Hungry for growth, bagel maker tiptoes into healthy food segment

Since its founding 17 years ago, Indianapolis-based Harlan Bakeries LLC has built its reputation, and its fortune, on making
bagels. Untold millions of bagels.

The four production lines at the company's flagship Avon facility, where 600 of the firm's 1,800 employees work,
churn out everything from full-sized bagels to mini-bagels to partially cooked bagels to raw bagel dough. Those legions of
savory rings are used to supply grocery store chain bakeries, private-label brands (including numerous Einstein Bros. stores),
and fulfill contract-manufacturing arrangements for clients worldwide.

Considering the number of conventional treats Harlan turns out, it might be easy to overlook the company's newest project:
producing a non-medical "diet cookie" for Boca Raton, Fla.-based Smart For Life Weight Management Centers. Yet the
work could be a key step in the firm's drive to diversify out of the well-worn traditional baked goods category into the
less-familiar (but potentially highly profitable) "good for you" niche.

"Strategically, this is a channel that we want to grow in," said Dennis Daniels, chief operating officer of Harlan
Bakeries. "It's a relatively fast-growing channel. And in a grain-based business, fast-growing is not something you
hear very often."

Not that bagels haven't been very, very good to the company. The firm began in August 1991 as a lone retail establishment
run by brothers Hugh and Doug Harlan and their father, Hal. Their timing was impeccable, because they opened their doors just
as the craze for bagels took off.

"In Indianapolis at the time, I used to try to explain bagels to people, and they'd say, 'Do you mean beagle?'"
recalled Executive Vice President Doug H. Harlan. "We started with a focus on bagels, but we didn't call the company
Harlan Bagels because we always knew we wanted to get into other products."

And so they did. Bagels were popular, but selling them retail soon became a competitive nightmare. Though the company still
offers a handful of grocery store products (including Harlan Giant Gourmet Bagels), it phased out most such efforts to concentrate
on the more profitable wholesale baking niche. The firm grew by baking products for a range of clients, from groceries to
restaurant chains like Steak n Shake.

Harlan now ranks among the largest privately held baking firms in the country. Robust profits allowed the firm to attract
financing for expansion without going public–a situation that won't change anytime soon.

"At this point in time, we like having it as a private company," Doug Harlan said. "I think there are certain
times when you may need that, but at this point we don't."

A series of acquisitions transformed it from a simple bagel baker (albeit a large one) into a multifaceted producer offering
everything from cream pies to angel food cake. The company has production facilities scattered across the country from Hope,
Ark., to Denver. Harlan declined to reveal revenue, though Snack Food & Wholesale Bakery, a trade magazine, estimates
it topped $300 million last year.

"We've diversified so that we can be more stable as economic times change and different trends come and go,"
Harlan said. "There are lots of trends out there. Some last a long time and others go away rather quickly."

Healthy growth

Diet cookies could be their first step into the dieting and healthy eating niche–a market segment Harlan values at $60 billion
a year.

"Getting a small percentage of that offers some very large potential," he said. "I think that's what we're
looking at and what we're excited about."

The cookies are sold in packages of six, all of them packed in nitrogen to avoid the use of conventional preservatives. The
Smart For Life company is all about avoiding preservatives. Each cookie contains 105 calories, with one package (a day's
worth) designed to substitute for breakfast, lunch and snacks.

"You feel like you're eating 300 to 400 calories [per cookie]," said Smart For Life's medical director,
Dr. Sasson Moulavi. "The reason we've been able to do this is because of the unique amino acid combinations we use
in the cookies, which is patent-pending."

All those trace elements also make it a much bigger headache to manufacture than the typical poppy seed bagel or coconut
cream pie. Which is part of the reason Harlan got the job.

"It's a very complicated project," Moulavi said. "We had six or seven vendors look at it, and they had
no idea even where to start. The Harlans were the only ones who actually sent one of their experts down here to spend a couple
of days with us. They invested in some pretty sophisticated equipment in order to get the bakery ready to produce the product."

Harlan currently makes three of the six cookie flavors (chocolate chip, oatmeal raisin and Maine blueberry) and will make
all six as soon as production is up to speed. The packs, available at the Smart for Life's 42 diet centers (none of which
is in Indiana) and online, cost about $8 each.

"That replaces your breakfast, lunch, and snacks, so it's actually more economical than what most people spend in
one day on breakfast and lunch," Moulavi maintained. "Plus, it's 60 percent organic. I don't have to tell
you how expensive organic food is."

Bagels are king

It may be expensive, but it's also one of the hottest categories in baking right now–and one of the reasons Harlan is
interested in exploring the niche. Not that it will dethrone the company's bagel business anytime soon. The cookies roll
off the Avon assembly line to the tune of about 100,000 a day–an impressive number, until one considers that the same plant
churns out about 250,000 dozen bagels a day.

"That's 3 million versus 100,000," Daniels said.

However, the category, variously called the "good for you" or "healthy eating" niche, could get a lot
bigger. It's been gaining traction since the carb-eschewing Atkins Diet craze fizzled, an episode bakers remember with
the same horror that Londoners recall the Blitz.

"It's kind of like the Atkins Diet gave birth to the nutritional whole grains movement," said Dan Malovany,
editor of Snack Food & Wholesale Bakery magazine. "I think now people are thinking, instead of taking something
out of the product, maybe if they added something to it, they might get some benefits. Even if they're eating a cookie."

Perhaps not surprisingly, this isn't Harlan's first foray into the health market. During the Atkins heyday, it rolled
out a low-carb bagel, a stumble that didn't discourage the company from trying again.

"Our overall business strategy is to grow into the weight loss category and the better-for-you category," Daniels
said.

While skyrocketing commodities prices have played havoc with Harlan's costs, the slowing economy hasn't affected
sales for its bagel and pie lines one bit. Daniels said slowdowns never do.

"Recessions for most kinds of pantry staple companies [are] a good thing," he said. "When the dollars start
tightening up, people tend to eat out less. People tend to spend less money on the higher-ticket items, like a new LCD TV.
But they will still spend money on groceries."

That includes healthful foods–as long as they don't taste that way.

"The worst thing we can say at our office about a new product is, 'Wow, this tastes healthy,'" Malovany
said. "It shouldn't. It should taste delicious and have some health benefits."