Beech-Nut Nutrition Corporation is the third largest baby food manufacturer in the United States, behind Gerber and Heinz. In the past, this century-old company produced foodstuffs ranging from bacon to chewing gum, but it has been exclusively engaged in the baby food business since 1972. They were very popular until the apple juice scandal of 1977.
“Although appearances suggested that Beech-Nut had turned the corner on its lean years, the company in fact was deeply embroiled in one of the worst scandals in American business history.” www.newsweek.com
Back in 1977, when Frank Nicholas had been touring the country promoting the nutritional quality of the Beech-Nut brands and apple juice sales had quadrupled, the company signed a contract with a new apple concentrate supplier called Universal Juice Co., which sold its product at up to 25 percent below the market. Initial tests of the concentrate by Beech-Nut research scientists raised the possibility that it might be adulterated with corn syrup, but company executives, including head of operations John F. Lavery, chose to turn to the possibility of a problem with the product's quality. With up to 30 percent of Beech-Nut's sales accounted for by products containing the concentrate, the already struggling company was saving millions of dollars by using Universal and a switch to another supplier could well have tipped the scales toward bankruptcy.
When Nicholas sold the company to Nestlé, Beech-Nut's director of research and development, Jerome LiCari, went once more to senior management to warn of problems with the concentrate, which further testing had again shown to be suspect. Lacking a definitive test for the purity of apple juice, however, LiCari could not prove absolutely that the juice was tainted, and without this proof Lavery and company president Hoyvald refused to take action.
In April 1982, that proof came in the form of a private investigator, Andrew Rosenzweig, who had been hired by the Apple Processors Trade Association to investigate claims of adulterated concentrate. Rosenzweig had staked out the processing plant where Universal claimed to produce their concentrate and found that the company was not just adding sweeteners to their mix, they were failing to add the apples altogether. Documents found in the plant's dumpsters revealed that the so-called apple juice was in fact nothing but water, sugars, flavoring, and coloring. According to the New York Times, Rosenzweig tracked a trailer truck full of the bogus concentrate from the Universal plant to Beech-Nut's facilities in Canajoharie and confronted Beech-Nut management with his findings.
It was at this point that Beech-Nut committed "a grave tactical error," as an attorney close to the case was later to tell Business Week. www.businessweek.com Instead of immediately recalling all of the products made from the synthetic concentrate, a recall that would have involved some 700,000 cases of inventory and might possibly have bankrupted the company, Beech-Nut began shipping the tainted juice out of the country clandestinely. www.newyork.com Meanwhile, Beech-Nut lawyers stalled U.S. Food and Drug Administration investigators, who were asking for samples of the suspect product. It was October before fed-up FDA officials threatened a seizure unless the company issued a voluntary recall. Beech-Nut finally issued the recall in November 1982, but by that time all but 20,000 cases of the juice had been distributed overseas.
FDA investigators initiated an investigation into Beech-Nut's role in the sale of the phony juice and of the cover-up. In November 1986, a federal grand jury found that there was sufficient evidence to indict both Beech-Nut as a corporate entity as well as its two top executives, John Lavery and Neils Hoyvald, on 470 counts of violating the Federal Food, Drug, and Cosmetic Act for selling adulterated apple products. Beech-Nut pleaded guilty to 215 counts of the indictment and was fined a record $2 million. Lavery and Hoyvald both pleaded not guilty but were convicted for their involvement in what the judge in the case would call "the largest consumer fraud case ever." www.answers.com Both men were sentenced initially to a year and a day in prison and fined $100,000, but these convictions would later be overturned on a technicality and the sentences reduced in a retrial to probation and community service.
Ironically, the recall of the phony apple juice in 1982 never created the bad press for Beech-Nut that Hoyvald had so feared. Apple juice sales continued to grow during the four years of the FDA investigation. It was only after the indictments of the company in 1986, long after all bogus juice had been removed from grocery store shelves, that the scandal began to impact sales. The intense publicity that surrounded the trial and sentencing, however, was disastrous for the company. Market share dropped from more than 20 percent in early 1986 to 16 percent in 1987. Most of this drop was the result of plummeting apple juice sales, which fell about 20 percent within a few months of the indictment. “Although Nestlé did not release sales figures for its subsidiaries, company sources told Business Week that Beech-Nut racked up near-record losses in 1987.” www.businessweek.com
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