitting still.

Halls, which got its start more than a century ago selling soaps and jams in Britain, has introduced icy lemon-flavored cough drops with a syrup center, drops with vitamin C and sugar-free products. Vicks makes cough suppressants, including menthol and cherry-flavored VapoDrops. Its NyQuil brand has introduced a sleep aid called ZzzQuil.

Silk says Smith Brothers stands out from Halls and Vicks, in part, because of its improved packaging. It's using a white coated-plastic bag, less noisy and shiny than foil, with bold black font. He has no plans to ditch Andrew and William Smith, who will continue to carry the brand.

"They had personality," Silk said. "I knew they could be brought back to life."

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