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Harlan Bakeries sues vendor over equipment glitches

April 6, 2009

Thousands of Bagel-fuls roll off Harlan Bakeries LLC's production lines these days as the Avon company races to keep up with demand for the cream-cheese-filled bagels.

The frozen product shaped like a corn dog has been a big hit for Harlan and its partner, Kraft Foods Inc., since the packaged-food behemoth launched it a year ago. But a lawsuit Harlan recently filed against an equipment vendor says packaging the product has been marred by costly glitches costing hundreds of thousands of dollars.

The privately held baker, which holds patent rights to the product, is suing New Richmond, Wisc.-based Doboy Inc., alleging the company made big promises about a $3.6 million robotic packaging system it sold Harlan two years ago, but then failed to deliver.

The suit says Harlan had questioned using a robotic system, but Doboy insisted it would work properly. "We will not let you fail, nor will we let Harlan and Kraft down," Doboy wrote in a letter submitted with the lawsuit. "There is simply too much riding on it."

The system, installed in Harlan's Indianapolis plant, was supposed to individually wrap and box 1,050 Bagel-fuls per minute, just after they emerged from the oven. But the company says it has never achieved that goal, in part because of malfunctioning sensors, malfunctioning vacuum valves and other problems.

The suit doesn't say whether the problems have caused Harlan to miss production quotas. But they came at the worst possible time—just as sales were growing rapidly and Northfield, Ill.-based Kraft was throwing its marketing muscle behind the product launch.

On March 30, Doboy answered Harlan's complaint with a counterclaim. Doboy alleges Harlan owes $279,846.13 in unpaid bills for parts and labor.

Doboy officials and attorneys representing it in the lawsuit did not respond to requests for comment. Officials with Harlan, which makes baked goods on contract and under its own brands, also did not respond.

The Avon company, founded by brothers Hugh and Doug Harlan 18 years ago, has about 1,800 employees. The firm doesn't publicly disclose revenue, but last year the trade magazine Snack Food and Wholesale Bakery estimated it at $300 million.

A hot product

The bragging rights for inventing the successful product go partly to Alvin "Al" Burger, a Miami baker who began making bagels stuffed with cream cheese in his deli in 1991, and patented the idea in 1993, according to a Miami Herald article.

Burger eventually licensed the rights to Gary Schwartzberg, the owner of Filled Bagel Industries, which also is based in the Miami area.

Schwartzberg then teamed with Harlan. An October 2003 press release issued by Filled Bagel Industries touts the launch of Bagelers, an earlier version of the product, described as "a delicious New York-style bagel filled with real cream cheese in a convenient, grab-and-go bar-shaped design."

The group approached Kraft and worked out a deal. Eventually, Harlan paid more than $1 million for the patent rights, according to the Miami Herald.

Kraft successfully debuted Bagel-fuls on supermarket shelves across the nation last April. According to Milling and Baking News, sales through groceries last year topped $25 million, a figure that excludes sales through big-box retailers such as Wal-Mart. Kraft executives have said they believe Bagel-fuls can quickly top $100 million in annual sales.

Quirky marketing

Less than one in a thousand new foods have that kind of sales potential, said Lou Cooperhouse, director of the Food Innovation Center at New Jersey's Rutgers University. He should know. Cooperhouse runs a business incubator devoted to developing commercial cuisine.

"Everybody has a great idea. But you have to differentiate and create an experience that consumers want," Cooperhouse said. "You need a product that's not a 'me-too,' not just another great marinara sauce or chocolate chip cookie. It needs to fill a void.

"It's really tough to be different."

Kraft put lots of marketing firepower behind the launch. In April, it staged an event in New York City, renting out a popular deli and redubbing it the "Bagelfuls Cafe." Comedian Joy Behar, co-host of "The View," made a paid appearance. Teams with push-carts handed out free Bagel-fuls around Manhattan all day.

Kraft followed up with a 20-city sampling tour and a television campaign. In one silly spot, a woman on a subway train wearing an enormous wedding ring eats a Bagel-ful. When a nearby passenger expresses admiration, she assumes it's for the Bagel-ful, not her ring.

In another, set in an elevator, there's similar confusion over a Bagel-ful and a ferret. Both conclude with the slogan "Get wrapped up in the taste."

Kraft now sells nine varieties of Bagelfuls, each with a different type of bagel and flavored cream cheese. They come in boxes of four with a suggested retail price of $2.39.

The bagels are stuffed with another Kraft product, Philadelphia Cream Cheese. The company's 2008 annual report notes that Bagel-fuls helped offset volume declines in all its cheese categories. They also give Kraft an opportunity to introduce new cream cheese flavors to consumers.

Packaging problems

Harlan's lawsuit says Doboy's packaging system included three identical packaging lines equipped with robots that picked up Bagel-ful bars and fed them into devices that wrapped and boxed them.

The company alleges that after production launched, it began experiencing myriad problems stemming from "Doboy's design errors and its selection of improper or defective equipment."

Harlan said it had specified that the three production lines be able to package at least 700 bars per minute, which should have been possible using just two of the three lines. In fact, Harlan says, it has been unable to package 700 bars per minute using all three lines.

For nearly a year, the suit says, Doboy has attempted to remedy the problems, sometimes by repairing or replacing defective components, but those efforts haven't worked.

Harlan still hopes to be able to resolve its dispute with Doboy before the case goes to trial, said Jeffrey Gaither, an attorney representing the company with locally based Bose McKinney and Evans LLP.

"The key would be to get this business relationship back on track. Hopefully we won't need a judge or jury to make that decision," he said.

"The bottom line is these are significant costs and damages we're working hard with Doboy businesspeople to address."

Having problems with new manufacturing equipment is not unusual, said Mary Pilotte, managing director of the Global Supply Chain Management Initiative at Purdue University's Krannert Graduate School of Management.

But it is unusual for such disputes to end up in court, she said, because contract language is usually very specific about performance expectations. And most machinery-makers aren't paid in full until their systems meet billed specifications.

Pilotte was not familiar with the Harlan-Doboy dispute. But she said equipment breakdowns can happen for a variety of reasons, and some wouldn't be Doboy's fault.

For example, if Harlan tried to cut costs by using thinner packaging material than it had planned, but never informed Doboy, it would have changed the equation.

"They're finely tuned, high-speed machines," Pilotte said. "Any little deviation can wreck havoc."

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