Forbes_USA_June_13_2017

THE CHEESE KING
Just as his timing ahead of America’s pizza boom proved
lucky, so did his location in the center of the country. In the
1970s, Wisconsin and New York were producing most of the
country’s milk, but California’s nascent dairy industry often
priced milk lower. Leprino had the foresight to engage in some
arbitrage, locking California dairy farmers into multi-decade
contracts at rates that were often above-market locally but below-market
nationally. Over the next two decades, Leprino
Foods also signed sweetheart deals with co-ops that eventually
became the Dairy Farmers of America, securing a lasting milk
supply with the country’s largest dairy co-op; the company also
purchased and renovated some of the older dairy plants, cutting
off the options for competitors who wanted to process milk. As
Jerry Graf, a former cheese buyer for Pizza Hut, notes, “Jim was
always one step ahead of the game.”
LEPRINO’S MOST IMPORTANT innovation, ultimately, was
marrying science and sales—a combination that met the needs
of the four biggest U.S. pizza chains during a period when they
were growing exponentially, launching one of the greatest turf
wars in the history of American food.
The first key was something called “Quality Locked
Cheese”—shredded and individually frozen portions—which
Leprino introduced in 1986. Leprino’s competitors, still mostly
run by Italian-Americans with strong immigrant roots,
sniffed. “They didn’t believe that was what should go on top of
their grandmother’s pizza recipe,” says Ed Zimmerman, a 30-
year pizza-industry veteran. But the franchise-friendly process
quickly became the industry standard, both for consistency
and scalability. With a patent in place, Leprino made himself
indispensable. Graf left Pizza Hut, which was still growing,
for Domino’s and brought Leprino’s business with him, as
that chain surged from 200 outlets in 1978 to 5,000 in 1989.
Meanwhile, Little Caesars, with more than 3,000 stores, was
growing 25% a year with its deal of “Two great pizzas, one low
price.” And by 1991, Leprino had become the exclusive supplier
for Papa John’s, which launched in 1985.
Leprino was able to grow with them all by putting them
in silos, granting each company its own specs and then troubleshooting
as necessary. “We treat every customer like our
only customer,” says Mike Durkin, a former Pepsi executive
who came on six years ago to run day-to-day operations as
president of Leprino Foods. “We don’t discuss Papa John’s
business with Domino’s—or anybody else’s.” Domino’s agreed
to an exclusive relationship in 1996—the contract was just
one page. “It was more of a handshake than it was anything
else,” recalls Michael Soignet, a former vice president of supply
chain at Domino’s.
When Pizza Hut began using a hotter conveyor oven, Leprino
Foods changed the formula so the cheese wouldn’t burn
at higher temperatures. As delivery-focused Domino’s expanded,
Leprino’s head cheese maker, Lester Kielsmeier, manipulated
the product so that it retained its fresh-out-of-the-oven
look and taste longer. When Papa John’s insisted it wanted
cheese without fillers—eschewing a new Leprino product that
contained some—the big cheese didn’t take it well. “His reflected
sense of self is his patents, his business,” Papa John’s billionaire
founder John Schnatter says of Jim Leprino. “That really
means a lot to him. When I said I didn’t like it, he took it
personally.” Within two months, Leprino switched Papa John’s
back to the previous blend. “Jim came at me and said, ‘It’s
going to cost you three more cents a pound.’ ”
Price has long been Leprino’s biggest advantage, and a large
one since cheese accounts for about 40% of a pizza’s cost. Leprino’s
scale begat better prices, which begat more scale. And
that scale also led to cost-saving breakthroughs that Leprino’s
fragmented competitors could neither catch up with technologically
nor fight in patent court. “They are a biotech company
that is wrapped inside a food business,” Zimmerman says.
For example, in the 1990s, Kielsmeier realized that just as
the cheese changed when ingredients were sprayed on at the
end, certain additives used early in the process could affect
how cheese melts—from how big and how brown the bubbles
get to how many are on the top of the pie. On the manufacturing
side, Kielsmeier cut down the cheese’s aging period from
14 days to just four hours, which multiplied the company’s
production capabilities while cutting costs significantly.
LIFE
OF PIES
HOW PAPA JOHN’S,
THE WORLD’S THIRD-
LARGEST PIZZA CHAIN,
DELIVERED A BILLION-
DOLLAR FORTUNE TO
JOHN SCHNATTER.
SELLING MOZZARELLA isn’t the
only way to become a pizza
billionaire. John Schnatter—more
commonly known as Papa John—
joined the club earlier this year.
The founder and CEO of Papa
John’s owes his $1 billion fortune
to the company’s rising stock
price—up 40% in the past year.
“When you start off broke—and
we weren’t broke, we were
negative broke—you never forget
that. You stay appreciative,” says
Schnatter, who owns 26% of the
company’s shares.
Schnatter (right), who was
born in Indiana, began washing
dishes at Rocky’s Sub Pub at
age 15 and worked his way
up to making pizza. With his
earnings, he saved up to buy a
1971 Camaro Z28. After college,
in 1983, he started working at his
father’s bar, Mick’s Lounge, which
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104 | FORBES JUNE 13, 2017