During the most bitter hours of the Depression, even th lowest-level Maryland Baking Co. employee could stop by the Baltimore home of Chief Executive Joseph Shapiro, who would happily ladle out a bucket of homemade crab soup.
"Uncle Joe" treated workers like family, and he, along with his three brothers, created a nationwide empire out of good feelings. Expanding from its first product, ice cream cones, the clan sold straws, cups and other picnic-blanket products.
Few people got rich working at the company, renamed Maryland Cup, but employees measured their tenure in decades. And why not? Layoffs and firings were discouraged. Executives led seasonal celebrations, handing out candy canes to factory workers at Christmas or packing freezers with free Popsicles on summer days. Uncle Joe, who could barely write his name, offered employees' children Shapiro Scholarships, with the largest grants going to the poorest families.
The result: a benevolent, innovative -- and profitable -- industrial giant. A company whose loyal customers willingly paid a premium for products with the quaint brand name Sweetheart.
And then everything changed.
The old Maryland Cup died in 1983, when heirs of the four Shapiro brothers approved its sale to Wisconsin-based Fort Howard Co., the pre-eminent, highly profitable maker of toilet tissue and other low-priced paper products. Within months, Maryland Cup was transformed amid a brutal restructuring.
Soon the turkeys, the scholarships, the Popsicles -- and thousands of employees -- were gone. Other benefits have since been scavenged: A multimillion-dollar surplus in the employee pension plan was liquidated, replaced by a new plan that has a multimillion-dollar deficit. And today, in the Baltimore courts, about 300 retirees are battling over a health care plan whose maximum benefit has been slashed from $1.5 million to $60,000.
Quality and service declined, meanwhile, and customers took their business elsewhere. Sales stagnated, profits disappeared and the company's balance sheet was ravaged. According to financial statements in Securities and Exchange Commission filings, from 1983 to 1991 the company's net worth plummeted from $256 million to negative $95 million.
What went wrong? Service-oriented Maryland Cup and rigid, cost-conscious Fort Howard were fundamentally incompatible. "It wasn't that the business deal wasn't any good; it was that the marriage didn't work," says former Maryland Cup General Manager Morton Gilden.
That painful union has been dissolved -- Fort Howard spun off the cup business as Sweetheart Holdings Inc. in 1988. But Maryland Cup's story illustrates the fragile nature of a corporate identity, and the dangers in the most well-intentioned takeover. And it provides a close look at the broad sweep of victims: customers, investors, workers and entire communities.
Creating a bakery network
Any tale about Maryland Cup must begin with Uncle Joe. A turn-of-the-century Russian immigrant, he quit working in a Boston bakery when it would not adopt his ideas on a new system. In 1911, he and his three brothers set up their own ice cream cone bakery outside Boston -- and from the beginning stressed family, innovation and extraordinary customer service.
By 1920, that meant finding a warmer climate where people ate more ice cream. Joseph and another brother boarded a train in Boston and hopped off at the first stop beyond the Mason-Dixon line: Baltimore. It became headquarters.
Joseph stayed in his newly adopted home as the rest of the family, and their children, branched out across the country, establishing bakeries in major cities. Cones had to be freshly baked, and they were extremely fragile to ship. Good customer service meant being close to the tobacco and candy stores that peddled ice cream.
To take advantage of the company's burgeoning distribution system, Joseph created separate Baltimore factories to produce matches, straws and other products. And after World War II, he sought to add paper cups to the product list. Cups, he believed, were like the company's other products: cheap, non-reusable and open to imaginative marketing.
Family members convened, and company legend holds that they voted 14-to-1 against the plan. "Good, we've got a majority of one," Uncle Joe is reputed to have said. Maryland Cup was born, and its first product, a 7-ounce waxed paper cup produced at a High Street factory, rode several trends to success.
Americans were on the move. And they were changing their eating and drinking habits fast. Cup-hungry vending machines were popping up in offices, at gas stations, at ballparks and in schools. An expanding network of highways helped create the fast-food industry. Paper cups and plates even invaded the home.
Joseph's genius was in elevating simple products to higher status. A cup was not just a convenient alternative to glass; it was a critical aid to companies that sold ice cream, soda and far more expensive products to this new society. That fact, combined with constant innovation and attention to customers' needs, triggered the company's success.
The result of Sweetheart's strategy: products that became facets of American life, like the flat yellow banana-split dish, the foam clamshell used until recently by McDonald's to package hamburgers and the glossy containers for yogurt. In light of such innovation and service, customers felt that it didn't cost anything to pay a premium for Sweetheart as a primary, if not exclusive, supplier.
Buyers come courting
By the time Uncle Joe died in the mid-1960s, the modern company was firmly established -- 32 Shapiro-owned operations had been combined in 1961 for a public offering of Maryland Cup stock. Sales and earnings were on a steady upward trajectory -- profits, for example, increased nearly fivefold from 1966 to 1982.
And a new management team was in place, headed by Joseph's son-in-law Merrill Bank and two nephews, Henry and Samuel Shapiro. Henry ran the Midwest division, developing the key relationship with McDonald's, which provided millions of dollars in annual sales. Samuel, in Wilmington, Mass., headed the fast-growing plastics division. Mr. Bank, the chief executive, worked at corporate headquarters in Baltimore and then Owings Mills, site of the flagship plant.
But like many great teams, it faced a problem it could not #F overcome: age.
As the 1980s began, the senior staff was nearing retirement. Merrill Bank was spending much of the year in Florida. In 1982, Samuel had a severe heart attack -- an event that triggered a letter from him to family members questioning succession.
That was a delicate issue among the 80 close relatives who collectively held just more than 50 percent of the outstanding stock. The company had become huge and complex, with more than 10,000 employees, sales of $650 million and profits of $32 million. Who should run it?
Buyers began to circle, first Kraft Inc. and Georgia Pacific Corp., then others, from abroad. Under Chief Executive Paul Schierl, Fort Howard, which once had disdained debt and deals, also was prowling for acquisitions.
The deal came quickly, after a flurry of negotiations in the summer of 1983.
Fort Howard paid $534 million and assumed $140 million in Maryland Cup debt. The price was more than double the value Wall Street had placed on Maryland Cup before takeover rumors drove the stock price up. Many Shapiros became millionaires overnight.
They also felt comfortable with Maryland Cup's new caretaker. Recalling the negotiations with Fort Howard executives, Eugene Foreman, Maryland Cup's former chief financial officer, says, "They left the impression that they had plenty of money, and nothing would change, we weren't broke and we didn't need fixing."
A sobering transition
Shortly after the deal closed in September, the most senior executives were flown to dinner with Fort Howard's Mr. Schierl. Always direct, Mr. Schierl displayed a flip chart, recalled an attendee. Page 1 said, "Maryland Cup's old values: service, quality, responding to customers." He flipped the page to show Maryland Cup's new values: "profits, profits, profits."
The strategy to boost profits was modeled on Fort Howard's own methods in the tissue business -- raising manufacturing technology and lowering costs. Part of that plan was to pour about $250 million into selected Maryland Cup factories, most notably the huge Owings Mills plant.
That fit Fort Howard's personality. The company viewed its product as a commodity to be made efficiently and inexpensively. Using a secret manufacturing process, it cheaply recycled wastepaper into cheap tissue, which it, in turn, sold cheaply.
The straightforward formula had worked for Fort Howard -- the company was nearly three times as profitable as Maryland Cup, whose own results consistently beat any competitor's. But the formula, so different from Maryland Cup's philosophy, prevented easy transition.
"They sold by the pound; we sold by the concept," said Sandy Baklor, former Maryland Cup operations manager.
Fort Howard's method's didn't require being nice, or imaginative. Soon, the corporate culture created by Uncle Joe and his clan began to change. Corporate hallmarks -- family, innovation and customer service -- dissipated.
After that Chicago meeting, Maryland Cup officials were given computerized printouts of all company employees, including wages and tenure. They were told to make significant cuts, with, several said, an emphasis on older, higher-paid employees. Friends were forced to terminate friends. "It was a lawless environment -- every man for himself," recalls one company official who attended the meeting.
An excruciating shrinkage followed. At the time of the deal, employment was listed in various filings as in excess of 10,000, and executives say a more precise estimate would have been 12,000 to 13,000. Within a couple of years, a third would be gone.
Wielding the hatchet was impossible for some senior managers. "I quit at the [Chicago] meeting," said Herbert Bank, a former vice president and son of the prior chief executive. "There was no way I could do that; I didn't want to do it. These employees were names and Social Security numbers to them. They didn't know that an employee was responsible for the success of a product."
At first, short-term arrangements allowed fired workers who were close to retirement age to qualify for benefits. Terminations were done behind closed doors, with a shrug and an apology. But that would change.
Consider Joseph Wilner, who had risen from clerk to head of purchasing in the paper division. He took a day off in 1984 and returned to find that his office door had a new name and a new lock.
Or Maury Fiterman, who headed the operation that had made Maryland Cup the largest provider of containers used for yogurt, cottage cheese and other dairy products. In January 1985, he was told that his salary was not in the budget for the year ahead. "They said they bought Sweetheart because of the management and the expertise, then they tore it all down," he says.
Many of the most experienced, and expensive, managers ended up at major competitors, including Imperial, Solo and Dixie. Dixie cups were soon appearing in Giant supermarkets, once a Sweetheart stronghold. A former Sweetheart man, forced out in 1985, wrote the sales ticket. "It was very emotional," says Bernard Levy, formerly head of supermarket sales, "but I had to ** make a living."
And efforts to cut costs didn't stop with employment. Millions of dollars in annual charitable contributions were pared or eliminated, and the company even eliminated the line on many paychecks that allowed employees to contribute their own money to the United Way. Picnics and sports leagues, a feature of Maryland Cup factories, were abandoned. Christmas trees were axed from the budget, and whimsical practices, like executives dressing as Santa to pass out candy canes on the assembly line, disappeared.
Signs of distress
Even as insiders bemoaned the changes, they were hesitant to criticize. After all, Maryland Cup's financial returns paled beside Fort Howard's. In 1982, the last full year before the acquisition, Maryland Cup survived the recession by generating $59 million in operating profit, on $656 million in sales. Not bad, but Fort Howard's operating profit was a remarkable $170 million, on $537 million in sales.
And initial results suggested that Fort Howard knew how to run a company -- even if it triggered some pain in the process. Costs fell, but sales didn't. The nation's economy was growing fast, boosting orders. And even as service declined, customers were slow to rebel, perhaps because switching suppliers meant changing dispensers, trays, lids and other products in inventory.
Moreover, all manufacturers tended to expand capacity in line with demand, trying to operate always at full capacity. Maryland Cup was the largest producer, so competitors were unprepared to handle a large influx of business from disgruntled buyers.
Flush with success, Fort Howard mocked the jarring impact it was having on Maryland Cup. At a sales meeting in Florida, Mr. Schierl appeared wearing a devil's mask, complete with horns. A few people laughed.
By 1986, however, signs of distress had emerged.
Fort Howard's strategy of out-manufacturing rivals wasn't working -- in fact, it began to backfire. The company's capacity had been greatly enlarged, but to what end? Efficiency demanded a large increase in orders, which hadn't occurred.
Key Maryland Cup employees had now been gone for two years, undermining long-standing relationships. As customer service and product development lagged, attitudes changed. If Maryland Cup wasn't creating fresh ways for customers to boost profits, then the cup itself became merely another cost to be squeezed.
To bolster the company's financial statement, one-time gains were extracted. A pension plan with a $6 million surplus at the time of the acquisition was liquidated in 1986, with a gain of at least $5 million, and company contributions slowed. (At the end of 1991, according to a footnote to a securities filing by Fort Howard, the new plan had a $17 million deficit).
As results deteriorated, Mr. Schierl became more strident, blasting employees at quarterly meetings. Other executives came from Fort Howard's Green Bay headquarters to do likewise. "They kept going to all our meetings and telling us how stupid we were," says Earl Shapiro, former president of the Midwest division and now a competitor. "I kept thinking that if we were so dumb, the only guys who were dumber than we were were the ones that bought us."
As business soured, Fort Howard tried to bolster its underused plant by buying out its competition. For $332 million, Fort Howard purchased Lily-Tulip.
That only brought more trouble. The day it was announced, Lily's board had just been told of a sudden decline in profits, recalls Richard Folkoff, the former Sweetheart marketing executive who had just joined Lily. Other Sweetheart employees say a significant amount of Lily's inventory was obsolete. And a key Lily product, a two-piece foam cup, was still controlled by a prior owner, requiring royalty payments.
"It was a . . . disaster," says Mr. Folkoff. "It was virtually an impossible turnaround."
Two years later, in 1988, Fort Howard itself was acquired in a $3.9 billion leveraged buyout by Morgan Stanley & Co., the investment bank that played a key advisory role in the Maryland Cup and Lily acquisitions.
It didn't take Morgan Stanley long to conclude that Fort Howard and cup manufacturing were incompatible. In 1989, it spun off the combined Lily-Maryland Cup operations into an independent, privately held company -- one that, ironically, resembled the old Maryland Cup.
Subsequent financial filings spelled what Fort Howard's management had done to the business. Lily had $320 million in revenues for its last full year before the 1986 acquisition. Maryland Cup had almost $660 million in 1982. Merely maintaining sales would have created a company with nearly $1 billion in combined revenue. With inflation, that should have come close to doubling.
But the company that Morgan Stanley divested had sales of $858 million in 1988 -- and they were sliding.
In Wilmington, Mass., on a frozen winter day in 1989, dozens of people gathered outside, next to a newly restored Sweetheart sign, to have their picture snapped. Aware of the widespread employee morale problems, executives who had taken over the troubled company produced a video of better times to come.
In some ways, good times have come to Sweetheart Holdings Inc., which owns the remainder of the Fort Howard cup business.
On an operating basis, the company has begun to make money, although its bottom line last year was worse than ever because of heavy debts and write-offs. The focus has moved from manufacturing to responsiveness -- and customer service has improved. Pay packages for salespeople have been fattened, and the company brought in managers with substantial experience in cup production and packaging.
"The old Sweetheart was a phenomenal company," says Mark Levin, president of Marstan Industries, one of the nation's largest distributors. "Fort Howard had changed the company's whole posture. You felt you were on an opposite team; you were adversaries. The new Sweetheart is going back to the way of the original. It's much more customer-oriented, much more concerned with not only its problems, but yours."
Selective hiring has started, and Sweetheart's employment is up about 10 percent, says Chief Executive R. Philip Silver. Lily's former factory in Springfield, Mo., for example, has been adding workers, allowing some of those laid off at the nearby Zenith television plant street to get new jobs.
Still, any euphoria is tinged with a tough reality. Sweetheart's gross income (net sales minus cost of sales) was $105 million in 1991 -- down from $210 million when Maryland Cup was sold. Meanwhile, annual interest expense has increased more than sixteen-fold. And the competitors that entered the market while Sweetheart floundered still abound. The company may not be able to survive alone.
Retirement health care benefits, long promised to employees, have been stripped away. Charitable contributions are handled out of Chicago, and Mr. Silver isn't involved. The company again is encouraging employees to give to the United Way, but the generosity of the past is, well, past.
Despite the rebound in hiring, the company provides about a third fewer jobs than Maryland Cup did. And more than half the facilities that existed a decade ago have been shuttered. Some were small and old, including the operations occupying the original Massachusetts plant begun by Uncle Joe.
Others, like the Wilmington plant a few miles away, were only a few decades old and had been modernized. At the time of Fort Howard's purchase, that plant had 1,400 employees -- including the first one hired.
But under Fort Howard, product development stalled. Just getting approval to build machinery for a product took longer than making a product had in the past, employees say. The final blow came about two years ago, when McDonald's abandoned the clamshell package for hamburgers because of environmental concern over plastics. Sweetheart, caught flat-footed, had no innovation to replace it.
By the time the doors closed at Wilmington, conditions had badly deteriorated. Rather than repair major leaks in the roof, the factory supplied buckets to catch the dripping water. Workers were encouraged to leave, and about 1,000 did so.
Those who stayed witnessed a pathetic unraveling of a once-powerful business. "I compare it to being a cancer patient," says Amy Farrell, a 19-year employee. "It gets worse, until you die."
Today, the factory is just another vacant piece of real estate in the state's glutted market. A broker who is trying to sell it says more interest has been shown in a nearby Sweetheart warehouse. Apparently, there is still demand for empty shells.
Meanwhile, former employees have been tossed into a state economy ravaged by recession. Of the nearly 200 who registered with a special state-sponsored assistance program, many are still struggling to get new jobs.
Still, former Sweetheart employees, a family, get together frequently. A recent reunion dance in the nearby American Legion Hall continued until the tired maintenance man turned off the lights. Ex-workers said they stopped in for a moment and then couldn't bear to leave.
Indeed, as many former employees try to move on from Maryland Cup, the closeness created by "Uncle Joe", is a formidable barrier for employees confronting the harsh modern world. "Who wants me?" wonders 60-year-old Virginia Staponites, whose only job has been in Wilmington for Sweetheart. "It was my life."
THE MARYLAND CUP STORY
1911: Predecessor to Maryland Cup founded in Boston by Joseph Shapiro and his three brothers. Company sells ice cream, then expands to bake ice cream cones
Headquarters moves to Baltimore
1932-1936: Company diversifies, making matches and straws. Sweetheart, the name used on products, is inspired by picture of two children using straws to drink a milkshake from the same glass.
1947: Company executives vote, 14-to-1, against entering the cup business. But Joseph Shapiro votes yes - and the cup business is born.
1961: Maryland Cup goes public, consolidating 32 companies controlled by Shapiro family members.
1968: Joseph Shapiro dies.
1983: Maryland Cup bought by Fort Howard, a Wisconsin-based paper manufacturer. At the time, Maryland Cup has 33 plants, more than 10,000 employees and a net worth of $250 million.
1983-1985: Fort Howard boosts capital spending in cup
business, while cutting costs through layoffs.
1986: Customer service deteriorates and cup sales start to slide. Fort Howard acquires Lily-Tulip, cup-maker with net worth of $108 million.
1988: Fort Howard itself acquired in leveraged buyout by Morgan Stanley for $3.9 billion.
1989: Fort Howard spins off cup business as Sweetheart Holdings. Business has 15 U.S. factories and more than 8,000 employees.
1991: Sweetheart turns a profit on operations, but saddled by debt, net worth falls to -$95 Million.